E-commerce China Dangdang (NYSE:DANG) delivered Q3 revenue higher +31% YoY, with accelerating revenue growth in non-Media categories offsetting weakness in Media. Third quarter revenues edged past the consensus estimate, but higher fixed expenses brought a narrower profit than analysts expected.
Although financial results may have been less than the street had hoped for, operating metrics showed improvement. The number of active customers grew over +14% YoY, and the new customer count was up +24% YoY. Dangdang Marketplace was again a key driver, with Q3 GMV up +80% YoY.
Management's Q4 outlook included total revenue growth of +27% YoY (just off the +31% YoY pace in Q3), and marketplace GMV growth of +60% YoY (down from a near 90% pace during Q1-Q3), implying slower own-merchandise sales (assuming a stable take rate of 4.5%).
Focusing on the gap between expected and actual financial results seems to discount the significant progress management has achieved over the past 12 months. Dangdang was profitable for the fourth consecutive quarter, and Q3 net income of 25 million RMB was a marked improvement vs. the 28 million RMB net loss a year ago. China's e-commerce industry is intensely competitive, however, so despite improvements thus far, there is still more to work ahead.
|Recent Quarterly Performance||FY2014|
|(000) RMB, Except Per Share Amounts||Q3||Q4||Q1||Q2||Q3|
|Earnings per share (GAAP, fully diluted, per ADS)||-0.07||0.04||0.00||0.05||0.04|
|Earnings per share||n.a.||n.a.||n.a.||n.a.||n.a.|
|Earnings per share||n.a.||n.a.||-91%||1375%||-15%|
Dangdang generated about 80 million RMB of operating cash flow during Q3, lower than the 246 million RMB last quarter and 158 million RMB in Q3 last year. The company spent about 17 million RMB of capex during Q3, mainly related to IT servers and system for the new warehouse in Tianjin.
The Q3 balance sheet included about 1.7 billion RMB of highly liquid current assets (cash and cash equivalents, investment securities), or about 273 million USD. Based on the number of shares outstanding at quarter-end, there was about 3.27 USD of cash per ADS (fully diluted basis).
Working capital management improved slightly during the quarter, with the total cash conversion cycle dropping to -41 days, vs. -34 days in Q2 and -39 days in Q3 last year. A negative cash conversion cycle means that the company's working capital needs are effectively financed through flexible terms from its suppliers, a strong positive supporting operating cash flow generation.
The company's Q4 FY2014 outlook included the following:
- Revenue: 2.5 billion RMB (+27% YoY, +2% QoQ), or approximately 406 million USD, in line with consensus estimates
- Marketplace GMV: 2.23 billion RMB (+60% YoY, +28% QoQ)
When discussing the outlook for Marketplace revenue growth on the Q3 call, management suggested that the slowdown was somewhat deliberate. Instead of continuing to use advertising spending to support Marketplace, the company decided to redirect spending to more of its own product sales (and boost progress in building up mobile), a major factor in the seeming slowdown in GMV growth YoY.
Active customers grew to 9.6 million in Q3 (+14% YoY, +13% QoQ).
This metric had previously been declining, and the reversal is positive. The previous decline was due to what management said were some older customers not spending in newer categories.
Management earlier said the influx of new customers would help with the shift in customer trends, and Q3 data seems to support that thesis.
New customers grew to 3.6 million in Q3 (+24% YoY and QoQ).
Management has recently made customer acquisition a priority, and new customers added in Q3 were a multi-year high, suggesting that acquisition efforts are working. The company increased marketing spending to accomplish this in Q3, something which could pay off over the long run if new customers become regular shoppers.
Total transaction value was 3.7 billion RMB in Q3 (+50% YoY, +11% QoQ).
Total transaction value was higher mainly due to strong sales in Marketplace, which grew +80% YoY (+22% QoQ).
Sales of Dangdang's own products were up +31% YoY (Media +26%, General merchandise +44%), or 2% QoQ (Media -3%, General merchandise +14%).
Average order size was 195 RMB (+5% YoY, -3% QoQ).
The AOS has been trending upward in recent years due to tailwinds affecting the broader e-commerce space in China, but also due to the company's widening of its overall product offering (its Marketplace program).
The positive trend is encouraging because it seems to illustrate customers recognizing Dangdang's value; however, some leveling off in the future shouldn't be unexpected.
Customer acquisition cost in the quarter was approximately 30 RMB, up +50% YoY and +7% QoQ. When discussing acquisition costs on the Q3 call, management signaled that the increased spend was deliberate; boosting customer numbers was the goal. Part of the company's efforts to build the business was building the brand, and overall marketing spending as well as targeted efforts to boost awareness of its new mobile apps were reasons behind higher spend. Going forward, the spending levels may continue for the near term, but would likely average 3-4% of revenues on an annualized basis.
Fulfillment expenses dropped to about 10 RMB per order (9.8% of revenues, down from 11.7% in Q3 last year, but up vs. 9.7% in Q2). Management has been investing in improving its order fulfillment capability, and credits the YoY decline in fulfillment expenses to lower shipping costs and larger order sizes.
Key Business Developments during Q3 FY2014
Mobile - on the Q3 call, Chairwoman Peggy Yu Yu shared some statistics highlighting the company's progress in building up its mobile shopping channel. By the quarter-end, mobile traffic was more than 50% of total traffic (web + mobile), but was significantly less of total orders (24%). The proportion of orders from mobile has grown (it was 17% last quarter, 10% Q3 last year), suggesting that although there is progress, a substantial monetization gap remains. Just how close the two will come remains an industry-wide question. Consumer behavior is still developing, and considering varying habits for mobile vs. desktop devices (casual browsing in free time vs. serious research and purchasing), it seems that the gap may persist.
Brand development - management mentioned on the Q3 call that it was stepping up its efforts to promote a "new" Dangdang to customers, reinforcing the idea that the company is more than a bookseller. The message isn't really anything new; Media stopped being the dominant category in late FY2012. But the recent emphasis may reflect some slow progress in communicating the message. Consumers still identify Dangdang as a leading destination for book sales, perhaps due to its legacy strength in that category. The increased Marketing spend this quarter reflects the effort to change consumers' perception, and based on comments from the company, spending will continue into Q4.
|Dangdang Income Statement||FY2014|
|Total revenue, net||1,525,866||1,971,900||1,735,779||1,960,776||2,002,805|
|Cost of revenues||-1,257,460||-1,623,956||-1,419,122||-1,602,206||-1,637,093|
|Gross profit margin||17.6%||17.6%||18.2%||18.3%||18.3%|
|Technology and content||-44,643||-39,241||-43,562||-47,040||-53,619|
|General and administrative||-36,007||-45,493||-37,635||-41,594||-39,549|
|Operating profit margin||-3%||0.4%||0.6%||0.7%||0.7%|
|Interest income, net||10,203||9,358||8,004||10,426||13,645|
|Other non-operating items||5,200||5,196||-16,119||3,801||-2,200|
|Income tax expense||0||0||0||0||0|
|Net profit margin||-2%||1%||0%||1%||1%|
Revenue was driven higher due to strong sales in Marketplace (+60% YoY), which helped offset relatively slower sales in Dangdang's Media segment (revenue growth slowed to a +26% YoY pace vs. 43% YoY last quarter).
Gross margin was flat vs. previous quarters, but up YoY due to the effect of Marketplace revenues (fees collected from third-party merchants with minimal direct costs).
Fixed expenses were up YoY and QoQ to support revenue growth, but also due to increased spending to build the Dangdang brand, emphasizing that it sold more than just books. The fixed cost burden was eased somewhat due to a higher VAT subsidy from the government, an opaque, but helpful phenomenon.
Non-operating income (mostly interest income) pushed pretax profit higher, and due to previous net losses, there was no tax expense, so net income reflected results at the operating level.