Leju Holdings Ltd (LEJU) 2015 Q3 法說會逐字稿

Hello, and thank you for standing by for Leju's Third Quarter 2015 Earnings Conference Call.

At this time, all participants are in a listen-only mode. After management's prepared remarks there will be a question and answer session.

Please note that today's conference call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference, Ms. Melody Liu, Leju's Investor Relations Director.

Thank you. Hello, everyone, and welcome to Leju's Third Quarter 2015 Earnings Conference Call. Today, we will update you regarding our financial results for the third quarter ended September 30, 2015. If you would like a copy of the earnings press release or would like to sign up for our email distribution list, please go to our IR website at ir.leju.com.

Leading the call today is Mr. Geoffrey He, our CEO, who will review our operational highlights for the third quarter of 2015. Ms. Min Chen, our CFO, will then discuss the financial results in more detail. We will then open the call to questions, at which time, our Executive Chairman, Mr. Xin Zhou, will be available.

Before we continue, please allow me to review Leju's safe harbor Statement. Some of the statements during this conference call are forward-looking statements made under the safe harbor provisions of Section 21E of the Securities and Exchange Act of 1934, as amended. 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 SEC. You are encouraged to review the forward-looking statements section of our annual report filed with the SEC for additional information concerning factors that could cause those differences. Leju does not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Our earnings press release and this call include discussions of unaudited GAAP financial information as well as some unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. Please note that unless otherwise stated, all figures mentioned during this conference call are in US dollars.

I will now turn the call over to Leju's CEO, Geoffrey He. [Hedong], please go ahead.

Thanks, everyone, for joining us on the call today. As you know, our strategy is focused on building and integrated online and offline platform to provide overall marketing solutions to connect and to serve our customers efficiently.

We are pleased to see that as we rolled out the platform during the third quarter this year, our customers continued to recognize the value in our services, as evidenced by another quarter of revenue growth as well as the number of operation achievements. For the first nine months of 2015, our O2O marketing platform serving the primary and the secondary listing business has generated more than $400 million of revenue, which solidly positioned us as the leading operator in this space.

Our commitment to marketing on behalf of and connecting our developer brokerage agency and the homebuyer customers is bearing fruit. We achieved a record high number of e-commerce products during the operation this quarter in the primary housing market and attracted a record number of paying agents onto our secondary listing platform.

We combine a powerful media platform, diversified distribution channels, membership services and e-commerce discount services to effectively serve our customers with innovative products.

[One each] product, for example, is the private car site visit product that we developed with Didi, which offers a premium, hassle-free, offline house hunting experience that can help significantly increase the sales conversion rate for developers. Since the launch of [Mafang Jin Suo] in July, it has been gaining traction with very positive feedback from both developers and potential homebuyers. By mid-November, more than 3,000 real estate projects in 56 cities have used Mafang Jin Suo as part of their marketing campaign. More than 50,000 private car site visit orders have been placed and more than 110,000 potential homebuyers has enjoyed our one-on-one car service.

We also strengthened our distribution capabilities this year by working more closely with secondary brokerage partners supporting primary e-commerce projects. During the third quarter, more than 10,000 transactions under our e-commerce platform were introduced by secondary brokerage agents. In the secondary listing services, we witnessed exciting revenue growth of 134% this quarter as we continue to expand our footprint, which validates our direction in this market to provide an independent information platform with verified listings. While pricing remained stable year-on-year, the growth is primarily driven by an increased number of paying agents and the increase for verified listing subscriptions.

In the home furnishing sector, we continue to roll out our Qianggongzhang platform, and have expanded into 60 cities with more than 15,000 qualified contractors. We also launched the contest programs among more than 7,000 contractors and a home furnishing promotion for customers, which were converted into 2,500 orders during the quarter. We are confident about the market opportunities in the home furnishing business and we will continue to invest in this area throughout the rest of the year.

Now I will turn the call over to our CFO, Ms. Min Chen, who will review our financial highlights for the second (sic - see presentation) quarter.

Thank you, Hedong. Good morning and good evening, everyone. For the third quarter 2015, we recorded total revenues of $151.2 million, representing an increase of 18% over the same quarter last year. Our e-commerce revenues -- e-commerce services revenues were $106 million this year, accounting for about 70% of our total revenues and a 26% year-over-year growth. The growth was mainly driven by the increases in the average price per discount coupon redeemed.

Our online advertising revenues for this quarter was $39.4 million, a decrease of 6% from the same quarter of 2014. Our revenues from listing services this quarter more than doubled to $5.4 million, posting a 134% growth, driven by increases in both the number of paying agents and verified listings sold. As expected, intense market competition continued to drive up marketing expenditures this quarter as we compete for, and allocate resources to, market real estate projects.

Our overall SG&A expenses rose 39% to $117.5 million this quarter from $85 million a year ago. In the third quarter of 2015, non-GAAP income from operations was $26.7 million, representing a 29% year-over-year decrease from the same period last year. Non-GAAP net income attributable to Leju shareholders was $21.1 million, representing a 32% year-over-year decrease from the same period last year.

For the first nine months of 2015, we recorded $402 million in total revenues, representing a 24% increase from the same period last year. E-commerce revenue [among this] grew 44% from the same period last year to $291 million, contributing roughly 32% of total revenues. Our online advertising revenue decreased 13% from the same period of last year to $97.2 million, contributing about 24% of total revenues, while our listing revenues increased 34% to $14.4 million.

Non-GAAP income from operations was $47.3 million, representing a 33% year-over-year decrease from the same period last year. Non-GAAP net income attributable to Leju shareholders was $39.3 million, representing a 34% year-over-year decrease from the same period last year. As of September 30, 2015, our cash and cash equivalent balance was $291.2 million. Our net cash flows from operations for the third quarter of 2015 were $49.3 million, including a decrease in customer deposits of $14.2 million.

We are maintaining our previous guidance of total revenues of $600 million to $620 million for the full year of 2015, which represents an increase from full year 2014 of 21% to 25%.

That concludes our prepared remarks. We're now ready to take your questions. Operator, please go ahead.

(Operator Instructions)

Your first question comes from Jinsong Du from Credit Suisse. Your line is open. Please go ahead.

Thank you. Your margins improved sequentially. Could you explain the reasons for the margin improvement? And also, do you expect the margins to improve further for the rest of the year and next year? And also, what will be your reasons for maintaining the guidance for the whole year, please?

I think, first, is the scalability of the business because as you know in the third quarter, we achieved a record high number of our projects. So the growth of the cost actually is much lower than the growth of our project numbers. So it's the scalability of our business.

And Jinsong, in terms of our view to maintain the guidance, obviously, we gave a full year guidance at the beginning of this year and, at that point, we had a view of the overall general real estate market, which so far, more or less, have panned out and the market has been performing somewhat on track as what we expected. So while the sort of exchange rates between RMB and US dollars have affected -- has affected our third quarter and will continue to affect our fourth quarter US dollar reporting performance somewhat, at this moment, based on what we're seeing in the operations of the business, we're confident of maintaining the guidance currently.

Got it. Thank you.

Your next question comes from Hillman Chan from Macquarie. Your line is open. Please go ahead.

Thank you, management, for taking my question. I have a question regarding the coupon business. I want to have a sense on during your conversation, discussion with the property developers, do you have a sense that they are shifting their advertising from, for example, from coupon back to brand -- display brand advertising? And other than that, do we see the decline of our -- year-on-year decline of our coupon sales more due to that shift in the formatting or more a market share loss to competitors? That's my first question.

Well, I think, first, let's just say that the coupon model has been running for three years, and more and more developers actually accept this model during their wholesale season. But it doesn't mean that it will replace the brand advertising business. Actually, they play different roles at different stage of their seasons -- sales season.

Usually, the developers will need advertising at the initial stage for the mass campaigning. And during the -- when they especially first launch their product, they need the e-commerce actually to bring more effective leads and to secure the intention of the buyers.

And after that, they will still need advertising to maintain the brand awareness of their product. So I think these two products or two services actually play different roles at the different stages. Our strategy is that we try to get as more as -- more projects as possible when they are doing their sales seasons. And after that, we will still get more advertising opportunities to get advertising dollars. So that's two different ways.

So just regarding the year-on-year decline in terms of the coupon sales volume. Do you see any sort of market share loss or any preference change in terms of property developers?

I think when you look at the market, actually, the most important is the number of the projects that we operate. In terms of the coupons that we sell, actually, it's affected by the market situation, especially, you can see -- when you compare this year and last year, you will see that the seasonality is very different. Last year, the fourth quarter is the best and the first three quarters actually is picking up quarter-by-quarter.

And this year, actually you can see that the second quarter is -- rise to a certain level. And the third quarter actually, the market performance -- the market actually is -- maintains its level but still slight down compared to the second quarter. And it's likely picking up in October. So the seasonality actually affects the number of the coupons we sell. That's the first question -- the first issue.

The second issue is that, actually when we cooperate with these projects, a key issue, decide whether we can sell -- or we can -- we can confirm the sales of the coupon is; when the projects actually confirm the sales. So if the projects actually confirm the sales across the quarter, so we can now book in this quarter.

So when you look at the business actually, there are several factors to influence our sales of the coupons. A key factor is that how many projects actually we incorporate in the quarter. That would decide -- when you look at our business, you can have a more careful or more precise watch of that.

Okay. And I have more a high-level question. Looking at your revenue composition now, e-commerce, the largest; followed by online advertising; and then listing, smaller. Looking ahead, like two to three years later, how should we expect the change in our business model and also the revenue composition? And what new business may potentially emerge, for example, the transformation in our e-commerce business? Any color on your vision in coming two, three years will be very helpful.

I think at the current level, that e-commerce, or especially the primary sector, e-commerce remains the largest proportion of our revenue composition. We actually are developing our secondary listing sector and especially the home furnishings sector. The e-commerce side, at the home furnishing side, we are -- it's an area that we are trying to drive more revenue growth because the market high for each sector is different. When you look at the primary sector, the marketing, we've said several times actually is that the e-commerce pie for the primary sector was -- [returned] RMB200 billion. But for the listing, the market pie is about RMB2 billion. So it's a different pie, but each sector will drive different margin and a different profits.

Thank you very much. That's very helpful. I'll get back in the queue.

Thank you.

Your next question comes from Cheng Yang from CICC. Your line is open. Please go ahead.

Thanks for taking my question. I have two. First, one of your competitors, Sohu, Focus, started to offer new home e-commerce through in-house agents, similar to [SouFun's] direct sale model. So for an online media platform, it is true that using new home agents does not substantially change the way it generates the sales leads, meaning majority of its sales leads still come from online traffic. But it seems everyone is doing it in order to better tag transactions. So my question is, do you think direct sale is a better business model for online media platforms? If not, what could we do differently to improve the performance tracking of our e-commerce business?

The second question is regarding our one-on-one car services co-developed with Didi. Intuitively, this channel should yield a higher conversion rate, given people who book a specific time for a [show floor] visits should have high buying intentions. So my question is, are there any data points you could share with us? And also, could you update us on the progress in the rollout of this new marketing add-on for developers? Thanks.

Okay, thank you for those two very good questions. First one is the direct sales model. I think they call it direct sales, but actually it's not direct sales. Why? Because for the primary sector, the developers own the products, owns the price decision right and owns the site to sell the products. So actually for all our media, we actually are service provider. Either way, the e-commerce -- service e-commerce or the channel e-commerce or whatever they're called, we are actually helping the developers to sell. What we can do is bring as many potential new buyers to the site and help them to buy the products -- buy the houses.

So I think our e-commerce, current e-commerce model, what we -- definitely it adds service e-commerce programs that we can provide a household solution to developers from the media awareness to the brand awareness to the online exposure, to the homebuyer recruitment and also connect them directly to the sites. So it's a total solution that developers they want.

For the direct sales, actually, the only effectiveness for the direct sale is that means that buyer is brought by the media. So what -- so it doesn't have any service idea about that. And running this model, we can see clearly that, first, it doesn't generate any profits because we have to pay a quite high, certain amount of the commission to the in-house agent, in-house -- what I know is that about 20%, 25% to 30%, so plus, your operation cost and the office (inaudible). You cannot get any money back. It's just burned cash.

The second one is that it's very hard to define what kind of people you brought -- you are bringing to the house are your clients but not the developers' clients. So -- and as I said last quarter, there are a lot of great practice among that. So we don't think it's a very good model, especially recently, I also heard a lot of negative comments from developers saying that they're stealing clients from them. So we don't think -- currently, we don't think it's a sustainable model in the long term, especially for making profits. Leju's strategy, I think, is still maintains our current strategy. We can provide total solution to developers which can create value to them.

As to the Didi cooperation, our Mafang Jin Suo, I think first of these products can strongly demonstrate how many clients we've brought to this new house sale site to the developers, of course, if we're bringing a lot of convenience to the homebuyers and also bring a lot of convenience for developers to do their marketing campaigns. Currently, we actually combined this service as a star service into our total solution. Going forward, I think we still have a lot of clients to upgrade this product; and I think we can generate more business opportunities from Mafang Jin Suo. It's already been a very effective way to demonstrate the sales [mix] and to increase the stickiness of the homebuyers to the new house sites.

Thank you very much. I'll jump back to the queue.

Thank you.

Your next question comes from Gregory Zhao from Barclays. Your line is open. Please go ahead.

Hi, management, thanks for taking my question. And my first question is still about your margin. So I think during this quarter, we launched some promotion with the Didi Taxi for the hailing services. But at the same time, we see margins still very strong compared to previous quarters. So just wanted to have a breakdown of the expense or cost contributed from that cooperation with taxi hailing services, and as well as the margin outlook for Q4 and next year. This is my first question.

My second question is about, as you earlier mentioned, there were some contribution from the offline secondary home agency to our e-commerce services. So I just want to understand in that part of business, so -- the cooperation, so what's the revenue-sharing terms between us and the agents? I have these two questions. Thank you.

For the first question, actually, the Didi cooperation, the Mafang Jin Suo is not a cash-burning project for us. It's a cash-making project for us. Yes, we paid the car fee to Didi. But actually, when we cooperate the projects, they have to pay a much higher cooperation fee for us to get this right to use these cars. So actually, we are making money out of it.

And on the other hand, actually, we saved a lot of cost, upfront cost. Previously, we used a lot of cost to bring people to the homebuyer sites that -- using that buses and also pay them certain gifts, or order lunch. But with Didi, we actually do not use that. So actually, we make money out of it and have saved a lot cost from this product. That's for your first question.

For the second question, as I said, that cooperation -- or our channel platform, the channel platform cooperation with the agents is also a part of our service solutions to the new home developers. This model -- if you're looking at this model, you can see, if you use this as a service, it's very valuable to the developers. If you use this model as a business model, you will not make any money out of it.

Currently, we actually cooperate with the agencies and project-by-project. And also, for each project, we will negotiate our commission rate to the agencies with the developers. And we pay this; we use this as a cost of the channel from our income from the e-commerce.

We don't have actually -- so it's very -- the commission rate, actually, is very different from project-to-project. We don't have an average rate for that. So it's quite different. So -- but we think it's a very useful tool. It's a very useful service for the developers.

Okay. And I have a follow-up question for our listing services. Actually, our competitor, SouFun, also announced their Q3 result with a listing services year-over-year decline around 25%. But at the same time, we see our listing services is growing very fast. So I just want to understand that -- is that business, is that market industry dynamic? Like, if we are taking market share from SouFun, maybe we're attracting more agents to our platform to do the listing services, and maybe we can monetize that services more aggressively? So yes, that's my third question. Thank you.

Yes, you are right. We are taking market share from SouFun. As we said, our strategy is doing an independent information platform, and we think the market needs an independent information market platform. So a verified listings model, that's our business model and the information platform, especially I think is we are -- we see quite an achievement quarter-by-quarter. So this strongly demonstrates that our strategy is right.

Secondly is that I think on the secondary markets, we -- SouFun and us, we are not competitors anymore. We are doing online. They've become an agent. So it's a very -- two very -- two different business, so directions, so it's not comparable.

Okay. Understood. Thank you very much.

Thank you.

Your next question comes from Jack Yang from T.H. Capital. Your line is open. Please go ahead.

Hello, management. I have a question about the overlap rate of the e-commerce project with other competitors. Or what do you see the budget allocation for advertisers especially for next year? Or are they willing to put their budget on multiple platforms or just [do] exclusively on a single platform? That's my question.

I think the overlap -- maybe last year, I think the overlap between us and our competitors is more. But this year, I think because we already take, I think, more than half of the market in terms of our projects, so the overlap actually is going down. For the developers, of course, they are willing to cooperate with more channels to squeeze the client source. But actually, currently the competitor e-commerce provider, there are few and we are the biggest. So in terms of the budgets, I think that the e-commerce does not involve any budgets from the developers. So it's decided actually project-by-project, especially when the developers set up their sales plan for each project. So it's quite hard to predict what next year the budget of the e-commerce, [it's quite hard].

Thank you. That's all for my question.

Thank you.

Your next question comes from Ming Xu from UBS. Your line is open. Please go ahead.

Hello, management. I have two questions. First is regarding the competition of the online media business. So we noticed that SouFun, they recently announced the spin-off of their online media business and relisted that on the -- in the Asia market. So I think that with a stronger financing capability in the Asian market, do you see more competition ahead if they raise more money -- if they are able to raise more money and become more aggressive in terms of their business? That's my first question, and I have a follow-up.

I think for the media business, who will be more influential is not decided by how many cash they have; it's decided by what kind of services they can provide to the users and what kind of media interest they can make to the audience. So that's the key issue. I think the Asia arrangements have -- so far, this capital arrangement is not involved with -- or any connection with the business.

Ming, if you look at our business, it's actually operating cash flow positive. It's an asset-light model and the financing into this business or the financing channels into this business, because we're generating cash flow already, while it's important, it's not critical. Whereas, if you look at some of the other assets or labor-heavy businesses, where they are spending a lot of cash but not very profitable, that's probably where the financing is actually more critical to them.

Sure. Thanks. Second question is a housekeeping question about the redemption rate of coupons. So we noticed that for the past few quarters, the redemption rate has been around 75% to 80%, but it declined quite substantially to around 55% in Q2 but recovered to around 80% in Q3. So how do we see this redemption rate going forward? How should we model it?

I think usually, quarter-by-quarter, that average rate should be around 70% to 80%. But this year's second quarter, I think the 52% -- 55% is a bit low, simply because a lot of projects, actually, they postponed the sales confirm through the third quarter. So that's the way. Actually, a lot of projects actually, they're attracting the users, attracting the buyers but confirm the sales actually quarter -- over the quarter. So that's the special reason, I think, for that.

Thanks.

Thank you.

Your next question comes from Hillman Chan from Macquarie. Your line is open. Please go ahead.

Thank you, management, for taking my question again. I have a question regarding your strategy on Internet finance. I think Fang Jin Suo -- and you have some product, a P2P product on Fang Jin Suo as well. I just want to see your role in it. Can you elaborate a little bit more? Or is it just mainly E-House was doing more active in Fang Jin Suo in the P2P financing? Thank you.

Okay, thank you for your question. Fang Jin Suo, actually, is the business line of our group, E-House group is not within Leju. But we have very close cooperation with Fang Jin Suo because we also help them to design some projects that we can jointly market to the developers. For us, I think the Internet finance from the Fang Jin Suo is also a very important part of our service solution to the developers.

Okay. Because when I look at Fang Jin Suo, I saw some product called [Leju Wang Tai], that I think you -- and like you say, you participate in the design of the product. So what's the economics for those products? I mean, do we take a cut of it? Or is it just mainly E-House who is doing it and Leju's more like directing -- redirecting the traffic from our website to Fang Jin Suo?

Yes, because we helped them design this product, so they gain some credit line to Leju's brand. And also, of course, we market this product to our developers, so that's why the product is called Leju Wang Tai. So it's just a brand credit line.

Credit [spending] -- [lending].

Okay. And then my -- another question will be that could you talk about, for example, the headcount or your geographical expansion in the coming few quarters for your e-commerce model?

I think because our e-commerce model for the primary house sector running for three years, so we don't have a very significant expansion plan, especially geographical expansion for the primary house e-commerce product. But we do have a plan to expand our Qianggongzhang platform geographically because it will -- in the future, it will also involve being sold about the e-commerce, particularly e-commerce. So currently, we don't have such a very big plan to expand our role (inaudible).

Okay, got it. So it's more about penetrating more into the existing cities. Okay.

Yes, because we are already in almost 60 -- 73 --

70 plus cities.

Any plan for the lower-tiered cities?

I don't think because if we are going to lower cities, we actually prefer to use franchise now.

Okay. That's all my questions. Thank you very much. That's very helpful.

Thank you.

Your next question comes from Nora Zhang from Merrill Lynch. Your line is open. Please go ahead.

Hey, good evening, management. Thank you for taking my question. I have a question regarding the average revenue per coupon. It seems that this quarter, the average revenue per coupon has declined about 17% quarter-over-quarter. Can you give us more color on the reason behind? And also I want to ask about the city tier breakdown of the e-commerce revenue.

Yes. The reason is very simple because we sell more coupons in the second and third-tier cities. And the average price of the coupons in these sixth-tier cities are much lower than the first tier. So that has actually dragged down the average price of the coupon.

Nora, the breakdown -- so the breakdown of between the tiers of cities is first-tier city, because of the coupon size, it's still roughly 50% of the overall revenue; and then second-tier cities this quarter has contributed around 45% of our overall revenues; and the remaining are the lower-tier cities.

Just a quick follow-up. So is this the trend that we should also think about in 4Q average selling price?

I think it will be stable, stable compared to the third quarter.

Yes.

Okay. Thank you.

Thank you.

Your next question comes from Cheng Yang from CICC. Your line is open. Please go ahead.

Thanks for taking my question again. I just have a follow-up question on your margins. Well, the non-GAAP net profit margin held up nicely for another quarter, which came at 14% plus in the third quarter versus 11% in the second quarter. So I understand that a smaller contribution by e-commerce revenue might partially distort the margins. But could you give us more color on how margins for our e-commerce project fared in the third quarter versus the previous one? And how do we see the trend in the fourth quarter? Thank you.

Cheng, actually, the e-commerce revenue contribution went from 72% to 70%, so the lowering of the revenue actually, I think, in effect, played very little into the margins. It's really what Hedong was talking about earlier. With more activities, we're able to save some of our probably previously spent marketing costs to increase the margins. And going into the -- and the general margin, on a project stand-alone basis between an e-commerce project and a advertising assignment, where we booked into the advertising line item, the overall project level operating margin's actually quite similar. And it's probably going to maintain at the similar level into the fourth quarter.

Okay. Understood. Thank you very much.

We are now approaching the end of the conference call. I will now turn the call back over to Leju's Investor Relations Director, Ms. Melody Liu, for her closing remarks.

Thank you. This concludes today's call. If you have any follow-up questions, please contact us at the numbers or emails provided on our earnings release and on our website. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.