LightInTheBox Holding's (LITB) CEO Alan Guo on Q1 2014 Results - Earnings Call Transcript

May.21.14 | About: LightInTheBox Holding (LITB)

LightInTheBox Holding Co., Ltd. (NYSE:LITB)

Q1 2014 Results Earnings Conference Call

May 21, 2014 08:00 AM ET

Executives

Margaret Shi - Investor Relations Manager

Alan Guo - Chairman and CEO

Mark Stabingas - President

Analysts

George Askew - Stifel

Cheng Cheng - Pacific Crest Securities

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Quarter One 2014 LightInTheBox Holding Co. Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions). I must advise you that this conference is being recorded today Wednesday, the 21st of May 2014.

I'd now like to hand the conference over to your host today is Margaret Shi, IR Manager of LightInTheBox. Thank you, Ma'am. Please go ahead.

Margaret Shi

Thank you, operator. Hello everyone and welcome to LightInTheBox first quarter 2014 earnings conference call. The company’s first quarter earnings results were released earlier today and are available on our company’s IR website as well as on newswire services.

Today you will hear from our Chairman and CEO Mr. Alan Guo who will give an overview of the company’s strategies and recent developments, followed by our President Mark Stabingas who will address financial results in more details. We are also joined here today by Jennifer Hu, our Financial Controller and Vice President of Finance.

Before we proceed I would like to remind you of our Safe Harbor statements. Please note that the discussion today may contain certain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause results to materially differ from those in the forward-looking statements please refer to our Form 20-F filed with the Securities and Exchange Commission on April 28, 2014. We do not assume any obligation to update any forward-looking statements except as required of the applicable law.

At this point I would like to turn the call over to LightInTheBox’s Chairman and CEO Mr. Alan Guo. Alan, please go ahead.

Alan Guo

Thanks, Margaret. Welcome everyone to the LightInTheBox first quarter 2014 earnings call. We are making good progress in executing our operational plan for 2014. Revenue for the first quarter was $81.5 million, which exceed our guidance range. Our revenue growth was primarily driven by the recovery in our wedding apparel business, strong sales in ready-to-wear fashion apparel and from our growing sales through mobile devices.

We also made notable improvements enhancing our platform capabilities in our core product categories in the geographic regions which we expect will result in an acceleration of growth rate.

As we have discussed previously, we believe that cross-border e-commerce represents a tremendous market opportunity and that we are beating one of the leading platforms to enable global marketplace.

We think about our business model in terms of a series of platform capabilities that allow us to serve our global consumers in a fashion that is authentic and native to each one of them. The most significant components, including supply chain management service, through which we can integrate suppliers and manufacturers and give them access to markets they otherwise may not be able to reach; our procurement and logistic management capability through which we can deliver products directly to consumers and our localization capabilities through which we manage our product catalog and translate the content into 27 languages, and offer native-speaking customer service in those languages.

Finally we have built a Demand Discovery, an online marketing platform that enables us to spot local product trends and acquire customers globally. Through each of these services, we are intensely data-driven and are able leverage our technology advantages to manage complexity in global e-commerce and identify market opportunities. Most of this technology is proprietary and has been built by our Engineering Team to suit our particularly to our own business needs.

We continue to make progresses in developing these capabilities on a number of fronts. Our new procurement center in Poland was officially opened. We have commenced the shipping through a new U.S. warehouse in a partnership with a third party logistic provider. The number of orders generated from mobile commerce business increased to approximately 27% of our total number of orders compared to approximately 16% in last quarter.

Over a 1,000 new suppliers were added offering approximately 209,000 new items to consumers. We added additional payment providers in South America and now offer approximately 20 payment options to consumers globally. We began developing our open platform strategy to work with our current suppliers and new brands hoping to expanding overseas. Initially our open platform will be primarily dedicated to fashion clothing. We continue aggressively invest in new talent with addition of James Wang and Todd Li to our retail team as well as Robin Lu as our new CFO who will join us at end the of this month.

We offer consumers factory-direct value on a selection of goods also not available in their home markets through a locally native online experience. We offer brands and manufacturers a new, turn-key channel to increase sales by reaching new global customers with minimal investment and organizational resources.

On that note, I will now turn the call over to our President Mark Stabingas, who will take you through our 2014 first quarter financial results.

Mark Stabingas

Thank you, Alan. And thanks everybody for joining. As I review the financial results, I’d like to remind that all percentage changes refer to year-over-year changes unless otherwise noted.

Net revenues increased 11.2% to $81.5 million for the quarter compared to the prior year period. This quarterly performance which exceeded our guidance is driven by the recovery of our wedding business, continued strong performance from our ready-to-wear fashion apparel, as well as the increasing contribution of our mobile commerce business. Total orders grew 40.9% to $2 million in the first quarter, while average order size decreased based primarily on changes in our product mix. Our total number of customers purchasing in the quarter increased 34.3% to $1.5 million, while repeat customer orders accounted for 37.8% of our total revenue, compared to 29.6% in the same quarter of 2013.

Please note that our earnings press release issued to the market two hours ago incorrectly states that repeat customer revenue was 33.5%, when in fact it was higher, we corrected there to our Q1 earnings release shortly and be filing our 6K with the correct data point.

Revenue in our apparel category grew 8.5% year over year to $24.5 million in the quarter representing two consecutive quarters of year-over-year growth since we first started to implement changes within this category. More specifically, we enjoyed continued momentum in our ready-to-wear apparel business, while the recovery of our wedding business remained on track.

As of today, we offer over a 130,000 apparel products compared to just over 90,000 a year ago. As a percentage of total revenues, apparel revenue was 30.0% in the first quarter of 2014 compared to 30.8% in the same quarter a year ago. Revenues from electronics and other general merchandise increased by 12.4% to $57 million in the first quarter of 2014.

Geographically Europe remained our largest market with revenues of $54.2 million representing an increase of 14.2% as a percent of total revenues in Europe were up, were 66.4% up from 64.7% in the same quarter of 2013.

North American revenues were $16.4 million, up 13% year-over-year, which represented 20.1% of total revenue in the quarter and revenues in South America remained at $5.1 million and constitute 6.3% of total revenues in the quarter.

Gross profit in the first quarter was $33.7 million, up 1.2% from $33.3 million in the same quarter prior year. Gross margin decreased to 41.3% of revenues from 45.4% in the same quarter of 2013 due in large part to the change in product mixes and apparel and pricing adjustments in our wedding business.

Nevertheless gross margins improved on a sequential basis from 39.1% in the fourth quarter of 2013 due to the increasing contribution from our wedding business, which enjoyed higher than average gross margin. Fulfillment expenses increased 33.1% to $5 million from $3.7 million in the first quarter of 2013, primarily reflecting the increase in sales volume and the number of orders fulfilled.

As a percentage of total net revenues, fulfillment expenses increased to 6.1% from 5.1% in the same a year ago and that increase was the result of increased headcount and expansion of our fulfillment facilities in China. And as a reminder, fulfillment expenses also include our payment processing fees.

Selling and marketing expenses increased 41.4% to $25.9 million from $18.3 million in the first quarter of 2013 reflecting the company's efforts to grow our customer base. Investments and marketing and related infrastructure helped increase the number of customer serves by the company in the quarter by 34.3% and the total number of orders by 40.9% respectively over the same period to the prior year. As a percent of total net revenues, selling and marketing was 31.8%, which was up from 25.0% in the same quarter of the prior year due principally to a fall in average order size as our products mix shifted.

General and administrative expenses increased 42.5% to $11.4 million from $8 million in the first quarter of last year, reflecting the growth in our overall business operations as well as $0.9 million in accelerated share-based compensation expense. As a percentage of total net revenues, G&A expenses were 14% which was up from 7.9% in the same quarter of the prior year.

In total, operating expenses increased 40.7% to $42.3 million as compared to the same quarter of 2013. Loss from operations in the first quarter of 2014 increased to $8.6 million compared to an operating profit of $3.2 million in the same quarter of last year. The net loss was $9.2 million in the quarter compared to a net profit of $2.6 million in the same quarter prior year. Net loss per ADS was $0.19 compared to net income per ADS of $0.05 in the first quarter of 2013. As a reminder each ADS represents two ordinary shares.

On a non-GAAP basis adjusted net loss which excludes the impact of approximately $1.4 million in share-based compensation expense was $7.8 million compared to an adjusted net income of $3 million in the first quarter of last year.

Cash flow from operations was negative $3.3 million as operating losses were somewhat offset by cash generated from working capital in particular a $4.4 million increase in advances from customers attributable primarily to the growth in our wedding business.

And as of March 31, 2014, the company had cash, term deposit and restricted cash of $99.7million, which is equivalent to roughly $2 per ADS. This compares to $105.1 million at December 31, 2013, and also reflects a $1.3 million exchange loss due to a term deposit which is denominated in RMB.

For the second quarter of 2014, the company expects its net revenues to be between $84 million and $86 million, representing a year-over-year growth rate of approximately 16% to 19%. And although the company does not issue guidance on profitability, it does expect quarterly adjusted loss from operations to improve in the second quarter compared to the first quarter. And of course these forecasts reflect the company's current and preliminary view on the market and operational conditions, which are subject to change.

This concludes our prepared remarks and at this point we are ready to take some questions.

Margaret Shi

Hi everyone, this is Margaret, IR Manager of LightInTheBox. I just want to give everyone an update on the mobile order metrics. We -- I think Alan [shared] metric there. So the number of orders generated by mobile commerce business increased to approximately 27% of our total number of orders compared to approximately 16% in the same quarter last year. Thank you. Gentlemen, we are ready for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). The first question comes from the line of George Askew from Stifel. Please ask your question.

George Askew - Stifel

Yes, thank you very much. Obviously there is a lot going on in your P&L and the business overall. Could you share with us what you expect your margin model to look like over the longer term? I mean nearly gross margins are being impacted by the mix shift in the products sold, sales and marketing also being impacted by that, you’ve added talent which has changed the G&A line a bit. What’s the longer term margin model look like for the company?

Mark Stabingas

George, it’s Mark. I think first of all, we haven’t necessarily communicated longer term guidance in terms of margins but I think what we could say is -- and what we did say last quarter is that we expect our gross margin trends to be trading into more of a range going forward as to significant year-over-year changes that we have seen more recently. We do expect fulfillment expenses to show the small amount of leverage as we open up regional fulfillment centers, we will be trading fixed cost in fulfillment for variable cost in shipping.

Obviously, we had increases in G&A which reflect some of the increases in talent that we are making and also newer acquisitions. But marketing obviously is the big one that is 31% of revenues. As was the case previously, if you look at marketing -- on marketing dollars on a per order basis, these numbers are much more consistent. Over the last four quarters, we continue to invest in building our customer base. And we do expect to achieve leverage as a percent of revenue from marketing as we’re able to build the customer base, drive more repeat customer revenue and also diversify our customer acquisition channels away from research and marketing which now remains the biggest channel today.

George Askew - Stifel

Okay, good. Thanks for that. And just a question on the repeat customers, can you kind of characterize what the half of that -- of repeat customer is? I mean is she coming in through the apparel category and then coming back for an order in the future in the gadgets or small electronics or something like that? What are you seeing as far as how repeat customers are sort of being -- why they are coming back to LightInTheBox?

Alan Guo

So, in the past, the majority of the consumers who came back for the second order was primarily either with their first orders category to all in our [adjacent] category. I mean there will be case of for example, the first order is ready-to-wear apparel and the second order is also ready apparel. There will also be a case where the first order is wedding and the second order is ready-to-wear apparel.

And we definitely see different level of synergies or different level of cross-sell among different categories. Typically, you will see apparel will be more close to -- ready-to-wear apparel is more close to weddings and small gadgets and [accessory] will be more close to [atonics]. So it's really kind of repeat having a centered device different demographic of our consumers and there will be different level of synergies across different categories. And that is also something that we deliberately want to take advantage of while we are introducing new categories.

George Askew - Stifel

Got it, okay. Thank you very much for that.

Operator

Thank you for your questions. The next question comes from the line of [Joyce Joel] from Barclays. Please ask your question.

Unidentified Analyst

Hi, thank you [so] much for taking my question. My first question is about the new categories on your website. Actually which one do you see that have bigger potential to become a significant category within your product range and maybe drive the top-line growth going forward?

Alan Guo

As we said in our release we felt very good about our progress in ready-to-wear fashion apparels. We have been seeing significant increase of our fashion apparels in the past couple of quarters and we think that will continue to be gross momentum driver for revenues. And we also are working very dedicatedly our home decor, which is reported in other merchandise, we think this is also category that fits our model fits our supply chain strength and also fits our demographic of our [unit growth].

Unidentified Analyst

Thank you very much. Can you give me some sense about the (inaudible) for those different product categories. You talked about the product mix change actually effect the gross margin level? And what kind of a difference for the gross margin as compared to the wedding versus ready-to-wear or the home decor categories?

Mark Stabingas

Of course, we haven’t given out sort of detailed category level breakdowns on gross margins. What we did comment on in the release was the fact that the wedding category has higher than average gross margin and the recovery in the wedding business in Q1 was impart the driver behind the improvement sequentially in gross margins. But obviously we’re in multiple categories across the Board. And I think we’ve communicated historically that the bulk of the changes that we have seen in gross margin were mix driven and I expect that to be the case going forward. But as we noted gross margin will probably trade in the higher range than it has over the last few quarters.

Unidentified Analyst

Okay. Thank you very much. And my last question is about your [flash] sales business. Is there any numbers that you can disclose like a percentage of your total orders or revenue or margin level compared to the company average that will be helpful.

Alan Guo

So, this is Alan. So, [flag] sale business primarily is focused on apparel business as of today. Certainly I think that contribute to the growth of our ready-to-wear fashion category significantly, but we don’t have plans to disclose in breakdowns in how much of that is generating from the flag sale channel.

Unidentified Analyst

Okay. How about the like margin level that should be below the company average rate?

Mark Stabingas

Yes we haven’t again disclosed the category level gross margins, but I think we will continue with that position.

Unidentified Analyst

Okay, thank you very much. Thank you. That’s all for my question.

Operator

Thank you. (Operator Instructions). The next question comes from the line of [Rick Scheer from Fagan Capital]. Please ask your question.

Unidentified Analyst

Thank you for taking my questions. There are three questions. The first is over what timeframe would you expect to see the return on sales and marketing expenses? Is there a tail return there or is that relatively immediate in terms of how you expect to see that? And then second, the release mentions offering brands and manufacturers a turnkey opportunity, could you walk us through how brands and manufacturers become aware of that offering? And then third on a mix basis based on the products offered currently how many would be considered nationally recognized brands versus private label or unbranded and how do you see that changing?

Alan Guo

This is Alan. So for the first question I think different channels have different payback time. Just qualitatively I think we are very much focused on performance marketing, so in general we feel the payback time of our marketing program is relatively short but there is still a differences, search marketing was certainly on clicking payback sites, display ads were certainly longer and app installation will be even longer. So in the past we have been very much focused on search marketing, but we have making very good progress in diversifying our marketing channels to affiliates to other platforms and to app installations as well.

For your second question, can you repeat your second question?

Unidentified Analyst

Sure, the release mentions the turn key opportunity for brands and manufacturers to get access to our global customer base, just curious how would a brand or a manufacturer become aware of that offering in the channel that you have?

Alan Guo

First of all, I think traditionally LightInTheBox has been very strong in developing private label and wide label product to introduce those to global consumers for the product offering that’s otherwise not available for them, but as you can see while we are entering more of the ready to wear apparel business, we certainly will start to engage more with our branded product, starting from Chinese branded products. So for all those brands that we have are reofferings where we can't engage with the retail model which (inaudible) and then with the flash sale model which help them to clean their inventory, [access] the inventories to a market that we are not cannibalized the home markets. And also we recently mentioned that we launched our open platform for third party, so that they can be on our platform and determine the price and the promotion, strategies and sell themselves, so they will have more flexibility in driving the channel growth.

So, I think with that kind of a [tiered] offering of different level of services and platforms, we certainly become a very attractive channel for the brands and particularly for Chinese brands who want to go accessing global markets. And in addition to that, I think our fulfillment capability and our customer service capability are supporting 27 different languages and being able to help them translate their product and content to other languages as well, we are also being a very attractive value added service for them so that they don't have to be equipped (inaudible) themselves.

Mark Stabingas

[Richard] to your question also in terms of how people become aware, we have a pretty robust outreach team that's focused on identifying and reaching out to key brands and manufacturers and educating them on our platform, the value proposition. And we referenced in our release that we added a 1,000 new suppliers in Q1. And that's sort of an output of that effort.

Unidentified Analyst

Great. And just last question, how many brands have taken advantage of the open source or open platform?

Alan Guo

The open platform is steering early stage of development. We just kicked off our vendor acquisition process, but we have had a number of brands that work with us in the past with the retail model and with the platform model. So there will be also transfer of the brands from those two models to the open platform. At this moment, we still feel it’s too early to disclose the number of brands, but we feel confident that based on our foundations in apparel business will be able to very quickly acquire number of competitive brands that will be very attractive to consumers.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you for your questions. Your next question comes from the line of Cheng Cheng from Pacific Crest Securities. Please ask your question.

Cheng Cheng - Pacific Crest Securities

Thank you, guys. I have one quick question on the open platform. Just wondering in terms of monetization for you guys, in terms of commission rates or anything like that, what does that look like and how revenue from that open platform will run through your financial statements or your P&L? Thank you.

Mark Stabingas

Yes. I think in terms of the accounting treatment, obviously we haven't disclosed anything, because it's not material at this point. We're going to be adhering to U.S. GAAP when it comes to recording revenue recognition which will vary depending on all the different tests that are applied under GAAP. And then in terms of our overall commission rate, these are rates which will vary based on the number of services that given business partner is interested in using. And so there is not necessarily a single rate, but certainly expected to be competitive with other options, they have developed new channels.

Cheng Cheng - Pacific Crest Securities

Okay. Thank you.

Operator

Thank you for the question. Your next question comes from the line of [John Harrill from Harrill and Solutions]. Please ask your question.

Unidentified Analyst

Yes, I am curious as to what level you guys see the cash level dropping to before the company achieves profitability?

Mark Stabingas

Again, we haven’t forecasted profitability necessarily. Of course, you can tell from our balance sheet, we have nearly $100 million in cash and we’re very comfortable relative to the level of operating losses that we have seen historically. And going forward that that’s a pretty robust cash cushion and certainly in the near-term not something that we’re overly concerned about. Obviously, we’re trying to be prudent and so forth. But our number one objective at this point is to reignite top-line growth. And we expect as we do that the company will push toward breakeven and profitability.

Unidentified Analyst

And with your cash position being rather comfortable, do you foresee any possible attractive acquisitions to help your growth model?

Mark Stabingas

I mean we are continually evaluating acquisitions. And I think under the right circumstances, we would certainly entertain point of trigger on something. But we don’t necessarily view the acquisitions as a sort of precondition to us achieving our goals and building a valuable company. So, we just, we try to be opportunistic and smart, but it’s not a precondition of our strategy for sure.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you for question. The next question comes from the line of [Robert Benhamou from Benhamou]. Please ask you question.

Unidentified Analyst

Hi. My name is [Robert Benhamou]. I am so happy I am going to be able to say something. Your products are beautiful, much better than any other company that I have seen on the computer, but there is one thing that upsets me, not really upsets me but it’s one thing that I have to mention to you people. I bought some clothes from you and I think you have to realize that when we deal with the others and public, they are bigger men. So what I did at the beginning, I bought some clothes that were [medium] just looked beautiful, [textile] and then my living and my life, I mean the beauty industry, your designs are beautiful but they too tight. I bought in medium, I could hardly put it on and then I bought another big one, I [have my butt] size 8, I am medium size and I have to order extra large from you and even extra large were little bit tight. So I think you should take in consideration then and different countries men are little bit bigger so as women. And I think if you are [Technical Difficulty].

Operator

There are no further questions at this time. I will now turn the conference back to the management for any closing remarks.

Margaret Shi

This concludes our first quarter 2014 earnings conference call. Thank you for your participation and I and ongoing support of LightInTheBox. We look forward to providing you with updates of our business in the coming weeks and months ahead. Thank you.

Operator

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect your lines.

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