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Vipshop Holdings Limited (VIPS 0.22%)
Q1Â 2019 Earnings Call
May 23, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, good day everyone and welcome to Vipshop Holdings Limited First Quarter of 2019 Earnings Conference Call. At this point I would like to turn the call to Ms Jessie Fan, Vipshop's Director of Investor Relations. Please proceed.
Jessie Fan -- Director of Investor Relations
Thank you operator. Hello everyone and thank you for joining the Vipshop First Quarter 2019 Earnings Conference Call. Before we begin, I will 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 facts we may 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 or are likely to, may, plan, 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 Eric Shen, our Co-founder, Chairman and CEO; and Donghao Yang, our CFO. At this time, I would like to turn the call over to Mr. Eric Shen.
Eric Ya Shen -- Chairman, Directors and Chief Executive Officer
Good morning and good evening everyone. Welcome and thank you for joining our First Quarter 2019 Earnings Conference Call. We delivered a robust operational and financial results during the first quarter of 2019. The successful execution of our mechanizing strategy is starting to bear fruits. During the quarter, our total active customers grew by 14% year-over-year driven by the healthy growth in both the number of repeat customers and the new customers. Our strategic partners also continued to bring us new customers in the quarter along the top 25% of our new customers came from the WeChat mini-program under the JD flagship store.
These successes are the result of our strategic focus on the discount apparel segment where we are dominant player in China. Our total GMV increase by 11% year-over-year during the quarter. More importantly apparel related category, which are our wheat, bread, and butter, grew even faster at 16% year-over-year. In addition, we continued to make good progress on cost reduction. On the logistics side, we're beginning to shift the approaching of our orders to third-party delivery companies. So far, we have not seen any notable difference in customer experience as a result of the change. In the coming quarter, we will continue to transfer more packages to our third-party delivery partners in order to reduce fulfillment cost over time.
We are making solid progress in the change of our strategic direction and are pleased to see positive results at an early stage. Looking ahead, we will continue to focus on profitability growth coupled with healthy top-line growth. We are deeply committed to delivering long-term sustainable shareholder return. At this point, let me hand over the call to our CFO Donghao Yang, so that he may discuss our strategies in more detail and go over our operational and the financial results.
Donghao Yang -- Chief Financial Officer
Thanks, Eric and hello everyone. We are delighted to have achieved financial results that exceeded our expectations during the first quarter of 2019. Our top-line increased by over 7% year-over-year, while our net margins improved both sequentially and on a year-over-year basis. These solid operational and financial results give us confidence that we are on the right track with the recent strategic shift. The enhanced profitability is the result of our focus on the apparel category in the current retail sector of which the GMV grew faster than our total GMV during the quarter. We are glad that our more selective assortment is becoming more attractive to our valued customers as demonstrated by improved year-over-year traffic and the conversion rate. Further, our cost reduction efforts also came into play as we streamlined resources invested into sort of loss-making businesses. During the quarter, approximately 5.5 million active customers used our consumer financing service which accounted for around 22% of GMV. As of March 31, 2019, the total balance of credit outstanding to customers was approximately RMB4.9 billion and the total balance of credit outstanding to suppliers was approximately RMB719 million. We continue to streamline our Internet finance business in order for it to better support our core e-commerce business. We are a leading player in China's discount retail channel and we are uniquely positioned to capture the market opportunities and further expand our market share.
We are dedicated to growing profit dollars while maintaining a healthy level of top-line growth. Over time, we will generate sustainable value creation and deliver solid returns to all our shareholders. Now moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all financial numbers presented today are in renminbi amounts and all percentage changes refer to year-over-year changes unless otherwise noted.
Total net revenue for the first quarter of 2019 increased by 7.3% to RMB21.3 billion from RMB19.9 billion in the prior year period, primarily driven by the growth in the number of total active customers. Gross profit for the first quarter of 2019 increased by 8.7% to RMB4.4 billion from RMB4 billion in the prior year period. Gross margin increased to 20.4% from 20.2% in the prior year period.
Fulfillment expenses for the first quarter of 2019 were RMB1.8 billion as compared with RMB1.7 billion in the prior year period, as a percentage of total revenue fulfillment expenses decreased to 8.3% from 8.7% in the prior year period. Marketing expenses for the first quarter of 2019 were RMB781 million as compared with RMB645 million in the prior year period, as a percentage of total net revenue marketing expenses were 3.7% as compared with 3.2% in the prior year period.
Technology and content expenses for the first quarter of 2019 decreased to RMB383 million from RMB466 million in the prior year period, as a percentage of total net revenue technology and content expenses decreased to 1.8% from 2.3% in the prior year period. General and administrative expenses for the first quarter of 2019 was RMB669 million as compared with RMB614 million in the prior year period. 80% of total net revenue, general and administrative expenses remain stable at 3.1% year-over-year. Our income from operations for the first quarter of 2019 increased by 30.3% to RMB863 million from RMB663 million in the prior year period. Operating margin increased to 4% from 3.2% in the prior year period. Non-GAAP income from operations which excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisition increased by 18% to RMB1 billion from RMB878 million in the prior year period. Non-GAAP operating income margin increased to 4.9% from 4.4% in the prior year period. Our net income attributable to Vipshop's shareholders for the first quarter of 2019 increased by 64.7% to RMB872 million from RMB530 million in the prior year period.
Net margin attributable to Vipshop's shareholders increased to 4.1% from 2.7% in the prior year period. Net income attributable to Vipshop's shareholders per diluted EPS increased to RMB1.27 from RMB0.77 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders which excludes share-based compensation expenses, amortization of intangible assets resulting from business acquisitions and equity-method investment. Tax effect of amortization of intangible assets resulting from business acquisitions, a gain on disposal or revaluation of investment, tax effect of gain on disposal or revaluation of investments. And share of gains in investment of limited partnership that is accounted for as an equity-method investing increased by 12.2% to RMB816 million from RMB728 million in the prior year period. Non-GAAP net margin attributable to Vipshop's shareholders increased to 3.8% from 3.7% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders increased to RMB1.19 from one RMB1.05 in the prior year period. End of March 31, 2019, our Company had cash and cash equivalent and restricted cash of RMB6.3 billion and short-term investments of RMB40 million. For the first quarter of 2019 net cash from operating activities was RNB692 million. Looking at our business outlook for the second quarter of 2019, we expect our total net revenue to be between RMB20.7 billion and RMB21.7 billion representing a year-over-year growth rate of approximately 0% to 5%. This forecast reflects our current and preliminary view on the market and operational conditions which is subject to change.
With that, I would now like to open the call to Q&A.
Questions and Answers:
Operator
Thank you ladies and gentlemen, we'll now begin the question and answer session. (Operator Instructions)
Your first question comes from the line of Joyce Ju of Bank of America. Please go ahead.
Joyce Ju -- Bank of America Merrill Lynch -- Analyst
Good evening management. Congrats on the solid set of results. I have a question regarding the latest outcome -- like apparels related initiatives. We have seen the contentany like say that like have seen initial success in terms of like we're refocusing on the apparel categories, can we get more colors like what exactly we have done to help us to encourage the purchases in this category and going forwards, are we going to have some other strategies to further increase our exposure in the apparel? And how we are going to differentiate from other e-commerce platforms in these categories over the long-term?
And my second question is related to the contentetitive landscape because the June promotion season is coming and we'd like to know what we have seen the latest contentetitive landscape and any big promotion plan from our contentany? Thank you.
Eric Ya Shen -- Chairman, Directors and Chief Executive Officer
(Foreign Language) So starting from the third quarter of last year, we started to focus or refocus onto the discount segment which is what we began our business with and within that segment, our focus is on the apparel category, which has traditionally been our strongest category and the core reason of why customers come to us. The most important thing is we're beginning to be more selective in terms of the product assortment on our platform and really focusing on the good merchandising. A high-quality merchandising at low and affordable prices, better brands and better assortment of products. As a result, we did discover that our metrics are starting to improve comparatively and customers like us more. So going forward, we will continue to invest into the apparel category and we've already incrementally increased our apparel category investment starting from the third quarter and in the fourth quarter, we also mentioned on last quarter's earnings call that we shifted a lot of the loss-making or non-performing standardized, SKUs on one (inaudible) reduce it back, so going forward, the focus will continue to be on the apparel category which drives our growth and profitability in the long run.
(Foreign Language) So, we are actively planning for our June promotional event which is a big industrywide promotional period. Our focus will be on how to best position ourselves in our core business and apparel-led categories to our customers and we're beginning our promotional events on June 16th. So, we will also be doing some standardized categories but not as much, given that the second quarter is also a popular quarter for standardized categories in the June promotional event usually customers are looking to buy those categories as well.
In terms of competition, we are seeing (inaudible) competition in the June promotional events as the industry is already into (inaudible)
Operator
Thank you. Next question comes from the line of Alicia Yap of Citigroup. Please go ahead.
Alicia Yap -- Citigroup -- Analyst
Hi. Good morning. (Foreign language) and Jessie thanks for taking my question. My question is relates to the retention rate for the new user profiles that you acquired through the Tencent tenure. So, for example I think we are seeing now probably almost a year now with Tencent channel partnership and JD partnership. So specifically for those that are coming from Tencent platform what is the retention rate and purchasing behavior? What type of categories that they usually buy and what bucket size? So for now over the past few quarters any improvement or change of new user coming from the Tencent platform? Thank you.
Eric Ya Shen -- Chairman, Directors and Chief Executive Officer
(Foreign Language) Alicia the many programs we (Technical Difficulty) collaboration in March 2018 with Tencent and in the beginning conversion rate was quite low but over the past year through our collaboration with Tencent, we have more than doubled the conversion rate in the WeChat mini program. In terms of retention, is also very similar to the retention we are seeing on our organic cap. Ticket size seems to be slightly smaller on the first quarter but from the second and third quarter on it converges with the kind of ticket size we see on the organic cap as well. So overall we are happy with the customer quality in the WeChat mini program.
Operator
Thank you. (Operator Instructions) The next question comes from the line of Wendy Huang of Macquarie. Please go ahead.
Wendy Huang -- Macquarie -- Analyst
Thank you, Management. I have two questions. First, can you update us on your thinking behind the logistics strategy and if so what's the plan to optimize the fulfilment cost in the long run. And similarly, how should we think about the GMV contributions of the (inaudible) that for me in the long-term? Thank you.
Eric Ya Shen -- Chairman, Directors and Chief Executive Officer
(Foreign language) So, on the logistics side, we're beginning to try a new method -- a new model called GSCi in the second quarter of this year. That means we're starting to shift a percentage of single-item orders from our one key logistic unit into the third-party -- for third-party partners to fulfill. We are balancing our customer experience as well as the costs. So, we pay very close attention to things like delivery time and the overall experience, the customers are giving us feedback on and we will continue to look at those metrics variables in the third and fourth quarter of this year to see how we can best position the logistics units in terms of the best balance between customer experience and cost.
Donghao Yang -- Chief Financial Officer
(Foreign language) On the marketplace size we take a similar position in terms of balancing the customer experience and the cost. So our third-party business contributed to around 2% to 3% of our total GMV before, but in 1Q '19 the contribution was around 6%. So it did increase similar to the 4Q '18 trends. And going forward, we do think it will likely increase, likely in terms of contribution maybe to something like 8% but it would not be 20%, 30%. So we'll continue to balance the customer experience and the kind of product assortment that we think the customers desire on the top-line..
Operator
Thank you. Next question is from Hans Chung of KeyBanc Capital Markets. Please go ahead.
Hans Chung -- KeyBanc Capital Markets -- Analyst
Thank you for taking my question. So first question, just can you elaborate more the offline business? I mean what's the plan this year for in terms of the store expansion? And then what's our differentiators advantage against the traditional offline store, and then what kind of economy so far? We have some -- we have been running some store and then what kind of economy so far we have seen and then I same question just follow up on the logistics. So, it seems like the costs being good and then user experience being good. So, why we don't just outsource the bigger portion of the logistics to third-party and then what's holding us to do more expansion? So..
Eric Ya Shen -- Chairman, Directors and Chief Executive Officer
(Foreign Language) So Hans regarding the offline store, we have actually two types of different stores positioning. One is called waiting place and the other waiting time. In terms of positioning waiting time is lower -- slightly lower tier than waiting place. We have some initial data, but we think it's too early to share the specific metrics, because we're still in the early trial stage and because we have stores across different tiers of cities in China. We are seeing quite a different results. So, we are still trying to implement and learn from the offline business model. (Foreign Language) Hans, regarding the logistics, we have a few million square meters of warehouses which we used due to property tax on combined orders from different suppliers currently. So as we mentioned, during the previous question, currently the type of orders that we're attempting to outsource is single-item orders and for multiple item orders, we still need to evaluate the different efficiencies through doing it one piece versus three pieces. So if the results are good and we're not being -- customer experiencing affected we may move a faster but we will really have to see the results.
Operator
Thank you. (Operator Instructions) Your next question comes from the line of Jamie Shen of Bank of China International. Please go ahead.
Jamie Shen -- Bank of China International -- Analyst
Hi, management. I have two questions. My first one is on the supplier network and I think from industry perspective we notice almost all key e-commerce players have started to approach high-quality merchants to offer low-price products that are particularly attractive to customers low tier cities. I think management also talk about how to fine tune the merchandising strategy for the new customers from lower tier cities in WeChat channel, I wonder if you could share with us some updates on that from in particular for apparel merchants. And I have another very quick question on the technology expenses. If my calculation is right, I think that technology expenses on an non-GAAP basis dropped 16% year-on-year. I just wonder if this is a contentarable run-rate we should be modeling for the rest of 2019? Thanks.
Eric Ya Shen -- Chairman, Directors and Chief Executive Officer
(Foreign Language) So Jamie, regarding your first question, we did notice that a lot of other e-commerce companies are bigger -- big and small are entering the discount retail segment which we've done for the past decade and we have a lot of expertise in this field. Unlike the other companies, we are actually very much focused on our merchandising strategy.
So, our apparel related categories are also down the first party model which is very inherently different from a lot of the marketplace models out there. And our merchandiser carefully care products offer to our -- from our platform, giving our customers differentiated high-quality assortment -- affordable assortments. So in a nutshell, we're trying to be very selective in terms of the products that we display and sell to our customers.
And we do have a very close relationship with a lot of our brand partners and that relationship is becoming closer. So, we are really much keenly focused on serving our suppliers and customers and really doing our own business to the best of our ability.
Donghao Yang -- Chief Financial Officer
Okay. All right. Let me take your second question about technology and content expenses. You're right that our technology and content expenses have come down quite a bit contentared to a year ago as a percent of revenue. we achieved the kind of cost savings by cutting back on our personnel and other investments in the technology and content departments. And I think you would be safe to use this new -- these new numbers in your model just for now, and as we said earlier we will continue to make efforts to cut more costs.
And as we do that we will keep you guys updated on our products and you can use maybe new numbers in your model next time.
Operator
Thank you. Next question is from Andrew Chan of J.P. Morgan. Please go ahead.
Analyst
(Foreign Language) Just for you just one quick question for me on the gross margin side. We noticed that after you guys cut the loss making items shifting to the third-party marketplace, the gross margin indeed rebounded but still at a rather low level versus the historical range. So my question is after cutting those loss making items the margin is still low. So what can take the gross margin back to the level we saw back in say before 2017 or 2016, does the track come from the still low utilization of the warehouse logistics and by moving those into the third-party then situation will improve or the other things we need to consider into this equation? Thank you.
Donghao Yang -- Chief Financial Officer
Well, thanks for the question. Let me try to answer that. Well in our financial statement you can see this Q1 '19 our gross margin was about 0.2 percentage points higher than a year ago. But actually if you contentare apple-to-apple like-for-like, our Q1 '19 gross margin was about 1 percentage point higher than a year ago. And that was because, we reclassified one line item in our fulfillment costs for the delivery services that we performed to clients outside of the Vipshop. So last year, Q1 '18 that was the first quarter that we reclassified that item and the net impact on our gross margin was about 1.9% and this Q1 '19 that reclassification had an impact on our gross margin for about 1.5%. So that was about 1.6 percentage point higher there. And also we had a new business called OTB, we helped our suppliers or our business partners to buy marketing services from other platforms and that impact on our gross margin was about 1.2 percentage point. So in total, if you do an apples-to-apples contentarison our year-over-year gross margin improvement was about 1 percentage point. So that said, we will continue to make more efforts to improve on our gross margin and mostly to refocus on our strategy on apparel and discount retail and we believe that to refocus on apparel and discount retail by sourcing more brand products at lower cost we'll be able to further improve on our gross margin down the road.
Operator
Thank you. Our next question is from Monica Chen of Credit Suisse. Please go ahead.
Monica Chen -- Credit Suisse -- Analyst
Hi, good evening. (Foreign Language) Jessie. Thank you for taking my question. I have two here. So last quarter, we launched several new flash sale formats like a (Foreign Language) and those results were very encouraging. So, I just wonder do you still have any plan to roll out more similar initiatives and to focus on deep discounts for this year?
And the second question is how should we think up our marketing spending plans for this year, particularly on branding, user acquisition and promotion? Thank you.
Eric Ya Shen -- Chairman, Directors and Chief Executive Officer
(Foreign Language) So, Monica to answer your first question regarding the (Foreign Language) we launched those platform which we're focused on more deeper discounted items than the average level of discount on our platform and what we're seeing they have grown quite fast. But yearly contribution in 1Q combined with already higher than 20% and customer acquisition is quite robust as well. In addition, to (Foreign Language) we also just launched a tap (ph) called (inaudible) which is focused even deeper level of discomfort and in the future our goal is to become a full cycle inventory management solutions provider for our suppliers. and really partnering with an (inaudible) at a broader and deeper levels of discount product.
(Foreign Language) In terms of marketing expenses at this moment, we anticipate the level of customer expenses this year to be similar to last year. In terms of customer acquisition cost we're also seeing that compared to 2018 it remains relatively flat. Therefore, we will continue to plan for this type of expenses this year.
Operator
Thank you. Next question is from Tian Hou of T.H. Capital. Please go ahead.
Tian Hou -- T.H. Capital -- Analyst
Yeah. Management congratulations for good results. So I have a question on two things. One is regarding the top-line guidance. So Q1 you guided is 0% to 5% top-line growth and at the end to the growth was actually a lot faster than you thought. So, I wonder 2Q guidance you maintain the same growth outlook with Q1, what's the prudentness behind the guidance? So that's number one.
Let me just continue. So Jessie make a notice to translate to Shen (ph) . So the second one will be we're seeing a loss of individual or smaller or newer merchants emerging and those merchants most of them are in like apparels, cosmetics and some small electronics. And so, I wonder if those guys are actually cut into your territory. If yes, how you fence them off? If no, why it's not? That's the two question Thank you so much.
Donghao Yang -- Chief Financial Officer
Thank you for your question. Let me take your first question on our top-line guidance. Yes, you're right. For Q1 topline growth, we guided 0% to 5% year-over-year growth and it turned out to be 7.3% But in our line 7.3%, it's really not a super big being of our guidance. And in Q2 we guided a top-line growth between 0% to 5% year-over-year. Again for a couple of reasons. One, our big promotional campaign in June 16th is yet to come. So we're not very sure about the results that would come out of that promotional campaign. And secondly, in our mind, a couple of percentage point difference are bigger you know just doesn't really make a big difference in our business. And for now and maybe for the future, we do hope that our investors would focus more on our profitability and healthy top-line growth, rather than focus too much on top-line growth.
Eric Ya Shen -- Chairman, Directors and Chief Executive Officer
(Foreign Language) Tian are you still there? So regarding the selection of our contentetitor and start-ups we did notice that there are a lot more start-ups out there and they are all doing business in different formats to target 2B, we also have waiting (inaudible) which is focused on 2B (ph) business but the majority and out biggest focus is on 2B business. But overall, we think it's important to focus on my own business and our own strategies. So we will continue to do that going forward.
Operator
Thank you. No question as of this time. (Operator Instructions). Thank you. Ladies and gentlemen, that's the end of our question and answer session. Thank you for participating. You may all disconnect.
Donghao Yang -- Chief Financial Officer
Thank you for taking the time to join us and we look forward to speaking with you next quarter. Thank you.
Operator
Thank you, ladies and gentlemen. You may disconnect now.
Duration: 48 minutes
Call participants:
Jessie Fan -- Director of Investor Relations
Eric Ya Shen -- Chairman, Directors and Chief Executive Officer
Donghao Yang -- Chief Financial Officer
Joyce Ju -- Bank of America Merrill Lynch -- Analyst
Alicia Yap -- Citigroup -- Analyst
Wendy Huang -- Macquarie -- Analyst
Hans Chung -- KeyBanc Capital Markets -- Analyst
Jamie Shen -- Bank of China International -- Analyst
Analyst
Monica Chen -- Credit Suisse -- Analyst
Tian Hou -- T.H. Capital -- Analyst
