Ctrip.com International's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Ctrip.com International, Ltd. (NASDAQ:CTRP)

Q4 2012 Earnings Call

January 31, 2013 8:00 p.m. EST

Executives

Lin Zhang – IR

Min Fan – President and CEO

Jane Sun – COO

James Zhang Liang – Chairman

Jenny Wu – Deputy CFO

Analysts

Fei Fang – Goldman Sachs

Andy Yeung – Oppenheimer

Richard Ji – Morgan Stanley

Jiong Shao – Macquarie Securities

Mike Olson – Piper Jaffray

Ming Zhao – 86 Research

Alex Yao – Deutsche Bank

Aaron Kessler – Raymond James

Alicia Yap – Barclays Capital

Eddie Leung – Merrill Lynch

Fawne Jiang – Brean Murray

Wendy Huang – CIMB

Tian Hao – T.H. Capital

Muzhi Li – Citigroup

Ida Yu – CICC

Operator

Good day, ladies and gentlemen, and welcome and to your Q4 and Full Year 2012 Ctrip.com International Earnings Conference Call. My name is [Denise] and I'll be the event manager today.

Throughout the conference you'll remain on a listen-only mode. If you need assistance at any time, you may press star 0 and a coordinator will be happy to assist you. We will be accepting questions at the end of the conference, at which time you may press star 1 to participate. We do ask that you please limit your question to two questions per participant.

And now I'd like to turn the presentation over to your host for today's call, Lin. Please proceed.

Lin Zhang

Thank you, [Denise]. Thank you for attending Ctrip’s fourth quarter and full year 2012 earnings conference call. Joining me on the call today, we have Mr. James Liang, Chairman of the Board; Mr. Min Fan, President and Chief Executive Officer; Ms. Jane Sun, Chief Operating Officer; and Ms. Jenny Wu, Chief Financial Officer.

We may during this call discuss our future outlook and performance which are forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent 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 Ctrip’s public filings with the Securities and Exchange Commission. Ctrip does not undertake any obligation to update any forward-looking statements except as required under applicable law.

Min, Jane, James and Jenny will share our business updates, operating highlights, strategic views and financial performance for the fourth quarter and full year 2012, as well as outlook for the first quarter of 2013. We will also have a Q&A session towards the end of this call.

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

Min Fan

Thanks, Lin, and thank you to everyone for joining us on the call today.

In the fourth quarter of 2012, Ctrip delivered solid results. Net revenues grew by 19% year over year, at the high end of our Q4 net revenue guidance. For the full year of 2012, Ctrip's net revenue grew 19%. We are pleased to see strong volume growth of 36% in our hotel business in the fourth quarter.

Online travel market in China is growing at a rapid pace and the competition in the market is intense. Last year our competitors expanded their coupon program from hotel to air ticketing business and recently to a larger scale. Ctrip is embracing the challenges proactively and [is becoming] to extend our leadership and gain market share in China.

Our strategy is straightforward. We will continue to offer the best products with the best service at the best prices to the travelers in China. We will execute our price matching strategy to ensure that our customers can enjoy the most competitive prices. Meanwhile, we will continue to enhance our product offerings and customer service, invest in effective marketing channels, and elevate the technology, especially for mobile and online platforms.

We will work with our business partners to build a healthy industry equal system and provide the best value to customers. Therefore, we will further enhance our open platform by partnering with different players in the industry, including [various kinds of] inventory, price and marketing channel owners. This open platform strategy allows Ctrip to leverage its advantages in service quality, brand name, technology and operations efficiency to benefit both customers and partners.

In 2012, Ctrip stepped up investments in a number of new products to meet the needs of travelers in different segments. These new investments range from our international air ticket and hotel booking platforms to more [independent] like Tujia.com, Sungko.com, [Huiping.com] and HH Travel. We are pleased that this new business has achieved good results in products, IT and team building. We will continue our efforts in new business development and further strengthen our leadership.

Extending our services to mobile is our strategic focus and investment priority. In the fourth quarter, Ctrip wireless reached over 20 million downloads, over 10% of hotel transactions were conducted through mobile channels. As the industry leader, we also launched the first Ctrip content for mobile entrepreneurs in December 2012 to encourage and help innovative players to develop mobile travel apps. This will help attract more mobile travelers.

In 2012 we are pleased we increased investment in sales and marketing through the price matching coupon program and various marketing campaigns. We have seen accelerated gains in market share and deep penetration. In 2013 we will start to launch the coupon program in air ticketing business and will roll out various varieties of promotions across the main product. Meanwhile, we will direct more efforts towards online marketing to optimize our sales channels. We have partnered with the leading players in multiple channels, including search engine, social media, online video, e-commerce, and many other interfaces.

Our market efforts together with offering the best products and services have won the recognition and trust of our customers. In October, Ctrip was awarded as the Most Reliable Customer Brand 2012 on the China industry meeting leaders' summit. We believe our unparalleled service quality is one of the key drivers for our continued success. The Ctrip Service Center has won the Golden [Head Set] Award for best contact center in China for five years, and in 2012 we won an even more outstanding recognition with the Golden [Head Set] China Lifetime Achievement Award.

We're also proud to share with you that for the first time, Ctrip won the World Travel Market Globe Award in recognition for our contribution to China's travel and tourism industry in 2012. Also in December, Ctrip once again ranked as one of the top 20 China tourism groups evaluated by the China Tourism Academy. All these awards demonstrate great recognition of our efforts and contribution to the China travel industry, and we will continue to maintain our high standards.

Now I will turn to Jane for the operating highlights.

Jane Sun

Thanks, Min. Thanks, everyone.

We are pleased with the development of Ctrip's major business lines. With the largest domestic and international hotel network in China, Ctrip further expanded its hotel coverage over the past quarter. By the end of 2012, our domestic hotel supply network covered over 48,000 hotels, which doubled the hotel coverage of a year ago. Internationally, our hotel coverage expanded to over 200,000 hotels in more than [170 countries] through cooperation with business partners and direct connections with multiple leading hotel groups.

We achieved strong volume growth of 36% year over year in the fourth quarter. Our Smart Choice hotel channel is now one-year old, and it is becoming a unique hotel booking option among the leisure travelers. By the end of the fourth quarter, Sungko.com has reached 10,000 hotel coverage. Our group buy model has built a strong momentum as a complementary product offering for cost-sensitive travelers and has become an effective marketing channel for our hotel partners.

Our air ticketing group worked hard to offer competitive prices to Ctrip customers. In the fourth quarter of 2012, Ctrip launched various air ticketing promotions. In 2013, we will be more proactive in the pricing strategy and make sure that our air ticketing prices are the most competitive in the market. We launched coupon program for air ticketing program. Our goal is to offer good price to our customers while maintaining high level of the services. We believe this will bring good value to our customers and will enhance our leadership in this segment.

In 2012 we kicked off our new international air ticketing booking platform and expanded our partners with international players. This will enable us to offer more international air ticketing products to Chinese travelers with more promotions and competitive prices. The international air ticketing volume grew over 50% year over year in the fourth quarter.

Our package tour business delivered solid results in the fourth quarter. The revenue from Mainland China grew over 40% year over year. With worldwide resources and outstanding service capability, we offer Chinese travelers the most comprehensive travel packages. During the October national holiday in the fourth quarter, we saw a record volume in package tour business. We are very pleased to see that our team has demonstrated their capability in accommodating the surge of customer demand with a high level of services.

Ctrip corporate travel services has once again achieved strong growth by gaining more market share. We see great potential in more Chinese companies proactively managing their travel expenses by leveraging our corporate management services. We continuously invest in our technology in order to improve our online and offline operational efficiency. Our online booking ratio was over 50% in the fourth quarter.

2012 was a challenging year for us on many fronts. Ctrip team has once again demonstrated strong execution throughout our business lines. We'll work hard to bring the best value to our customers and our partners in coming years.

Now I will turn to James for his strategic views of our business.

James Zhang Liang

Thanks, Jane.

China's leisure market is growing rapidly. We capture the opportunities in this segment. Ctrip is allocating more resources to ensure that we offer the best prices in the market coupled with the best products and services. We believe that Ctrip has the best combination of IT infrastructure partnership, customer base and the financial stream to further enhance our leadership.

Meanwhile, healthy and scalable growth needs strong technology support. Ctrip is accelerating our technology investment in online and the mobile platform. Our target is to become the leading technology-driven company servicing travelers from China and worldwide.

Now I will turn to Jenny for financial update.

Jenny Wu

Thanks, James. Thanks, everyone.

For 4Q 2012, Ctrip's total revenue were up 18% year on year and decreased 6% Q-on-Q. Hotel reservation revenues were up 17% year on year, primarily driven by an increase of 36% in hotel reservation volume and partially offset by a decrease of 14% in commission per room night. The decrease of commission per room night was primarily due to e-coupon offered to customers. Hotel reservation revenues increased by 2% Q-on-Q.

Air ticketing business revenue for 4Q increased 18% year on year, driven by an increase in air ticket volume. And the revenue decreased by 7% Q-on-Q, primarily due to seasonality. Package tours, the revenue for 4Q were up 27% year on year due to the increase of leisure travel volume. Package tour revenue decreased by 26% Q-on-Q, primarily due to seasonality. Corporate travel revenues for 4Q were up 22% year on year and 6% Q-on-Q, primarily driven by an increased corporate travel demand from business activities.

For 4Q, net revenues for Ctrip were up 19% year on year and decreased by 6% Q-on-Q. Gross margin was 74%, down 2 percentage points year on year and Q-on-Q.

Product development expenses increased 53% year on year and 9% Q-on-Q, primarily due to an increase in product development personnel-related expenses and share-based compensation charges. Excluding share-based compensation charges, product development expenses accounted for 21% of net revenues versus 16% a year ago and 18% a quarter ago.

Sales and marketing expenses for 4Q increased 52% year on year, primarily due to an increase in sales and marketing related activities and personnel-related expenses. Sales and marketing expenses for 4Q decreased by 7% Q-on-Q, primarily due to a decrease in sales and marketing related activities. Excluding share-based compensation charges, sales and marketing expenses accounted for 24% of net revenues versus 19% a year ago and 25% a quarter ago.

General and administrative expenses for 4Q increased 34% year on year, primarily due to an increase in administrative personnel, share-based compensation charges and incremental turnover tax due to the new value-added tax reform. General and administrative expenses for 4Q increased by 1% Q-on-Q. Excluding share-based compensation charges, general and administrative expenses accounted for 8% of net revenues versus 6% a year ago and remained consistent -- sorry, versus 6% a year ago, yeah, and remained consistent Q-on-Q.

Income from operations for 4Q decreased 48% year on year and 37% Q-on-Q. Excluding share-based compensation charges, income from operations decreased 28% year on year and 22% Q-on-Q.

Operating margin was 11% for 4Q versus 25% a year ago and 60% in the previous quarter. Excluding share-based compensation charges, operating margin was 21% versus 35% a year ago and 25% a quarter ago. The effective tax rate for 4Q was 25% versus 23% in 2011 -- in the same period of 2011, and 24% in 3Q, primarily due to the increase in amount of non-tax-deductible share-based compensation charges as a percentage to our income, before income tax expenses as a whole.

Net income attributable to Ctrip shareholders for 4Q decreased 24% year on year and 1% Q-on-Q. Excluding share-based compensation charges, net income attributable to Ctrip shareholders decreased 12% year on year and increased 1% Q-on-Q. Diluted earnings per ADS for 4Q was USD0.22. Excluding share-based compensation charges, diluted earnings per ADS was USD0.35.

As of December 2012, the balance of cash and cash equivalents, restricted and short-term investment were USD899 million.

Now, talk about the business outlook. For first quarter 2013, we expect to continue the net revenue growth year on year at a rate of approximately 15% to 20%. This forecast reflects Ctrip's current and preliminary views, which is subject to change. Regarding the share buyback, as of January 31, 2013, Ctrip had purchased approximately 17.5 million ADS in aggregate with a total consideration of USD299 million under the domestic share repurchase plans adopted in 2008, 2011 and 2012.

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

Question-and-Answer Session

Operator

[Operator Instructions].

And your first question comes from the line of Fei Fang from Goldman Sachs. Please proceed.

Fei Fang – Goldman Sachs

Hi, Jane, Jenny. Thanks for taking my question. So first question is on air ticketing rebate, can you let us know the rationale behind launching the program as well as how much resources future plans to allocate to this? Thank you.

Jane Sun

Sure. The reason for us to launch the air ticketing rebate is mainly due to a few reasons. First of all, externally we have seen the industry and the market has grown very rapidly, and yet Ctrip's market share is very small. So in this fast-growing market, Ctrip is very determined to extend our leadership through different strategies, including our pricing strategy, product strategy, IT strategy. So this cash rebate is one of the measures we have to take in order to rapidly grow our market share.

Fei Fang – Goldman Sachs

Okay, understood. So in terms of resources, is there any guidance or visibility on how much Ctrip could potentially allocate to this?

Jane Sun

Sure. I think the guidance that we gave for the first quarter has already taken into consideration of the impact of the cash rebate for the first quarter. As we move forward into Q2 and beyond, we'll be able to give you a more detailed guidance going forward as we have more visibility. But whatever it takes for us to gain market share, we'll do it.

But meanwhile, I think since we already gained quite a lot of experience last year through the coupon program for hotel, I think we will study each line very carefully to make sure every dollar we spend will generate the best return for our company and for our shareholders.

Fei Fang – Goldman Sachs

Understood. Last question, can management discuss your mobile strategy for 2013, meaning how should we model the cost and benefit of your mobile investment and how do you think the competition will evolve on mobile devices? Thank you.

Min Fan

Yeah. I think for Ctrip's mobile platform, last year we released mobile, a kind of mobile one-stop platform. That means we have a serious mobile app. But our main operational mobile app, we have more than 20 million downloads; that means we are a leader in this field. And I think right now the mobile OD transaction generated from the mobile apps, we’re satisfied for the outcome of this mobile strategy, Ctrip platform.

And I think we will continue to give high priority in the development of mobile apps as well as building the backend supporting system to ensure the seamless booking experience. And I think right now we, in the market, Ctrip mobile app is one of the hot apps used by customers in the market, and our [best] app won 2012, the award for innovative service apps in China internet industry summit. So in this year we will continue to invest more in this field and we will try to grab more and more market share.

Fei Fang – Goldman Sachs

Thank you very much.

Min Fan

Thank you.

Jane Sun

Thank you.

Operator

And your next question comes from the line of Andy Yeung from Oppenheimer. Please proceed.

Andy Yeung – Oppenheimer

Hi, good morning. Thank you for taking my questions. My question is also a follow-up question on the air ticketing promotion. When you look at the competitive landscape over the last couple of quarters, is there anything that changed that we -- made you decide that you really need to do the coupon promotions for air ticketing?

Jane Sun

Our marketing strategy is very carefully thought of and it's evolving everyday based on the market condition. And we believe that the market is growing so rapidly that for Ctrip who has a very small market share at this moment, the cash rebate program is one of the measures we have to take to close the gap on the pricing and to extend our leadership into the market. So it's evolving process.

Andy Yeung – Oppenheimer

I see. And is the rebate program directly related to the rebate coupon, can be used for air ticket or can be also used for hotel? Because when we look at your commission rate for air ticketing and for hotel, there's a significant difference between what you get in commissions for air ticket and hotel. So there seems to be less room for coupon rebate in the air ticketing program. Can you elaborate on that a little bit? Yeah.

Jane Sun

Sure, sure. I think the reason we launched the coupon is because Ctrip has a comprehensive product offering, so we can offer more choices through this coupon program. So we definitely opt for cross-selling across the borderline and we've designed the program so that every dollar we spent for the coupon program will generate the best return overall for our business portfolio.

Andy Yeung – Oppenheimer

Okay, got it. And if I can, just one housekeeping question. There's a significant increase in the other income line, can you give us some idea if that's government related subsidies?

Jenny Wu

Sure. Below the operating income, there's two major factors to increase net income. One is the other income, which is primarily the government subsidy, and in 4Q we received quite a lot, but usually the timing and the amount that we can get will depend on the government decision which is beyond our control.

And the second part is the non-controlling interest. And recall, we made a lot of investments in recent years, some of them they are still at loss-making stage. And in 4Q we, probably you heard from news, we completed the second financing for one of our subsidiaries, and as a result, we will share -- we will attribute part of this loss to minority stakeholders. And that's why it impacted our net income.

Andy Yeung – Oppenheimer

Got it. Okay, thank you.

Jane Sun

Thanks, Andy.

Operator

And your next question comes from the line of Richard Ji from Morgan Stanley. Please proceed.

Richard Ji – Morgan Stanley

Hi, Min, James, Jane and Jenny. Good morning and congrats on the strong -- morning, hi. Congrats on the strong top line growth. I have two -- yeah. I have two questions. First of all, given you have been several quarters into the coupon promotion program for the hotel booking business and we are obviously seeing very strong recovery or rebound in the hotel booking volume, can you comment on the margin trend in the hotel booking business? Are we seeing margin stabilization for the time being?

Jane Sun

Thanks, Richard. Yes, we do see stabilization in margin trend. So for hotel, I think we also monitor the market development very carefully to make sure our pricing stays strong compared to all the other players in the market.

Richard Ji – Morgan Stanley

Okay, yeah. Thanks. And secondly, your package tour business has been one of the bright spots of -- for your growth. And should we be worried about, you know, your all-out price war into the package tour business? And also, can you give us a little more color on the split between domestic package tour versus overseas portion? Yeah.

Jane Sun

Sure. The sales for package tour is not going to be materially impact our business because relative to the other business line, package tour still is very small and there are very few players in the market who offer similar products with Ctrip. So the impact is not material.

Secondly, domestic versus overseas, in terms of volume it's about 60% overseas. In terms of revenue, it can crawl -- become about 60% to 70% of the total package tour. So overseas definitely grows very fast.

Richard Ji – Morgan Stanley

Yeah, great. That's helpful. Thank you.

Jane Sun

Thanks.

Operator

Your next question comes from the line of Jiong Shao from Macquarie.

Jiong Shao – Macquarie Securities

Good morning. Thank you very much for taking my questions. I have two as well. The first question is on your guidance. In the past you have given out the segments guidance in terms of the revenues. I was hoping you can do the same for Q1. And also, could you talk about your guidance for the operating margin? I think Jane mentioned stabilization for the operating margins for Q1; I was wondering, do you have a specific range? That's my first question. Thank you.

Jenny Wu

Okay, sure. For the hotel, for 1Q, the volume may grow 25% to 35%. The price, the ADR for hotels may decline 5% year on year, which is mainly due to our further penetration into lower-star hotels and lower-tier cities. For the commission, nominal commission rate, will -- largely flattish. And the e-coupon impact will be around 10% to 15%. So revenue will grow about 10% to 15%.

For air ticketing, volume growth will be 15% to 20%. Both the price and the commission rate will largely flattish. The revenue will grow 15% to 20%. For package tours, total revenues may grow 25% to 30%. And for the corporate travel, its growth will be largely in line with air ticketing business which is 15% to 20%. So for Ctrip totally, our top line will grow about 15% to 20%.

For the operating margin, as Jane just mentioned, we'll see e-coupon on hotel business stabilize in 4Q. And for 1Q, we expect the similar situation. But 1Q is usually a weaker season, and so we usually see the slight margin decline Q-on-Q. So we will try our best to make sure 1Q's margin will be largely similar to 4Q which is 20% to 21%. That's the visibility we have so far.

And I understand the people always want us to give the full year guidance, but actually when we look at the market and look at the competition situation, it's quite dynamic, and our visibility for the rest of the year is limited. So we believe it will be at the investors' best interest if we can guide the more realistic level when we've got clear pictures later on. So going forward we may guide on the [confident] basis.

And for Ctrip, people usually know, we are very decisive to invest for our future. On the other hand, we also have very tight cost control, we are very disciplined. We will make sure we'll continue to do that to avoid any -- to avoid losing any pennies. So we will try our best. Thank you.

Jiong Shao – Macquarie Securities

Okay, great. Thank you, that's extremely helpful. Thank you. And my second question is on the competition side. I think earlier Min mentioned that one of your OTA competitor launched air ticketing coupons a couple of quarters ago, now you are on the offense also. Could you talk about the current competitive dynamic between you and your OTA competitor? And also talk about the e-commerce guys, the vertical search guys and the e-commerce platform, where you think the greatest threat to you may be. Thank you.

Min Fan

Yeah. I think the competition landscape right now is there's no very big difference from last quarter. And for Ctrip, I think Ctrip is still positioned, very unique positioning in the market. I'd just say Ctrip is the only OTA that has one-stop full service for -- no matter business travelers or leisure travelers. If you compare other OTAs, probably they will just do a product line which we enjoy, and for example, eLong where the main focus is on the hotel side. So I think if you compare OTAs, Ctrip has the most comprehensive product offerings, most sophisticated operating system, and advanced IT infrastructure to service our customers. And also we have our content website and also we have our full suite of mobile apps. So I think for Ctrip, we are really a kind of one-stop solution for any leisure or business travelers, they want to find a one-stop solution, Ctrip is the best place for them to use.

And if you're talking about vertical search engine, I should say vertical search engine, normally they will -- just like a platform to just exhibit various kinds of medium to small travel companies and they list their products there. The service experience is not the same and other sales probably not so guaranteed, the quality is not so guaranteed. So I think for customers, if Ctrip can provide the best price as well as other search engines or other OTAs, definitely Ctrip is the best place to shop around.

Jiong Shao – Macquarie Securities

Okay. Thank you very much for the comments.

Min Fan

Thank you.

Operator

Your next question comes from the line of Mike Olson from Piper Jaffray. Please proceed.

Mike Olson – Piper Jaffray

Hey, good morning. I think you said that mobile was 10% of hotel bookings in the quarter. And as China online travel continues to take share from offline, how important is mobile to furthering that transition and how much do you expect mobile will be of hotel bookings for the entire year for 2013?

Min Fan

Yeah. I think last year we already see our mobile booking volume accounts for more than 10% of our total hotel transaction volume. So for this year I'm sure there will be still very fast and strong growth in this field. Since we have a strong team for mobile app design and interface and also I should say Ctrip wireless app is one of the first travel mobile apps to support LBS services and voice recognition. Our team continuous upgrades the platform and enrich the content to provide very good quality service based on our customer, mobile customers' feedback and booking habits. So definitely we are very confident that Ctrip still will be a far ahead leader in this field in the market.

Mike Olson – Piper Jaffray

Okay. And then I wanted to ask you about travel metasearch. Travel metasearch is a fast-growing category in the US and Europe, and can you just talk about how you expect travel metasearch to grow or not grow in China and why you think that? And how would growth of travel metasearch sites impact Ctrip?

Jane Sun

Sure. I think every company has its strengths. Travel metasearch definitely has its convenience for the users, but we believe that in order for a customer to have full services, price searching is one part of the required services. After the search of the price, somebody needs to do a good job to do the fulfillment cycle. And that cycle is very well handled by Ctrip.

And if you look at the US market which represents the future for China market as well, travel metasearch, Kayak does a very good job in price searching. But compared to Expedia and also Booking, their sizing and the service they can provide relatively is smaller. And recently I think they also teamed up with Booking. So everyone has its strengths and everyone provides the value to the consumers, but we believe OTA model still is the most comprehensive model for the users. And if you look at the more developed countries, that has been proven to be the model so far.

Mike Olson – Piper Jaffray

Okay. Thanks very much.

Jane Sun

Thank you.

Operator

And your next question comes from the line of Ming Zhao from 86 Research. Please proceed.

Ming Zhao – 86 Research

Thank you. So a follow-up question on the margin. You're talking about flat margin from Q4 to Q1. However, you're going to report a lower top line Q-on-Q. You're also going to apply air ticketing coupon. So, how can you maintain a flattish operating margin? Is it because you're cutting hotel coupon rate further or are you cutting marketing expense? Thank you.

Jane Sun

For Q1, our margin guidance reflects the impact of the coupon program, and we will do it in a couple of ways. First of all, I think through the coupon program, on the revenue per ticket perspective, it will have a decrease. But we will work very hard to make sure the volume will partially offset that impact.

Secondly, internally we will also work very hard to make sure our operation is as effective as possible. So I think for Q1 the guidance has reflected everything we can see so far.

Ming Zhao – 86 Research

Thank you.

Jane Sun

Sure.

Operator

Your next question comes from the line of Alex Yao from Deutsche Bank.

Alex Yao – Deutsche Bank

Hi. Good morning everyone and thank you very much for taking my question. My first question is on the investment side. In the previous calls, you guys mentioned that investment in 2012 would cause about 4 percentage point margin impact. How would you review the achievements so far from this investment and how do you guide to think about investments in 2013, and what could be the financial impact? Thank you.

Jane Sun

Investment in the product line and also in technology is ongoing effort. So we will maintain certain level of the investment. In 2012 we have invested in many new products and each line of business has been delivering the results meeting our expectation. So we are very positive in their growth. In 2013, we will still maintain certain level of the investment, and that has been taking into consideration of the guidance Jenny has given to everyone.

Alex Yao – Deutsche Bank

Got it, thank you. Second question is a follow-up on the air ticket cash rebate. Based on our estimate, your air ticket volume is more than 15 times bigger than the second largest OTA in China. Given such a big difference, from which part, from which channel would you expect it to gain volume from by offering these coupons? Thank you.

Jane Sun

Yeah. I think air ticketing coupon is one of the strategies we adopt. We believe in order to extend our leadership, every branch needs to stay strong, including our product comprehensiveness, including our IT technology team, including our product and pricing. The coupon give us a leap on the pricing, but we also need to make sure our product is the most comprehensive, which we -- Ctrip does have the advantage in the market because we're the only platform which offers tickets, hotel, package tour, corporate travel and many other services. So if we have a comprehensive solution coupled with the air ticketing coupon, we believe our competitive advantage will be extended.

Jenny Wu

The leisure travel and online travel is growing at a very robust pace and we would consider continue to see this fast growth in 2013, and we also see the continued offline to online migration. So that's one part, and we will see the core market size will continue to expand. And secondly for Ctrip, our market share in the market is still relatively small. We would expect to at least we can proactively embrace the market opportunity and to gain more market share from all fronts.

Alex Yao – Deutsche Bank

Thank you very much.

Jane Sun

Thank you.

Operator

And your next question comes from the line of Aaron Kessler from Raymond James. Please proceed.

Aaron Kessler – Raymond James

Yes, thank you. A couple of questions. First, just to clarify on the air revenue growth, I believe you said 15% to 20%, but then I believe you also said volume growth of roughly 15% to 20%. Can you just clarify? It doesn’t sound like there's impact from the coupon in the guidance for Q1, unless I missed something.

Jenny Wu

Sure. For air ticketing for 1Q, both volume and revenue growth will be around 15% to 20%. And you're right, the air ticketing coupon impact in 1Q will be limited. And as Jane just mentioned, we were methodically to design the whole marketing campaign and to fine-tune our tactics and the coverage and the magnitude according to the market conditions. And for 1Q the impact will be limited. For the rest of the year it will -- we will adjust, fine-tune based on the market situation.

Aaron Kessler – Raymond James

Okay. And then I have just a follow-up question in terms of the air coupons also. I mean the hotel commission rates are much greater than the air commission rates for you, and so there's probably more of an incentive for consumer to opt for the lower-priced hotels, where they probably wouldn't save much on the air coupon. So just maybe if you can talk about, I mean, is a rebate on the air coupon of just a few dollars, is that enough to really gain further market share on the air whereas hotel may be more compelling?

Jane Sun

Again I think just having a cash coupon is not enough to compete in the market. Ctrip's competitive advantage has to be in service, pricing, product, IT and branding. All these five items are very important for us. So, coupon is one of the measures that will be taken by us to leap forward in the market.

Aaron Kessler – Raymond James

Great. And just a final question, can you talk a little bit about the wholesale pricing environment? We were hearing I guess some of the hotels, it sounds like, pulled out of companies that were offering [post-sale] prices on other websites.

Jane Sun

Yeah. First of all, wholesale price only represents a very small portion of the total volume in the market. So that's very limited. Secondly, if the price is listed online and if it is legal and supported by the hotels, Ctrip as the largest OTA should be able to get it for our customers. And thirdly, if the price is not supported by the hotel or it is not legal, then hotel will discipline all the players in the market to create a very healthy ecosystem. And Ctrip is very much in supportive of hotels' initiatives.

Aaron Kessler – Raymond James

Great. Thank you.

Jane Sun

Sure.

Operator

Your next question comes from the line of Alicia Yap from Barclays. Please proceed.

Alicia Yap – Barclays Capital

Hi, good morning. Thanks for taking my questions. So my first question is actually a follow-up on the air. I know that you said probably 1Q will be more limited. But just wanted to get a sense like, you know, what will be your tactic? For example, are you going to follow your competitor like from route to route matching dollar to dollar like the one that you did on the hotel coupon side? And then for -- the other thing is that will airline, what is the airline views on the OTA doing the discounting? Would that be impacting their direct sales? And how will airline react on that? That's my first question.

Jane Sun

Sure. For ticket, I think we will study each line very carefully. Some of the routes probably are selling well, it doesn’t take too much effort to sell. Some of the routes might take some effort to promote. And we'll work with the airlines to make sure the sales and marketing campaign we put into these markets will help airlines as well as help our customers to best utilize all the capability in the airline routes. So we'll make sure we work with all the planners to develop our strategy.

Alicia Yap – Barclays Capital

So, does that mean that airline is actually supporting on you guys doing air couponing?

Jane Sun

We will of course work with all our business partners when we develop our marketing strategy.

Alicia Yap – Barclays Capital

Okay. And then when you say 1Q is more limited, so does that mean from time to time these things are [accelerating], you probably will increase your magnitude of the discount? Does that mean probably throughout the rest of the year we may see further margin decline if that is the case?

Jane Sun

So, first of all, our priority is very clear, market grows fast, Ctrip's market share is very small. So in this fast-growing market, our priority is extend our leadership into the market. Secondly, when we do the detailed execution, we'll be very prudent to make sure everything we design will create the best value for our company and for our shareholders.

Alicia Yap – Barclays Capital

I see. And then my second question, very quickly, is on recently there were some comments that you laid off some sales ground employees. So, what exactly happened there? Is that true? And if that's so, are you actually moving more sales and marketing campaigns through online channel with the shift of the online booking that is happening? And is there any plan for you to actually cut down your call center employee as well?

Min Fan

Okay. I think the expect in the past years were always -- we always study our sales channel, study the efficiency of different kind of sales channel, including marketing channels. Reducing sales presence in some airports is our consistent effort to optimize the return on investment of sales marketing. As we continue to evaluate the efficiency of these marketing channels, we will allocate our resources to more effective ones. So that's why you may know that we later in the next half of last year, we adjust some offline channels in some airports. While we're becoming more dominant in the online business travel segment, our focus right now is to penetrate more into the leisure travel market. So with that, we will allocate more resources to the channels which can generate more effective return such as online channels, such as some efficient marketing channels. So I think it's an ongoing process for us to maximum our return on investment of sales and marketing channels.

Jenny Wu

And just I'll add. We noticed that there's a lot of false comments in the news about how we handled the layoff and that we care and appreciate our employees very much which [inaudible] being our corporate culture. We help most of our affected employees to relocate to other departments internally based on their talent and experience. And we also make the decent compensation to our affected employees which are totally lawful and considerate way.

Alicia Yap – Barclays Capital

I see. Can I just quickly follow-up on the call center employees? So, given more and more bookings shifting online, do you have any plans to be more efficient on that line?

Jane Sun

Yeah. Call center is still a very important part of our business. The growth on the call center volume still grows very strongly. So, yeah, the volume -- our hiring still matches our growth in volume.

Min Fan

Yeah. And also I think for call center, still in the market, there are still some people that are very, you know, very easy to use call center, very -- they would like to choose offline service. So for this part of the customers, Ctrip definitely is the number one and the best service company in the market. So that's why we're still having our call center service, is the, you know, one of our core competence to attract our target customers.

Jane Sun

And also the customers who are using call center are very high-end users based on our study. So we'll provide the best service for them.

Alicia Yap – Barclays Capital

Okay, great. Thank you.

Jane Sun

Thanks.

Operator

Your next question comes from the line of Eddie Leung from Merrill Lynch. Please proceed.

Eddie Leung – Merrill Lynch

Hi, good morning. Thank you for taking my questions. I basically have two questions. The first one is a follow-up questions on your hotel couponing program. Could you give us an update on the hotel partnership as well as the customer redemption rate? Are we seeing stabilization and uptrend or a downtrend?

Jane Sun

Yes, Eddie. Trend is stabilizing, so we're monitoring the change very carefully. But so far as we discussed, our guidance has reflected the hotel couponing is stabilizing.

Eddie Leung – Merrill Lynch

Got it. And then my second question is also a follow-up question on your strategy on air ticketing side. It's pretty interesting to hear that you guys are focusing on market share gain. So we understand that Ctrip already being number in the business, although I agree that your market share could be a bit small. But putting it that way, are we anticipating any change in the commission structure of the airlines which would put a bigger focus on the market share of the distributors?

Jane Sun

So far commission is stabilizing, so we do not see any changes.

Eddie Leung – Merrill Lynch

Okay. Thank you very much.

Operator

Your next question comes from the line of Fawne Jiang from Brean Capital.

Fawne Jiang – Brean Murray

Good morning. Thank you for taking my questions. First one is actually a quick follow-up on the air couponing program. Just wonder, what's the official timing of launching the program? Secondly, regarding the coupon program, I guess will customer who has coupon or gained coupon through their hotel booking, will that, I guess, will that coupon be applied to your air program or is air coupon program will be very separate from your hotel coupon program?

Jane Sun

Sure. First of all, timing, I think we're still designing and completing the program, but very much likely to be after the Chinese New Year when the market slows down. Secondly, in terms of the cross-selling, yeah, definitely I think we take into consideration of the comprehensiveness of our product. So we will use all our strengths in different products to make sure the coupon program will generate the best return for our overall revenue, not only air ticket but also hotel, but also package tour. So when we design it, we'll use many smart ways to design our coupon program.

Fawne Jiang – Brean Murray

Got it. Thanks, Jane. Second question is actually regarding your margin. I do understand we're probably early in the year and there are still a lot of moving parts. But just wonder, compared with your 2012, out of the major lines that have impacted your margin 2012, where we may potentially see some step-up on the cost side or where we may potentially see some leverage or saving? Just some color around that in terms of like marketing direction, that'll be very helpful.

Jane Sun

I think as we discussed, Q1 margin guidance has taken into consideration everything we can see so far. And when we move forward into Q2 and Q3 as the business has been evolving, we'll have better visibility and we'll give you more detailed margin guidance at that time.

Fawne Jiang – Brean Murray

Got it. Thank you very much.

Jane Sun

Thanks.

Operator

And your next question comes from the line of Wendy Huang. Please proceed.

Wendy Huang – CIMB

Thank you. First I have a follow-up on the air ticketing coupon's impact. Historically you've provided a very detailed quantitative analysis on the hotel coupon's impact on the margin side and how you will recognize those impacts. I just wonder, by the time that we have full quarter impact from the air coupon program, how will that recognition be different from the hotel coupon program and also how will the margin impact on the gross level and operating level? Thank you.

Jane Sun

So in terms of accounting, the treatment will be similar to hotel coupon. In terms of the impact, in terms of dollar amount, again as we discussed before, Q1 number is already included in our guidance. And going forward, Q2 and Q3, we need to wait until we get a bit better visibility and give you a very detailed guidance as we always do going forward. So we need to get more visibility before we can give you a more detailed guidance on the margin.

Wendy Huang – CIMB

Okay. Second question is, among the third-party air ticketing booking platforms, who do you consider as the major competitors? I don’t really think eLong is a major competitor in this arena right now. So, who are those guys? Thank you.

Jane Sun

I think the market is so fragmented, I think Ctrip is focused on our own strategy. There are many players who can always grow. But in terms of competitive advantage, because Ctrip not only has air ticketing business, also have hotel and package tour, I think as the user getting onto Ctrip's platform, we'll enable them to do one-stop shopping plus a very high quality of the service, plus the reliability of the pricing and product. So overall we believe, if we keep up with our strong execution, we have very good advantage to leap forward. But obviously the market grows so fast, I think all the players will enjoy their growth.

Wendy Huang – CIMB

Right. Actually, Jane, I'm just referring to the third-party air ticketing booking platform, since you have more than 10% volume share in the total air ticketing market, I just wonder, among the third-party guys, is any of them actually taking maybe 2% to 5% volume share based on your observation?

Jane Sun

Because we -- in terms of the OTA market, there are only two companies who are publicly listed, so this information is readily available, everyone can read it. All the other companies' information, you know, we don't have official data, so probably you know as well as we do for the official numbers.

Wendy Huang – CIMB

Okay. Finally, I remember that three years ago when you just started to expand into the lower-end hotel and low-tier cities, you set up Starway Hotel alliances. However, I noticed last year you actually sold a majority stake of that company to [Hanqing]. So I just wonder, what has changed in your expansion into the lower-end hotels that has made you to -- sold a company that you [shed out] from the beginning to affiliated company? Thank you.

Min Fan

Yeah. For Starway Alliance, in fact it's a kind of a marketing alliance association organization and it's mainly operating within the -- along the three-star hotels, this kind of level. And since Ctrip will have many things to handle and we are focused very much on our core business, so we spinning off this company and we hope we can focus more on our main stream business line. But for the budget hotel side and also for the middle scale hotel side, for 2012 the hotel booking volume from these product lines will see very healthy growth and also very strong growth. So that means for the year path we have very good strategy on this field. Yeah.

Wendy Huang – CIMB

Okay. Thank you very much.

Min Fan

Thank you.

Operator

Your next question comes from the line of Tian Hou from T.H. Capital.

Tian Hao – T.H. Capital

Yeah, I have two questions. The first one is about your share account on the fully diluted basis, I saw some increase from Q3 to Q4 level, and would you please elaborate the detail changes, where the gain is, where the decrease comes from? So that would be very helpful for me.

Jenny Wu

There's two parts. First one, we purchased back shares aggressively, so it decreased the share count by roughly 3 million. And on the other hand, in fourth quarter -- in late third quarter we issued a CB, and the underlying shares associated with CB is about 9.3 million. And based on the GAAP requirement, it should be treated as converted basis. So this 9.3 million shares, ADR should be left into the calculation of liability ADRs. And so this will imply about a 6% to 7% of dilution. And as of the 4Q, we have about 145 million ADR and I think we can use that like the baseline for 1Q and 2013.

Tian Hao – T.H. Capital

Okay, that's very helpful. The second question is still really, you know, I tried to get some clarification for air ticketing rebate program, so I really want to understand how that work. I saw a lot of, you know, rebate program attached to your flight information on your website, a lot of them. So, are you saying, even though there are a lot of attached rebate, you're not actually using it in Q1? So if you start to use it, how are you going to -- how it's going to, you know, volume and the revenue still the same growth? I really can't get that math right and I need some help on that front.

Jane Sun

Sure. As you have seen in the hotel coupon program, when we issued a coupon, volume will have a pick-up. So, volume will increase quite large, which will be partially offset by the decrease on the per hotel commission basis. So the impact on the revenue is a dynamic formula which takes into consideration the increase of the volume and decrease on the per room night income. So we are hoping when we render coupon, we set our priority to take market share. On the other hand, I think we will also carefully design the program so that the revenue gets the best return, our overall revenue portfolio.

Tian Hao – T.H. Capital

So that is for the air ticketing, so if you book one ticket, for example, if it's a RMB1,000 ticket, you get RMB40 in commission, then your rebate program, like RMB80 to RMB110, so you actually have a net loss. So, how could you at the end the volume growth is still in line with your revenue growth in -- not hotel, in the airline front?

Jane Sun

So again we are still designing our program. Of course when the final program comes out, the end-result has taken into consideration of the revenue growth so that we don't have a negative revenue.

Tian Hao – T.H. Capital

Sure.

Jane Sun

But on the other hand, we also need to achieve our goal to gain market share. So the program is still being designed and we will take into consideration of the two dynamic parts to make sure the return for each dollar we spend is maximized.

Tian Hao – T.H. Capital

Okay, that's very helpful. Thank you.

Jane Sun

Thanks.

Operator

And your next question comes from the line of Muzhi Li from Citigroup. Please proceed.

Muzhi Li – Citigroup

Hi. Thank you for taking my questions. Sorry about my throat, I have -- under fever today. I would like to follow up on the share-based compensation impact for the laying off of the extra capacity of workers. The share-based compensation in the future quarters will be less or unchanged in terms of the total number of -- or I'm sorry, total percentage of revenues? Thank you.

Jane Sun

Share-based compensation has two elements. One is the number of the shares we grant. The second one is valuation of the shares. The number of the shares is locked every year. So it's a steady number we can control and we control it very tightly. However, the price and also volatility of the stock will impact the valuation of the stock compensation. That number we cannot control.

So for your modeling purposes, I think a consistent number with 2012 is a reasonable estimate. But, you know, nobody can control the price, there will be some fluctuation.

Muzhi Li – Citigroup

I see. Thank you very much. And secondly, I would like to ask more about the air ticket coupon things, because even though that the air coupon program will not be available until after Chinese New Year, I already see some instant price cut that's available among the major cities like Beijing, Shanghai, Guangzhou. So, would you kindly share some data to show how these instant price cuts improve the air ticket volumes or your market share gains? That would be very helpful. Thank you.

Jane Sun

Sure. Yeah, you're very observant, we do have instant cuts for certain routes, and that's our test run. I think the test run obviously is successful, which enable us to launch air ticketing coupon program. So the impact on the financials for these instant cuts is already reflected in our announced results.

Muzhi Li – Citigroup

Thank you. But again, similar question from the previous analyst, is if you increase the volume because of these coupon -- oh, sorry, because of these instant price cuts and those instance price cuts offering a bigger volume -- bigger amount than the commission you get, then it is sadly negative revenues. So, how does it improve the total -- maintain the same level of revenue growth? Thank you.

Jane Sun

Yeah. I think we designed the program so that overall the revenue growth will be maximized. So from route to route, the amount of the rebate and the frequency the rebate is offered may be adjusted based on the market, so that the return on our overall revenue growth will be maximized.

Muzhi Li – Citigroup

I see. Thank you. Forgive me, one last question. I want to congratulate you for the very great result about the mobile internet and the booking. Ten percent is a big number. Is the 10% included in the more than 50% of booking online?

Jane Sun

Yes.

Min Fan

Yes, yes.

Muzhi Li – Citigroup

Okay. In that case, I'm seeing that the offline booking is gradually decreasing in terms of -- as a percentage. So, isn't that affecting the -- either the top line growth as well as the margin because I think the one big advantage is the offline call center is they actually help to upsell the high margin and the high commission product versus the offline, that people can see like anything they would like to, not in the interest of Ctrip?

Jane Sun

I think if you compare the two platforms, you're right, the call center customer is more high-end, so on a per call basis, probably it generates a little bit higher revenue, which will be offset by a little bit more cost in the labor. On the online platform, on a per booking perspective, it might be a little bit lower, but again the labor involved is a little bit less. So if you compare it net-net margin basis, both platform is generating similar margin.

Muzhi Li – Citigroup

I see. Thank you very much.

Jane Sun

Thanks.

Operator

And your next question comes from the line of Ida Yu from CICC. Please proceed.

Ida Yu – CICC

Hi, good morning, everyone. Thank you for taking my questions. I just got one follow-up question on air ticket rebating program. So, how is the company going to allocate your capital resources in some of these new promotional programs? And how much downside you're going to see on -- in the margin side going through 2013?

Jane Sun

Again, I think we have already provided the Q1 guidance. That guidance has taken into consideration of the margin impact and the revenue impact for the air ticketing coupon for Q1. As we move to Q2 and beyond when we have better visibility, we'll provide a more detailed guidance going forward.

Ida Yu – CICC

So, how about this company resources allocation, so, are you going to increase the pool that you previously mentioned about this promotional program or are you going to stay in the same pool so that you cut apart from the hotel couponing program?

Jane Sun

Yes. Again, the -- depending on the market reaction, if it's very efficient, then I think obviously we'll increase it. If it's proven to be not efficient, then no matter what program you're in, it's not helping. So it's very much we will monitor the market reaction and adjust our program in order to achieve the maximum return.

Jenny Wu

For hotel part, we will continue to have this pricing matching strategy.

Ida Yu – CICC

Okay. So, how does this hotel coupon program extend into 2013? Is it going to continue or -- sorry.

Jane Sun

Yeah, stabilizing. Stabilizing. And we are monitoring the situation on 24-hour basis everyday.

Ida Yu – CICC

Okay. Thank you very much.

Jane Sun

Thanks.

Operator

And your next question comes from the line of Fawne Jiang from Brean Capital. Please proceed.

Fawne Jiang – Brean Murray

Just one quick follow-up actually on your share repurchase program, just wonder, like out of your last tranche which is around 300 million program, I just wonder how much cash is left. And also for your CB, whether the money you've raised have all applied in 4Q, and what's the commitment on the share repurchase from here?

Jenny Wu

So far we announced this three tranche of the share buyback plan. Together the [quota] is about USD50 million plus USD100 million plus USD300 million, which is USD450 million. And we already purchased back about 300 million, so we still have roughly 150 million left from the previous [quota].

And when we announced the issue of CB, the primary usage is for share buyback, and we have -- we committed up to 150 million from that. So together we still have around [USD250 million] under our commitment for the future share buyback.

Fawne Jiang – Brean Murray

Got it. Thanks, Jenny.

Jane Sun

Thanks.

Operator

At this time we have no further questions in the queue. I would like to turn the presentation back over to Lin for closing remarks.

Lin Zhang

Thank you everyone for joining us on the call today. A replay of the call will available here on the IR website shortly after the call is completed. We appreciate your interest in Ctrip and look forward to reviewing with you again next quarter. Thank you.

Jane Sun

Thank you very much.

Min Fan

Thank you.

Jenny Wu

Thanks.

Operator

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.

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