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eLong, Inc. (NASDAQ:LONG)

Q3 2012 Earnings Call

November 16, 2012 8:00 PM ET

Executives

Echo Yan - Investor Relations

Michael Doyle – CFO

Guangfu Cui – CEO

Analysts

Alicia Yap – Barclays

Fawne Jiang – BM Capital

Tian Hou – TH Capital

Mu Zhi Li – Citigroup

Jiong Shao – Macquarie

Chris Lai – Bank of America

Felix Hong – Goldman Sachs

Wendy Huang – CIMB

Operator

Good day to everyone and welcome to eLong's Third Quarter 2012 earnings report conference call. (Operator Instructions) I will now hand over the line to Echo Yan and I will be standing by for the Q&A session. Please go ahead, thank you.

Echo Yan

Hello everyone, thank you for joining eLong’s third quarter 2012 conference call.

Today, Guangfu Cui, our CEO, will make some remarks about the company’s performance in the third quarter 2012 followed by Mike Doyle, our CFO, who will provide additional detail on our financial results. Following their prepared remarks, Guangfu and Mike will be available to take your questions.

Before the management presentations, please allow me to read our Safe Harbor Statement. During this call representatives of the company will make certain forward-looking statements within the meaning of the U.S. Securities Act and the Securities Exchange Act. These statements are based upon management’s current views and expectations with respect to future events and are not a guarantee of future performance. Furthermore, these statements are, by their nature, subject to a large number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements as a result of a wide variety of factors. eLong undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. Please refer to the risk factors described in our Annual Report on Form 20-F, as well as the full text of the Safe Harbor Statement in our Form 6-K, which will be furnished to the SEC in connection with our press release, for discussion of some of the important factors that could affect future results.

I will now turn the call over to our CEO, Guangfu Cui.

Guangfu Cui

Thank you, Echo. Hello everyone, thank you for being on this call.

Hotel room nights grew 70% year over year to 4.6 million in the third quarter. It is the first time that our quarterly room nights exceeded 4 million and represents nearly 2 million additional room nights compared to the third quarter 2011. 76% of our hotel bookings are now made by our customers online or through our mobile applications. Our domestic hotel coverage network expanded 54% to almost 36,000 domestic hotels as of September 30, 2012. In addition, our international hotel coverage totals over 160,000 hotels through our direct connection to Expedia.

In Q3, we launched our largest-ever marketing campaign featuring the “Book Hotel, Use eLong” branding message and an increased level of coupon offers. This marketing campaign significantly improved eLong brand awareness and contributed to our expanded market share. It did come with a price, but we are willing to take a short-term loss for the long term market share gain. We have been executing on-line hotel strategy for 5 years. Our goal is to become No.1 on-line hotel booking service provider. We are moving along well toward our goal in the past few years.

Despite intensified competition, our hotel groupbuy product growth accelerated in the third quarter, and remains the clear market leader in China. During the quarter, we expanded groupbuy daily hotel deals from approximately 4,500 to 6,000. The hotel groupbuy products provide significant consumer savings, and our leadership in this product segment reinforces our overall brand value proposition.

We continue to see high traffic growth from mobile booking channels, and now provide a full range of mobile options for our customers, including iPhone, iPad, Android and Winphone as well as our mobile website m.eLong.com. We will continue to invest to strengthen our position in this growing channel. Due to the outstanding user experience of eLong mobile applications, eLong was awarded the 2012 China Top Micro Innovation Company by Business Review Magazine

To support our growing hotel business and to maintain our high quality service, we made significant investment in improving our IT infrastructure in recent quarters, and expect to continue these investments for the remainder of 2012. We also opened our second customer service center in Hefei in Q2 and continued to staff that facility in Q3. We now have 700 service agents in Hefei. We currently intend to further expand capacity in Hefei in 2013.

In Q3, we received the 2012 China Best Employer award, and our customer service center received the 2012 China Best Contact Center award for the sixth consecutive year.

Looking forward, we will stick to our online hotel strategy. We will stay our course. There is no change here. In 2013, we will take an investment mode and aim to push forward. We will market aggressively to further improve eLong brand awareness and expand market share. We will fight aggressively and drive harder.

Now, I would like to hand the call over to Mike for a review of our financial results.

Mike Doyle

Thank you, Guangfu. In the third quarter, strong online hotel performance drove our year-on-year net revenue growth to 20% compared with the third quarter of 2011.

Our hotel business benefitted from our continued product investment and innovation in emerging hotel booking models such as groupbuy as well as developing channels such as mobile. Q3 room nights booked through eLong increased 70% year-on-year to 4.6 million.

In the third quarter, hotel revenue grew by 24% year on year due to increased room night volume, partially offset by lower average commission per room night. Commission per room night decreased 27% year-on-year primarily due to three factors: (1) an increase in the size of our coupon program in terms of the number of hotels and the cash-back amounts offered to customers, (2) the growth of groupbuy and budget hotels which together now represent approximately 55% of our room night volume, and (3) lower average daily rates across other hotel segments. Hotel revenue now represents 74% of our total revenues, which is an increase from 72% in the third quarter of 2011.

Air ticketing commission revenue increased 5% for the third quarter of 2012 compared to a year ago, driven by a 12% increase in air segment volumes to 662,000, that was partially offset by a 7% decrease in commission per segment driven mainly by a lower air commission rate and to a lesser extent our air coupon program. Air revenue decreased to 17% of total revenues from 19% in the prior year quarter.

Other revenue, primarily derived from advertising on our websites and travel insurance, increased 30% year-on-year for the third quarter, mainly driven by increased advertising revenue. Other revenue was 9% of total revenues, consistent with the prior year quarter.

Gross margin in the third quarter of 2012 decreased to 70%, compared to 73% in the third quarter last year, mainly due to lower hotel commission revenue per room night to cover volume-driven fulfillment costs. We also remain in the investment phase of our second customer service center in Hefei.

Total operating expenses increased 80% or RMB86.5 million for the third quarter compared to the third quarter of 2011. Total operating expenses increased to 99% of net revenues from 66% a year ago.

Service development expenses increased 27% in the third quarter, mainly driven by an increase in headcount. We continue to invest in improving our online user experience and technology systems, as well as expanding our hotel coverage. Service development expenses increased to 17% of net revenues in the third quarter from 16% a year ago.

Sales and marketing expenses for the third quarter increased 110% or RMB75.7 million over the third quarter of last year, mainly driven by increased advertising expenses from our marketing campaign and a further level of increased investment in online marketing channels. We are pleased with the measurable improvement in brand awareness and room night demand from our brand channels and plan to make additional investments to acquire new customers and promote our brand. Sales and marketing expenses increased to 74% of net revenues in the third quarter of 2012 from 42% in the same quarter of the prior year. .

Q3 G&A expenses increased 25% compared to the third quarter of 2011, mainly driven by higher personnel expenses. G&A expenses were 8% of net revenues, consistent with the same quarter of 2011.

Other Income in the third quarter of 2012 increased year-on-year primarily due to a higher cash yield and lower foreign exchange losses as a result of a lower mix of USD in our cash balances.

Net loss for the third quarter was RMB33.1 million, compared to net income of RMB9.4 million in the third quarter of 2011.

Moving to our Balance Sheet, I’d like to mention that as of September 30, 2012, eLong held cash and cash equivalents, short-term investments and restricted cash of RMB1.9 billion or approximately $306 million US dollars. Of this balance as of September 30, 96% was held in Renminbi and 4% in US dollars.

Looking ahead to Q4, we expect Q4 net revenue growth of 15% to 25% year on year.

As Guangfu noted, given the momentum in our online hotel business, we have been increasing our level of investment in brand, marketing and promotions in order to further strengthen our market position in the hotel sector. Due to this, our profitability will be under pressure for the coming quarters.

This concludes my remarks; and, Guangfu and I look forward to any questions you may have.

Moderator, if you would now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Ms. Alicia Yap from Barclays. Ma’am your line is open. You may begin.

Alicia Yap – Barclays

Hi. Good morning, Guangfu and Mike. Thanks for taking my questions. My first question is, I wanted to get a sense on your fourth quarter guidance. It seems that the April wide range of 10% between the 15% to 25% this time, why is the bigger range and what will be the swing factor that could lead to, either to the low end or to the high end?

Mike Doyle

Hi, Alicia. This is Mike. Our top line revenue guidance we gave each quarter always has a 10% range. So that part is the same. But the 15% to 25% range is dependent upon the level of couponing in the quarter. So today as couponing has existed through the quarter to-date, we have come up with this forecast for the full quarter. But our strategy or couponing could change in the back half of the quarter.

Alicia Yap – Barclays

I see. And to follow up on that, that looks like this is actually a little bit higher than what you guided for 3Q, all right, so does that mean that in the fourth quarter, can you get a sense on the seasonality on the hotel booking for the fourth quarter?

Mike Doyle

Yes. We’re not finding any difference in seasonality from what we’ve seen in prior years. The fourth quarter is – and the third quarter often are very similar size. But what we have seen is a slight reduction in coupon catch back in Q4 to-date versus Q3 which has helped revenue growth a bit.

Alicia Yap – Barclays

I see. And then, so in terms of the ASP decline, it was a steeper decline in 3Q. And so, if you’re saying that the tax rebate in the fourth quarter to-date is a little bit lower, so should we assume in terms of the magnitude of the decline, ASP in 4Q should be a little bit lower than the 3Q?

Mike Doyle

Not necessarily. It’s – yeah, I think it’s heavily dependent on looking at the year-on-year comp. But if you look at the prior quarter, we are currently rebating less on a room night basis than we were in Q3.

Alicia Yap – Barclays

I see. Okay, all right. Good. I’ll get back to the queue. Thank you.

Mike Doyle

Thank you.

Operator

Thank you. The next question comes from Fawne Jiang from BM Capitals. Your line is open. You may begin.

Fawne Jiang – BM Capital

Good morning, Guangfu and Mike. First question is actually regarding the hotel pricing trend. It seems like the ADR in the 3Q was down around 9% year-over-year. I just wonder how much was that coming from the norm – like apple-to-apple hotel ADR decline and how much does that coming from your shift to lower end hotels overall for your portfolio?

Mike Doyle

Hi, Fawne. This is Mike. The majority of the decline was due to the mix shift, but this quarter we did see decline in same segments hotel pricing year-on-year, which is different from last quarter. That was true across almost all star categories.

Fawne Jiang – BM Capital

How much was that approximately, Mike, in terms of the normal ADR decline year-over-year?

Mike Doyle

When you say that the majority of the decline was still due to mix shift, but its – but it was a – but there was a real impact from same star category ADR decline year-on-year as well.

Fawne Jiang – BM Capital

Got it. Second question’s actually regarding the promotion. You mentioned that there is slightly reduction on the promotion level in 4Q, just wonder whether it’s mainly coming from the level of coupon coming down or overall your coupon coverage has been reduced?

Guangfu Cui

This is Guangfu. I will take your question. First of all the – in the coverage of coupon, we have kept this same coverage as of the third quarter. We did see a little bit change in the market that some of the hotels had asked the OTA to stop the couponing that may reduce our coverage, so that we expect hotels decision not doing coupon, so that you can see in the bar and hotel sector, hotels such as Home Inn, Hanting, Green Tree and 7 Days, the broader chain has asked to stop. So that’s why we are seeing a little bit of help on the revenue side, but a little bit of reduction in the coupon coverage effect. Thank you.

Fawne Jiang – BM Capital

Got it. Guangfu, just a quick follow-up on that, in terms of the leveled coupon, there is also reduction in 4Q as well?

Guangfu Cui

We couldn’t make that decision or judgment at this point of time. The coupon could go either way in the – during the quarter, depends on competition. I think a lot of you may have the question, so that why don’t I just take a step back and have a elaboration on the couponing. So first off, I think it’s coupon and also you can refer it to price war. If I take a step back and ask why the price war happened, the key reason is that we have been outgrowing our key competitors in the past 10 consecutive quarters. In the second quarter of the year, we grew 67% on hotel year-over-year growth, but our competition only grew 20%.

At the same time, our key competitors couldn’t find other means to grow their top line in the hotel segment. So that’s why that our key competitors launched coupon and trying to raise it to a certain level. So that’s the key reason why the price will begin. So I think that also answers in the future trend of coupon. Thank you.

Fawne Jiang – BM Capital

Got it. Guangfu, just a follow-up on that was really related to the dynamic going forward. You mentioned that at this point, it’s hard to say where the coupon could potentially trending, I guess the question here is what are the key factors to make you – making the decisions to swing the coupon well with other?

Guangfu Cui

Yeah, so the key courtier if I have to make decision in that eLong is aiming to achieve number one position in the online hotel service sector. So with that objective in mind, we would try all the best possible ways to grow our market share and coupon is one of them. So that’s one criteria. The second criteria is that our key competitors has been in the past tried to use their size to block access to inventory and/or pricing or rates. So to – we could not allow them to get away with it without paying a price.

So we will be aggressive in terms of doing couponing to make sure that we keep growing and become relevant to our suppliers in terms of production. And at the same time we were trying to make sure that when they’re trying to block competition, they pay a price in terms of profitability. We are not only doing hotel, we are also introducing coupon to our business.

Our business is not a key components of our business, but could be painful to our key competitors if they are not behaving properly in terms of doing fair the competition and et cetera, et cetera. So that’s another factor to do the coupon, so we want our competitors to know they should pay a price for the earnings and for our competition in the market. That too can now procure across the sector will be ROI in terms of whether we can afford it, whether it’s in the best interest of the shareholders of this company. But as of now, we think doing aggressively in coupon in the best interest of our shareholders long term. Thank you.

Fawne Jiang – BM Capital

Got it. Thank you very much, Guangfu. That’s very helpful. My third question is actually regarding your sales and marketing effort. Mike mentioned that you run a brand campaign in 3Q, just wonder what’s the impact or the cost associated with that? Also what’s the plan for brand campaign going – in the coming quarter? Another question related to sales and marketing was, is there any other – like besides your regular coupon, is there any other marketing initiative that could have driven up the 3Q sales and marketing and how we should look at those factors in the coming quarters.

Guangfu Cui

Let me answer some of your questions and Mike may add later. The first question is about look, are we doing what our plan is going forward in terms of marketing or what we have done in the marketing in the third quarter? What we have done in the third quarter is a combination of coupon plus the branding.

The branding we have done is mainly done through the LCD advertisement in the focus media and also posters in the residential building elevator. So that’s a branding part of the marketing in the Q3. And going forward, we will continue the marketing branding campaign during out the next year in 2013. The key reason is that if we benchmark with key competition, one of the opportunities area for eLong is our awareness is lower than our key competitor. So we want to make sure that our awareness – we want to close the gap in that regard.

And we’re also seeing from our past results that our competitors are no longer enjoying the service quality advantage versus eLong in the past few years as we can see from our growth rate from the hotel sector. So while our service is as good as our key competitor and the key opportunity lay ahead of us is really about brand awareness. So that’s why we are going to do more branding in the fourth quarter and also going forward in 2013.

Mike may want to answer the other questions.

Mike Doyle

I would just add that we haven’t broken out spend by marketing channel, but what we can say is that the majority of the incremental spend in sales and marketing quarter-on-quarter was a result of our brand campaign. We continue to be aggressive in other online channels as we have in the past, but certainly the step-up was related to kick starting our brand campaign and we envision sort of a more maintenance level of spend going forward.

Fawne Jiang – BM Capital

Got it. Thank you very much, Guangfu and Mike. I’ll go back to the queue.

Operator

Thank you. Our next question comes from Ms. Tian Hou from TH Capital. Ma’am your line is open.

Tian Hou – TH Capital

Hi Mike. The question is really regarding your last comments about your going to – regarding the range of the guidance. So it’s really subject to the magnitude how much you want to continue the coupon program and cash rebate. And the Q4 is relatively a weaker seasonality. And we have been into the quarter in the half way. So I wonder at this point, what’s the companies thoughts on – for the second half of this quarter. Are you going to be increased coupon program and the cash program or you’re going slow down it? So that’s for this year. And then, going forward, what do you see those promotions and cash rebate? You see that as a common ongoing business process or you still see it as a something special? That’s my question.

Mike Doyle

Hi. This is Mike. So regarding the coupon, yes as we I mentioned, we have stepped back a bit on the level of cash back to customers. But we are prepared to make whatever investment in coupon required to continue to grow our share. So we can’t comment on what the couponing environment will look like in the back half of the quarter, but the first half has been slightly less aggressive than Q3 was.

Regarding what will happen to couponing and the environment in the future, we believe there’s always going to be price competition in the online travel industry in China, and obviously the Internet mix price information transparent and these were customers who care about price. So we’re committed to providing customers great value, broad selection and easiest way to book hotels at whatever cost that requires.

Tian Hou – TH Capital

Okay. The second question is even this quarter, your operating margin turned from – become negative and to how long do you see this trend?

Mike Doyle

So, the negative operating margin that you see this quarter was driven by the two – few things we discussed so far, which has been an increase level of couponing and our largest ever brand campaign. So the brand campaign spend despite in our first quarter to get things started, so we’re not expecting the same level of brand spend in the fourth quarter. And as I mentioned couponing will be in reaction to the market environment. So we do thing there’s likely to be pressure on margins in the short term. But we’re prepared to take that in the interest of long-term market share gains.

Tian Hou – TH Capital

Okay. Thank you. That’s all my questions.

Mike Doyle

Thank you.

Operator

Thank you our next question comes from Mr. Mu Zhi Li from Citigroup. Sir, your line is open. You may begin.

Mu Zhi Li – Citigroup

Hi. Thank you very much for taking my questions. Will you give me some – your view about some study shows that a hotel pricing structure has undergo some of fundamental change and not just from OTA’s coupon, but also from the flexible pricing and the diversified distribution channel, would you agree with this? And how will the OTA business model, I mean the traditional brokerage model or the agency model evolved to compete with the new pricing structure for the – from the hotel side. Thank you.

Guangfu Cui

Thank you. I would take your question, this is Guangfu. I think what you’re referring to, just correct me if I’m wrong is that the wholesaler practice in the market because if you look at the – really and truly the new platform which you may refer to, I believe Qunar and Taobao, and most active sellers in those channels are not hotel direct as a matter of fact, but really and truly wholesalers. Is that what you are asking or is that red understanding?

Mu Zhi Li – Citigroup

Yes.

Guangfu Cui

Okay. So what you are asking then is that how eLong view wholesalers in this opening platform. So let me try to answer that part of the question. So basically we believe that the practice of wholesalers offering unbundled and restricted inventory to the open platform like Qunar and Taobao is a threat to hotels own direct selling channel and to other OTA channels because hotel selling direct (inaudible) because of BAR rates and eLong, we also offer the BAR rate to the consumers when we sell agency model of the hotel.

So this open platform, the first impact is really kind of a hotel direct selling channel because the price is no longer competitive in the hotel direct selling. And hoteliers we think should take action to ensure that wholesalers abide by the terms of their agreements. Normally, the wholesaler get inventory from hotel, they need to sign their contract with the hotel and saying they will sell inventory in a bundled and restricted fashion, but apparently they are not doing it. So that’s the current problem of the wholesalers selling unbundled and unrestricted rate in the open platform.

So, as the wholesalers selling more the volume, what’s going to happen is that it’s a negative impact to the hotels revenue management because more volume goes through this wholesaler channel. So we believe hotel, it is in the best interest of hotel to ask all the wholesalers is signed up to obey these rule. As you can see in the coupon matter, that hotel asked OTA to stop couponing, they follow, and we believe that if hotels taking a tougher position to work our wholesalers, we will see the situation improved. So that’s the current rate of the situation. And the market is quite volatile and dynamic it could happen in a lot of directions in the short term. So that’s how we rate the market. Thank you.

Mu Zhi Li – Citigroup

Thank you. The follow-up question is those wholesalers since they are unbundled and unrestricted, so they can go as long as hotel agree that, they can grow anywhere to Taobao to Qunar and some other open platform. Do you – while since – if the hotels can now restrict them, do you have any plan to work with them in the future?

Guangfu Cui

(Inaudible) a lot. We will do it with them, but we have to be, number one, trying to be helpful to the hotel and trying to convince them the negative impact if they continue to allow this situation to evolve, of course, has a interest to consumers and to our shareholders. So we would take all things considered when we make the decision. We couldn’t comment where we would to this or do that, but that’s how we current see the market. Thank you.

Mike Doyle

Maybe I just want to add to that as well, I mean, we currently bring a very high yielding demand to the hotels, given the price volume that we sell at. And what we can do in the near term until that they – hotels are able to improve the revenue management with the wholesalers is to continue to offer the hotels many different innovative hotel products and channels with different price points. So like groupbuy, like fast sales okay, things like that but can help bridge the gap between the OTA price point and the wholesalers.

Mu Zhi Li – Citigroup

Okay, so another follow-up is, do you plan to adopt the prepaid model and how do you think the margin of the prepaid model will affect the overall margin mix shift?

Guangfu Cui

At this point of time we couldn’t comment whether we would do prepay or what. So we will look into the market and see, are we competitive in the market in terms of pricing? Are we delivering the best value to the consumers? So those are the key decision making, of course, another criteria is are we being helpful while we’re hotel partners too? So those are our decision making criterias. However we couldn’t answer whether we would do something which is we are not ready to disclose. Thank you.

Mu Zhi Li – Citigroup

I see, I also noticed that you opened the Taobao store probably in last quarter, like August. So do you see some sales improvement or how much do you think the sales will grow from the Taobao because of the large traffic in that platform?

Guangfu Cui

As we see Taobao, one thing we are sure, very certain of, is that if you sell BAR rates in Taobao, you are not going to sell a room. So what we are selling in Taobao is our groupbuy deals. And we’ve been doing that and the volume is right now immaterial to our business and we are trying to grow that channel, but again Taobao has a lot of traffic, however, just getting things selling in Taobao so that we’re not seeing traffic to our stock significantly better than a lot of other channels right now. Thank you.

Mu Zhi Li – Citigroup

Thank you, Guangfu and Mike.

Mike Doyle

Thank you.

Operator

Thank you. The next question comes from Mr. Jiong Shao of Macquarie. Your line is open. You may ask your question.

Jiong Shao – Macquarie

Good morning. Thank you very much for taking my questions. Firstly, could you just follow up on the discussion around the wholesalers? Do you have an estimate on sort of the market share of these wholesalers among the OTAs in the hotel room area?

Guangfu Cui

So basically if you look at the hotel, you have to understand that a different segment in the hotel has different wholesaler mix. For example budget hotel, there is very little or almost none of wholesalers basis because the budget hotel selling their rooms at a Wal-Mart type of approach, everyday low price, so they don’t have a wholesalers approach.

So in that sector, which is even bigger portion of our business coming from budget hotel sector and also the guest houses, so those – there’s no wholesalers. So those wholesalers are playing in the sector of four, five-star hotels. So it really depends on the hotels. So normally if the hotel is priced higher, normally there are – in the four, five-star hotels, if their BAR rate is very high, normally they have bigger portion of the wholesale business. If their BAR rate is lower, their wholesaler business is very small. So basically it depends on their package, pricing mechanism of the high-star hotels.

So it’s very hard to tell what portion of the business is coming from wholesalers in total. It’s just – I think it’s going to be misrepresentation if I tell you a number because the hotel is just all over the places. There is hotel – no wholesale inventory, there is hotels quite a lot of wholesaler inventory. Thank you.

Jiong Shao – Macquarie

I understand that, but if you look at four to five-star hotels for example, if we narrow it down to that segment, do you have a rough estimate what’s the representation of the wholesalers?

Guangfu Cui

We do ask hotels – there are hotels in wholesaler inventory percentage, again, I don’t have average industry number. So I’m not in the position to tell you that. But I have my own estimation, but I couldn’t give you a good number. Thank you.

Jiong Shao – Macquarie

Okay, that’s very helpful. My second question is on your airline airfare coupon, I think you highlight earlier that it’s not a major part of your business, but you want to take share and to make the competitor see a bit pressure. So I was wondering given the typical commission rate for airfare is much lower than hotel, number one, do you feel that the couponing would be as effective? Number two, based on what you have seen so far sort of how – what the traction this program has been getting?

Guangfu Cui

Yeah, so basically when we – before coupon, we only launched coupon in Beijing, Shanghai, Guangzhou, Shenzhen routes for the business travelers. We tried to attract them into the coupon program. So before the coupon, our ticketing business decreased year-over-year about double digits. After the coupon, remember we only do four cities, right. So our tickets volume increased above 10%. That couldn’t only – it’s contributed to couponing because we also did the marketing campaign in the third quarter, which have to drive traffic to our website. But coupled with our branding efforts and also couponing in the four cities, we have seen a good increase or uplift in our ticketing business. Thank you.

Jiong Shao – Macquarie

Great. Thanks. My last question is about your hotel side. I recall last quarter I think you briefly suggested on your call that you are reviewing the hotel coupon program. I think at this time, you feel like it might not be as effective as it was before. It seems like you may now have a little bit new thoughts around how aggressive you want to be in the hotel coupons. Thank you.

Guangfu Cui

Yeah, thank you. I think when I said coupon is not a factor, I think most people read me thinking that I’m going to back off from coupon, which is wrong understanding or maybe I might not make myself clear. But what I really mean that coupon is going to put tremendous pressure for profitability.

While, in the past, we have been keeping the coupon level which is a saving from the offline, while customers book online, we could give that saving to consumers, so that in total we’ll be cost-neutral. At the same time, it helps grow our business. So, in that regard, we feel coupon is very effective, right. So we make money of the transactions and it’s good. However, when competition also copy our coupon strategy, then coupon is no longer effective in terms of profitability for eLong. So that’s the part it’s revealing, but that doesn’t mean, it’s going to stop coupon or reduce the level of coupon because our first and primary goal is gaining market share in this fast-growing China travel market. So that’s how I think analysts should read my comment. Thank you.

Jiong Shao – Macquarie

Thank you very much, Guangfu, for the extremely helpful comments.

Operator

Thank you. Our next question comes from Ms. Fawne Jiang from Brean Capital. Ma’am your line is open. You may ask your question.

Fawne Jiang – BM Capital

Hi, Guangfu and Mike. Just follow-up question regarding your new partnership with Expedia, just wondered like what are the new like dimension in terms of the like partnership going forward and how could that potentially impact your growth from here?

Guangfu Cui

Yes, first of all, (inaudible) we will work in the Expedia, our relations – we are being I think very helpful in the past because Expedia had the one of the best outbound inventory and as we know outbound Internet hotel is a very attractive segment of China travel market. We provide consumers with fully integrated access to the inventory hotel already with Expedia direct connection. And we think we’re well positioned to compete in this area and then both Expedia and eLong are looking to our existing corporate and see how we can make it better.

So we reached agreement in that – that both product has latitude to be able to compete more exactly for the outbound business and in the future eLong is not going to get Expedia’s prepaid inventory because Expedia is also signed the agreement with the hotels to acquire agency hotels. So going forward we’d be able to sell their agency model. Another aspect of the corporation will be Expedia is going to transfer more up to date. IT technologies and also the knowhow to eLong on a more systematic way than in the past. Thank you.

Fawne Jiang – BM Capital

Got it. Just a quick follow-up. Like what’s the current percentage of your – what’s the proportion of your international hotel as a percentage of the hotel and also the same foot on the air side.

Guangfu Cui

Mike, do you want to...

Mike Doyle

Yeah, on the – it’s a very small – it’s growing very quickly, but we’re still less than 2% of our room night volume from outbound hotel.

Fawne Jiang – BM Capital

How about air, Mike?

Mike Doyle

For air, we’re about 5%.

Fawne Jiang – BM Capital

Got it. Thank you.

Operator

Thank you. Our next question comes from Mr. Chris Lai from Bank of America. Sir, your line is open. You may ask your question.

Chris Lai – Bank of America

Hi. Good morning. I’m actually looking through your press release and I was wondering if you could comment on what the lower air commission rate would be and also what the hotel commission rate would be?

Mike Doyle

We haven’t shared that information this quarter. But our average hotel commission is around 15% and the average air commission is around 5%. There is a range on the hotel side in general as the ADR increases, the commission rate itself decreases. And the same is true as it’s lower the commissioned rate percentage is entire. On the air side, the way it works is there’s usually a base commission of around 3% and then there are a couple of bonuses based on volume and promotions. And in the past couple of quarters when our air commission rate has fallen, it’s really been due to our volume being weak so that we haven’t earned the full potential of our volume bonuses, but the industry commission rates really had been pretty stable.

Chris Lai – Bank of America

Okay. That’s very helpful. A follow-up question on what was raised earlier, you mentioned that commission rates for hotels have dropped because of promotion, but is that more to do with the lower daily rates and you also mentioned like the shift like a lower rate within the start itself just trying to get a feel which one it would be?

Mike Doyle

Yeah, the biggest driver has been couponing. So the accounting of coupon is counter-revenue, so it comes directly out of the top line and then impacts revenue for room night particularly in Q3 that was the primary driver. But there is also an impact from mix shift to lower priced products, namely budget hotels and groupbuy. And then also, an industry impact of just lower average daily rate in the same star category year-on-year, which was an impact – a driver this quarter as well. So, it’s those three things together. But couponing overall, I mean, is the biggest driver.

Chris Lai – Bank of America

Okay. Great. Thanks very much.

Operator

Our next question comes from Mr. Felix Hong from Goldman Sachs. Sir, your line is open. You may begin.

Felix Hong – Goldman Sachs

Hi, Guangfu and Mike. Thanks for taking my question. Just a quick follow up on the coupon strategy in your air ticketing segment. Do you have any volume growth or market share target on your mind? And also regarding your financials, I understood that you took an operating loss in 3Q. So in terms of free cash flow, are you right now in a positive or negative territory and how you’re your cash flow picture going – trend going forward? Thanks.

Guangfu Cui

Let me take the first part of the question regarding the air coupon. So the air coupon, we want to first to send a message to the key competitors that although it is not a big part of our businesses and – so we also have a limited scope of only doing Beijing, Shanghai, Guangzhou, Shenzhen, we have seen very positive growth and we want to make sure that the market back to the – our key competitors behave in a way that is in the fair competition range.

So that’s our key purpose. As if in the air, we are not aiming any kind of big share, market share of the – our business because our key strategy is always on always online hotel basis. However, our air is very nice, which is I’m so glad to flaunt our business and plan to put pressure on our key competitors. Thank you.

Mike Doyle

Regarding cash flow, let’s not maybe disclose our quarterly, but we’d refer you to our release where we do have a significant amount of detail around adjusted EBITDA and adjusted net income.

Felix Hong – Goldman Sachs

Thank you.

Operator

Thank you. Our next question comes from Ms. Wendy Huang from CIMB. Ma’am your line is open. You may begin.

Wendy Huang – CIMB

Thank you. My first question is, you just mentioned that you are doing the branding campaign and also you want to make sure that your customer service quality will be matched to your competitors. I just wonder, what have you done in the past two years to improve the customer service quality? What are you going to do further to make sure that your customer service quality can be at least the same as your key competitor? Thank you.

Guangfu Cui

Our customer service is one of the best. We have no gaps. We are leading in some aspects. We are the first one to launch the seven times – seven days a week, 24 hours day, micro blog, customer service, we are the first one to launch that. We are also launching a few other service program that our competitor even don’t have today in other platform. And we always been leading in terms of launching new service features to our customers in customer centers.

And I feel kind of a hot measure is that our customer certification rate is 99.7% and our rate is 93%. These are measured for average single call that customers place in our call centers and our customers would give us that reading of very certified, certified, not certified. And the results we have been getting from the customer service front and also the after sales service which have the similar results. So that’s one indicator. The other indicator that we have been awarded The Best Contact Center in China for sixth consecutive years. So that has been our – one of our strengths compared with other OTAs and compared with open platform.

So going forward, we will continue to improve of our customer service. The way we see customer service is that the more customer online, the better customer service we are going to be. So if you look at our online mix, we have 76% of our transaction coming through online while our competitors are only 50%, which means that our online service is much more better than our competitors. So that’s how we look at the – we use the metrics to see whether we are matching up with our key competitors.

Mike, do you want to answer the other question?

Mike Doyle

I would just say that online leisure customers, to them good service is self-service and so we’ve been investing in features and functionalities to allow customers to meet their own service needs when possible. And I think that – it’s good for our business, but then also what customers prefer.

Wendy Huang – CIMB

Okay. So Priceline announced the acquisition of Kayak recently, so what’s your read as OTA? What do you think is the implication for the overall travel industry and your market position?

Guangfu Cui

So far, the impact is primarily in the U.S. market. So we are not in the best position to comment because we know more about Taobao and Qunar and very influential here in China, but we have very little sense of how Kayak and the dynamic of the U.S. So you may want to ask our..

Wendy Huang – CIMB

Sure. Maybe I want to clarify my question. When do you expect That similar consolidation to happen in China market? And if so, how will this kind of consolidation affect maybe the ecosystem in the channel market? Your view?

Taobao to Qunar So basically if you look at the market it’s already being consolidating, the process has already been in place, Qunar is owned we know majority by Baidu. And another major search company which is Kushen and you could also called Doudou, which is part of the TripAdvisor, that’s already being bought by TripAdvisor. So in China, if you look at (inaudible), there are not so many major firms to be consolidated.

Wendy Huang – CIMB

Okay. My final question is, I wonder if you can share your observation on the travel demand change, a month-on-month change from August to November so far. Thank you.

Guangfu Cui

Demand has been very strong in the summer and I think it is in the October holiday period, representing one of the best travel season ever in China history. That is driven by this no-charge of toll fees and also longer holidays due to the two holidays combined together, so that represents the peak of the year. And then after holidays, there are a few factor that negatively impact the demand and we are in the – in that is in November, although compared last year, we still see good year-over-year comp, but it’s no longer like something in the summer and in October. Thank you.

Wendy Huang – CIMB

Okay, thank you very much. Those were my questions.

Operator

(Operator Instructions) At this time, there are no further questions. I will now hand the call over the eLong management team for the closing remarks.

Guangfu Cui

Thank you all being this call and I look forward to the – my team look forward to talk to you next time. Thank you. Moderator, you can now commend the call. Thanks.

Operator

Thank you. That concludes the eLong Third Quarter 2012 Earnings Report Conference Call. Thank you for participating. You may now disconnect.

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