Tuniu Corp (TOUR) 2016 Q3 法說會逐字稿

Good day and welcome to the Tuniu Corporation third quarter 2016 earnings conference call. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Maria Xin, Investor Relations and Strategic Investment General Manager, please go ahead.

Thank you and welcome to our 2016 first quarter earnings conference call. Joining me on the call today are Donald Yu, Co-Founder, Chairman and the Chief Executive Officer, Alex Yan, Co-Founder, President and the Chief Operating Officer, and Conor Yang, Chief Financial Officer.

For today's agenda, management will discuss business updates, operational highlights and the financial performance for the third quarter of 2016. 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 discussion 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, the figures mentioned in this conference call are in RMB. I would now like to turn the call over to our Co-Founder, Chairman and Chief Executive Officer, Donald Yu.

Thanks Maria. Good day everyone, welcome to our 2016 third quarter earnings conference call. We had a solid third quarter performance with total travel GMV and net revenue growing 56% and 35.7% year over year respectively. The number of trips for organized tours and the self-guided tours increased 67.5% and 46% year over year respectively.

With travel to Europe still recovering during the third quarter, our total travel GMV, excluding Europe and the [Middle East], increased 71.2% year over year, reflecting solid growth rate in other regions. Our growth rate continues to be higher than our peers in the industry, as we strengthen our leading position in China's online leisure travel market, while expanding our offerings of additional travel related products.

For the fourth quarter, we have observed a notable improvement in our gross margin as our operation continues to benefit from economies of scale. As the leader in China's online leisure travel market, we are able to procure increasingly more competitively priced products from our suppliers.

Additionally, Tuniu's expansion horizontally and vertically in the travel industry has also positively contributed to our gross margin. As our offering of other travel-related services continue to grow, customers have access to more products for their travel needs, which increases user stickiness to Tuniu's platform.

Contribution from repeat customers increased to 45.7% of total travel GMV in the third quarter. Additionally, because we offer more products and services, our conversion rate has increased significantly. In the future, we believe the increased user stickiness and the conversion rate will improve our efficiency.

We are also pleased to see the strong contribution from lower tier cities as it reflects the coverage and the reputation of our brand. Notably in this quarter, GMV from lower-tier cities reached more than 55% of our total GMV. We believe that Tuniu is currently well positioned to take advantage of the growing consumption power in both first-tier cities and the lower tier cities across China.

Now I would like to give an update on our key strategies in greater detail. First, I would like to give an update on the business side. In recent years, Tuniu has expanded its capabilities throughout the travel industry and especially for destination-based service. By leveraging our regional and the international service centers, we have been able to greatly increase our ability to procure local products and provide additional services to our customers.

For example, in Japan we have significantly improved our procurement network with local suppliers after the opening of our international service center. Since then we have successfully launched our DMC business in Japan. By assembling the products ourselves, we are able to create competitively priced products and a Tuniu direct procurement brand.

The new DMC divisions, in both Japan and [Xiamen], have demonstrated positive results. Going forward, we plan to open additional DMC divisions in Beijing, [Hainan], [Sichuan] and Guangxi in order to provide high quality and a competitively priced product to our customers.

During the third quarter, GMV of our transportation ticketing and accommodation reservations increased approximately 500% and 300% year over year respectively. We continue to make significant strides in expanding our coverage of leisure travel resources, particularly in terms of flight routes and hotels.

As Tuniu's coverage of leisure travel resources is one of the most comprehensive in China, we expect this to evolve into a core competitive advantage and differentiate Tuniu from its industry peers.

Tuniu's transportation ticketing business maintained its high growth momentum during the third quarter, with airline ticketing, railway ticketing, and bus ticketing, all pushing rapid growth.

We continue to expand our product coverage and strengthen our relationship with airline companies. Our focus on flight routes to popular tourist destinations has yielded great results, as we are able to offer customers competitively priced products and comprehensive routes.

We are on pace to bring many new airline company flagship stores onto our platform in the near future. For the airline companies that already have stores on Tuniu, we continue to deepen our relationship with them.

Recently Tuniu formed strategic cooperation with [Futu] Airlines and Capital Airlines to better offer their products on Tuniu. For example, the agreement will allow Tuniu customers to buy Futu Airline or Capital Airline tickets at highly attractive prices and bundle them with other Tuniu products.

Let's move onto our accommodation reservation business. Tuniu's accommodation reservation business delivered equally impressive results during the third quarter, as it utilized our established leisure travel resources to quickly expand its coverage at popular domestic and international travel destinations.

Currently we cover over 640,000 hotels across more than 200 countries and regions. Based on our experience, customers booking accommodation for leisure purposes often pay for high-end hotels with a higher ADR than business travel. That's why Tuniu's ADR is one of the highest in the industry.

In addition to coverage, we will also introduce various new services to improve the user experience. For example, we will introduce a new booking service that allows users to bundle together various hotel services such as recreational activities or dining experiences along with the hotel booking.

Also, we will introduce new technologies that will allow users to better discover and explore hotels online or through their mobile devices. Combining these innovative technologies with our leisure travel focus, we will differentiate our accommodation reservations from our industry peers.

As we continue to expand our coverage of air routes and hotel resources, we are able to provide more customized self-guided tour products to our customers. Given the increase in demand for customized trips, we believe that expanding our coverage of leisure travel resources will greatly strengthen our position in self-guided tours.

Now I would like to talk about our branding. Tuniu has dedicated many years to forming and growing its brand in China. Our brand has one of the highest awareness and repetition within the online travel industry. Starting in the third quarter, our brand investments will focus on the channels that bring the highest return on investments for Tuniu.

We will also monetize our existing brand assets in order to bring additional growth. This is new branding strategy -- this new branding strategy will be a trend going forward as we control our expenses and make adjustments based on the overall market environment.

I would now like to talk about our strategy in technology. In order to efficiently monetize our existing brand assets, we must continuously improve the user experience and increase our overall efficiency. Technology is a central component driving these improvements. By continuing to fine-tune our customer-facing interface we have taken significant steps in improving the user experience.

Features like live customer support through online messengers and the booking through WeChat, we have greatly improved the customer experience and improved our efficiency. We will be able to reply to customers' requests faster and we can better utilize our customer service representatives.

On the back end, we have developed various systems that can also greatly improve our efficiency. These technologies allow us to significantly reduce the time it takes to help a customer book products and increase the utilization rate of our staff. Automating more processes and implementing innovate technology will greatly benefit our efficiency in the long run.

Overall, we remain optimistic on the outlook of the travel market. There are several factors that continue to drive further travel demand in the long run, such as increasingly [variable] global visa policies, a growing middle class, and the increase in recreational activities.

Tuniu's advantage in the market is its established brand reputation in China and its large base of loyal customers. Having established our brand, we will focus on improving the quality of our products and services while focusing on marketing channels with higher ROI.

We aim to become an increasingly global company, particularly with our expanding coverage of global travel resources. With this in mind, we expect to be well positioned to take advantage of China's outbound growth.

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

Thank you Donald, hello everyone. As Tuniu continues to expand both horizontally and vertically in the travel industry, GMV contribution from our other travel-related services will continue to increase. As this trend continues, our total GMV and gross profit will be a better indicator of Tuniu's scale and the growth going forward. That's why, starting from the third quarter, we will start to give guidance on gross profit as well.

In the third quarter, we have started to re-scale our marketing expenses to mostly focus on channels with higher ROI. As a result, our sales and marketing expenses have declined in the third quarter on a quarter-over-quarter basis. We expect to continue controlling our marketing expenses going forward, as we leverage our brand assets to efficiently expand both our core business and other travel-related services. Combined with our increasing gross margin, we expect to improve our profitability in the near future.

Now I'll walk you through our third quarter 2016 financial results in greater detail. Please note that all the monetary amounts are in RMB unless otherwise stated. You can find the US dollar equivalent of the numbers in our earnings release.

Starting from the third quarter 2016, the total leisure travel GMV for the third quarter increase by 56% to RMB7.1 billion. Packaged tour gross bookings for the third quarter increased by 34.8% year over year to RMB5.3 billion including 60.2% from outbound tours.

For the first quarter, net revenues were RMB4 billion representing 35.7% year-over-year growth. Revenues from organized tours, substantially all of which are recognized on a gross basis, were up 33.4% year over year to RMB3.9 billion. And accounting for 95.1% of our total net revenues for the quarter.

The increase was primarily due to the growth in demand in travel to certain international destinations, such as Japan, South Korea, Middle East, Africa, and North America. The number of organized tours, excluding local tours, increased by 67.5% year over year, to over a million. The number of trips of local tours increased by 26.8% year over year, to over 840,000.

Revenues from self-guided tours, which are recognized on a net basis, were up 0.6% year over year to RMB67.4 million and accounting for 1.7% of our total net revenues. The increase was primarily due to the growth in travel to Japan, South Korea, North America, South-East Asia, and domestic destinations. The number of trips for self-guided tours increased by 46% year over year to 540,000 in the third quarter of 2016.

Other revenues were up 191.6% year over year to RMB130 million and accounting for 3.2% of our total net revenues. The increase was primarily due to a rise in service fees received from insurance companies, revenue generated from financial services, and commission fees received from other travel-related products such as transportation ticketing and accommodation reservations.

Gross margin for third quarter of 2016 was 5.8%, compared to 5.6% in the same period in 2015. The increase in gross margin was primarily due to the increased contribution from other revenues as a result of category expansion and the optimization of our supply chain management.

Operating expenses for third quarter 2016 were RMB832.3 million, up 58% year over year, excluding share-based compensation and amortization of acquired intangible assets. Non-GAAP operating expenses was RMB775.8 million representing a year-over-year increase of 58.3% and a quarter-over-quarter decrease of 7.9%.

Research and product development expenses for the third quarter of 2106 were RMB168 million, up 92.8% year over year. The increase was primarily due to investments for the implementation of additional product categories, such as transportation ticketing, hotel booking and financial services, improvement of online technology and the rise in technology and product development personnel related expenses.

Sales and marketing expenses for the third quarter 2016 were RMB499.9 million representing a year-over-year increase of 47.9% and a quarter-over-quarter decrease of 19.8%. The year-over-year increase was primarily due to advertisements for our mobile channels, expansion of our VIP customer service team, and amortization of acquired intangible assets for the previously announced transaction with JD.com. The quarter-over-quarter decrease was primarily due to the decline in brand promotions, such as advertisements on television and offline advertisement campaigns.

General and administrative expenses were RMB168 million in the third quarter of 2016, up 61.7% year over year. The increase was primarily due to an increase in the headcount of our administrative personnel as a result of our business expansion, such as regional service center expansion and product category expansion.

Net loss attributable to ordinary shareholders was RMB568.5 million in the third quarter of 2016. Non-GAAP net loss attributable to ordinary shareholders which excluded share-based compensation expenses and the amortization of acquired intangible assets was RMB511.8 million in the third quarter of 2016. As of September 30, 2016, the Company has cash and cash equivalent, restricted cash and short-term investments of RMB5.5 billion.

In the third quarter, cash conversion cycle excluding the impact of the pre-payment to HNA Tourism, cash conversion cycle was negative 21 days. Capital expenditures for the third quarter of this year were RMB48.7 million.

Now let me provide guidance for the fourth quarter of 2016. For the fourth quarter 2016, Tuniu expects to generate approximately RMB2.1 billion to RMB2.2 billion of net revenues. Which represents 10% to 15% growth year over year and RMB147.4 million to RMB155.3 million of gross profit, which represents 85% to 95% year-over-year growth rate.

This forecast reflects Tuniu's current and preliminary view on the industry and its operations, which is subject to change. Please note that this forecast reflects Tuniu's current (inaudible).

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

(Operator Instructions). Natalie Wu, CICC.

Hi, good evening management and thanks for taking my questions, so a couple of questions here. The first one is, what is the corresponding GMV growth rate expectation in terms of organized tours, self-guided tours, and also those travel-related products like ticketing and accommodation services in the fourth quarter? What's the GMV growth expectation for the next year? That's my first question.

We will provide guidance on the fourth quarter, the revenue guidance mostly reflecting the organized tour. As you know that most of the organized tours is recognized on gross basis and composed most maturity of the reported GAAP revenue. So organized tours is similar to 10%, 15% growth rate.

As we have observed, that we mentioned in the past, that the overall business momentum of our Company right now, we are experiencing the self-guided tour growth rate is higher, especially for young generations that they are booking tickets or hotel with more flexibility.

That's why our overall GMV actually is growing a lot faster than other GAAP revenues, which has just pure -- mostly organized tours. So overall GMV, fourth quarter will 30%-something year over year and self-guided will be overall higher than the organized tour.

For next year we do not provide guidance for next year, we provide guidance on a next-quarter basis. Fourth quarter, actually there's several factors also affecting that. As you know that we are on a way of -- continue to -- as you can see that we are shrinking our [loss] and the fourth quarter especially, you'll see more improvement in terms of the expenses growth rate versus GMV growth rate.

We are expecting the fourth quarter, for a long time will be the first time that you'll see our overall GMV growth rate will be higher than the operating expenses growth rate overall. So we are expecting a reasonable growth rate but with a more noticeable improvement on the low side and we have a plan that by 2018 we want to reach a whole-year non-GAAP break even.

So every quarter you see the improvement of this financial profile overall. Of course, that certain recent events such as in Thailand, the King passed away in October, has a certain impact on one of our largest destinations, South-East Asia. Also, in Korea that the THAAD deployment in this September also causing deteriorating diplomatic relationship between South Korea and China. So has a certain impact on the Korean tourist business as well.

And Europe is not really recovering with the terror attack in Nice in third quarter, and also the Turkish political turmoil in the third quarter, also had a certain impact. So overall, the guidance we provide reflects our current view. But in the longer term, we are still quite optimistic of our overall leisure travel development in China. In the overall market especially, we will continue to strengthen our leadership position in this area.

Thank you Natalie.

Great, thanks Donald, so my second question is that your gross profit target for the fourth quarter is actually very high. So is there any improvement sign in relation with the take rate of the packaged tour or simply due to the low base last year on European related inventory risk and mix shift towards higher gross profit margin business like self-guided tour and ticketing and accommodation business.

And (multiple speakers).

Right, our guidance --

Yes, you said that you achieved the non-GAAP breakeven in the year of 2018, just wondering what's the presenting gross profit margin you are thinking about at that time? Thank you.

As we indicate, our guidance for fourth quarter, gross margin we are expecting year over year 85% to 95% growth rate.

For the most part this year, so far, we have -- as we have quite an aggressive plan beginning of this year. So in terms of securing the seats, the inventory, quite aggressive in the beginning of this year. So causing sudden inventory loss from here to third quarter end.

So fourth quarter, basically, most of this inventory risk will decrease to a large extent, and also that with the more reasonable growth rate expectation that we're able to continue to expand our product gross margin. So -- and combined with the leveraging on our operational efficiency in the fourth quarter, so we are expecting high year-over-year growth rate and gross margin.

We expect that we'll continue to make effort on this gross margin improvement. So, going forward we hope we can deliver a very positive trend on the gross margin, until 2018. That's our plan on the breakeven.

Okay, great.

Thank you.

Thanks Conor.

Alvin Jiang, Deutsche Bank.

Hello management. This is [Marima] on behalf of Alvin Jiang. Thank you for taking our questions. So we have around three questions here.

The first question is on new business. So can we get some updates on the [Fung Jia Xi] and the financial services business?

The second question is, as we see the traffic of Tuniu is ramping up very rapidly, so what is average cost for each new customer Tuniu acquires?

Our last question is on the offline service centers. So what is number of service centers in 3Q, and is there any guidance of service center expansion in 4Q or 2017? Thank you.

(Spoken in Chinese).

Sorry?

(Spoken in Chinese).

[Tifong], which is our B2B distribution platform that we're starting from end of last year. Now we're covering about 10,000 customers on the business side that we're expecting to cover -- it's going to extend to about 30,000 coverage.

Currently the team is about 200 people, and we have covered mostly -- first tier, second tier, third tier cities that we're expecting to expand our coverage into the fourth tier and fifth tier cities.

The rationale is really to leverage our product capability to sell to vast network of the current offline retail stores. That's the answer on Tifong.

(Spoken in Chinese).

Now we continue to expand into the supply chain financing that we see more and more about. Currently we have about 16,000 suppliers. We see more and more our suppliers are utilizing our facility, our supply-chain management -- sorry, supply-chain financing.

On the consumer financing that will further utilize our network of 40 million members. Many of those after evaluation will start to give them credit, and we also extend our service to some of these business travelers. Currently, this business is growing, but not very sizeable right now, but were expecting this will continue to grow at a very high growth rate.

And was your second -- sorry. The second question is the customer acquisition costs, right?

Yes. What is the average cost for acquiring each new customer for Tuniu?

Yes, we have a large, diversified client base such as clients buying train tickets, airline tickets and hotel bookings. But if we just calculate that the package tour customer acquisition has -- since we have a decreasing -- the higher spending on most of the offline advertisement that we were able to decrease new customer acquisition from before -- in the previous summer quarter was RMB200-something to even RMB280, more or less, per customer, and decreased to, right now, about RMB140 per customer.

We're expecting to continue to trend down. Our target is the -- to (inaudible) the sales and marketing expenses as a percentage of the package tour GMV from previously 8% to 9% to eventually about 3% to 4%. So in that case that customer acquisition cost would drop below RMB100.

Our next question comes from Monica Chen --

Sorry, let me answer. We still have a third question.

(Spoken in Chinese).

Right. Currently, by the end of the quarter we have about 180 regional service centers. We are evaluating their performance, based on ROI. We might close -- in the fourth quarter we are closing down some of these lower-ROI places, replacing with some of the higher ROI locations. So third quarter we have 180, similar to second quarter.

Okay, thank you. Next please.

Monica Chen, Credit Suisse.

Hi management, Yu, Yan, Yang and Maria. Thank you for taking my questions. I have two questions here.

The first question is regarding the competitive landscape. So we actually see Ctrip and Qunar, they consolidated their online treasury business in this month, and I think they said they want to focus on the online treasury travel segment. Also, Alibaba's Alitrip is also doing good, and wants to focus more on online travel.

So I just want to understand, given we -- we currently already have the leadership in online leisure travel, but how do management see the potential competition level going forward, especially when we see these potential challengers? They are entering our market and what is our strategy to keep our main strengths and keep our leading position in the market?

Thank you. And then I have a follow-up question.

(Spoken in Chinese).

Right. In terms of the online retail sale, our retail market that -- for the last 10 years that Tuniu has made an effort to become the leader, number one in this area, and we believe we'll continue to be the leader and continue to strengthen our market leadership.

In terms of the product side that, right now, currently actually we are facing consumer demand upgrading. Lots of consumers are demanding a better product. So how to differentiate on the product side, that is our main effort.

Going forward, that we would continue to do our own product, better service, better selections, and also pay attention to customers' feedback that we want to differentiate our product on the product side.

So for the last 10 years, we have established our market leadership through our branding, our membership system, our infrastructure, technology and our service center system that has created high entry barriers. We believe that our next efforts that strengthen on the product side, to make a better product, better service to our customers, to differentiate ourselves, will continue to support our growth going forward with our peers. Thank you.

Okay, thank you very much. Then I have a second question. So management mentioned we actually [refuel] our marketing spends this quarter, and going forward we will focus on the channels with higher ROI, right?

So I understand we used to do the branding through some TV programs, and we seem to have stopped doing that. So I just want to understand a little bit more on the channels with higher ROI. So what kind of channels, potentially, are we targeting, and what's the strategy or the measures we have to really ensure the efficiency or the effectiveness of this marketing tool that's really delivering a high ROI? Thank you.

(Spoken in Chinese).

Right. Our internal systems allow us to track ROI on each channel we have spent money on. Online channels, you know, we have using hundreds of different online channels.

In the past, when we were pushing a very high growth rate, of course we spent a lot of our marketing dollars, and on the other side that there were also contain many of the sales channels that ROI is not so efficient. So we start to streamline our marketing effort, and focused on higher-ROI channels, that we have a system to track that.

On the other side, there are many ways to enhance the marketing efficiency -- marketing dollar efficiency, such as saying we will focus on our members. We have a lot of members, you know? Many register as members, or they have visited our website but not consumed yet.

We have these records, through our big-data data mining that will be able to have a more focused targeting on these members, and we will enhance this conversion rate for both our old customers as well as the visitors that have registered with us but not spent money with us. We'll continue to convert them into our customers.

So, as demonstrated by the percentage of GMV contributed by old customers continued to increase. So this quarter, it has increased to about 45.7% of the GMV contributed by old customers, compared to one year ago, was only 37.2%.

So these are a quite efficient way to enhance the overall marketing balance. So we'll continue to focus on more higher-ROI channels and methods to make our marketing data more efficient. Thank you.

Thank you.

(Spoken in Chinese).

Alex, commenting on the competition.

(Spoken in Chinese).

We think that in terms of competition, actually would be more and more like rational in -- compared to in the past where lots and lots of companies are competing purely on pricing.

By now, each larger player has its own positioning, such as us on the focus on leisure travel online, and our peers have their own different position. I think that changing to focus from purely price competition to more focusing on the margin improvement is what we've seen.

We also demonstrate ourselves that we have -- in the coming future that we will have more and more improvement on the margin side. As we implicated in our guidance for next quarter and onwards. Thank you.

Thank you. Yu, Yan, Yang. Thank you very much.

Thanks.

(Operator instructions). Wendy Huang, Macquarie.

Thank you. Firstly, about your gross profit guidance. So you're guiding next quarter's gross profit to be around RMB150 million, which suggests a sequential decline from the RMB236 million in Q3.

Was this purely due to the seasonality and also some of the incidences that you just mentioned in Thailand and Korea, et cetera? Was there any other reason leading to the pull-back in the gross profit again in Q4?

Second question is about VIP customer service team. So how many people do you have in that team right now, and what's your expansion plan? Because you mentioned that for this quarter, you actually sped up on the VIP customer team expansion. Thank you.

Yes, the fourth quarter. In terms of seasonality in our business, that we have very clear seasonality with a peak on the third quarter and the summer time. So you can see every year, the third quarter is increasing dramatically, in a big way from the second quarter, and then will fall -- falls down -- will drop to the fourth quarter.

But in terms of -- that's why it's more correct -- a more correct way to look at our business is look at year-over-year rather than quarter-over-quarter. So in terms of the gross margin, we still demonstrate -- we have indicated that the growth rate will be 85% to 95% compared to the fourth quarter last year.

The reason you say that the number is smaller than third quarter is definitely from the seasonality factor.

The VIP team, currently we have about 140, 150 people in the VIP team who are cultivating more business from our members as well as the visitors that have visited our Company. And --

Hello?

(Spoken in Chinese).

Yes. We don't have a plan to expand that too much, and we're focusing more on enhancing the efficiency improvement on the VIP team. Yes, (multiple speakers) 1000-plus people.

(Spoken in Chinese).

Yes, after one year of building of the VIP team, that sales team, we have more and more clear data model, that how to make it more efficient. So going forward, the focus will be to continue to improve the efficiency of the VIP team members, yes.

Okay, thank you.

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

Once again thank you for joining us today. Please don't 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.

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