Autohome Inc (ATHM) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by for Autohome's First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. If you have any objections, you may disconnect at this time.

It is now my pleasure to introduce your host, Anita Chen, Autohome's IR Director. Ms. Chen, you may begin.

Thank you, operator. Hello, everyone, and welcome to Autohome's First Quarter 2019 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 CEO; And Mr. Jun Zou, Autohome's CFO. After the 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 risk and uncertainties include, but are not limited to, those outlined in our public filings with the Securities 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 discussions 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 will now turn the call over to Autohome's Chairman and CEO, Mr. Lu.

Thank you, Anita. Hello, everyone. Thank you for joining us today to discuss our first quarter 2019 results. I'm pleased to report a strong start to the year, in which our revenue increased by 25% year-over-year to over RMB 1.61 billion. More importantly, adjusted net income during the quarter grew 35% year-over-year to RMB 701 million, representing an adjusted net margin of 43%.

During the quarter, we continued to face a challenging operating environment as the auto market is still trending down. However, we embraced these challenges by continuing to pursue innovation across our key products and explore new business opportunities. We saw encouraging progress in each of our major business lines.

In March, the number of average DAUs, who accessed our mobile websites and primary application, increased by 14% year-over-year to 30.2 million. We saw strong traction from both used car channels and Carso, which is a self-developed intelligent search engine, providing aggregated car-related information. This continued traffic leadership and growth was driven by our capability of precisely identifying the true needs of our large and expanding user base while offering them customized content and tools by our advanced Big Data technology.

For media business, we continued to build up our competitive edge with high-quality content, improved user experience by enhancing data-driven intelligent recommendations. For the first quarter, all of our PGC, UGC, OGC and AGC content category gained solid user traction. EV channel and mini short video channel both saw rapid traffic ramp up.

Youth channel achieved peak DAUs of 2.7 million in April, which was very essential as we are increasingly able to retain younger generation, all of our efforts in creating immersive contents, SMS and tools that users love， want to share and interact with others have resulted in the continued expansion of our traffic as I have mentioned in the beginning.

Our intelligent market solutions, which is based on UVN-B model, leveraging Big Data and AI technology is gaining wide acceptance among OEMs. By the end of April, we have signed 15 intelligent marketing solution projects and will expanded throughout 2019. On average, such projects have successfully increased OEMs brand awareness by 60% to 170% while expanding the lead volume by 30% and more.

For our lead generation business, the number of paying dealers was over 24,000 as of the end of first quarter with lead volume increased by 19% year-over-year.

Next, our data business continues gaining market momentum with positive reviews. For the first quarter, 11 OEMs and over 14,000 dealers have purchased our data products.

And for our used car, C2B2C platform, by the end of the first quarter, we were able to grant very competitive merchant loans products to over 3,900 qualified dealers, resulting in total cumulative credit line of RMB 6.3 billion.

For the auto-financing business, during the first quarter, we facilitated over RMB 5 billion in loans and insurance, representing over 130% increase year-over-year.

Further to the Beijing AR Auto Show last year and the recent Shanghai AR Auto Show, we plan to host the first ever global mega online auto show on August 18, with new vehicle debut plus TV gala plus online shopping carnival.

To conclude, the solid progress across our business manifests the power of our ecosystem combining the best of content and Big Data technology. We are confident that our diverse revenue model and pioneer spirit will accelerate the network effect in fueling our long-term sustainable growth.

With that, I will now turn the call over to our CFO, Jun Zou, for a closer look at our first quarter financial results and business outlook for the second quarter.

Thank you, Min. Hi, everyone.

As Min already highlighted, we are very pleased to report an excellent first quarter in 2019. Please note that I will reference RMB only in my discussion today.

Net revenue for the first quarter was CNY 1.61 billion, representing a 25% growth compared to previous year. This was 2% above the high end of our original guidance. For detailed breakdown. Media service revenue increased 10% year-over-year to CNY 643 million. Despite the challenging auto market, Autohome continues to be the automakers' partner of choice. Leads generation services revenue increased 20% year-over-year to CNY 734 million primarily driven by increasing ARPU. Online marketplace and others revenues increased 152% year-over-year to CNY 235 million primarily due to auto financing and data business growth.

Moving on to costs. Our cost of revenue increased by 26% year-over-year to CNY 184 million. Gross margin remained stable at 89% in the first quarter.

Now for operating expenses. Sales and marketing expenses in the first quarter were CNY 510 million compared to CNY 398 million in Q1 2018 mainly because of increased cost in salary and benefits as well as off-line execution expenses. Product and development expense were CNY 269 million compared to CNY 229 million in Q1 2018. Again, this reflects our R&D head count increase and is proof of our commitment to technology and hiring talents. Finally, G&A expenses were CNY 68 billion compared to CNY 63 million 1 year ago.

Overall, we delivered an operating profit of CNY 657 million for the first quarter of 2019, representing an increase of 26% year-over-year primarily due to consistent top line growth, streamlined operational efficiency and effective cost control.

Adjusted net income attributable to Autohome was up 35% year-over-year to CNY 701 million for the first quarter of this year. Non-GAAP basic and diluted earnings per share and per ADS for the first quarter were RMB 5.93 and RMB 5.87, respectively, compared to RMB 4.43 and RMB 4.36, respectively, in the corresponding period last year.

As of March 31, our balance sheet remained very strong with cash, cash equivalents and short-term investments of CNY 10.48 billion. We generated operating cash flow of CNY 418 million in the first quarter.

Let me now address our second quarter 2019 outlook, which reflects our current and preliminary view on market and operating conditions that may be subject to change. At this point, we are expecting to generate net revenue in the range of RMB 2.275 billion to RMB 2.305 billion, representing a 21.7% to 23.3% year-over-year growth.

In summary, we're very pleased with our first quarter results. Together as a team, we again achieved very strong year-over-year growth in revenue and profitability. Given the solid car business performance and continued momentum of our new business initiatives, we're confident in maximizing long-term shareholder value.

With that, we are ready to take your questions. Operator, please open the line for Q&A. Thank you.

(Operator Instructions) Your first question is from Liping from CICC. Your line is now open. Please go ahead.

I have three questions for the management. The first one is related to the outlook of auto industry because we see that the new car sales for April is still very soft. So what's the outlook of the new car sales industry from the management perspective? And what's the implication on media revenue growth? And my second question is related to our business model as the company is testing new monetization model. So can you elaborate a little bit more on the progress of our CPL and CPS model? The third question is that online marketing revenue breakdown of that business and what should we .

[Interpreted] And so this is Mr. Lu answering the first question about the outlook for the auto market as well as the advertising business. Concerning the auto market, the business in April is not exactly very good. There is no official statistics yet, but it's not very, very good. We expected better performance in April because of the 3 percentage points reduction of VAT. Without it, it seems that the effect is not that ideal.

[Interpreted] And talking about the second half of this year, it's very difficult to estimate because the crucial factor is the macro economy of China. If China's macro economy could perform better, then I am positive that the auto business will follow.

[Interpreted] About Autohome's OEM advertising business, we believe that a rather good growth will be maintained, relatively speaking. And however, we will continue to work on the core issues, which I have already mentioned at several meetings previously. That is, we will continue to make efforts to, first of all, increase the total amount of lease, and second, to help improve the conversion rate of the dealers. And if we could successfully do the previous 2 tasks that I have mentioned, I believe there will be no decrease in the OEM advertising business here.

[Interpreted] Ever since the second half of last year, there has been concern in the market, that is, as there is a downward trend in China's automobile market, will there also be a decrease in the revenue of Autohome, but the fact has proved that. In the time of a downward trend, the resources will be accumulated towards the top in the Internet business. Because in a downward trend in the automobile market, there will be higher requirements of the effect.

[Interpreted] So in conclusion, it is very difficult to give an estimation of the second half of this year, but we will continue to make our best efforts to improve the effects and to help the dealers to increase their conversion rate.

[Interpreted] And by the way, in Q1, the total volume of our lease has an year-on-year increase of 19%, which is already mentioned in our report previously.

[Interpreted] As for your second question, you mentioned the new business model. Yes, we are making a lot of attempts including the CPL and CPS as you mentioned. About CPL, well, it is an effort that we take to try to help some dealers because some dealers, they are in a lot of difficulties at the moment. So if we charge our fee according to the single lead, then that might help some dealers to return to the business. But we are at a very early stage in this business model, so the total amount is not very substantial, just a couple of hundreds.

[Interpreted] About CPS, this is something we are trying to expand this year. However, this is going to be a quite challenging project. And for example, now we are using our e-commerce platform to carry out the CPS projects in the low tier cities for the level 2 dealers where there is no authorized dealers.

[Interpreted] We are making attempts in these 2 areas because actually, we have already gone through these procedures. And now we are facing some difficulties. One of them is the SKU is not sufficient enough. And second, we need some change in the habits of automobile purchase from the consumers. And the volume of our transactions of the deal is not very substantial yet. It's like a couple of hundreds per month. We hope that this business will be expanded this year, and we will try to increase the volume here and so that the volume will have a considerable contribution to our performance next year.

[Interpreted] Actually, there are some other comments I would like to make concerning your second question. That is, our used car open platform. It is already open. It is already initiated in later March, this March. So this is going to increase the revenue of our department of used cars. Currently the DAU for our used vehicles is about 3 million and even more. We certainly have the most traffic in used vehicles in China. And the next step is how to maximize the value out of the lease of the used vehicles.

[Interpreted] About your third question concerning the online marketing revenue breakdown, well, we will have an accurate breakdown at a later time. And this year, the growth looks quite good, especially our data business as well as auto-financing business. They are 2 major media drives for us, and we hope that in a medium- to long-term perspective, our data business, auto financing as well as transactions will be as important as our current major business. Also, you know, actually CPL model is actually a very, very new model that was just launched in April, so just 1 month into its live, and we're still watching the progress closely.

[Interpreted] And I would like to make some more comments about the data business because it consists of 2 parts: first is about the OEM; and second is about the dealers. Because the contracts are annually signed.

Any contracts that chose the prepayment in the beginning of the year and amortizing over every month.

So currently we already have the signed contract value of almost RMB 500 million.

[Interpreted] And in the remaining months, in the months to come this year, we will try to sign more dealers into this. And we are also developing more data products targeting the dealers. And these products are highly practical. They could really help the dealers to increase their ultimate final conversion rate. So we will continue to expand this business, and currently, there are over 4,000 dealers signing to this product, and we expect more growth by the end of this year.

[Interpreted] About the data product for the OEM, it is also signed annually. Considering there was no such business at the same period last year, and currently, we already have 11 OEMs that signed the contract, so we could expect more growth because some of them signed at the second half of last year, some of them in the first half of this year. So we will expect more.

[Interpreted] About auto-financing business, we will continue to promote this sector, and we are confident of good progress this year.

[Interpreted] Thank you, Liping, for your questions, and that is our brief answer.

(Operator Instructions) Your next question is from Wendy Huang from Macquarie. Your line is now open. Please go ahead.

My questions many are related to the dealer agreements. So can you give us an update on the number of the paying dealer as of March and also as of now? I recall the number you previously mentioned was 24,000 dealers as of March. And also among the 24,000 dealers, if that number is correct, have you included any dealers who are now paying to CPL model? And also what's your kind observation on the number of dealers in marketing total? Are you seeing the increasing number of the dealers that's shutting down, does that imply your market share is actually increasing in the market headwind? And also related to the dealer's revenue, there is an item on the balance sheet called deferred revenue, which seems only growing at 4% year-over-year this quarter. And also if you translated that into the percentage of the dealer value in the quarter, that seems to be just only 42% of dealer revenue versus 50% a year ago. Is this related to your dealers contract change? Or have you changed any like payment policy towards the dealer?

Wendy, thanks for your question. Yes, firstly, we do have more than 24,000 dealers by end of March, and we are expecting probably renew another batch probably in midyear, and of course, we're gradually adding CPL model clients into that as well. As Mr. Lu said we launched the product just 1 month ago and added a few hundred, and we could see more. And as for the overall market dealer count, of course, in beginning of the year, we saw that dealer counts reduced to just over 26,000. And now the number is a little over 27,000, it's still less than end of last year, and maybe 2,000 to 3,000 less, but that number can change over the course of year when some of the dealers actually shift from one brand to the other. And we'll see, it happened last year too.

And in terms of deferred revenue. Well, we still see actually the deferred revenue for our subscription business dealer subscription business alone still increased by 2 digits. However, there are some actually other business, for example, our used car business and our new car e-commerce business, we are rolling off new business models, and they're changing from actually prepayment model to actually like more CPL, CPA performance-based model. So actually there are a reduction in deferred revenue on those business lines. But overall, our retail business are still growing at a very strong pace, and we hopefully, probably end of the quarter still going to grow very strongly in the second half as well.

Our next question is from Eddy Wang from Morgan Stanley.

I have 2 questions actually. The first one is about the incident actually in last month between your Mercedes dealer and its customer. And such dispute actually makes people turn more sensitive about the auto finance and it's related service fee charged to the customers. Have you seen any impact to the overall auto finance our overall in the auto-finance business in the short term and through the overall industry? And the second question is about effective tax rate. So in the first quarter this year, actually our effective tax rate is around 3 percentage point lower than same quarter last year. So what's the reason for this? And shall we expect similar tax rate in the second and third quarter this year?

[Interpreted] So Mr. Lu will answer your first question, and Mr. Zou will answer your second question.

Interpreted That incident between Mercedes-Benz and dealer and its consumers actually didn't have impact on our business, auto financing. Because as I have previously mentioned, the closed-loop deals, we're doing quite of a few of them, not a lot, especially in essentially concerning the used cars. So we have a very small business concerning the mortgage after the individual's purchase of automobile. So that incident has very little impact on us. So of course, we need to look in the long-term perspective. If in the future there is a tighter super-visionary requirements, if the transparency increases, I think that will actually help us with our business.

Yes. As for effective tax rate, I think given this year, we do have a 2.2% reduction compared to Q1 last year. And the main reason was actually the deduction for R&D was allowed to increase from 150% to 175% in September last year. And that policy was also applied to the whole year 2018, respectively. So in Q1, when we made our estimate, we were making estimate based on the old policy. But now this year, of course, we have actually a more amplified deduction for our R&D expenses. And we do not expect our ETR to be higher than Q1 this year's level. Hope this answers your question, Eddy?

(Operator Instructions) Your next question is from Jamie Shen from Bank of China International. Unfortunately, the line was disconnected. We'll move on to the next question. Your next question is from Hillman Chan from Citigroup. Your line is now open, please go ahead.

So I have 2 questions. The first one is about the used car sales leads businesses that we started since late March. Could management share more on the progress with that particular business? And regarding the 3 million DAUs, how should we think about the amount the volume of the used car sales lease and the utilization of them as of now? And regarding the major customer, could you share also the feedback of them? And my second question is about profitability of our auto loan, auto insurance business in the near term and also long term?

[Interpreted] So Mr. Lu will answer your first question, and Mr. Zou will answer your second one. So about the used cars business, as I have mentioned in our previous roadshow event, we will develop this business, and previously, our sales lease C1 is only for Tiantian Paiche and C2 is for the dealers. And there are over 30,000 of them. And with the increase of DAU, we are witnessing increase in both types of lease. And so the lease are already too much for Tiantian Paiche as well as the used cars dealers that cooperate with us. That's too much for them to digest.

Interpreted In order to improve the utility rate of the lease, we try to open them up to others. For example, e-commerce platforms or other entities to cooperate with us. And now about the sales lease, we already have 2 more platforms cooperating with us. Next step, we will cooperate with some original platform of automobile auctions.

Interpreted About the car purchase lease, apart from the dealers, there are also platforms that wish to cooperate with us. And since it's a little over a month since its launched, the utilization rate is not optimized yet. So we will continue to make efforts to help the platforms and businesses to make the best use of the lease.

Interpreted And now Mr. Zou will answer your second question.

Yes. Hillman, as for auto-financing business, of course, this is bit of a lower-margin compared to our other business lines. And but we have an internal policy to have a positive incremental margin for every line of businesses. And at this stage, it's a marketplace, even though, we're spending actually many of the sort of commissioning revenue on served market. We really intend to, of course, bear low credit risk and very little heavy assets. And in the long term, we're confident that this will be a high-margin sort of business. And also this model is healthier than many other asset-heavy credit risk bearing models on the market. Thank you, Hillman, for your question.

Your next question is from Miranda from Bank of America Merrill Lynch.

So I have 3 questions. The first one is about the cost per lease product. So can management share with us what are the target dealers for this kind of product? And what's the company's strategic positioning for this product over the mid to long term. Is it more of a product that the company will use to improve monetization during the downturn of the auto market? Or is it like an important strategic product that's in over mid to long term? And then my second question is about the margin. So we have seen the margin improvement for past many consecutive quarters. So can management share with us your outlook for the margin? We are seem to see mixed factors here. On the one hand, we have seen the decline in the head count in 1Q on a Q-o-Q basis. So will there be any leverage in your personnel related costs? But on the other hand, we had the sales and marketing may go up driven by the expansion of the financing insurance business. Then my last question is about the lease volume. So we have seen that in FY '18, the traffic growth is faster than the lease volume growth of 10% in FY '18. But in this quarter, the lease volume growth of 19% was faster than the traffic growth. So just trying to understand the reason behind it. Is it mainly due to the company's intelligent marketing product?

[Interpreted] Mr. Lu will answer the first answer to the question. About first question, the answer is very concise because CPL is not our current major model. CPL is targeted to as Mr. Lu has mentioned previously, to dealers who are having difficulties in operation, who has difficulty in paying the membership fee in a lump-sum manner. So these dealers are concentrated in low-tier cities. And there are consumers, they are our users and their demands in the low-tier cities. And for the dealers, we could help them do more business in this way. And so CPL is, comparatively speaking, a simple approach. So this is how CPL works in a simple way, and there is not going to be a large amount or a large size of this business.

Interpreted And your third question about the relationship between DAU and the amount of lease. So currently, we observed from Q1, the 19% growth of the lease amount actually doesn't have much to do with intelligent marketing. Because within Q1, there is February, the Chinese New Year, so few OEMs would do promotion because they were all enjoy the holidays. But the logic is like this as I have explained previously, for a user to visit Autohome, it actually takes 2.5 months before it's actually convert into a lead. So yearly, the traffic increases and afterwards the lease increases as it follow suit. So that is the pattern in general, and besides, it might also have something to do with our constant improvement of the approach of lead collection. And we will continuously improve our users product. And currently, we are updating 2 versions every month, and by June or July, there will be also major updates in this product. So we constantly update and release new versions of our products in the hope of attracting new users and helping them to fulfill their dream of car purchase here.

And Mr. Zou will answer your second question.

[Interpreted] Yes. Miranda, yes, of course, things that fourth quarter 2017 we started to implement cost control programs, in particular, for future businesses. And this progress has been prudent and very effective so far. And you have seen now that we do have a continuous improving margin trend. But as I will maintain to the market, in the past quarters, our target this year is to at least maintain the same margin level compared to last year, potentially it could be higher. But we will still continue to invest in new businesses. And as for the head count and sales and marketing questions you asked, actually, if you compare our head count in Q1 this year to last year's Q1 on a year-over-year basis, we do see a 8% head count growth. And so we are definitely not sort of just trying to save money. And we evaluate our, actually, personnel needs on a very sort of prudent basis as well. As for sales marketing, yes, with the initial developments of costs of our auto-financing business, there are certain sales marketing expenses. But when I mentioned that when I addressing Hillman's question, in the long term, we believe our third-party marketplace model is a healthy model. Thank you very much, Miranda.

[Interpreted] And as for the comments to Mr. Lu. Cost control is something that Mr. Lu, as the CEO, starts to work very hard on since 3 years ago. There are 3 parts that we work really hard on. The first is to control of the head count. Actually, comparing the head counts now and about 3 years ago, there is actually no increase. So that is the first part head count because human resource cost is the biggest cost for Internet business companies.

Interpreted This second major part of cost control is the exchanges of traffic and lease. And we have a ceiling here no matter how it develops, there is a ceiling that cannot be exceeded.

Interpreted The third part is like Mr. Zou mentioned about the budget management including the procurement management. This kind of internal cost control, such as procedures and platforms, these are some of the tools that we use to control that. So we are working very hard in these 3 aspects to trying to control further increase of any further increase of costs. So that is all.

There are no more further questions at this time. I will turn the conference back to the management for closing comments. Please go ahead.

Okay. Thank you very much for joining us today. We appreciate your support, and we look forward to updating you on our 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. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all now disconnect.