Autohome Inc (ATHM) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by for Autohome's Third Quarter 2017 Earnings Conference Call. (Operator Instructions). I would now like to turn the meeting over to your host for today's conference, Ms. Vivian Xu, please go ahead.

Thank you, operator. Hello everyone and welcome to Autohome's third quarter 2017 earnings conference call. Earlier today, Autohome distributed its earnings press release and you may find a copy on the company's website at www.autohome.com.cn. On today's call, we have Mr. Min Lu, Autohome's Chairman and Chief Executive Officer; and Mr. Jun Zou, Autohome's Chief Financial Officer. After prepared remarks, Mr. Lu and Mr. Zou will be available to answer your questions.

Before we begin, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the Security and Exchange Commission. Autohome does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

The earnings press release in this call also includes discussion of certain unaudited non-GAAP financial measures. The press release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures and is available on Autohome's IR website. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Autohome's IR website. I would now turn the call over to Autohome's Chairman and CEO, Mr. Lu. Lu, please.

Thank you, Vivian. Hello everyone, thank you for joining us today to discuss another record quarter of Autohome. Our 4+1 strategy continues to drive growth momentum and guide us in our transformation into an automotive eco-platform based on data and technology. This will continue to be our focus well into 2018. The next phase of our strategy has been code-named Yi Yu Si Chi(foreign language) in Chinese, which literally translates into 4 ways to eat one fish and it refers to the 4 pillars where we're leveraged to increase monetization going forward.

The 4 pillars comprise of our media and the leads generation businesses, which will be combined with 2 of our new initiatives, data product suites and auto financing and insurance. Combining these 4 business and leveraging the synergies created between each of them will allow us to better serve our users and clients and drive our overall monetization efforts into next year.

Looking at our business overall, we had a strong third quarter in which we beat topline guidance again. Net revenues grew 39% year-over-year driven primarily by 2 of our pillars, our media and the leads generation businesses, which when combined significantly outpace growth in the overall market and that of our competitors. Strong topline growth over the past 2 consecutive quarters is a testament to our ability to continuously gain market share and further solidify our dominant market leadership.

Now I'd like to walk you in detail through each of our 4 pillars of our business going forward. Number one, growth in our media business was driven by growth in traffic and our continued focus are optimizing the user experience and increasing user engagement. Mobile advertising revenue grew 130% during the quarter, accounting for 48% of our media service revenue. The number of average daily unique visitors during the quarter who accessed our primary Autohome apps increased by 28% year-over-year. We now offer a more immersive open platform with customized and enriched content from PGC, intelligent filtering, personally tailored recommendations and enhanced auto-lifestyle recommendations.

We also upgrade OEM and dealer services to provide them with better returns on their marketing budgets. We are expanding the use of AR and VR throughout our eco-platform in order to offer OEMs and the dealers an expanded array of options for branding campaign and greater exposure to highly targeted potential consumers especially in low-tier cities in China.

Number two, our leads generation business continued to generate increased volumes and high conversion rates. Our recently launched dealer cloud platform which consists of intelligent showroom, a database of consumer profiles and the behavior data, CRM and aftermarket services is gaining widespread acceptance and getting positive feedback.

Number three, data product suites is our newest initiative which has been launched recently. Big data is one of our key competencies. Being a leader in the market, we're well positioned to build and unify our comprehensive database of auto consumers and vehicles in China and leverage this vast amount of data to offer vehicle planning and design, consumer acquisition and sales leads conversion, highly targeted marketing solutions and detailed competitive analysis and sales projections. We are working on developing new ways to leveraging this data and applying it in new and innovative ways across our entire eco-system.

Number 4, lastly, our auto financing and insurance initiative has now been fully integrated with Ping An Group and is offering various consumers and merchants loans and leasing services. During the first 9 months of this year, cumulative consumer loans facilitated by Autohome totaled RMB 5.4 billion with over 1 million new accounts being created by consumers in Autohome. We plan to further expand our financial service capabilities and increase monetization in 2018.

I'm very excited to begin implementing the next phase of our strategy by combining all 4 pillars of our business to increase shareholders' value. I'd like to point out that our highly talented and motivated employees have been instrumental in driving our strong performance. We will continue to offer highly competitive packages to retain them as we build up our strategy. So on behalf of Autohome, I would like to thank all of our hard working employees and management team for contributing to our continued success and innovation. With that, I'd like to welcome Mr. Jun Zou who joined us just a few weeks ago as Autohome's new CFO. Jun will go over our financial results and the business outlook. Jun, please.

Thank you, Min. Hi everyone, it is a real honor to join Autohome's senior management team and participate in tonight's earnings call. I'm very impressed with what I have seen so far here at Autohome and what we have achieved in the past. I look forward to working closely with everyone here as we continue to drive business development and increase shareholder value. I appreciate everyone's support and hope to meet many of you in the near future.

As Min has already highlighted, we are very pleased to report another strong quarter. Please note that the numbers I will reference today are all in RMB, unless stated otherwise. Net revenue for the third quarter increased 5% year-over-year to RMB 1,548 million. For media and the lead generation services combined, net revenue increased 39% year-over-year. Media services revenue once again outgrew the underlying auto sector, increasing 38% year-over-year to RMB 797 million. The strong growth in Q2 and Q3 has proven that Autohome continues to gain market share from our competitors because of continued traffic expansion, user engagement optimization and brand awareness as the market leader. Now lead generation service revenue was up 39% year-over-year to RMB 701 million. This increase was primarily driven by an increase in ARPU and our client base, which demonstrates how we continue to build trust among dealers by increasing sales lead volumes and enhancing conversion rates.

Online marketplace revenues were RMB 50 million. Online marketplace revenue mainly consist of commission based revenue from our new car e-commerce and financing business.

Cost of revenue decreased 48% year-over-year to RMB 304 million mainly due to a decrease in cost of goods sold related to direct vehicle sales. Sales and marketing expenses in the third quarter were RMB 422 million, representing an increase of 10% year-over-year. This was primarily due to an increase in offline execution and promotion expenses. Product and development expenses were RMB 207 million, up 39% year-over-year. Again, this reflects an increase in R&D headcount during the past few quarters and is proof of our commitment to technology and recruiting talents.

Finally, general and administrative expenses increased 40% to RMB 87 million from RMB 62.5 million in the corresponding period of last year primarily attributed to an increase in share based compensation. As a result, we delivered operating profit of RMB 527 million, a significant increase of 79% year-over-year. Adjusted net income attributed to Autohome Inc. was up 63% year-over-year to RMB 476 million. Non-GAAP basic and diluted earnings per share and per ADS for the third quarter were RMB 4.07 and RMB 4.01 respectively compared to RMB 2.54 and RMB 2.52 respectively in the corresponding period of last year.

As of September 30, 2017, our balance sheet remained very strong with cash, cash equivalents and short-term investments of about RMB 6.9 billion. We generated operating cash flow of RMB 548 million in the third quarter of this year representing 42% year-over-year increase. I'm very pleased to announce that our board of directors have also approved a special cash dividend of approximately USD 0.76 per ordinary share or $0.76 per ADS representing an aggregate dividend payment of approximately USD 90.2 million to shareholders. Considering our large cash position, we are confident that this dividend will generate increased value for shareholders. Following this dividend payment, we still have ample capital resources to invest in our business and further strengthen our leadership position going forward.

Let me now address our fourth quarter 2017 outlook, which reflect our current and preliminary view on the market and operating conditions that maybe subject to changes. At this point, we expect to generate net revenue in the range of RMB 1,690 million to RMB 1,710 million. This represents a 29% to 30.5% year-over-year growth rate excluding our direct sales business.

In summary, our strong results throughout the past few quarters demonstrate that we are continuously making progress in capturing the enormous opportunity in China's automotive market and delivering consistent financial results. We are returning a portion of our capital to our valued shareholders this quarter as we continue to invest in the growth of our business. With that, we are ready to take your questions. Operator, please open the line for Q&A.

Thank you. (Operator Instructions) Our first question today comes from Alvin Jiang of Deutsche Bank.

Congrats on Jun Zou's new role. I have a quick question about 4Q guidance, could you give us the breakdown between traditional business and the new business and how is the outlook in terms of margin in 4Q? Thank you.

Alvin, please wait a second for us to translate. (foreign language) (technical difficulty).

Hey Alvin, thanks for the question, I will take the first question. Yes, actually in the existing quarter, still majority of our revenue are coming from existing media services and lead generation services and even though our online marketplace business start to actually contribute to our topline as well and in the fourth quarter, we expect that all the 3 sectors will continue to grow in a very strong pace and our purpose for this year actually in terms of new business are actually -- firstly, building a closed loop transaction system for our auto financing, auto insurance system and building up a main account system for auto financing business. And certainly, we also just rolled out our data products suite in the beginning of this month, which has show very strong momentum already. I believe, actually Mr. Lu can also add some color to this.

(foreign language) Actually, we have just started to kick-off the data products in our company. So they are for -- some of them are for OEM and some are for dealers, but this year we have just done this project for a short time. I think the outcome of this product will be delivered to us in next year.

However, as Mr. Lu already mentioned, actually we already seeing our auto financing business accumulated almost approximately 1 million customers with main account and we also have already issued RMB 5.4 billion in loans on our marketplace business as well.

We will now take a question from Hillman Chan of Citigroup.

I want to ask more about the auto financing business. Could you share more about our growth strategy going into 2018 and how are we leveraging the strength of Ping An Group and also appreciate your thoughts on the competition especially Yixin somewhat a different business model and quickly on our consumer loan, what's sort of the credit profile for our customers? Thank you very much.

(foreign language) Actually, your voice are breaking up a little bit. Can you please repeat your question?

(foreign language) Is it better now? Can you hear me better now?

Okay, yes.

Just let me repeat myself. So my question is on the auto finance part. First, just want you to share more of your color on the growth strategy especially into 2018 and how are we leveraging the strength of Ping An Group to support the growth of auto finance business. And also want to hear your thoughts on competition, especially with Yixin even though we are somewhat a different business model? And lastly, for our auto online marketplace, how should we think about the credit profile of some of these consumer loans that we expanded to? That's pretty much my questions. (foreign language).

(foreign language) So first about the cooperation with Ping An Group, our cooperation motto is that we will combine the advantage of Autohome and the financial strength of Ping An Group. (foreign language) So for Autohome, our strength is that we have large amount of traffic and the next year, we will also build and roll out new platforms. So this kind of cooperation is our strength. (foreign language) And as for Ping An, its strength lies in its finance, especially in the risk management and control. (foreign language) And Ping An also has a very mature service process. (foreign language) So I think in 2018, on the Autohome's platform, we can create synergy while combining our bilateral strengths. (foreign language) And as for the competition from our other competitors, we have adopted a different approach from them. (foreign language) So to my knowledge Yixin does the finance by itself. (foreign language) As for Autohome, we do not engage in establishing the -- we do not engage in the finance by ourselves. However, what we do is that we establish a platform for the other financial institutions like Ping An so that on our platform, these financial institutions can provide their financial service. (foreign language) So the Autohome, we are focused on the business relevant to cars as I have mentioned above to eat one fish in 4 ways, that is our 4 strategies. (foreign language) So I think the reason why we are not directly engaged in the financial business is that it will take up a lot of effort to build the risk management control system by ourselves. However, if we commission this business to other financial institutions, the service will be undertaken by them. (foreign language) Actually for different companies, they may have different approaches. For Autohome, what we do is that we choose to bear with service rather than providing the -- rather than engaging in finance by ourselves. (foreign language) And if I have understood your question correctly, I think one of your question is about evaluating the credit of the users. So now actually we have launched one product, which is called the auto credit system and with this system we are cooperating with the professional financial institutions so that we can provide further and detailed data for their financial and risk control and management. (foreign language) I think I have answered your questions.

(Operator Instructions) We will now take a question from Thomas Chong of Credit Suisse.

I have a very quick question about the 2018 outlook. I remember last year in the third quarter results, you gave this year's forward revenue guidance. I just want to see if there is any color about the 2018 outlook, in particular, the media and leads generation business? Thanks. (foreign language)

Thomas, thanks for your question, this is Jun. And we actually believe we're going to still outgrow the markets next year with our strong content -- the user experience as our core competencies. We can still deliver high value to our users which will make us still the best choice for OEMs and dealer customers. And also as Mr. Lu mentioned, Big Data and auto finance will contribute significantly next year to our topline, but at this stage, we are still in the process of generating our 2018 budgeting process, but we're not ready to give out actually a whole year guidance yet, but we'll definitely keep you guys posted along the way.

(foreign language) So actually, since last year, our user traffic has been growing. This year in the third quarter, we have found that the traffic on the mobile -- actually on the application has been growing and we look forward to sustainable growth well into the next year. And also I think that with more users, we can give strong impetus to the growth of our traditional business, that is the OEM advertising and the dealer leads. So as Zou has mentioned about, as for the detailed guidance, we are still making that. I think in the next year, our traditional business will grow and at the same time, we will begin to sell our data products and that will bring an additional sale. In addition to that, we also have our financial service that is providing the platform for the financial institutions, which will also generate new revenue. So that's what we say about eat one fish in 4 ways.

Just some color to show you how we actually outgrew the market in the third quarter. According to official data, in the past third quarter, China added 6 million new cars based on mandatory auto insured liability -- actually mandatory liability auto insurance policy numbers added. So 6 million new cars is roughly a 7.9% year-over-year increase compared to same period last year. Now, take a look at actually our media service and the lead generation revenue, which grew roughly 39%.

We will now take our next question from Robert Cowell of 86Research.

I just wanted to ask about the November 11 event. It seems the strategy is a little bit different this year than last year, so could you talk a little bit about that? And then also in the context of this event, what are our main goals and how are we defining success? Thank you.

Robert, allow us a minute for translation.

(foreign language) So actually, we are making preparation for this year's November 11, the festival. However, this year we have one thing different that is the financial order. Actually, in terms of the non-financial order, we have more orders this year than the last year's order. In terms of non-financial order, now the volumes amount to CNY 26 billion and the number for the financial order equals to CNY 2 billion to CNY 3 billion. So I think that's add up to CNY 30 billion. So I think now this year we have more orders than last year and also we have summarized some experiences and lessons from the last year's November 11 festival, so that this year we can have better cooperation in our team. (foreign language) So actually, there are still several days to go before this festival arrives, but I firmly believe that this year we will have far better results than last year. (foreign language) And this year's results may also exceed our expectation.

(Operator Instructions) We will now take a question from (inaudible).

Thank you for a great quarter. I have 2 questions. One is regarding to your traditional business, I mean the media service. Basically, in the third quarter, with the acceleration of your media service revenue growth, can you break down which kind of -- what is the driver behind the growth, is it from domestic OEMs or is it more from the JVs? And my second question is about your financials, so we noticed the increased cost of -- percentage of cost of revenue and also the increased tax implication, so what's the reason behind it? (foreign language).

(foreign language) So, I'll answer the first question. (foreign language) So actually, our growth in OEM comes both from JV and domestic. (foreign language) In the first half of this year, according to the statistics among the Top 20 advertisers, 19 of them put the largest wallet share in Autohome. However, in last year June's statistic, among the 20 top advisers, only 9 of them did same way. (foreign language) And there are several reasons for that. The first reason is that since this year, we have more and more cooperation with the factories and the merchants with also high level -- more and more high level exchanges. (foreign language) The second reason is that we -- our sales teams have continuously improved their sales techniques and skills and they are better motivated in sales this year. (foreign language) As I think the most essential reason is that we have more and more user traffic in Autohome and we have higher chance to raise conversion rate in Autohome.

Okay, Brenda, I will address your second question. Yes, I believe, when you talk about gross margin, you are referring to gross margin excluding buyout, because our total gross margin actually increased more than 20%, but our gross margin excluding buyout did decline a little over 2% mainly because we increased content production cost in particular for PGC content production cost, which actually helped us to increase our traffic on mobile and data side. As for tax, there is actually CNY 60 million withholding tax that's associated with the dividend payment of RMB 600 million this time. This is a one-time actually tax provision. Hope we answer your question, Brenda.

Thank you, there are no further questions at this time. I will now turn the conference back to management for closing comments.

Okay, thank you very much for joining us today. We appreciate your support and we look forward to updating you on next quarter's conference call in a few months time. In the meantime, please feel free to get in touch with us if you have further questions or comments. Thank you.

Thank you.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect.