eLong, Inc. Q1 2006 Earnings Conference Call Transcript (LONG)

eLong, Inc. (LONG)
Q1 2006 Earnings Conference Call
May 11, 2006 8:00 p.m. EST

Executives

Tom Soohoo - Chairman and Chief Executive Officer
Derek Palaschuk - Chief Financial Officer
Raymond Huang - IR Manager

Analysts

William Bao Bean - Deutsche Bank
Andrew Collier - New York Global Securities
Kit Lu - Goldman Sachs
Michael Millman - Soleil Securities
Chun Qui - Analyst
Ming Zhao - SIG

Presentation

Operator

Good morning and good evening to all participants. Welcome to the eLong first quarter 2006 earnings results conference call. (Operator Instructions) I would now like to hand you over to our moderator today, Mr. Raymond Huang, and I will be standing by for the Q&A session. Mr. Huang, go ahead, sir.

Raymond Huang

Hello everyone. Thank you for joining eLong’s first quarter 2006 conference call. Today Tom Soohoo, our CEO, will make some remarks about the quarter, followed by Derek Palaschuk, our CFO who will provide greater detail on our financial results. Following their prepared remarks, Tom and Derek will be available to take your questions.

Before the management’s presentation, please allow me to read our Safe Harbor Statement. During this conference call, representatives of the Company will make forward-looking statements. 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 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 number 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 eLong’s filings with the SEC, including its Form 20-F as well as risk factors described in our Form 6-K which will be filed with the SEC in connection with our press release and this conference call for a discussion of these important factors that could affect future results.

Our press release and this call include discussions of some non-GAAP financial information as well as some GAAP financial measures. Our release contains a reconciliation of the non-GAAP measures as well as GAAP measures and is available on the Investor Relations section of the eLong website at www.elong.net. We urge you to have a copy of our release on hand as we proceed with the remainder of this call.

I will now turn the call over to eLong’s CEO, Tom Soohoo.

Tom Soohoo

Thank you, Raymond. Hello everyone, and thank you all for being on this call. We are pleased to report another solid performance in our travel revenues for the first quarter, which increased 47% year-over-year to RMB53.3 million. With the steady growth of the Chinese economy, the travel industry and user population of the Internet, we believe that eLong has excellent opportunities in China's highly fragmented travel market.

In the recently published World Travel and Tourism Council's Special Report on China, Hong Kong and Macau, they reiterated that China has the potential to be one of the great tourism economies in the world. Over the next 10 years, China is projected to have the fastest-growing leisure and business markets of the 174 countries surveyed by the WTTC, with compound growth rates of approximately 10% per annum. This will propel China to be the second-largest tourism market in the world by 2016.

We believe that our continued efforts to improve our operating platform, as well as improve our integration of Expedia will deliver many scale and network benefits to the Chinese consumers. I am happy to report that we announced on May 10th eLong, in its partnership with Expedia, launched enhanced hotel inventory and web site content which will give Chinese consumers an unprecedented set of features to help them make informed decisions and choose from a selection of key properties in over 140 select destinations worldwide.

The new functionality includes 360 degree virtual tours of both international and domestic hotels. The 360 degree tours feature crisp, rotating images of hotel rooms and facilities which allow travelers to see the hotels they are considering before they book. It also includes detailed property descriptions and enhanced booking options, including a greater range of room types to select from. All of this is available in the Chinese language format.

Although online booking has been available in China, never before has such rich content, imagery and functionality been tailored for the needs of the Chinese consumers.

Let me take just a moment now to review with you the first quarter progress we made in our hotel and air businesses. On the hotel side, the solid 46% year-over-year hotel revenue growth to RMB42.1 million confirms the strength of our hotel product. Within the first quarter, we continue to expand our hotel inventory.

At the end of the first quarter we offered our customers a wide range of hotel rooms at discounted rates in 3,220 hotels in 278 cities across China, which was up approximately 21% from the 2,660 hotels in the corresponding period a year ago. This is evidence of our continuing efforts to improve and provide better products and services to our customers.

In March of 2006 approximately 76% of our bookings were done through guaranteed allotment as compared to 75% in December of 2005, and 10% in March of 2005. Guaranteed allotment allows us to improve customer service by confirming the availability of rooms to our customers immediately. Clearly our customers strongly appreciate our guaranteed allotment service, and we intend to continue expanding this.

With respect to the air business, our air ticketing revenues grew to RMB8 million, or 115% year-over-year and 6% sequential growth during the first quarter of 2006. Air segments sold reached a record high in the first quarter as a result of our efforts to improve the booking platform and to strengthen our cooperation with airline partners. Air ticketing represented 15% of total travel revenues in the first quarter, as compared to 10% in the same period one year ago, as we continue to diversify our revenue base. As of the end of the first quarter, our users were able to book air tickets in 57 cities across China.

A further area of focus for us is to improve our air infrastructure. We are implementing a plan to improve our air platform, including front to back business processes, procedures, operations as well as the MIS system. We believe this will result in a more scaleable and efficient platform that will support our future growth in the air business.

We believe that eLong is one of the strongest online travel brands in China, and our customer acquisition track record underscores our brand strength as well. During the first quarter, we were able to continue to expand our customer base by adding 74,000 new customers as compared to 58,000 customers in the corresponding period a year ago, and 84,000 customers in the previous quarter. At the end of March, we had 815,000 cumulative customers. We will continue to invest in customer acquisition and our brand through our sales and marketing efforts.

We recently repositioned our Company mission as, to enrich people's lives through the freedom of independent travel, in order to reemphasis our continuing focus on improving the customer experience. This year, eLong's management will focus in particular on building a strong team, a scaleable infrastructure, a stronger culture of execution and a stronger brand.

As more and more people in China can afford to travel, we have the strong passion and pride to help make their travel experiences as convenient and enriching as we can.

Before I give the floor to our CFO, I would like to emphasis that the opportunity of travel in China is immense, and we believe eLong's current strength, combined with our deep relationship with Expedia, positions us extremely well to take advantage of the tremendous growth potential of the market.

Let me now turn the call over to Derek Palaschuk, our CFO, who will review the financial results in greater detail.

Derek Palaschuk

Thank you, Tom. Let me just give you a quick overview of our first quarter results, starting with our statement of operations followed by our balance sheet. Our first quarter travel revenues, which were RMB53.3 million, and comprised 91% of total revenues, grew 47% year-over-year and decreased 5% sequentially.

Revenue from hotel commissions for the first quarter totaled RMB42.1 million, an increase of 46% from RMB28.9 million year-over-year, and a decrease of 8% from RMB45.6 million sequentially. The 46% increase from the first quarter of 2005 was primarily due to higher room volume, accompanied by higher hotel commission per room night.

Hotel room nights booked through eLong totaled 666,000 in the first quarter, up 30% from 513,000 in the corresponding period a year ago, and down 9% sequentially from 724,000 in the fourth quarter.

I would like to emphasis, our first quarter year-over-year growth rate of 46% for our hotel business was the highest year-over-year growth rate that we reported over the past five quarters.

Our hotel commission per room night were RMB63 in the first quarter, up 13% from RMB56 in the corresponding period a year ago, and remain unchanged from the previous quarter. Our hotel commission rate has continued to improve in recent quarters, due to the better override in commissions as a result of higher room volume.

Our hotel commission rate of 14.9% was up 160 basis points year-over-year from 13.3% in the corresponding period a year ago, and up 50 basis points sequentially from 14.4% in the previous quarter.

Revenues from air ticketing in the first quarter totaled RMB8 million, an increase of 115% from RMB3.7 million year-over-year, and an increase of 6% from RMB7.6 million sequentially. Volume in air segment sales continued to grow, with 218,000 air segments sold in the first quarter, an increase of 112% year-over-year and 1% quarter-on-quarter.

Commissions earned per air ticket in the first quarter were RMB37, which is RMB2 higher than the previous quarter due to an increase in average air ticket price.

Other travel revenue in the first quarter of 2006 was RMB3.2 million, a decrease of 13% from RMB3.7 million year-over-year, and an increase of 10% from RMB2.9 million sequentially. The year-over-year decrease was due to lower revenues from [Ray Time] and the sequential increase was mainly due to an uptake of vacation packages sold during the Chinese New Year holiday.

Our non-travel revenue, which was 9% of our total revenue in the first quarter, consisted mainly of non-travel related, short messaging revenue and online advertising on our website.

Gross margins in the first quarter were 77%, unchanged from the corresponding period a year ago, and down from 82% in the previous quarter. The sequential decline in gross margin was consistent with a seasonal downturn in our hotel business, as well as higher contribution from our air business, which has lower gross margins than our hotel business.

Operating expenses for the first quarter, excluding business taxes, write-down of goodwill and intangibles, stock-based compensation, amortization of intangibles were RMB52.6 million, an increase of 43% from RMB36.7 million year-over-year, and a decrease of 13% from RMB60.1 million sequentially. The year-over-year increase was mainly due to continuing investments and service development, sales and marketing and general and administrative expenses.

Our adjusted loss was RMB1.3 million in the first quarter, as compared to an adjusted loss of RMB3.5 million in the first quarter of 2005, and an adjusted loss of RMB1.9 million sequentially.

Let me now make a few comments on our March 31 balance sheet. As of March 31, our cash and cash equivalents balance was $131.4 million, including restricted cash and cash equivalents of $9.6 million. We intend to continue to use our cash balance to enhance our organic growth and consider strategic acquisitions. During the first quarter, we had capital expenditures of RMB3.6 million and our depreciation was RMB2.4 million.

Finally, the business outlook. We expect travel revenues for the second quarter of 2006 within the range of RMB60 million to RMB65 million, an increase of 30% to 41% from the second quarter of 2005, and we expect total revenues of RMB65 million to RMB70 million, an increase of 28% to 38% from the second quarter of 2005. We expect a decrease in our operating loss in the second quarter of 2006, as compared to our RMB14.5 million first quarter of 2006 operating loss.

This concludes the financial review. Tom and I look forward to any questions you may have.

Raymond Huang

Moderator, you may now open the call for any questions. Thank you.

Question-and-Answer Session

Thank you, sir. (Operator Instructions) Your first question comes from William Bao Bean, Deutsche Bank Hong Kong. Mr. Bean, your line is open for questions.

William Bao Bean - Deutsche Bank

Hello, yes. Sorry about that. Can you update us on the timing of the completion to your air travel platform improvement? When can we expect you to start pushing your air service? Thanks.

Tom Soohoo

Thanks, William. The project for improving our infrastructure is actually a work in progress at this stage. As you might be aware, it is difficult to actually nail down specific completion dates, but we will be working on it aggressively from here at least until the end of the year.

William Bao Bean - Deutsche Bank

So when do you believe that you will start really pushing your air service? Promoting it?

Tom Soohoo

We wouldn't anticipate that to happen any earlier than next year.

William Bao Bean - Deutsche Bank

Thanks.

Tom Soohoo

Thank you.

Operator

Our next question comes from Andrew Collier - New York Global Securities.

Andrew Collier - New York Global Securities

Hello, guys. Thank you. Can you give me a sense of the number of 3 star and above hotels in China? What do you think your ultimate penetration rate can be?

Tom Soohoo

Sure. Right now we have relationships with over 3,200 hotels. We have expanded that quite rapidly, obviously, over the last couple of years. Over the next year or couple of years you are not going to see as high increases we have in the past, where we are pretty well covered in most of the major cities. We are expanding in the second tier cities, but you won't see significant increases in our 3-5 star hotels.

One thing that is happening in China is there is a lot more economy hotels being built. It is still quite early stages, so what you will see is us expand our products in that segment.

Andrew Collier - New York Global Securities

As you expand into the second tier cities, and as you talk to the economy hotels, which I assume are going to be below 3 star, how does it affect your payment per room night and your gross margins?

Derek Palaschuk

If you look at our revenue per room night, that is clearly one of the wins that we have had in the past year. If you look at our first quarter revenues, we grew 46% year-over-year, and that was on the back of solid volume increases, but also our revenue per room night has increased from RMB56 a year ago to RMB63 this quarter.

We see no pricing pressure on that RMB63, and actually as our volume increases we would expect that to increase, including in the second quarter.

The 2 star hotels, or the economy hotels, are just a very, very small part of our business so certainly for the rest of this year we wouldn't see that product swing having any impact on our revenue per room.

Andrew Collier - New York Global Securities

Do you expect then the growth of the business to be reliant on increasing penetration and increasing travel among, essentially, the upper end business travelers? Or do you see it moving into packaged tours more or consumers? Would that have any impact on your margins, or is that a couple of years away?

Tom Soohoo

Certainly for this year we see the mix not changing significantly. You are right, that the consumer and vacation packages will provide an area of growth for us in future years. Right now vacation packages is just a very, very small part of our overall business.

Andrew Collier - New York Global Securities

So for the rest of '06, it is penetration of the business customer, essentially, and expanding the room night among that group?

Tom Soohoo

I think what we've said in the past, Andrew, and it is difficult for us to estimate, but we believe probably 30% of our business, our hotel business, is from leisure travel and 70% is from business. We wouldn't expect that to change significantly this year.

Andrew Collier - New York Global Securities

Okay, thank you.

Operator

Our next question comes from Kit Lowe - Goldman Sachs.

Kit Lowe - Goldman Sachs

Good morning, thanks for taking my question. Can you explain your customer acquisition costs for this quarter compared to a year ago and the last quarter, please?

Derek Palaschuk

Sure, Kit. It is Derek here. Our customer acquisition costs is around RMB200. That amount has been actually fairly flat over the last few quarters.

Kit Lowe - Goldman Sachs

Okay, great. Thanks.

Operator

Thank you, sir. Our next question comes from Michael Millman - Soleil Securities.

Michael Millman - Soleil Securities

Two questions. Today or this evening Expedia reported, very disappointing numbers in part because they did not get the traffic they expected, in part because their advertising message didn't particularly resonate.

I was curious as to whether you had been using the same marketing approach as they had, and whether based upon their experiences that you might change to become somewhat more promotional.

My other question is, I think you indicated that the expectation was for travel in China to grow about 10% a year. If you could give us some forecasts of online penetration going forward. Thank you.

Tom Soohoo

Hi Michael, this is Tom. Thanks for the question. In reference to Expedia's release today, yes we are obviously aware of the marketing campaign. Just for clarity sake, we do not link our marketing strategies with Expedia's. As part of our strategic partner, any of the key learnings that they have from their campaigns, clearly we will apply to any of our future strategies.

In reference to your second question, which was do we see an increase in online, we see that over time, the convergence of e-commerce and credit card penetration will lead towards greater use of online transactions to drive our businesses. That is principally one of our long-term objectives for the business, but we cannot give any specific numbers as of now.

Michael Millman - Soleil Securities

Currently, what would it be?

Derek Palaschuk

I think your question was for overall China. Is that correct?

Tom Soohoo

The online portion.

Michael Millman - Soleil Securities

It was for overall China.

Derek Palaschuk

Yes, there are various numbers around. You are probably better to get them than we are. We clearly see the onset of tremendous potential for growth. Right now, the majority of our business is through the call center. But over time, and especially working with Expedia, and similar to what happened in the United States, more and more of that is going to be booked online. For the overall China numbers, I mean, there are various numbers around. I see less than a few percent of the total travel being done online.

Michael Millman - Soleil Securities

You mean currently?

Derek Palaschuk
Yes.

Michael Millman - Soleil Securities

Thank you.

Operator

Thank you, sir. Our next question is coming from Chun Qui calling from the U.S. Go ahead, sir.

Chun Qui

Good morning, Tom and Derek. Maybe one simple question first. For the stock-based compensation expense going forward, making your second quarter guidance, how much are you guiding?

Derek Palaschuk

For the stock-based compensation? There will not be any material change in that number. It was around $3.3 million in the first quarter, Chun.

Chun Qui

Right, and in the guidance, it is about the same.

Derek Palaschuk

Correct.

Chun Qui

Okay, and maybe continue with the earlier question regarding your marketing strategy. I know you used, you know, handing out a car, hand-outs at airports and many physical locations. Also, you have a website with various portals. My question for you is, is there any way that you can compare various approaches so that you know which way is more effective for your target audience?

Tom Soohoo

Thanks for the question. Yes, we clearly measure all of the effectiveness of all our marketing channels. So in reference to your earlier statement, yes we do have direct sales channels through distribution of cards. That will continue to be an important part of our distribution and new customer acquisition mix. We are, since I am relatively new to the company, are going through a deep-dive analysis, looking at all of our sales channels and seeing where we have opportunities to improve them.

Chun Qui

Thank you.

Operator

Thank you, sir. Next we actually have a follow-up question coming from Mr. William Bean. Go ahead, sir.

William Bao Bean - Deutsche Bank

Thank you. In terms of traffic from your portal partnerships and other partnerships, how can we think about the progress there? Can you give us any metrics?

Derek Palaschuk

Sure, William. We are seeing increased traffic, as well as increased bookings from our online channel. We see this as an important distribution channel. We will continue to work on that. We are also working with Expedia, who has a lot of expertise, and trying to improve the efficiencies of our online marketing, as well as our website. You know, we just launched a 360 degree product, as well as our international booking platform, so this is clearly an area of focus for us.

William Bao Bean - Deutsche Bank

On a quarter on quarter basis, or year over year, the traffic and bookings have been up. Could you give me the percentage of total from that particular channel?

Derek Palaschuk

If you just look at our overall online bookings, it is between 15% and 20% for our hotel business, and that also includes what is coming through our website, directly from our eLong website. Air is a bit more than 20%.

William Bao Bean - Deutsche Bank

Okay. Can you give us a sense if there is any change in your thinking on marketing spend going forward?

Derek Palaschuk

Sure, William. What we always said is that we have a very long-term view. As Tom often tells our senior management team, we are clearly in the right place at the right time. So we are going to make the necessary investment to take us to the number one position in this market. We have a very strong competitive position now, and we want to protect that and increase our position. So we will invest what we think is necessary to achieve that.

William Bao Bean - Deutsche Bank

So no change then? Can you give us a sense of when you expect the international to become material, or over 5%?

Derek Palaschuk

We would not see it happening this year, William.

William Bao Bean - Deutsche Bank

Okay. Can you just give us an update on the competitive environment? Anything new from Travel Sky?

Derek Palaschuk

Since our last call, William, there has not been, as we said on the hotel business, there has not been any change in the competitive landscape. There are really very few players in that area. In the air, we have seen some new entrants, but if you look at eLong’s competitive advantage, we are very well-financed. We have over $130 million in cash. We have Expedia as a shareholder. We also have a very broad product offering, hotel and air, so that some of these new air entrants are not able to provide a full suite of products, so we are well-positioned and we are working hard to improve on our existing execution.

William Bao Bean - Deutsche Bank

Can you just remind us about what we can expect from air and hotel seasonality in Q2, and maybe for the rest of the year?

Derek Palaschuk

Sure, William. For Q2, April -- first, let’s talk about our hotel business. April was strong in our hotel business. As you know, in the first quarter, we had 46% year over year growth. On the top end of our hotel guidance, we should be close to that.

Air business will also be stronger in the second quarter than the first quarter, as it was last year. The top end of our guidance was perhaps around 90% year on year growth in our air business.

William Bao Bean - Deutsche Bank

In terms of normal seasonality, I mean, it is generally up and then Q3 is generally the strongest quarter again?

Derek Palaschuk

Normally, actually, Q3 and Q4 both are strong. If you look historically, Q4 has been better than Q3. Q1 is clearly the weakest quarter.

William Bao Bean - Deutsche Bank

But usually the quarter over quarter growth is strongest in Q3, is that correct?

Derek Palaschuk

Correct.

William Bao Bean - Deutsche Bank

For the industry. Okay, last question, can you give us an update on any personnel changes post the arrival of Tom?

Tom Soohoo

We have had the appointment of Thomas [Zhong], who is our VP of Human Resources, who joined us in mid-April. We also had the appointment of Hal Fiske, who is our General Counsel.

William Bao Bean - Deutsche Bank

Okay. Thank you.

Operator

Thank you, sir. Our next question is coming from Ming Zhao calling from SIG in America. Go ahead, sir.

Ming Zhao - SIG

Thank you. Good morning, Tom. Good morning, Derek. I have two questions. First question regarding Expedia. In the forecasted numbers, it seems like eLong’s contribution as a percentage of Expedia’s revenue is less than 1.5%. We have heard your announcement regarding the 360 degree virtual room show. I just want to have an idea how and what kind of support Expedia is giving eLong to grow the business. Could we expect this contribution to Expedia to exceed maybe 5% in two years or three years? Is there any target?

Tom Soohoo

In reference to your question about support from Expedia, support from Expedia has actually been significant and deep. Over the last 18 months of our partnership with Expedia, they brought numerous benefits in the form of management expertise, technical expertise, analytical methodology and processes. Obviously, they have been very supportive of some of our management changes as well, which I think ultimately has really strengthened the team and our process for the future, and for future growth.

Obviously the biggest and most visible support from Expedia has really been the recent launch of our enhanced connectivity to the hotel inventories through use of Expedia’s hotel inventories. We are actually very excited about this, because it really takes the use of the Internet and brings a fungible, clear benefit to Chinese consumers in terms of enhancing their travel experience. So we believe that this is a sign of the strength of the partnership not only now, but also going forward.

In reference to when eLong will become a larger portion of Expedia’s revenues, I am really not in a position to answer that, because it would also hinge somewhat in terms of our revenue growth as well as Expedia’s. Thank you.

Ming Zhao - SIG

Second question, very quickly, Derek, maybe somebody has already asked, but could you explain the drop of gross margins for the quarter? What kind of trend will we see in future quarters?

Derek Palaschuk

Sure, Ming. Our gross margins was 77% in the first quarter, which is actually identical to a year ago. It is down from the fourth quarter, where it was 82%. The main reason for that is the seasonality. Q1, because of Chinese New Year, we got lower hotel revenues and we have a certain fixed cost base that we need to maintain. As well, our air gross margins are lower than the hotel, so as our air business increases as a percentage of our revenues, you will see a reduction in our gross margins. I think in the second quarter, you will traditionally see an increase from the first quarter in our gross margins.

Ming Zhao - SIG

Okay. Thank you very much.

Operator

Just as a reminder to all participants that it is star, 1 on your telephone keypads if you have any questions.

We have a follow-up question coming from Chun Qui. Go ahead, sir.

Chun Qui

Derek, one question regarding your other revenues. Normally in Q1, the advertising revenue is weak. For your guidance, it looks like you are guiding about flat for the other revenue line. But normally, Q2, the advertising is stronger. Can you give us some clarification here?

Derek Palaschuk

Sure, Chun. There are two components to our non-travel revenue. One is advertising revenue, the second is wireless revenue. So in terms of advertising on our portal, that is not a key focus for us, so we would not expect significant increases in our online advertising revenue.

Chun Qui

Do you expect the wireless revenue also about flat?

Derek Palaschuk

Yes.

Chun Qui

I see. Okay, thank you.

Operator

We have a follow-up question coming from the line of Andrew Collier. Go ahead, sir.

Andrew Collier - New York Global Securities

Yes, I wanted to find out, what is your average bookings, or current rate bookings, from travel agents, and what is the trend?

Derek Palaschuk

Sure, Andrew. A small percentage of our bookings are from travel agents. Most of our business is done directly with consumers. Working with travel agents is not an area that we are focused on, because we prefer to own the customer.

It is interesting. We do have a number of travel agents that want to work with us because, as you know, we really have only one of the few hotel GDS systems in China. It is one of our competitive advantages.

Andrew Collier - New York Global Securities

How can you tell when a travel agent is booking that it is not a customer?

Derek Palaschuk

Because we have card numbers for all of our customers, so we can identify them.

Andrew Collier - New York Global Securities

Okay. You do not see that as a significant growth area for you then?

Derek Palaschuk

No, nor is it an area that we want to focus on.

Andrew Collier - New York Global Securities

I guess you could actively, or you would not actively prevent an independent agent from booking through you?

Derek Palaschuk

You are correct. We would not.

Andrew Collier - New York Global Securities

Thank you.

Raymond Huang

Thank you. Moderator, any other questions, please?

Operator

Yes, sir. We have a follow-up question coming from William Bean.

William Bao Bean - Deutsche Bank

Last one here. I just wanted to dig down and search. Could you give us an update on the percentage of total marketing spend? Are you seeing any changes in the efficacy of search? Are you using some of the management optimization techniques that Expedia uses? Thank you.

Derek Palaschuk

Hi, William. We are working with Expedia to optimize our search and become better at managing that in China. Right now, it is a very, very small percentage of our marketing spend. It is also a small percentage of our customer acquisition.

William Bao Bean - Deutsche Bank

Thank you.

Operator

We have another follow-up question coming from Andrew Collier. Go ahead, sir.

Andrew Collier - New York Global Securities

Thank you for your time. I appreciate it. Can you give me some clarity about your marketing spend in terms of breakdown between the people at the airport handing out cards and other forms of advertising?

Derek Palaschuk

Sure. Most of our marketing spend right now is really sales related, and we split that between the different channels that Tom has talked about -- our website partnerships, our business partners, as well as our direct sales channels.

Andrew Collier - New York Global Securities

No, please go ahead.

Derek Palaschuk

That basically would be my response.

Andrew Collier - New York Global Securities

So website partners, business partners, and direct sales channels. Are any of those three areas predominant?

Derek Palaschuk

Our direct sales channel is our largest customer acquisition channel. I think we said on the call earlier our average cost of acquisition is around RMB200. That is obviously the combination of all of our channels.

Andrew Collier - New York Global Securities

Direct sales channels has to do with salesmen, the people at the airport but also salesmen talking directly to potential customers?

Derek Palaschuk

It is our direct sales, correct.

Andrew Collier - New York Global Securities

Okay. Thank you.

Operator

We have no more questions at this point in time, sir.

Tom Soohoo

Thank you. At this point, I would like to thank everybody for joining the call. Thank you very much. This concludes the Q1 2006 eLong earnings release.

Operator

Thank you. That concludes today’s conference call. On behalf of eLong, I would like to thank you all for your participation in this conference. All lines may now disconnect. Thank you.

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