Millicent Tu - Director, Investor Relations Eric Shen - Chairman, Co-Founder and CEO Donghao Yang - Chief Financial Officer.

Alan Hellawell - Deutsche Bank Yu Wang - J.P. Morgan Jiong Shao - Macquarie Binnie Wong - Bank of America Merill Lynch Xiaoyan Wang - 86Research Angela Sun - UBS Eric Wen - China Renaissance Evan Zhou - Credit Suisse Chao Wang - Nomura Lin Tang - Goldman Sachs Thomas Chong - BOCI Fawne Jiang - Brean Capital.

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

Thank you, Operator. Hi, everyone. And thank you for joining Vipshop first quarter 2014 earnings conference call. Before we begin, I’ll read the Safe Harbor statement.

During this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates and projections about Vipshop Holdings Limited and industry.

All statements other than statements of historical fact that we make during this call are forward-looking statements.

In some cases, these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is/are likely to, may, can, should, will, aim, potential, or other similar expressions.

These forward-looking statements speak only as of the date hereof and are subject to change at any time and we have no obligation to update these forward-looking statements. Joining us on today’s call are Mr. Eric Shen, Chairman, the company’s CEO and Co-Founder; and Mr. Donghao Yang, the company’s Chief Financial Officer.

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

Hello, everyone. Welcome to our first quarter 2014 earnings conference call. We are very excited to report robust first quarter 2014 financial results. Our continued strong growth momentum and increasing operational efficiency were supported by our 126% year-over-year growth in net revenues to $702 million and gross margin expansion to 24.9%.

Just as impressive was our operational performance. Our total active customers increased by 165% to $7.4 million and total orders increased by 129% to 20.2 million. Moving on to our core platform, we continue to outreach our brand mix and improve in selection. We continue to do well on mobile.

Mobile revenues grew by 71% quarter-over-quarter and now account for 36% of our revenues, up from only 8% in the first quarter last year. Our strong mobile growth proven that our flash sales model is well-suited for the on-the-go shopper. In 2014, we aimed to continue to stay on top of the technical and user behavior trends.

We will focus on further improving the customer experience for viewing and purchasing product across both the PC and mobile phone platforms. Last, our integration with Lefeng is on top and there will be extensive focus in 2014.

The integration we are along at the benefit of, one, streamlining our cosmetic offerings, two, reducing our combined procurements and marketing expenses, and three, cross-selling between Lefeng and Vipshop user basis.

As this time, let me hand over the call to our CFO, Donghao Yang so that he may discuss some new growth strategies, as well as this quarter’s financial achievements..

Thanks, Eric, and hello, everyone. We are proud of our first quarter financial performance, I would like to highlight that our number of sales events, including 7900 events from our main channel and 6300 events from our group buy channel exceeded 14,000 in last quarter, up 63.4% from a year ago.

This compares to the 39,300 total events we held during the full year 2013, which included 20,100 events from our main channel and 19,200 group buy events, indicating the fast growing output per event. Going forward in 2014, we continue to focus on strengthening our fulfillment ability, as well as other operational efficiencies.

Warehousing expansion is key to lowering our fulfillment expenses and enhancing our ability to serve our customers. Our warehouse capacity reached approximately 350,000 square meters at the end of the last quarter and is on track to expand to over 700,000 by 2016, having already broken ground on two new warehouses this year.

We are aggressively ramping up our warehousing capacity in order to keep up with customer demand and expand our product offering. We are committed to further growing our products portfolio both organically and through acquisitions when appropriate. Our strategic go forward expansion into cosmetics is a key element in this strategy.

For us cosmetic is an important vertical to expand into, but we also seek to cautiously expand organically or through acquisitions into other verticals. As we continue to invest in our growth both internally and externally, we require additional capital to support our expansion.

In March, we conducted a follow-on and convertible senior offering, which raised over $632 million. The proceeds have been used to pay for the Lefeng acquisition and fund future growth initiatives.

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

Second, I would also like to note that with our acquisition of Lefeng last quarter, we incurred additional amortization expenses. These expenses will have a downward impact on both our GAAP operating income and GAAP net income over the next few years. Total net revenues for the first quarter of 2014 increased by 125.9% to US$701.9 million.

The growth of which were primarily driven by 165.1% increase in the number of total active customers and 129.3% increase in a number of total orders. Gross margin for this quarter further expanded 24.9% from 23.4% in the prior year period and gross profit increased by 140.3% to $174.9 million.

This improvement was driven by the increase scale of our business, leading to greater bargaining power with our suppliers, as well as the development of our marketplace business. Moreover, we continued to see improvement in operating margins as a result of improved economics of scale and increase operational leverage.

More specifically, fulfillment expenses increased by 97.8% to $74.6 million for the first quarter of 2014, as a percentage of total net revenues fulfillment expenses decreased to 10.6% from 12.1% in the prior year period. The cost reduction was primarily due to our efforts, reduce warehousing and personal costs and negotiate better carrier rates.

Marketing expenses increased by 129% to $30.1 million. As a percentage of total net revenues, marketing expenses remained stable at 4.3%, compared with 4.2% in the prior year period.

Technology and content expenses increased by 134.8% to $18.7 million, as a percentage of total net revenues technology and content expenses remained stable at 2.7%, compared with 2.6% in the prior year period. General and administrative expenses increased by 146.1% to $24.1 million.

As a percentage of total net revenue, general and administrative expenses were 3.4%, compared with 3.2% in the prior year period.

Driven by the growing scale of our company’s operations improved gross margin and cost control, income from operations increased by 452% to $30.2 million for the first quarter of 2014 from $5.5 million in the prior year period. Operating income margin increased to 4.3% from 1.8% in the prior year period.

Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of intangible assets, resulting from business acquisitions increased by 394.3% to $42.8 million from $8.7million in the prior year period. Non-GAAP operating income margin increased to 6.1% from 2.8% in the prior year period.

Our net income attributable to Vipshop's shareholders for the first quarter of 2014 increased by 355.2% to $26.6 million from $5.8 million in the prior year period. Net income margin attributable to Vipshop's shareholders increased to 3.8% from 1.9% in the prior year period.

Net income per diluted ADS increased to US$0.46 from US$0.11 in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders was excludes share-based compensation expenses and amortization of intangible assets, resulting from business acquisitions by 318.2% to $37.7million from $9 million in the prior year period.

Non-GAAP net income margin increased to 5.4% from 2.9% in the prior year period. Non-GAAP net income per diluted ADS increased to US$0.63 in the first quarter of 2014 from US$0.17 in the prior year period.

As of March 31, 2014, our company had cash and cash equivalents of US$871.8 million with scripted securities of $179.1 million and held-to-maturity securities of $332.5 million. For the first quarter of 2014, net cash from operating activities were $84.1million.

Looking at our business outlook for the second quarter of 2014, we expect our total net revenues to be between $780 million and $790 million, representing a year-over-year growth rate of approximately 122% to 125%. These forecasts reflect our current and preliminary view on the market and operational conditions, which are subject to change.

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

(Operator Instructions) Our first question is coming from line of Alan Hellawell from Deutsche Bank. Please ask your question..

Thank you very much and congratulations on another fantastic quarter. First quarter active customers and orders again saw phenomenal year-on-year growth.

I just want to know within the 7.4 million active customers and the 20 million orders, what would Lefeng's contribution be? And perhaps, how much would come from the platform business? And just related to that, our math suggests kind of a sequential decline in average order size.

Is that due to the lower unit price of Lefeng product or is there any other specific reason? Thank you..

Thank you very much Alan for the question. Okay, of the total active -- number of active customers that we had in Q1, about 1 million came from Lefeng. And of the total number of orders in Q1 that we had, about 1.3 million actually came from Lefeng.

And the -- you are right, the average ticket size in Q1 was actually lower than the previous quarter primarily because cosmetic’s customer – cosmetic’s orders tend to have lower dollar amount..

Our next question is coming from line of Alex Yao from J.P. Morgan. Please ask your question..

Hi. It’s Yu Wang calling for Alex. Thank you very much for taking my questions and congratulations on a very strong quarter. Actually my question is on your strategy on future products portfolio expansion. In your prepared remarks, you mentioned that you were first growing product portfolio organically, also acquisitions.

And we also noticed that in March, you actually tested the auto flash-sales model. So I'm just wondering what's the product categories or strategic areas we are focusing on. Thanks..

[Foreign Language].

To answer your question, Eric emphasized therefore our future strategy, we would still remain focused in our core categories, for example, apparel, handbag, shoes, cosmetics and home goods. And these are very important for our continuous growth and success. We wouldn’t extend to -- into other non-core categories as yet.

But for the auto sales, it’s just testing the marketing because we know that the majority of our customers are female and would be a good campaign to attract some males’ attention. We will consider our future categories expansion based on our business development stage..

Our next question comes from the line of Jiong Shao from Macquarie. Please ask your question..

Thank you for taking my question. I'd like to follow up on cosmetics.

Could you please elaborate a bit on how much is cosmetics as a percentage of the revenue now? What are its gross margin, operating margin profile currently? And in addition, I think from the numbers you mentioned earlier, there's 1 million customers for cosmetics and 1.2 million orders.

It sounds like cosmetic customers order or any Lefeng customers order a bit over 1x a quarter compared to like on average 3x for the traditional Vipshop's customers. Is that not correct? And do you have a plan to somehow make them more procuring buyer? Just some elaboration on cosmetics would be great. Thank you..

Well thanks Jiong for your question. First of all, the 1 million active customers or 1.3 million orders were not for the first quarter -- were not for the full quarter first quarter. It was actually one and half months starting from the time we closed the transaction with Lefeng which was February 14 till the end of Q1.

So it’s about one and half month. And you’re right, the repeat purchase rates for cosmetics is lower than our core customers for apparel and we’re going to make real efforts to increase the repeat purchase rates primarily by -- improving our operational capabilities.

And also for the revenue contribution from Lefeng to the total in Q1, it’s not -- its pretty insignificant, less than 5% of our total. So that’s why we didn’t disclose that number.

But I think what you’re trying to understand is how big the combined cosmetics business at the Vipshop is and what does that mean in terms of the competitive landscape in the cosmetics market. What I can tell you is for the full quarter or the first quarter of 2014, the combined GMV, cosmetics GMV of Lefeng and Vipshop was US$167 million.

As far as we know, we are the second largest player in that assessment and we are pretty confident that we can become the -- we can take the leader to position pretty soon even in that vertical..

Our next question is from the line of Binnie Wong from Bank of America Merill Lynch. Please ask your question..

Hi. Thank you for taking my questions. I have two questions here. On the gross margin improvement seen in this quarter, would that mostly be driven by product mix optimization or better negotiation power with supplier as our scale grows? And how should we expect the margin to trend? And the next question is more on the technology side.

Given that we have -- there's a new hire of the Vice President of Technology Company has made, could you talk a little bit more about any update on company's R&D plan to, say, enhance product recommendation when the user log in or any plan company in mind to use technology to drive up the repeat customer ratio? And lastly, just a housekeeping question on the particularly high tax rate this quarter.

Thank you..

Okay. Let me take your first question about the gross margin improvement. It was certainly because of the growing economy of scale, of the fast-growing top line which resulted in a greater bargaining power with our suppliers. And also it was because of the growth or development in our market place business.

And I will leave your second question to Eric on technology..

[Foreign Language].

So Binnie, to summarize Eric’s answer, so obviously where we have invested a lot in IT and content. We now have all together 860 people in our IT department and by the end of this year we expected to go to approximately 1500.

So we’ll invest a quite a lot in the human resources in this regard because we believe that going forward technology competitive advantage is going to be huge in order to continue to capture success in our business. We also invest a quite a bit in this data. And we have launched our efforts in personalized recommendation and customer profiling.

And in Q2 this year, we already started to test different user interface for male and female customer, based on their shopping pattern and purchase history, all in all that kind of data.

So hopefully, as we continue to make more progress, this is going to be a crucial asset to improve our customer loyalty and our customer continues therefore increasing customer repeat purchase rate..

The next is from Ella Ji from Oppenheimer. Please ask your question..

Yes. Thank you for taking my question. First question is relating to Lefeng as well.

So I wonder within that 1 million active customers, how many -- are you able to cross sell between Lefeng and the Vipshop already? And if you can share some colors on your strategy of cross selling, that would be helpful?.

[Foreign language].

So Ella, at this particular moment, you know that we just acquired Lefeng not long ago. And at the moment, they’re still independently operating in terms of different website, two websites and two different systems. And ultimately, hopefully we can have opportunities to -- this is actually not the top priority at this particular stage.

So hopefully going forward, we’ll be able to have -- to make more progress in cross selling these two set of customers..

(Operator Instructions) Our next question is coming from line of Xiaoyan Wang from 86Research. Please ask your question..

Good evening, (indiscernible), Donghao, and Millicent. Congratulations on the very strong results. My question is regarding the future growth. You mentioned that we were focused on our organic growth as well as acquisitions.

I was just wondering, in terms of organic growth, can you give us a little bit of color of our additional merchants in the first quarter, how many merchants we have now, how many brands we have now? Also, maybe you can give us a little bit of color into the top maybe 20 or 30 brands, how much they count for our GMV revenue? Secondly, regarding acquisitions, (indiscernible) mentioned that we are focused on categories such as apparel, home goods and baby and maternal products.

Can we assume if there is suitable acquisition target, which will continue to focus on this area, or are we looking at other verticals instead of our current core area? Thank you..

[Foreign language].

Okay. So the future strategy is actually to achieve more growth organically, so we wouldn’t be making a growth plan to do more acquisitions going forward. And as of now, we have over 9900 brands that we’re working with. For the top 20 suppliers, it accounts for about 12% to our revenue.

For the top 10, it accounts for about less than 10% to our total net revenue..

[Foreign language].

Okay. So all any future acquisitions going to be strategic and supplement to our core customers and the purpose is to focus on our core customers to continue to attract more loyal and sticky customers to our business..

The next is from Erica Poon Werkun from UBS. Please ask your question..

Hi. Good evening. This is Angela calling on behalf of Erica Poon Werkun. And my question is regarding the margins, so we notice that the fulfillment expense as percentage of revenues continued to challenge over the past quarters.

So what is management’s agenda of the fulfillment expense? Is the current level sustainable, or do you foresee any upside or downside given ongoing expanding of the warehouse and logistics capacity?.

Thank you for your question. Well, for fulfillment expenses, we’re still pretty confident that there will be some room to improve going forward. As we mentioned, we’re being very aggressive in expanding company warehouse space in the next three years.

And by owning the warehouses, instead of leasing the warehousing, we’re going to be able to save some rental dollars. So that’s going to be one area we can achieve some cost savings. And also we’re going to be investing in automation systems in our own warehouses, which will help us improve efficiency and reduce headcounts in the warehouses.

So, we believe that there is still some room to improve in fulfillment expenses. But that being said, we don’t think that there is a huge room for improvement because and if you look at the cost of labor and cost of gasoline and almost all of the cost are going up. So we’re going to have some headwind going forward.

So that’s why there is some improvement but not much..

The next is from Eric Wen from China Renaissance. Please ask your question..

Thanks, Shen-Jung and Donghao and Millicent for taking my questions. I've a question regarding your working capital management. It seems to me you continue to enjoy a good level of linearity, even at the bigger and bigger size of the company.

Can you elaborate to us how scalable to do you expect this linearity to hold as your business site is getting bigger and bigger, and also your categories are getting into new areas? Thanks..

Well, thank you, Eric for your questions. And we believe that the current working capital situation is going to be sustainable going forward because as a retailer, we almost get paid in increase from the customers. But we have sometimes one and sometimes one month, sometimes 45 days before we have to pay our suppliers.

So the working capital situation is going to remain favorable to us, as long as we can keep growing our business..

The next is from Evan Zhou from Credit Suisse. Please ask the question..

Hi. Good evening, Shen Jung, Donghao and Millicent. Congrats on a very, very strong quarter. My question was a quick follow-up on the point that we just -- which was just discussed right here.

I think Shen-Jung mentioned that, I think, we will still be kind of focusing on our key categories like female categories of apparel, cosmetics and stuff, et cetera.

But my question was about like, if we looked at our growth trajectory going forward, we're probably going to look at, kind of, the actual customer size of like more than 10 million or close to 20 million in probably next six, seven quarters.

So, I'd like to know that from that point of view like with that scale, how do you see the kind of the male contribution into that kind of the customer size? And what are the specific categories that we'd like to consider to attract more male customers down the road, maybe more like long term but I'd like to pick some of your brain on that front.

[Foreign Language].

[Foreign Language].

So, Evan, just for the benefits, I will just quickly to sum up what Eric just said, so as we know about 75% of customers are female, about 25% male. But given that over the last few years, the company’s cover has grown so much, actually, the absolute number of male customer has increased very significantly over time.

For our business model, obviously, is more a costumer or loved by female customers but having said that, we are not saying that we would like to exclude our male customers. At the moment, we have categories that cater for these customer types, so we have male apparel on the 3C.

We have home goods and going forward, we might be looking at other niche but sizeable markets, sizeable segments that might be adored by our male customers..

The next is from Chao Wang from Nomura. Please ask the question..

Hi. Thank you for taking my question. My question is on the cooperation with Tencent or with WeChat.

So could you share with us some data points probably for conversion of revenue from that source and how does that compare to your expectation? And also, given Tencent's investment into JD, how should we think of the partnership going forward? And secondly, I have a very quick one on tax rate. It seems pretty high this quarter.

I wonder if it's because the Lefeng lot cannot be deducted from the profit. And how should we think about the tax rate trend for future quarters? Thank you..

[Foreign Language].

So, Chao, we launched WeChat channel under the bank payment page on WeChat.

At the moment, we are just started the cooperation with WeChat and currently it’s a very small tiny percent of our business and it’s at a very early stage after commercialization and with every endorsement of WeChat, we are not in a position to discuss various specific financial numbers.

But as I mentioned, WeChat is an open platform and whereby it welcomes the quality players to join. So we do foresee lot of opportunities to pursue going forward.

And the cooperation or the partnership between Tencent and JD doesn’t put pressure on us because again, it’s an open platform and we really need to exercise our development on the mobile and just give you some reference points for Q1 2014, mobile trends already contributed 36% to our topline and in the month of April alone, it reached 43.6%.

So it’s growing very fast..

Well, let me answer and take your second question about the high tax rate for Q1. It was actually the high taxes in Q1 that had lot to do with the adjustment required by GAAP.

So that’s why every quarter in addition to the GAAP numbers, we offer you guys to the capital market, the non-GAAP numbers which is much more accurate reflects on how much tax we are paying in the real operations..

The next question coming from the line of Lin Tang from Goldman Sachs. Please ask the question..

Good evening, Shen Dong, Yang Dong and Millicent. Thanks for taking my questions. So, I’m wondering about our revenue recognition. May I confirm that the 4% to 5% of revenue in terms of GMV and fully recognized in product revenue.

And another thing is that would you please give a rough breakdown of other revenue in terms of advertising income and marketplace? Thank you..

Okay. The revenue recognition for Lefeng is actually a mix of net basis and gross basis. So as far as we are recognizing 100% of Lefeng’s GMV to revenue. No, it’s actually a mix, but since it’s pretty insignificant, we don’t disclose that number.

And your second question, I am sorry, can you please say it again?.

Other revenue?.

Other revenue, okay, the breakup. Okay, so in the roughly $10 million other revenue line, about 75% of that revenue actually came from the marketplace and about 30% came from the advertising revenue..

Our next question is coming from the line of [Wong Jin Yu] (ph) from CICC China International. Please ask your question. Mr. [Wong Jin Yu] (ph), your line is open, please ask your question. Please wait.

The line seems to be experiencing some technical difficulty, let’s move onto the next question which is from Chi Tsang from HSBC, please ask your question..

Good evening. (indiscernible) calling on behalf of Chi Tsang. I think I have two questions.

The first question is could the management help walk through your expectations for the business over the next three years and how it will progressive over like year one, two, three? My question is could you please also give us some color on the warehouse capacity currently, the company’s view, are there capacity constraints? Is there are any like specific timing for the next warehouse opening? Thank you very much..

Okay, thanks for asking the questions. Let me take your question. First question is on forecast for the next three years. Unfortunately, we don’t give guidance beyond the next quarter’s topline. And the reason is the business is growing very fast.

And it’s very hard to give -- for us to give accurate forecast or guidance for the long run, and I’m sorry for that.

And your second question, warehouse capacity, well the current plan we’ve communicated to the capital market is very clear, we are going to spend $200 million to actually double the warehouse space in the next three years from the current 350,000 square meters to 700,000 by the end of 2016.

And our first company-owned warehouse is going to be up and running before the end of this year..

[Joyce] (ph) I think Eric has a few more comments to answer your first question for the next three years growth..

[Foreign Language].

[Joyce] (ph), I mean, Donghao was saying that we are not in a position to give forecast because we haven’t provided any formal guidance, but just to add some more color, Eric saying for -- to fund our future growth, we will be focused on three things. First is to extend our customer base.

At the moment, it’s still very tiny, but the customer penetration is very low. And second is to continue to include the customer shopping experience so that we have happy customers and high repeat purchase rate. And then thirdly is to use technology and mobile to driving more business..

Next is from Thomas Chong from BOCI. Please ask your question..

Hi, good evening. Thanks for taking my questions. I have two questions.

The first question is about the second quarter guidance, can management give some color about how much is coming from Lefeng and when should we expect Lefeng revenue to become meaningful? Do you think we are talking about the third quarter, fourth quarter? And my second question is about the revenue growth rate.

Should we expect Lefeng to grow faster than your organic business? Thanks..

Okay. Thanks for your questions, Thomas. So in our Q2 guidance, again the revenue contribution from Lefeng will not be over 5%. So I don’t think it’s going to be meaningful if that’s what you meant. And when will Lefeng be meaningful, we hope that it will become meaningful as quickly as possible.

And actually Lefeng’s business is growing not as fast as Vipshop’s core business, which is apparel. But after the acquisition, after we fully integrate Lefeng’s business, hopefully we can help Lefeng catch up with Vipshop’s core business in terms of growth rate as quickly as possible..

Our final question comes from the line of Fawne Jiang from Brean Capital. Please ask your question..

Good evening, (indiscernible), Donghao and Millicent. My question actually focused on your regional penetration.

Just wonder what’s the current I think GMV contribution from say second tier and above versus below, and whether you see the -- where you see the -- I guess the regional penetration shift over time, and what’s the, I guess, the implication on top line growth versus your margin trend associated with that going forward.

Any color would be helpful?.

[Foreign Language].

So Fawne, just to quickly summarize Eric’s answer, so a lot of the people had the misconception that the majority of our revenue has been coming from tier 3, tier 4 cities, countries, that’s not true. The combination revenue from tier 1 and tier 2 is actually bigger compared to that from tier 3 and tier 4.

For example, tier 2 and tier 3, we have tier 1 12% and then tier 2 almost 40%. We actually are facing the entire nation. I am not specifically saying that we cater for tier 1 or tier 2 cities. We actually are facing the entire country.

So all tiers are very important for us and we will continue to optimize our brand portfolio to improve operations and to cater for the entire online shopping population in China..

Thank you. At this time, I would like to hand the conference back to Mr. Donghao Yang for the closing comments..

Thank you very much for taking the time to join us and we look forward to speaking with you again next quarter..