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eLong, Inc. (NASDAQ:LONG)

Q3 2008 Earnings Call

November 26, 2008 7:00 pm ET

Executives

Philip Yang - Investor Relations

Guangfu Cui - Chief Executive Officer

Chris Chan - Chief Financial Officer

Analysts

Eddie Leung - Merrill Lynch

Catherine Leung - Citigroup

Operator

Good day to all of you and welcome to eLong's third quarter 2008 earnings report conference call. (Operator Instructions) I will now hand over the line to Philip [Yang] and I will be standing by for the Q&A session. Sir, you may begin.

Philip Yang

Thank you. Hello, everyone. Thank you for joining eLong's third quarter 2008 conference call. Today, Guangfu Cui, our CEO, will make some remarks about the quarter, followed by Chris Chan, our CFO, who will provide greater details on our financial results. Following their prepared remarks, Guangfu and Chris will be available to take your questions.

Before the management 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 on 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 the risk factors described in our annual report on Form 20-F, as well as the risks discussed in the company’s Form 6-K, which will be furnished to the SEC in connection with our press release and this conference call for a discussion of the important factors that could affect future results.

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

Guangfu Cui

Thank you, Philip. Hello, everyone. Happy Thanksgiving and thank you for all being on this call. In a challenging third quarter, we were able to achieve net revenue growth of 6.3% year over year. Externally, we encounter a strong headwind. The domestic travel market in China contracted year over year in the third quarter as a result of global financial crisis. We are cautious about this situation and expect the global economic slowdown will impact China.

Despite this challenging external environment, we achieved several milestones in the third quarter. First, the eLong call center was awarded the best call center in China by the China Call Center and BPO Association. In September, our internal customer research results indicates that approximately 99% of our customers were very satisfied or satisfied with our call center service, of which 90% were very satisfied. This is an improvement of 2% over the results reported in the second quarter.

Our external third-party mystery shopper research also indicates that eLong's call center service is overall significantly better than that of our key competitor. Based on these results, we believe that eLong's call center now provides the highest standard of customer service in the online travel industry in China. If you will recall, fixing our service level was the first of my priorities when joining as CEO and we are now in a position where this has been largely accomplished.

Second, eLong continues to improve the online booking experience for our customers and we see our online growth -- our online business growth growing at a much faster rate than the offline business. In the third quarter, we partnered with Google and launched hotel search integrated with Google mapping functionality. Consumers can now search and book hotels at eLong.com using customer-defined target locations, rather than a demonstrative [districts] [of] predefined areas. This customer access search results and makes our website more intelligent.

In the third quarter, we also launched debit card online banking payment functionality. Consumers can now use their credit card and debit card to pay for their tickets online. Two-thirds of eLong's air tickets are now purchased using non-cash measures, which is an increase from approximately one-third a year ago, that we believe we have now addressed the payment bottleneck for online bookings.

Third, if you will recall, we communicated with you in the third quarter of 2007 that eLong planned to upgrade our internal systems. We are happy to announce that eLong successfully launched Oracle ERP in the third quarter and successfully launched CBO CRM in November. With these internal systems in place, we will further improve our customer service and operational efficiency.

Fourth, on the product front, we increased our contracted hotels from approximately 6,600 hotels in the second quarter to approximately 6,800 in the third quarter. Lastly, on the marketing front, we tested offline media through a brand awareness campaign in select cities, followed by a consumer promotion. We achieved brand awareness target in those selected cities but the incremental volume during the promotion period was below our expectations, partially due to the slowdown of the travel industry in the same period. Nevertheless, we believe our efforts in building brand awareness will pay off in the long run.

You may ask us where we are now in turning around the business. The first stage of our company turn-around, which was to fix the fundamentals and build our core competencies, will be completed by the end of 2008. In 2009, eLong will enter the second stage of turn-around, which is to demonstrate our competitiveness in the marketplace. At this stage, we have high quality service as our enabler.

However, our challenges will be first how to market our products and service effectively under difficult market situations, and how to work with our hotel and airline partners to bring back the value to consumers; and last, how to move even faster on IT platform innovations. Our focus will be on winning online booking and winning hotel booking business. We have laid out our game plan to bring in these two target areas and we will focus on our execution, just as we have done in 2008. We remain confident and committed to turning around the company.

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

Chris Chan

Thank you, Guangfu. Let me give you an overview of our third quarter results, starting with our statement of operations, followed by our balance sheet. Our third quarter total gross revenues were RMB19 million, an increase of 7% year over year. The mix of revenue from our core travel business was 95% of total revenue, down approximately one percentage point from 96% in the same quarter prior year. Gross revenue from hotel commissions totaled RMB65.2 million, a year-over-year increase of 1%, mainly due to higher [room] volumes offset by lower commission per room night.

Hotel room nights booked through eLong totaled 1,050,000 in the third quarter, up 4% from 1,009,000 in the corresponding period a year ago. Hotel commission per room night was RMB62, which was lower than RMB64 of the same quarter during the prior year, mainly due to an increase in the proportion of room nights from budget hotels.

Our hotel commission rate was 15%, which was similar to the same period last year. Our third quarter 2008 average daily rate of RMB412 was slightly lower than the RMB416 of the same period last year. Gross revenue from air ticketing commissions totaled RMB19.9 million, a year-over-year increase of 28%. Total air segments were 484,000, an increase of 31% over the prior year period. Commissions earned per air ticket in the third quarter were RMB41.1, down slightly from RMB42.1 in the same period last year, mainly due to a decline in the average ticket price, which dropped by RMB127 to RMB764 compared to the prior year quarter. The average commission rate in the third quarter increased to 5.4% from 4.7% in the same period a year ago, an increase of 0.7%. Non-travel revenue remains at 5% of total revenue in the third quarter and consisted mainly of non-travel online advertising on our website.

Going forward, we intend to continue to make prudent investments in marketing, IT, and in improving our product competitiveness. This increased investment is expected to continue in the next few quarters. At the same time, we recognize the challenge our business faces from the slow-down and uncertainty in the global and Chinese economy. We expect lower demand and potentially lower room rate and lower ticket prices in the China travel market. Management have taken steps to streamline our costs and improve efficiencies during this difficult time and believe that the company will benefit from more efficient operations when economic growth recovers in the future.

Let me now make a few comments on our balance sheet. As of September 30, 2008, the company’s cash and cash equivalents balance was $150.5 million. Also between March when the company began its share buy-back and November 25, 2008, the company repurchased 1.8 million ADS shares at a cost of $13.7 million.

And finally, let me share with you our business outlook for the fourth quarter of 2008 -- eLong expects net revenues net of business tax and surcharges for the fourth quarter of 2008 to be within a range of RMB83 million to RMB92 million, an increase of 1% to 12% compared to the fourth quarter of 2007.

This concludes the financial review 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

(Operator Instructions) We have a question coming from the line of Eddie Leung. Please go ahead.

Eddie Leung - Merrill Lynch

Good morning. Could you guys help us to understand what’s the ASP trend into the fourth quarter so far?

Guangfu Cui

I’ll take your question. If you look at the Q3, I think demand is pretty [inaudible] Olympic Games but in Q4 the demand is hurt by the overall economic slowdown. The global financial crisis is clearly reaching China’s shore now. The market appears softening. We saw the October demand rebound versus Q3 due to the unleash of the depressed demand in Q3. We actually saw a record revenue in October but we did not see the same level of year-over-year percent increase versus the same period last year. Then in November, we saw a significant drop from October.

I think the mood in China is now cautious and concern. China’s central government RMB for [inaudible] economic stimulation plan will have to dampen this shock of the global financial crisis but the depth and duration of the slowdown remains unclear. It’s very hard to predict Q4 and going forward to 2009, given all the uncertainty in this turbulent period. But we must accept now to prepare for the softness of the market.

Eddie Leung - Merrill Lynch

I understand. Guangfu, just a follow-up on this one -- we all understand the negative impacts of the macro slow-downs on the travel industry but so far this moment, should we think of it more an impact on the traffic or more on ASP because of the competition between airlines and hotels?

Chris Chan

I think it’s both. We did see softening in the volume in November month-to-date and we also -- in October, we saw the pricing was better than Q3 but in November, the price started to soften again.

Eddie Leung - Merrill Lynch

Understood. And could you update us on your headcount as well as your call center staff, if possible?

Chris Chan

We were able to maintain the headcount at about 900.

Eddie Leung - Merrill Lynch

Okay. I’ll get back to the queue.

Operator

Thank you. The next question is coming from the line of Catherine Leung. Please go ahead.

Catherine Leung - Citigroup

Good morning. Thank you. I have a few questions. The first question is a follow-up to Eddie’s question. We noticed that you had higher air ticketing commission rates in the third quarter. To what extent do you think that you can offset some of the commission declines related to the lower air ticket prices with higher commission rates that I think that you have achieved through reaching certain volume thresholds. That’s the first question.

And the second question is that you indicated in your script that external surveys indicates that eLong call center is overall better. Would you be able to share with us some of the details, for example, by which factors these surveys evaluate eLong's call center compared to other online travel agencies?

And my third question is would you be able to give us any idea of the gross margins of your air ticketing versus your hotel business? Maybe you can address these questions first and I’ll get back into the queue. Thanks.

Chris Chan

I’ll address the last question first, that’s relatively more straightforward. We do disclose the product gross margin in our 20-F, so I think that would be a good document to refer to, so in general we earned I would say one-third to one-half of the hotel in terms of gross margin. Online gross margin would be higher than offline and where online would be an area we can scale a little bit better. At the same time, we do have project and the IT platform improvement helping us, better scheduling and so on, that will have positive impact on the gross margin.

So to answer your question, the air, one-third to one-half of hotel gross margin in general. But it would be impacted by several drivers -- productivity, the pricing as a percent commission.

So on the air percent commission, I think in this time of the year, given the regulation and the uncertainty in the economy, I think it would be difficult for us to project the air commission, what it’s going to be. I can only say that what we have done so far in this year, we improved the online. We actually had some further optimization in the allocation of where we issue the ticket. We did have the mailing functionality which helped us to capture a higher percent commission to eLong, though we do use ticket issue agents in other foreign remote cities and because of the changes, we are able to have the company benefit more from the air commission structure.

Guangfu Cui

I would like to take your question regarding the mystery shopper research result -- basically there are several key metrics we use to measure this. First is staff service level of our call center staff. We measure the attitude of the staff and the knowledge of our call center staff and the effectiveness of handling the calls. Then we also measure the processes -- for example, the inquiry of the booking process, the booking, then the change cancellation service. So basically the consumer will rate us in terms of overall -- are we significantly better than our competitors or slightly better or the same or below? And then the panel of consumers also rate the service of our call center staff and also the efficient and effectiveness of our booking processes. So those are the key areas we measure against our key competitors.

Catherine Leung - Citigroup

Thank you. Can I ask how many consumers were surveyed?

Guangfu Cui

We have over 200 consumers surveyed, which is -- the survey is conducted by a third-party and the panel of consumers do not know which company is initiating this kind of a survey.

Catherine Leung - Citigroup

Okay. Thank you. I’ll get back in the queue then.

Operator

Thank you. (Operator Instructions) We have another question from the line of Eddie Leung. Please go ahead.

Eddie Leung - Merrill Lynch

Just a follow-up on the commission rate on the air side -- should we expense certain structural change in the commission rate that the airline is willing to pay to agencies in general or do you guys still think that we should see pretty stable commission rates, at least in the near-term, say into 2009?

Guangfu Cui

So far there are no signs that our commission rates will be cut or reduced, so all the signs are indicating that we will be able to keep the commission rate as of now for the -- in the near future. We are also starting to negotiate 2009 contracts with the airline but so far we are the most efficient channel for the airline industry and given the economic situation and the online travel sector becomes more important to our partners, so that’s our current rate and we currently closely monitor the situation and we will report back if there is anything changed.

Eddie Leung - Merrill Lynch

That’s very interesting, Guangfu. Can I add one question following your comments? Could you also help us to understand the development in the offline so-called traditional agency business? Do we see an obvious drop-out of some of the smaller guys or how does going into 2009?

Guangfu Cui

Apparently there are some new policies and regulations in the airline industry and that apparently helps us for the online travel sector. For example, you now have to have a higher deposit with the BFP so that they will give you the quota for you to sell the tickets. So if you don’t have enough cash, apparently your volume will be -- will have to adjust. I mean, that’s number one. Number two is that you have to negotiate with the airlines directly on an open market approach rather than the government regulated commission structure, so again that helps the stronger player in the market.

So overall I think the trend is in favour to the online travel sector because we are -- we have the capability of online booking, e-ticketing, and we have the best service and also the policies are apparently also driving the efficiency in this sector.

I’m not sure -- is that all you want to know or do you also want to understand the hotel sector?

Eddie Leung - Merrill Lynch

If you can, that would be great. Thanks.

Guangfu Cui

So on the hotel part, we haven’t really seen any policy or the overall markets shifting to the online booking, which is in favour of kind of enable online booking. But I think the current development will be in favour in the online booking. The reasons are first the -- during the downturn, the consumer will shop around and compare and try to understand what the best use available in the market so which really favoured the online booking service provider and also the eLong website, we have made significant improvement in the past year so our usability of the website is a apparently improving significantly versus before, so which really kind of makes it easier for consumers to book online.

So overall in short, there’s no policy or overall market kind of driving [inaudible] to moving online but the popularity of credit cards, computers, personal computers, broadband, and also the usability improvement of the eLong website, really kind of moving, driving people online. So I think it’s the consumer choice rather than the policy or overall environment. Thank you.

Eddie Leung - Merrill Lynch

Thank you.

Operator

Thank you. We have another question coming from Catherine Leung.

Catherine Leung - Citigroup

My follow-up question, firstly could you give us the current mix of your online versus offline business? And secondly, the hotel network, you mentioned that some of the growth is driven by increased in budget hotels. How much of your existing hotel network is composed right now of the budget hotels? And thirdly, you mentioned that in this type of environment, consumers will probably opt to shop around a little bit more. In this context, what do you see as a threat of the meta-search, dedicated travel meta-search engines in this market? And fourthly, going into 2009 as you enter the second stage of your turnaround, should we expect to see a material increase in the amount of sales and marketing costs compared to the current year? Thank you. And sorry, the budget hotels, I think it explains more the decrease in the average commission rate.

Chris Chan

Catherine, let me give you the online percent first. For the percent of hotel, Q3 is about 20% and therefore air ticket is about 32%. So for hotels, that would be five percentage point increase year-on-year and therefore air would be 10% point increase.

Catherine Leung - Citigroup

Okay. Thank you.

Guangfu Cui

And Catherine, I would like to take your question of marketing for 2009. I think probably I would like to step back and see probably overall how we plan to do in 2009 in terms of overall company approach, which is including our marketing effort. So I think the first step we would take is we need to drive harder and market smarter to move business online. This will reduce costs to serve and also demonstrate our apparent competitive advantage with booking online. So this also would require us to be more selective in marketing programs. So we will continue to invest in marketing but we will be more selective and our marketing will be targeted and so selective.

Second, we need to work with our hotel and airline partners closer and better to deliver better value for money, [or to] stimulate demand so -- this is also part of marketing that we need to make our product competitive and bring a unique value to consumers. So we will be able to work with the hotel and be creative in terms of doing this.

Third, we need to focus our investment on moving even faster on some game-changing IT projects. We have put in place some good infrastructures in the past 12 months, such as ERPs, CRM, and the booking process, et cetera, et cetera. And we can now drive innovation faster, given our current infrastructure.

And last, we do need to control our G&E costs and we also need to drive efficiency on call center so that we can reduce cost to serve. So I hope this answers some of your questions and I guess that you still have some other questions, so you can repeat some questions which is not answered.

Catherine Leung - Citigroup

Sorry, the first question is really straightforward -- how much of your existing hotel network is comprised of budget hotels? And the second question was in reference to one of your previous responses, which is in this type of more difficult environment consumers may be prone to shopping around more to compare prices and in this context, how much of a threat or how much value do you think such products, such as a kind of dedicated travel meta-search engine provide in this type of market? Thank you.

Guangfu Cui

In terms of [inaudible] of the meta-search, we do not usually -- because we are just one major kind of meta-search in China so we don’t want to comment specifically on them but we do see the current meta-search, you know, recently there is a, you know, news regarding Baidu of the search [inaudible], so I do see that the same issue makes [inaudible] the current meta-search which the result is not displayed as the competitive price but rather who is paying will be listed in front, in the highest order, so I do see the consumer, if they shop around and there is still distrust of certain search affect our results because a consumer may not completely trust the meta-search results. So that’s my answer to your question.

Catherine Leung - Citigroup

Sorry, can I ask -- do you have some sort of feature in your technology that prevents any meta-search engine from collecting the data from your websites?

Guangfu Cui

In fact, we can block some IP sites but it’s only after a certain number of [websites]. Exceeding that, we can block the IP address but it’s very hard to block a unique IP which accepts our [inaudible].

Catherine Leung - Citigroup

Okay.

Chris Chan

Catherine, I will answer your budget hotel questions -- we don’t comment on the hotel style mix but I can comment on the general trend. So over the several quarters, we did see a higher proportion of budget hotels and in terms of pricing, we saw that the three star hotel may have a lesser pricing ability and just some shift from the three-star hotels to the budget hotels. So -- but less impact on the five star hotels. So I think for the customers who are more price sensitive, they are looking for a reasonable hotel rooms, you know, through the experience they may prefer a budget hotel. And in this economy, we should expect a further trend to at this level of hotel.

Catherine Leung - Citigroup

Thank you. And sorry, a last question, if I could -- would you be able to disclose what is the approximate overlap between customers who book hotels and customers who book air tickets? I guess in other words, how many -- what proportion of your customers book both air ticketing and hotels through eLong?

Chris Chan

I don’t really have the exact percentage on my mind. I think generally we don’t disclose this. We are seeing a higher cross-sell between the air customer and hotel customer.

Catherine Leung - Citigroup

Okay. Thank you very much.

Operator

Thank you. (Operator Instructions) We have no further questions at this time. I would like to turn the line back over to the eLong management team.

Guangfu Cui

I just wanted to make a few remarks so that we will complete the call. As in Chinese, credit actually means risk and opportunity. Looking ahead, we remain optimistic for long-term prospects of the online center and eLong proposition. For one, we have $150 million in cash and no debt and we are now more competitive than a year ago. For two, the short-term contraction leads to a further consolidation in the travel industry and may also help conversion to online booking. With the hard work in the past 12 months, eLong is now well-positioned to compete online. eLong has shorter webpage response time but advanced searching features such as Google Map search, better hotel content display technology, [inaudible] 360 degree virtual tour and simple and efficient booking process. For three, the short-term difficulty in the travel sector will make online travel agencies an even more important distribution channel than before. This will help eLong to gain more guaranteed allotment from hotels and increase the level of cooperation with hotels to bring back our value to customers. Yes, we may grow slower and our job is tougher in this period but we will come out strong. Thank you.

With that, we would like to conclude the call.

Operator

Thank you. And that concludes today’s conference call. Once again, on behalf of eLong and its management team, I would like to thank you all for your participation and good day to all of you.

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