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Ctrip.com (NASDAQ:CTRP)

Q1 2006 Earnings Conference Call

May 17, 2006, 9.00 pm EST

Executives:

Tracy Cui

Min Fan, Chief Executive Officer

James Liang, Chairman

Jane Sun, Chief Financial Officer

Analysts:

Lu Sun, Lehman Brothers

Paul Beaver, Piper Jaffrey

Jason Breuschke, Citigroup

Kit Lowe, Goldman Sachs

Jenny Wu, Morgan Stanley

Ashish Bedani, Gilford Securities

William Bean, Deutsche Bank

Ming Zhao, Susquehanna Financial Group

Michael Millman, Soleil Securities

Presentation

Operator

Good day ladies and gentlemen and welcome to the Q1 2006 Ctrip.com international earnings conference call. My name is Alexis and I will be your coordinator for today. Operator instructions. I would now like to turn the presentation over to Ms. Tracy Cui. Please proceed ma’am.

Tracy Cui

Thank you for attending Ctrip’s Q1 2006 earnings call. During our call today, we have Mr. James Liang, Chairman of the Board, Mr. Min Fan, Chief Executive Officer, and Ms. Jane Sun, Chief Financial Officer. We may during this call discuss our future outlook and performance, which our forward-looking statements made under the Safe Harbor positions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties, as such our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in future public filings with the Security and Exchange Commission. Ctrip does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Min will provide a business update on Q1 2006, James will provide updates on new business development and then Jane will give highlights of the Q1 financial performance as well as the Q2 outlook. We will also have a Q&A session toward the end of this call.

With that, I will turn to Min for our business update.

Min Fan, Chief Executive Officer

Thank you, Tracy. We are pleased to report another fantastic quarter going into the year 2006, with strong performance from all our business lines. Despite the fact that the first quarter is normally the slowest season in the year, we were able to turn Q1 2006 into a record quarter in terms of revenue and gross margin, through our competitive strategies, effective product development and sales and marketing campaigns. During Q1 2006 we achieved 61% of total revenue growth over the same period last year, and a slight increase from the previous quarter sequentially. The revenues from the hotel reservations grew 36% year over year, and revenues from air ticketing grew 103% YoverY. The revenues from package tours grew 173% YoverY. The strong growth during Q1 2006 was mainly attributable to the increased cover volume, accompanied by the unit contribution compared to last year, which indicates continuous enormous(?) industry growth.

Our supplier network grew to about 3,500 by the end of Q1 2006 compared to 3,100 by the end of Q1 2005 and about 3,400 by the end of the previous quarter. The hotels with guaranteed allotment rooms increased to approximately 1,600 in Q1, compared to approximately 1,100 during the same period in 2005 and about 1,500 at the end of the preceding quarter. For package tour business, we have grown the number of package tour products to about 950 in over 220 destinations by the end of Q1 2006. In the coming quarters, we expect to grow the number of departure cities in addition to the current six cities. By the end of March 2006 we had over 1.9 million cumulative customers, representing 12% growth over the last quarter. On average will continue to add approximately 60,000 on a monthly basis during Q1 compared to approximately 46,000 new customers per month in Q1 2005 and 57,000 new customers per month in the previous quarter.

Starting in Q1 2006, we set up four new branch offices in Wuhan, Shenyang, Qingdao and Shandong(?) in order to effectively extend into the second tier cities. We expect those places to be another (inaudible) engine for us (inaudible) business. Looking at the competitive landscape, Ctrip remains as the dominant market leader in China. We’re continuing to lead the competition through revenue growth and customer acquisition, with our innovative product development, effective sales and marketing campaigns and high quality customer service.

Now let me turn to James for new business development initiatives.

James Liang, Chairman

Thank you, Min. I am very proud of the great results delivered by our Ctrip team. I want to thank all of our colleagues for their hard work and their remarkable achievements. As Min has mentioned, we continued to see robust industry growth in Q1 2006. According to China’s statistics bureau and the China National Tourism Administration, China’s preliminary 2005 GDP was about $2.3 trillion, a 9.9% increase from the previous year. Travel consumption has grown to US $95 billion in 2005, representing a 12% increase from the previous year. Based on the latest announcements made by the CRAC(?), 50-100% of air tickets will be issued electronically by the end of 2007 compared to less than 10% in 2005. We anticipate rapid adoption of electronic tickets in the next couple of years.

We see excellent opportunities for Ctrip to take advantage of the growth while leveraging and enhancing their existing robust infrastructure, supply network, loyal customer base, scaleable business model and dedicated management and employee team. During Q1 2006, we officially launched the corporate travel business. As the largest consolidator of hotel reservations and air tickets in China, we are well positioned to expand our service operations to the corporate travelers in addition to FIT(?) customers. As of today, we have hotel partners in over 270 cities and air ticketing capabilities in approximately 45 cities. We believe we can offer more advantages to our customers, such as expensing local supply network convenience and timely customer service and efficient travel management systems. Now I will turn to Jane, to discuss our financial results.

Jane Sun, Chief Financial Officer

Thanks, James. We have once again achieved remarkable growth during Q1 2006. Our revenues were RMB156 million, or US $19 million in Q1 2006, representing a growth of 60% YoverY and a slight increase from the previous quarter. Revenues from hotel reservations were RMB96 million or US $12 million in Q1 2006, up 36% YoverY due to higher volume and commission per room compared to the same period last year, and down 8% QoverQ due to the reduced hotel bookings during the Chinese New Year holiday. The total number of hotel room nights booked was approximately 1.38 million in Q1 2006, compared to approximately 1.1 million in the same period last year and 1.52 million in Q4 2005. The average commission per room night increased to RMB69, or US $9.00, in Q1 2006 from RMB64 or US $8.00 during the same period last year and RMB69 or US $8.00 in the previous quarter. The average commission margin on hotel bookings was approximately 14%.

Air ticketing reached another recording during Q1 2006. The revenues from air ticketing were RMB16 million or US $7 million in Q1 2006, up 103% YoverY and 15% QoverQ. The total number of air tickets sold during Q1 2006 was approximately1.38 million compared to approximately 0.68 million during the same period last year and 1.17 million in the previous quarter. The average commission per ticket sold was RMB45 or US $6.00 in Q1 2006, increased from RMB42 or US $5.00 in the same period last year, and remained flat from the previous quarter. The average commission rate per ticket sold was 4.8% in Q1, remaining nearly flat compared to the same period last year and down from 5.1% in the previous quarter. Revenues from package tours were RMB9 million or US $1 million, up 173% YoverY and 32% QoverQ as we continue to gain greater customer acceptance to our FIT (Frequent Independent Traveler) packaged products.

Gross margin was 82% in Q1 2006 compared to 85% in the same period of 2005. This decrease was largely due to the higher cost of services as a result of increased revenue contributions from air ticketing services. The gross margin remained relatively consistent with previous seasons. Product development expenses for Q1 2006 increased by 95% to RMB23 million or US $3 million from the same period in 2005, and increased by 30% compared to the previous quarter, primarily as a result of hiring additional staff to extend our cargo supply network and a charge of RMB3 million for share based compensation expenses. Excluding share based compensation expenses, product development expenses accounted for 13% of total revenue, slightly higher than 12% during the same period last year and 11% in the previous quarter.

Sales and marketing expenses for Q1 2006 increased by 56% to RMB35 million or US $4 million from the same period in 2005, primarily due to the hiring of new sales and marketing staff, increased expenses associated with our customer reward program and a charge of 2 million for share based compensation expenses. Sales and marketing expenses remain relatively consistent with the previous quarter, excluding share based compensation expenses. Sales and marketing expenses accounted for 21% of net revenue compared to 23% during the same period last year and 21% in the previous quarter. General and administrative expenses for Q1 2006 increased by 136% to RMB21 million or US $3 million from the same period in 2005, primarily due to the hiring of additional staff, increased accrual for professional expenses and a charge of RMB8 million for share-based compensation expenses. General and administrative expenses increased 57% from previous quarters, primarily due to a charge from share-based compensation expenses.

Excluding that charge, general and administrative expenses accounted for 8% of net revenues, relatively consistent with 9% during the same period last year and 8% in the previous quarter. Operating income for Q1 2006 on a GAAP basis was RMB50 million or US $6 million excluding share-based compensation expenses. Operating income was RMB63 million or US $8 million, a 56% increase from the same period in 2005 and a slight increase from the previous quarter. Operating margin was 32% in Q1 2006 on a GAAP basis and was 40% excluding share-based compensation expense compared to 41% in Q1 2005 and 40% in the previous quarter. Net income for Q1 2006 was RMB48 million or US $ 6 million on a GAAP basis. Excluding share-based compensation, net income was RMB62 million or US $8 million, representing a 54% increase from the same period in 2005, mainly due to the higher income from operations.

Excluding the share-based compensation, net income decreased by 2% from Q4 2005 due to lower government subsidies received in Q1 2006. Net margin reached 31% in Q1 2006 on a GAAP basis. Net margin reached 40% excluding share-based compensation expenses, compared to 41% for both the same period of 2005 and Q4 2005. The diluted EPS/ADS were RMB1.48 or US$0.18 on a GAAP basis. The diluted earnings per ADS excluding share-based compensation expenses were RMB1.88, or US $0.23 for Q1 2006. On March 31, 2006 we announced a change in the ratio of our ADS to ordinary shares from one ADS representing two ordinary shares, to one ADS representing one ordinary share, effective on April 11, 2006. This ratio change has the same effect as a two for one ADS split. The information presented in the press release already reflected this ratio change.

As of the end of Q1 2006 the cash balance was approximately RMB790 million or US $99 million, representing over 70% of total assets. Before we give Q2 guidance, we would like to discuss a minor divestiture plan that affects our package tour business. Traditionally, package tour revenue included two components. The first component is FIT tour packages, which contributed to about 80% of our overall package tour revenue in Q1 2006. The second part is the lower-end group tour business, which we inherited through the acquisition of Shanghai Cuiming Corporation in 2003. As we are focusing our resources on our core FIT tour packages which have higher margins and higher growth rate, plan to divest the lower-end group tour business in Q2 2006. The revenue for our core FIT tour packages is expected to grow robustly at approximately 100% YoverY while the revenue for the lower-end group tours will remain flat in Q2 2006, to be reduced to zero starting at Q1 2006.

For Q2 2006, we expect our revenue growth rate to be approximately 40% YoverY. We revised our four-year revenue growth guidance at approximately 40% as well, a 5% increase from our previous guidance of 35%. We expect the ongoing margin to remain consistent from previous quarters.

Tracy Cui

With that, operator, please open the line for questions.

Questions and Answers

Operator

Operator instructions. Your first question comes from the line of Lu Sun, with Lehman Brothers. Please proceed.

Q - Lu Sun, Lehman Brothers

Good morning everyone, congratulations on a great quarter. I actually have three questions. The first question is on the air ticketing. There seems to be a nice rebound, approximately 12 % quarter on quarter rebound, from the low level of Q4. Do you think this is sustainable given the pricing environment of the China airline I industry? The second question is on your new corporate travel business. Can you actually provide us with some key metrics for this business, and also indicate when this business will start to have meaningful contribution to your total revenue? My last question is on your business tax. You did say there is a slight increase in business tax in Q1. What is the reason behind that? Thank you.

A – Jane Sun

I think the three questions will be addressed by three different people. Our CEO will take the air ticket price question, James will talk about the corporate travel, and I will address the business tax.

A – Min Fan

For the air ticketing business in Q1, we achieved quite good results. I think it was mainly because last year we took more leisure travel (than this time last year?). In this quarter, although it’s normally a low season with Chinese New Year, it’s also a high season for leisure travel. Instead, even the price (was lower during this season, which is quite a good result?)

A – James Liang

Corporate travel is a huge market and presents a great opportunity for us. As the largest (inaudible) of a hotel, any air tickets, we believe we can offer a better value proposition to our customers than incumbent corporate travel agencies, mostly the international business travel agencies such as American Express. At this stage, our corporate travel business is still relatively small compared to other businesses, but we believe we will be able to grow this business very rapidly. We expect, in about two years, there will be a meaningful contribution to our overall revenue and profits.

Q - Lu Sun, Lehman Brothers

Are there any statistics related to customers acquired or are there any targeted customers for this service?

A – James Liang

We target customers, actually the big corporations, the leading domestic and international corporations with excellent credit histories. We believe this market is currently estimated at about US $3-6 billion in China and we only have a tiny portion of that. The rest is controlled by the other business travel agencies. The market is growing very rapidly and we believe we can grow more definitely more than 100% this year and we will see rapid growth in the next few years until we become a very significant player in this area.

A - Jane Sun

On the business tax, business tax rate should be around the 6-7% range. From quarter to quarter it might differ a little bit depending on the source of the revenue and whether it is more revenue from air ticketing versus hotels, or which indicates where the revenue is coming from. For this quarter, it is about 6.7%, which is still within our normal range.

Q - Lu Sun, Lehman Brothers

OK. Great. Thanks a lot.

Operator

Your next question will come from the line of Safa Rashtchy, with Piper Jaffrey. Please proceed.

Q – Paul Beaver, Piper Jaffrey

Good morning. Congratulations on a strong quarter. This is Paul Beaver for Safa. What is the reason for the increase in average commission per room? That’s my first question. Then I think you might have touched on this early on in the call but I missed it, can you discuss when you expect to see the adoption of electronic ticketing increase?

A – Min Fan

For the average room commission, we increased it a little bit. This was mainly because I think we have a good cooperation with our suppliers and also, we have better revenue management. In fact, we don’t think we can add quite a lot on this average commission, so we’re still trying to do our best to maintain and try to go a little bit higher. In terms of the e-ticketing, the government is encouraging every airline company in China to have all tickets issued by e-ticketing by the end of the year 2007. I think this will be a good time for Ctrip. In that way, we will definitely have better parallel affinities for e-ticketing and holidays will have e-ticketing for quite some time in China. The e-ticketing volume from Ctrip will help any other business in China, so we will still be a market leader in this interesting field. It is more interesting I think for customers in terms of cost bidding.

Q – Paul Beaver, Piper Jaffrey

Did you say that online booking now is 10%?

A – Jane Sun

Did you mean the e-ticketing?

Q – Paul Beaver, Piper Jaffrey

Yes.

A – Jane Sun

E-ticketing is around 12% for this quarter.

Q – Paul Beaver, Piper Jaffrey

OK. Thank you.

Operator

Your next question will come from the line of Jason Breuschke, with Citigroup. Please proceed.

Q - Jason Breuschke, Citigroup

Thank you. Good morning and let me add my congratulations as well for a fantastic quarter. I’m going to ask a slightly complicated question, but I think it’s important for investors as we look out to 2007 and 2008 and how your gross margins are trending. The way I see it, you have three potential drivers of your gross margins and I’d like you to comment on this if possible. First of all, you have a new partnership that you’ve announced with Google which could potentially drive the percentage of online transactions versus your call center. Second of all, the move to e-ticketing, as you answered in the last question, certainly allows you to remove the delivery charge associated with air ticketing. Third, you announced this divestment of your low-end tour group. Could you maybe talk to us about how we should be thinking about, by the time we get to 2007 and the second half of 2007, the gross margin trends that kind of have been going down? Are we expecting them to rebound and how strongly should we be thinking about that? Thanks.

A – Min Fan

In terms of the Google corporation, we have a corporation co-branding with the Google channel. If you have any hotels in major cities in China you will find a local Google search result. Then if you want to know more hotel information, they will direct you to Ctrip. I think they will open a new channel for all those people who want to search this information in Google and I think we will contribute some new customer features. On e-ticketing, I still think e-ticketing will definitely be a future trend in China. I think the technical platform of Ctrip for e-ticketing is much better than any other players. With that enhanced then, we would have more market share and also we would definitely save some costs on delivery and also the other costs.

A – James Liang

Let me add that when e-tickets become mainstream, that really opens up more opportunity for us, especially geographically, the opportunities currently that we don’t have access to in the second or third-tier cities. Our market share for e-ticketing and packages is already close to (inaudible) in Shanghai, which is actually very high, but in the rest of China our market share in typical second-tier cities, our market share is almost less than1%. Part of the reason for that is paper tickets, we cannot – it’s very expensive and cumbersome for us to establish the logistics in these cities individually. When the e-ticketing comes along, this barrier does not exist any more so it’s much easier for us to expand into second or third-tier cities. That’s been our strategy. Looking at it this way, that’s actually the most important growth element for our business in the next year or two. That will definitely contribute to our e-ticket, air ticket and packages businesses. That will be our growth driver there. On the revenue side, the cost side and the margin side again, e-tickets save on cost, but also mean we have more market share and more leverage with our suppliers so we can get more share, more commission revenues. Also, generally, the hotel prices, particularly, have been increasing every year.

Q - Jason Breuschke, Citigroup

So the question for Jane is, should we be thinking that as you scale, and all these things come to factor up the gross margins, which have kind of been trending down every so slightly as these things play out, that that will probably either stabilize or reverse itself going forward?

A – Jane Sun

Yes. We expect our gross margin to re-stabilize at around 80%. The three factors you mentioned, it’s definitely very helpful from our business perspective. However, on the gross margins, the impact is not that significant for a couple of reasons. For e-ticketing, we do achieve some cost savings by saving the delivery costs specifically. However, for e-ticketing most people will probably pay by using credit cards so we will incur some credit card costs. These two costs will probably offset each other so the margin impact would be pretty minimal. On that divestiture of the lower end business is also mainly targeted to refocus our resources on the high growth area. That portion of the lower end group tour is very small, so the impact on gross margin for these initiatives as of now is very small on gross margins.

Q - Jason Breuschke, Citigroup

Great. Maybe just one follow-up, related to what you just said, Jane, the outbound travel market is still a small percentage of your business, but it looks like that business is set to triple in the next five years to maybe 100 million outbound Chinese travelers, which will probably put that market maybe 50% bigger than Americans traveling abroad today. Could you guys talk about how you are going after this opportunity? I realize you’re not going to go after the tour part, but more the independent traveler. How, since you’re probably not going to get the very first wave of people going abroad, because they’ll probably go with a tour group, but on their second or third trip to, say, Thailand, that’s when you could pick them up. Where do we really expect you guys to maybe hit an inflection point to capture the repeat international travelers?

A – Min Fan

Actually, outbound travel is our focus now. The group tour we divested is really the lower end group tour, which basically means the lower end domestic tour. We view the outbound travel as actually the high end. Of course, what we are doing now is mostly in the FIT packages as you said, mostly in their second or third time, people going to a particular destination. We are actually – the reason we want to divest this low-end group is that we want to move the chain to concentrate on high-end tours. That will actually include the first time (to pack?) tours to some of the destinations, such as Europe, Australia, Japan, the higher end of the group tour. That’s what we will be focusing on as well. I think the overall market is actually – I’m not sure where (we are going to be in the US markets?) over the next years, but it is actually growing much faster than the overall travel markets. That’s something that we are very interested in doing and we will expend a lot of effort trying to capitalize this opportunity. Internally, I think already, in terms of the other transactions, already building to 40% of our overall package business. So actually, we already have a pretty big presence on brand awareness in our customer base. It’s just that we’re currently only doing packages. We will aggressively move into high-end group tours.

Q - Jason Breuschke, Citigroup

Great. Congratulations again. Thanks.

A – Min Fan

In fact, what we are not going to do, the high end group tour, we are already testing these, and set from last year, we already designed some particular products for high-end clients. I think this is definitely new business for our high-end travel business.

Operator

Your next question comes from the line of Kit Lowe, with Goldman Sachs. Please proceed, sir.

Q - Kit Lowe, Goldman Sachs

Good morning. Thanks for taking my question. Two questions. The first question, Jane, if you don’t mind commenting on what percentage of your air ticketing sales at the moment are contributed by outbound international travel, and is that part of the reason why you have the commission rate going up quite drastically on a year on year basis?

A – Jane Sun

The outbound tickets accounted for about 7% volume wise. Dollar terms it is about 15%. Commission rate is about 4.8%, very consistent from the same period last year and it’s a little bit lower than Q4 last year, just because in Q4 we got extra commission by adding incentives for the high volume we reached for the year. Commission wise, I think it is very stabilized.

Q - Kit Lowe, Goldman Sachs

OK. In terms of the revenue per ticket, how does that compare with last year? So 7% by volume and 15% by dollar terms this year. How was that in Q1 2005?

A – Jane Sun

Slightly increased. Last year, it probably was around 4-5%. Volume wise.

Q - Kit Lowe, Goldman Sachs

OK, thank you. Second question, a very simple question, on the hotel side, you grew about 36% on a year on year basis. On a 2005 basis, you grew about 31% year on year. What has been done differently, is that a trend that we should be able to expect to maintain some sort of growth rate?

A – Min Fan

For the hotel production, I think in the first tier cities, the growth rate would be a little bit slower because of all the large volume, still we can anticipate quite high growth among second tier cities, especially this year we will expend more effort among second-tier cities. Generally speaking, the growth of the hotel side will be a lot higher than last year, but still over 20, there will be no problem.

Q - Kit Lowe, Goldman Sachs

And has anything been done differently in Q1 that you exceeded 30%?

A – Jane Sun

If you look at the unit contribution, Kit, Q1 this year, we have average RMB69. Last year it was only RMB64. So the base for last year was very low. That’s probably the main reason. We continuously improve our relationship with hotels in order to maximize our revenues. That’s something we are continuously focusing on.

Q - Kit Lowe, Goldman Sachs

OK. So am I correct to assume that if the rate, if you can maintain the hotel rates that you’re having, than if you (all in growth perspective?) then you basically could grow beyond the 20-25% range? Is that true?

A – Jane Sun

Yes. It’s tough what you say, because it depends on the season and availability of the room. It depends on our negotiation power. If the hotel has limited resources, you can probably argue a lower commission if we are dying for rooms. But if they have more availability, then we have more bargaining power. So it’s hard to say. But I would say that we are continuously focusing on maximizing the unit contribution. Right now, it’s between RMB66-69. It’s already at a very high level. Anything beyond that would be very difficult to achieve.

Q - Kit Lowe, Goldman Sachs

I understand. Thank you so much.

Operator

Your next question comes from the line of Jenny Wu, with Morgan Stanley. Please proceed/

Q - Jenny Wu, Morgan Stanley

Hi, how are you everyone? Congratulations on a good quarter.

A – Jane Sun

Thanks, Jenny.

Q - Jenny Wu, Morgan Stanley

I have just one question. Regarding your R&D expense, excluding share-based compensation, which you see over 10% QoverQ growth, I just want to know to which part of your business sector did you allocate more Human Resources?

A – Jane Sun

Jenny, I didn’t get your question very clearly. Do you mind repeating it again? I’m sorry.

Q - Jenny Wu, Morgan Stanley

Yes. Regarding your increase in R&D expenses, I want your explanation if that is due to the hiring of additional staff in your travel supplier network. Additionally I want to know to which sector did you allocate the most Human Resources?

A – Jane Sun

The head count increase? OK. The main reason for product development increase is that this year, we’re focusing on extending in the second tier. We’re trying very hard to extend in these areas. As a result, we’re hiring more people and paying more people to extend into these cities. That is our expectation, to increase the product expenses in line with our initiatives.

Q - Jenny Wu, Morgan Stanley

OK, is this in hotels (inaudible)?

A – Jane Sun

Yes, hotels. Hotels definitely accounts for a good portion of it.

Q - Jenny Wu, Morgan Stanley

OK. Thank you.

A – Jane Sun

Sure. Thank you.

Operator

Your next question comes from the line of Ashish Bedani, please proceed, sir.

Q - Ashish Bedani, Gilford Securities

Good morning. A couple of questions. The first one has to do with your guidance, which appears conservative again, going from roughly 60% year on year growth in Q1 to 40% I believe, despite seasonal tailwinds. Is that the case? It is just conservatism, or is it something else that you are factoring into this outlook?

A – Jane Sun

There are a couple of reasons why the guidance is at 40%, not 60%. First of all, Q1 2005 had a much lower base than Q2 2005. If you look at our last year’s results, Q2 2005, we had a 33% QoverQ growth. Therefore, to achieve 60% YoverY growth is almost impossible in Q2. Additionally, I think when you look at the revenue growth, there are two main driving forces. The first one is the volume. The second one is unit contribution. For volume growth, we are still seeing a very positive growth YoverY. However, for the unit contribution, if you look at least year’s Q2, we had already reached a couple of records on the per-unit basis. The tickets were at RMB46 per ticket, which was a record for the company, and hotel was at RMB66 per room night, which is also very high. So the room to increase the unit contribution in this year is more limited than the volume increase. That’s the second reason. The third reason is that we always want to be prudent when we develop our guidance. Our goal has always been to try very hard to close the gap between the actual results versus our guidance. 40% is the number we feel comfortable (assessing on?) based on our visibility.

Q - Ashish Bedani, Gilford Securities

That’s very helpful, thank you. Should one expect a similar amount in stock compensation expense for the next several quarters, roughly 1.7 million?

A – Jane Sun

Yes. Probably a little bit higher, just because in Q1 we do not have the Q2, Q3, Q4 grants reflected in that number yet. But I do not expect it will be too much higher.

Q - Ashish Bedani, Gilford Securities

OK. A little bit higher, and all the way through 2007, more or less? Or is there going to be any significant variation, drop off or anything like that in the next few quarters?

A – Jane Sun

Yes. The stock compensation is based on the Black Scholes model and the Black Scholes model is highly linked to stock prices, which we have no control over. So depending on our stock performance, that number can fluctuate. Overall, I think the range should increase steadily, but not too significantly different.

Q - Ashish Bedani, Gilford Securities

OK. Two quick housekeeping items, one the cash flow from operations in the quarter and secondly, longer term, over the next couple of years, two or three years, where can one expect the tax rate to stabilize?

A – Jane Sun

The cash flow, our normal cash flow from operations is around 20-30 million on a quarterly basis. The tax rate before stock compensation should be around 12-15%. After stock compensation, it should be around 16-19%.

Q - Ashish Bedani, Gilford Securities

16-19% after, OK. The cash flow number for the last quarter, do you have that readily available?

A – Jane Sun

Our normal cash flow from operations is around 20-25.

Q - Ashish Bedani, Gilford Securities

OK. Thank you very much.

Operator

Your next question comes from the line of William Bean, with Deutsche Bank. Please proceed.

Q - William Bean, Deutsche Bank

Hi guys. This is on the corporate side. Did I hear that correctly, you think it’s going to be material in two years, so 10% of sales by 2008?

A – Min Fan

Did I say 10%?

Q - William Bean, Deutsche Bank

You said material, or significant, or something like that. I just want to clarify.

A – Min Fan

I think it’s a little bit too far to predict an exact number. That’s certainly something we are shooting for.

Q - William Bean, Deutsche Bank

Are you putting that into package or is it going to be spread over hotel and air in terms of from a modeling standpoint?

A – Jane Sun

Right now, it is spreading among hotel and air ticketing, but if it is getting to be a significant portion, we will probably have a separate line item in a couple of years.

Q - William Bean, Deutsche Bank

OK. And can you give us a sense of percentage of revenue from Air China and China Mobile? I think you gave us a sense of that about a year ago, I just want to get an update there.

A – Min Fan

The percentage of Air China and China Mobile is a small portion, not a very big portion of our total revenue. Right now, most of our production is still generally from our direct sales.

Q - William Bean, Deutsche Bank

Great. So it isn’t material?

A – Jane Sun

No.

Q - William Bean, Deutsche Bank

OK. Finally, you commented on this already a little bit, but do you think that on the hotel side, the tier one cities will basically take the low-hanging fruit and going forward it’s going to be harder and harder to maintain growth on the hotel side? Or do you think you can sustain the current level of growth on the hotel side for the next couple of years?

A – Min Fan

We are getting taller every day. Actually, on hotels, because we already have a pretty high market share in the first-tier cities, especially for hotels in first tier cities, particularly in Shanghai, we’re seeing a little bit slower than the rest of the market, but outside of Shanghai we don’t have a lot of market share and as well as that, we’re putting a lot of effort I there. We are able to grow more rapidly. We don’t see that yet in the air ticketing and our other business, because we still, even in Shanghai it’s pretty early in the market penetration. So we see growth rates all very robust(?), all across China. I think as we extend more and we have better capability into the second tier cities, we will definitely achieve a much higher growth rate, and that can compensate our slowing in the hotel business in Shanghai and some other first tier cities.

Q - William Bean, Deutsche Bank

OK. Thanks, guys.

Operator

Your next question comes from the line of Ming Zhao with SID(?).

Q - Ming Zhao, Susquehanna Financial Group

Thank you. Good morning everyone. Congratulations on the good quarter. I have a couple of questions here. First, again on your guidance, you have raised your guidance up by 5%. I remember last call, you guys said you lowered the guidance to 35% because of a larger base number. Now your base number is getting even larger and you have raised your guidance again. My question is, do you see anything accelerating so that you will get more and give us again this 40% YoverY growth?

A – Jane Sun

The guidance, sometimes it’s hard to develop it, just because of visibility. We know our base is getting bigger and bigger every day, and there are certain points where something has to slow down. It’s just a matter of when. At year end, based on our visibility and forecasts, we give a prudent guidance at 35%. As we move into each quarter as we have clearer and clearer visibility, we prudently monitor the progress and make adjustments if necessary. Right now, I think since Q1, which is supposed to be the slowest season, has passed, we know the market for this year a little bit better, we feel comfortable revising it up by 5%, but again we want to be prudent. Also, again it’s a bigger base for Q2 and also for the limited growth for unit contribution. Volume-wise, it’s still growing at a very healthy rate. That’s why 40% is the number we feel comfortable with now.

Q - Ming Zhao, Susquehanna Financial Group

The second question, we look at the number of new customers acquired. I’m just wondering, do you have a breakdown between the business from these new customers versus the old customers? I really also want to know if we only compare the old customers versus last quarter, what kind of growth will we see in that particular portion?

A – Jane Sun

The revenue contributions from existing customers is around 80% versus 20% from new customers, very steady for the past couple of quarters. Of course, we want to increase revenue contributions from both existing customers and the new customers. We have different promotion programs and customer reward programs to stimulate these two bases, to remind them that Ctrip has new products and has good package tours, so we can increase the revenue per customer.

Q - Ming Zhao, Susquehanna Financial Group

So if your new customers contribute 20% of your revenue, does that mean that growth is mainly found in new customers, whereas the old customers’ contribution is either flat or seasonally sequentially down, because of seasonality?

A – Jane Sun

I think the revenue growth is coming from both of the basics. The new customers, we had a base of zero, anything they bring to us is going to be additional revenue. For existing customers, the room nights they booked and tickets that they purchased have been increased QoverQ slightly, so our sales and marketing team’s task is to stimulate contributions from both sides.

Q - Ming Zhao, Susquehanna Financial Group

OK. Then maybe a long term question, we were looking at the 2008 Beijing Olympics. The question is that ideally it’s good for Ctrip, but should we worry about the room availability or guaranteed room nights when we are in that time, meaning maybe there are too many demands or you may get as many room suppliers. How do you resolve that problem, if that is the problem?

A – Min Fan

Still, we continuously (monitor our hotel polls?) for our membership, for members, and with guaranteeing a lot of hotels, when we’ve signed contracts with hotels it doesn’t matter whether it’s high season or low season or anything, they must achieve the room inventory for Ctrip. That’s why we have higher customer knowledge and satisfaction. Even in high season or in the Olympic games, or in other events in Shanghai or Beijing, we will still try to secure known inventory from hotel sites and you may know that recently in Shanghai and Beijing, there are more high levels of hotels under construction. I think even with this, we can still try to apply more and more allotment hotel inventory. It should not be a problem for us to secure bookings between larger matches(?).

Q - Ming Zhao, Susquehanna Financial Group

That’s great, thanks.

Operator

Your next question is a follow up from the line of Lu Sun with Lehman Brothers. Please proceed.

Q – Lu Sun, Lehman Brothers

I just wanted to follow up on the split between the revenue contribution from the first tier cities and the second or third tier cities for each business line, if possible.

A – Jane Sun

The overall revenue contribution from the first-tier cities is around 70%. If you break it down into further details, probably 50-55% of hotel is from the first tier cities and around 80% of the air ticketing is from the first tier city.

Q – Lu Sun, Lehman Brothers

And probably all your leisure packages are sold to the…

A – Jane Sun

Exactly, you’re right. The leisure package is almost 100% from the first-tier cities.

Q – Lu Sun, Lehman Brothers

OK, great, thanks a lot.

Operator

Your next question comes from the line of Michael Millman, of Soleil Securities. Please proceed.

Q - Michael Millman, Soleil Securities

Could you talk about who your partners may be regarding destinations for your outbound packages? First question.

A – Jane Sun

I’m sorry, we didn’t get the first part of your question. Could we talk about what?

Q - Michael Millman, Soleil Securities

On the packages, who are your partners, supplying destination inventory outside of China?

A – Min Fan

Outside China for packages? You mean Thailand, or… In the Asian areas, we do have some partners, let’s say local partners in Hong Kong, Thailand and in Singapore. We select our local partners very carefully. The partners there, many do the options for our clients because all the bookings that are active, mainly the airlines and the hotels, most of the hotels in Asian destinations are hotels (we buy for features to sell?). Most of our partners will provide a local ground service and some options.

Q - Michael Millman, Soleil Securities

So it’s not that you have deals with some of the major travel companies?

A – Min Fan

No. We select our partners locally, so maybe nothing can cope (with the best players there, but maybe not the last players in the airline?), so we select our quality partners locally. That is why they do all the local services for us.

Q - Michael Millman, Soleil Securities

I didn’t hear, did you say that you expected to take it electronically to 50% of your air tickets by the end of 2007?

A – Min Fan

The government has to, by 2007, tickets at 100%…

A – James Liang

50-100%. In China, I think it will still at least be targeted state by state. I don’t think overnight we will have 100% issued by e-ticketing. That was a phrase, I think.

Q - Michael Millman, Soleil Securities

I thought you said earlier that trying to confirm that you said you’d expect, for the company, 50% by the end of 2007, but maybe you didn’t.

A – James Liang

Only as a general e-ticket percentage, in general markets, over 50%. We should at least have 50%.

A – Min Fan

It’s currently a much higher percentage in the overall market.

Q - Michael Millman, Soleil Securities

OK. eLong has been at least talking about spending a lot to invest for the future. Have you seen any impact on the competitive climate or on the market from all their expenditures?

A – James Liang

We are also actually investing very heavily in the future. Actually, some of the new product lines that particularly, you know, even the e-tickets are growing much faster, now mentioning the new product lines such as packages and corporate travel will actually be even more ahead of these products lines. I think from the business actually, initially it might not be that profitable and they also need to put a lot of manpower and resources into these areas, such as outbound packages such as corporate travel and we’re investing heavily. We have preserved our lead overall in these areas.

Q - Michael Millman, Soleil Securities

On the hotels in the first tier cities, could you talk about what the occupancy rates are for the top hotels, the four and five star hotels in the first tier cities?

A – Min Fan

The occupancy among those cities, in fact we grew much faster than the natural hotel industry growth. For example, in Shanghai the occupancy rate increased not so much but what we did coming from Ctrip increased a lot. I think even in the bottom we have some margin not only on the existing hotels but also from the new hotel suppliers and more potential customers.

Q - Michael Millman, Soleil Securities

Finally, on the packaging, what is typically the revenue per package and has that been expanding?

A – Jane Sun

About RMB2,000 per person on average.

Q - Michael Millman, Soleil Securities

And has that been expanding?

A – Jane Sun

It’s our goal to always increase it by stimulating the spending from our customers. Right now it’s very stable, sometimes RMB1,800, sometimes RMB2,000, within that range.

Q - Michael Millman, Soleil Securities

How does that compare with the average buyer hotel space? What is the average number of days?

A – Min Fan

The hotel room rate?

Q - Michael Millman, Soleil Securities

Not the hotel room rate, but the average stay per hotel client?

A – Jane Sun

The average for our total customers is around three nights. Tickets per customer is around three tickets per customer, three nights per customer.

Q - Michael Millman, Soleil Securities

And that would be how much revenue? What would the booking be on that?

A – Jane Sun

Air ticketing is about 45.

A – Min Fan

Are you talking about the booking volume?

(crosstalk)

A – Min Fan

I think it’s around 1,600. For two or three room nights it’s around more than 1,000. Because our average room rate is 480 so a similar number.

A – James Liang

And some other long term optional services.

Q - Michael Millman, Soleil Securities

So the average room rate is 480, did you say?

A – Jane Sun

Around 470-490.

Q - Michael Millman, Soleil Securities

Per night?

A – Min Fan

Depending on the seasonality.

Q - Michael Millman, Soleil Securities

OK. Finally, could you tell us what your gross bookings were in the quarter compared with last year?

A – Min Fan

For which product type?

A – Jane Sun

If you take our net revenue, hotel, if you divide it by around 14% you will get the gross bookings. If you take the air ticketing and divide it (inaudible) you will get our gross booking.

Q - Michael Millman, Soleil Securities

OK. Thank you very much.

Operator

Operator instructions Your next question is a follow up coming from the line of Jenny Wu with Morgan Stanley. Please proceed.

Q – Jenny Wu, Morgan Stanley

Hi. Just one quick question. What percentage of revenue is coming from online booking for the hotel business?

A – Min Fan

32=0% versus 70%. 30% is the online booking ratio.

Q – Jenny Wu, Morgan Stanley

OK. Thank you.

Operator

Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the presentation back over to Ms. Tracy Cui for closing remarks.

Tracy Cui

Thank you everybody for attending the conference call. We’re finishing here and we look forward to hearing back from you again in the next quarter.

Operator

Ladies and gentlemen, I would like to thank you for your participation in today’s conference, this now concludes the presentation, you may all disconnect and have a wonderful day.

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Source: Ctrip.com Q1 2006 Earnings Conference Call Transcript (CTRP)
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