Tuniu Corp (TOUR) 2014 Q2 法說會逐字稿

Good day and welcome to the Tuniu Corporation second quarter 2014 earnings conference call. (Operator Instructions). I would now like to turn the call over to Maria Xin, Investor Relations Officer. Please go ahead.

Thank you. And welcome to our second quarter 2014 earnings conference call. Joining me on the call today are Dunde Yu, Co-Founder and the Chief Executive Officer; Alex Yan, Co-Founder and the Chief Operating Officer; and Conor Yang, Chief Financial Officer. For today's agenda, management will discuss highlights for the second quarter 2014.

Before we continue, I refer you to our Safe Harbor Statement in the earnings press release which applies to this call as we will make forward-looking statements. Also this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of non-GAAP measures to the most direct comparable GAAP method.

Finally, please note that unless otherwise stated, all the figures mentioned during the conference call are in renminbi. I would now like to turn the call over to our Co-Founder and the CEO, Dunde Yu.

Thank you, Maria. Good day, everyone. Welcome to our second quarter 2014 earnings conference call, our first quarterly earnings call since our successful IPO in May.

I am pleased to report that we have achieved a strong top-line growth in the second quarter with net revenues increasing 85% year on year. This was a particularly strong read out given that leisure travel to certain destinations was impacted by the tragic Malaysia airline incident and the political instability in South East Asia.

In the organized tour segment, the diverse range of travel destinations and the professional guidance provided by our tour advisors enabled us to achieve an 86% jump in revenues over the year-ago period. Japan, South Korea and Europe were the top growing outbound destinations during the quarter.

The self-guided tour segment, which typically has a greater proportion of trips to South East Asian locations grew at 62% year over year. And the number of trips of self-guided tours was up 105% year on year. This was driven by strong demand for self-guided tours in China as well as a significant increase in demand for cruise line packages which rose by more than 200% year on year.

During the second quarter, we also launched our flash sales platform that is dedicated to sales of hotels and products that are close to expiration. This platform not only helps our suppliers reduce inventory risk it also provides more options for those consumers that are cost sensitive but flexible on time. Although we have only recently launched this platform and it currently has a relatively limited contribution to our top line, we believe we have gained a first-mover advantage in the flash sales segment of the online leader travel industry.

The addition of the mobile-friendly flash sales platform and ongoing enhancement of our mobile apps helped to significantly boost mobile traffic during the quarter. Mobile contributions to total traffic and the total orders increased to over 35% and 30% respectively during the second quarter, up from roughly 20% to 25% in the first quarter this year. We are pleased to see this [trend] and we are continuing to enhance our mobile development.

Cementing our leadership position in online leader travel is the number-one propriety for Tuniu. And during the quarter, we continued to build our market share through three strategic priorities; first, expanding our competitive price of organized and self-guided tour offering; second, enhancing Tuniu's brand recognition; and third, extending our customer regional sales network to more leisure travelers across China.

Let me walk through some of our recent achievements in these three areas. One of the key reasons behind Tuniu's success has been our ability to constantly enrich our product offerings to match the evolving needs to Chinese leisure travelers. During the second quarter, we made significant progress on this front. We increased organized tour SKUs from 100,000 at the time of Tuniu's IPO to 200,000 at the end of the second quarter. And we increased SKUs for self-guided tours from 100,000 to 120,000 over the same period.

We also expanded the number of departure cities on offer from 64 at the time of our IPO to 83 at the end of the second quarter. These initiatives expand the breadth and the depth of our product portfolio, increasing customer choice and giving Tuniu access to new markets in tier two and tier three cities in China. The additional departure cities also serve to attract traffic to major departure cities which in turn increases the opportunity for greater revenue generation.

In terms of branding, during the quarter we invested heavily in marketing by advertising through a wide range of offline and online channels including television, outdoor platforms and various online channels. This program was instrumental in building Tuniu's brand recognition and the customer base. In the second quarter, we doubled the daily average unique visitors compared to the year-ago period.

The quality and the coverage of our customer service network are also critical for us to expand market share in the online leisure travel sector. During the second quarter, we continued to train and expand our professional team of Tuniu advisors. These advisors guide Tuniu customers to the most suitable travel packages. By the end of the second quarter, we had over 500 tour advisors, almost 100 more than at the time of our IPO. These advisors will enable us to ensure customer service quality during the peak season.

We also expanded our customer service network by opening regional service centers in five additional cities. This not only helps customers but also improves our ability to localize sourcing and launch more targeted sales and marketing activities. As we aim to rapidly expand our market share, we will continue to expand the reach and the quality of our customer service network. In the second half of this year, we plan to set up more than 10 new regional service centers in the second and the third-tier cities.

Another way that Tuniu is enhancing the user experience is by continuously upgrading our online and the mobile platforms. We will continue to invest in this area to ensure that customers find it easy and attractive to book travel on Tuniu.

In the second half of 2014, we will continue to focus on expanding our market share through a combination of price leadership and the enhancement of our product offerings and customer service network. We have also leverage our scale, brand recognition and operating efficiency to strengthen our leading position in multiple segments of the online travel market.

I will now turn the call over to Conor Yang, Tuniu's CFO.

Thank you, Dunde, and hello, everyone. We're pleased to deliver a strong quarter as Tuniu is increasingly seen as the place to book leisure travel online.

In the second quarter, we made a strategic decision to price and market aggressively, to increase our scale more quickly and achieve massive share gains against our competitors. In the long run, as our scale increases over time, we should obtain stronger bargaining power with our supply chain and improve our operational efficiency over a longer -- a larger revenue base.

Now turning to the financials, all the momentary amounts are in renminbi unless stated otherwise. You can find the US dollar equivalent of the quarter's numbers on our earnings release.

For the second quarter, net revenues were RMB716.4m, representing a 85% year-on-year growth.

Revenues from organized tours, which are recognized on a gross basis, were up 86% year over year to RMB696.7m and accounted for 97% of our total net revenues for the quarter. This was mainly due to the rapid growth in demand for travel to certain international destinations, such as Europe, South Korea and Japan and some domestic tours.

The number of trips for organized tours, excluding local tours, increased by 99% year over year to over 150,000 and the number of trips of local tours increased by 51% year over year to almost 310,000.

Revenues from self-guided tours, which are recognized on a net basis, were up 62% year over year to RMB16.5m and accounted for 2% of our total net revenues. This was mainly driven by the growth in demand for cruise line products and travel to domestic destinations.

Gross bookings for self-guided tours increased 59% year over year to RMB281.2m in the second quarter. The number of trips of self-guided tours increased 105% year over year to 82,000 in the second quarter of 2014.

Other revenues were up 42% year over year to RMB6.8m, primarily due to a rise in service fees received from insurance companies and the revenue from tourist attraction tickets which are recorded on a net basis.

Gross margin for the second quarter of 2014 was 5.9% compared to 7.9% in the year-ago period. The decline in gross margin was primarily due to Tuniu's efforts to expand market share through a competitive pricing strategy and the higher costs associated with new product lines and newly added second and third-tier departing cities.

Operating expenses for the second quarter of 2014 were RMB159.2m, up 287% year over year. Our operating expenses include share-based compensation expenses of RMB18.3m, the majority of which were related to one-off option grants that vested upon the successful completion of the initial public offering in the second quarter of 2014. Excluding share-based compensation, the non-GAAP operating expenses were RMB140.8m, representing a year-over-year increase of 243%.

Research and product development expenses were RMB21.5m, up 182% year over year. This was primarily due to the increase investment in mobile-related development and the technology and product development personnel-related expenses.

Sales and marketing expenses increased 403% year over year to RMB96.9m as we aggressively invested in marketing initiatives, particularly in branding campaigns on the national TV networks.

General and administrative expenses were RMB41.9m in the second quarter of 2014, up 184% year over year. The increase was mainly due to the expansion of Tuniu's business, including the regional service centers in five additional cities and the increase of mid-to-high-level headcount related expenses.

Net loss attributable to ordinary shareholders was RMB129.2m in the second quarter of 2014, which includes a one-off deemed dividend to preferred shareholders of RMB15.6m related to the modification of Series B preferred shares conversion ratio upon our initial public offering.

Non-GAAP net loss attributable to ordinary shareholders, which excludes share-based compensation expenses were RMB110.3m in the second quarter 2014.

Now moving to our balance sheet. As of June 30, 2014, the Company had cash and cash equivalents, restricted cash and short-term investments of RMB1.54b. As customers pay up front for travel, Tuniu is able to maintain healthy cash flow. Cash flow generated from operations for the second quarter of 2014 was RMB195m.

In the second quarter, cash conversion cycle was negative 54.7 days compared to negative 57.4 days in the corresponding period last year.

Capital expenditures in the second quarter of this year were RMB9.1m mainly used for enhanced technology infrastructure and the purchase of electronic equipment.

Now let me provide some top line guidance for the third quarter 2014. Tuniu currently expects to generate net revenues in the range of RMB1.2b to RMB1.237b in the third quarter this year, representing a 70% to 75% year-over-year increase.

Please note that this forecast reflects Tuniu's current and preliminary view on the industry and its operations which are subject to change.

Thank you for listening and now we are ready for your questions. Operator?

(Operator Instructions). Dick Wei, Credit Suisse.

Hi. Good morning. Thank you for taking my question. Maybe I start off with about the competitive pricing strategy. I wonder what kind of locations or what kind of pricing discount we are talking about?

And also do you actually see any of the longer-term customer loyalty increase on the back of this kind of pricing strategy change during the quarter? And do you plan to do that into the future quarter as well? Thank you.

Yes. You mentioned about the more aggressive pricing strategy is that in a few ways, as you know that in this quarter we have expanded to buy more regional service centers. And our strategy going forward will be to continue to expand to more second tier and third tier cities in China. Therefore, for the regional smaller cities, our strategy is really one to provide a more competitive price to attract more customers. So that's one area.

And the other area is the, as you know, we have launched the flash sale platform in our -- in Tuniu. And it's going very well. And to grab the market for this year, we want to attract more suppliers and customers to Tuniu to purchase the flash sale products. Therefore our current strategy is we have a lower markup for flash sale. So therefore these are all in lower margin.

And overall, we see that the growth in various product lines that we're willing to be more aggressive in terms of pricing.

Going forward, yes, we will continue to put the market share as our first priority to gain our business. Thanks, Dick.

Okay. Great, Conor. And so you mentioned about maybe flash sales. Is it mainly to the self-guided tour front or for the organized tour? And then maybe any kind of sense of the kind of discount you are giving or the lower [take] rate we are talking about?

(Spoken in Chinese).

Yes. The flash sale is for the most part, is on the self-guided tour area. This is very particularly helpful for us to expand our mobile business as well as our regional strategy, regional business.

In terms of the take rate, currently it's below our average. We believe that we -- by expanding more quickly in this area that we can attract more suppliers to our platform to provide products. More SKUs is very important to attract clients on the other side. So this year our strategy was we continue to offer a lower markup for the flash sale product for us to expand market share. And until such time as next year, we might -- we'll be able to see that the margin improves on flash sale products. Thank you.

Great. Maybe just quickly. So as far as the gross booking on self-guided tour, how much is it on the flash sale now?

Currently because we just start in April, so it's still like a couple of percentage point below 5% of or total GMV but it is increasing and growing very fast.

Okay. Got it. Great. Thank you very much.

Yu-Heng Fan, China Renaissance.

Hi. Good evening. Thank you for taking my questions. My first question is regarding your future SKU expansion plan. I wonder if you can provide some color regarding what your major area of focus for your product strategy for the second half? And how will your product strategy compare to your peers such as Ctrip, (inaudible) and other traditional travel agencies? Thank you.

(Spoken in Chinese).

Yes. We have increased lots of SKUs. For example, on organized tours we have increased from 100,000 SKUs at the time of the IPO to now 200,000 SKUs. For self-guided tours we have increased from 100,000 SKUs to about 120,000 SKUs by now.

We'll continue to expand to more regions our service centers. Currently we have 20 regional centers. In the second half of this year, we'll expand at least 10 more. And we also beef up our procurement team in the region, therefore in terms of the product strategy, we'll continue to provide more SKUs especially in the local level, the local procurement team will enrich our overall product portfolio. And we believe that the continued trend is still very strong for leisure travel booking switching from offline to online.

And Tuniu will continue to invest here in market share and in terms of more product coverage, more area coverage and more SKU to ensure that we continue to have the leading position in this area.

Okay. Thank you. And then my second question is regarding your B2B strategy. I recently learned that you have launched a B2B platform and has attract a lot of suppliers. I wonder if you can address the benefit of this B2B platform?

And what will be your future strategy for you in the travel B2B front? Thank you.

(Spoken in Chinese).

The B2B, we have seen that the growth rate is pretty fast on the platform. We have just started doing this a while ago. We have over 400 suppliers for Tuniu and most of the suppliers actually, from time to time, they have -- they need to digest more inventory quickly. By doing B2B, we can provide a sale to more -- the area that we are not covered. And for our product, for example, we purchase in bulk and we sell through our own platform (inaudible) that we need to, also using this B2B platform to digest some of our inventory, if any.

4,000, right?

We have over 4,000 suppliers in Tuniu.

Thank you. Lastly, just a quick housekeeping question, I wonder if you can breakdown your GMV between the outbound travel and the domestic travel, within your group tours and organized tours and self-guided tours individually? Thank you.

The outbound travel for this quarter actually compared to a year ago, a year ago it was 67% of our total GMV. This quarter it's about 64% of our total GMV. This is because as you know that the South East Asian countries for the second quarter, for the most part, has various issues, like a Malaysian airline missing or Thailand continues to have unrest in the political fronts. And Vietnam has anti-Chinese sentiment. There is hostage being kidnapped -- Chinese being kidnapped in the Philippines.

Therefore, in South Asia countries this same quarter this has a pretty big impact. Therefore in second quarter we were able to switching the customer demand to the similar price range area which are mostly in the domestic area. Therefore we see even though it's pretty weak in South East Asia, but the domestic business is picking up as a conversion of that loss from that area.

Therefore the overall outbound this quarter is about 64%. But we believe in the longer term that as this area resumes to a normal situation that outbound will continue to grow very strongly. You might have seen the official number from the government that outbound travel for Chinese in the first five or six months of this year has increased year on year 18%, outbound travelers. So this is a very strong trend for outbound.

So going forward, still believe that outbound will continue to have a strong growth rate and we'll continue to benefit from that.

Great, thank you very much.

Amanda Chen, Morgan Stanley.

Good evening (spoken in Chinese). Thank you for taking my question. First of all, congratulations on the strong growth of your top line, I have three questions. First there is a follow-up on your B2B platform. Could you please give us an update, how many hoteliers and how many retailers are on your platform now? And do you have any operational target for this platform for 2014? Thank you.

Well, as we've just started this business is actually still quite small. We mentioned two sites. We'll have a few thousand on the main site that we can sell to. And on the other site we have several hundred suppliers that are providing the product. This is still is in a very initial stage.

Okay, I see. Actually our main concern about your B2B business is that it may enhance the strength of your offline competitors. For example in some territories it is, before you launched the distribution platform, offline retailers may not have comprehensive trip, travel products. So in that case those local customers may become your customers.

But however relying on your distribution platform these retailers can get more SKU with cheaper price than before. And probably will gain your market share in their local markets. So how do you think about that?

(Spoken in Chinese).

Yes, the current coverage is actually for the area that we don't have network, we don't provide product. Therefore this kind of complements to what we are doing right now. And so we are not worried about cannibalizing our current business.

I get it, thank you. And my third question is about your flash sale business. Can you give us some updates on it? Like how many suppliers do you have for the flash sale now? And how many of them are also your regular product buyers?

(Spoken in Chinese).

Yes, the flash sale actually we open up to all suppliers whenever they have need they can put their product on our platform. And we have continued to increase the total number of SKUs now on flash sale.

So, now your current suppliers can include a SKU on your platform?

(Spoken in Chinese).

Yes, currently these suppliers for flash sale are our current suppliers; they have been doing things with us. Now, of course if they are good and we use what's not our supplier we can consider to enroll them.

Got it, thank you. And my final question is still about the flash sale. So could you give us some guidance for second-half 2014 and 2015 because we see there are some political events in first half from 2014 so maybe the flash sale inventory is comprehensive. But for next year and 2015 how do you size the market? Thank you.

(Spoken in Chinese).

Yes, the market might be different condition the second half of this year but conclusion is we believe that second half of this year we'll continue to expand that trend of the first half. And going forward even 2015 or onward the demand will still exist that this is and this is industry practice that flash sale will always be there and we provide a flash sale, become a leader of this area. And we believe that there will be more -- the sell channel will be more concentrated in particular companies because the demand in time, timely sells of this flash sale very important.

(Spoken in Chinese).

Typically in the low season we'll have more like last minute product for flash sale. On the other side we also have the hot deals. So in October or even if it's peak season we can provide a hot deal in every day amounts we sell through our platform that is also very attractive to our customers. Thank you.

Got it, thank you.

[Lee Juang], 86 Research.

Thank you very much for taking my questions. My first question is regarding the growth of business lines. In second quarter the group tour business was growing faster than self-guided tour, although group tour actually contributed a larger proportion of your GMV. What is the reason behind that?

And then regarding the third quarter guidance it seems to slow down a little bit from the second quarter. And could you please elaborate the reason behind that? Thank you very much.

Yes, we'll continue our strategy that -- to expand into more cities especially the second and third tier cities. Self-guided tours might be more popular in the first tier cities. But in turn when you go into the smaller cities organized tour is a more popular fashion, a popular way of travel. So internally we do see that second and third tier, even fourth tier cities the growth rate is higher and we continually spend more and put more effort in these areas. So we see organized tour growth rate as stronger and we'll expect that trend to continue.

As a newly listed company we want to be conservative. We think that this reflects the current build of our operation in the third quarter.

Thank you. My second question is regarding the competitive scenario. You have mentioned that you would like to provide more competitive (technical difficulty) to consumers mainly because of the launch of flash sale products also because you are entering lower tier cities. I'm wondering if you have noted any change in the competitive scenario. Have you seen competitors stepping up on price war in the sector? And how do we forecast pricing and take rate trend going forward?

(Spoken in Chinese).

Yes, it's quite nature to have competition in all different areas of the area that we are in. But the bigger picture is still that we're grabbing market share from the offline to online. We do see that there's a huge market potential of there. And also as we continue to expand our foothold into the second and third tier cities, as we continue to invest more on branding we do see that we are confident that we'll continue to strengthen our leadership in this online digital travel area.

(Spoken in Chinese).

Yes, we think the most important thing really is to continue to grab market share from the offline retail front to position the customers from offline to online. And the speed of this expansion is very important. And look at what of our peers, the current overall market condition that we feel confident to see that our growth rate will continue to be strong. And we'll continually invest in branding and overall to grab more market share.

Thank you very much. My last question is regarding your cooperation with Ctrip. Have you formed any format of cooperation with Ctrip since Ctrip in Tuniu at the beginning of May? And what kind of format is that? And going forwards how do we expect your cooperation with Ctrip to trend in future?

(Spoken in Chinese).

Our team has interact with Ctrip team. The first step is really to tap into their hotel resources. We have demand on that front as well. Going forwards it will be possible that maybe joint purchase -- joint procure in certain products to lower down the costs and to lower down the inventory risk as well. Thank you.

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

Ella Ji, Oppenheimer.

Thank you for taking my questions. I have some follow-ups first. Relating to your flash sales business how much do you expect they will represent of your total business when the flash sales have reached a stabilized level?

Right, currently it's below 5% and we do see the increasing pace of the flash sales. So we would have supplies by end of this year or next, beginning of next year to exceed 5% of the overall GMB.

Exceed the 5%, right? So shall we see?

And for us flash sales actually -- sorry, flash sales actually is a add-on of our business, it's not really cannibalizing our existing business. Because people who purchase flash sale really have a very flexible time to travel. So maybe our existing customers that they saw the flash sale, they don't have time. But they can purchase for their friends, their families. So we do believe that it's really additional to our current business. Sorry, Ella, back to you.

Okay, thank you. And then second question is also relating to your cooperation with Ctrip. You mentioned that actually you have added their hotel retail resources to your platform. Then how about are they going to add your inventories to their platform in any near future?

And then given the recent cooperation between Ctrip and Priceline, can you also talk about how do you think of Ctrip as maybe a partner or a competitor in the outbound travel market?

(Spoken in Chinese).

Yes. we mentioned the joint procurement and other way of cooperation is all possible that for the future cooperation. In terms of the Ctrip and Priceline, yes, our resources of hotels, special organized tours, different channels. For Priceline their offer is for the product for the individual travelers. For our business that's a good travel, that the hotels use in the travel agencies business it's kind of different segment and different pricing. So therefore we don't see any impact for the joint efforts on the outbound front.

Thanks. And then my last question is actually relating to your sales and the marketing spending. I understand it that you have some major (inaudible) campaign TV commercials going out and we are seeing a big increased. Could you share with us how much probably within your sales and marketing is one-time spending that's not likely to repeat in future quarters or future years?

(Spoken in Chinese).

Yes, the area we are in is the ASP is very high and therefore the demand for brand recognition and [charter] is very important. Our investment in branding campaign in the first half of this year together with the successful IPO has helped a lot to our overall branding and trust.

On the second-half of this year we would not spend as much as percentage-wise of the marketing to revenue as we have did in the first half. But we'll continue to invest in our brands, continue to put market share as our first priority.

Got it. Thank you very much.

Eddie Leung, Merrill Lynch.

Hi, good evening, thank you for taking my questions, just two questions. The first one is about your geographical expansion strategy. I'm wondering if you have any sense that how long will you take for a lower tier city or a lower tier region to breakeven or reach a more stabilized margin after you launch a regional service center? That's my first question.

As you know we have been carrying an asset-light business model. As we continue to expand into various cities the costs associated with that is rental plus certain personnel and we will put that productivity as also important in these areas.

Of course to begin with, like second quarter of this year, as part of our expenses associated with our expansion to the five different regional cities. And so the first half -- the first year of this newly opened areas we do not really expect it will contribute a significant amount on the profits to begin with. But we believe that given a year that you should be able to turn profitable.

Got that, Conor. And then my last question is about your longer-term industry outlook. Could you share with us your thought on the impact from group buy offers in the industry? Sometimes perhaps offer to buy some of your competitors, sometimes even offer to buy some of the (spoken in Chinese) companies. So just wondering what's your view on these type of developments in the industry in the long-term. Thanks.

(Spoken in Chinese).

First of all the current -- they've approved by website or companies they're selling for the most part very low ASP products like low-end hotels and tickets for tour attractions. These areas are popular for group buy. But our area that we are leading in is with the high ASP products. And this area for high ASP product needs high level of services that no more group buy company would not be able to offer.

And plus our organized tour itself is also a way of group buying activities. You can think about that as a travel group organized tour of 30 people in essence is really we group people together to purchase. So therefore it would be a lower cost for air tickets as well as hotels and other travel-related expenses. But again the area we are in is high ASP, demand high level of service and this is differentiated from the group buy activities.

Got that. Thank you.

Alicia Yap, Barclays.

Hi, good evening, everyone. Thanks for taking my question. Congratulations on your strong first public result. I have a couple of questions. Number one is regarding your third quarter guidance. Would you be able to share with us the growth rate breakdown for the self-guided tour and the organized tour?

Right, overall the current trend we still see then higher growth rate for organized tour, and that's higher than our self-guided tours. In terms of overall that's our guidance was 70% to 75% still reflects a combination of these two. But as you know that we recognize revenue for most part on a gross basis on organized tours. Therefore the combination of the overall revenue will be majority on the organized tour. But in terms of GMV we do see that we have a higher growth rate for organized tours. Thank you.

I see, great. And then second question is related to some of your promotion and discount. So, how do you recognize some of the rebate or the coupon? Is that more on the counter revenues? Or are you recognize on the sales and marketing line?

On the flash sale product we don't have coupon things like that, it's a mark-up model. Certain like in the tour attraction tickets area that would be a deduction of -- tour attractions are recognized on a net basis anyway, it will be subtracted and after subtraction that will be recognized as -- the net will be recognized as revenue.

This concludes our question and answer session. I'd like to turn the conference back over to Conor Yang for any closing remarks.

Thank you, everyone, for listening and we really look forward to speaking with you in a few months. Thank you. Bye.

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