Caroline Dong - Investor Relations Wenbin Qiu - Chairman and Chief Executive Officer Zhaoming Chen - Chief Financial Officer.

Eileen Deng - Deutsche Bank AG Eddie Leung - BofA Merrill Lynch Monica Chen - Credit Suisse AG Joyce Ju - Citigroup Chen Bi - China International Capital Corporation Limited Nan Ge - China Renaissance Securities Billy Leung - Haitong International Research Limited Tianxiao Hou - T.H. Capital.

Ladies and gentlemen, thank you for standing by, and welcome to Baozun Quarter 1 2018 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Caroline Dong. Thank you. Please go ahead, Caroline..

Thank you, operator. Hello, everyone, and thank you for joining us today. Baozun's earnings release was distributed earlier today and is available on our IR website at ir.baozun.com as well as on Global Newswire Services. On the call today from Baozun are Mr. Vincent Qiu, Chairman and Chief Executive Officer; and Mr. Beck Chen, Chief Financial Officer.

Mr. Qiu will review business operations and company highlights, followed by Mr. Chen who will discuss financials and guidance. They will be available to answer your questions during the Q&A session that follows.

Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intends, plans, beliefs, estimates, targets, going forward, outlook and similar statements.

Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law.

It's now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Mr. Qiu, please go ahead..

technology empowers future success. This slogan reflects a shift in our positioning within the industry and the direction we are heading in. As the industry has evolved, we have strategically expanded the scope of our business through targeted investments in innovation and the productization over the past few years.

This has resulted in our emergence as a leading brand e-commerce business partner and technology development and a solutions service provider. To highlight this strategic shift, the theme of the third annual Global Brand E-commerce Summit, which we held in Shanghai earlier this month, was Eyes on The Data.

During the summit, we demonstrated our cutting-edge technological capabilities by showcasing some of our most innovative new products, including a comprehensive range of big data, AI and cloud computing products.

This innovative big data products focus on leveraging the massive amount of data that is generated in real time across omnichannel to create a tailor-made solution and reports. Leveraging on these, brand partners and our in-house operations teams can improve operational efficiency and better understand consumer behavior.

We also showcased an AI image recognition products that provide design suggestions to brand partners and identify fashion trends for them. In addition, we are also working on next-generation e-commerce shop front product to further improve efficiency and our ability to quickly create official sites and online stores on social media platforms.

Some of these products are currently in trials with some of our brand partners. We are confident that these products will deliver superior value for our brand partners.

We will continue to invest in innovation and productization to improve operational efficiency and develop new and innovative businesses, which will further solidify our long-term competitive advantages.

As the leader and the innovator in the brand e-commerce market, we were recognized as a 2017 Tmall best partner at the Tmall operations service provider summit last month. I believe this recognition demonstrates the outstanding quality of our services and our undisputed leading position on Tmall.

Our digital marketing services likewise made significant progress during the quarter. In recognition of our big data analysis capabilities and in-depth understanding of consumer behavior, we won the most value digital marketing agency during the Golden Mouse awards.

A number of successful Baozun brand partners' case studies were also showcased as part of the Golden Mouse digital marketing award cases collection, which I believe demonstrates the recognition that our high-quality marketing services are getting across the industry and how Baozun has quickly become one of the marketing companies in China with the most potential.

Turning quickly to our warehousing and logistics business. Warehousing continues to play an important role in our development and ability to provide a one-stop omnichannel solution. Full operations at our Chengdu warehouse began in May and have greatly helped in expanding our logistics network in Western China.

Our newest warehouse in Wuxi and Suzhou began trial operations during the quarter. The Wuxi warehouse is especially customized for the apparel category while the Suzhou one is partially customized for the cosmetics category and has also started to provide services - orders from China.

In addition to our warehousing in Wujiang, Hong Kong, Guangzhou and Beijing, these new warehouses will greatly improve our entire domestic e-commerce logistics network. By continuing to expand our logistics network, we will be able to provide brand partners with ample resources to reduce transportation costs and lead time nationwide.

I'm pleased with our strong start of this year and confident that a new technological focus the strategic direction our business is taking will greatly strengthen our industry-leading position and generate long-term sustainable value for our shareholders. I'd also like to warmly welcome Dr. Gang Yu who joined our board as an Independent Director. Dr.

Yu's deep experience in e-commerce operations and logistics management will greatly benefit Baozun going forward as we expand our portfolio of services and innovate new ones. I'd also like to thank David Hand for his many years of service to Baozun and wish him all the best in his future endeavors.

With that, I'll pass the call over to Beck who will review our financials..

Thank you, Vincent. We started off the year very strongly with GMV increasing by 66% year-over-year and non-distribution GMV, in particular, increasing by 84%. Let's now go over the numbers, but a few housekeeping items in advance. We believe year-over-year comparisons are one of the most useful ways to judge our performance.

All percentage changes I'm going to give will be on that basis. Firstly, let's start to review of the financials. Total GMV during the quarter increased by 66% to RMB 4.9 billion. Our focus remains on growing our non-distribution business, which saw GMV increased by 84% this quarter.

The decrease of distribution GMV was primarily due to the transitioning of one electronic brand's business to the non-distribution model. Total net revenues increased by 14% to RMB 921 million. Breaking down further.

Product sales revenue decreased slightly by 8% to RMB 460 million, which was primarily attributable to the transitioning of a leading electronic brand partner's business from the distribution model to the consignment model, which was partially offset by an increase in product sales revenue resulting from the increased popularity of brand partners' products and our increasingly effective marketing and promotional campaigns.

Services revenue increased by 50% to RMB 461 million during the quarter. The increase was primarily due to the rapid growth of our consignment and service fee business model, and in particular, the growth in sales from existing brand partners and the addition of new brand in the apparel category. Total operating expenses were RMB 893 million.

In particular, costs of products decreased to RMB 379 million, primarily due to the transition of the leading electronic brand partner's business from distribution model to consignment model, which were partially offset by higher costs associated with an increase of product sales revenue.

In the meantime, product sales margin improved from 11.8% to 17.6%. Fulfillment expenses rose to RMB 211 million, mainly due to an increase in GMV contribution from our consignment model and warehouse rental expenses.

We have the best in cost warehousing operation and fulfillment experience in the brand e-commerce industry, and we believe our top-tier capabilities within fulfillment are one main driver of customer and brand satisfaction, which is a key factor to sustain our long-term growth.

As Vincent mentioned, we are continuing to strengthen our logistics network with addition of warehouses in Chengdu, Wuxi and Suzhou. These new warehouses were not fully utilized this quarter and will remain so in Q2. We have invested in these new facilities and expect it to fully leverage them during the peak season.

Sales and marketing expenses rose to RMB 221 million, primarily due to an increasing recruitment of additional online store operations staff and an increase in promotional and marketing expenses associated with the company operating online stores. Technology and content expenses rose to RMB 15 million.

The increase was primarily due to increased investment in innovation and productization, including recruitment of additional technology-focused staff. G&A expenses rose to RMB 32 million. The increase was primarily due to the increase in administrative, corporate strategy and business planning staff.

Income from operations increased to RMB 28 million, while operating margin improved to 3.1% compared with 1.9% in the same quarter of last year.

Non-GAAP income from operations was RMB 46 million, an increase when compare to RMB 34 million in the same quarter of last year, while non-GAAP operating margin improved to 5% compared with 4.2% in the same quarter of last year.

The first quarter is typically slower than the other quarters of the year due to seasonality and the Chinese New Year factor, so the impact from our additional investment in innovation and productization were more apparent. During this quarter, the additional investments in innovation and productization were RMB 13.5 million.

Excluding these investments, our non-GAAP income from operations increased by 76% on a year-over-year basis, which is faster than the GMV growth of 66% for this quarter. In Q1, net income attributable to Baozun ordinary shareholders rose to RMB 15 million, an increase of 41% for the same quarter of last year.

Basic and diluted and net income attributable to ordinary shareholders per ADS were RMB 0.27 and RMB 0.25, respectively, compared with RMB 0.20 and RMB 0.18, respectively, during the same period of last year.

Non-GAAP net income attributable to Baozun ordinary shareholders rose to RMB 32 million, an increase of 11% compare with the same quarter last year.

Basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS were RMB 0.57 and RMB 0.54, respectively, compared with basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS of RMB 0.54 and RMB 0.50, respectively, for the same period of 2017.

That completes the profit and loss statement for the quarter. As of March 31, 2018, the company had RMB 709 million in cash, cash equivalents and short-term investments, an increase from RMB 557 million as of December 31, 2017. Turning to the revenue guidance.

For the second quarter of 2018, we expect total net revenue to be between RMB 1.06 billion and RMB 1.1 billion. We started to provide growth guidance for services revenues since Q2 2017 as we began transitioning a leading global electronic brand partner's business from distribution model to the non-distribution model since September 2017.

Under the non-distribution model, we only recognize revenue on a net basis as services revenues. For the second quarter of 2018, we expect services revenue to increase by over 50% on a year-over-year basis. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you..

[Operator Instructions] Your first question comes from Deutsche Bank by Eileen. Please go ahead..

Thank you management for taking my question. Congratulation on the strong quarter. I have three questions. The first one is can management give us some color on the progress of getting a global leading sportswear brand onboard? The second one is regarding the take rate.

That take rate of the service revenue over total GMV seems to have declined by 100 bps year-on-year basis in the first quarter.

Just wondering what's the underlying reason driving that, and how the trajectory will look like in the following quarters? And lastly, given the industry growth has slowed down quite a bit in the April, does management see any sign among our brand partners to follow the same trend as industry?.

Okay. Thank you, Eileen, for the question. So I will answer the 3 questions. So for the first question, about some color of the progress of the leading sportswear brand. So we are still in discussion with the leading sportswear brand and - about their Tmall in the JD's businesses.

And in the same time, our business talk is - our potential business scope is enlarging like including the Mini Program stores, including the potential launch of their Hong Kong and Taiwan official branded sites and also including more supply chain business within their B2B scope. So yes, we are intending to provide more services to the brand.

But just for the Tmall and the JD businesses, they're still in the discussion talks.

And about the second question, about the non-distribution model take rate, so yes, just like we talked during the last earnings call, so on a year-over-year basis, the non-distribution model take rate is sliding down because the 3C categories is increasing faster and also we transfer - we are transferring the leading electronics brands to - from distribution model to consignment model, which will further dilute the take rate of the non-distribution model.

But look, if you look at the take rate on a Q-on-Q basis, so it's steadily up.

So that's why we say just like last quarter's earnings call, so we expect that for the Q1 and Q2 of this year, still the 3C key categories will increase very far, so we have some pressures on the take rates, but not so - not necessarily sliding down further, but could be more steady at the current level.

And for the second half of this year, we will see that the take rate will gain more momentum and slightly going up. And about the third question, for the April businesses, so just for now, as we are monitoring from our business' side, the growth is very healthy..

[Operator Instructions] Your next question comes from Merrill Lynch by Eddie Leung. Please go ahead..

Hi. Good evening, guys. Thank you for talking my questions. Just a question on your technology platforms. We know that you guys have been launching more complicated technology solutions like marketing, customer management, automatic establishment of a storefront, so on and so forth.

Could you talk a little bit about the adoption rate of your merchants on to these different technology products? Which one are more popular? Which one less? What's the reason behind? And how management think about the future, so on and so forth..

Thank you for the question, Eddie. So just like Vincent talked in the prepared remarks before, so right now, for our expenditure in innovation center and the productization program, right now, some of the products are in the trial progress with some of our brand partners. And up to now, we receive very positive feedback.

But still, we need to furnish our products further. So right now, it's not a very mature product to be launched to all of the public. So we will continue to monitor and also we will invest in the human resources..

Thank you..

Your next question comes from Credit Suisse by Monica Chen. Please go ahead..

Good evening, management. Thank you for taking my questions. I have three questions here.

So firstly, can management provide some color on the next quarter's GMV growth, given in the second quarter there will be a lot of promotional events? So do we expect a better sales results from the major brands? And then the second question, can management share more color on the new brands we added in this quarter? And what's our target for the brand partner acquisition for the full year? And is there any focus in terms of their product category or take rates or the domestic business global brands? And the third question is about the WeChat e-commerce ecosystem because we see many brands are actively developing the Mini Programs and there are a couple of private companies are helping them to do that.

So how is our product or services differentiated from the peers? And what is the competition outlook looks like in that area?.

Yes, Monica, so let me take the first 2 questions first. So about the color of the GMV growth of the second quarter. So in the beginning of the year, we gave the whole guidance, full year guidance, about RMB 30 billion for the full year, which is representing 57% on a year-over-year growth rate compared to last year.

And for the first quarter, we're achieving higher than the 57%. So as far as we have - as far as we expect, we think, for the second quarter, we will keep the momentum and we shall be able to achieve higher than 57% growth rate.

And for the second question about the newly added brands, so just like we talked before, we added a new brand in FMCG category and the cosmetics and the apparel categories, and we are targeting to acquire 20 to 25 new brands in next for the full year. And just like we talked before, we value the quality over the quantity of the brands.

And in terms of the business model, generally more in the non-distribution model, especially consignment model, and most of them are still from international brands. So the major focus is still apparel, cosmetics, luxury, these categories..

Okay, Monica, I will take the third question. This is Vincent. Yes, we have a team who is working very closely with the brands and also Tencent teams to make possible their Mini Program source business on WeChat platforms.

And right now, I think we are still in a quite early stage, but we can see that the brands and also Tencent side are very active in all this kind of testing. We see a lot of brands show strong interest to get on to the WeChat platform. So we're quite confident.

Recently, we will release more - launch more brands, WeChat site, and looking forward to a quite successful second half of this year for all these brands on WeChat, so it's very interesting.

We are - but this time, we involve more different functions from the brand side, so we can aggregate all the efforts and the resources from different departments of the brand..

Your next question comes from Citi by Joyce Ju. Please go ahead..

I have like three questions. First question is once you know how about this quarter's like same-brand sales growth, just try to understand how strong is the performance of your existing brands. And my second question is regarding the take rate. As Beck has mentioned, like this quarter we have seen sequential improvement in non-distribution take rate.

We kind of understand like for this quarter, should we see they're only strong for 3C products while seasonally weak for apparel? So just wonder why, quarter-over-quarter, we actually can see an increase in the take rate. Any particular reason from the category shift or something? My third question is regarding the innovation center-related costs.

Could you give us some guidance in terms of like how shall we model the future growth in the coming quarters?.

Okay. So thank you for the question, Joyce. So about - the first question about the same store - same brand stores, the sales growth rate, for the first quarter it's 55%, 5-5, 55%. So still this growth rate is very, very encouraging.

And for the second question about the take rate, so yes, on a Q-o-Q basis, it's slightly up, but the gap is not so much so we do think that we could be steadily around like the 10.5%, the take rate, during the first quarter or second quarter. And there is no specific reasons about the 0.1% increase.

And for the third question, the costs in the innovations and productizations, we expect that, sequentially, we will increase more investment in the innovations and productization because we keep to hire a new management team in the productization team and the innovation team.

So as of March 31, we have like 140 people engaged in this kinds of work area and starting from scratch since July last year, and we expect to hire maybe 400 people at most by the end of this year..

Your next question comes from CICC by Chen Bi. Please go ahead..

I have two questions here. The first question is regarding our product sales revenue. We see very good product sales revenue growth if they exclude the impact of like one of our biggest partners shifting their model in 1Q 2018.

And could management help us to understand the trend for product sales revenue growth going forward in the second quarter and in the full year 2018 given our businesses transferring more to non-distribution model. That's my first question. And second question is more like a housekeeping question.

Can management share with us what is our GMV mix for the first quarter across different categories? Okay. So thank you for the question, Chen. So about the first question, product sales revenue. So in September last year, we talked that we transferred one of the leading electronics brand from distribution model to non-distribution.

By that time, this brand e-commerce - this brand business is the largest brand partners in our distribution model, so we expect that we have more pressure under the product sales revenues on a year-over-year basis for the - especially for the first half of this year.

And as you can see right now, the remaining brand partners and the distribution model is growing very, very promisingly. So largely in Q1, it grows off the origin of the existing stores, making the gap for the transferring - for the transitioning of the leading electronics brand.

So for the second quarter of this year, we are confident that we can at least make all the gap - all the gap incurred by the transitioning of the business of the electronic brand, which means that, on a yearly basis, the product sales revenue could be at least a flattish in Q2.

And for the second half of this year, it should be back to the growth stage as we do not have any legacy reasons for the transitioning, especially in Q4. And about the second question in GMV mix among the different categories.

So like we said before, our top 3 categories, apparel, electronics and appliances, contributing like 92% of our total GMV in Q1. And for the apparel category, it still contributes 50% of the total GMV amount. So this is the GMV mix among the categories..

Your next question comes from China Renaissance by Nicky Ge. Please go ahead..

I have two questions. Firstly, I note that we have some investment in warehousing in the first quarter. What is the company's investment plan for the warehousing in the coming quarters? And then second question is about our category expansion.

Could management share your progress in category expansion, especially in cosmetics, FMCG and household?.

Okay. Thank you for the question, Nicky. So for the first 2 question, investment in warehouses so that we talked in the prepared remarks, we have these new warehouses in Wuxi, Suzhou and Chengdu, so which contribute over 50, 5-0, 50,000 square meters for the gross floor area and we may have more, but not so much during Q2 and Q3.

And the pattern is, generally, in the first 3 quarters we prepare and we make ourselves ready for the peak season, especially the Double 11 campaign.

So during the first 3 quarters, especially in Q1, it's a slack season in business, so we may need to hire the laborers and we may need to purchase streamlines and shelves and stocks and we need to input all those stocks. And then we have some investment.

And then along the year - along the quarters, we - our utilization rate for the warehouses will be going up and up and usually before the Double 11 campaign it's over 100% rate. So every single dollar investment will be leveraged during - especially during Q4.

About the category expansion, so right now, we are still in talks with some leading brands or leading brand group in FMCG, cosmetics. Just like we said, we are - right now, we are working with the largest cosmetic group to build up their China official stores for all their brands in China.

And also, we are - right now, we started - from the beginning of this year, we started to work with the leading FMCG group brand and to kick off some 3 of the sites from January to May. So this is the progress on the categories.

And for the - but still, for some, like sportswear, apparel and even home furnishing categories, we are still very optimistic and we will keep to spend more time like in luxury brands as well..

Your next question comes from Haitong International by Billy Leung. Please go ahead..

The first question is I know we've talked about the major apparel brand.

But in terms of the other brands that we mentioned in the pipeline, for example, the home goods and luxury and cosmetics, do we have a timeline of when we can sign these clients' partners on? And my second question is, at this current moment, are we pursuing any major M&A activities?.

Okay. So thank you for the question, Billy. So for the first question, about the timelines, so it's a dynamic process. So usually, some of the brands, they have some in-house procedures they need to clear.

So we expect that you launch some of these projects like you mentioned some of the stores were luxury brand in July or August because they need to get online, especially for the peak season - coming peak season.

And about home furnishing brands in the pipeline, at this time, it's like we are talking about their flagship store on Tmall, the earliest time is Q4, earliest time. And also, we are in talks with them about their overseas business, Hong Kong businesses and Mini Program businesses as well.

And about the second question, M&A, so yes, like we said, we are always open in this area and - but we have a very high criteria. So we are open, but right now, there is no - there is not anything concrete in the pipeline about M&A..

Your next question comes from T.H. Capital by Tian Hou. Please go ahead..

So the question is related to your investment in the technology. So the company has been doing that for a while. And I wonder, in which part of business operation can show such kind of results or increased efficiency of your operation. So that's my first question.

The second question is what's the target brand partners do you expect to add in the whole year of 2018? So that's 2 questions..

Okay, Tian. So let me answer the second question first. So like we said, we target to add 20 to 25 brands, most of them are international ones, by the end of this year. Yes, I'll leave the first question to Vincent..

Yes. Generally, our investments on IT side can generate 2 kind of results. First one is that it is more like to improve the internal efficiencies through different aspects. That is one side. The other side is that we sell the new solution software services, related services, to clients directly. So that is 2 kinds of results we can expect.

For the first one, like we have some of the initiatives on developing some of tools to support the front-end operations. We have already seen a lot of very clear results, which means that we can expect that, in the future, this kind of software can help our team to operate the store more efficiently, which means lower costs. So that is one thing.

The other one is that for those things like constructing a new official website or new versions of product help to shorten the period for us to deliver to the clients. So this also means higher quality and lower costs. For those products, which is sellable to the outside clients, it generally takes longer for us to have a result.

But when all this product is proved to be a successful in the market, we can expect a very high quality revenues through that stream..

There are currently no more questions in queue. I would now like to hand the conference back to the speakers. Please go ahead..

Thank you, operator. In closing, on behalf of the entire Baozun management team, we'd like to thank you for your interest and the participation in today's call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call..

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