eLong's CEO Discusses Q4 2012 Results (Q&A Session) - Earnings Call Transcript

| About: eLong, Inc. (LONG)

eLong, Inc. (NASDAQ:LONG)

Q4 2012 Earnings Call

February 21, 2013 8:00 PM ET

Executives

Mike Doyle – CFO

Guangfu Cui – CEO

Analysts

Eddie Leung – Merrill Lynch

Wendy Huang – CIMB

Fawne Jiang – BM Capital

Muzhi Li – Citigroup

Tian Hou – T. H. Capital

Alicia Yap – Barclays

Echo Yan

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

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

Before the management presentations, please allow me to read our Safe Harbor Statement. During this call representatives of the company will make certain forward-looking statements within the meaning of the U.S. Securities Act and the Securities Exchange Act. These statements are based upon management’s current views and expectations with respect to future events and are not a guarantee of future performance. Furthermore, these statements are, by their nature, subject to a large number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements as a result of a wide variety of factors. eLong undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. Please refer to the risk factors described in our Annual Report on Form 20-F, as well as the full text of the Safe Harbor Statement in our Form 6-K, which will be furnished to the SEC in connection with our press release containing our fourth quarter and full year 2012 unaudited financial results, for discussion of some of the important factors that could affect future results.

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

Guang Fu - CEO

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

Before I discuss the Q4 performance, I would like to share with you a great honor eLong received in 2012. eLong was named the 2012 China Best Employer by Zhaopin.com and Beijing University. As part of this award, eLong was also ranked No. 26 among the top 100 best employers in China. This is the first time eLong has received the best employer award in China. eLong company culture “People, Service and Profit” is well received by our employees and is now well recognized by our society.

Now the business result. In Q4, hotel room nights exceeded 5 million for the first time. Our hotel room volume growth accelerated in each quarter during 2012. And now more than three-quarters of our hotel bookings are made by our customers online through our websites or mobile applications. Our domestic hotel coverage network expanded 53% to over 39,000 domestic hotels as of December 31, 2012. In addition, our international hotel coverage totals over 160,000 hotels through our direct connection to Expedia. The highlight for 2012 was that hotel room nights grew 75% to 16.1 million room nights compared to 9.2 million in the prior year.

In Q4, we continued our largest-ever marketing campaign featuring the “Book Hotel, Use eLong” branding message and coupon offers. This marketing campaign improved eLong brand awareness and contributed to our hotel volume growth. Our goal is to become the No.1 online hotel booking service provider. We have been executing our online hotel strategy for 5 years. We are moving along well towards this goal. Given the great opportunity ahead of us, we are willing to bear the costs of increased marketing efforts, and we will continue our aggressive marketing approach in 2013.

Despite intensified competition, our hotel groupbuy product growth accelerated in the fourth quarter, and remains the clear market leader in China. During the quarter, we expanded groupbuy deals from approximately 6,000 to 10,000. Hotels typically offer deep discounts for groupbuy deals. Our leadership in this product segment reinforces our overall brand value proposition.

We continue to see high growth from our mobile booking channels, and now provide a full range of mobile options for our customers to book hotels and air tickets, including iPhone, iPad, Android and Winphone as well as our mobile website m.eLong.com. We will continue to invest to strengthen our position in this growing channel.

To support our growing hotel business and to maintain our high quality service, we made significant investment in improving our infrastructure in recent quarters, and expect to continue these investments in 2013. These investments include IT infrastructure and operation capacity. We opened our second customer service center in Hefei in Q2 and continued to staff that facility in Q4. We intend to further expand capacity in Hefei in 2013.

In 2013, we will continue executing on our online hotel strategy with an increased emphasis on mobile. Most of our priorities in 2013 remain consistent with 2012, and these priorities are:

1) Offer more competitively priced hotel products;

2) Offer more domestic hotels;

3) Aggressively market to and attract online customers, especially mobile customers;

4) Improve the online booking experience and overall customer service quality; and finally

5) Continue to build IT and operation infrastructure.

To compete and win, we must continue to provide customers with broader hotel product choices at competitive prices coupled with an outstanding user experience. We are excited about the great opportunity in front of us!

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

Mike Doyle – CFO

Thank you, Guangfu. In the fourth quarter, strong online hotel performance drove our year-on-year net revenue growth to 32% compared with the fourth quarter of 2011. For full year 2012, net revenue grew 27% compared with 2011.

Our hotel business benefitted from our continued product investment and innovation in emerging hotel booking models such as groupbuy as well as developing channels such as mobile. Q4 room nights booked through eLong increased 94% year-on-year to 5.0 million. For full year 2012, room nights booked through eLong increased 75% year-on-year to 16.1 million. Due to technology system improvements, our groupbuy room nights can now be tracked by the date of customer stay. As a result, our room nights and revenue are recognized on the date of customer stay rather than waiting for the date of expiration of the groupbuy voucher. In Q4, we recognized an additional 330,000 room nights booked in prior quarters, which increased room night growth from 81% to 94% compared to the fourth quarter of 2011.

In the fourth quarter, hotel revenue grew by 38% year on year due to increased room night volume, partially offset by lower average commission per room night. Commission per room night decreased 29% year-on-year primarily due to three factors: (1) growth of groupbuy and budget hotel room nights which together represent more than 50% of our room night volume, (2) lower average daily rates across all hotel segments, and (3) an increase in the size of our coupon program. Excluding the groupbuy technology system change, hotel commission revenue increased 36% compared to the fourth quarter of 2011. Hotel revenue now represents 78% of our total revenues, which is an increase from 76% in the fourth quarter of 2011.

For full year 2012, Hotel revenue increased 36% compared to 2011, primarily due to higher room night volume, partially offset by a 22% decrease in commission per room night. Room nights booked through eLong in 2012 increased 75% year-on-year to 16.1 million. Commission per room night declined primarily due to the growth of groupbuy and budget hotels, lower average daily rates across other hotel segments, as well as an increase in coupons. Hotel commission revenue grew to 76% of total revenues from 72% in the prior year.

Air ticketing commission revenue increased 8% for the fourth quarter of 2012 compared to a year ago quarter, driven by an 11% increase in air segment volumes to 637,000, which was partially offset by a 4% decrease in average ticket price compared to the same quarter of 2011, as well as the air coupon program. Air revenue decreased to 14% of total revenues from 17% in the prior year quarter.

Air ticketing commission revenue for full year 2012 decreased 1% compared to 2011, driven by a 4% decrease in commission per segment, partially offset by a 3% increase in air segments to 2.4 million. Commission per segment decreased due to a lower air commission rate compared to 2011, as well as our air coupon program. Air ticketing commission revenue decreased to 16% of total revenues from 20% in the prior year.

Other revenue, primarily derived from advertising on our websites and travel insurance, increased 43% year-on-year for the fourth quarter of 2012, mainly driven by increased advertising revenue. Other revenue increased to 8% of total revenues from 7% in the prior year quarter.

Other revenue for full year 2012 increased 25% compared to 2011, mainly driven by increased advertising revenue. Other revenue was 8% of total revenues, consistent with the prior year.

Gross margin in the fourth quarter of 2012 decreased to 72%, compared to 74% in the fourth quarter of 2011. Gross margin for full year 2012 decreased to 73%, compared to 74% in 2011. Gross margin decline was mainly due to lower hotel commission revenue per room night to cover volume-driven fulfillment costs and continued investment as we scale our second customer service center in Hefei.

Total operating expenses increased 57% or RMB60.3 million for the fourth quarter of 2012 compared to the fourth quarter of 2011. Total operating expenses increased to 79% of net revenues from 66% a year ago.

Total operating expenses increased 59% or RMB224.2 million for full year 2012 compared to 2011. Total operating expenses increased to 81% of net revenues in 2012 from 65% in 2011.

Service development expenses increased 32% in the fourth quarter of 2012, mainly driven by an increase in headcount. We continue to invest in improving our online user experience and technology systems, as well as expanding our hotel coverage. Service development expenses were 17% of net revenues, consistent with the same quarter of 2011.

Service development expenses for full year 2012 increased 31% compared to 2011, mainly driven by an increase in headcount. Service development expenses were 17% of net revenues, consistent with 2011.

Sales and marketing expenses for the fourth quarter of 2012 increased 74% or RMB46.7 million over the fourth quarter of last year, mainly driven by a further level of increased investment in online marketing channels, increased advertising expenses from our brand marketing campaign and hotel commission payments to affiliates. Sales and marketing expenses increased to 53% of net revenues in the fourth quarter of 2012 from 40% in the same quarter of the prior year.

Sales and marketing expenses for full year 2012 increased 79% or RMB181.4 million over 2011, mainly driven by a further level of increased investment in online marketing channels, increased advertising expenses from our brand marketing campaign and hotel commission payments to affiliates. Sales and marketing expenses increased to 55% of net revenues in 2012 from 39% in 2011.

Q4 general and administrative expenses increased 19% compared to the fourth quarter of 2011, mainly driven by higher personnel expenses. G&A expenses decreased to 8% of net revenues in the fourth quarter of 2012 from 9% in the same quarter of 2011.

General and administrative expenses for full year 2012 increased 18% compared to 2011, mainly driven by higher personnel expenses. General and administrative expenses decreased to 8% of net revenues in 2012 from 9% in 2011.

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

Net income for the fourth quarter was RMB5.7 million, compared to net income of RMB15.0 million in the fourth quarter of 2011.

Net income for full year 2012 was RMB0.5 million, compared to net income of RMB39.3 million in 2011.

In the fourth quarter, net income was impacted by an income tax benefit of RMB11.6 million relating to the valuation of certain non-current deferred tax assets. The deferred tax assets relate to our wholly foreign owned enterprise which currently enjoys a 15% preferential tax rate that expires at yearend 2013. Until our re-application is approved, we must value the deferred tax assets using the standard 25% rate. This tax benefit may be reversed in a future period dependent upon the outcome of our application.

Moving to our Balance Sheet, I’d like to mention that as of December 31, 2012, eLong held cash and cash equivalents, short-term investments and restricted cash of RMB2.0 billion or approximately $314 million US dollars. Of this balance as of December 31, 98% was held in Renminbi and 2% in US dollars.

Looking ahead to 2013 Q1, we expect Q1 net revenue growth of 20% to 30% year on year.

As Guangfu noted, given the momentum in our online hotel business, we plan to continue our aggressive investment in marketing in order to strengthen our position in the hotel sector. Due to this, we will be under profit pressure for the coming quarters.

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

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

Question-and-Answer Session

Operator

Thank you. We will now begin our question-and-answer session. (Operator Instructions) Our first question comes from Mr. Eddie Leung of Merrill Lynch. Sir, your line is now open.

Eddie Leung – Merrill Lynch

Good morning, Mike and Guangfu. Congratulations on a very solid quarter. I have a couple of questions related to your hotel segment, so you mentioned that in the fourth quarter, there could be some onetime impact or benefits from the change of booking policy when you recognized the revenues. So my first question is when we look ahead into the first quarter on your guidance would the 81% be a more or least or appropriate reference point of what to think about the volume growth in the first quarter rather than the over 90% growth? So that’s my first question.

Mike Doyle

Eddie, this is Mike. We haven’t given volume guidance on hotel room night growth, but certainly the 94% year-on-year growth would not be a good proxy given the onetime adjustment in Q4, given the change to our technology systems.

Eddie Leung – Merrill Lynch

I got that. And then my second question related to the hotel segment is, from your press release we see that you mentioned about mix shifts would be a primary factor for the decline in average daily rates of your hotel booking volume. So my question is if we take away the mix shift factor, have we seen a stabilization of the hotel room prices in general in the industry?

Mike Doyle

We have not yet. So stripping out the impact of mix shift to lower ADR of properties, we’re still seeing a decline year-on-year of mid single digits across all star categories.

Eddie Leung – Merrill Lynch

Understood. And then finally just a housekeeping question, I noticed that there is – it sounds like an impairment booking charges of your investment about RMB4 million. What is it about?

Mike Doyle

We took an impairment charge in the fourth quarter related to a minority investment in a start-up company that creates hotel mobile booking applications earlier in 2012.

Eddie Leung – Merrill Lynch

Would that be a recurring book – recurring charge or it’s more like a onetime in nature?

Mike Doyle

It’s a onetime charge related to this particular investment.

Eddie Leung – Merrill Lynch

Got it. Thank you very much.

Operator

Thank you. Our next question comes from Ms. Wendy Huang of CIMB. Ma’am your line is now open.

Wendy Huang – CIMB

Thank you. I just have two questions, first, I think in your final comment in the prepared remarks you alluded that in Q1, you might be under profit pressure. So are you implying that you may dip into the last territory [ph] again and can you maybe give more color on the reasons behind that? Thank you.

Mike Doyle

Hi Wendy, this is Mike. I think we’re not – we haven’t given profit guidance but we wanted to be clear that we are planning to continue our aggressive investment in sales and marketing, and combined with a continued use of our coupon program both in hotel and in air are likely to put some pressure on profitability in the coming quarters and that could be even beyond Q1.

Wendy Huang – CIMB

Okay. And second question is on your air coupon program, can you remind me of what’s the exact date that you started this coupon program and also what’s your current coverage of this air coupon program, like the number of the routes and the cities covered? Thanks.

Guangfu Cui

Wendy, this is Guangfu. We started our couponing a few quarters ago. And we could give you the exact date separately, Mike can do that there. We are now expanding the program to four southern routes as of yesterday and so we want to make sure that our coupon is more competitive in the market. Thank you.

Wendy Huang – CIMB

Thanks.

Operator

Next question comes from Ms. Fawne Jiang of BM Capital. Ma’am your line is now open.

Fawne Jiang – BM Capital

Good morning, Mike and Guangfu. First question is actually regarding your robust hotel growth in the fourth quarter. It seems like (inaudible) I think fourth quarter coupon level on hotel sales was over than 3Q, but somehow you even higher hotel growth. Just wondered what’s the reason behind it? Is it the strong management growth and helping you guys more, you are consolidating the market right now? Also how should we look at the trying to going forward?

Guangfu Cui

Yes, Fawne, this is Guangfu. I would take your question. First of all, that our growth is driven by our expanded hotel networks. We are now operating globally 200,000 hotels. We are – if you look at the domestic hotels in terms of single website, we provide the largest book of our hotels in our elong.com.

Number two, we are leading in group buy business. Our business is a lot – volume is a lot higher than our competitors. And then third, we see tremendous growth out of the outbound business which is – our growth is still its small portion of our business but growing very fast. And last but not least our branding efforts in Q3 and Q4, has helped our brand online growth. Those are some of the factors beyond coupon has driven our progress. Thank you.

Fawne Jiang – BM Capital

Got it. Guangfu, just a follow-up question on that, apparently (inaudible) as well compared with your history of growth and you are here as well. It’s fair to assume that you guys are consolidating the market right now? What’s the, I guess status with the smaller air agent [ph] space right now?

Guangfu Cui

So what we’re doing now is that eLong is growing faster than the OTAs average. So we are not so sure about market foundation because everybody looks like doing fair to well in the market based on the information available to us. So we couldn’t say it’s the markets consolidation but the market is such is rapidly growing. We are – what we can say is that we are penetrating little bit deeper than our competitors in the market, so we grow a little bit faster than the rest of the market, the OTA market I would say. So that is our read of the market.

Fawne Jiang – BM Capital

Got it, very helpful. Second question is actually regarding your mobile penetration. It seems like there you have been growing very well in that channel. Just wondered what’s the current percentage in terms of the traffic as well in terms of booking and then on your contribution if you can share?

Guangfu Cui

I would share one data point at this stage. In the fourth quarter, our mobile order mix of the hotel business is more than 10%, and we are seeing acceleration of mobile business. It’s growing faster than the online PC part, of course it’s growing a lot faster than the call center business. So mobile is a strategic focus area in 2013. We will invest more behind this fast growing channel. Thank you.

Fawne Jiang – BM Capital

Got it, then with the 10% traffic in the bookings – in terms of booking, right?

Guangfu Cui

(inaudible) room nights.

Fawne Jiang – BM Capital

Room nights impact.

Guangfu Cui

Yes.

Fawne Jiang – BM Capital

And last question is actually regarding your international business, just wondering after your partnership with – recent partnership with Expedia, what have you made in terms of progress between the two companies and how does your international business are doing right now, particularly hotel as well as air?

Guangfu Cui

So after the strategic cooperation agreement signed between Expedia and eLong, we work ever closer with each other. And we integrate all the Expedia inventory, and we test with the contest to the Chinese. We improved the user experiences with that marketing to the Chinese consumers. We addressed the payment, now people can use local credit card to pay, and the success rate of payment has been significantly improved. And we localized the customer service in China, so people can talk to our call center staff 24 hours a day, seven days a week.

I want to give you one data point, this is not true for data point but rather the Spring Festival travel data. During the Spring Festival, we see a search for online travel and according to the China statistics, the people travel in group grew about 14%. The population going outside of country is about four million, a little more than four million. What we have seen eLong’s data is that our volume growth during the seven days target holiday, our room nights growing more than 260%. So what we have seen is that people like the domestic travel. They start to travel in groups, but now they are travel individually. And they make their own travel plan bookings and they are growingly use individual travel growing abroad. Thank you.

Fawne Jiang – BM Capital

Okay, got it. Guangfu, just wondered whether you can quantify your international business like in terms of hotel, is it 5%, 10% or how about on the air side as well?

Guangfu Cui

So the internet hotel business is still a small portion of our business. It’s growing fast but it has a very low base. So we are not ready to close, but I can tell it’s not a significant portion of our business now, but it will be going forward. We are not going to disclose the portion of the international hotel mix, international – our mix as we are – if it’s growing to a significant part of our business, we will let you know.

Fawne Jiang – BM Capital

Got it. Thank you very much. I will jump back in the queue.

Operator

The next question comes from Mr. Muzhi Li of Citigroup. Sir, your line is now open.

Muzhi Li – Citigroup

Hi thanks for taking my questions. Two questions, number one, could you give some mix shift between the high-end hotel and the three end – three star and budget hotels in the fourth quarter and/or the whole year? Thank you.

Mike Doyle

Muzhi, this is Mike. So our group buy and budget hotels continue to be our fastest growing segment within the star categories of hotels. Though the differential in the growth rates of those two segments versus the others has reduced some, so we haven’t seen the same mix shift that we’ve seen in other quarters which is in general are good for the P&L. We haven’t disclosed the exact change in percentage this quarter, but its more than 50% of our room nights, for those two segments together.

Muzhi Li – Citigroup

I see. The second question is about the air ticket coupon. First of all, I’d like to know the average coupon percentage of the ticket that if you keep track of that, and secondly what is the revenue impact from the air coupon that you saw over the past two quarters that you execute this program? Thank you.

Mike Doyle

So we haven’t shared the average discount in the air coupon program primarily it’s quite a new program and the discount is very considerably by flight, and based on changes we make to the program. As far as impact on our revenue, it’s immaterial given the small size of our air business and then within the air business only a small portion to-date of the flights that had a coupon attached.

Muzhi Li – Citigroup

I see, thank you.

Guangfu Cui

I want to add just one point about, I don’t think it’d be for us but we want to articulate why we are doing our couponing business. I think that’s probably one thing I’ll do share with the group. So eLong launched our fixed coupon as one of the efforts to counteract Ctrip’s blocking of higher end hotel access. Ctrip have viewed this as high-end hotel advantage to block other OTAs access to certain hotels and also certain recent promotions.

Ctrip’s action hurts consumers’ interests and hurts the online industry. So eLong, we were spared no efforts to counteract it. One of our matters is to launch our coupon. Air ticker is a small portion of our business but significant to Ctrip. So our coupon potentially will hurt our competitor’s interest and we hope that Ctrip will conduct fair play. If Ctrip conducts fair play in hotels, eLong will stop air coupons.

Muzhi Li – Citigroup

Thanks Guangfu and Mike, very helpful.

Mike Doyle

Thank you.

Operator

Next question comes from Ms. Tian Hou of T. H. Capital. Ma’am, your line is now open.

Tian Hou – T. H. Capital

Yes, hi Mike and Guangfu. I have a couple of questions, and the one is, we are moving away from the old traditional OTA which is mainly the call centric driven to what internet and mobile, you guys are building another call center. So I tried to understand the logic and why you are doing that? That’s number one question. So I will give you the second one after the answer.

Guangfu Cui

Thank you very much. It’s a very good question actually. So first of all that we are – in doing the second call center, we are going to increase our order processing capacity. One of the reason is that although our customers already book online, more than three quarters of our customers book online. However our interface with hotels are still offline driven, meaning telephone calls to the hotels and fax to hotels to confirm and to audit customers whether they are checking or not because we use agency model and the settlement et cetera, et cetera.

So one of our efforts is to do direct connection with the hotels and use extranet to connect with the hotels so that customer hotels are online. So if you look at our online strategy, our first efforts to move customer, move these consumers online which we have successfully done it over three quarters of consumers are booked online. And then the second phase of our online strategy is to move our partners online which they are not now.

So we want to use 2013 to move more and more hotel partners online, so that we can do direct connection, extranet to save the labor intensive interaction with the hotel. The last is that although our customers book online, we still have a lot of outsource service costs that is also significant as of now, so much of our efforts is to move those customer service online using new technology et cetera, but if we follow it and do all these things, we have to increase our operational capacity and you’ll see that our volumes – hotel volumes grew 75% year-over-year we haven’t really increased our call center capacity in Beijing for about five years. So we didn’t expand any seats, rental space, we really grew out of the capacity. So we have to add another call center. When we decide where to add the call center apparently add in Hefei, which would give us more access to local reached labor resources and also lower the cost of operation. That’s why we are building the call center, second service center and that’s why we select Hefei as our second service center.

Tian Hou – T. H. Capital

Got it. That’s pretty clear. And the second question is really related to what’s currently is really the hot topic regarding the airline cash rebate program. And certainly you guys, airline ticket business is much smaller than Ctrip, and so you really want to – the strategy is really want to drag Ctrip come back to unlock the block on the five-star, four-star hotel by hurting their airline tickets in the program, but I wonder will the strategy successful, because when Ctrip has such a big volume using some price even competitive price as a hookup or more travelers or more bookings, they could actually grow volume faster to offset depending on later cash rebate. And so I just wonder if your cash rebate program on the airline ticket can serve the purpose, so what do you think about that?

Guangfu Cui

Yes, I think this is a well hard effort as I mentioned, we will spare no efforts including lobbying, potential legal lawsuit and working with our other trip partners et cetera, et cetera to make sure that the industry is having a good environment on the high-end hotel. And so our couponing as I had mentioned is not strategy to eLong, right. And our ticketing business is small portion of our business. Our strategy is online hotel, but if Ctrip, it’s now our couponing and they will see that our business travel segment erosion in Beijing, Shanghai, Qingdao, Shenzhen which is why they followed us and most of us would not think they will follow us, but they did and so that shows that eLong’s air couponing program has strategic impact to Ctrip.

So Ctrip’s reaction to our couponing has validated our assumption that air is not important to us, but very important to Ctrip. If Ctrip discounts our coupon and if Ctrip continues to do a hotel coupon, then as Ctrip’s volume is a lot bigger than eLong, it hurts Ctrip more.

Tian Hou – T. H. Capital

Okay. I think I got it. So two more questions, one is for the mobile booking and what is your strategy to increase the mobile booking in 2013, and to also in terms of airline ticket to cash rebate program, what could be the margin impact in 2013, so that’s the two question?

Guangfu Cui

Right, in terms of mobile, I have been very clear that we want to make sure that we provide the full solutions for all platforms, so that we have launched all the applications for iPad, iPhone, Android, Win phone and even dot com, so that’s our plan [ph], so the next will be that we re-optimize our ads and mobile sets to improve consumer user experiences and improve CBR [ph].

The next one would also be that with aggressive market our apps and our mobile set to consumers to attract more consumers, so those are the three actions we are taking right now.

Mike Doyle

And regarding the margin on the air business, given that we are still relatively new to the air couponing, we’ll be collecting more observation or experience on what the impact is and how – what portion of our air business has a coupon attached but nothing to share currently on impacts on margins.

Tian Hou – T. H. Capital

And so Mike, you guys have been doing this air coupon programs at least one quarter, so from last quarter’s appearance and what’s the market impact has happened in Q4, how much was it?

Mike Doyle

It’s immaterial.

Tian Hou – T. H. Capital

Okay, thank you so much for the answers. That’s all my questions.

Mike Doyle

Thank you.

Operator

Our next question comes from Ms. Wendy Huang of CIMB. Ma’am your line is now open.

Wendy Huang – CIMB

Thank you. My first follow-up is this year the Chinese New Year is late than last year, so could you maybe have us to quantify the late Chinese New Year’s impact on your 20% to 30% year-over-year revenue guidance for Q1. And secondly, your impact on the aggressive investment since three year ago, so what metrics are you closely monitoring to decide when to maybe gradually step out this investment phase? Is it the hotel volume size, revenue size or market share? Thank you.

Mike Doyle

So I’ll take the first question on our outlook and the impact of the timing of Spring Festival. The timing of Spring Festival actually doesn’t have an impact now that have packed the holidays so that both our first quarter 2012 and quarter to-date 2013 data is comparable. So what we’ve mentioned the holiday was a strong booking period for us and that is already reflected in the 20% to 30% year-over-year growth.

Guangfu Cui

Yes, in terms of how we decide marketing, I think while the factor we look is the market penetration of online travel industry. Right now the online traveling penetration is very, very low. So I think we have great growth ahead of us, so it’s not the time to talk about throwing down the marketing effort and given our competitiveness in the hotel sector, so we might feel our growth in this segment. Thank you.

Wendy Huang – CIMB

Okay. Just to follow-up on that, the reason I asked that because I want to get some sense when can we expect to maybe an inflection point of your profitability in the medium to long-term, because eventually you are making today’s investment in order to drive the future earnings growth, right?

Mike Doyle

Yes, that is correct but we have not provided any guidance as to when that inflection point may occur or when will be seen a big change in margins but as Guangfu mentioned that less than 15% of the industry online, we’re in very early stage in the lifecycle of the industry in China. And as the number two, we are very focused on closing the volume gap first, and then we’ll figure out the right decisions for the business at that point.

Guangfu Cui

Yes, we would – and the management team, we would really hope that we can feel the high growth with profitability but if you look at the industry that you have one of leading competitor who abuse their high-end hotel volume advantage to block the excess of inventory and hotels. And you look at the factors that competition from other players in the market and potential entrants. And if you look at the penetration of online market, and so that’s the only wherewithal to try [ph] continue to drive our online hotel business and push forward.

So that’s the decision the board and the management team makes and we will stand behind it. Thank you.

Wendy Huang – CIMB

Thank you very much.

Operator

Our next question comes from Ms. Fawne Jiang of BM Capital. Ma’am your line is now open.

Fawne Jiang – BM Capital

Thank you for taking my follow-up questions. First one regards what – just wondering what’s online penetration for 4Q?

Mike Doyle

For online business it was more than three quarters of the total room night volume.

Fawne Jiang – BM Capital

All right, thanks Mike. Second question is regarding the change – the onetime change in the 4Q. I was just wondering, you told me there is some technology improvement, I just wondered of what’s the details are online accounting changed? Also what would be the impact on the revenue on 4Q? I guess it seemed to be onetime we don’t expect additional upside for 1Q, right?

Mike Doyle

Yes, that’s correct. So in the past our group buy deals have traditionally been vouchers good for either three or six month. And so without perfect insight as to when the vouchers were used by consumers and stayed in the hotels which is a very conservative approach on the accounting side and just recognized that the revenue and reported the room nights when the voucher actually expired.

We now have the ability to track when the customers stay and so we’ll be recognizing the revenue and the room nights at that point in time. So there were group buy vouchers have been purchased in prior quarters that we were actually waiting until they expired, but now we don’t have to drag that revenue which we don’t have to do any longer, so there was a benefit in the fourth quarter of roughly 330,000 room nights and about 3.3 million in revenue.

Fawne Jiang – BM Capital

Got it. It’s very helpful. To that question regarding your air coupon program, Guangfu mentioned that you recently expanded that program to 4,000 routes, just wondered what was the coverage before that changed? Also what’s your total route of approximately?

Guangfu Cui

So before that our coupon is only limited to four cities Beijing, Shanghai, , Qingdao, Shenzhen and basic current all the routes for all the flights. So these four flights within these four cities but now we expand beyond these four cities and now covering 4,000 routes, and Mike do you have the total flight numbers, but we would check that the total flight numbers and give you that data later.

Fawne Jiang – BM Capital

Okay, got it, Guangfu. What about the – what cities you’re offering right now?

Guangfu Cui

We haven’t made also separate about the exact – you can go to our website and check it out.

Fawne Jiang – BM Capital

Okay.

Guangfu Cui

And it’s changing, so even if I tell it today that we have, you know let us say 10 cities, but for competitive reasons and et cetera, et cetera it could change to 18. So I would then really kind of chasing that number, it’s very dynamic in terms of couponing amount, in terms of the number of routes, in terms of number of flights, it’s going to be changing every day. So yes, it’s very hard to tell you exact numbers, any number can be wrong.

Fawne Jiang – BM Capital

Yes. Second question is regarding your strategy on the air coupon program, you explained that when you know what’s the rationale driving it, but I guess in terms of taking the coupon level, are you able to beat the (inaudible) the coupon or you’re going to be following the coupon for your competitor, just the exact number [ph]?

Guangfu Cui

So basically we have three things that is unique for us. So that we have announced that we will launch more routes than our competitors and we will be beating our competitors at least by RMB1. And we will make our programs easier, so that consumer can use it in a very simple way to get cash coupon. Thank you.

Fawne Jiang – BM Capital

Got it. Thank you very much. Last question is actually regarding hotel commission in the fourth quarter. I think the commission per room night was down around 29% in fourth quarter versus 27% in 3Q, in fact I understand quietly, I think your coupon level has come down in 4Q from peak in 3Q. Just wondered what has driven the, I guess a rigid decline here?

Mike Doyle

Yes, there is a couple of things. So the primary driver is coupon and while it’s true that the average discount was lowering in Q4 than Q3, the number we’ve shared on the reduction in revenue per room night was a year-over-year number and so the discount levels in Q4 of 2012 were still considerably higher than Q4 2011. We also saw a mix shift to budget hotels and group buy, and we eventually had a lower ADR across all star categories.

In addition because of the adjustments of group buy room nights and revenue, we added quite a few room nights to the total, but not a lot of revenue because a lot of these group buy vouchers were sold during the very aggressive promotional period during the summer when we had a 10% off coupon on group buy inventory.

Fawne Jiang – BM Capital

Got it. Mike is that fair to make assumption that the actual group buy whatever volume you got from the quarter is actually contributed in that revenue and that earnings, a big portion to your room night book, right?

Mike Doyle

Yes, that’s right.

Fawne Jiang – BM Capital

Okay, got it. Thank you very much.

Mike Doyle

Thank you.

Operator

Our next question comes from Ms. Alicia Yap of Barclays. Ma’am your line is now open.

Alicia Yap – Barclays

Hi, good morning Guangfu and Mike, thanks for taking my questions. Just very quickly on just overall trend going forward, so your hotel revenue has been growing very high despite very high base in 2011. So just wonder as we head into 2013, do you think that we can still grow at the same rate despite a very high base in 2012 as well and then given that it’s continued to be a very robust growth in the leisure travel market? Then a follow-up on that is that on the commission per room night, like decreased more than last quarter, but then you kind of explained it a little bit just now, but wanted to see if these will be the trend going forward to continue which is your hotel room night growth will be increasing higher, but then offset by a even bigger decline in ASP?

Mike Doyle

Yes, so let me – I can take both of those. So the first one, we’re in the practice of just giving some color one quarter out, so I haven’t commented again on revenue growth for the full-year, but there is a couple of things to think about. The revenue growth is heavily dependent upon the level of couponing which is hard to predict just given changes in the competitive environment. But if you were to assume a similar level of couponing as Q4 for the full-year, there will be some benefit in the back half of 2013 from easier year-over-year comps when we were in period of very aggressive couponing, so that could have a benefit to hotel revenue growth. But as I mentioned it’s extremely heavily caveated on what happens to coupon, so going forward.

Alicia Yap – Barclays

I see. That’s helpful. And then lastly just, not sure if you can quantify it, so if your hotel cash rebate programs actually able to attract more business travel using the coupon rather than still dominant more buy in the individual travelers, so what I mean is that would – are you seeing a lot more business traveler actually booking maybe using one or two same account to leverage the cash rebate?

Mike Doyle

We haven’t checked that level of detail on the coupon program but sufficed to say that we do see coupon usage across all star categories of hotels as well as both of our primary customer segments, business and leisure, and not notably different between them. So I think it could be concluded that business travelers are equally interested in the program.

Alicia Yap – Barclays

And what is the latest on split between the leisure and business traveler right now?

Mike Doyle

We don’t have an updated view on that. It’s not something that we track – closely track.

Alicia Yap – Barclays

Okay, good. Thank you.

Mike Doyle

Thank you.

Operator

Our next question comes from Mr. Eddie Leung of Merrill Lynch. Sir, your line is now open.

Eddie Leung – Merrill Lynch

Hi guys, just a quick follow-up question about the inbound business. After integration with some of Expedia’s systems like hotels.com, has inbound become a more material part of your business, it would be great if you will share some color and impact after the integration? Thanks.

Guangfu Cui

So we are not ready to share about the inbound business. What I can tell you is its very tiny but we are testing certain initiatives with Expedia but nothing to share at this moment. Thank you, Eddie.

Eddie Leung – Merrill Lynch

No problem. Thanks.

Operator

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

Guangfu Cui

Thank you. Let me summarize that little bit, in 2013 we will stick to our online hotel strategy, we would save the cost. In 2013, we would take the same investment approach as of 2012 and aim to push forward. We do market [ph] aggressively to further improve eLong brand awareness and expand our hotel business. It can be done. Thank you. Now moderator, you can now commend the call. Thank you. Moderator?

Operator

That concludes the eLong Fourth Quarter and Fiscal Year 2012 Earnings Report Conference Call. Thank you for participating. You may now disconnect.

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