Tuniu Corp (TOUR) 2017 Q1 法說會逐字稿

Hello, and thank you for standing by, and welcome to Tuniu's 2017 First Quarter 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 call, Head of Investor Relations and Strategic Investment, Maria.

Thank you, and welcome to our 2017 First Quarter 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, operational highlights and financial performance for the first quarter of 2017.

Before we continue, I refer you to our safe harbor statements in the earnings press release, which applies to this call, as we will make forward-looking statements. Also this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most 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, Chairman and Chief Executive Officer, Donald Yu.

Thank you, Maria. Good day, everyone. Welcome to our 2017 First Quarter Earnings Conference Call. We are pleased to report a strong first quarter to start off 2017. Our net revenues increased by over 60% year-over-year while gross profit increased by over 170% year-over-year. Also during the quarter, we further improved our #1 position in the online leisure travel market in China. Our focus on improving operational efficiencies and realizing economies of scale has helped us significantly reduce our net loss both on an absolute basis and as a percentage of revenue.

As we continue to improve our gross margin while controlling cost, our path to profitability becomes increasingly clear. China's leisure travel market continued to grow at a healthy pace during the first quarter of 2017. The growth rate of the travel industry continues to outpace the growth of the overall economy as the idea of traveling becomes increasingly widespread in China's households and develops as a user habit. We are seeing solid growth across all demographics as each generation of traveler is finding their own customized style of travel. Young adult generations are traveling more and more with friends and coworkers, while older generations are traveling more frequently with their families.

Based on third-party reports, Tuniu continues to lead the online travel market in China during the first quarter of 2017 with a market share of approximately 27%, consistently outpacing the growth rate of our industry peers as well as the overall growth of the industry. Starting in the second half of 2016, we have made several improvements to the efficiency of our business. We are pleased with the progress we have made during the past quarters. Significant improvement to each step of our operations has contributed to higher margins and better control of our expenses. Additional improvements will continue to be implemented throughout 2017 to further strengthen our efficiency and to support growth.

Now I would like to give an update on our key strategies for 2017 in greater detail. In 2017, Tuniu will primarily focus on its core operation and innovation. Starting with customer service, we have a number of exciting features that will be fully implemented this year with the goal to further improve customer experience. Our core initiative to improving customer experience on Tuniu will be the newly implemented one-stop consultant feature. This feature will further streamline our customer service by pairing our customers with one dedicated customer service representative whenever they book and travel with Tuniu.

The customer service representative will be in charge of helping the customer plan and book their trip and resolve questions that may arise before, during and after their trip. This will greatly enhance the customer experience as it allows us our customer service to closely work with our customer during a period of generally 2 to 4 weeks, creating a more personalized experience for our customers. Our one-stop customer service feature will also dramatically reduce the average time required to help with each booking as the customer service representative will be fully aware of the customer's situation while handling customer inquiries.

Next, I would like to talk about our strategies for improving the level of customization and the quality of our travel products. One of our key initiatives this year is the fragmentation and the restructuring of travel resources. We will break down every travel product to its most granular element. Our system will then recognize these elements into -- our system will then reorganize these elements into bookable products and allow the customers to be able to fully customize trips in terms of every perspective.

For example, for services that were previously only available to packaged tour products, we can now break down the individual elements, such as the bus ride to a tour site or [stop-overs] in a hotel and fit it into fully customized trips. This feature will greatly enhance the level of customization for our customers and help them assemble their perfect trip. This will also increase the utilization rates of our product resources by making each element bookable and will give customers the ability to book various complementary services with higher price transparency.

On the product design and the procurement side, Tuniu has also been making strong progress. While our packaged tour products formed as destinations continue to gain traction with our customers, we will also continue to make improvements to our direct procurement capabilities. Previously, our direct procurement allowed us to directly procure products from local tour operators and would bundle it together with transportation and accommodation. Now we are taking a further step in enhancing our direct procurement by acting as the local tour operator.

For certain domestic and international products, we have already hired the tour guide, booked the tour buses and designed the schedule of the trip. We leveraged our years of experience and understanding of customer preference to create the most suitable products for each region. By serving as the local tour operator, we have a stronger control over the quality of our products and improve the price competitiveness of our packages.

Lastly, I would like to talk about our technology. Big data analytics continue to be used across our operations. We have strengthened our usage of big data by pushing products to our customers based on their location and their historical preferences. On the sales and marketing side, we have increased the efficiency of our company campaigns by leveraging our data from previous campaigns to identify channels with high return on investment. Using this data, we have reallocated our sales and marketing budget to primarily focus on these channels with high returns to maximize our efficiency.

Based on our recent performance, we have been successful in maintaining our growth momentum in recent quarters, even while reducing our sales and marketing expenses. This is a positive for us because it reflects our previous investments into brand has been successful and we are able to leverage that brand as an asset for sustained growth in the future. Also in 2017, as we improve and upgrade our internal (inaudible) systems to increase the level of automation, we will be able to more efficiently grow our business into scale while controlling operation costs.

Overall, we will implement new features in customer service, product innovation and technology on Tuniu in 2017. These features will continue to improve the quality of our products and services to meet the evolving demands of customers. By focusing on our core products and services, we expect to continue strengthening our leading position in the online leisure travel market in China.

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

Thank you, Donald, and hello, everyone. Before we begin with the financial highlights, I would like the first to go over some changes to our accounting standards. Starting from January 1, 2017, we have adopted the new ASC 606 accounting standard by applying the full retrospective method. Since our role changed from a principal to an agent, under the new standard, substantially all of our revenues from the organized tours, which were previously recognized on a gross basis, changed to being recognized on a net basis. Also the relevant standard changed the timing of revenue recognition of packaged tour services from the tour end to the departing day of the tour.

To increase the comparabilities of operating results and aid investors to better understand our business performance and operating trends, we have provided the comparison of revenues, cost of revenues and gross profit for the first quarter of 2017 with relevant non-GAAP adjusted data for corresponding period in 2016 in our earnings release. Please also note that starting from this quarter, our packaged tour and other revenues reflect a negative impact of the adoption of the VAT tax of approximately 5% to 10%.

Now I'll walk you through our first quarter 2017 financial results in greater detail. Please note that all that monetary amounts are in RMB, unless otherwise stated. You can find the U.S. dollar equivalent of the numbers in our earnings release.

Net revenue was RMB 456 million, representing 60% year-over-year growth compared to non-GAAP net revenues from the corresponding period in 2017. Revenues from packaged tours, substantially all of which are recognized on a net basis, were up 53% year-over-year on a non-GAAP basis to RMB 355.9 million and accounted for 78% of our total net revenues for the quarter. The increase was primarily due to the growth of organized tours and self-guided tours. Other revenues were up 52% year-over-year on a non-GAAP basis to RMB 100 million and accounted for 22% of our total net revenues. The increase was primarily due to commission fees received from other travel-related products, such as transportation ticketing and accommodation reservation. Gross profit was up 171% year-over-year on a non-GAAP basis to RMB 251.3 million for the first quarter of 2017. The increase in gross profit was primary due to the economies of scale and optimization of our supply chain management.

Operating expenses for the first quarter of 2017 were RMB 559.3 million, down 14% year-over-year. Excluding share-based compensation and amortization of acquired intangible assets, non-GAAP operating expenses were RMB 498.5 million, representing a year-over-year decrease of 16%. Research and product development expenses for the first quarter of 2017 were RMB 159.4 million, up 31% year-over-year. The increase was primarily due to investments for the implementation of additional product categories, such as transportation ticketing, accommodation reservation and financial services, improvement of online technology. Research and product development expenses as a percentage of net revenues were 35% in the first quarter of 2017, decreasing from 43% as a percentage of non-GAAP net revenues in the corresponding period in 2016. The decrease was primarily due to an increase in our efficiency resulting from economies of scale and implementation of new systems.

Sales and marketing expenses for the first quarter of 2017 were RMB 253.8 million, down 24% year-over-year. Sales and marketing expenses as a percentage of net revenues were 56% in the first quarter of 2017, decreasing from 135% as a percentage of non-GAAP net revenues in the corresponding period in 2016. The decrease was primarily due to the decline in brand promotion and the preference for marketing channels with higher ROI. General and administrative expenses were RMB 155.3 million in the first quarter of 2017, up 5% year-over-year. The increase was primarily due to the increase in associated expenses as a result of our business and product category expansion. And general and administrative expenses as a percentage of net revenue were 33% in the first quarter of 2017, decreasing from 51% as a percentage of non-GAAP net revenues in the corresponding period in 2016. The decrease was primarily due to the increase in the efficiency resulting from economies of scale and optimization of administrative personnel.

Net loss attributable to ordinary shareholders was RMB 288.2 million in the first quarter of 2017. Non-GAAP net loss attributable to ordinary shareholders, which excluded share-based compensation expenses and amortization of acquired intangible assets, was RMB 227.1 million in the first quarter of 2017. As of March 31, 2017, the company has cash and cash equivalents, restricted cash and short-term investments of RMB 4.2 billion. In the first quarter, excluding the impact of prepayment to HNA Tourism, cash conversion cycle was negative 20 days compared to negative 26 days in the corresponding period last year. Capital expenditure for the first quarter of this year was RMB 14.7 million.

Second quarter 2017 outlook. Now let me provide the top line guidance for the second quarter of 2017. For the second quarter of 2017, Tuniu expects to generate RMB 442.7 million to RMB 457.6 million of net revenues, which represents 48% to 53% growth year-over-year compared to non-GAAP net revenues in the corresponding period in 2016. Please note that this forecast reflects Tuniu's current and preliminary view of the industry and its operations, which is subject to change.

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

(Operator Instructions) And the first questioner today is going to be Natalie Wu with CICC.

So my question is regarding the GMV growth. So can management give us some color on the GMV growth in the first quarter of 2017? And what's the expectation for GMV growth of packaged tours and self-guided tours this year? What kind of scale do you expect your ticketing and hotel business GMV can grow into this year and also for next year? And one more follow-up question is that given that you have already reduced a lot of sales and marketing expenses, especially those offline branding-related sales and marketing expenses, is there any kind of side effect you have been witnessed in terms of user activities as well as new customer acquisitions?

Thank you, Natalie. Well, our overall GMV this quarter is about 30% overall. And we cannot separate the packaged tours and everything since a lot of our clients actually, they are using our ticketing and hotel booking for their leisure travel. So that's the kind of situation for this first quarter. And our focus really -- our top priority is really to breakeven in the near term. We hope that as we demonstrate that, we continue to increase the gross margin and decrease the operating expenses. And hopefully that -- as the first quarter demonstrated, actually we have (inaudible). And this will be our priority that create a clear path to profitability. And we want to achieve the company that is being profitable for next year, do our best. So therefore, our focus will be -- priority-wise will be continue to decrease the expenses, increase operating expenses efficiency as well as increase the gross margin. And we don't really provide guidance on future GMV.

Yes, Conor. So another question is regarding the sales and marketing reduction. So obviously, you have cut the sales and marketing expenses very significantly. Just wondering if there are any kind of side effect you have witnessed during the past month.

Yes, all right. We have invested a lot (inaudible) for the last 2.5 years. And now it's time for us to leverage these investments. As we demonstrated that our top line growth rate is very strong. And we also spent a lot of effort to increase the customer repeat ratio. Our customer repeat ratio continues to increase this quarter to about 59%. So while we decrease the absolute dollar of marketing expenses, but in fact that our customers continue to come back increasingly more. And as a percentage of the net revenue, you can see that marketing expenses has dropped a lot from previous year. And we expect this trend will continue.

And our next questioner today is going to be Alvin Jiang with Deutsche Bank.

This is Maria asking on behalf of Alvin. So we have two questions here. The first one is about the margin. So for 1Q, especially for the gross margin, we just wonder, what's the main driver of the margin improvement. And also can management share their margin outlook for 2Q and for the full year 2017? And the second question is about the financial service business. So can management share some updates on that business?

Right. Gross margin, okay, let me first talk about the product gross margin. Our take rate continued to increase. There are several major reasons that, firstly, that this year, we better managed our inventory. The first quarter last year, at the beginning of first last year, we have substantial inventory loss from areas such as Europe due to the terrorist attacks. This year, we have a lot better managing on the inventory. And also we continue to increase the direct procurement percentage right now to about 40%. And more importantly, not only replacing -- the direct procurement not only replace the wholesale packaged hotel but going to the destination, we also, through further integration in many popular areas like currently in about 7 largest destinations, we even replaced the local tour operators' job, gone more direct to the resources for our overall package. So that also enhanced the overall profitability of our product. And also as we mentioned last quarter that we have enhanced our system, now we can price more smartly according to our big data analysis and the popularity of each (inaudible). So now we use a different (inaudible), we have different pricing strategy that, in fact, in turn -- turning to the higher product gross margin. And also that's due to economy of scale. As we continue to increase more, we get more rebates from our supplier, we have a lower procurement cost. Also this year that we have, in many overseas destinations, we have increased our product sourcing capability in areas such as Europe, such as Southeast Asia, such as Japan, to further integrate on the value supply chain. So overall, that all increased our take rate currently to about 9% more or less. And also that on the cost of revenue side that we continue to enhance the efficiency of our operations. And we -- in the quarter last year, for example, we have a lot more customer-related [perks] and especially in the regional service center. And now we make it more efficient. So that also have a positive impact on our gross margin. And are you talking about the financial product, right?

Yes.

Currently, we continue to do that as part of a service to attract more customers to our products in terms of like consumer financing, for example. We have this quarter, about RMB 80 million amount that the customer borrowed money from us, and then they go for a trip. And supply chain financing, similar amount as the previous year. And we increase our financial products, in the meantime, we want to very carefully manage our risk.

And our next questioner is going to be Tianxiao Hou with T.H. Capital.

I have several questions. I'm going to go one-by-one. The first question is about the centers you have. And in 2016/'15, you opened a lot of centers across China as part of your brand expansion or marketing efforts. And I wonder how many do you have now at the end of the year. And also next year, how many do you intend to keep? That's my first question. I will follow up with a second to Conor.

(foreign language)

The total number of regional service centers, we intend to keep a very similar number as last year. But we kind of modified the function of the regional service center. Originally, these regional service centers were all located in the middle of office [building], does not have the function of a customer position. And this year, we changed more and more, moving from the office to kind of on the street side to make it more visible for our customers. Therefore, we now enable our regional service centers to have a full function as we doing on the online function. So right now -- we have lots of branding investment in the past, but we're lapping that into our like a storefront regional service center, so customer can go there to sign. And we also assigned a regional service center sales target, so they will also have the capability to acquire customers and also to serve the customers, not only sign contracts, but (inaudible) in the middle of a trip or even after the trip. So we don't really spend incremental expenses on that, which has a modified function. And currently, we found a pretty good return on these changes.

Okay. I have two more questions. The next question is related to your operating expense. I see a significant reduction in R&D and sales and marketing in these 2 lines both year-on-year and even sequential basis. And I wonder, what's -- how much room do you have going forward to continue this kind of reduction in the absolute dollar basis? And those reductions, where did it come from? (foreign language)

(foreign language)

Right. On the operating expenses side, that's right. First quarter, we have demonstrated that we were able to increase the efficiency of these expenses to a pretty large extent compared to the first quarter of last year. Having said that, we -- actually, the highest expenses for marketing, for example, was second quarter last year. And we also increased lots of people through the second quarter of last year. As you can recall, we start to kind of start downsizing our staff on the second half of last year until now. And even through the second quarter, we have even more efficient in terms of all these personnel expenses and operating expenses. So what I'm going to say is that we have a good demonstration improving our efficiency in the first quarter, while (inaudible) the second quarter will even show this much more positive impact in terms of the overall operating efficiency increase.

I see. I have a last question. I know both JD and Ctrip are your shareholders. And now the personnel from those 2 companies become the director on the board. They have been your shareholder for a while. And I really would like to see some kind of synergistic activities between you and them. I wonder if there are any upcoming sort of cooperation down the road. That's my last question.

(foreign language)

Actually, JD and Ctrip has been our shareholder, and then (inaudible), right? And we have lots of cooperation with JD and Ctrip. JD, for example, our GMV generated from JD channel last year was kind of -- performed about 1% to 2%, and now has increased to about 5% of our GMV is from JD. So we are happy to see the development. We expect that (inaudible) we'll have more effort on this to increase the contribution percentage from JD to Tuniu. And Ctrip are still -- the change of the format, but still they are on our board. And the new board member, Tao Yang, actually he's in charge of their packaged tour product area on the leisure travel side. So with him coming onboard, there will be more cooperative projects in terms of the product or company. And definitely, we will not have any price war as some of the competitors in the market. The two companies, Ctrip and us, are very friendly and cooperate any time and we expect that will continue.

And our next questioner is going to be Evan Zhou with the Crédit Suisse group.

Questions regarding the demand side. Wondering for this year's outlook, you were talking about a roughly 30% GMV growth for first quarter. How should we think about the -- on the demand side, the outbound travel services, like industry (inaudible) like a big year or a small year? And also specifically by definition, can we have an update on the definition mix? Also any specific like strength or weaknesses around those regions?

Right. On the demand, actually outbound travel for first quarter in terms of GMV has increased to 72% of our total GMV compared to in the past, around 65%, 65%, more or less. So we have seen a pretty good rebound from outbound travel in the area like -- in our area -- in our product, like Middle East, Africa or our cruise line. Europe even it has been long time you have no growth. But first quarter, we see pretty healthy growth trend from Europe. And also in terms of GMV, our Maldives product also has a pretty good increase. And Japan, Korea, even Korea, the recent diplomatic relationship with China has kind of tensed, but a lot of customers actually switched to Japan. So as a result, we see that Japan, Korea combined are still a pretty high percentage of our total GMV. And I think that's the overall environment this quarter. In terms of outbound area, it's better than -- improving from the previous year. Evan, your voice -- I cannot hear very clearly. If I don't answer your question, can you please (inaudible)?

(Operator Instructions) And our next questioner is going to be Juan Lin with 86Research.

This is [Sisi] asking on behalf of Juan Lin. So I have one question maybe for Donald. So in your prepared remarks, you mentioned that one of our strategy this year is to move further upward along the value chain. So Tuniu, we're going to be -- we're going to act as a local tour operator. So my question is, in the meantime, we will also purchase the inventory from wholesalers. So does that mean you would create conflict of interest with those wholesalers? And how do we look at the relationship with them? And also a follow-up question related to that is, so we've seen this purchase -- direct procurement. So what's the percentage of the direct procurements from wholesaler? And what's the percentage from direct that we tend to assign to those direct to operator?

(foreign language)

(foreign language)

(foreign language)

Right. Right now, we have mostly like a merchant model that customers -- this model, there are 2 types. One is we buy from a packaged wholesaler, currently about 40 -- 60%. And the other one we do direct procurement, which is about 40% of our GMV. And the other type is we just started, we also provide a channel open to like a third-party suppliers, so like a marketplace business model. And we opened all these products to our customers. And the customer can write a comment and have a different score system for these products. So the product itself can, I think, compete in a healthy way that the better service product will have a higher score, more better comment, therefore, it will sell better. So I think that is a healthy competition. And plus we have like 1.7 million SKUs with many, many different kind of products for our customers to select. At the end of the day, the product with the better service, with better quality will stand out using our model. And so there isn't really a so-called conflict between us and our packaged wholesaler because our product actually we have somewhat kind of differentiated. We don't do exactly the same product. We will kind of modify, maybe different service vendor, different meal system to kind of differentiate ourselves versus wholesalers of our products.

This will conclude our question-and-answer session. I would like to turn the conference back over to Conor Yang, Chief Financial Officer, 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. Bye-bye.

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