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Executives

Maria Xin – IR Director

Peggy Yu Yu – Co-Founder and Executive Chairwoman

Susan Zhang – Financial Reporting Director

Analysts

Fawne Jiang – Brean, Murray

Philip Wan – Morgan Stanley

George Chang – Macquarie

Emma Zhao – ROTH Capital

Ida Yu – CICC

Tian Hou – TH Capital

Wallace Cheung – Credit Suisse

Andy Yeung – Oppenheimer

Andrew Marok – Cowen Group

Alicia Yap – Barclays

Muji Li – Citigroup

E-Commerce China Dangdang Inc. (DANG) Q2 2012 Earnings Call August 16, 2012 8:00 AM ET

Operator

Hello, ladies and gentlemen. This is Desmond, and I’ll be tele-operator for this conference call. I would like to welcome everyone to E-Commerce China Dangdang Second Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. (Operator Instructions)

Now, I would like to turn the call over to Ms. Maria Xin, Investor Relations Director of Dangdang. Please proceed.

Maria Xin

Thank you, and welcome to our second quarter 2012 earnings conference call. Joining me on the call today are Peggy Yu Yu, Executive Chairwoman and Susan Zhang, Financial Reporting Director. For today’s agenda, management will discuss highlights for the second quarter of 2012. This will be followed a question-and-answer session.

Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Also, this call includes discussion of certain non-GAAP financial measures.

Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the mostly direct comparable GAAP measures. Finally, please note that unless otherwise stated, all figure mentioned during this conference call are in renminbi.

I’d now like to turn the call over to our Executive Chairwoman, Peggy Yu Yu.

Peggy Yu Yu

Thank you, Maria. Good morning and good evening everyone. I’m pleased to report that during the second quarter, Dangdang delivered a solid performance. Our growth momentum is good.

Net revenue growth of 53% was better than our guidance issued last quarter. Books and media grow 32%, general merchandise grow over 110% year-over-year and contributed one-third of revenue compared to one-fourth of revenue in the same period last year. Our gross margin of 13.1% in the second quarter was better than the second half of last year.

Competition in this segment was also very intense. We benefit from the fast growth in marketplace, gross merchandise value transacted on our marketplace grow at much higher rate than Dangdang’s own general merchandise.

At Dangdang, in the first half of 2012, we continue to progress in giving our customers the best possible shopping experience. As planned, we made our efforts in fulfillment, product selection and the pricing to optimize the shopping experience of our customers.

In fulfillment, we enhanced service in both Dangdang merchandized products as well as that by marketplace vendors during the quarter. First, for procurement products we increased our monitoring levels in core cities and managed courier companies more closely to improve delivery speed and services.

As a result, the customer satisfaction rate went up. We are now providing same day delivery in 20 cities. Furthermore, we increased our next-day-delivery by 10 cites to 150 cities to reach out to more customer in offering our next-day-delivery service.

On the other level in marketplace we improved the services we offer our third-party merchants. The lower costs fulfillment capacities at Dangdang help our third party merchants have the long-term ability to serve our customers.

Let me turn to product selection. In Sale Procurement, we improved the supply chain management. Dangdang’s merchandising department walked very closely with our suppliers during the past quarter. We came out with many joint promotions and a joint product launchings.

In our destination categories, we achieved bigger buying power than before. We also added premium brands are in the products exclusively available on Dangdang, always helped us with very good product mix. And there are traffic promotions throughout the quarters.

As for market place, we started to shift certain products to our market place programs from previous self procurement programs, such as many consumer electronic products. One sports apparel and outdoor gear.

Throughout the first half of this year, our market place programs has attracted high quality third party merchants, who have similar positioning as Dangdang does in customer targeting of mid to high end customer base.

In terms of pricing, there were unprecedented competitions in the second quarter and our Dangdang team did it intelligently and with good result. Some players use irrational pricing tactics. As pricing levels dropped below procurement cost though access is of suppliers buying back their own products at a profit and the small retailers purchasing from certain new E-Commerce companies below their own procurement costs. The low quality of the sales either back to suppliers or to small shops make this unsustainable way of building long-term competitive strength in the market.

At Dangdang, however, we have a disciplined way of dealing with this tactics. We plan and timed our product promotions to take place in different periods of the quarter than the other players. We made many efforts to make sure Dangdang’s existing customers not some suppliers or other retailers from our – benefit from our programs. The fact that we maintain our pricing lead played a important role in our achievement of quarterly growth rate of 53%.

Let me now go over some other points regarding operations. Marketing, either in the highly competitive landscape, our new customers’ acquisition cost was only RMB22 in the second quarter. We had over 5.7 million active customers in the second quarter. We maintained a rational marketing strategy and prepare ourselves to make adjustments as required by changes in the competitive environment.

E-Books, early July our E-Reader had a trial launch. We are not expecting material sales of E-Readers and E-Books in the near-term for Dangdang. We are still at this early stage of forming new customer reading habits.

Technology, we added more engineers in the past quarter. The investment in our technology cooperating of both our PC and mobile platforms will help improve our customer’s shopping experience and promote mobile E-commerce.

Dangdang’s long-term strategy is to provide excellent customer experience with low pricing, good product selection and high service level. The execution of our strategy brought about a solid result in the second quarter and approved strategy rational and sound.

Moving to second half of 2012, Dangdang will stick to this long-term strategy. We will make our destination category stronger. We will be recording new merchants to our marketplace so that our product selection getting rich. We will keep adding exclusive products to better utilize our spread in supply chain management.

To ensure ongoing improvement of our customer experience, we will set up strong across-function of customer committee and provide quantified targets to our sales and to our merchants – to our merchants in marketplace participants.

With that, I will now pass this floor to Susan Zhang, our U.S. Reporting Director for more details about financial results of this quarter. Thank you.

Susan Zhang

Thank you, Peggy. On this call, I will discuss with you in more details second quarter results. Our total net revenues were RMB1.2 billion in the second quarter of 2012, a year-on-year increase of 53%. Media revenue was RMB772 million, which was up 32% year-on-year.

General Merchandise revenue was RMB403 million, a year-on-year increase of 110%. Other revenue which is mainly from third-party merchant was RMB33 million, a year-on-year increase of 122%.

Dangdang acquired 1.7 million new customers in the second quarter. We had about 5.7 million active customers in the second quarter, a year-on-year increase of 23%. Total orders in the quarter were up approximately 11.1 – a 20% increase year-on-year. Average contribution per customer in the second quarter was RMB212 compared to RMB171 in the second quarter of 2011 representing a 24% increase.

Gross margin was 30.1% in the second quarter as compared to 14.3% in the second quarter of 2011. The year-over-year decrease was primarily due to the competitive pricing changes in product mix with the higher percentage of general merchandise. General merchandise revenue was 33% of total net revenues as compared to 24% in the corresponding period in 2011. Gross profit was RMB158 million, a year-on-year increase of 40%.

The fulfillment expenses which include warehouse and shipping expenses were RMB181 million, an increase of 71% year-on-year. Fulfillment expenses were 15% of total revenues in the second quarter compared to 30.3% in the same period in 2011. The increase was primarily due to the expanding of procurement team and the increase of rental costs for the new fulfillment centers as well as investments in improving customers’ shopping experience.

Total warehouse capacity at the end of the second quarter was 350,000 square meters as compared with 210,000 square meters one year ago. We also added 10 more cities to 150 cities where we provide next day delivery services.

Marketing expenses were RMB36.3 million, representing 3% of total revenues compared to 2.3% in the second quarter of 2011. The increase was primarily due to the different marketing tactics in the two corresponding periods and competitive environment in the second quarter of 2012.

Technology and content expenses were RMB38.8 million which was 32% of total revenues compared to 2.6% in the second quarter of 2011. The increase was primarily due to the increased head count of mid-to-high level engineers who will improve Dangdang customer’s shopping experience and promote mobile e-commerce.

G&A expenses were RMB30.8million which represented 2.6% of total revenues and which was the same to the corresponding quarter in 2011. Share based compensation expenses, which were allocated to related expenses line items, were RMB2.8 million in the second quarter compared to RMB2.6 million in the second quarter of 2011, which was a 7.8% increase.

Net loss was RMB122.2 million compared with a loss of RMB28.4 million in the second quarter of – in last year, primarily due to the increase in cost of revenues and the increase in fulfillment and marketing expenses.

Now let’s move to the balance sheet. As June 30, 2012 our cash balance was RMB1.4 billion, an increase of 47.6 million from the December 31, 2011. Turnover days for account receivables were 5.5 days in the second quarter of 2012, compared to 4.1 days in the corresponding period in 2011.

Our accounts payable were 2 billion as compared to RMB1.5 billion at the end of fiscal year 2011. Turnover days for account payable were 162 days in the second quarter of 2012, compared to 156 days in the corresponding period in 2011.

Our inventory was RMB1.7 billion at June 30, 2012, as compared to RMB1.6 billion at December 31, 2011. Turnover days for inventory in the second quarter of 2012 were 144 days, as compared to 131 days in the second quarter last year. Capital expenditures for the second quarter of 2012 were RMB47 million.

Finally, our outlook for the third quarter of 2012 is as follows. We expect total net revenue in the third quarter of 2012 is to be around RMB1,272, representing year-over-year growth of around 40%.

We will now open the call to questions. Operator, please go ahead. Thank you.

Question-and-Answer Session

Operator

Ladies and gentlemen, we would now begin the question-and-answer session. (Operator Instructions). The first question comes from the line of Fawne Jiang from Brean, Murray. Please ask your question.

Fawne Jiang – Brean, Murray

Thank for taking my question. First one is actually regarding your guidance. You guided 40% year-over-year for 3Q, I just wonder what’s the implies – implied growth rate for e-Shopper segment?

Peggy Yu Yu

Yes, our guidance of 40% for third quarter, it’s slower than what we had in the second quarter which was 53%, and we are channeling more sales from our self procurement program into E-marketplace. And there are own general merchandize right now for about 110% and our E-marketplace transaction is growing may be twice that rate. So it makes sense for us to have more sales from our self procurement program in to marketplace program, that’s what we are doing.

Fawne Jiang – Brean, Murray

Got it. Peggy, I guess the question here is, I don’t know whether you guys have assembly over there, like what would be the growth rate if you guys didn’t. Because apparently you are booking GMV, right, in your own general merchandize versus – net revenue.

Peggy Yu Yu

No. They – in our net revenue booking we are only booking the revenue of media product under the product sales from those inventory that Dangdang have. And therefore our marketplace we only booked a commission, and that a third component and so we don’t book GMV value for our marketplace transaction.

Fawne Jiang – Brean, Murray

Right. So I guess that’s the part of the reason your guidance seems like year-over-year growth seems started coming down.

Peggy Yu Yu

Yeah, Right. Yeah, yeah.

Fawne Jiang – Brean, Murray

I guess like what kind of part in terms of category like what are specific product type, what covered type of product you’re trying to move into your e-marketplace and what you will continue to keep on your general merchandize platform?

Peggy Yu Yu

Apparel is one segment and we think apparel is highly seasonal and there are shops who know trends and other things better than we do. And so fashion apparels, sports apparel, outdoor gear, and also some consumer electronic things and we are moving a lot of those things to marketplace programs.

Fawne Jiang – Brean, Murray

Got it. Second question is really about competitive landscape in 3Q. It seems like all the big players in the space are running or planning to run pretty aggressive promotion in 3Q and just I want to get your view on the near-term, I think, competition dynamic as well as the implied – the potential impact on your margin in 3Q?

Peggy Yu Yu

I think Dangdang will have – will get favorable benefits from the current competition. And since August, we’re seeing that e-commerce electronics, e-commerce companies having heavy promotion and they are getting each others’ turf like 360 is strong in computer, pad and the cell phone, and is moving to large home appliances.

And assuming eco on a gourmet of who are strong in large home appliances like refrigerator are moving to the turf. So, I am looking at this as a three new app equivalent, one – the two with offline – offline shops – online only. And they are pitching – they are competing each other very heavily.

And for Dangdang, Consumer Electronics is what we call a convenient category and another destination category. And so I think this current competition is arousing a lot of eyeballs from offline shoppers. And people are focusing very much on the strong and growth momentum of online shopping.

So, the competition is taking in the segment that Dangdang is not heavily involved and is arousing a lot of customer awareness of online shopping. So I think we’re going to benefit from this trend in the second – in the third quarter.

Fawne Jiang – Brean, Murray

Any potential downside to your margin for the quarter, just given you may have to set up your – from like sales pricing effort? Or do you think margin could be pretty stabilized from second quarter level?

Peggy Yu Yu

I think stabilize for the – from the second quarter level.

Fawne Jiang – Brean, Murray

Got it. That’s very helpful. Thanks Peggy.

Operator

Thank you for your questions. Next question comes from the line of Philip Wan from Morgan Stanley. Please ask your question now.

Philip Wan – Morgan Stanley

Hi, good evening. Thanks for taking my question. My first question is also regarding the price competition. I wonder when you deal with the vendors, what are their reactions about the priced bonds. And also you mentioned in your prepared remark that Dangdang is dealing with this in a disciplined way. Could you elaborate a little bit more on this? Thank you.

Susan Zhang

Yeah. When we talked with vendors and actually a lot of vendors this year have a huge inventory problem because the general spending – consumer spending is slowing down. For instance, in July, I think from the top 50 retailers, I am seeing the growth in that at about 6% to 7%. And the – a 5% to 6% and the growth rate from top 50 retailers that in the second quarter was more than twice as much as this, which directs us to the direction that a lot of the vendors have a inventory issue. So for the short-term, I think the vendors want to see their inventory to be moved from their warehouse or retailers warehouse to the homes of consumers. But vendors in the long run hate to see their pricing structure to be destroyed by e- rational price wars.

So it really depends on what type of vendor, if it’s a like A plus vendor, who doesn’t have an inventory problem, they hate this kind of behavior. But for some vendors who have a inventory padding a problem they are trying to use their channels to get rid of their inventory.

At the same times, the vendors try to protect themselves by giving such type of machine to one retailer and some others to different kind of retailer. And what’s your second question, sorry I kind of forgot.

Philip Wan – Morgan Stanley

So, you mention Dangdang is dealing with this price competition in a more disciplined way, that’s very -a little bit more on this – is Dangdang not competing had to have with the other competitors or are you only selecting...

Peggy Yu Yu

Definitely we compete and if you check price index such as eTao by Ali, you can see that Dangdang price index is the best. But we are seeing there are many ways of doing promotions and giving customer benefits. For instance, whereas a joint promotions, like this year by popular singer Hang Kung that’s Dangdang exclusive or for the jeweler, Chow Tai Fook, they have – we have a special program for that.

So with all kinds of those things, we can, one, our develop pricing aggressive, two at the same time protect our margins and then incentivize vendors to go along with Dangdang for the long run.

Philip Wan – Morgan Stanley

Okay. Are those promotions at process basis?

Peggy Yu Yu

Some are. At the same time I should also answer that the Dangdang’s Supply Chain Management and market position also help. In our media segment because we have – we are very bigger than second or third or fourth player to the market. So we enjoy a significant procurement cost. And on top of that, we do special programs and there we also have exclusive products so we have different peers to deal with this competition.

Philip Wan – Morgan Stanley

All right. Thank you and then my next question if I may. Could you share with us your top product categories within your merchandize services and their revenue contribution if possible? Thank you.

Peggy Yu Yu

Our destination category are household items – that we break that into bathroom lines, bedroom lines and our living room lines and all those different lines and that our destination category also include baby stores. And the baby clothing formula and those things and another destination category is personal care which includes in-care and the cosmetics and the body care, those were the destination categories that Dangdang does its own procurement and the sales.

And in our market place program, right now is very heavy on apparel and we’re adding more product sales and more vendors into this program.

Philip Wan – Morgan Stanley

What’s the contribution for your electronics?

Peggy Yu Yu

For electronics they – is low, yeah.

Philip Wan – Morgan Stanley

All right. Thank you. That’s very helpful.

Operator

Thank you for your question. Next question comes from the line of Jiong Shao from Macquarie. Please ask your question.

George Chang – Macquarie

Hi this is George calling on behalf of Jiong. Good evening Peggy, Susan and Maria. Thank you for taking my question. So, I have couple of questions regarding your vendors. So basically, I saw that your AP balance is gradually building up and the AP actually turnover days reached 161 days this quarter, which is slightly increasing.

So, I wonder can you actually comment on the trend and also you said that the vendor actually – some of the vendors have some inventory piling up problems. So, does that actually help you in terms of your bargaining power to actually further increase the AP turnover days?

Peggy Yu Yu

The AP turnover days did increase and we don’t feel much pressure from vendors to start with. And also in Dangdang, we managed our inventory AP days and AR days as a way to utilizing our asset to contribute revenue growth at very low capital cost of ourselves.

George Chang – Macquarie

Right. So, actually I’m asking is it possible to actually increase from this level to actually utilize more from the capital from the vendors?

Peggy Yu Yu

It is possible to increase, but we don’t necessarily do that. There also we use payment as a way of getting additional points.

George Chang – Macquarie

Okay. And so...

Susan Zhang

Advance payments to certain vendors, so that vendors markdown their inventory. And sometimes, we talk to them, you see. We know you have – you want to achieve certain AR days, you want to achieve certain sales targets, and then let’s do promotion together. So that’s a way to manage this.

George Chang – Macquarie

Okay. Thank you. And so, basically on the 80 days; on your different types of vendors is there any...

Susan Zhang

There’s a huge difference, there is a huge difference. Certain vendors, for instance, like iPhone or iPad there is no way we can get like 80 days. And those are just, you pay the money and then you’ll get your goods. And then for some other vendors, they – as long as their products get sold on Dangdang, they are not hesitate to say 200 days or something, so there is a huge difference there.

George Chang – Macquarie

Okay. So, can I understand this way, so basically for those vendors that have a high bargaining power you don’t have 80 or very sure 80 days, and also you need to take the inventory risk in terms of just doing it on a consignment basis?

Peggy Yu Yu

No. Actually, I think it has to do – a lot more to do with the industry than with the company. For instance, consumer electronics, companies like Apple or Sony and because the markdown of their products, not really an Apple, but some other cell phones. There are second markdowns of their products. So that industry in general has very short AP days. And for some other vendors, for instance, a publisher of architecture that – is that industry itself contains high AP days. I think it’s not dictated by a particular supplier, but rather it’s that industry’s practice.

George Chang – Macquarie

Okay. And my second question is about the procurement cost. So basically, you just mentioned that your procurement cost is actually better than like the smaller players. So if – for example, if you compare it with your bigger peers or maybe compare to the offline guys, do you see a difference here that you are actually disadvantaged because of your smaller scale?

Peggy Yu Yu

Category by category, immediate, definitely, we have a very big procurement cost advantage. In consumer electronics, we have about – we don’t have procurement cost advantage. We may be a little bit more expensive than bigger guys like Gome or Sony. And in other types of general merchandize there we’re about the same as offline, because no one is particularly bigger in those kind of categories.

George Chang – Macquarie

Okay, great. And the final question, so you actually mentioned that basically for the market price segments, you booked just the commission. So I guess that means that the margin of this category should be much higher, so can you actually share some color with us about the margins in this category and also if this category is actually growing at a faster pace than other categories so should we actually see some kind of gross margin recovery going forward? Thank you.

Peggy Yu Yu

This category gross – will not affect gross margin because gross margin is a difference of sales and the cost of goods sold. And the cost of goods sold seems – the market plays transactions don’t go into cost so margin has nothing to do with that. And in terms of the commission we get from the marketplace program and for consumer electronics we book low commissions like 0.5% of the gross merchandise value. And for apparel we – you know, sometimes we book 6%, 8% or even 10% and that it really depends on the types of products the vendor is engaged, then we book with – book a commission accordingly.

George Chang – Macquarie

Yeah. I understand that, but basically because you just booked the commission as a revenue, so I’m actually wondering so do you have any other kind of cost of goods sold for this category....?

Peggy Yu Yu

Okay, I got your question. Yeah. The commission we get from our marketplace programs in the second quarter that was RMB33 million basically that’s just pure commission we book. And the costs involved are mostly human resource cost, which already gets reflected in the fulfillment line. You know, all the people that we engaged in recruiting vendors, helping vendors fulfill, those are like head count costs that gets reflected in fulfillment cost. And then the technology platform that we need to develop to accommodate marketplace program that cost get reflected in the line of tech cost so on so forth.

George Chang – Macquarie

So, actually the – all the cost you actually book actually in the expenses line and not the COGS line, right?

Peggy Yu Yu

That’s right. That’s right.

George Chang – Macquarie

So, in terms of this if this is your commission growth further from here then is it possible that your gross margin as a whole will actually improve from this level?

Peggy Yu Yu

Our bottom line will be helped, and then because our gross margin is pure gross margin from sale under cost line, that doesn’t get changed.

George Chang – Macquarie

Okay. Thank you very much. That’s very helpful. Thank you.

Operator

Thank you for your questions. Next question comes from the line of Emma Zhao from ROTH Capital. Please ask your question now.

Emma Zhao – ROTH Capital

Hi, this is Emma Zhao in for Adam Krejcik. And my first question is concerning your new customer acquired this quarter. If I get it right pagination that the acquisition cost per customer is RMB33 this quarter?

Susan Zhang

I’m sorry. I think, it’s RMB22.

Peggy Yu Yu

32.

Emma Zhao – ROTH Capital

22? Okay. So does that translate to about 1.6 million new customer this quarter?

Susan Zhang

1.7 million new active customer...

Emma Zhao – ROTH Capital

1.7.

Susan Zhang

Okay, six.

Emma Zhao – ROTH Capital

And the next question is about, all right we know that you recently just joined QQ Buy and running exclusive book channel. Could you give us some update on that? And how do you think that would – how big contribution are you expecting on this to your revenue side?

Peggy Yu Yu

Tiny-winy, very small. And we proceed partners by QQ (inaudible) the way we proceed by marketplace either we have additional channel on QQ or Gome has additional channel on Dangdang, and is presenting each other either with products with always customer. And at this stage, the sales or volumes on QQ is very, very small.

Emma Zhao – ROTH Capital

Is this because you’ve just started or is because the nature of QQ user like very small, like portion of e-readers or?

Peggy Yu Yu

I think it’s because QQ is very early stage of our companies operation. And e-commerce is also a new territory for QQ and QQ e-commerce effort is trying to figure out where together traffic for its own entire QQ e-commerce. So I think we all need time to explore how we congregate traffic, how we convert traffic into shopping behavior.

Emma Zhao – ROTH Capital

All right. Thanks. That’s very helpful. And my next question is about your operating cash flow, what’s the status of Q2?

Peggy Yu Yu

Maria, do you have that? I just remembered, our cash is about RMB1.4 billion and there is an increase of either RMB40 million or RMB50 million from the end of last year.

Maria Xin

And net cash flow from the operating activities is 18.6 million negative.

Emma Zhao – ROTH Capital

18.6 million – RMB18.6 million?

Maria Xin

Yeah, RMB.

Emma Zhao – ROTH Capital

Negative?

Maria Xin

Yes, negative.

Emma Zhao – ROTH Capital

Okay. RMB18.6 million, okay. And what about the CapEx this year, and this quarter and obviously looking to like the second half of the year?

Maria Xin

Okay. In the second quarter this year the CapEx is RMB47 million and in the first half 2012 is RMB70.8 million.

Emma Zhao – ROTH Capital

And – should we...

Maria Xin

And then for the whole year...

Emma Zhao – ROTH Capital

Yeah.

Maria Xin

Yeah, for the whole year we budgeted US$40 million to US$50 million for CapEx. We are not sure we can use all of that because some of the constructions in our largest distribution center is progressing slowly because of construction permits and all those issues.

Emma Zhao – ROTH Capital

Originally US$40 million.

Maria Xin

I think originally US$40 million to US$50 million. I am not sure we can use all that this year.

Emma Zhao – ROTH Capital

All right. Thanks. That’s very helpful. Thank you.

Operator

Thank you for your questions. Next question comes from the line of Ida Yu from CICC? Please ask your question now.

Ida Yu – CICC

Hi, good evening, everybody. I do have a quick question. What cause the quarter-over-quarter decline number of order purchases and a number of basket customers? And why they say customer average purchasing value for order increase when compared with the last quarter? Thanks.

Peggy Yu Yu

The average basket size of customers went up, you’re looking at a slight increase of preference of 0.2, is that right?

Ida Yu – CICC

Yes.

Peggy Yu Yu

I think seasonal change from like say twice to 1.9 times is okay and there is a increase of average size of our order, which is much bigger than size of a – than preference, but your voice was very small – just now and I didn’t get the whole question?

Ida Yu – CICC

Okay. My question is – I’m trying to understand why there is a decline in order purchase – number of order purchase in compared with the last quarter and as far as active customers decrease – as I don’t see there is...

Peggy Yu Yu

No, the number of orders this quarter – number of orders this quarter is 11 million, number of orders – last number of orders; you are referring to last 9.2 million.

Ida Yu – CICC

(Inaudible).

Peggy Yu Yu

Okay. Yeah, there is a slight increase, a slight decrease of total number of orders. I think that it’s a small decline and we haven’t really paid that much attention to that. So, I can’t answer your questions immediately. I’ll think about it and have Maria get back to you.

Ida Yu – CICC

Okay. And I also noticed that customer average purchasing value per order as you said total product revenue divided by the number of their order. So I also noticed that this number actually increased a bit.....

Peggy Yu Yu

Yeah. Yeah.

Ida Yu – CICC

And I was also trying to understand that...

Peggy Yu Yu

Okay.

Ida Yu – CICC

No problem. I can wait for Maria’s response. Thanks.

Peggy Yu Yu

Okay. Yeah.

Operator

Thank you for your questions. Next question comes from the line of Tian Hou from TH Capital. Please ask your question now.

Tian Hou – TH Capital

Hi, Peggy. Actually my question is much more similar to the previous one and when I look at the operation metrics, so there are two declines, one decline is in the active user and one decline is a total orders. So for those two metrics in the measurements, if I look at the past records in the second quarter didn’t really show downward trend. So I wondered what happened, is that because this competition promotional or competition in the market, is that because the CCT report?

Peggy Yu Yu

I think in the second quarter in April and in May, Dangdang stopped a lot of search and also how do I say, (inaudible) web directory efforts, because there is a sharp increase, so for close to two months, we were very laid backing our marketing activities. So the customer acquisition and also the customer activeness in those two months went down. And then we increased our marketing spending again in June. So that’s – because of our lack of marketing effort in April and May, I think that’s the main reason contributed for the decline of active customers.

Tian Hou – TH Capital

So when you say the marketing and promotions all those if you increase that those activities will put further pressure on your margin, right?

Maria Xin

If we increase that, that puts downward pressure on our bottom line, because that increase our expense ratio. The downward pressure is not on the margin but on expense.

Tian Hou – TH Capital

Yeah. So if I look at income statement, the marketing expense and technology and content expense, so on the Q-to-Q basis – have increased tremendously, so what’s the plan there going forward, like technology and content expense, I think is somehow comparable internally, certainly marketing is – if the market you have to react to it is a is little different but what’s about this technology and content expense, is it anyway, is there any plan to control this part of expense?

Peggy Yu Yu

I think our tech expense is around like 3%, yeah, around 3% is healthy. Because in the last couple of months we increased a few 100 maybe close to 200 engineers to this apartment because we are adding mobile platform, and we’re adding programs for E Commerce merchants. And so I – we think that, you know, we should add those kind of technology personnel to deliver good capacities both to our sales and to our marketplace programs.

And if I compare our tax expense with companies – if must larger scale, I think it’s – is very well managed. And therefore marketing – marketing change quarter-to-quarter, and I am a firm believer that we spend money when the efficiency rate is good. And there are times that everybody rushed by ads and there are times that they start another expenses.

So I like to use that to make sure that our cost of acquiring customer remains very, very low by all kinds of measures. We have compared our Dangdang customer acquisition cost with that our team of Dangdang customer acquisition cost is below that. And we have compared with our customer acquisition costs of that by say 360. And I believe their customer acquisition cost is something like 70 to RMB80 some per customer and their margin is maybe what 40, 50% less than ours.

So I think, I perceive customer acquisition cost as that of retail – traditional retailers opening new shops. If a traditional retailer can open new shop, they’re cost effectively then Dangdang should build a capacity of acquiring new customers.

Tian Hou – TH Capital

Okay. So the last question is regarding that E-reader and – so certainly you just – you guys just started and I wonder how did that go and what’s the feedback and reactions from our customers?

Peggy Yu Yu

We had a trial launch and the trial launch is very small. We actually sold our trial launch products and now we are at a stage of collecting feedback and we want to change some of the features. But looking at the user habit, I think, we should be very long-term patient with customers evolving from book readers into e-reader customers. I think that part will take much, much longer than that in the U.S.

Tian Hou – TH Capital

Okay. Thank you. Those were my questions.

Operator

Thank you for your question. Your next question comes from the line of Wallace Cheung from Credit Suisse. Please ask you question now.

Wallace Cheung – Credit Suisse

Hi. Thank you, Peggy and thanks for taking my questions. The first question is there is some I think news – mentioning Dangdang is also trying to build some new warehouses in Hua-nan and Hua-Dong provinces; can you confirm the plan and what will be the CapEx of both ?

And the second question will be on the – I think on some of the processes or some of lower teens to these it seems Dangdang has increased the minimum order size. Are you going to change the strategies for the whole Dangdang customers as such to increase the ARPU for customers going forward? Thank you.

Peggy Yu Yu

Wallace – you trail us very closely. In Hua-nan, we have increased our warehouse space in Hua-nan, and Hua-nan is part of Central China, we’re looking at a bigger space. So, we’re actually talking to multiple cities in both Hua-nan and Hubay area to see what will be a profit one for us.

But all those municipal government wants to claim their achievements of attracting companies. So, whether they are making any news or not, I don’t know. But we are still – we are at the early stage of talking to different cities for a bigger space in Central China. And so, I don’t think we are going to change that much for the next quarter.

And in terms of the minimum size for smaller cities, yes, we are doing that, because when I look at – when we look at the Dangdang’s fulfillment ratio, shipping is the largest component. And I think that for customers in smaller cities, their shopping venues are less than that in bigger cities. And we hope that the order large size and that in a way reduce our shipping costs by the end. So that’s our purpose.

Wallace Cheung – Credit Suisse

So, well, like RMB39 be pretty much the whole company policy to be implement, going forward such the ARPU, I mean per order that we should expect, should be further increasing in the next couple of quarters?

Peggy Yu Yu

I am not so certain about it – the degree of increase and what we want to do is that we reduced shipping cost subsidized to cities with less dense orders. And I think ARPU is a function of several factors, product mix is the biggest factor, then comes with say shipping charge.

Wallace Cheung – Credit Suisse

Thank you, Susan. And just two more minor questions, one is I think recently you have launched the group-buying channels, that how should we see the potential incremental grasping over there. The other thing is I think like in second quarter China has been – market has capacity on your own apparel. How’s that business to grow versus – were you helping your margins trends going forward?

Peggy Yu Yu

First, we have a small department, who – which is pioneering not just group-buying, but also travel services and other what we call Shoukanjuu leading services. And so that we bring non-goods services to Dangdang customers. So that’s what that group is doing.

And for Dangdang sales brands, Dangdang premium and we – in second quarter, we started that and we have not spent money outside of Dangdang to market these lines. We mostly market them to Dangdang’s existing customers. And I think the Dangdang – Dangdang premium growth brands they bring margin much higher than say margin from other vendors, but at the same time it is small to start with. And right now is mostly concentrated in that linen and some everyday households like slippers, those kind of goods.

Wallace Cheung – Credit Suisse

So the impact of these two new approaches, I mean new product lines is still very, very small. Correct?

Peggy Yu Yu

Correct.

Wallace Cheung – Credit Suisse

Okay. Thank you so much, Peggy.

Operator

Thank you for your questions. Your next question comes from the line of Andy Yeung from Oppenheimer. Please ask your question.

Andy Yeung – Oppenheimer

Hi. Good morning. Thank you for taking my questions. I have two questions today. The first one is a follow-up on the logistic area. I noticed that your fulfillment cost as a percentage of revenues actually have came down little bit on a sequential basis, but you also have expanded your one-day-delivery and also night delivery services. One is, how do you manage to lower your expenses while you improve your delivery services? And then second is can we expect that trend to continue in third and fourth quarter this year?

Peggy Yu Yu

Actually, I think our fulfillment cost has gone up this quarter and its – right now it’s 15%. And most of the – because – in this procurement cost, there are cost associated with logistics, customer service, procurement department buying teams, head count expense. So, the increase of logistics also procurement – and for procurement cost in the second quarter mostly come from the increase of head count and also the increase in rent of warehousing space in the last quarter. So, that’s what happened in the second quarter, yeah.

Andy Yeung – Oppenheimer

I’m sorry like – wrong like I think this quarter, your procurement cost as a percentage of revenue is 15% and last quarter it was 16.2%?

Peggy Yu Yu

Yeah. Last quarter? Sorry, yeah, last quarter was 16, this quarter – sorry, I was comparing with what it was year ago. Yeah, you’re right.

Andy Yeung – Oppenheimer

Okay. And for sequential improvement like quarter-over-quarter improvement, where is that coming from and can we expect that continue in third, fourth quarter or it just for this...?

Peggy Yu Yu

No. Because we’re beating up certain functions in procurement, so I don’t see that increase soon. I’m sorry I don’t see that decrease soon, sorry. Yeah.

Andy Yeung – Oppenheimer

Okay. And then next question is about your market price, I think you just mentioned you have opened up a new category call living services, should we expect more product introduction in what we consider to be a virtual item or electronic items versus to view merchandize of product that you sell.

Peggy Yu Yu

I think real merchandize will be the vast majority.

Andy Yeung – Oppenheimer

Okay. So that would be the better focus for you on the marketplace?

Peggy Yu Yu

Yes, because different – many company has marketplace, the biggest marketplace is Tmall. And what Dangdang has is – Dangdang has very strong logistic capacity. So a lot of the vendors use Dangdang logistic department services to serve our customer. So I think that utilizing our shipping and customer and office sales support and all those are the value contribution we make to marketplace participants, they tend – good that need to physically transacted.

Andy Yeung – Oppenheimer

And just one quick follow-up question. A number of your competitors or couple of competitors have actually applied for the express carry service license in China. Do you have plans to do so yourself.

Peggy Yu Yu

Sorry, some of our competitors have what?

Andy Yeung – Oppenheimer

Applied for the national express delivery license?

Peggy Yu Yu

We’re not doing that.

Andy Yeung – Oppenheimer

You’re not doing that, okay. Okay, good. Thank you.

Operator

Ladies and gentlemen, due to the time constraint, please limit your questions to one question. Next question is coming from the line of Kevin Kopelman from Cowen Group. Please ask your question.

Andrew Marok – Cowen Group

Hi, this is Andrew Marok on for Kevin. I just had one question on mobile. What kind of traffic were you seeing on mobile in Q2? And if you have any data related to mobile revenues or conversion rate? Thank you.

Peggy Yu Yu

I think we’re getting about 8,000 orders from our mobile. And in terms of traffic, Maria, do you have any – I think you have that number.

Maria Xin

Traffic is 10% to 20% of our total traffic.

Peggy Yu Yu

Okay. And the traffic is about 10% to 20% of total Dangdang traffic and it varies, so that’s a mobile activity.

Andrew Marok – Cowen Group

Okay. Thank you. I am sorry. I didn’t catch that number of orders, was that 1,000?

Peggy Yu Yu

Eight.

Andrew Marok – Cowen Group

8,000 and is that in the quarter or per day?

Peggy Yu Yu

Per day.

Andrew Marok – Cowen Group

Per day. Per day. Okay. Thank you.

Operator

Thank you for your questions. Next question is coming from the line of Alicia Yap from Barclays. Please ask your question.

Alicia Yap – Barclays

Hi, good evening. Thanks for taking my questions. Actually I have one question and one very quick question. I’ll ask a quick one first, will the eBook release have any impact on your margins in the third quarter?

Peggy Yu Yu

No, it doesn’t. No.

Alicia Yap – Barclays

Okay. And then just on general, what is management view on the future E-Commerce landscape in china? And how long do you think that enhanced competitions will last and when do you think the players will operate more rationally?

Peggy Yu Yu

I think that right now while seeing the struggling a lot of vertical sites and some luxury sites and there are some say (inaudible) sites. And I think that the integrated companies such as Dangdang or 360 or Amazon progressing and added advantage that all flying retail presents a huge landscape for us to get. And the competition is a perpetual situation, I think, not just in e-commerce, but in China or worldwide. And so from the fact that since – in the last quarter, two quarters or even longer period of time, I think that competition has seen the limits of capital, either from private equity fund or from hedge fund. So I think that we’ve been witnessed pretty much ugly scenario and its steady now.

Alicia Yap – Barclays

Okay, great. Thank you.

Operator

Thank you. Your last question comes from the line of Muji Li from Citigroup. Please ask your question now.

Muji Li – Citigroup

Hi. Thank you for taking my question. Just want to ask you about the inventories. I saw that inventory level has been creeping up over the past couple of quarters. Could you please share that – the category of this increase and do you have any like a split of what the book or the media product or other category has – the composition? Thank you.

Peggy Yu Yu

The bulk part of the – the bulk part of the inventory is media products and the increase of the inventory has lot to do with the fact that we opened up new distribution centers and so the inventory get split into different places. And so I think the sharpest inventory increase happened in year 2011, and the increase – the inventory increase this year has been better managed than what it was last year.

Muji Li – Citigroup

Very, helpful. Thank you.

Operator

Thank you for your questions. Ladies and gentlemen, we are running out for any further questions. I would like to hand the conference back to your host Miss Maria Xin. Please go ahead.

Maria Xin

Thank you for joining us today. See you next time.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participations. You may now disconnect.

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