Tuniu Corp (TOUR) 2017 Q3 法說會逐字稿

Good day, and welcome to the Tuniu Corporation Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mary Chen. Please go ahead.

Thank you, and welcome to our 2017 Third Quarter Earnings Conference Call. Joining me on the call today are Donald Yu, Co-Founder, Chairman and Chief Executive Officer; and Maria Xin, Chief Financial Officer. For today's agenda, management will discuss business updates, operational highlights and financial performance for the third quarter of 2017.

Before we continue, I'll 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 our reconciliations of 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, Mary. Good day, everyone. Welcome to our 2017 Third Quarter Earnings Conference Call. We are pleased to report solid results for the third quarter of 2017. Net revenues increased by 53.5% year-over-year, while gross profit increased by 73.5% year-over-year.

During the quarter, we actively improved the efficiency of our operations by focusing on technology and by leveraging our presence in the travel industry's supply chain.

Gross margins improved to 54.7% in the third quarter of 2017 compared to 48.4% during the third quarter of 2016. We also continued to optimize our expense structure by controlling branding expenses and diversifying our sales channels with off-line distribution. As a result, we generated a non-GAAP net income of CNY 40 million during the third quarter of 2017, the first profitable quarter since our listing. This quarter demonstrates Tuniu's ability to be profitable and serves as a meaningful step towards achieving long-term profitability. In the future, we expect to maintain this trend and continue unlocking value for our customers and shareholders.

On the strategy side, Tuniu continues to make exceptional progress with our core strategies of expanding our 3 networks: sales, service and technology. That means increasing our off-line sales presence, implementing our own local tour operators and improving our technology infrastructure. These strategies reflect our long-term vision of the industry and are the central part of maintaining our competitive advantage in the future.

I will now like to give an update on these 3 strategies in greater detail. As the #1 provider in China's online leisure travel industry, Tuniu has always had a strong presence online. To differentiate ourselves, we launched off-line expansion campaigns in the past 2 to 3 years to diversify our distribution channels. We opened a number of off-line service centers across China to better serve our customers. In order to further enhance these stores' efficiency, we have launched a new campaign to reposition these stores into off-line retail stores in order to better serve customers who are customers to booking trips in off-line stores. To do so, we have relocated our service centers from office buildings to retail locations with high amounts of customer traffic. By the end of 2017, we plan to have 220 of these off-line retail stores throughout China. Of the retail stores we now have in operation, operating and financial metrics have been very positive. Because we utilize a light asset model, starting investments are often earned back within 6 to 12 months of launch.

These stores also offer a number of benefits for Tuniu: First, although Tuniu is already a well-known travel brand in China, having physical off-line stores can help further promote the brand. This helps us better convert consumers who already know the Tuniu brand but have not purchased from us.

Secondly, having off-line stores significantly increases our ability to serve our customers during the planning and booking phase. Early stage shows that the acquisition cost of users through our off-line stores have been highly efficient.

Lastly, the off-line stores complete Tuniu's online to off-line ecosystem and allow us to better distribute our products. With Tuniu's online and off-line model, off-line customers have access to our full customer service and products covering all major destinations across the world.

In an era where online traffic acquisition is becoming increasingly expensive, Tuniu has found a cost-efficient way to attract and better serve our customers. As a result of the increased efficiencies of our spending, sales and marketing expenses as a percentage of net revenues were 27.9% during the third quarter of 2017 compared to 94.6% during the same period last year. The improved sales network has also allowed us to better reach out to our existing customers. In the third quarter, existing customer contribution reached approximately 60% of our GMV. Combining our growing off-line retail stores, increasing contribution from existing customers and other channels such as our B2B distribution, we have been able to continue growing at a solid rate despite the decrease in our sales and marketing expenses.

Next, I would like to talk about our service network. In 2014, Tuniu firstly introduced these direct procurement products. We sourced the best local tour operator products and bundled them together with transportation and hotels that we procure. Over the years, Tuniu has evolved its direct procurement even further. In the past year, Tuniu has launched a number of its own local tour operators in major destinations, such as Xiamen, Beijing and Tongcheng. By the end of this year, we will have our own local tour operators in 11 domestic destinations and 2 international destinations. With our own local tour operators, we have full control of the quality of the tours and allow us to leverage our years of data on customer preferences to create the ideal trip at major destinations.

These local tour operators have been very successful as user reviews and feedback have been positive. As a result of increased consumption power in China, Chinese consumers are demanding better and higher-quality products. Our expanded service network allows us to provide these higher-quality products and to capture the opportunities of this shift in the consumption trend. Also serving as a local tour operator vertically expands Tuniu's presence in the travel industry, allowing us to increase our margins.

Lastly, I want to briefly go over our strategy in technology. Tuniu has dedicated years of efforts to developing its technology infrastructure. We were one of the most -- the first companies to offer dynamic packaging of travel products. And currently, we are one of the leading players in the utilization of big data within the travel industry. Our focus on technology has allowed us to offer differentiated products, meeting every customer's needs. Products that we source at local destinations can be directly bundled with other product. For example, once we input a new local product into our system, customers can directly bundle that product into their trip no matter where they are departing from. This process of breaking down each resource into the smallest components and then allowing customers to mix and match at their own preference is crucial for capturing the future market.

For data analytics and system operations, we are making solid progress. We continue to refine our algorithm so that we can better convert both new and existing customers with precise recommendations.

On the operations side, our system has allowed our employees to be more efficient at the -- at their work site, also increasing the quality of our products and service. Compared to the same period last year, our total number of employees declined approximately 20% year-over-year. Even though we have fewer employees, our technology network has allowed Tuniu to continue serving our customers with greater efficiency and focus on products.

Overall, the strategies that we have implemented in the past several years are starting to benefit our operations and financials. As we continue to execute our core strategies and optimize our operations, Tuniu will expand while maximizing value for our customers and shareholders.

I will now turn the call over to Maria Xin, our CFO, for the financial highlights.

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

Starting from the third quarter of 2017. Net revenues were CNY 806.1 million, representing 53% year-over-year growth on a non-GAAP basis. Revenues from packaged tours, which are mainly recognized on a net basis, were up 53% year-over-year on a non-GAAP basis to CNY 604 million and accounted for 75% 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 55% year-over-year on a non-GAAP basis to CNY 202 million and accounted for 25% of our total net revenues. The increase was due to a raise in revenue generated from financial services and commission fees received from certain travel-related products.

Gross profit was up 74% year-over-year on a non-GAAP basis to CNY 440.9 million for the third quarter of 2017. The increase in gross profit and gross margins was primarily due to the improved economies of scale, increased operational efficiency and optimized supply chain management.

Operating expenses for the third quarter of 2017 were CNY 506.9 million, down 39% year-over-year, excluding share-based compensation and amortization of acquired intangible assets. Non-GAAP operating expenses were CNY 440.5 million, representing a year-over-year decrease of 43%.

Research and product development expenses for the third quarter of 2017 were CNY 124 million, down 26% year-over-year. Research and product development expenses as a percentage of net revenues were 15% in the third quarter of 2017, decreasing from the 32% as a percentage of non-GAAP net revenue in the corresponding period in 2016. The decrease was primarily due to the increase in efficiency resulting from the economies of scale and implementation of operation systems and optimization of research and product development personnel.

Sales and marketing expenses for the third quarter of 2017 were CNY 224.8 million, down 55% year-over-year. Sales and marketing expenses as a percentage of net revenues were 28% in the third quarter of 2017, decreasing from 95% as a percentage of non-GAAP net revenue in the corresponding period in 2016. The decrease was primarily due to the decline in brand promotions and the preference for marketing channels with high ROI.

General and administrative expenses were CNY 165.9 million in the third quarter of 2017, down 1% year-over-year. General and administrative expenses as a percentage of net revenues were 21% in the third quarter of 2017, decreasing from the 32% as a percentage of non-GAAP net revenue in the corresponding period in 2016. The decrease was primarily due to the increase in efficiency resulting from the economies of scale and optimization of administrative personnel.

Net loss attributable to ordinary shareholders were CNY 29 million in the third quarter of 2017. Non-GAAP net income attributable to ordinary shareholders, which exclude share-based compensation expenses and amortization of acquired intangible assets, was CNY 37.4 million in the third quarter of 2017.

As of September 30, 2017, the company had cash and cash equivalents, restricted cash and short-term investments of CNY 4.4 billion in the third quarter. Excluding the impact from the prepayment to HNA Tourism, cash conversion cycle was negative 23 days. Capital expenditures for the third quarter of this year was [CNY 51 million].

Now let me provide top line guidance for the fourth quarter of 2017. For the fourth quarter of 2017, Tuniu expects to generate CNY 450.4 million to CNY 466.5 million of net revenues, which represents 40% to 45% growth year-over-year, compared with non-GAAP net revenues in corresponding period in 2016. Please note that the 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?

(Operator Instructions) The first question comes from Alvin Jiang with Deutsche Bank.

I have a couple of questions. First question is on the destination [lift]. How's the different destination's contribution to your revenue in the last quarter? Did you see any specific destination lift? Or did you see any turnaround from specific destinations? I have a follow-up.

Okay. In terms of the GMV breakdown by geography or region, domestic tours this quarter contributed about 35% of our GMV; Europe, around 15%; islands contributed us 5%; and Maldives 5%; Southeast Asia, around 9%; Japan and South Korea together, around 8%. And the increase for this quarter is Europe and -- compared with about 12% in the same period last year. And we also see the higher growth rate in long/short outbound destinations, such as Australia and Middle East and Africa are some destinations.

And my next question is about your local stores. How many local stores do you have? And how much is the contribution to revenue of GMV? And what's your future (inaudible)?

(foreign language)

So as of now, Tuniu currently has around 198 off-line retail stores. By the end of the year, we target to have 220 stores overall. We expect this number to continue growing going forward next year. Currently, GMV from our off-line retail store is in the high single digits, but we expect this ratio to continue increasing to a level around 10% by next year.

The next question comes from Natalie Wu with CICC.

A couple of questions for me. Just one is regarding the gross profit margin improvement. Just wondering how much is driven by the Europe recovery and how much by financial-related business and how much by price hike and how much by the increased economies of scale. And how far can our gross profit margin go? How should we think of your profitability in longer term? Second one is that with the resignation of your COO and CFO, will there be any change regarding the strategic focus and the company's guidance? Will the company continue to operate as an independent entity? Will you be open to be acquired in the future? And the last one is more like a housekeeping. I was just wondering what's your headcount plans next year and also the brand-related advertising expenses in the last quarter and also the plan of next year.

Our gross margin has improved on a year-on-year basis, largely due to the economies of scale of our operations and better supply chain management. During this quarter, direct procurement was contributed us 40% of our total GMV and has positively contributed to our margins. In the future, further increases to the ratio of direct procurement, may be around 50% next year, will allow us continue to improving our gross margins. Also, the expansion of our service network have -- on local tour operators has benefited Tuniu's margin as well. So Donald will answer your second question.

(foreign language)

In terms of our strategy, there has not been any major changes in our strategy since we listed on the NASDAQ. So our strategy has always been in the right direction. We are one of the first players to go off-line and increase our penetration in the off-line channels. We are expanding our service and sales network, and we think that will be a positive direction for us. And in 2014, we started our direct procurement. And so far, we have seen pretty positive results. So overall, we think our strategies have been the correct direction. And in terms of M&A, there are none that we have to disclose at this time.

The next question comes from Ivy Ji with Crédit Suisse.

I have 2 questions. First is a follow-up on the gross margin outlook. Specific in the fourth quarter this year, are we expecting the gross margin to improve sequentially? Or will it be more affected by a weak seasonality? And my second question is, can we talk a little bit more about the -- so for the net revenue growth in the past quarter, what was the progression on the GMV and tax rate?

Since we only provide a top line guidance for the fourth quarter -- and currently we don't have the guidance for the gross margins in the next quarter. But as we are doing more and more direct procurement and initiate our self local tour operators, we believe, in the long run, we have -- still have long to improve our gross margins. For this quarter, tax rate was around 9%, so slightly higher than last quarter. We -- currently, we don't provide GMV numbers.

(Operator Instructions) The next question comes from Chun Choi with 86Research.

Two questions, maybe. The first one is, may I ask what is management's view on next year market outlook? Is the market turning better next year, especially after the reopening of South Korea? Second question is on the competition. So one of your major competitor is pushing forward of the strategy of opening more off-line franchise store. So will this create a competitive pressure to us? What is our -- can management remind us what was our strength compared to -- or advantage compared to other players?

(foreign language)

Currently, we believe South Korea will be better, although there has been no definitive announcements. But we believe for next year, this will be a positive step for outbound travel and especially for our business. And for your second question, Ctrip also has their own offline stores, but they are different. Tuniu stores are all run by Tuniu, and this allows us to control the quality and -- of our products and services. So -- and another advantage of Tuniu's off-line store is that we integrate our booking advisers with our professional advisers. So in the off-line store, it's extremely hard to train an adviser to be able to be familiar with all of the destinations and products. But with Tuniu's model, we are able to integrate those advisers with professional advisers in our -- in Tuniu, and then this kind of establishes also our ecosystem that allows the off-line client to access Tuniu's core expertise.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Maria Xin for any closing remarks.

Once again, thank you for joining us today. Please feel free to contact us if you have any questions. Thank you for your continued support, and we look forward to speaking with you in the coming months. Thank you.

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