Eric Shen - CEO Donghao Yang - CFO Millicent Tu - Director, IR.

Jialong Shi - Nomura Alan Hellawell - Deutsche Bank Evan Zhou - Credit Suisse Binnie Wong - Merrill Lynch Natalie Wu - CICC Alicia Yap - Citigroup Julia Zhu - Morgan Stanley Jin Yoon - Mizuho Securities Piyush Mubayi - Goldman Sachs Chi Tsang - HSBC Wendy Huang - Macquarie Capital Sean Zhang - 86Research.

Ladies and gentlemen, good day everyone, and welcome to Vipshop Holdings Limited Second Quarter 2016 Earnings Conference Call. At this point, I would like to turn the call to Ms. Millicent Tu, Vipshop's Director of Investor Relations. Please proceed..

Thank you, Operator. Hello everyone and thank you for joining Vipshop's second quarter 2016 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 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 anticipates, believes, continues, estimates, expects, intends, is/are likely to, may, plan, should, will, aim, potential, and other similar expressions.

These forward-looking statements speak only as of today 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 Chairman, Co-founder and Chief Executive Officer; and Donghao Yang, our Chief Financial Officer.

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

Good morning and good evening everyone. Welcome to our second quarter 2016 earnings conference call. Our results once again showed strength of our platform and the discount retail sector as both active customers and total orders grew by more than 50% year over year.

Despite the challenging microenvironment, we were able to successfully accelerate our revenue growth. In the first quarter, we added more than 8.2 million new customers, which is a 50% increase compared to the same period last year.

This is exciting as customer growth by expanding our customers age range is one of the key factors of our continued success. In doing so, we have enhanced the personalization of our product offerings and the user experience on our apps and the website.

Younger shoppers have smaller order size, but they are more internet and mobile focused and are the future of e-commerce. We expect these order sizes to increase, and their spending power growth over time. Looking ahead, we will continue to expand our product offerings and deliver more personalized products and service to our valued customers.

We are confident that we have the right plan and team to continue growing our business and creating values for our shareholders. 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 financial results..

Thanks Eric, and hello everyone. We are pleased with our second quarter 2016 operational and financial results. As Eric mentioned, during the second quarter, we re-accelerated our topline growth and significantly strengthened our operating cash flow.

On the customer side, we were able to grow our number of active customers to 23 million, a 62% increase compared to the same period a year ago and total orders to 69 million, a 54% increase compared to the same period a year ago.

Customer satisfaction is the foundation of our success, and we are constantly looking for new ways to improve the user experience on our platform. That is why we continue to invest in the personalization of our merchandise offerings.

By providing our users with product choices that are most relevant to them, we were able to increase both conversion rate and ARPU on our app. As you know, we have recently launched a customer financing program in addition to our supplier financing program.

As of June 30, 2016, the total balance of credit outstanding to customers was approximately RMB 1.2 billion and the total balance of credit outstanding to suppliers was RMB 390 million. At the end of the day, these programs are here to support the growth of our core business.

Our plan is to expand the scale of these programs over time through balancing core growth opportunities with risk controls. This is demonstrated by our recent move to hire a chief risk officer for our internet finance unit, who has over 20 years of international and domestic financial risk experiences.

Turning to logistics, we remain focused on enhancing and expanding our logistics capabilities. Over the past several quarters, we have continued to build out a strong infrastructure of warehouses and networks of both invested companies and proprietary logistics to enhance our order fulfilment capabilities.

We’re now able to deliver more than 90% of our orders through our last mile network. Also, we’re on track to add approximately $500,000 square meters of warehousing capacity by the end of this year. Looking ahead, we aim to continue delivering solid topline growth while maintaining our margins.

We’re confident that by continuing to leverage our proven models, improve our operations and deliver the best shopping experience possible to our loyal customers, we will continue to drive sustainable growth and generate additional value for all of our stakeholders. 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 RMB amounts and all the percentage changes refer to year over year changes, unless otherwise noted.

Total net revenue for the second quarter of 2016 increased by 49% to RMB13.44 billion, primarily attributable to a 62% year over year increase in the number of active customers which grew to 23 million and a 54% year over year increase in total orders to 68.9 million.

Gross profit for the second quarter of 2016 increased by 44% to RMB3.24 billion, primarily driven by the expanding scale of the business. Gross margins for this quarter was 24.1% as compared with 25% in the prior year period. The decrease in gross margin was primarily due to our promotional activities which made pricing more attractive to customers.

Fulfilment expenses for the second quarter of 2016 were RMB1.15 billion as compared with RMB820 million in the prior year period, primarily reflecting the increase in sales volume and number of orders fulfilled.

As a percentage of total net revenue, fulfilment expenses decreased to 8.6% from 9.1% in the prior year period, primarily reflecting the scale effect associated with the growth in total net revenue and improved fulfilment efficiency.

Marketing expenses for the second quarter of 2016 were RMB672 million as compared with RMB503 million in the prior year period, reflecting our strategy to drive long term growth through sustainable investments and strengthening our brand awareness, attracting new users and expanding our market share.

As a percentage of total net revenue, market expenses decreased to 5% from 5.6% in the prior year period, primarily reflecting on cause control efforts.

Technology and content expenses for the second quarter of 2016 were RMB392 million as compared with RMB246 million in the prior year period, reflecting our continued effort to invest in human capital, advanced technologies such as data analytics, as well as new business opportunities including our internet finance unit.

As a percentage of total net revenue, technology and content expenses were 2.9% as compared with 2.7% in the prior year period. General and administrative expenses for the second quarter of 2016 were RMB434 million, as compared with RMB287 million in the prior year period.

As a percentage of total net revenue, general and administrative expenses were 3.2% as compared with 3.2% in the prior year period. Our income from operations increased by 47.1% to RMB644 million for the second quarter of 2016. Operating margin was 4.8% as compared with 4.9% in the prior year period.

Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of intangible assets resulting from a business acquisition, increased by47.2% to RMB837 million from RMB569 million in the prior year period. Non-GAAP operating income margin was 6.2% as compared with 6.3% in the prior year period.

Our net income attributable to Vipshop’s shareholders for the second quarter of 2016, increased by 13.1% to RMB452 million from RMB699 million in the prior year period. Net margin attributable to Vipshop shareholders was 3.4% as compared to 4.4% in the prior year period.

The decline is partially attributable to lower interest to income as well as RMB48.6 million impairment loss of investments. Net income per diluted ADS increased to RMB0.76 from RMB0.66 in the prior year period.

Non-GAAP net income attributable to Vipshop shareholders, which excludes share-based compensation expenses, impairment loss of investment and amortization of intangible assets resulting from a business acquisition and equity method investments, increased by 38.9% to RMB678 million from RMB580 million in the prior year period.

Non-GAAP net margin attributable to Vipshop shareholders was 5% as compared with 5.7% in the prior year period. This decline is primarily due to lower interest income. Non-GAAP net income per diluted ADS increased to RMB1.12 from RMB0.86 in the prior year period.

As of June 30, 2016, our company had cash, and cash equivalents and restricted cash of RMB3.27 billion and held-to-maturity securities of RMB1.75 billion. For the second quarter of 2016, net cash from operating activities was RMB1.23 billion.

Looking at our business outlook, for the third quarter of 2016, we expect our total net revenues to be between RMB11.9 billion and RMB12.4 billion, representing a year-over-year growth rate of approximately 37% to 43%. With that I would now like to open the call up to Q&A..

Thank you. [Operator Instructions]. Our first question comes from the line of Jialong Shi from Nomura. Please go ahead..

Jialong Shi:.

,:.

. :.

Jialong, thank you very much for your question. As your question is mostly related to margin and growth rate, I’d like to take that question instead of Shen-zong. Our goal is very clear. We want to drive our topline growth as fast as possible while maintaining a steady profitability.

So we are not giving any guidance to our future growth rates beyond the next quarter, but our priority is very clear. We want to grow as fast as possible, but at the same time we want to maintain a steady profitability level..

Our next question comes from the line of Alan Hellawell from Deutsche Bank. Please go ahead..

Great. Thank you. I was hoping you could offer a forecast of your revenue by activity. We obviously have our incumbent inventory clearances and then more recent initiatives such as tailor-made and in-season discounting.

If my estimates serve me well, tailor-made and in-season as a proportion of total revenue seemed to remain pretty constant at about 35% over the past couple of quarters. Is this likely to remain the case and if so, are there any other new sales formats that might offer a new growth driver? And sorry, just another related question.

We do see we have evidence across markets that many brands have a finite role for inventory clearance. Many will leverage it up to the point that obviously it clears excess inventory and to the point where it doesn’t begin to impair their broader brand equity and pricing power. We’ve obviously offered inventory clearance over the past eight years.

Where is the growth going to come from going forward? Is it new brand partners with new inventory issues or somehow existing partners? Thank you. [Foreign Language].

So Alan, just to quickly summarize what Eric just said, in the second quarter actually the in-season and tailor-made or custom made accounted for approximately 35% of our business. And as far as Eric’s concerned, that percentage might eventually go even higher.

As far as customers are concerned, this is a natural choice, whether it’s out of season, in-season or tailor-made. As long as they find the brands popular, we’ll cater for that.

And in terms of new areas of business or areas set for expansion, obviously Eric mentioned that apparel, handbags, shoes, our tier one category, coupled with beauty, cosmetics, baby and mother, et cetera, we are adopting an embracing approach.

Anything that’s welcome or popular among our shoppers, including new merchants, including new categories, including custom made, including fast fashion or even live broadcasting format of retailing, we’ll be open minded and explore..

Our next question comes from the line of Evan Zhou from Credit Suisse. Please go ahead..

Hi, good evening, Shen-zongand Donghao and Millicent. Thanks for taking my questions. Question surrounding the old customer retention.

I noticed that within our 23 million active customer base for this quarter, I think the old customer actually in this quarter seems to be contributing a lot in terms of percentage of total customers and orders fulfilled in this quarter.

So I’m wondering like, is there any effort that was done to revive the activity for these customers? How do you actually see the behavior of the old customers in our platform to migrate as sounded out? [Foreign Language]. .

Okay. So Evan, just quickly summarize what Eric said for the benefit of others. In terms of your first question, what we have done to encourage all customers to buy more, obviously Eric mentioned at the start function of CRM and we deliberately try to encourage our customers to cross by into different categories.

For example a new customer for the first time for cosmetics and the next time we encourage them to buy other categories into including apparel, handbags and shoes and et cetera.

The second question is obviously it is shown in our numbers that we have added a lot of new customers and which has same small impacts in terms of decline on the average ticket size, order through currency and ARPU et cetera, but we’re embracing that because we knew that these younger customers in the future will be the potential for our growth.

We are at the right time to expand our customer base and embrace and diversify into different customer age reach. Personalization is very important. Eric mentioned that in the first quarter actually the contribution to topline was about 15% and that number went up to about 17% in the second quarter.

And obviously we’re able to do different customizations for different age groups and able to do customer labeling. And if eventually you hear from the company saying that personalization is contributing 30%, 40% of our revenue, that would not be too surprise in the longer run..

Our next question come from the line of Binnie Wong from Merrill Lynch. Please go ahead..

Hi Shen-zong and Donghao and Millicent. Good evening. Thank you for taking my questions. I have 2 questions here.

I was wondering that in terms of your widening your user base to expand into younger user generation, any change in terms pf our marketing strategies or in terms of like personalization you mentioned earlier or maybe the brand mix right, that drive is to happen? And how should we expect this to trend going forward in terms of the younger user generation and what are the things that we will do more to continue that? And then second question is that looking at, there’s a great improvement on your operating cash flow.

If you can just share with us what are the things that in terms of the working capital cycle, what are things that we have been doing that improved that? That would be great. Thank you. [Foreign language].

Binnie, Eric mentioned that in the second quarter, out of the 8.2 million new customers that we added, about 45% of that are coming from post 90s. The new addition of the younger customers on one hand expands our customer base. On the other hand we recognize that there are some things to tackle in the future.

For example, improve stabilize our platform, but at the same time the average ticket size and the spending power is lower compared to the post 70s and post 80 customers. One thing Eric shared was that for post 90s, they rarely are what’s tallying before, which is very different compared to customers that are in a much older, much mature age profile.

For the younger demographics, we leverage on the new media, social interaction et cetera to target them..

Okay Binnie, thanks for your question. Let me take your second question about our cash flow. Actually in Q2 we didn’t do much different than before to drive a very, very strong cash flow improvement. First of all, this is a very profitable business.

We made a huge amount of profit every quarter and secondly, as a large retailer, we always get paid by our customers almost instantly and have at least 30 to 40 days before we pay our suppliers. So the cash flow of this business has always been very, very strong. But there might be some seasonality in our cash flow pattern.

For example, this past Q1, our operating cash flow came down temporarily because of the impact of the Chinese spring festival, but going forward we are very confident that our cash flow will continue to be strong and solid. .

Our next question comes from the line of Natalie Wu from CICC. Please go ahead..

Hi, good evening Eric, Donghao and Millicent. Thanks for taking my question. I have a question regarding the consumer financing business. You mentioned in the last call that those who use your consumer financing product tend to buy 30% more in each quarter.

So just wondering if the ratio still held the same for this quarter? Also, what’s the coverage ratio of your consumer financing products? That is, what’s the percentage of your old customers that have used your financing products in the quarter? So have you also noticed any lift in buying times in addition to the ticket size? [Foreign Language].

I’ll continue to speak in English. I think Eric has answered most of your questions. There are a couple of things that I want to add to that. One is about our risk control mechanism or team. We have a pretty strong and seasoned risk management control team here at Vipshop. So the default rate so far has been super low.

This is a very promising business over time and we do believe it’s going to be a profitable business as well. And secondly, we do plan to grow this business as a healthy addition to our core business or as a support to our core business over time. The financing of the business, we can also find very good solutions to that.

For example, in the next few months, we’re going to launch our first ABS product. We don’t really worry about the cash or the financing of this business. It’s a very healthy and solid business. .

Natalie, just I would like to clarify, it’s not the average ticket size increased by 30%. It’s actually the ARPU..

Our next question comes from the line of Alicia Yap from Citigroup. Please go ahead..

Hi, good evening, Eric, Donghao and Millicent. Thanks for taking my questions. I have a follow up question on the latest user acquisition strategies and also the customer profile. Just wanted to get a sense.

You mentioned about a younger customer, which contributes to about 40% of your new customer growth, but what other marketing events and the channels that you have been using to successfully attract these younger group of shoppers? Have you been using for example the internet celebrity type of promotional channels? Then in relation to these young group of user, could you share with us their frequencies of their purchase and the categories? Are these younger groups of customer tend to shop more frequently than your existing older core users? And in addition to cosmetic category, what other categories they’re also spending their money on.

Thank you. [Foreign Language].

So Alicia, just quickly to answer the question. Obviously earlier on the call, Eric did mention that younger demographic access information quite differently. So of course we use applications like what we did in the past. Increasingly we are adapting interesting ways to engage with the younger demographics.

For example with celebrities and with live broadcasting et cetera. In terms of their categories, obviously they buy a lot of cosmetics, at the same time apparel, handbags and shoes as well. Because the post 90s are in their mid-20s. 25, 26 years old, understandably their spending is lower.

But we believe as time go by as we’re able to nurture them, their ARPU, their shopping frequency over time will improve..

Our next question comes from the line of Julia Zhu from Morgan Stanley. Please go ahead..

Thanks Shen-zong, Donghao, and Millicent for taking my call and congratulations on the strong quarter. I have a follow-up question regarding the ARPU because the management mentioned that ARPU decline has down like 7% to 8% year on year at this time.

So could management help us to understand the impact from increasing customers from post 90s in ARPU decline? If I remember correctly, last quarter we’re talking about a 3% year on year decline in customer spending from this millennial in fact.

And also another question is regarding the category expansion because we know there is some personnel change in our management team. For example the merchandising team previously. Should we expect a change of merchandising strategy in the future and how will that impact or help our category expansion plan? Another question regarding the promotions.

Could management give us some color on the performance of our promotions around April 19 and June 18, for example the customer additions for marketing expenses because we note and as presented yourself, a decline year on year.

Where shall we see the marketing efficiency gain coming from because previously management mentioned the intention to migrate from fixed scale promotional events to smaller scale but with more times. Have we started to do so and how has the marketing efficiency gained from that? Thank you. [Foreign language].

So the ARPU decline by 7% was mainly due to the following reasons. Number one, we added a much bigger number of new customer. So Eric we mentioned in the second quarter last year we added 5.5 million new users. In this quarter we added actually 8.2 million new users. Secondly, out of these 8.2 million new user, more than 45% would be post 90s.

Post 90s their average spend is lower because of their age profile. And also the other factor would coming from the increasing contribution from cosmetics. This quarter cosmetics actually in terms of absolute dollar amount is historically high.

For the first order buying cosmetics, the average ticket size is lower, but we’re trying different ways and means to encourage customers to cross buy into other categories. Therefore over the time their ARPU will increase. Okay.

Maggie served the company for more than 7 years and she’s reached a stage for early retirement, which is normal and Susan has taken over. Regardless who is actually in charge, our merchandising strategy remains consistent, which is focusing on bringing -- sorry bringing new brands and improving the ROI and the output for the existing brands.

What’s even more important at this stage is we’re going after more users, going after more customers to expand our customer base. Both April 19 and the June promotion went exceptionally well. So as we mentioned a few times, we added quite a bit number of new users and the market efficiency has been improved.

Overall we’re pretty satisfied with our promotion performance..

Our next question come from the line of Jin Yoon from Mizuho Securities. Please go ahead..

Good evening guys. A couple of things. Between flash sales and in-season items, is there a meaningful GM difference? How much of the GM downturn is due to increased promos versus a continued change in revenue mix? That’s the first thing.

The second thing is, where is the retention rate of these post 90 users? I mean in the past your user retention rate is about 80%. Are we seeing any evidence of that with the couponing amongst these 90 users? Thanks guys. [Foreign language].

So Jin, regardless whether the in-season custom may or out of season, the gross margin is actually the same. Our blended gross margin came down year over year was largely because of the promotion that we did in the second quarter which we made pricing more attractive to customers.

The retention rate overall for the post 90s is lower compared to that from post 70s to post 80s..

Our next question come from the line of Piyush Mubayi from Goldman Sachs. Please go ahead..

Thank you for taking my question. On the logistics side, you talked about adding half a million square meters of warehousing capacity in the year.

Could you talk through your initial plans for 2017 and 2018? And a sense of your number of last delivery staff at this point in time and a possible split in CapEx for the current quarter between construction of warehouse, land use, equipment and others. Thank you. [Foreign Language].

So this year we are on track to 500,000 square meters of warehouses and the capacity for next year and the year after would be largely similar, but of course the total CapEx compared to a year ago, compared to last year would be much smaller..

Our next question comes from the line of Chi Tsang from HSBC. Please go ahead..

Hi, good evening. Thanks for taking my question and congratulations on the nice set of results. I wanted to ask you about two things. Firstly, in terms of customers. You had 23 million customers this quarter. You had 37 million last year. Other companies like Alibaba and JD, they have hundreds of millions of buyers.

I was wondering if you can talk about what you think your addressable market is in terms of customers and what type of customer figure may be achievable over the next couple of years. And then secondly, I wanted to ask you about brands. You have over 17,000 brands today.

What kind of changes are you seeing in the brand mix? And for a typical brand, what percentage of the excess inventory do you think you handle? Thank you [Foreign Language].

So Chi, so let’s do the first question first. Yes, obviously like you mentioned, we had 23 million users this quarter and this year, the total annual customers for 2016 will be a much bigger one. And we are pretty comfortable, pretty confident in terms of our market potential at this current stage.

Compared to 400 million users in China, obviously we still have a very tiny percentage of the market share. And Eric’s saying from his perspective to have annual more than 100 million active users will probably need some time, but obviously we think that will be the first milestone to hit and after that, we’ll have different other targets to achieve.

But overall, he is pretty confident, pretty optimistic in terms of where we can grow to in the future. [Foreign language]. So yes, we have accumulatively 17,000 brands that we work with.

But the core suppliers or the core brands is actually coming down to about 4,000 to 5,000 and these core suppliers generated a big amount of revenue to our overall business. And obviously our priority and our focus is trying to maintain these brands and give them more value added services and to strengthen our relationships with them.

Your second question in terms of what’s the percentage that we are doing in terms of the inventory clearance. That is actually very difficult to define. When we work with brands, we negotiate the -- we look at their inventories number one and then we go into the custom made, go into the in season.

So it’s very difficult to generalize in terms of that percentage, but all we can say is in terms of inventory clearance we are definitely number one..

Our next question comes from the line of Wendy Huang from Macquarie. Please go ahead..

Thank you. I think you just mentioned earlier about the strong cosmetic sales. So can you provide the dollar amount of the cosmetic category for the quarter? And also I think historically you also provide the top five brands on your platform.

Do you have an update on the figure? Finally, regarding the next quarter’s margin trend, so should we expect the gross margin to maybe recover a little bit given that Q3 is our low season with less promotions? And also for the OP margin, how should we expect the trend for the next quarter? Thank you. [Foreign Language].

So in the second quarter, cosmetics total GMV exceeding $400 million and Eric mentioned earlier saying that this is actually a historic new number for us. We don’t provide specific numbers in terms of top five brands, but just to share with you on a high level top 20 brands accounted for approximately 30% of our business..

Let me take your second question. While we do not give guidance on the gross margin or operating margin for the future, but again I want to emphasize our strategy. We want to drive our topline growth as fast as possible, while maintaining steady profitability levels..

Our next question comes from the line of Sean Zhang from 86Research. Please go ahead..

Great. Thank you for taking my question. Congrats on a great quarter. Just want to understand a little bit more of how do we maintain our old customer, the returning customers, as they still account for majority of our contribution? Very curious to learn about for example the CRM. Maybe any detail management can share.

Also personalization recommendation as well as just anything that we are doing trying to hold on to our old customer. And also maybe just a follow up on the margins. We are seeing we are generating leverage on the fulfillment line and we understand that in terms of market impact, we continue to invest.

Is this the trend that we are going to see in the nearer --In the next few quarters? Thank you. [Foreign Language].

So Sean, CRM has actually more than one or two ways and means to maintain our customer. Just to give you one or two, for our customers, we can actually encourage them to cross buy into our other categories, which we talked about earlier.

And then we can study customers’ data and profile and recommend the brands that are suitable for them when these brands go live..

Sean, let me take your second question. You’re right. We’ll continue to see operating leverages in our operations because of our rapid topline growth, but we will most likely reinvest the incremental profits back to the business to drive topline growth as fast as possible.

Again, our goal is to maintain a steady profitability level while prioritizing our topline growth,.

Thank you. Thank you everyone for your invaluable questions. This is the time we have for today. I will hand the time over to Mr. Donghao Yang for closing remarks..

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

Thank you..

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