Tuniu Corp (TOUR) 2016 Q4 法說會逐字稿

Hello and thank you for standing by for Tuniu's 2016 fourth quarter and full year earnings conference call.

(Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time. (Operator Instructions).

I would now like to turn the meeting over to your host for today's conference call, General Manager of Investor Relations and Strategic Investment, Maria.

Thank you and welcome to our 2016 fourth quarter and full year 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 its business updates, operational highlights and financial performance for the fourth quarter and full year 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 for non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that, unless otherwise stated, all figures mentioned during 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.

Thank you, Maria. Good day everyone. Welcome to our 2016 fourth quarter and full year earnings conference call.

We had a solid fourth quarter performance with total travel GMV and net revenue growing 38.7% and 11.2% year-over-year, respectively. Notably, gross profit increased 131%, while gross margin improved to 8.7% during the fourth quarter.

Our operation continued to benefit from our position as the number one player in China's online leisure travel market. Our strategy of leveraging our brand is starting to benefit Tuniu's new pricing power as we expand our position both horizontally and vertically in the travel supply chain.

With better product variety and improved customer service, GMV for our repeat customers increased 53.4% year-over-year during the quarter. Contribution from repeat customers increased to a historic high of 54.4% of total travel GMV in the fourth quarter, up from 46.6% during the same period last year.

In 2016, Tuniu reached many milestones. Total travel GMV for the year surpassed RMB20 billion, an increase of 66% year-over-year. During the year we successfully diversified our product offering as other revenue grew more than 200% year-over-year. Due to the increased diversification of offerings and improved procurement capabilities, our gross margins have improved from 4.8% in 2015 to 5.9% in 2016.

In order to further scale our products and service, Tuniu continues to expand its coverage of departing cities within China. During 2016, the number of cities covered by our product increased by additional 50 cities, to 290 cities in total. We are also pleased to see strong contribution from lower-tier cities as it reflects the coverage and reputation of our brand. GMV from lower-tier cities reached more than 51% of our total GMV for 2016. The balance in contribution between first and the lower-tier cities reflect the growing demand for travel throughout China.

Overall in 2016 we have strengthened our position as the number one player in China's online leisure travel market and better positioned ourselves to capture future demand.

Now I would like to give an update on our key strategies in greater detail. I will first start off with an update on our packaged tour business.

We were able to strengthen our position in the supply chain, expand our offerings of travel-related products, and develop an ecosystem for travel. Our ecosystem connects our customers with travel products and services from around the world. This gives our customers the ability to create high quality and cost efficiency using Tuniu.

To meet the increasingly complex demand of customers and improve the efficiency of our operations, we began to offer various tour products that are formed at the destination. These products are highly scalable and allow Tuniu to efficiently gather travelers from various departing cities to form tour groups at their chosen destinations. We expect these destinations based tours to continue serving as a driver for growth.

Data and technology continues to be a central part of Tuniu. With 10 years of experience providing travel services in China, Tuniu has one of the most comprehensive sets of data on Chinese travelers. This data on user preference and behavior has benefited Tuniu. By leveraging historic data along with big data analytics, our dynamic packaging system can use smart recommendations to help travelers bundle various products during the booking process. When customers begin their trip, we are also able to recommend products based on the traveler's location and status. As a result, we've been able to cross-sell our products and increase our customer conversion rate and stickiness.

In order to increase the efficiency of our business, we continued to implement new systems and technologies that reduce the processing time of each product. We have been able to increase the level of automation for customer service to maximize the utilization rate of our staff. The improvement of our technology and better utilization of big data are both keys to Tuniu's future.

Transportation ticketing and hotel booking maintained their growth momentum during the fourth quarter as we continued to invest in their growth. GMV from transportation ticketing grew more than 300% during the fourth quarter, while hotel booking grew more than 100% in the same period. We will continue to work closely with both airline companies and the hotel groups, improving our ability to procure their products. As we continue to invest and develop their operations in 2017, we expect their growth rates to maintain strong.

Now I would like to talk about branding. One of Tuniu's key assets is its brand recognition in China. We have dedicated years of investment to achieve this and we believe our brand is well-known enough to support our growth without significant additional investment. During the fourth quarter, we continued to closely monitor our branding expenses and focus on marketing channels with higher ROI. This strategy we are continuing to 2017, to further decrease sales and marketing expenses as a percentage of GMV.

Looking ahead to 2017, we will continue to improve the quality of our products and services to meet the evolving demand of our customers. By focusing on our core products and services, we expect an improvement to the repurchase rate and stickiness to the Tuniu platform.

Even though China is already one of the world's largest travel market, key factors such as the favorable visa policies and higher household disposable income will unlock China's full potential. We believe Tuniu, as the leading player in China's online leisure travel market, is well-positioned to take advantage of the growing demand for travel in the future.

Overall this quarter, our gross margin continued to improve, while our operating expenses are being more strictly controlled. This is a positive step for us. In 2017, we expect to continue making meaningful improvements to our profitability. New systems and technology will be implemented during the year to increase the efficiency of our Company. As we continue to benefit from economies of scale and leverage our previous brand investments, we expect our operational efficiency to improve significantly.

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

Thank you, Donald, and hello everyone. Before we discuss the financial highlights, I would like to bring to your attention that the new revenue standard ASC 606, Revenue from Contracts and Customers, will be effective beginning January 1, 2018. And adoption, as the original effective date of January 1, 2017 is permitted, we have decided to adopt ASC 606 starting from January 1, 2017, using the full retrospective method.

And also since the beginning of fiscal year 2017, we have implemented a tour product branding strategy which is aimed to help our suppliers to build up their tour product brands by providing more information about the tour on our platform, including the name of the tour operators, product satisfaction rate, and product brand satisfaction rate. Accordingly, our role in the organized tour arrangement has changed from a principal into an agent.

As the result of adopting the new accounting standard and the change of the Company's role, revenue from our organized tours will be mainly recognized on a net basis starting from January 1, 2017.

I will now walk you through our fourth quarter and full year 2016 financial results in greater detail. Please not 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 fourth quarter of 2016. Total travel GMV for the fourth quarter increased by 38.7% to RMB4.5 billion. Packaged tour gross bookings increased by 13.6% year-over-year to RMB3 billion, including 65.1% from outbound tours.

Net revenues were RMB2.1 billion, representing an 11.2% year-over-year growth. Revenue from organized tour substantially all of which are recognized on a gross basis, were up 8% year-over-year to RMB1.9 billion for the fourth quarter. The increase was primarily due to the growth in demand for travel to certain international destinations such as Japan, South Korea, Middle East, Africa and North America.

Revenues from self-guided tours, which are recognized on a net basis, were up 8.4% year-over-year to RMB56.6 million. The increase was primarily due to the growth in travel to Maldives, Europe, North America, Middle East, Africa, and domestic destinations.

Other revenues were up 115.6% year-over-year to RMB102 million. The increase was primarily due to a rise in revenue generated from financial services and commission fees received from other travel-related products such as transportation ticket and accommodation reservations.

Gross margin for the fourth quarter 2016 was 8.7%, compared to 4.2% in the same period in 2015. The increase in gross margin was primarily due to the decline in procurement cost as a percentage of net revenues, resulting from economies of scale, optimization of our supply chain management, and the increased contribution from other revenues as a result of category expansion.

Operating expenses were RMB765.4 million, up 19.4% year-over-year. Research and product development expenses were RMB170.1 million, up 60.5% year-over-year. The increase was primarily due to the investment for implementation of additional product categories such as transportation ticketing, accommodation reservation and financial services.

Sales and marketing expenses were RMB400.8 million, representing a year-over-year increase of 1.5% and a quarter-over-quarter decrease of 19.8%. The quarter-over-quarter decrease was primarily due to the decline in brand promotions and preference for marketing channels with higher ROI.

General and administrative expenses were RMB205.5 million, up 40.2% year-over-year. The increase was primarily due to an increase in headcount as a result of our product category expansion and expenses associated with our regional centers.

Net loss attributable to original shareholders was RMB554.4 million in the fourth quarter of 2016.

As of December 31, 2016, the Company had cash and cash equivalent, restricted cash, and short-term investments of RMB4.8 billion. In the fourth quarter, excluding the impact of the prepayment to HNA Tourism, cash conversion cycle was negative 29 days, compared to negative 31 days in the corresponding period last year. Capital expenditures for the fourth quarter of this year were RMB12.8 million.

Now, moving to our full year 2016 results. Total travel GMV for 2016 increased by 66% to RMB20 billion. Packaged tour gross booking for 2016 increased by 38.4% year-over-year to RMB14.7 billion, including 53.8% from outbound tours.

In 2016, net revenues were RMB10.5 billion, representing 38% year-over-year growth. Revenues from organized tours, substantially all of which are recognized on a gross basis, were up 34.9% year-over-year to RMB9.9 billion, and accounted for 94.1% of our total net revenues in 2016. The increase was primarily due to the growth in demand for travel to certain international destinations such as Japan, South Korea, Middle East, Africa, North America, and certain [vacational] islands.

Revenues from self-guided tours, which are recognized on a net basis, were up 30.5% year-over-year to RMB253.3 million and accounted for 2.4% of our total net revenues. The increase was primarily due to the growth in travel to Japan, South Korea, Southeast Asia, Middle East, Africa, North Africa -- North America, and domestic destinations.

Other revenues were up 201.9% year-over-year to RMB385.6 million and accounted for 3.7% of the 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.

Gross margin was 5.9% in 2016, compared to 4.8% in 2015. The increase in gross margin was primarily due to the decline in procurement cost as percentage of net revenues resulting from economies of scale and optimization of our supply chain management, and the increased contribution from other revenues as a result of our category expansion.

Operating expenses were RMB3.1 billion in 2016, up 72.3% year-over-year. Research and product development expenses were RMB601.4 million in 2016, up 101.7% year-over-year. The increase was primarily due to investment for the implementation of additional product categories, improvement of online technology, and the rise in technology and product development personnel-related expenses.

Sales and marketing expenses were RMB1.9 billion in 2016, representing a year-over-year increase of 65.4%. The year-over-year increase was primarily due to the advertisement of our mobile channels, expansion of our VIP customer service teams, and amortization of acquired intangible assets from previously announced transaction with JD.com.

General and administrative expenses were RMB658.8 million in 2016, up 70.9% yea-over-year. The increase was primarily due to an increase in headcount as a result of our product category expansion and the expenses associated with our regional centers.

Net loss attributable to ordinary shareholders was RMB2.4 billion in 2016. In 2016, excluding the impact of prepayment to HNA Tourism, cash conversion cycle was negative 26 days compared to negative 30 days in last year. Capital expenditures for 2016 were RMB116.2 million.

First quarter 2017 outlook. Now let me provide revenue guidance for the first quarter of 2017. The guidance for the first quarter 2017 will be compared to non-GAAP revenues of the corresponding period in 2016, which are adjusted mainly to reflect the revenue on net basis in order to provide meaningful comparable information. For the first quarter of 2017, Tuniu expects to generate RMB440.6 million to RMB454.8 million of net revenues, which represents 55% to 60% growth year-over-year.

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. We are now ready for your questions. Operator?

We will now begin the question-and-answer session. (Operator Instructions).

The first question comes from Natalie Wu of CICC. Please go ahead.

Hi, good evening, Donald, Alex, Conor and Maria. Thanks for taking my questions. A couple of questions here.

Firstly, a housekeeping question. Can we get an update about the top destination in first quarter that contribute to the GMV? Also the GMV contribution, respectively.

And also regarding the recent Japan and Korea incidents that happened since January, so what kind of impact are you expecting from this kind of events in the first quarter?

And lastly, about your headcount plan this year. So, can management give us an update about the headcount in the fourth quarter and also the target of 2017? Is there any target regarding operational loss cut this year? Thank you.

Thank you, Natalie. I don't really -- is your first question regarding to the top destinations contribution to GMV?

Yes.

Right. The top destinations still in terms of the percentage were still like Korea and Japan, Europe about the same. You know, for European region, year-over-year actually fourth quarter last year was decreasing from previous year but still occupy -- compose about 10%-11% of our total GMV, 11% and then Korea and Japan about 10%. Southeast Asia about 10% and followed by many others, Maldives about 5% right. These are the top destinations.

And the recent incident in Korea and Japan, for Korea actually has certain impact in kind of end of last year, the more severe impact and beginning of this year. Gradually, we have seen that kind of slow recovery from Korea.

So and the current President was kind of in the move of being replaced. So if no other incident happens in Korea, we expect Korea might recover slowly. And the event happened in Japan regarding to the radiation, so it has certain impact but at this point of time, the impact (technical difficulty) to be seen. Yes, we are, we are still watching the changes.

So and Europe actually for this quarter, I mean talking about fourth quarter last year was kind of decreasing from 2015, but the current trend in Europe actually is very promising. We have seen a good recovery from European region and we expect for full year 2017, Europe should do better.

In terms of the total headcount, we have decrease from about 9200 in third quarter to current about 8200 people by end of 2016. And we continue to decrease the number of staff. As of now, the total number of our people has further decreased to about slightly above 7,000. Yes, so we should see pretty substantial efficiency improvement in terms of the operation. Thank you.

Very helpful. Thanks, Conor.

Great.

The next question comes from Amanda Chen of Morgan Stanley. Please go ahead.

Hi, good evening. Thanks, management, for taking my question. I have three here. So the first one is regarding the repeating customer number. I think it's quite impressive but just wondering among all your hotel and air booking customers, how much of them are your repeating customers who at least about one packaged tour product on your platform in last 12 months? This is my first question. Thank you.

(interpreted) We have seen that repeating customers as a [percentage] of the ratio has continued to increase to the current historical level high of 50 something percent and we have seen that category exchange into hotel and air ticketing actually has helped in a great deal for our customers to come back to our platform to consume. And we expect as we continue to improve the services and data mining on big data continue doing better on the category expansion that these customers will repeat coming back to Tuniu to buy product. And we are expecting the repeating customer ratio contribution will continue to increase over 2017.

Got it. Thank you.

(Spoken in Mandarin).

Amanda is asking the customer acquisition cost from our hotel booking and air ticketing and the company actually, so far we take it as a whole group and divide it by the total marketing expenses as spend.

So at this moment, we don't have a separate number for the customer acquisition cost for air ticketing and hotel booking. But overall, that's -- the hotel and air ticketing are growing very fast. So about 60% to 70% of the customer for air ticketing and hotel booking are new customer to us. Thank you.

Got it. Thank you. Very helpful. The second one is regarding the sales and marketing budget for 2017. Could you please share the breakdown of online ad spending, traffic acquisition or all the app pre installation if any? Thank you.

Total marketing spending in 2017 we are expecting will be a lot lower than 2016. We want to leverage our brand investment for the last two years. And we are quite happy about their current development that we are cutting marketing budget, but in the meantime we see that the growth is still quite robust.

In terms of the allocation, we spend mostly online and then trim down the offline advertising. and on the online portion, about 70% plus will be spent on the mobile related marketing channel, the remaining 30% spend on the PC side. Thank you.

Thank you. Sorry if I may have some housekeeping questions as well. So first is the quarterly take rate of different segments in 2016 and also how do you see that trend in 2017? And regarding the other revenue, could you please give us the mix I mean for the breakdown of the other revenue items? Thank you.

As we demonstrated, our gross profit has increased in triple digit in fourth quarter last year and in the fourth quarter 2016, the take rate has increased quite substantially, organized tour to about 7% to 8% and self-guided tour to 6% to 7% respectively.

These are increased more than 1.5% from the previous quarter and even more year-over-year. So we expect that margin will continue to expand in 2017. And for other revenue in that, the largest component coming out from like insurance commission and then followed by some financial products commission as well as air-ticketing, hotel booking and tour attraction ticket and others.

Got it, thank you very much, very helpful.

Yes.

The next question comes from Juan Lin of 86Research. Please go ahead.

Hi. Good evening, Donald, Alex, Conor, and Maria. Thank you for taking my questions.

I have two questions. The first one is on your business strategy. I am wondering what is our strategy for 2017 in terms of destination focus, departure city selection, improvement plan, and product mix and as already talked about, marketing plan?

Also I would like to elaborate a little bit on the total number of (technical difficulty) and what is the plan or targeted number of service centers for 2017? This is the first question.

And the second question is that (technical difficulty) kind of aggressively, I am wondering which department you are mainly focusing on headcount cut? And which business lines will see the most top line impact from headcount reduction and which destinations will be impacted most in terms of GMV growth? Thank you.

(interpreted) The two major strategies for this year that we want to continue expand our two networks. One is our sales network that we have extensive sales network and we will continue -- we have a big data, we want to use more like technology for more accurate targeted marketing and data mining on big data and then better service overall to enhance the conversion ratio. For example right now, our home traffic to order, the ratio has increased, previous year about 3% to currently about 6% to 7%.

And the other strategy to continue to enhance the repeated ratio of the old customers.

And the other network is our supply chain network that we again -- through our economy scale that we have extensive network on the supply chain and we will continue to, as we demonstrated in the fourth quarter, that we are able to lower down our procurement cost to enhance the take rate especially we will strengthen our destination procurement capability to enhance more variety of our product offering and through our dynamic packaging, that once we procure a destination, we can -- we'll be able to sell to customers nationwide.

So through this strengthen of the sales network and supply chain network, hopefully we can continue to be more efficient even though we have kind of headcount decrease, the headcount decrease, so far, we don't really feel that it has any significant impact.

On the other side, we feel that through this streamline of operation that it will further increase enhance our operational efficiency.

(Multiple Speakers)

Thank you, Donald.

May I ask a follow up question? There are procurement and the inventory risk. You mentioned about procurement at a destination and I'm wondering whether our long-term direct procurement target still remains at 50% above for the total business and how do you plan to manage and control inventory risks going forward? Thank you.

(interpreted) When I mentioned about the procurement from the destination level, it doesn't mean will increase the inventory risk. We strengthened our procurement capability in the destination places mostly that doesn't really involve a high level of inventory risk, mostly are kind of inventory risk, very low inventory risk. In terms of the direct procurement, we feel that will gradually increase, our target has been like 2000 -- like two year time, reaching about 50%.

Currently, we see about 30 something percent from the direct procurement. Thank you.

Thank you, very helpful.

The next question comes from Eileen Deng of Deutsche Bank. Please go ahead.

Hi. Thank you management for taking my question. My first question is regarding our revenue growth trajectory. We see a clear slow down as far as -- in the fourth quarter revenue growth and a strong rebound according to our guidance in the first quarter. So just wondered what drives this trend, the strong up and down trend?

And my second question is regarding our reporting revenue basis. What leads us to decide to change the reporting from gross to net basis. Thank you.

In the fourth quarter last year, again, even though reported net revenue is only 11% plus, but the total GMV is close to 40%. As we mentioned in previous several times that in 2016, before 2017, the US GAAP reported revenue mainly representing organized tours' growth rate as we've seen that our gross rate coming out from organized tour and other more dynamic type of packaged tour that grossed higher than organized tour.

So in 2016 and previous reporting method doesn't really reflect the Company's real growth momentum. And as we explained and written in the earnings release in 2018, there will be a new GAAP, ASC 606, that regarding to revenue recognition and early adoption is permitted.

So and also that we have the need, as Donald mentioned earlier, to -- we have launched a product branding strategy that will enable our supplier to demonstrate their name in our product. And that would actually give more responsibility and pressure to our supplier to provide a better product and services to our customers.

In our product demonstration, right now, if you get into any of our products, we will show the suppliers name or like local tour operators' name that and including will also show the level of satisfaction rate, level of our product satisfaction rates. So therefore, customers will have more transparency and better understanding about the product.

So by doing that, the Company's role in past was like principal role now changed into -- from this year, beginning of this year to an agency role. Therefore, to cope with the new GAAP and as well as the branding, part of the branding strategy we started using order net basis substantially net basis for the organized tour.

And so therefore that, going forward, revenue reporting number will be more in line with [OTAPS] and so that investors will have a more clear view about our revenue, about all the expenses as a percentage of revenues ratio that will be kind of in the same format and apple-to-apple compared to our peers.

Thank you.

Thank you.

(Operator Instructions)

The next question comes from Wendy Huang of Macquarie. Please go ahead.

Hi. This is Ivy asking on behalf of Wendy.

So I have several questions here. One is regarding our GMV gross, I am wondering if management can give us guidance with our target GMV gross for 2016? And especially in the longer term and over the next three years.

And my second question is regarding our margin and profitability. So are we still targeting to reach breakeven like non-GAAP breakeven by 2018? And, if so, what's our margin target for 2017?

And I also have a housekeeping question regarding the gap between the revenue generated for organized tours and the number of trips. So the year-over-year growth and the gap between the number of trip and the revenue actually widened a bit in the fourth quarter. So I am wondering if that's because there are more trips coming from the lower ASP destination or is there any other reasons for this gap. That's my questions. Thank you.

Thank you, Wendy.

On the GMV, our gross rate, our expectation, is we will continue to grow faster than among our peers; we will grow faster than the industry average. In the meantime, have a greatly improved operational efficiency.

As we have demonstrated, we have grown substantially on our gross margin. And in terms of the take rate that in the fourth quarter we have as I mentioned earlier, we have improved quite substantially in fourth quarter last year and we expect it will continue to improve for this year.

There are several reasons that -- first we have a better management -- sorry better inventory control and management system and also we are using our technology that we have a differentiation pricing system with a different product, different client profile, we have a different pricing strategy compared to in the past like universal pricing markup strategy.

So we have developed a more sophisticated system to manage better using different pricing to ends up a better result and better margin. And, yes, you are right, we are still target for non GAAP breakeven in 2018 and we are working towards to it.

We should see the great improvement on the P&L side this year, currently, we have gave guidance first quarter growth rate 55% to 60%, and in the meantime we should see quite substantial loss shrinking in first quarter this year. And the fourth quarter, you are right that the -- on the organized tour, ASP has decreased more compared to the previous year.

One of the major reason is as I mentioned, that first quarter in the European region still have a pretty big impact, therefore European business have a year-over-year decrease, that has a very substantial impact as you know, that Europe has one of the highest ASP. So instead of going to Europe many other people go to like lower ASP region such as Asia and others. That's the reason for the ASP drop.

But again that we've seen, very happy to see the positive recovery from European business so far this year. Thank you.

Thank you. Very helpful. I just have a quick question. So what's the outbound percentage that we mentioned in our prepared remarks? The Outbound percentage.

Yes, for fourth quarter about 65% of our GMV coming out from outbound.

Okay, thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Conor Yang, CFO, 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. Bye-bye.

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

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.