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E-House (China) Holdings Limited (EJ)

Q3 2012 Earnings Call

November 15, 2012 7:30 AM ET

Executives

Michelle Yuan – Director, IR

Li-Lan Cheng – COO

Bin Laurence – CFO

Xin Zhou – CEO and Co-Chairman

Analysts

Jinsong Du – Credit Suisse

Ella Ji – Oppenheimer

Jack Yeung

Brandon Dobell – William Blair

Sunny Tam – Bank of America

Operator

Hello and thank you for standing by for E-House’s Third Quarter 2012 Earnings Conference Call. (Operator Instructions) After management’s prepared remarks, there will be a Q&A session. Today’s conference call 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, Ms. Michelle Yuan, E-House Director of Investor Relations.

Michelle Yuan

Hello, everyone, and welcome to E-House third quarter 2012 earnings conference call. Today, we are going to give you an update on our financial results for the third quarter ended September 30, 2012. If you need a copy of the earnings press release or if you would like to sign up for our investor distribution list please go to the IR section of our website at www.ehousechina.com.

Leading the call today is Mr. Li-Lan Cheng, our COO, who will review some highlights from the third quarter of 2012. Ms. Bin Laurence, our CFO, will then discuss the financial results in more detail. We will then open the call to questions, at which time, our Co-Chairman and CEO, Mr. Xin Zhou will be available.

Before we continue, please allow me to read you E-House’s Safe Harbor statement. Some of the statements during this conference call are forward-looking statements made under Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC.

You are encouraged to review the forward-looking statements section of our Annual Report on Form 20-F filed with the SEC for additional information concerning factors that could cause those differences. E-House does not undertake any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.

Our earnings press release and this call include discussions of unaudited, unaudited GAAP financial information as well as some unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

Please note that unless otherwise stated, all figures mentioned during this conference call are in U.S. dollars.

I will now turn the call over to E-House’s COO, Mr. Li-Lan Cheng. Mr. Cheng, please go ahead.

Li-Lan Cheng

Thank you to everyone for joining us on the call today. In the third quarter, our primary agency business benefited from both sequential and year-on-year in transaction volume as targets turnaround in operating profitability. The 4.8 million square meters of new homes sold in the third quarter set a single quarter record for GFA of new property sold. The growth of our online revenue was mainly driven by our online e-commerce platform which was used by more than 11,000 home buyers during the quarter and continue to show growth momentum.

Although our real estate consulting business remained sluggish during the third quarter due to continued softness in land transactions and delays in new development projects, we made progress in developing new information products that we believe will contribute to our growth next year. We achieved healthy operating income this year driven by improved profitability from our primary agency business and effective cost control. Although we continue to operate within a relatively slow real estate industry environment, we have laid the necessary ground work to continue on our path to improve the profitability next year.

I will now turn the call over to our CFO, Ms. Bin Laurence, who will review our financial highlights for the third quarter of 2012.

Bin Laurence

Thank you, Li-Lan. Good morning or good evening, everyone. I will walk you through our third quarter 2012 financial results in more detail.

Revenues, third quarter total revenues were $136.6 million, an increase of 25% compared to last year. For the first nine months of 2012, total revenues were $309.9 million, an increase of 9% compared to the same period of 2011.

Third quarter revenues from real estate brokerage services, which include primary real estate agency services, and secondary real estate brokerage services were $68.2 million, an increase of 35% compared to last year. For the first nine months of 2012, revenues from real estate brokerage services were $133.4 million, an increase of 5% from the same period of 2011.

Third quarter revenues from primary real estate agency services were $56 million, an increase of 39% compared to last year. This increase was mainly due to a 35% increase in the total GFA of new properties sold and a related to 37% increase in the total transaction value of new properties sold.

For the first nine months of 2012, revenues from primary real estate agency services were $122.3 million, an increase of 8% from the same period of 2011. This increase was mainly due to a 15% increase in the total GFA of new properties sold and related 7% increase in the total transaction value of new properties sold.

Third quarter revenues from secondary real estate brokerage services were $4.2 million, a decrease of 3% compared to last year. For the first nine months of 2012, revenues from secondary real estate brokerage services were $11.1 million, a decrease 25% from the same period of 2011. This decrease was mainly due to the closing of a number of stores from 2011 in order to reduce costs and optimize our store network. As of September 30, 2012, we had a total of 68 secondary real estate brokerage stores in four cities in China compared to 107 stores as of the last year, and 69 stores as of last quarter.

Third quarter revenues from real estate online services were $52.6 million, an increase of 34% compared to last year. For the first nine months of 2012 revenues from real estate online services were $113.8 million, an increase of 25% from the same period of 2011. This increase along with the year-over-year single quarter increase was mainly due to revenue growth in existing and new cities that we entered since 2010 as well as growth in e-commerce revenues.

Third quarter revenues from real estate information and consulting services were $16.5 million, a decrease of 9% compared to last year. The decrease was mainly due to a decline in consulting services revenue partially offset by an increase in revenues from information services.

For the first nine months of 2012, revenues from real estate information and consulting services were $41.1 million, a decrease of 12% from the same period of 2011. The year-on-year decrease was primarily due to reduction in land transaction-related consulting fees as well as a reduction in other consulting revenues from property development due to reduced land transactions and fewer project starts, partially offset by an increase in revenues from information services.

Third quarter revenues from other services, which include offline real estate advertising services, promotional events services and real estate fund management services were $7.3 million, an increase of 1% compared to last year.

For the first nine months of 2012, revenues from other services were $21.6 million, an increase of 11% from the same period of 2011. The increase was mainly due to the expansion of promotional event services in the first nine months of 2012.

Cost of revenues. Third quarter cost of revenues was $55.3 million, an increase of 19% compared to last year, primarily due to higher commission expenses for sales staff in the primary real estate agency services, higher editorial cost related to the expanded coverage of our websites and amortization of exclusive right to sell Baidu’s real estate Brand Link product starting in August 2011.

For the first nine months of 2012, cost of revenues was a $142.8 million, an increase of 32% from the same period of 2011, primarily due to higher salary and commission expenses for the sales staff in the primary real estate agency services, higher editorial cost related to the expanded coverage of our website, additional amortization of the exclusive right to see by this real estate Brand Link product starting in August 2011 and higher cost of promotional events services in line with the increase of revenue.

SG&A expenses, third quarter SG&A expenses were $77.7 million, an increase of 12% compared to last year, primarily due to increased staff and marketing expenses for our real estate online services segment. For the first nine months of 2012, SG&A expenses were $241.6 million, an increase of 27% from the same period of 2011. This increase was primarily due to increased staff-related expenses, higher rental and online marketing expenses, and higher bad debt provision compared to the same period of last year.

Operating income, third quarter operating income was $5.9 million compared to operating loss of $420.1 million for the same quarter of 2011, during which we recorded $417.8 million goodwill impairment charge of our online segment.

Third quarter, non-GAAP operating income was $20.6 million, an increase of 79% from $11.5 million for the same quarter of 2011. For the first nine months of 2012 operating loss was $68.5 million compared to operating loss of $427.3 million for the same period of 2011. For the first nine months of 2012, non-GAAP operating loss was $22 million, compared to non-GAAP operating income of $30.1 million in the same period of 2011.

Net income. Third quarter net loss was $20.1 million, compared to net loss of $425.6 million for the same quarter of 2011. Third quarter non-GAAP net loss was $66.1 million, compared to non-GAAP net income of $5.3 million for the same quarter of 2011. For the first nine months of 2012, net loss was $65.6 million, compared to net loss of $433.1 million for the same period of 2011. Non-GAAP net loss for the first nine months of 2012 was $21.5 million compared to non-GAAP net income of $23.6 million in the same period of 2011.

Net income attributable to E-House shareholders. Third quarter net loss attributable to E-House shareholders was $21.6 million or $0.18 loss per diluted ADS, compared to net loss attributable to E-House shareholders of $235.3 million or $2.97 loss per diluted ADS for the same quarter of 2011. Third quarter non-GAAP net loss attributable to E-House shareholders was $7.8 million or $0.07 loss per diluted ADS, compared to non-GAAP net loss attributable to E-House shareholders of $0.5 million or $0.01 loss per diluted ADS for the same quarter of 2011, for the fort nine months of 2011 net loss attributable to E-House shareholders was $55.3 million or $0.54 loss per diluted ADS, compared to net loss attributable to E-House shareholders of $242.5 million or $3.02 loss per diluted ADS for the same period of 2011. Non-GAAP net loss attributable to E-House shareholders for the first nine months of 2012 was $17.8 million or $0.17 loss per diluted ADS compared to non-GAAP net income attributable to E-House shareholders of $9.2 million or $0.11 per diluted ADS for the same period of 2011.

Cash flow. As of September 30, 2012, we have a cash balance of $167.4 million. Third quarter 2012 net cash used in operating activities was $8.4 million. This amount was mainly attributable to non-GAAP net loss of $6.1 million and an increasing accounts receivable of $38.4 million, offset by an increasing income and other tax payable of $27.9 million. Non-cash depreciation and amortization of $6 million and non-cash bad debt provision of $3.2 million.

Third quarter 2012 net cash used in investing activities was $13.4 million. This amount was mainly attributable to $11.1 million payment to Baidu for the exclusive rights sell its real estate branding products in China and $2.8 million for regular PP&E. Third quarter 2012 net cash proceeds from financing activities was $0.2 million.

Business outlook, we estimate that our revenues for the fiscal year ending December 31, 2012, will be in the range of $440 million to $460 million, an increase of 10% to 15% from 2011. This forecast reflects our current and preliminary view, which is subject to change.

Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Thank you. And your first question comes from the line of Jinsong Du from Credit Suisse. Please go ahead.

Jinsong Du – Credit Suisse

Hi, thank you for taking my question. I’d just like to know a little bit more about the revenue guidance. So, for the revised guidance, what was the main reason for that, was it – we could expect it online businesses or you know is it because of the primary or secondary business, if you could elaborate a bit more on the key reasons for the downward region? And also what – why is Chairman, Zhou, not on this earnings call, if you could explain a little bit that would be great? Thank you.

Michelle Yuan

Well. First of all, Chairman, Zhou is on the call.

Xin Zhou

Hello. (Foreign Language).

Jinsong Du – Credit Suisse

Okay.

Xin Zhou

(Interpreted). First of all the updated guidance reflected our expectation that the online advertising growth in the fourth quarter will be less than we previous expected. And this is in line with the outlook for the overall advertising marketing growth in China and so if you look at forecasts by similar advertising companies and within our online advertising we were pioneering in promoting without oriented online advertising, which is growing very fast and as result this product’s strong growth offset somewhat slower than expected growth in our online – regular online advertising.

Li-Lan Cheng

No, no, no, it’s not.

Jinsong Du – Credit Suisse

Yeah. If you could, because this is only November already, I think people are more and more interested in next year, if you could let us know a bit more about next year for the all three business lines? And also do you – if you can give us a little bit of indication on what net profit will be for the full year that will be good if you can?

Xin Zhou

(Foreign Language)

Jinsong Du – Credit Suisse

(Foreign Language).

Li-Lan Cheng

Responding to a slowdown in real estate industry starting last year, the company made a strategic decision to integrate online and offline real estate sales and this turned out to be a very correct decision. Correctly, we’ve pretty much completed the integration of online advertising and offline sales. And as a result, the whole company is on the path to achieve better profitability starting from this quarter as you can see our operating income is quite healthy. We believe that, we’re very confident about continued profitability in the next year.

Going into more detail of operating segments for information and consulting segment due to our continued softness in land transactions and project starts, the growth in our real estate information and consulting business and information consulting business, particularly the consulting business has been lackluster. However, we did take the opportunity to develop new database products including what we just pushed out, an appraisal tool for our secondary real estate transactions, and we also are in a process of finalizing our commercial and construction – commercial real estate database, and construction material of database, which will be launched early next year. We believe that those new products will contribute to the growth of our information consulting segment next year.

Jinsong Du – Credit Suisse

(Foreign Language) 00:25:39

Li-Lan Cheng

From the agency business previously we faced two main issues, one is volume, transaction volume was slow for the whole market and two is our commission rates declined, but our operating costs did not decline as much as the staff and commission rates. However both of these problems are being solved in a sense that the transaction volumes start to stabilize and we are very well-positioned to take advantage of that trend as reflected in our growth in primary real estate revenue this year. And we’ve made huge progress in controlling our costs. As a result you will see improved profitability starting form this quarter for the primary agency business

As for our online segment as I mentioned before, currently regular online advertising growth has been less than that. However, we are fortunate that we do have strong growth in our results oriented e-commerce advertising. We believe that, that trend will continue and should contribute to our continued growth for the online advertising segment next year.

Those are the three main business segments of the company, because of what I just said, we are confident that both revenues and profits will be better next year versus this year.

We are still in a process of a companywide budget session. So as of now we are not ready to give you detailed guidance for next year. We should be able to let you know more when we report earnings next time for the whole year guidance of 2013. As for the fourth quarter, growth should still be relatively strong as third quarter.

Xin Zhou

Okay.

Jinsong Du – Credit Suisse

All right. Thank you. (Foreign Language).

Michelle Yuan

Thank you. (Foreign Language).

Operator

Thank you. And you next question comes from the line of Ella Ji from Oppenheimer, please go ahead.

Ella Ji – Oppenheimer

Thank you Michelle Yuan, Bin, Li-Lan, and Xin Zhou. So, my first question is about your information and consulting services. So I think this segment’s performance was sluggish in the third quarter; however, with the developers are beginning to becoming a lot more active in acquiring land. So can you just talk about these differences between what we are seeing on the market versus your performance, and what your outlook in 4Q? Thanks.

(Foreign Language)

Li-Lan Cheng

Hi, Ella. You’re correct in pointing out that our rent transaction activities have picked up since the second half of the year. However, because of that lag in the actual market pickup and the revenue for our consulting business, we believe that the pickup will be more reflected in our growth of this segment, for next year. And also, as I mentioned earlier, we are launching a few new database products, for our information business, which should be a growth driver for next year as well.

Ella Ji – Oppenheimer

Great. If I can sneak in one more, which is about your commission rate? So we see that this quarter’s commission rate is actually a little bit below, what the, in the first of half of the year. However I think you’ve talked in previous quarter that, you’re actually expecting an increasing average of commission rates on the marketplace. So, could you also help explain this? Thank you.

Li-Lan Cheng

Thank you.

Xin Zhou

(Interpreted). Yeah. So, commission rate is actually relative stable it’s always been around 0.9% for the whole year, this year and due to the differences each quarter in terms of premium, there will be some fluctuations from quarter to quarter. But overall the commission rate is relatively stable.

Ella Ji – Oppenheimer

I see. Thank you. I will get back in the queue.

Xin Zhou

Thank you.

Operator

Thank you. And your next question comes from the line of Brandon Dobell from William Blair. Please go ahead. Give me the line for Brandon Dobell from William Blair. You line is open. Please go ahead with your question.

Li-Lan Cheng

Hi, Brandon. Are you there? Did you forget to mute – unmute your phone? Maybe we will move to the next question operator for now.

Operator

Certainly. And your next question comes from the line of Jack Yeung (inaudible) Capital. Please go ahead.

Jack Yeung

Hello. I want to ask why the tax is so high at about 24 million U.S. which caused the loss. That’s the first question.

Xin Zhou

(Interpreted). Hi, well the tax this quarter is higher. The reason is at the beginning of the year we have an estimate for the full year net income and based on that estimates we have a whole year estimated tax rate which we use to calculate against the pre-tax GAAP income or loss. However, our outlook changed in the third and fourth quarter resulting in a change of estimated tax rate. So our current tax rate is actually lower than the first – beginning of the year estimated tax rate due to reduced net income, and as a result in a sense we over calculated the tax benefits in the first two quarters, and this quarter we need to adjust that. That’s the reason why tax is higher this quarter.

Jack Yeung

Okay, thank you. I have a follow-up question about the general business and how – I want to ask you how much is a low growth in 2012 was due to the businesses restructuring, for example, e-commerce internal restructuring and how much was impacted by the policy? This is a general question. Thank you. Hope you answer it.

Bin Laurence

So you are saying the expense or revenue?

Jack Yeung

Actually the both, the spend – the general and slowing down this year for 2012?

Bin Laurence

In revenue?

Jack Yeung

In revenue and also the expenses?

Li-Lan Cheng

(Interpreted). So the – in terms of revenues as we mentioned earlier, the online advertising growth was slower than what we had expected in the beginning of the year, especially for the fourth quarter which is in line with general advertising market condition in China amidst a slowdown in the whole macro economy. The expense -on the expense side, you’re right in a sense that the investment in our e-commerce business did add to our expenses for the online segment, especially given that in the first half of the year there were no associated revenues. However we have pretty much finished our – completed our investment for our online e-commerce business. And as revenue continues to grow, we expect that profitability will increase next year.

Jack Yeung

Thank you so much.

(Foreign Language)

Operator

All right. Thank you. And your next question comes from the line of Brandon Dobell, William Blair. Please go ahead.

Brandon Dobell – William Blair

Hi, thanks. Sorry about that before – I’m not sure what happened. Couple of questions, I was hoping you could answer whether or not you thought the recent political transition had any impact on the developers, the advertisers, like did they hold off on doing things until they got through all the political leadership transition? And then second question would be as you think about the consulting business, what do you think it’s most correlated with? So do you think it’s more about Chinese GDP growth or is it more about just the recovery in the secondary markets for housing? I’m just trying to get better idea on what the major signs you would look for in the macro economy that would give us some confidence around the consulting business returning? Thanks.

Xin Zhou

Okay. (Interpreted). Hi, Brandon. Your first question, I guess, is related to that today is a special date in the political agenda here in China.

Today, China completed its transition of new generation of leadership. For people in business, we all hope a stable political environment, and a smooth transition of Chinese leadership is good news in that sense.

Usually after the transition of political leadership, their focus – one of their key focus will be on economic growth, which is good news for the country’s economy. However, we’re not sure exactly when whether it will be next year or the after that we will see this growth reflected in a general economy.

And I continue to believe that real estate industry will remain one of the important industries in China due to continued organization and economic growth.

Li-Lan Cheng

Many people have been speculating what it would mean for the various state policies once the new government is in place. My personal view is that near-term further tightening up is unlikely. However, I don’t think that we would see a huge chance that the government will loosen up the policy either. As a result the most likely scenario is we would see some near-term stand-off in terms of policies. In the long-run though due to what I just mentioned urbanization and economic growth, we believe that there is still huge opportunities for the growth of the industry.

As what can be seen as a macro driver for our consulting business, from our past experience, the consulting business is more or less co-rated with the land acquisition activities as well as the new property development activities especially majority of our consulting revenues so far have been derived from new property development activities. We believe that this new property development activity will be relatively stable in the near term.

Bin Laurence

The growth driver might be a little bit different as we continue to develop new product for information and consulting segment. As we mentioned before, we are going to launch commercial real estate database, construction material database as well as a appraisal system for the secondary real estate market. As we derive more revenues from those new products, our information and consulting revenues will be – will further diversify. And as a result, the reliance on land transaction consulting would be less and less in the future.

Brandon Dobell – William Blair

Thank you.

Li-Lan Cheng

Thank you.

Operator

Thank you. And your next question comes from the line of Sunny Tam from Bank of America. Please go ahead.

Sunny Tam – Bank of America

Hi, Li-Lan, I have a quick question on your primary business, just like to get an update on the saleable resources for all of the pipeline that you have on hand and how much that could be launched this year and next year?

And a follow-up question would be, how much was actually launched in the first three quarters to help you generate 10.5 million square meters of DFA that was sold through E-House? And do you see any of these actually meeting their targets for the year, and they aren’t delaying their launches to next year and stop selling in the fourth quarter that would impact your fourth quarter earnings? Thanks.

Li-Lan Cheng

(Interpreted). So far for the first nine months, our pipeline has been approximately 30 million square meters and we expect for the full year it will be somewhere between 36 million to 38 million square meters, which is roughly what we have expected for the whole year. And we believe that we will have further increase for next year.

Sunny Tam – Bank of America

(Interpreted). Translation of the question, have we seen any project launch delays in the fourth quarter to next year?

Li-Lan Cheng

(Interpreted). Yeah. We did see some project launch delays as many of the developers have already achieved their full year sales target. So, some of them start pushing off their project launches, but this shouldn’t affect our full year revenue achievement as there are some delays between contracted sales and actual revenue.

And, one other reason that they were very confident about this revenue for primary business is recall that we have mentioned the contracted sales as of the first half before was RMB90 billion, now as of the third quarter it has increased to RMB140 billion. And therefore we are very confident about the growth in our primary revenue growth in the fourth quarter.

Michelle Yuan

Okay.

Operator

Thank you. And your next question comes from the line of (inaudible) Capital. Please go ahead.

Unidentified Analyst

(Interpreted). Basically I have two questions. One is regarding to the e-commerce business. So what is the, could you actually let us know, like what is the GFA actually sold to the e-commerce platform and what will be commission rate for this project being sold? The second question is related to the commission rate. You mentioned that the commission rate has been relatively stable this year. And I just want to understand a little bit more with regarding to the bonus rate, basically you achieved a higher price and the contract price, so you actually receive a bonus rate. So what is the situation for this year?

Is there any increase in terms of bonus rate or is there a decrease for so. In terms of the cost control measurements, you are saying the company has been achieved a better cost of efficiency. So just wondering, how we actually get sorted this cost of control efficiency, is that we have a – in terms of the base salary, that which is a cost part of the entire cost base. So is that one going down or how about the flexible part which is the sales commission. Any changes in the fixed costs and in the flexible costs in this, in this regard? Yeah, that’s it.

Li-Lan Cheng

(Interpreted). I’ll answer the first question on this for re-launching. The properties we sold through our online e-commerce platform are not a subset of the properties we sold in our primary agency business. These two are actually quite separate. To totally understand, our primary agency business unit executes about 500 products each year. But our online platform and also our online advertising business unit handles thousands of projects a year, so they serve very different client groups.

There’s obviously overlap, but the properties we sold through the online e-commerce support cover may, may cover products that are not handled by our agency business and so that we can’t really talk about commission rate for the online e-comment business because we don’t earn commission on those. We earn revenues through service fees for operating the online platform, and other source of income, but when we earn those we also typically at least not yet, we typically don’t calculate the GFA of the unit sold through the online e-commerce because we are not paid, our revenue does not depend on the GFA or the transaction, necessary transaction value. So, it’s more of, it’s more like a service oriented, platform based service fees. So we don’t really calculate the GFA or commission rate for the e-commerce business.

Bin Laurence

Our commission rate, fees rates are mostly associated with regular commissions. There are very few premium commissions. That’s your second question.

Unidentified Analyst

(Foreign Language).

Xin Zhou

(Interpreted). Yeah, I’ll answer this as well. Our (inaudible) actually efforts cover many different areas. First of all, for the most part we didn’t lower people’s salary, that’s presumably hard to do but, first it will control the number of volume for you, we hire two key very tight control on the number of sales people you start for each product that need for our agency business and also to control the whole labor related cost and to tie that with a revenue increase for each of our local branch, or each of our regional offering.

We try to keep or maintain certain control, certain ratio of the labor related cost as a percentage of their second revenue. So to increase our local GM’s awareness of their profit margin and the – so the number of head count in that’s one thing, the other is without necessarily lowering people’s salary, we do try to link a greater portion of our employee’s total compensation to their performance target whether its revenue target, or profit target, or whatever measures that are appropriate for their positions. So these are the primary tools for us to control our costs.

Unidentified Analyst

Okay.

Michelle Yuan

Operator do we have another question? Hello?

Operator

All right, there is, no other questions that I can see from the queue.

Michelle Yuan

This concludes today’s call. If you have any follow-up questions, please let us know. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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