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Vipshop Holdings Ltd. (NYSE:VIPS)

Q2 2014 Earnings Conference Call

August 14, 2014 08:00 AM ET

Executives

Eric Shen - Chairman, Co-Founder and CEO

Donghao Yang - CFO

Millicent Tu - Director, IR

Analysts

Alan Hellawell - Deutsche Bank

Karen Chan - Jefferies & Company

Alicia Yap - Barclays

Eric Wen - China Renaissance Securities

Binnie Wong - Bank of America Merrill Lynch

Chi Tsang - HSBC

Jiong Shao - Macquarie

Thomas Chong - City Group

Weibo Hu - Goldman Sachs

Wendy Huang - Standard Chartered Bank

Ella Ji - Oppenheimer

Chao Wang - Nomura

Tian Hou - TH Capital

Xiaoyan Wang - 86Research

Operator

Good day, everyone. And welcome to Vipshop Holdings’ Second Quarter 2014 Earnings Conference Call. At this point, I’d like to turn the call to Ms. Millicent Tu, Vipshop’s Director of Investor Relations. Please proceed.

Millicent Tu

Thank you, Operator. Ladies and gentlemen, thank you for joining Vipshop second quarter 2014 earnings conference call.

Before we begin, I’ll read the Safe Harbor statement. During this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates and projections about Vipshop Holdings Limited and its industry.

All statements other than statements of historical fact that we make during this call are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is/are likely to, may, can, should, will, aim, potential, or other similar expressions. These forward-looking statements speak only as of the date hereof and are subject to change at any time and we have no obligation to update these forward-looking statements.

Joining us on today’s call are Mr. Eric Shen, Chairman, the company’s CEO and Co-Founder; and Mr. Donghao Yang, the company’s Chief Financial Officer.

At this point, I’d like to turn over the call to Eric Shen.

Eric Shen

Hello everyone. Welcome to our second quarter 2014 earnings conference call. We are happy to share our second quarter 2014 earnings results. Vipshop continued stellar growth both operationally and financially. We grew revenue by 136% year-over-year to $829 million. And we added 4.1 million new customers closing out the quarter with 9.3 million total active customers. Total orders from our platform also continued to grow in line with revenues to over $26 million in the second quarter.

Our key focus in 2014 is to gain market share. Our success in growing our customer base and the total orders shoots our early success for the first half of the year. Acquiring Lefeng fit into this strategy and has supported this push for great market share. The [ph] [accretion] with Lefang has gone well and Lefang contributed nearly 2 million total orders and more than 1.3 million active customers in the second quarter.

We will continue to make careful investments in order to grow our business and market share, both organically and through acquisition when opportunities arise. In line with our goal of expanding market share, we remain committed to improving our mobile offering. This is our strong belief that our flash-sale model is well suited for mobile.

With this in mind, we recently launched our first U.S R&D center in San Jose. It will allow us to test the talent pool of mobile and data mining engineers in Silicon Valley by improving our R&D capabilities in the areas of Big Data, data mining, and machine-to-machine learning. We can focus on better personalized (indiscernible) shopping experience on our mobile platform.

At this point, let me hand over the call to our CFO, Donghao Yang so that he may discuss our trends to further improve our operational and the customer experience, as well as this quarter’s financial achievements.

Donghao Yang

Thanks, Eric, and hello, everyone. Along with continuing to deliver strong growth in the second quarter, we have concurrently been working to further optimize our platform for customers and brands alike to support our goal of driving market share expansion in 2014.

In line with our efforts of investing in R&D to optimize our mobile offering, we’re also aggressively spending headcounts in our IT team. These investments reflect our strong belief that technology is key to expanding market share and scaling our business.

Furthermore, we’re investing heavily and improving our fulfillment capabilities from both total capacity and automation perspectives. On the capacity side, we’ve reached a total warehouse capacity of 540,000 square meters and we’re on track to meet our goal of reaching 700,000 square meters by the end of 2016.

As we ramp up our technology investment and expand our IT team, we’re keen to improve automation, reduce labor costs, and shorten our delivery inventory turnover cycle at our fulfillment centers. As part of our overall commitment to customer satisfaction, we will continue to make strides in improving delivery times, optimizing brand portfolios, and ensuring a customer friendly return policy.

This theme has been particularly evident in the way in which we have built our marketplace segment. In this new lucrative segment, we’ve closely monitored customer feedback and accordingly increased the bar for suppliers to sell on our platform, in order to guarantee a high-level of satisfaction that is in line with our established market reputation in our traditional business.

Our technology investments in mobile, R&D, headcount and fulfillment characterize our overall product centric strategy of expanding market share by offering the best possible experience in order to attract and retain customers.

The superior customer experience we provide continues to drive our marketing through word of mouth referrals. However, in order to accelerate the growth of our customer base and take more on market share, we’re also moderately increasing marketing spending in tandem with our technology investments as we believe that our infrastructure can now scale and support accelerated customer growth.

Now moving on to our quarterly financial highlights. Before I get started, I’d like to clarify that all the financial numbers presented today are in U.S. dollar amounts and all the percentage changes refer to year-over-year changes unless otherwise noted.

Total net revenues for the second quarter of 2014 increased by 136.1% to $829.4 million. The growth of which was primarily driven by 167.9% increase in the number of total active customers and 138.4% increase in the number of total orders.

Gross margin for the quarter further expanded to 24.8% from 23.5% in the prior year period and gross profit increased by 149% to $205.8 million. This improvement was driven by the increased scale of our business, leading to greater bargaining power with our suppliers, as well as the development of our marketplace business. Moreover, we continued to see improvement in operating margins as a result of improved economies of scale and increase operational leverage.

More specifically, fulfillment expenses increased by 95.8% to $82.8 million for the second quarter of 2014. As a percentage of total net revenues, fulfillment expenses decreased to 10.1% from 12.2% in the prior year period. The cost reduction was primarily due to our continued efforts to reduce warehousing and personnel costs and negotiate better courier rates leveraging the growing order volume.

Marketing expenses increased by 196.7% to $44.8 million. As a percentage of total net revenues, marketing expenses increased to 5.4%, compared with 4.3% in the prior year period, reflecting our strategy to continue expanding market share and building greater brand awareness.

Technology and content expenses increased by 147.2% to $21.4 million. As a percentage of total net revenues, technology and content expenses remained stable at 2.6%, compared with 2.5% in the prior year period.

General and administrative expenses increased by 243% to $36.9 million. As a percentage of total net revenues, general and administrative expenses were 4.4%, compared with 3.1% in the prior year period primarily due to headcount expansion and the amortization of intangible assets resulting from the acquisition of Lefeng.

Driven by the growing scale of our Company’s operations, improved gross margin and cost control, income from operations increased by 251.3% to $23.7 million for the second quarter of 2014 from $6.7 million in the prior year period. Operating income margin increased to 2.9% from 1.9% in the prior year period.

Non-GAAP income from operations, which include -- which excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisitions increased by 349.4% to $42.9 million from $9.5 million in the prior year period. Non-GAAP operating income margin increased to 5.2% from 2.7% in the prior year period.

Our net income attributable to Vipshop's shareholders for the second quarter of 2014 increased by 192.1% to $26.4 million from $9 million in the prior year period. Net income margin attributable to Vipshop's shareholders increased to 3.2% from 2.6% in the prior year period. Net income per diluted ADS increased to $0.44 from $0.16 in the prior year period.

Non-GAAP net income attributable to Vipshop's shareholders which excludes share-based compensation expenses and amortization of intangible assets, resulting from business acquisitions increased by 263.6% to $43 million from $11.8 million in the prior year period.

Non-GAAP net income margin increased to 5.2% from 3.4% in the prior year period. Non-GAAP net income per diluted ADS increased to $0.72 in the second quarter of 2014 from $0.20 in the prior year period.

As of June 30, 2014, our Company had cash and cash equivalents of $635.5 million and held-to-maturity securities of $558.9 million. For the second quarter of 2014, net cash from operating activities were $29.6million.

Looking at our business outlook for the third quarter of 2014, we expect our total net revenues to be between $850 million and $860 million, representing a year-over-year growth rate of approximately 122% to 124%. These forecasts reflect our current and preliminary view on the market and operational conditions, which are subject to change.

With that, I’d now like to open the call to Q&A.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question is coming from the line of Alan Hellawell from Deutsche Bank. Please ask your question.

Alan Hellawell - Deutsche Bank

Thank you very much and congratulations on yet another strong quarter. Questions really just around the marketing expense line, it seems to have propped up maybe one percentage point quarter-on-quarter as a percentage of revenues. I would love to get little more color Donghao, as to what has driven that up and I think you did mention in your comments that it might moderately increase and what should we expect going through the rest of this year and next year? Thank you very much.

Millicent Tu

Okay. So Alan, Eric mentioned a few things here. First of all, the marketing expenses increased sequentially primarily due to two factors. First is marketing spending on mobile acceleration to acquire new mobile users. Secondly, to promote Vipshop’s branding to increase our visibility among consumers in China. And looking at our strategy, obviously, we think now it’s the right time to invest aggressively into mobile and to benefit the longer term growth. We have some priority shift. We would like to put more priority on market share gain over margin expansion in the near-term, given that we’ve such low penetration in China, as overall e-commerce market share. Along with that, we still remain very disciplined and expect to control marketing spending at a reasonable level. As a percentage to the top line marketing expenses, we will continue to countdown longer term.

Another thing that Eric would like to add is that the good thing with mobile is once you spend some marketing spending dollars to convert (indiscernible) into an active customer, you do not require to spend any further marketing to acquire the traffic from the App. So longer term, it will generate benefits to the Company.

Operator

Thank you. Your next question comes from the line of Cynthia Meng from Jefferies. Please ask your question.

Karen Chan - Jefferies & Company

Hi. Thank you management. This is Karen calling on behalf of Cynthia. A few questions here. First of all, can you share you with us the break down of other revenue between marketplace and advertising? Secondly, what’s the current revenue contribution from Lefeng and can you update us the progress of this integration in terms of supply chain marketing etcetera? Thank you very much.

Donghao Yang

Okay. Thank you for asking the question. Let me take this one. Well, from the other revenue line of this quarter, about $8 million were actually from the third-party marketplace business. We don’t report Lefeng’s revenue separately because its less than 5% of our total revenue, its relatively small and insignificant.

Operator

Thank you. Your next question comes from the line of Alicia Yap from Barclays. Please ask your question.

Alicia Yap - Barclays

Hi. Good evening, Eric, Donghao, and Millicent. Thanks for taking my questions. I have a couple of questions. One is regarding your announcement of the opening up of the R&D center, in the U.S. I’m just wondering in addition to tapping to more sophisticated engineer talents in the Silicon Valley, do you have -- also have a target to spending of flash sales service into the U.S and are these talents hard to find in China market, so that you have to do it in the U.S? And what would be the incremental labor cost or the salary costs associated to that and have that reflected in the second quarter?

Millicent Tu

So Alicia, we might have internationalization plan, but not at this particular stage. It’s obviously U.S is at the forefront of the technology innovation and Vipshop really needs to embrace and adapt to that. And overall by tapping into the detail and who in the U.S. we will increase the overall technology to -- and move into the next level.

Donghao Yang

And also we’re asked about the cost of that team. Well, the team is still relatively small. They’re about 10 people in that office in San Jose. So its not a very significant cost for Vipshop, not yet.

Alicia Yap - Barclays

I see. Great. And then, my second question is regarding that recently you have this promotional event called (indiscernible) in August, can you (indiscernible) should we see further increase in the sales and marketing spend? And can you remind us is this event -- last year you also have this event in August?

Millicent Tu

So Alicia, to answer your question, we did three promotions last year, one in April, one in July, and one in December. So we didn’t have any one in August last year. And we to be honest we didn’t have a fixed pattern as to when -- that the frequency of running such promotion will depend on our needs and based on (indiscernible). In terms of the marketing spending, obviously we would have ROI within our team. So the dollars spend to acquiring new customers we will be measured against to the top line and also the new customer growth.

Operator

Thank you. Your next question comes from the line of Eric Wen from China Renaissance. Please ask the question.

Eric Wen - China Renaissance Securities

Thanks very much for taking my question. (Foreign language) Donghao and Millicent. I have two questions. My first question is, can you give us more color on how Vipshop intend to expand on Big Data as mentioned, and how you would balance the incentives of your buyer’s team with your Big Data capabilities? And I’ve a follow-up question.

Millicent Tu

So a lot of key elements here. So, obviously Vipshop was very, very on the forefront in terms of operating the Big Data. And flash sales obviously well suited for this concept and over time it will increase our efficiency. At the moment, we have over 200 people in our Big Data team and the Big Data comes into two functions. First is to personalize Web pages based on different customers, their preferences, their age, and do some personalization from the end. And the other thing that we’re looking at after using the Big Data is to use the historical data to have a buyer to customize their merchandising when we effect -- when we gave KPIs to buyers, we look at two things now. First is the appearance and second is how the historical data can serve as the key function to improve the efficiency.

Eric Wen - China Renaissance Securities

Thank you very much. It’s very helpful. My second question is Donghao; can you comment on the take rate of your market price revenue and the composition category, merchant category composition of this revenues? Thanks very much.

Donghao Yang

On an average our take rate of our marketplace business is between 10% to 12%. Well, most of the product categories that we do on our marketplace are not -- are non-core -- are not our core product categories. For example, a lot of 3C products general merchandise and a lot of the bulky stuff, heavy stuff, very bulky big stuff, we do a lot of that on our marketplace. And for our core product categories, for example apparel, cosmetics, baby and home goods, we do them ourselves.

Operator

Thank you. Your next question comes from the line of Binnie Wong from Bank of America Merrill Lynch. Please ask your questions.

Binnie Wong - Bank of America Merrill Lynch

Thank you for taking my questions. I have two questions here. I was wondering that like for the order per repeat customers, we noticed that has improved from 3.3 times -- 3.4 times last quarter to 3.5 times this quarter. And then the track from Lefeng has started to get I guess normalized, and then we start improving in terms of the order per repeat customers, and so I was just wondering that what is the trend going forward. And then the second question is on the cosmetic side. What is the total cosmetic -- the percentage of total GMV now? I understand the combined (indiscernible) legacy cosmetics together as one segment. So, I just want to understand that as a percentage of total, what is there for this quarter?

Millicent Tu

So, Binnie to repeat what Eric said. So in Q2, 2014 the average order per customer is actually 2.8 times up slightly from 2.7 in the first quarter. And Eric did mention that in Q3 and Q4 you’d see some improvement there especially -- in particular in Q4 whereby that is our key season of the whole year. And in terms of cosmetics contribution to the total GMV, our overall cosmetics category is growing rapidly. So, during the second quarter both Lefeng and Vipshop the combined GMV accounts for $177 million.

Binnie Wong - Bank of America Merrill Lynch

Thank you.

Donghao Yang

I’m sorry. Well, that U.S. dollars -- US$177 million combined GMV for cosmetics from both Lefeng and Vipshop.

Operator

Thank you. Your next question comes from the line of Chi Tsang from HSBC. Please ask your questions.

Chi Tsang - HSBC

Hi, good evening. Thanks for taking my question. I wanted to ask you about your operating margins, and your spending? I know you guys talked about accelerating your spend for marketing, but non-GAAP marketing expenses grew 50% Q-on-Q. So I’m wondering how we should about that for the upcoming few quarters and similarly your G&A on the non-GAAP basis also increased by a lot on the Q-on-Q basis. So, just how should we think about spending for those both of those expense lines (technical difficultly)? Thank you.

Donghao Yang

Okay. Thanks for your question. On the marketing expenses I think Eric has already explained our strategy. We are going to spend dollars to acquire more mobile traffic because it’s the right time for us to do that. And then we’re going to spend money to build greater brand awareness which will benefit our long-term growth. But in the next few quarters and in the long run we’re going to be very careful in terms of making sure that our marketing expenses will not go up too aggressively as a percent of revenue. In Q2 we actually booked fairly large amount of amortization expense resulting from the acquisition of Lefeng which is more than $9 million. That was a big reason why our GMV expenses were a lot higher than compared to Q1. And you’re going to see that amortization cost for the next few years because our amortization period is about five years.

Chi Tsang - HSBC

Great. And sort of, and also in line with means of adjusted operating margins were 5.2% in the second quarter. How should we be thinking about operating margins for the second half? Thanks a lot.

Donghao Yang

Well, I’m sorry, we don’t give guidance on operating margin for the future. But what I can tell you is, currently the strategic focus for the company is not -- its not so much margin improvement as gaining more market share or growing our top line aggressively. So, growth especially in terms of top line market share is our primary focus. And if you look at our operating expenses especially our marketing side you’re going to see the reflection of our current strategy.

Operator

Thank you. Your next question comes from the line of Jiong Shao from Macquarie. Please ask you questions.

Jiong Shao - Macquarie

Thank you for taking my questions, and congrats on the very strong results. Just first to follow-up on what Donghao just said about the amortization costs from Lefeng acquisition. Donghao, you said $9 million in Q2, additional $9 million because of the amortization and for the next five years is that every quarter, does it going to be a $9 million non-cash expenses in your P&L -- in SG&A line?

Donghao Yang

Well it’s slightly more than $9 million, but that is only the amortization cost resulting from the acquisition of Lefeng. And if we do more transactions down the road, you’re going to see more amortization costs resulting from our future acquisitions.

Jiong Shao - Macquarie

Okay. So, for the time being roughly over $9 million straight line amortization for the next five years -- $9 million every quarter which are non-cash?

Donghao Yang

Yes.

Jiong Shao - Macquarie

Okay, that’s helpful. My first question is also on Lefeng, would you be able to share a bit with on actually for the overall cosmetics, the Vipshop plus Lefeng, you talked about $177 million revenue. Are you able to share with us a bit on the margins, gross margin, operating margin for this particular category of products?

Donghao Yang

Well, first of all it’s not revenue, its GMV, $177 million GMV. And sorry, we don’t disclose the actual margin profile for our Lefeng business because we do want our -- the capital markets or the investors to look at our total cosmetics business as a whole. That’s why we only disclosed the GMV for the combined cosmetics business, not so much in particular about Lefeng business.

Operator

Thank you. Your next question comes from the line of Thomas Chong from City Group. Please ask your questions.

Thomas Chong - City Group

Hi, good evening everyone. I have two questions. The first question is, can management provide some color about how much of your GMV are coming from mobile in the second quarter, and how should we think about the trend in the third quarter and the fourth quarter? And my second question is regarding the geographical mix for your GMV between the top tier and lower tier cities. Can management comment about how is it different in PC and mobile? Thanks.

Millicent Tu

Our mobile business is growing very fast. In the second quarter alone mobile accounted for 46% to GMV which is compared to 12% in the same period last year. And in July alone, mobile contribution to GMV already exceeded over 62%. So the trend for Q3 and Q4, we would expect acceleration from there and so, most likely it will be higher contribution in the second half. The combined contribution from tier 2 and tier 3 has increased 50% in Q1 this year to 53% in the second quarter and the remaining is from tier 3 and tier 4 cities. It’s very similar to the overall tier city contribution for Vipshop for the mobile business, the mobile platform.

Operator

Thank you. Your next question comes from the line of Binnie Wong from Bank of America Merrill Lynch. Please ask your questions.

Binnie Wong - Bank of America Merrill Lynch

Hi. Thank you. I think my question has already been taken. Thank you.

Operator

Thank you. Your next question comes from the line of Weibo Hu from Goldman Sachs. Please ask your questions.

Weibo Hu - Goldman Sachs

Hi, good evening. So congratulations on such strong earnings, and thank you for taking my question. And my first question is in terms of the order size. We find that the second quarter order size declined 2% year-on-year and 9% quarter-on-quarter. So, would you mind sharing with us how much is caused by the dilution from Lefeng, and how much is due to the promotion of other factors? And again as the (indiscernible) just mentioned, in this quarter about 53% of the orders come from the tier 1 and tier 2 cities. So, it seems like that, the order size in tier 1 and the tier 2 cities is lower than the tier 3 or tier 4 cities. So, I just want to confirm on this question. And then my second question is that, we learned from (indiscernible) and you said we’re recruiting some M&A talents from (indiscernible). So would you mind sharing with us our longer term strategy on M&A and (indiscernible) pension? Thank you.

Millicent Tu

The decline in (indiscernible) is actually back in the second quarter it’s a little deepened whereby we’re selling mainly some clothing, whereas in Q1 it’s the weakest season. So obviously the (indiscernible) is higher compared to the second quarter.

Donghao Yang

Okay. Let me take your next question about our M&A strategy. We have built a fairly small M&A team currently with about six people. And our M&A strategy is actually very clear. Any of our -- any deals that we do must be of strategic value to Vipshop. We don’t want to be a pure financial investor, meaning any deal that we do must be complementary to our existing business or supporting our long-term goal in our business.

Millicent Tu

Not necessary in terms of your question on the average ticket size between the first and second tier versus that in the third and fourth tier cities, it may be a factor of seasonality.

Operator

Thank you. Your next question comes from the line of Wendy Huang from Standard Chartered Bank. Please ask your questions.

Wendy Huang - Standard Chartered Bank

Thank you. I have some housekeeping questions. Your revenue guidance suggest there is year-over-year growth, but in terms of the sequential expansion it seemed to suggest less than 5% sequential growth. And in your earlier answers you seemed to imply that the average order per user in Q3 actually should continue to go up sequentially. So, does that mean the number of active customer actually will slightly decline in the third quarter or this kind of the sequential growth trend is actually more driven by the seasonality rather than anything else?

Donghao Yang

Well, it’s driven by more -- more by seasonality than anything else. And if you look at our historical numbers or guidance for Q3, sequential growth rate was actually always pretty low, like in the single-digit.

Wendy Huang - Standard Chartered Bank

Okay. Should we expect the user base to continue to expand in Q3?

Donghao Yang

Slightly, yes. Because in Q3 we have the two hottest months in the year, July and August. And as an apparel retailer people don’t buy a lot of clothing in hot summer times.

Operator

Thank you. Your next question comes from the line of Ella Ji from Oppenheimer. Please ask your questions.

Ella Ji - Oppenheimer

Good evening management. First I have a follow-up relating to your total cosmetics GMV $177 million. Could you share with us of what's the year-over-year growth on a pro forma basis, and also quarter-over-quarter growth?

Donghao Yang

Q-over-Q, yes because we disclosed last quarter, our total cosmetics GMV from the combined Lefeng business and Vipshop’s own business was $167 million. So, this quarter Q2 we did $177 million, its very easy for you to calculate the Q-over-Q growth rate. But last year it was, we can't because, we didn’t acquire Lefeng last year. So, we can't make that comparison.

Ella Ji - Oppenheimer

Yes, my question was on pro forma basis. I’m not sure if you added Lefeng’s 2Q GMV last year. What year-over-year growth are we seeing?

Donghao Yang

Well we can -- we don’t have that number right now, but we can probably do that after the call.

Ella Ji - Oppenheimer

Sure. So, you said that 1Q the cosmetics GMV is $167 million, is that right?

Donghao Yang

Yes.

Ella Ji - Oppenheimer

Okay, so then if I do a quick calculation the Q-on-Q growth is about 6% and that seems a little bit lower than your total sales growth. So, can you give us some color so, are you continuing to see apparel maybe grow faster than the cosmetics?

Donghao Yang

Well some of this seasonality in the cosmetics business, Q2 is again the low season in the year. So, 6% Q-over-Q growth may seems a bit low compared to our core apparel business where its still not so bad if you can consider the seasonality element.

Operator

Thank you. Your next question comes from the line of Chao Wang from Nomura. Please ask your question.

Chao Wang - Nomura

Good evening. Thank you for taking the question. I have a question on fulfillment expense. If we look at shipping and handling expense its down quite much even lower than the fourth quarter last year while orders have been increasing. So, in terms of per order expenses its down over 35% compared to 4Q, I just wondered if you could give us more color on that and how should we think about the trend going forward? Thank you.

Donghao Yang

Thanks for the question. But there are few things that have been contributing to the reduction of our fulfillment expenses. We have moved to larger warehouses where we can achieve very economic scale. We have been working very hard to implement some automation in our warehouse by which we can improve our efficiency and reduce cost and also we have been pretty strict on our headcount increase in our warehouses in order to reduce cost. So we have done quite a lot of things. We have made quite a lot of efforts to drive the fulfillment expenses down. But going forward, I don’t think there is too much room. But there will be some room, but not too much for us to further drive down the fulfillment expenses because as you can see labor cost is going up, gas prices are going up. So there are things that are out of our control that are driving the fulfillment expenses up.

Chao Wang - Nomura

Got it. I just want to clarify; does the shipping and handling expense include warehouse depreciation as well?

Donghao Yang

Yes.

Chao Wang - Nomura

Okay.

Operator

Thank you. Your next question comes from the line of Binbin Ding from J.P. Morgan. Please ask your questions. Binbin Ding your line is open. Please ask your questions. As there is no response, we will move on to the next participant. Your next question comes from the line of Tian Hou from TH Capital. Please ask your questions.

Tian Hou - TH Capital

Management, thank you for taking my question. One of my questions related to the new customers. Actually you were spending more marketing dollars. I wonder, how do you see your new customer acquisition? How many do you have in this quarter? And do you expect marketing dollars benefit the future new customer increase? That’s number one question. Number two is related to your self procured business -- not self procured business, your (indiscernible) business versus market place. So, you have expanded into a lot of different categories beyond apparels and shoes and bags. So, in the apparel business, one thing if your competitive advantage is buyers, (indiscernible) but in the new categories you’re expanded into. So, what type of key for the success in the new category? That’s the two questions.

Millicent Tu

So in the second quarter we added $4.1 million total new active customers. And new active customer acquisition cost is close to US$10. And I think you need to invest before you can benefit, and so, if you look at the total new active customer for the first half it’s very close to what we had in 2013. So, going forward, we don’t think new active customer acquisition cost would go very high. Actually it is a misunderstanding here. We always had our key categories including apparel, home goods, cosmetics, baby and mother, shoes and bags and accessories et cetera. So, obviously buyers -- we have buyers across all these categories since day one. And what we have been doing is actually to increase our market penetration in the existing category. We have to set a lot of data on (indiscernible) event. We know exactly which event to what are selling right what are not and that data is constantly set back to our buyers to help them improve.

Operator

Thank you. Your next question comes from the line of Xiaoyan Wang from 86Research. Please ask your questions?

Xiaoyan Wang - 86Research

Hi, good evening management. Thank you for taking my question. My first question is regarding our cash position. I see that our (indiscernible) factors our account receivable increased by $12 million so, that write down our cash flow from operations. So, could you give some color on that first?

Donghao Yang

Well, cash -- account receivable is actually a number at the end of that month. So there is some -- there is a chance that it’s just a minor movement or it’s just temporary movement. So, it doesn’t reflect our long-term cash position, especially cash from operations.

Xiaoyan Wang - 86Research

So you’re saying we’re expecting a recovery in terms of the cash flow from operation or a decrease in terms of account receivable days, and that mean the next quarter?

Donghao Yang

Yes, in the long-term we believe that our cash from operations will continue to go up. And also our account receivable base are usually very, very short, because more than half of our customers do pay online. So, it’s basically cash advance from our customers. And only about 40% to 45% of our customers are paying on cash on delivery terms. But even for those customers they typically pay us within seven days. So, usually our account receivable days are just one or two day’s right now. So it’s not an issue at all.

Operator

Thank you. There are no further questions at this time. I would now like to hand the conference back to Mr. Yang. Please continue.

Donghao Yang

Well, thank you everyone for coming to our conference call and I look forward -- we look forward to speaking with you again a quarter from now.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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