Tuniu Corp (TOUR) 2015 Q1 法說會逐字稿

Hello and thank you for standing by for Tuniu's first-quarter 2015 earnings conference call. (Operator Instructions). Today's conference 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, Tuniu's IR and Strategic Investment Director, Maria.

Thank you and welcome to our first-quarter 2015 earnings conference call. Joining me on the call today are Donald Yu, Co-founder, Chairman and Chief Executive Officer; Alex Yan, Co-founder, President and Chief Operating Officer; and Conor Yang, Chief Financial Officer.

For today's agenda, management will discuss business updates, operations highlights and financial performance for the first quarter 2015.

Before we continue, I refer you to our Safe Harbor statement in 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 directly comparable GAAP measures.

Finally, please note that, unless otherwise stated, all the figures mentioned during this conference call are in RMB.

I will now like to turn the call over to our Co-founder and Chief Executive Officer, Donald Yu.

Thanks, Maria. Good day, everyone. Welcome to our first-quarter 2015 earnings conference call. I am pleased to report that we delivered exceptional growth and expanded our market share during the first quarter with gross bookings rising by 117% year over year. This is an acceleration from the 70% increase in gross bookings as we saw in the fourth quarter of 2014. Our growth continues to be significantly faster than both our peers and the overall industry. This demonstrates the success of our strategy to build the market share by offering a broad portfolio of leisure travel products and industry-leading customer service combined with competitive pricing.

We are confident that we will be able to further expand our market share by leveraging our recent strategic partnership with JD.com, implementing a three-year business expansion plan, and continuing our aggressive investments in our business.

Now I will provide an update on these key initiatives. In early May, we launched a strategic partnership with JD.com in conjunction with a $500m investment from a group of investors including JD.com. This investment is a strong testament to our positive outlook within the fast-growing industry and will give us the resources to continue expanding our business and accelerating our growth.

As part of the collaboration we will leverage JD.com's strong user traffic, customer base, big data capabilities, financial services and the operational support to further penetrate the leisure travel market. The new capital will also enable us to more aggressively enrich our product portfolio, expand regional service centers, improve user experience, promote our brand, and advance research and development capabilities.

Specifically, over the next three years, we plan to expand our coverage to 1,000 departure cities and to establish 100 service centers at our most popular international travel destinations. We also aim to establish product development centers in Beijing, Shanghai and Guangzhou, to better leverage local resources and to expand our SKUs at travel destinations to 1m so that we can provide more comprehensive services to our customers.

To execute our business plan, we need to continue to invest in our future. In 2015 we will invest in the following strategic areas to strengthen our long-term leadership position, regional expansion within China, service capabilities at overseas destinations, R&D and mobile technology, and company branding.

First, we remain committed to investing in and expanding our regional service centers throughout China and especially for lower tier cities. Regional expansion will allow us to stay close to local customers, improve our local sourcing, strengthen our products generation capabilities and ensure seamless online to offline services. Also it will enable Tuniu to capture opportunities from local markets with strong growth potential.

We are particularly pleased to see strong growth momentum from the 58 cities where we have added new centers since the beginning of 2014. As regards gross bookings from these cities with new centers already contributed to 12% of the company's total gross bookings in the first quarter compared to less than 2% a year ago.

Secondly as I noted earlier, we have seen tremendous growth in outbound tours. Together with this growth we are seeing stronger demand for better services at overseas destination cities that can improve users' travel experience. To meet this trend we established a new business department dedicated to overseas destination services in order to accelerate our investments in developing new and better products and services at overseas destinations.

In the next three years we will open over 100 oversea destination service centers in popular destinations. These centers serve as the crucial infrastructure for Tuniu to better understand and meet travelers' diverse and the evolving needs. It will provide services such as car rental, local guides, day tours and dining services to self-guided travelers through direct cooperation with local suppliers. Customers will have the flexibility to purchase add-ons when booking package tours or travel-related services through our website or app.

Thirdly, we will enhance our investment in research and development as well as mobile technology. By making long-term investments we enhance our management systems of procurement, inventory and the pricing. We can improve our supply chain management in order to increase our overall efficiency.

Our mobile segment is rapidly developing as more customers are booking through our mobile channel. In the first quarter, mobile platforms contributed to over 70% of total online traffic and 55% of total orders up from [68%] and 45% respectively. In the previous quarter, mobile orders accounted for 70% of attraction ticket, 50% of local tour and 85% of train tickets in the first quarter. Going forward, we will make ongoing investments on our mobile to improve the user experience and increase customer stickiness.

In terms of branding, we understand that our Tuniu brand is one of our most important assets. In the first quarter we invested in the comprehensive set of branding initiatives through both online and offline channels. In the future we will continue to invest in marketing and advertising to ensure that consumers recognize and trust our brand.

We are confident that these four areas of long-term strategic investments will drive the expansion of our market share and position Tuniu as the number one online leader travel provider in China in the years to come.

I will now turn the call over to Conor Yang, our CFO for the financial highlights.

Thank you, Donald. Hello, everyone. We are pleased to deliver a strong quarter with net revenue exceeding both our guidance and market expectation as we continue to gain market share within the rapidly growing in China leisure travel market. I will now walk you through our first-quarter 2015 financial results in greater detail. Please note that all the monetary amounts are in RMB unless otherwise stated. You can find the US dollar equivalents of the numbers in our earnings release.

Starting from the first quarter of 2015, the gross bookings including organized tours and self-guided tours for the first quarter increased by 116.9% year by year to RMB1.9b, including 72.2% from outbound tours. Organized tours accounted for 65.8% of the overall gross bookings in this quarter.

For the first quarter, net revenues were RMB1,248.2m representing 115.9% year-over-year growth. Revenues from organized tours, substantially all of which are recognized on a gross basis, were up 116.8% year over year to RMB1,201.4m and accounted for 96.2% of our total net revenues for the quarter. The increase was primarily due to the rapid growth in demand for travel in certain international destinations such as Europe, North America, South Korea and Japan, and for domestic tours. The number of trips for organized tours excluding local tours increased by 154.8% year over year to over 259,000 and the number of trips of local tours increased by 77.7% year over year to over 200,000.

Revenues from self-guided tours, which are recognized on a net basis, were up 77.3% year over year to RMB40.4m and accounted for 3.2% of our total net revenues. The increase was primarily due to the growth in travel to Maldives, South Korea, certain islands and domestic destinations. The number of trips for self-guided tours increased by 200% year-over-year to over 199,000 in the first quarter of 2015.

Other revenues which are recognized on a net basis were up 105.2% year over year to RMB11.2m primarily due to an increase in revenues from tourist attraction tickets and service fees received from insurance companies and revenues from visa applications and certain new businesses such as service fees associated with the air tickets and train tickets.

Gross margin for the first quarter 2015 was 4.1% compared to 7.3% in the same quarter in 2014. The decline in gross margin was primarily due to Tuniu's investment in pricing and higher cost associated with the newly-opened regional service centers, new product lines and newly-added second and third tier departing cities.

Operating expenses for the first quarter of 2015 were RMB293.8m, up 170% year over year. Excluding share-based compensation, non-GAAP operating expenses were RMB281.1m representing a year-over-year increase of 158.3%.

Research and product development expenses for the first quarter of 2015 were RMB43.5m, up 156.3% year over year. The increase was primarily due to investments in new product offerings and mobile-related initiatives and the increase of technology and product development personnel related expenses.

Sales and marketing expenses for the first quarter of 2015 were RMB189.7m, up 158.1% year over year. The increase was primarily due to branding campaigns and advertisements related to our mobile business expansion.

General and administrative expenses were RMB62m in the first quarter of 2015, up 214.2% year-over-year. The increase was primarily due to an increase in the headcount of our administrative and regional personnel as a result of our business expansion and an increase in the professional service fees associated with being a public company.

Net loss attributable to ordinary shareholders was RMB233.1m in the first quarter of 2015. Non-GAAP net loss attributable to ordinary shareholders, which excluded share-based compensation expenses, was RMB220.2m in the first quarter of 2015.

As of March 31, 2015, Company has cash and cash equivalents, restricted cash and short-term investments of RMB1.9b. Cash flow generated from operations from the first quarter of 2015 was RMB19.5m. In the first quarter, cash conversion cycle was negative 28 days compared to the negative 42 days in the corresponding period last year. Capital expenditures for the first quarter of this year were RMB10.5m.

Now let me provide topline guidance for the second quarter of 2015. As Donald mentioned earlier in this call, we are confident about the outlook for the second quarter of 2015 and expect the trend of accelerated growth in our topline to continue, as our investment in regional expansion, product offering and marketing initiatives started to pay off.

Tuniu currently expects to generate revenue in the range of RMB1,396.9m to RMB1,432.7m in the second quarter of 2015, representing a 95% to 100% year-over-year increase. Please note that this forecast reflects Tuniu's current and preliminary view on the industry and its operations which is subject to change.

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

Ella Ji, Oppenheimer.

Good evening. Congratulations on a strong quarter. Two questions. First, I am not sure if I missed it in your prepared remarks, what is the total percentage coming from direct procurement in this quarter and will you reiterate your target by end of 2015?

And secondly, could you share with us how much does repeat customers represent within your total orders in 1Q? Thank you.

Okay, thank you, Ella. The direct procurement percentage at the current level is around 20% and our target within three years' time will increase to like 50% of our total procurement from direct procurement and the other 50% will still be working with the suppliers.

In terms of the repeated orders, at our current level in this quarter, all of the GMV was generated at about 37% is from the old customers. So the rest of 63% is generated from new customers. And we have seen the ratio from old customers continue to increase. A year ago that was kind of slightly below 30% and as we continue our effort in the customer retention program, that ratio has increased to current level about 37% even considering the growth rate of this quarter is the highest among the last many quarters, the old customer repeat ratio is still very high. Thank you.

Tian Hou, TH Capital.

Hi, Conor, and congratulations on a good quarter. And so for your three-year plan and you are talking about to establish like 100 service centers and 1,000 departure cities and it's a very, how to say, exciting target. So I would like to hear some more specific under those targets. For example, what is the average growth rate or CAGR for your gross booking and the number of trips and the net revenues for the three years each year, and how many headcounts should we expect increase? And also, you are going to develop the centers in Beijing, Shanghai and Guangzhou, and I wonder what's exactly the functions of those centers? That's my question.

(Interpreted) Just to answer the second part of the question that as we continue to grow we found that it's necessary for lots of tenant recruitment that are based in Beijing, Shanghai and Guangzhou, these major cities and that is also that the most important purpose for that is really to set up a direct procurement center as many tenants they are actually working in these places. So, by setting up the regional service expanding the size of Beijing, Shanghai and Guangzhou will be very, very helpful for us to recruit tenants as well as for the setting up of the direct procurement center and to beef up our product offering.

In terms of the setting up like 100 service center in the destination cities and 1,000 departing cities in three year time, we believe that this will be extremely helpful for our topline. For example, the regional service center we set up last year has already contributed as Donald mentioned about 12% of our total GMV for the first quarter this year and we believe by expanding to like a large number of, as we just mentioned, that will definitely will be very, very helpful for our business expansion and yes, on the other side, I am sorry that we cannot provide the guidance for the whole year and next two years, but we believe at current level we are at 100% something and by expanding more definitely will be helpful for our overall CAGR.

So how many people you are going to hire? How many additional headcount are you going to have in each year time?

Right, this year is the -- we invested a lot in regional service center and currently our -- as we continue to expand more, we'll be going to like a smaller cities. The overall that -- the gross rate of the headcounts for this year and next will be kind of as we continue to invest, it might not see much of a leverage of that, but give like a year later that the headcount increase should be less than the topline growth rate increase on year-over-year basis, so that's kind of the current plan.

Okay, that's helpful. Thank you.

Thank you, Tian.

Ida Yu, CICC.

Hi, congratulations for the great quarter and thank you for taking my questions. I have two questions here. The first one is, can management share with us some more colors about the impact to the OTA sector as -- after Ctrip and eLong's cooperation. As you know the Ctrip will cooperate with Expedia on its dynamic package tour business going forward, so what do you see the impact to Tuniu?

The second question is about after the JD's investment in Tuniu and now Tuniu has cash and cash equivalents, I think going forward will reach RMB4b to RMB5b so what will company do with those money, except your three years long-term plan, are you going to do some M&As or strategic investments in some smaller companies? That's my two questions.

(Interpreted). Yes, these two companies like Ctrip and eLong, they're -- especially eLong is more like hotel sector. In terms of the current ranking for the hotels sector business in terms of the number of room nights, Ctrip rank number one followed by [Maetwon] and then eLong and Tuniu. So by the combination of Ctrip and eLong, then Tuniu will move up its ranking from number four to number three. And these two actually, we consider the set-up of -- Ctrip's large investment in eLong does not really impact our business because we are in the leisure travel package tour side that eLong doesn't have that sector of the business.

In terms of the -- yes, you are right. After JV investment our cash will be more than RMB4b. Our investment will continue to be in areas of the departing city regional service center and the service center on the destination areas. Other than these that we mentioned we will look for suitable M&A targets. For example on the vertical integration side there are many good companies around China. We are evaluating those opportunities. We will do that as it fits in our overall business strategy. Thank you.

Okay, just one follow-up. Ctrip will cooperate with Expedia on its dynamic package tour business going forward so what will that impact Tuniu? Do you think Tuniu will, together with Ctrip to share some of the resources from Expedia for more competition -- more competitive pressure from this side?

Expedia, there are -- in the dynamic packaging they're really catering for like foreign visitors to China. Their target actually is not the Chinese consumers. They are like an offshore business. And our business is -- all our clients actually are basically coming up from -- departing from China. So definitely it's not overlapping. And in terms of the sourcing of our air tickets and hotels, as many of you may know, the one for hotels, the one they sell to OTA versus they sell to travel agencies business is through different types of pie, different channel and different pricing. And again like air tickets are similar to when they sell to individual retail customers from OTA side versus they are selling to travel agencies business. The industry is a different segment and different pricing. So even they might work together but we have been seeing that's how that will be impacting our business.

Okay great. Thank you.

Thank you.

Amanda Chen, Morgan Stanley.

Hi, management. (technical difficulty) taking my question and congrats on the great quarter. I have three questions here. First is regarding your self-guided tour, it seems that our take rate improved quite nicely this quarter. It was up from around 5% last quarter to almost 6% this quarter. So could you please share any special reasons behind? We understand that the direct procurement percentage is increasing but for this very healthy growth do you see any special reason behind? Thank you.

Right, yes. In terms of the self-guided tours, as we continue to increase our size, as we continue to do more direct procurement we do see a small improvement from previous quarter. But in terms of the year over year comparison, overall margin is still below that year ago. As we mentioned, we are investing in some of the pricing. Also that the regional expansion personnel expenses also be part of the cost of revenue. So overall this quarter margin is not below a year ago. But in terms of the take rate, yes, you're right. As we continue to have a higher scale of procurement and more direct procurement we think that overall for the longer term it will be helpful for our take rate overall.

Got it. Thank you. The second question is a follow-up on the three-year expansion plan. Could you give us more specific guidance how it will impact our top line and bottom line, especially the bottom line? How should we expect the margin in the next three years and will we [post] on the breakeven point in maybe 2017 or even later? Thank you.

As you know, before the founding from (inaudible) and others this time, the first quarter we were able to grow at 117% on GMV. So after we received more investment definitely that we will speed up our expansion plan and so that's why we set this three-year plan. In terms of the top line, as I mentioned earlier we look at the track of the newly set up regional service center we had down last year. That has already contributed 12% already. And given the fact that we only have 75 regional service centers as of now, if we expand to 1,000 departing cities you can imagine that will be extremely helpful.

Of course the more and more we expand we'll go into smaller cities, like third tier or even fourth tier cities or fifth tier cities. But China is very, very big, a lot of untapped market that we need to penetrate. So I cannot give you a specific number on the top-line growth through this expansion but our belief is that will be very, very helpful.

In terms of the bottom line, again that's why we invest in regional service centers last year and you see that that has an impact on the bottom line. This is the investment phase and as we continue to invest more, yes you might see in the short term it will also have an impact on the bottom line. The trade-off will have a higher top line going forward.

So in terms of when will be the breakeven period of time, we do not give a specific guidance on that but as we continue to grow faster we should be able to see certain leverage start to kick in. The level of loss ratio will start to kind of improve from next year.

Okay. That's very helpful. And the third one is a housekeeping question. Could you please share the GMV from different tier cities and also from Obon Travels? That's the third question. Thank you.

Yes, the Obon this quarter is due to seasonality. The first quarter typically especially the Chinese New Year more people travel abroad. So this quarter our Obon composed more than 72%, 72% of our overall GMV. In terms of the GMV coming out from the different departing cities, we have seen again that due to our regional expansion those first tier cities -- percentage from first-tier cities has decreased compared with one year ago from about 60% plus to currently about 50% from Beijing, Shanghai, Guangzhou and Shenzhen. And we expect going forward that the smaller cities percentage will continue to increase.

In terms of the destination cities composed of the GMV, we see a very, very strong growth rate from South East Asia. So the first quarter of this year the number one destination actually is South East Asia that composed about 15%, 16% of the total GMV. And followed by Maldives, about 13% and then also Japan and Korea also increased quite fast. From last quarter Japan and Korea probably 8% of GMV, this quarter increased to 10%. So the top three areas are South East Asia 16% and Maldives 13% followed by Japan and Korea about 10%. And next will be like Europe.

How much from Europe please?

Europe slightly below 10%.

Okay. Thank you very much.

Thank you.

Juan Lin, 86Research.

Hi, good evening. Thank you very much for taking my questions. I have one question regarding the competitive environment. Your takeaway declined sharply by over 2 percentage points over the last quarter. I'm just wondering what is the main reason behind the aggressive pricing strategy? Have you seen an improvement in the competitive environment? And going forward, more importantly, what is the long-term target for your gross margin and operating margin, particularly for your type of business model?

Right, this quarter our pricing actually is -- we follow the market. So you see that sudden drop on first quarter on the take rate but still if you -- we expect that this year probably -- as far as we have seen, current stage will be gradually improved from first quarter. But we don't expect much improvement for this year because we think that this market is very big, growing fast, it also attracts lots of new entrants into this area. So in the short term we don't expect much improvement from the gross margin side.

But give a long-term target, as we continue to increase the percentage of the direct procurement, as we continue to increase our economies of scale, we think that gross -- the gross margin on the GMV side should be able to reach about 10% in the longer-term target with the operating profit in the longer term probably 2% to 3%.

Thank you very much.

Thanks.

Evan Zhou, Credit Suisse.

Hi, good evening, Conor, Alex and Donald. Thanks for taking my questions. Just two quick follow-ups. One is on the other revenue. You mentioned in previous prepared remarks that we have insurance revenue in the component and also some other contribution from the air tickets and hotels and train tickets. Can you give us some more color on what's the overall breakdown between these categories and what's the growth rate for each category that we can foresee as this quarter the other revenue has been growing pretty well? Thanks.

Yes, the major improvement actually from the insurance, as we continue to -- the fee from insurance. As we continue to grow faster and larger in size our bargaining power with the insurance companies has increased. So compared with one year ago we have the rebate ratio from insurance companies has increased quite substantially. So other revenues major contribution is coming out from the insurance companies.

And in terms of the other new business, for example, as you know, we have newly added hotel channel, air ticketing channel and the [digital] train ticket channel. But these are still in the infant stage. We see the growth rate of course is very high because the base was very small but in terms of percentage contribution from hotel channel, air ticketing channel and train ticketing channel, actually the contribution is still quite small compared to the overall other revenue. So the majority contribution is coming out from the insurance fees.

And of course in terms of the percentage, the tour attraction ticket is ranked number two following the insurance commission.

Got it. Thanks. Second question is regarding your sales and marketing spend. I think this quarter it was still pretty aggressive spending mode. I was wondering can we have some more color on components within sales and marketing? How much is from the brand marketing spend and what other major channels do we have incremental to the previous quarters? Thank you.

Right. If you recall, a quarter ago in 2014 first quarter we were still a private company so we did not spend much on the branding. So in terms of year-over-year comparison, we have invested in brands in this quarter, mostly since second quarter of last year. So I think going to the second year -- second quarter this year you will see the growth rate will not be as much as you have seen so far.

And in terms of the marketing spending, close to 50% of the first quarter spending are for like offline. We cover all the major TV -- several TV channels in China. For example we have advertisements for I'm a Singer which is ranked number one popular program in China in first quarter and many, many others.

And the other major spending on the marketing is for the mobile application promotion. We have seen that more and more traffic on mobile side and the percentage of marketing spending on mobile has also increased. So the offline branding campaign as well as the spending on the mobile advertising, that's the two major parts.

And in terms of other, PC online is just regular spending on SEM, like web directory, as we have spent in the past. Not much changing on that front.

Got it. Thanks for the color, Conor.

Henry Guo, WR Hambrecht.

Hi, thanks for taking my question. So my question is regarding the direct procurement. So can management comment on what's the strategy for going forward how to continue to increase direct procurement contribution but meanwhile also minimizing the interest conflict with suppliers and maintain good relationships with them? Thank you.

(Interpreted). This year we have set up a few core destinations that we want to emphasize more. The first is Europe and then followed by US and then Japan. So in these areas we will increase the direct procurement percentage more. And in terms of how is this going to conflict with our existing suppliers, actually it's somewhat different, it's very different actually. In terms of the client base, our direct procurement product is catering for mid high end customers' needs. We will have a higher standard of hotel, meals and everything. So the direct procurement product will be more like a mid to high end versus our suppliers -- existing suppliers' packaged products is more designed for the mass market.

And in terms of how we do the procurement, it's also different than our suppliers. We will do the direct procurement in terms of our group, our tour will be formed in the destination areas. So we will gather customers from many, many places that we have a service -- a regional service center and we'll send them to -- they'll all fly to the destination and then we form the group in the next phase. That's versus our suppliers, they are typically like based in certain destinations, departing cities. So they will form a group in a departing city. So that's different methodology then. We form the group in the destination places.

Thank you.

Thank you.

Juan Lin, 86Research.

Thanks for taking my follow-up question. I'm just wondering by the end of the first quarter how many service centers have you already achieved and what is the total number of departure service centers you're planning to reach by the end of 2015?

We are preparing for operating more. As you know, we opened a lot in the fourth quarter last year. So as of the first quarter end we have close to 80. But our plan -- we are preparing -- at this time we are preparing for opening many more. Our target is at least to increase to about 200 departing cities regional service centers by end of this year.

Before the funding of this -- before this RMB500m investment our original target was 125 and now we have revised to close to over 200 departing cities by the end of this year.

Thank you very much, Conor.

Thank you.

Tian Hou, TH Capital.

My question is related to your relationship with some offline travel services providers. And as you started to do the self-procurement and you start to have your own products do you see any conflict of interest between you and those offline service providers, such as the one we saw not long ago and in China some agencies start to have some protests to Tuniu, even though you guys had reached agreement? I wonder if such a situation will happen again in the future.

(Interpreted). Due to our rapid expansion of our business of course we have definitely taken away many businesses of these traditional retail travel agencies on the retail side. So therefore a few weeks ago you have seen that there were about 16 travel agencies (background noise) to us. And most of them actually also have a retail outlet; therefore, there is certain conflict over there.

But at the end of the day, as you can see, two days -- it only took two days; the problem was solved in that time. I think that it will come to a point that both sides, like traditional travel agencies will work together more and more with online companies like Tuniu. We help our suppliers to sell more products. That's what they want. So even though we do the direct procurement, as I mentioned earlier for Henry's question, these -- we have a different segmentation of the customers, our product is more for the mid high end versus suppliers for mass market. So there is kind of differentiation of our direct procurement product.

So I think the point is that as we continue to sell more products for our suppliers, definitely they will see that it's beneficial to work with Tuniu more.

Thank you for answering my question.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to the management for any closing remarks.

Once again, thank you for joining us today. Please do not hesitate to contact us if you have any further questions. Thank you for your continued support and we look forward to speaking with you in the coming months. Thank you.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.