Yatra Online Inc (YTRA) 2018 Q2 法說會逐字稿

Good day, and welcome to the Yatra's Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Manish Hemrajani. Please go ahead, sir.

Thank you, April. Good morning, everyone. Welcome to Yatra's fiscal second quarter 2018 financial results for the period ending September 30, 2017 conference call. I'm pleased to be joined on the call today by Dhruv Shringi, Yatra's CEO and Co-Founder; and Alok Vaish, our CFO.

The following discussion, including responses to your questions, reflects management's view as of today, November 14, 2017. We do not undertake any obligation to update or revise the information.

As always, some of the statements made on today's call are forward-looking, typically preceded by words such as we expect, we believe, we anticipate or similar statements. Please refer to the company's filings with the SEC for information about factors which could cause our actual results to differ materially from these forward-looking statements.

Additional information concerning these statements is contained in the Risk Factors section of the company's annual report on Form 20-F filed with the SEC on June 30, 2017. Copies of this and other filings are available from the SEC or on the Investor Relations section of our website.

With that, let me turn the call over to Dhruv.

Thank you, Manish, and welcome, everyone, to this conference call and earnings release for the second quarter of the fiscal year 2018. The second quarter has been a very exciting quarter for us. We registered our highest quarterly growth rate on our key Revenue Less Service Cost metric since becoming a public company, achieving over 46.1% growth in Q2 on a year-over-year basis.

Gross bookings growth during the quarter was 40.2%. This was achieved with improving operating economics.

Our adjusted EBITDA loss reduced by 12% versus the same quarter last year and by over 50% versus Q1 2018.

Marketing cost as a percentage of revenue was at less than 50%, as we scaled back on some of the brand marketing initiatives without compromising on the growth. This trend continues to demonstrate the strength of the Yatra brand.

The travel industry in India is witnessing a period of sustained growth, and we are very excited to be a leader in this sector.

Now onto some additional data points that reflect the strength of our business during the quarter.

Our growth this quarter was broad-based with all our offerings experiencing strong consumer adoption.

Revenue from our Air Ticketing business grew 31.7%, driven by large -- largely by higher growth in both our B2C and corporate businesses. Our air business outpaced overall market growth taking incremental market share in the domestic air market. Over the last year or 2, the growth in the aviation sector has been faster in Tier 2, Tier 3 markets than the metros, and the new UDAN scheme launched by the government, which subsidizes air travel from Tier 2 and Tier 3 markets, will drive further growth in the sector.

Our Hotels and Packages business growth rate further accelerated this quarter, with Revenue Less Service Cost growth of 42.3% year-over-year aided by room by growth of 47.7%. We are starting to see early signs of acceleration on the hotel front, given our new brand positioning, the largest inventory and the cross-sell initiatives that we've adopted. We continue to be the leading platform for domestic hotels and homestay options with over 70,000 properties being available to the consumers at the end of the second quarter. A sizable lead over our closest competitor.

On the hotel partnership front as well, we signed a new partnership with OYO Rooms during the quarter, This brings in about 2,500 to 3,000 rooms -- sorry, 2,500 to 3,000 hotels initially onto our platform from the OYO's table. We remain focused on building out our hotel inventory and expanding supply lead over the competition.

Let me now talk about our corporate travel business, where post the acquisition of ATB, we are now the largest corporate travel provider in India in terms of gross bookings. The corporate travel opportunity in India to our minds is the more exciting and larger opportunity in travel in front of us and is projected to grow at over 12% per annum through 2020, making India the fastest-growing corporate travel market in the world according to KPMG research.

I would like to spend a few minutes to explain why we are so excited about this opportunity. In an emerging market with limited disposable income, business travel is generally the first form of travel undertaken by consumers. As such, by being the leader in business travel, we believe that we are positioned to capture some of the most attractive consumers in India as they make their first online travel purchase.

Post our acquisition of ATB, the combined entity of Yatra and ATB now has the potential to access a captive consumer base of over 4 million people who are employed in the over 650 large- and medium-scale enterprises that we service. Assuming an average family size of 4 in India, the employees of these organizations would translate into roughly 16 million consumers to whom leisure travel services can be cross sold. ATB, for the moment, continues to operate as an independent entity, and we expect further growth and improved operating leverage once the ATB business is integrated more deeply post completion of the earn-out period for their current management.

We believe that there is an opportunity to cross-sell Yatra's hotel inventory, which is India's largest with over 70,000 properties, to the 400-plus existing customers of ATB and the opportunity to implement Yatra sales book corporate travel platform and mobile app across ATB's customer base.

Switching gears to mobile. Mobile traffic continues to garner the larger share of our overall traffic, with 72% of our traffic during the quarter coming from mobile devices. We expect to see this trend accelerate further in the coming quarters, as the cost of mobile data in India continues to drop sharply, thereby significantly expanding the market. I'm pleased to announce that our organic mobile app downloads have now crossed the 11 million mark, as we added over 1 million new installs in the quarter. Additionally, I would also like to point out that our apps have the highest approval ratings on the Play store.

Going back to our performance during the quarter, overall, we delivered Revenue Less Service Cost growth of 46.1% for the first quarter. Our adjusted EBITDA loss improved to INR 287 million versus a loss of INR 610 million last quarter and INR 328 million a year ago for Q2, with improved profitability in parts of our business offset by marketing and sales promotion expenses. We think that on the back of our high brand recall and deep distribution network across India and now our leadership position in corporate travel, we are well positioned to strongly capitalize on this next wave of growth.

I am now going to hand it over to Alok to walk you through the details of the financial performance for the quarter. Alok?

Thank you, Dhruv. Good morning, everyone. As Dhruv mentioned in his opening remarks, we obviously are very pleased with our performance during the quarter ended September 30, 2017.

Before we dig deeper in the financial results, I do want to highlight that our results for the current quarter include the financial and operating results of Air Travel Bureau Limited for the 2-month period for August and September. We acquired the majority stake in ATB on August 4, 2017. The balance stake will be acquired some time next year in the July-August time frame.

On the key financial highlights for the quarter, on an overall basis, Revenue Less Service Cost grew by 46.1% year-over-year to INR 1.69 billion. Gross air passengers booked were 2.2 million representing year-over-year growth of 31.7% with a favorable mix towards international travel.

Stand-alone hotel room nights booked were 443,000, representing an increase of 47.7% year-over-year.

Revenue from our Air Ticketing business increased by 40.3% to INR 1.2 billion in the current quarter. This growth was driven by an increase in gross bookings by 42.7% to INR 19 billion in the current quarter.

Our net revenue margins improved from 6.1% in the sequentially previous quarter Q1 to 6.3% in the current quarter, while it declined marginally from 6.4% year-over-year, mainly due to consolidation of the ATB business, since corporate business has slightly lower net revenue margin, but significantly better economics due to absence of marketing and sales promotion expenses.

On Hotels and Packages, our Revenue Less Service Cost for this segment was up by 42.3% Y-o-Y to INR 320 million in the current quarter. This growth was led largely by an acceleration in our Hotel and Packages business, as this segment shed the impact of demonetization. And we continued our strength in stand-alone hotels on the back of largest online hotel inventory in the country. We also benefited from an improvement in our Hotels and Packages net revenue margins of 11.6% during the current quarter versus 10.2% in the year-ago quarter. The increase in net revenue margin is due to change in business mix, skewed more towards stand-alone hotels and higher margins as negotiated from suppliers.

Our other revenue grew by 123% to INR 170 million from INR 76 million in the prior year quarter.

On the expenses front, marketing and sales promotion expenses increased by 52.4% to INR 828 million in the current quarter from INR 543 million in the prior year quarter, primarily on account of increases due to marketing campaigns with our new brand ambassador on TV and print media, and consumer promotions and loyalty incentive programs.

Marketing and sales promotion expenses as a percentage of Revenue Less Service Cost marginally increased to 49% in the current quarter from 47% during the year ago corresponding quarter. However, from the sequential previous quarter, Q1, this ratio has declined significantly from 70.6% of revenues to 49%, demonstrating efficiencies in these expenses without compromising on growth in Revenue Less Service Cost. I would like to highlight that this ratio at 49% of revenue compares extremely favorably to similar ratio as reported by a large competitor in India. I believe our ratio is roughly half the ratio reported by them. I think their number was closer to 98%. We were at 49%. And we believe this serves as a testament of our differentiated go-to-market strategy and a strong brand.

Our personnel expenses increased by 86.2% to INR 715 million in the current quarter from INR 384 million in the 3 months ended September 30, 2016. This increase was primarily on account of consolidation of ATB and an increase in employee share-based payment expense to INR 184 million in the current quarter from INR 3 million in the prior year quarter. Excluding the employee share-based payment expense, our personnel expense growth would have been 39.3% for the current quarter, including the impact of ATB consolidation.

Other operating expenses increased by 11% to INR 624 million in the current quarter from INR 561 million in the prior year quarter.

As a result of higher marketing expense, our adjusted EBITDA was a loss of INR 288.5 million in the current quarter. It was an improvement in both margin -- which was an improvement in both margin and overall quantum over the INR 328 million in the prior year quarter.

As of September 30, 2017, the balance of cash and cash equivalents and term deposits on our balance sheet was INR 3.7 billion or approximately USD 57.3 million as compared to INR 1.4 billion as of September 30, 2016. We have also during the quarter taken a new debt facility of approximately USD 15 million, details of which are mentioned in our 6-K filings.

We remain bullish -- in closing, we remain bullish on Indian macro environment. The growth in air and hotel industry and our strong presence both as a consumer brand and as a platform that we provide to our B2C, B2E and our B2B2C customers. We are thus maintaining our fiscal year '18 guidance of 35% to 40% growth in Revenue Less Service Cost.

This concludes our prepared remarks. We can now open it up for Q&A.

(Operator Instructions) We'll take our first question from Jed Kelly with Oppenheimer.

I guess my first one is the gap between the growth in sales and marketing and net revenue dissipated significantly quarter-over-quarter. Can you talk about the drivers of the increasing marketing efficiency?

Sure. So one of the key drivers, Jed, on this -- in our efficiency in the marketing spend has been on account of the brand investment that we've done in the previous quarter. So on the back of the brand investment that we did in the previous quarter, we saw significant growth in direct traffic. So both direct and organic traffic for us grew pretty significantly. And as you would recall, direct traffic typically ends to convert better and on the back of that increase in direct and SEO traffic, we were able to get incremental efficiency in our marketing spend on the traffic that came in the current quarter. We've always maintained, and this is not the first time but just to reiterate this, we've also maintained that we will continue to invest behind the brand. The brand investments, however, will happen more in a cyclical manner. You will see more in higher brand investment happening down the peak travel periods. And you would see lower spends happening around the trough. But what we've been able to demonstrate out here is that the brand investment does pay off in terms of incremental traffic coming through not just in that quarter, but in subsequent quarters as well. So this is the efficiency on the brand investment that we have done in the previous quarter, which led to the higher direct traffic and improvement in conversion.

And then digging into the non-OTA segments following the acquisition, can you discuss the growth in the margin profiles of the corporate segment and your traditional offline travel segment?

So in terms of the margins, as I mentioned in my remarks, while on the corporate side, your take rates might be slightly lower than what you would see on the B2C side. But the good thing about the corporate business and for the B2B business is there is no marketing cost or in most cases even payment B2B cost. So it turns out to be significantly better economics for the business at the bottom line of the contribution line for those businesses versus the B2C business. On the B2C, marketing continues to be the largest line item of cost and that's the reason why even though it has a slightly higher take rate, but at the bottom line, it turns out to be inferior margin on the B2C side, at least in the current environment versus the corporate or the B2B business.

And then, as you start to get a better understanding of brand marketing along with the corporate segment becoming a larger part of your business, has the target around achieving EBITDA profitability changed?

No, at the moment, Jed, we would stick to the same targets that we've spoken about earlier. We would want to see a few more quarters of this trend continuing before we can actually look at revising that target.

And then a final one from me. Can you speak to some of the competition from the global OTAs, specifically Booking.com? And how much customer overlap you think you actually have with them?

So for us, we haven't really seen that much of an impact of Bookings.com (sic) [Booking.com] ...

Yes.

Especially given that our customer base historically has been more mid-market, mid-India, middle-class and middle-income range, right? In that segment, the penetration of Bookings.com (sic) [Booking.com] has been fairly limited. So we haven't really seen much impact of Bookings.com (sic) Booking.com at least on the consumer segment that we have been targeting. Likewise, on the corporate side, obviously, there is not much of an impact of Bookings.com (sic) Booking.com either on the corporate side. In fact, on the corporate side, we do partner with them for getting content for people and our business travelers traveling out of India.

We'll take our next question from Kevin Kopelman with Cowen and Company.

Just have a few questions. Just to start, given we're almost halfway through F Q3, can you talk about what we should expect -- or what you've seen quarter-to-date in terms of growth in your key operating metrics, like passengers, room nights and packages and also in terms of your plans for marketing and promotion spend in F Q3 and EBITDA and cash burn? And then, I have a -- some follow-up questions.

So Kevin, it's -- given that we're still in the middle of Q3, it's going to be slightly premature first to start talking about that. I think we'll have to wait out some more time before we can start talking about any numbers for Q3. In a public disclosure perspective, suffice it to say that I think we are seeing continued strength in the business and I would just leave it at that as for the moment.

Sure. And then I have some questions on ATB. Can you -- it's still operating as an independent entity. Can you share any more details on the integration plans, like timing or specific things you have in mind? And then just in F Q2, could you give us the ATB contribution for air passengers bookings and EBITDA?

Sure. So I'll address a couple of the questions around the integration part of it. So at the moment, while ATB continues to operate independently, and will do so till 31st of March 2018, we are in the background doing some work in terms of assessing their customer base and looking at opportunities where we can start cross-selling our hotel product to their customer base. And also looking at some of the unique requirements, which might be there from their customers from a technology platform implementation point of view. So that work and that background work has already happened. So that come 1st of April, we can actually hit the ground running. Integration, I think will be -- obviously in this kind of business, integration will have some degree of challenges as we migrate ATB from their existing platform to our platform. But I think given the work that we've done on the platform and the success that we've had with our customer base, I'm fairly confident that we'll be able to make that work smoothly. With regards to your specific questions around ATB and ATB's contribution, I think we put out in the last call that we had that we expect ATB to contribute about 8% to 10% of our revenue. And that's pretty much where it's tracking for the moment.

Okay. And then one last question just on your loyalty programs, you've talked about them in the past. How important are those in the mix right now for you? And can you give us any sense of customer adoption? And also how you feel that your loyalty programs stack up against the competition today?

Sure. Our loyalty program is an integral part, Kevin, of the offering that we have to the consumer. It's the part of the business and the offering which has helped drive high degree of repeat rate for our customer base. It's also the part of the business which is helping us drive cross-sell from business travelers into the leisure travelers segment. So as the business traveler, you have the opportunity, if your organization permits, to earn eCash reward points and you can then subsequently use those points for your personal travel as well. So it acts in a very efficient means of consumer acquisition also for us. So it's an integral part of [Audio Gap] how does it stack up versus competition. I think we've got a very well-established eCash rewards program. I think we've got over 3.5 million customers who use this rewards program. So it's a fairly deeply entrenched offering with a large following. We don't -- at least our view is that the competitive plans, which are out there, or offerings, which are out there, are still in their nascency. So it would not really be directly comparable versus what we have right now, which is a well-established product that's been running now for the last at least 3-plus years.

(Operator Instructions) And we'll take our next question from Gaurav Rateria from Morgan Stanley.

Question on the hotel room night growth on a stand-alone basis. First -- last 2 quarters, we saw that growth between 50% to 70%. This quarter, the growth has kind of slightly tapered down. And that includes the impact of the acquisition as well. So what do you think about overall longer term this number should be growing at, given the penetration rates are fairly low in this segment?

Sure. Gaurav, firstly, just to clarify from a growth point of view, ATB's business is pretty much air related. There is very marginal impact of the ATB on these numbers from our hotel growth point of view, especially on the stand-alone hotel side. So this would be nearly entirely coming from organic growth. The other thing, in terms of what kind of growth rates to expect going forward, we think growth rate around 40% is what we would expect in terms of stand-alone hotel room night growth and that's on the back of the lower penetration at the moment of the product in the consumer segment.

So Dhruv, do you think this number is sustainable over the next few years despite whatever competition we see in the market?

I think 40% kind of trend is what, given the current competitive landscape, we think should be feasible. Now, obviously, we all know that the competitive landscape in India continues to be challenging and continues to be volatile. So based on what we see right now, we think we'll be able to deliver this kind of growth. The other thing, and the reason why I'm also confident about this number, is that from a strategy point of view, our strategy is fairly differentiated from competition. It's not just based on the back of deep discounting. We have this large ATB consumer base, which will be available to us to start selling, or rather cross-selling, our hotel product come 1st of April. So we think there is significant upside on that as well. And part of this 40% growth will come from that consumer segment, which is today untapped.

Sure. Dhruv, how should one think about the average transaction value for the stand-alone hotel room night?

So for us, we are averaging around the $50 to $60 mark in terms of average room rate.

Got it. So...

We've seen some softening on that, but we don't see a significant amount of softening. Because as we go deeper on the consumer side, there is some softening that ends up happening, but that softening ends up getting offset by the incremental penetration on the corporate side.

Sure. One question on the competition and the competitive landscape, especially on the budget hotel side. You've tied up with the budget aggregator. Do you view them as more of a supplier or more of a supplier plus a distributor? And do you think there is any conflict of interest with respect to distribution? Is there any exclusivity you've assigned to avoid that conflict of interest?

Sure. So we see this more, Gaurav, as supply partners as opposed to competitors. Our view on this has been that in India, where the supply base is fairly fragmented and -- especially in the budget category, where the quality of supplier at times is suspect, having good quality supply partners is essential to drive online adoption and penetration. So from a customer experience point of view as well, we think these partners, as they go through their own journey of improving their product content and quality of service, will enable greater online adoption for us. This was the very reason on account of which we had taken some of these partners off our platform, because from a customer experience point of view, we thought that product experience was not up to the mark that we expected for Yatra customer. Over the intervening few years, we've seen their product experience improve and that's been the reason for bringing them back on the platform. So we feel there is an opportunity for us to partner with them, which is what we've done, and standardize and bring better quality supply to our customer base.

Fair enough. Last question from me. Any metric around total monthly unique visitor, just to kind of see how that has grown, despite tapering down the branded -- branding -- investments around branding? And any view around competition from Paytm on the hotel side?

Sure. So in terms of the traffic, as we put out our own investor presentations over the next few days, we'll highlight some data around that. At the moment, from a Paytm point of view, Paytm, we've seen some competition from Paytm on the air side. We haven't really seen much from them on the hotel front. The other area where we see them being very active is on the bus and rail side. So, today, there is limited impact of Paytm, given that again, from a customer base point of view, obviously, our consumer on the corporate side is largely insulated from Paytm and likewise on the B2B side. It's on the consumer direct side, where there is some impact of Paytm, which is there on the domestic flights front. But again, pretty much no impact on international flights. And very limited impact on domestic hotels as well.

(Operator Instructions) It appears there are no further questions. I'd like to turn the call back over to management for any closing or additional remarks. My apologies. We do have a follow-up question. Would you like to take it?

Yes, please.

We have a follow-up question from Gaurav Rateria from Morgan Stanley.

Dhruv, just question on booking. You did highlight your strength areas vis-à-vis them. But have you seen them beefing up their hotel offering in India in the last 12 months with respect to number of properties listed on their platform? Or on the sales side, them going aggressively feet -- like feet-on-street going aggressively to the hotels and trying to increase business?

Sure. So Gaurav, we have seen some effect of that in a few cities, where bookings have increased the on-ground presence for them. They've also signed up with all the aggregators. So from a total supply point of view, we see them having close to about 30-plus thousand hotels, of which roughly about 20-odd thousand is direct hotel contracting. And about 10,000 of it is coming from third-party suppliers. So yes, to your point, there is a little bit of impact of bookings, which is there on the ground in terms of incremental supply that they are aggregating. But we're yet to see the effect of that directly in terms of customer competition.

Got it, sir. Sir, any estimate you guys have with respect to total number of room nights being stayed in India every year, how much of that is being sold online? And how much of that is being accounted by the OTAs?

Gaurav, we've all been trying to do some work around that, but it's -- as I am sure you understand, because you've also been trying to do the same, it is a fairly challenging task to truly ascertain the amount of room inventory that's available in India. We initially had this assumption that there were about 1 million to 1.2 million, 1.3 million rooms, but looking at the inventory and the content that we built up thus far, right, we are already at 70-plus thousand hotels. We think the overall market might be closer to about 1.5 million to 2 million rooms. From an occupancy level point of view, I think occupancy levels have improved a bit. They are now hovering around the 60% mark versus around 55%, where they were last year.

Sure. And Dhruv, any color on how fast is the international air growing for you or for the overall market? And is there a room for significant market share gain like you saw in domestic air over the last several years?

The international air, we feel is the big opportunity right now. From an online penetration point of view, it's relatively modest. From a growth rate point of view, it's not that far off from domestic, right? International, I think, grew at about 14% in the first half of this year. So we feel international is a big opportunity. There's a lot of work that's happening on our side in terms of introducing new products that enable the customer to find the cheapest fare on international flights. We spoke about an Explore the World product in the last call and that product is gaining good traction at our end. It allows the customer to find the cheapest fare to any place in the world over a 365-day period. So products like that and other innovations which are enabling customers to make a booking, or hold a booking for the first 24 hours before confirming, given that it's a high-value purchase, et cetera, are product features, which are helping drive greater adoption of international flights online. So I see that as a big opportunity in front of us, given the relatively lower degree of online penetration of international flights and high-growth rate of the overall industry.

There are no further questions at this time.

Thanks, April. I'll turn the call over to Dhruv for closing remarks.

Sure. Thanks, Manish. I just want to highlight that the differentiated approach that we've taken to India, right, the multichannel distribution approach is what we believe is the right approach to adopt for an emerging market like India, as it allows us to acquire customers at source in a cost-effective manner as they undertake their business travel and then we have multiple touch points with them, which result in strong cross sell between B2E and B2C platforms. Our innovative eCash loyalty program, which we started back in 2014, has over 3.5 million loyalists, which further encourages and incentivizes cross sell. We continue to be the most innovative online travel agent in India, as seen by the initiatives like eCash loyalty program, the largest number of hotels under inventory at over 70,000 properties, providing the widest choice to our customer base, our [light] Android multilingual app released last year, products like Explore the World, which make it easier for customers to book international travel and a corporate self-booking platform, which is backed by both an app and comprehensive desktop solution. The travel industry in India is witnessing a period of sustained growth, and we are very excited to be a leader in this sector.

With that, I would like to thank all of you for joining this call today, and I look forward to interacting with you in the near future. Thank you.

Thank you.

Thank you, everyone.

This concludes today's presentation. We thank you for your participation. You may now disconnect.