LightInTheBox Holding Co., Ltd. Q1 FY2020 Earnings Call

Good morning everyone and welcome to the First Quarter 2020 Earnings Conference Call for LightInTheBox Holding Company, Ltd. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Christian Arnell for opening remarks and introductions. Please go ahead, sir.

Thank you. Hello everyone and welcome to LightInTheBox's first quarter 2020 earnings conference call. The Company's results were released earlier today and are available on the IR website as well as through PR Newswire. Today, you will hear from LightInTheBox's CEO, Mr. Jian He, who will give an overview of the Company's strategies and recent developments, followed by Ms. Wenyu Liu, the Company's acting Chief Financial Officer, who will go over financial results in more detail. Before we proceed, I'd like to remind you of our Safe Harbor statement. Please note that the discussions today may contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause results to materially differ from those in the forward-looking statements, please refer to our Form 20-F filed with the Securities and Exchange Commission on May 1, 2020. We do not assume any obligation to update any forward-looking statements, except as required under applicable law. At this point, I'd now like to turn the call over to Mr. He. Please go ahead.

Thanks, Christian, and thank you everyone for joining us today. The first quarter presented challenges for our business. Consumer demand and fulfillment were impacted due to the effect of the coronavirus. This created an opportunity to further test all our current strategies for driving operational efficiency in the first half and make strategic adjustments throughout the quarter to weather the economic disruption. I'm proud to say that all of our efforts to ensure the health and safety of our employees, maintain business activity plans for the resumption of normal operations, and safeguard partnerships for fulfillment capacity, resulted in our third consecutive quarter of GAAP profitability. Our strategy adjustments in the first quarter also strengthened our relationships with suppliers, expanded our customer base, and further optimized our cost structure. All of which has helped to improve our market conditions and ability to scale the business going forward. Despite the significant reduction in activities globally, revenues still increased to $51.5 million during the quarter, up 1.3% year-over-year. Gross margin expanded significantly to 46.4% from 34.8% during the same quarter last year, once again driven by our continuous efforts to grow revenues from categories with higher margins as part of our efforts to improve the optimization of our product mix. This was also underpinned by our ability to quickly negotiate with suppliers to secure fast-moving products in the PPE category and realize cost savings through a disciplined approach to inventory management. Adjusted EBITDA also improved significantly, increasing to $1.4 million, compared with a loss of $7.9 million in the same quarter of 2019. As I mentioned earlier, we delivered our third consecutive quarter of GAAP profitability while our cash and cash equivalents position remains healthy at $35.6 million, which is providing us with the resources and flexibility needed to drive growth going forward. We began to see the impact of coronavirus on our operations as early as late January. We couldn't deliver goods from our warehouse for almost a month. Employees were severely restricted from coming to work. As the situation worsened, countries started to implement more global restrictions, and customer service became more constrained. Our focus shifted greatly to safeguarding our employees, but equally importantly, ensuring that our customers continued to receive packages on time. In rapid response to the challenge, our management team quickly implemented remote work. We had serious strategy conversations with suppliers and made adjustments to our innovative logistics infrastructure as we addressed the fast-moving and high demand PPE products. This helped to mitigate the overall impact on our business, but we also took further steps to set up commitments to greater social responsibility, helping many of our global customers in the fight against the pandemic. During the quarter, we shipped over 1.5 million medical masks to customers in Europe and Southeast Asia. The unintended effect of our other efforts is that we expanded our customer footprint, strengthened supplier relationships, and improved overall operations. We're now seeing sales volume start to increase across all countries. While it's premature to use specifics, we can confidently say that our repeat customer adjustment rates are trending higher. We expect revenue in Q2 2020 to grow on a year-over-year basis. We resumed production at full capacity towards the end of the first quarter of 2020. Over the last two to three weeks, we have also seen a rebound in more traditional categories, such as fashion as customers plan for gradual reopenings. We are confident that our balanced category mix, enhanced additions, expanded customer base, strong supplier relationships, innovative logistics infrastructure, and the increasing worldwide adoption of online shopping all position us to drive profitability going forward and deliver on our targets for margin expansion. Our performance this quarter reflects our ability to rapidly adapt to changing operating conditions, showcasing the tremendous commitment of our employees and management team. It has also demonstrated how well the strategies we laid out last year are driving long-term sustainable value for shareholders despite the challenges. I am extremely proud of our performance during the quarter and am encouraged by the positive activity we are seeing in the second quarter thus far, looking forward to further progress throughout the rest of 2020. I am confident that we are well-positioned to scale the business better, improve profitability, and drive top line growth as the recovery continues. I'll now turn the call over to Wenyu to go through the financials for the quarter.

Thank you, Mr. He, and thank you everyone for joining the call. I will now review our financial results. Let me remind you that all numbers quoted are in U.S. dollars. As Mr. He mentioned, we are very encouraged by the continued growth in our top and bottom lines, overall profitability, and stronger balance sheet strength despite the significant adverse conditions due to COVID-19. We are confident that our operational targets and growth trajectory will lead to further increases in profitability regarding management returns. Total revenue was $51.5 million, up 1.3% year-over-year from $50.9 million in the same quarter of 2019. This growth was mainly driven by stable product sales, which were $49.9 million, compared with $49.8 million in the same period in 2019, and an increase in service sales which were $1.6 million, up 45.5% year-over-year. We will continue to prioritize high-quality growth, leverage the expansion and strength of our relationships with factories, as we cater to the needs of our growing user base and improve operational efficiencies in the long run. We will also continue to look for unique opportunities to optimize our category mix towards products. Our overall focus remains squarely on margin expansion and attainable profitability. Gross profit was $23.9 million compared with $17.7 million during the same period last year. Gross margin improved to 46.4% compared with 34.8% in the same quarter of 2019, primarily due to our continued efforts to drive revenue growth from categories with higher gross margins. Total operating expenses in the first quarter were $27.1 million, a marginal increase from $26.5 million during the same quarter of 2019. The increase was primarily due to higher selling and marketing expenses. Taking a closer look at the results this quarter, fulfillment expenditures were $5.0 million compared with $5.2 million in the same quarter of 2019. The decrease was primarily due to increased efficiency across our innovative logistics infrastructure. As a percentage of total revenue, fulfillment expenses were 9.8% compared with 10.2% in the same quarter of 2019 and 10.7% in the fourth quarter of 2019. The number of orders for product sales during the first quarter was 1.0 million compared with 1.2 million during the same period last year. Selling and marketing expenses were $14.8 million, compared to $9.3 million in the same quarter of 2019. As a percentage of total revenues, selling and marketing expenses were 28.7%, compared with 18.3% in the same quarter of 2019, and 24.9% in the fourth quarter of 2019. Our focus on growth throughout 2020 will likely result in higher marketing expenses, but we will continue to exercise cost discipline in order to maintain profitability and healthy margins. G&A expenses were $7.2 million compared with $12.2 million in the same quarter of 2019. As a percentage of total revenues, G&A expenses were 14.1% compared with 23.6% in the same quarter of 2019 and 11.8% in the fourth quarter of 2019. Included in G&A expenses, our R&D expenses were $3.5 million, compared to $2.2 million in the same quarter of 2019. Technology will continue to be a part of our DNA, but the slight scale back in R&D investments reflected our ability to leverage technology call enhancements that we made throughout 2019 while preserving cash during the COVID-19 outbreak, which caused a slowdown in our operations. We intend to gradually increase our investments in R&D going forward to further enhance user experience and improve future operating margins. Throughout the first quarter of 2020, repeat purchase rates were impacted by longer delivery times due to COVID-19, including logistic constraints. However, in the last two or three weeks as the operating environment continues to rebound, we have seen a significant improvement in repeat purchase rates alongside increasing customer engagement from an extended customer base. Adjusted EBITDA, which represents a gain or loss from operation before share-based compensation expense, changes in the fair value of convertible promissory notes, interest income, interest expenses, income tax expense, and depreciation and amortization expense, was $1.4 million in the first quarter of 2020, compared with a loss of $7.9 million in the same quarter of 2019. Net income was $0.7 million, compared with a net loss of $14.1 million in the same quarter of 2019. Net income per ADS was $0.01, compared with a net loss per ADS of $0.21 in the same quarter of 2019. As of March 31, 2020, we had cash and cash equivalents and restricted cash of $35.6 million, compared with $40.4 million as of December 31, 2019. We believe this level of liquidity is sufficient to navigate an extended period of uncertainty. For the second quarter of 2020, based on current information available and business seasonality, we expect net revenue to be between $105 million and $120 million. This concludes our prepared remarks. At this point, we are ready to take some questions.

Thank you very much everyone for joining today's call. If you have any questions or further comments, please don't hesitate to reach out to the LightInTheBox IR team. This concludes the call. Have a good night. Thank you. Ladies and gentlemen, this concludes the conference calls for today. Thank you for participating. You may now all disconnect.