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Edited Transcript of CTHR earnings conference call or presentation 8-May-18 8:30pm GMT

Q1 2018 Charles & Colvard Ltd Earnings Call

MOORESVILLE May 16, 2018 (Thomson StreetEvents) -- Edited Transcript of Charles & Colvard Ltd earnings conference call or presentation Tuesday, May 8, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clint J. Pete

Charles & Colvard, Ltd. - CFO

* Suzanne T. Miglucci

Charles & Colvard, Ltd. - CEO, President & Director

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Conference Call Participants

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* Rodney Baber

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Presentation

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Operator [1]

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Good day, and welcome to the Charles & Colvard First Quarter 2018 Earnings Call. (Operator Instructions)

This earnings call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, including statements regarding, among other things, the company's business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future developments and actual results could differ materially from those set forth and contemplated or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate.

This earnings call does not constitute an offer to purchase any securities nor a solicitation of a proxy, consent, authorization or agent designation with respect to the meeting of the company's shareholders. Please note, this event is being recorded.

I would now like to turn the conference over to Suzanne Miglucci, President and Chief Executive Officer. Please go ahead.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [2]

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Thank you, Brian. Good afternoon, and thank you for joining us as we summarize Charles & Colvard's First Quarter 2018 results. We introduced a new format to our earnings call in Q4 with the intention of providing you a more comprehensive visual presentation of our quarterly report. It's been met with enthusiasm, so we have decided to continue this format going forward.

Accompanying today's call is a supporting PowerPoint slide deck, which we'll refer to during our formal remarks. This presentation file is available in the Investor Relations section of our website at ir.charlesandcolvard.com/events.

Let's turn to our review. I'll begin on Slide 3. We'll divide today's call into 3 sections. I'll discuss our execution highlights in Q1 2018. Our CFO, Clint Pete, will discuss the numbers, and then I'll wrap up with an update on our strategic initiatives.

Let's turn to Slide 4. Our 20% net sales growth in Q1 was driven in large part by the continued growth in our direct-to-consumer Online Channels segment. Online Channels grew 40% over the year ago quarter, bolstered by the continued digital marketing efforts that are expanding our awareness with the consumer. We're reaching the consumer through a mix of digital marketing, channel expansion and co-promotional partnerships since we believe it's important that we engage the consumer where they socialize and shop.

In Q1, we began a concerted effort to partner with organizations that are already engaged with our target market. For example, we launched a program for current and former military servicemen and women, providing a special promotions and discount for Forever One moissanite jewelry purchased from Charles & Colvard's website. This partnership provides us access to over 30 million active and retired military personnel.

We went live on zulily, a membership-based daily sales website. We recently hosted a successful inaugural event on their platform, promoting our popular stackable rings. Based on the promotion's positive traction, we've been invited to participate in a second event.

We also introduced a curated assortment of jewelry, including rings, necklaces, earrings and bracelets, in support of She Should Run, a nonpartisan organization whose mission is to expand the talent pool of women running for office. Similar co-promotional relationships were launched with Flont, a fine jewelry rental service for luxury brands, and Zebit, an online creditor.

We also continue to grow our presence on marketplaces. In Q1, we went live on Wish, a marketplace that helps us reach the younger Gen Z audience and creates opportunities to sell our legacy inventory.

We're also fostering deeper relationships with existing marketplace partners that are high performing. In the first quarter of 2018, we achieved more than 100% net sales growth in marketplaces compared to the year ago quarter. A significant part of this growth came through Amazon, which has quickly become our #1 marketplace.

Q1 2018 was our first full quarter as a Seller Fulfilled Prime vendor on Amazon. With the Seller Fulfilled Prime badge, we ship directly from our global distribution center, enabling us to feature any of our inventory to the Amazon Prime audience.

Our transactional website, charlesandcolvard.com, also continues to see steady growth, with 53% growth in net sales over the same quarter last year. These increases in online sales are a result of targeted digital marketing efforts that continue to grow our direct relationship with the consumer.

Since the Charles & Colvard relaunch in October of 2016, we've grown our social media following by 750%, including a 776% increase in views on our YouTube channel.

In Q1, our public relations and digital marketing efforts drove significant traffic to our Valentine's and St. Patrick's Day sales and garnered a unique opportunity for exposure on the Megyn Kelly TODAY show, where our product was featured and gifted to studio audience members. The subsequent traffic to our website from these promotions contributed to our Q1 Online Channel success.

This growing awareness for moissanite is creating a halo effect for Charles & Colvard. On Slide 5, you can see excerpts from online media attention received in Q1, with articles across Reddit, Huffington Post, Harper’s Bazaar and Pinterest that feature the beauty, value and ethical sourcing of moissanite.

Pinterest recently issued its annual trends report, and they noted moissanite as of one of the top 10 wedding trends for 2018 based on a 294% increase in searches for moissanite engagement rings on their site.

All of this buzz in Q1 boosted organic traffic and increased social media traffic to our website. Our social media presence has increased traffic to our site by 305% in Q1 2018 versus last year, and our sales conversions from that traffic have increased by 46%.

We continue to optimize the customer journey to make it easy to shop on charlesandcolvard.com. In Q1, we deployed new technology to automate returns processes. We also implemented an interactive voice response system, or IVR, to automate inbound phone inquiries. These efforts to enhance the customer experience when engaging with Charles & Colvard can be directly tied to our growth.

Our Traditional segment, which had a 7% increase in net sales over Q1 2017 -- this growth is not a surprise as most traditional jewelry retailers experienced a slow quarter. Sales through our domestic distributors were lower than in the year ago quarter, but this was positively offset by our growing relationship with Helzberg Diamonds stores. We're now in nearly all of their flagship stores.

In summary, we grew net sales by 20% while keeping our expense base and our cash on hand relatively flat to the year ago quarter.

With me today is Clint Pete, our Chief Financial Officer. Clint will dig deeper into the financials, then I'll return to close out our discussion with thoughts on the coming quarters. Clint?

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Clint J. Pete, Charles & Colvard, Ltd. - CFO [3]

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Thank you, Suzanne. Good afternoon, everyone, and thank you for joining us today. Please turn to Slide 7, as we first review our Q1 results. Net sales for the first quarter 2018 increased 20% versus the year ago quarter.

Here's the breakdown. In the company's Online Channels segment, which consists of e-commerce outlets, including charlesandcolvard.com marketplaces, dropship, and other pure play, exclusively e-commerce customers, net sales for the quarter increased 40% to $3 million or 45% of total net sales for the quarter, compared with $2.2 million or 38% of total net sales in the year ago first quarter.

In the company's Traditional segment, which consists of wholesale, retail and television customers, net sales for the quarter increased 7% to $3.8 million or 55% of total net sales, compared with $3.5 million or 62% of total net sales in the year ago first quarter.

On a product line basis, finished jewelry net sales increased 83% (sic) [89%] to $3.3 million for the quarter. This increase continues to result from our direct-to-consumer expansion and our strategy to drive finished jewelry sales across multiple geographies and channels, including Helzberg retail stores, which had very positive sales trends.

The company's net sales of loose jewels decreased 10% to $3.5 million in Q1, primarily due to lower demand in our distributor channels.

Moving on to Slide 8. While our gross margin has strengthened and stabilized over past several quarters during 2017, in the first quarter 2018, our gross margin was 39% compared to 43% in the first quarter of 2017. This decline was mainly due to the intentional impact of higher levels of finished jewelry sales from our legacy inventory gemstones. We made a focused effort to move these older gemstones and jewelry pieces out through promotions and were pleased with the positive margins we were able to generate, even at lower rates in Forever One jewelry sales.

In an upcoming slide, I will address the corresponding reduction in our legacy inventory, which is a positive trend.

On Slide 9, at the top of the bar, we show operating expenses as a percentage of net sales, which continues to show improvement from a level of 53% in the year-ago quarter, to 48% in Q1 2018. While expenses increased slightly in Q1 versus Q4 2017, the trend line of our expenses as a percentage of net sales continues to reflect the scalability that we have built into our business by controlling costs while growing the top line.

The dollar level of operating expenses for each quarter is presented inside the bar. Operating expenses for the first quarter 2018 were $3.2 million, up from the $3 million in the year ago quarter. Sales and marketing expenses in Q1 were $1.9 million, essentially flat compared with the first quarter of 2017, which included approximately $245,000 and a onetime severance expense related to the departure of our former Chief Revenue Officer. This decrease in severance expense was offset in part by an increase in salaries and related benefits as well as digital marketing investments aligned with the ongoing strategic expansion of our sales and marketing initiatives.

G&A expenses in Q1 were $1.4 million, an increase of $300,000 compared with the year ago quarter. This increase was primarily due to higher salaries and related benefits, which included certain noncash items such as restricted stock expense related to the annual equity awards.

On Slide 10, we reported a net loss for the first quarter of approximately $578,000 or $0.03 per share compared with a net loss of $560,000 or $0.03 per share in the year ago quarter.

As we described, Q1 2018 was impacted by a combination of lower gross margin dollars from selling legacy gemstones and jewelry, slower sales through distributor channels and increased G&A expenses.

Slide 11 presents a balance sheet snapshot. We ended the first quarter 2018 with $4.5 million of cash and cash equivalents compared to $4.6 million at the end of 2017. The company anticipates continuing to invest a portion of this cash in marketing, branding and awareness initiatives during the upcoming quarters. The company has no long-term debt and has not utilized our $10 million credit facility.

Inventory at the end of the first quarter of 2018 was approximately $31 million, essentially flat with inventory at the end of 2017. At the end of Q1, loose jewel's inventory increased to $22.9 million from $22.1 million at year-end 2017.

Finished jewelry inventory decreased to $8 million compared to $8.8 million at the end of 2017. This trend shows the success in selling finished jewelry with both our current higher-margin Forever One gemstones and our legacy lower-margin gemstones.

On Slide 12, we provide a detail regarding the classification of our new versus legacy materials. At the end of the first quarter 2018, 68% of our inventory was classified as new inventory, this leaves just 32% of our inventory classified as legacy inventory at the end of the first quarter. Based on the carrying value of our inventory, this change in legacy inventory represents an 11% reduction from the amount of the inventory classified as legacy inventory at year-end 2017 and a 30% reduction from the amount of inventory classified as legacy inventory at year-end 2016.

Before closing, I'd like to highlight a few financial reporting matters for your information. As of January 1, 2018, we adopted the new ASC 606 revenue recognition accounting standard issued by the Financial Accounting Standards Board. Based on our analysis, we determined that our prior revenue recognition accounting policy was consistent with the requirements of the new guidance. Therefore, except for required disclosures that readers of our financial statements will see, adoption of the new accounting standard did not have a material effect on our financial statements.

I'd also like to remind our shareholders that in January of this year, our Board of Directors approved a change in the company's calendar year-end reporting cycle from December 31 to a fiscal year ending June 30. Following the filing this week of our results for the first quarter of fiscal 2018 ended March 31, we plan to file a transition year-end report with fiscal results for the 6-month period ending June 30, 2018. This filing and our related earnings release is expected in early September. Our fiscal 2019 year will begin on January 1, 2018. In connection with the change of our fiscal year, our 2018 Annual Meeting of Shareholders will be held on November 8, 2018.

I'd like now to turn the call back over to Suzanne.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [4]

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Thank you, Clint. On Slide 14, I'll turn our attention to the quarters ahead. We intend to build on Charles & Colvard's position as a leading worldwide moissanite provider to further establish our presence in emerging markets and to differentiate our product's quality and service offering globally.

Here's what to expect from our key strategies. Number one, drive organic revenue growth in the U.S. and maintain attractive margins. We're making significant headway in expanding our reach with the U.S. consumer, and we plan to continue engaging our target customers through creative and progressive marketing campaigns.

Number two, expand our gemstone and jewelry offerings to serve a broad range of customers. We believe it's important to offer a selection of jewelry to address a variety of significant moments, from fine jewelry worthy of commemorating birthdays and anniversaries, to fashion jewelry, simply because she loves it. Our Q1 2018 bridal sales on charlesandcolvard.com were 63% of net sales compared to 37% for both fine and fashion jewelry combined. We expected this surge in bridal sales during the first quarter given the popularity of engagements around Valentine's Day. However, we believe there's more opportunity to capture sales in the fashion space. For example, we recently expanded our jewelry offerings with a selection of personalized options, as seen on this slide.

We'd like a deeper relationship with the consumer as she's coming of age so that we can develop a lifetime customer. Offering fashion jewelry at an attractive entry price point is a logical way to gain her attention and have her fall in love with moissanite. This establishes a long-term connection that we believe will guide her to bridal and fine jewelry selections over the lifetime of her relationship with Charles & Colvard. We're focusing on our breadth of selection and targeting our fashion category for future growth.

Number three, target the global market opportunity through continued brand building, focused channel expansion and world-class customer service. There are many strategies that can be deployed when expanding into new geographies. Traditional land-and-expand strategies can be very costly, requiring significant upfront investment and a lot of patience. And it's often a long time line to return on investment, so we are not going to take that approach. At Charles & Colvard, our methodology is an agile strategy based on digital marketing and e-commerce investments, underscoring our commitment to using technology in everything we do.

Over the past 18 months, we've become adept at utilizing marketplaces to serve our customer. We believe that marketplaces offer a logical channel of entry into new territories. The customer base is already established. For Charles & Colvard, it first requires localizing product listings and then posting them to the marketplace. Then with the addition of in-country social and digital advertising, we can draw attention to our brands and marketplace presence. The beauty of this strategy is that it's entirely digital and entirely measurable. Investments can be dialed up or down depending on the customers' reaction to the brand. Should we find a territory is underperforming, we can easily shift our marketing investments to other territories where the consumer is embracing our brand.

In Q2 and into fiscal year 2019, we'll be testing a few new territories for their viability. We're focused on 2 major areas, Asia-Pacific and Europe. We began with our pilot into China in 2017, and we'll continue our efforts there. Australia is an attractive target due to customer trends being similar to the U.S. and the use of the English language. We'll also look at select markets in Europe.

These aren't random selections, rather they're guided by cross-border purchasing already taking place on our U.S. charlesandcolvard.com website. We believe that if the consumer is finding their way to us in the U.S., the likelihood of us finding a meaningful customer base in their territory is promising.

We'll also continue taking steps to optimize our cross-border sales. If a foreign national comes to our U.S. website to shop, we want to welcome them in a manner familiar to them. For that reason, we'll be focused on serving select native languages to international visitors and improving our international customer service capabilities to make cross-border purchasing easier. This cross-border approach gives us both an ongoing revenue stream and it serves to provide market research to inform our next geographical selections.

And finally, strategic initiative #4, balance growth-oriented investments to generate sustainable earnings improvement. We plan to maintain financial flexibility and use data-driven business decisions to balance investments in future growth with consistent near-term financial performance. We remain very pleased with our performance as we consistently outpace growth rates in traditional retail and e-commerce sales, and we'll continue to invest in these 4 strategic strategies as we believe they're central to helping us propel the business forward.

We'd now like to open the call to take your questions. Brian, would you please poll for questions from our listening audience?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from [Polly Ferguson], a private investor.

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Unidentified Participant, [2]

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I think that your momentum is really great and that you're managing this company very well. I just had one question. What is happening with your supplier contract that's coming up in July?

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [3]

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Sure. Thanks for the question, Polly, and for being on the line with us. The question that Polly has is related to our supply agreement with Cree. They are the company that supplies us our base moissanite material from which we facet our gemstones. Charles & Colvard has the exclusive and unilateral right to renew that agreement for 2 years. So we can simply determine that we want to do exactly the same as we're doing and go 2 years ahead or we can certainly negotiate for new terms. We are actively engaged with our supplier. We've got a great relationship with them. We're actively at the table at all times, both doing research together as well as negotiating a contract that we both believe is beneficial for both companies. So we feel good about our future with that organization.

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Operator [4]

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Our next question today comes from [Jeremy Bloom].

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Unidentified Participant, [5]

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Yes, on the last call, you talked about some new product lines. I was wondering if you could just give some more color on them. You talked about colored stones, exotic stones, men's stones. Can you give us an update on what's going on with those?

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [6]

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Sure. So we did launch a men's lines of jewelry. It was put out there for the holiday time frame. We offered men's rings, many of them in alternate metals, which is kind of fun. It seems to be fairly popular with the male organizations there. We also -- we put in single-stud earrings, which we're finding as kind of common with both women and men, but we offered a stud for your stud campaign over the holiday period for women to buy their gentlemen earrings. We do have a colored program that we launched, I think, it was late Q4 and into Q1 with our green gemstones. We've actually had green gemstones for some time. We took them off the market for a bit, brought them back forward. We've very much focused on being a green company and being green in everything that we do from a business standpoint, and so we think that these stones are sort of indicative of what it is we focus on as a business. What's interesting about that program is that a portion of the proceeds actually go to a -- the conservancy for the nature -- the nature conservancy, excuse me, and we give funds back to saving the earth. As you may know, the moissanite gemstone is not mined from the earth, it's completely lab created. That makes it a sustainable product. That's what makes it so attractive to some of our millennial consumers, and this green program actually brings that forward. I will say, going forward, and as I noted in prepared remarks, expanding the selections are very important because we really want to make sure that we are squarely hitting this millennial audience that is our target as well as the Gen Z that's coming of age now. Gen Zs go up to about age 21. They're starting to move into their spending years. So critically important for us that we engage them as they're thinking about where they want to make their investments. For that reason, we believe fashion jewelry is an important thing for us to begin expanding into, and I think you can expect to see some of those opportunities come live with us in the coming quarters.

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Clint J. Pete, Charles & Colvard, Ltd. - CFO [7]

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And I'd like just to point out that the -- just want to highlight the 89% growth in our finished jewelry, which just -- which Suzanne mentioned, just indicates that traction that we're gaining.

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Operator [8]

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(Operator Instructions) And our next question comes from [Chuck Lynn], a private investor.

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Unidentified Participant, [9]

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A couple of basic questions. Where are we with regard to new competition around the world? Years ago, we had an exclusive position in the marketplace, and I know I can't ask more than one question, but what is the point at which we will turn a profit for the quarter?

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [10]

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Sure. Thanks for being on the line with us, Chuck. We appreciate it. There is moissanite competition coming to market. We went off patent in the U.S. about 2 years ago, about 1.5 years ago in certain Asia-Pacific and European countries. We are seeing some products trickle to market. And we're seeing it where we were several years ago, we're not necessarily seeing competitive color on -- in the clear stone, the D quality that we can bring forward in Forever One. We're certainly not seeing quality of stone when it comes to the faceting of the stones, the polish, the finishing that we have spent 22 years perfecting at Charles & Colvard. So we do believe we're going to see competition coming to market. We're not seeing it at volume and scale, Chuck, but we're seeing it sort of onesie, twosie at this point in time. What we love about the competition, and I did say love, we love that the competition is out creating buzz about moissanite. And so we have organizations other than just Charles & Colvard now speaking to the market and bringing forward an awareness and a buzz around the beauty, the value of this gemstone. So we're seeing them there in the market. Now you asked 2-part -- a part 2 question which is around profitability. Let me remind you that we had a profitable quarter in Q4, and that was the first profitable quarter that we saw since the year 2013. So the good news is that we understand what profitability looks like and how to get there. Clint, anything that you would like to add on the profitability side?

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Clint J. Pete, Charles & Colvard, Ltd. - CFO [11]

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I think you summarized it fine.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [12]

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Okay.

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Operator [13]

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(Operator Instructions) Our next question comes from Rodney Baber with Paulson Investment Company.

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Rodney Baber, [14]

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I've got probably more than one question, but a couple of things I wish you would just give us some color on. The finished jewelry up 89%, that's obviously a good number, but the down 10% on loose jewel sales. It appears to me that you're focusing on doing your own stuff as opposed to just selling the loose stones. What's the difference in the margins in those 2 pieces of business? And also, the drop in loose jewel sales, I would wonder why that would happen in light of all the opportunities out there to bring on new people distributing the product, new retailers, all those kind of things. So if you could clarify that for me, I'd appreciate it.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [15]

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Sure, Rodney. And again, thanks for being with us today. I think that finished jewelry up 89% is an absolutely great metric that points to Charles & Colvard controlling our own destiny. So this is absolutely an indicator that we are making the immediate sales to the customer. This is direct-to-consumer outcomes. This is indicative of the sales that we have on charlesandcolvard.com. This is also, in this bucket, is direct sales that we do through Amazon, eBay and other marketplaces where we're deployed. We get to still control the brand message and the customer experience as they're opening that box and they're having an experience with Charles & Colvard. So we're pleased with it because we do see higher margins in that business, Rodney. Our blended margin rate right now is around 39%. Over the holiday period, it was a bit higher, more like 43% or so. These are nice margins for us to have. The more we go direct-to-consumer, the higher margins we see. We may see -- and I'm going to swag some general numbers here because we don't give specific guidance on this, but we can see ranges of 60% or more when we're going directly to consumer on our margins. As we go down into our distribution channels, of course, we need to leave room for our distribution partners and then their customers, the independent jeweler and the retailers, to also make margin off of that business, so we take the hit on that margin and that's what brings their numbers down far lower in the low 30% range. So it's a blend of the two. We really like controlling our destiny. Not that we don't mind selling through distribution partners, they're absolutely a critical part of what it is we do, but we can certainly have far more control and far better margin when we sell direct to consumer.

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Rodney Baber, [16]

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Got you. One other thing. The China, you didn't break the numbers out. You've been in that for a while, and I think you were cautious about how quickly that comes on. And then you announced that Asia-Pacific and Europe, you're bringing those on, which implies that you're happy with what you're seeing in China. Can you give us any more color on China and how that is doing? And if you've changed your opinion, plus or minus, on whether or not that's going to be a significant market for us. And then Asia-Pacific thing and Europe, just any more color on that.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [17]

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You've got it. So as I mentioned in prepared remarks, we believe that marketplaces are a logical way for us to go to market because it's a very low overhead, light footprint for us to test a market. So we are using that vehicle in order to bring us into various channels. In China, that vehicle is Tmall. Tmall is the largest e-commerce channel in all of China, and it's a challenge. And I did put cautionary -- sort of a cautionary tone out there about it because we don't know how long this one will take. We've only been 2 quarters in China now. The numbers are coming through. We are seeing sales. It's very slow. And it's commensurate with the amount of dollars we're throwing into advertising. The more we throw into advertising, the faster we may grow. But we are up against a number of western brands that are attempting to get into China. So we're taking a cautionary and fairly slow burn there to see what will the consumer inch away from a jewelry standpoint and how much investment does it take to turn a dollar or a yen. When we go into Europe and we go into certain other Asia-Pacific countries, there are marketplaces that are more familiar to Charles & Colvard. As you may know, we have strong capabilities on both Amazon and eBay. Amazon and eBay are already in many of the new territories that we may test. What that means for us, by using technology, is we can turn with things that we currently have in the U.S. and make them live in other countries. A very, again, low-footprint way to use technology to test a market. So we're going to put out our feelers in many of these places. The beauty is that the marketplace does the job of bringing all the eyeballs, and then Charles & Colvard, ultimately, is there to then deliver. Once we get to yes, and we understand that there is a potential consumer in that region, then and only then are we going to spend time building a brand. Building a brand costs money. And we're not quite ready yet to make a full investment in any one of these territories until the territory validates itself through sales, either cross-border trade to us in the U.S. or internationally on marketplaces where we serve our goods. So we'll call it dipping a toe, and it's a cautionary way for us, again, to do market research while collecting a bit of a profit and validating a potential market.

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Rodney Baber, [18]

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Do you have a revenue growth in China? A number with Tmall you can share with us over the last few quarters?

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [19]

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We do not. But what I can share with you, Rodney, is that we saw a nice uptick in our international traditional sales. That's up compared to prior quarters. We're seeing our distributor partners in that part of the world beginning to see an uptick in their business. If you do go to China and you search for moissanite, it is out there and there is awareness of it. And the good news is that, that is to the benefit of our distributors, they're seeing an uptick. And of course, we're seeing the uptick here as well on cross-border trade. We're seeing some of those Chinese nationals come to the U.S. and transact with us here. So indicators are good that there is a market. We just are not clear entirely on how much effort it's going to take to build a brand in China. Therefore, we're crawling before we're walking on this one.

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Rodney Baber, [20]

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Suzanne, on my first question talking about the margins, which have been 40% the last 3 or 4 quarters, dropped to 38%. Was that just -- is that product mix? Or is there anything else involved with that?

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [21]

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The good news here is that is a drawdown of legacy inventory. So we got very aggressive in Q1 about bringing down the total amount of inventory that is legacy. And what we've done here is we did a fairly meaningful sell-off of the inventory that is legacy in order to -- what that's done is, it's brought us from that 42%, 43% down to 39%. Clint, why don't you share with folks on the call the mix and the drawdown -- percentage drawdown that we did as we went and sold these legacy goods? Can you address that for the audience?

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Clint J. Pete, Charles & Colvard, Ltd. - CFO [22]

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Sure. I just wanted to point out our actual gross margins were actually 39%. So just to make that clarification. But we did see some decrease in our legacy inventory compared to our year-end 2017. The carrying value of our inventory decreased about 11%.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [23]

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Right. So we're pleased with the fact that we are working very hard to bring down that legacy inventory. And to be clear, we talked about this on our last call. Forever One, it was our breakthrough product that came live in the 2015 into 2016 time frame. It's a whole new substrate material that we have generated with our partner, Cree. Prior to 2015, we've created legacy inventory and we carry that over here on our shelves. Our charter here is to sell through our legacy inventory. The good news is it sells. We can load it up in jewelry, and we've done a very nice job of bringing that forward in finished jewelry on marketplaces. Hence, the 89% growth in finished jewelry and hence the 11% decrease in our legacy inventory. These are great numbers, folks. We're selling it through, we're making a profit, and at the same time, we're cleaning the decks so that we can focus on the premium product, which is Forever One. Brian, do we have anyone else in the queue?

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Operator [24]

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Not at this time. There are no more questions in the queue.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [25]

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All right. Well, let me just say once again, we'd like to thank everyone for taking the time to participate in our call today. Charles & Colvard has started 2018 with top line growth, continued momentum in online sales, an improved inventory position and a positive outlook for the year. We believe we're well positioned for growth as we execute on our 4 strategic initiatives in 2018. We appreciate your time, your interest and your investment in Charles & Colvard, and we look forward to being in touch and updating you on our continued progress. Thank you, and good evening.

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Operator [26]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.