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E-House Holdings Limited (NYSE:EJ)

Q1 2009 Earnings Call

May 19, 2009 8:00 am ET

Executives

Michelle Yuan - Investor Relations Manager

Xin Zhou - Chairman of the Board, Chief Executive Officer

Li-Lan Cheng Ph.D. - Chief Financial Officer

Analysts

Echo Hi - Oppenheimer

Brandon Dobell - William Blair

Colin Sebastian - Lazard Capital Markets

Operator

Good evening and thank you for standing by for E-House’s first quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the meeting over to your host for today’s conference, Ms. Michelle Yuan, E-House’s Investor Relations Manager. Please proceed.

Michelle Yuan

Hello, everyone and welcome to E-House’s first quarter 2009 earnings conference call. Today we are going to give you an update on our financial results for the first quarter ended March 31, 2009. If you need a copy of the earnings press release or if you would like to sign up for our investor distribution list, please go to the IR section of our website at www.ehousechina.com.

Leading the call today is Mr. Xin Zhou, our Chairman and CEO, who will be giving a few business highlights for the first quarter 2009. Li-Lan Cheng, our CFO, will then discuss the financial results in more detail. We will then open the call to questions.

Before we continue, please allow me to read you E-House’s Safe Harbor statement: some of the statements during this conference call are forward-looking in nature and subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC. You are encouraged to review the forward-looking statements section of our annual report on Form 20-F filed with the SEC for additional information concerning factors that could cause those differences.

Please take note that unless otherwise noted, all figures mentioned during this conference call are in U.S. dollars.

I will now turn the call over to E-House’s Chairman and CEO, Mr. Xin Zhou. Mr. Zhou will be speaking in Mandarin and then I will translate his comments into English. Please go ahead.

Xin Zhou (Translation)

Thank you to everyone for joining us on the call today. Our first quarter results reflect a clear rebound in China’s real estate industry and demonstrate that E-House is a major beneficiary of such a rebound. Our total revenues and net income excluding share-based compensation expenses was roughly on par with the same period last year. However, these results do not fully capture the extent of the rebound in market transaction volume and its impact on E-House.

First, the increase in transaction volume in the real estate market started to gain momentum in March but the majority of our sales during that month will not be recognized as revenue until the second quarter.

Second, we have a low commission rate of 1.2% in the first quarter, reflecting very little bonus commission. As we record higher transaction volume, we will be able to recognize more bonus commissions tied to sales performance in the coming quarters, thereby bringing up our average commission rate. Therefore, while I am pleased with our strong results in the first quarter and even more confident that we will be able to deliver better results in the second quarter and later this year.

Our real estate consulting and information services segment continues to grow and has become a significant and stable contributor to our revenues and profits. As we continue to build and enhance our CRIC database system, particularly in the areas of commercial real estate, secondary transactions, and real estate industry suppliers, the database, as well as the various value-added services we offer, have gained industry-wide recognition and become our core competitive strength.

In addition, our real estate advertising services, a new business segment we started in the second half of 2008, began to make meaningful contributions to our revenues. Our advertising design, consulting and agency services broaden our service scope and create additional value for our developer clients.

Looking forward to the second quarter and the rest of 2009, we are confident in the fundamentals of China’s real estate industry. The rebound in real estate transaction volume that began in the first quarter further strengthened in April and so far in May across all major markets in China. Although market uncertainties remain and fluctuations and setbacks are possible, we believe the overall trend of China's economy is positive. The Chinese Government has consistently stated its goal of promoting stable growth of the real estate industry and secular demand for improved housing by Chinese consumers remains strong. E-House is well-positioned to take advantage of the new opportunities accompanying the market recovery, given our unique core competitive strengths, strong project pipeline, strategic relationships with developers and our experienced and motivated management team.

After facing the challenges of 2008, our management team is leaner, more efficient, and more motivated. All of this will support our solid growth in 2009.

I will now turn the call over to Mr. Li-Lan Cheng, our CFO, who will review the quarter’s financial highlights.

Li-Lan Cheng

Thank you, Mr. Zhou and hello to everyone on the call. Before I go into the details of our first quarter results, I would like to emphasize that our results in the first quarter benefited from improvements in both the overall industry environment and our cost-cutting initiative, which reduced our overall expense level and improved our cost structure. As the industry continues its rebound, we believe that we are well-positioned to resume robust growth while remaining flexible to deal with the changing environment.

Now I will walk you through our first quarter 2009 financial results in more detail.

First quarter total revenues were $32.8 million, a decrease of 1% from $33.2 million for the first quarter of 2008.

First quarter revenues from primary real estate agency services were $17.4 million, a decrease of 20% from $21.9 million for the first quarter of 2008. This decrease was mainly due to a lower average commission rate of 1.2% for the first quarter of 2009, compared to 2.8% for the same period in 2008. This was partially offset by increases in both the GFA and total transaction value of new properties sold. We expect our commission rate to gradually increase later in 2009 as higher transaction volume will result in more bonus commissions being recognized upon achieving sales targets specified in certain agency contracts.

First quarter revenues from secondary real estate brokerage services were $3.0 million, an increase of 5% from $2.8 million for the same quarter of 2008. The increase was mainly due to an increase in secondary real estate transaction volume.

As of March 31, 2009, E-House had a total of 106 secondary real estate brokerage stores in five cities in China, compared to 115 stores as of December 31, 2008 and 164 stores as of March 31, 2008; so this shows that we were able to generate higher revenues per store and generate higher total revenue while operating fewer stores.

First quarter revenues from real estate consulting and information services were $10.9 million, an increase of 31% from $8.3 million for the first quarter of 2008. This increase was primarily due to an increase in the number and size of consulting projects completed for real estate developers as well as an increase in the number of paid subscriptions to our CRIC database system as we further expanded coverage and marketing of the CRIC database.

We began a new business segment, real estate advertising services, in the second half of 2008. Currently we offer real estate advertising design and consulting services, as well as real estate advertising agency services. Revenue from this business segment was $1.3 million for the first quarter of 2009.

First quarter cost of revenues was $9.8 million, an increase of 63% from $6.0 million for the first quarter of 2008. This increase was mainly due to higher salaries and commission paid to our sales staff and higher operating costs incurred at sales offices as a result of increases in both the number of salespeople and the number of primary real estate projects for which we acted as the sales agent. This was partially offset by lower project-related advertising and promotion expenses that we were contractually obligated to pay for several primary real estate projects.

The increase in cost of revenues was also attributable to higher costs associated with developing, maintaining and updating the CRIC database system as a result of the expansion of the our real estate consulting and information services.

Our cost-cutting initiatives helped reduce our total costs in the first quarter compared to the fourth quarter of 2008.

First quarter selling, general and administrative expenses were $19.9 million, an increase of 31% from $15.2 million for the first quarter of 2008. The increase was primarily due to an increase in staff salaries, consulting expenses, rental, travel expenses and depreciation as a result of a higher number of managerial employees and the expansion of consulting and information services. The increase was also due to higher share-based compensation expenses as a result of share options granted in 2008 and 2009. This was partially offset by a decrease in management bonuses, which were tied to the company's financial performance.

First quarter SG&A expenses represent a decrease of 10% from $22.2 million for the fourth quarter of 2008. This decrease reflects the effect of our cost-cutting initiatives, which resulted in decreases in salary and benefits, rental, office and travel expenses. Overall, we have reduced our cost and expenses by more than $3 million in the first quarter compared with the fourth quarter of 2008.

First quarter income from operations was $3.1 million, compared to $12 million for the first quarter of 2008. Income from operations excluding share-based compensation expenses, which is non-GAAP, was $4.8 million compared with $12.8 million for the same quarter of 2008.

First quarter net income attributable to shareholders was $7.1 million, a decrease of 18% from $8.7 million for the first quarter of 2008. Net income attributable to shareholders excluding share-based compensation expenses was $8.8 million, a decrease of 7% from $9.4 million for the same quarter of 2008. Net income for the first quarter of 2009 includes $3.3 million of investment income representing gains from the company's investment in shares of a developer.

Now, moving to the balance sheet and cash flow, as of March 31, 2009, we had a cash balance of $153.4 million. First quarter 2009 net cash outflow from operating activities was $66.7 million, mainly due to an increase in customer deposits of $32.2 million and a decrease in deposit payables of $39.2 million, partially offset by net income of $7.1 million.

In other recent developments, on January 1 2009, CRIC Holdings Limited, a wholly owned subsidiary of the company, granted options to purchase 12 million share of CRIC's ordinary shares, representing approximately 10.7% of the fully diluted share capital of CRIC, to certain employees at an exercise price of $1.50 per share. The purpose of this grant was to attract, retain and provide additional incentives to employees and to promote the success of our real estate consulting and information services. The options will expire ten years from the date of grant and vest between one and four years from the date of the grant.

For the second quarter 2009 guidance, we estimate that our revenues for the second quarter of 2009 will be in the range of $49 million to $51 million, an increase of 14% to 19% over the same quarter of 2008. This forecast reflects management’s current and preliminary view, which is subject to change.

We will now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of [Echo Hi] with Oppenheimer. Please proceed.

Echo Hi - Oppenheimer

Thank you for taking my question. I just wanted to -- could you explain to us that which area in your company’s operation you see more activity increase? Because last time I remember you commented on each region and how much percentage of revenue it counts -- is there any changes this time?

Xin Zhou (Translation)

Mr. Zhou just said that overall, the rebound in transaction volume was across the board in all major regions. In terms of our own business, we divide our business into five major areas and we have seen a very strong rebound in all five regions. In terms of the change in our regional mix, so far this year we have seen the strongest increase in the western region, mainly [inaudible] and other western cities.

This is also partly the result of our initiative last year to build up our project pipeline and expand our regional coverage, so that our business presence in western China and also in northeastern China has been greatly expanded.

Echo Hi - Oppenheimer

Okay, I understand -- so you mean last time you said a 6% of revenue coming from the west. This time --

Li-Lan Cheng

The first quarter is more than 10%.

Echo Hi - Oppenheimer

Okay, so there are some changes of the revenue mix? So if -- so like east, last time you were saying it’s 30% of revenue from the east and 20% to 25% from the north. Are these major regions, any changes of their revenue share?

Li-Lan Cheng

No. East China, including Shanghai and the rest of the East China, still contributes to close to 40% of the total. North China is still around 25%. Central China’s contribution for the first quarter was down a bit -- they were down to about 15%, but that was made up by the growth in Western China.

The reason Eastern and Northern China continue to contribute heavily is due to their higher average selling price. In terms of volume growth, we are seeing equally strong growth overall but since we are selling more expensive properties in Shanghai and Beijing, they will always contribute a bigger share of our revenue.

Echo Hi - Oppenheimer

Okay, I understand. Also, what’s your other income source?

Li-Lan Cheng

That’s a new segment that we talked about. The other actually includes two segments -- one is the real estate advertising consulting revenues. That’s relatively new. The other is our fund management fee. That’s $1 million a year.

Echo Hi - Oppenheimer

Okay. Would that be eventually in one of your regular revenue items?

Li-Lan Cheng

It is. It’s already regular.

Echo Hi - Oppenheimer

Okay, but these are already excluding the cost, right?

Li-Lan Cheng

No, no, this is -- are you talking about other revenue?

Echo Hi - Oppenheimer

Right.

Li-Lan Cheng

Well, other revenue is revenue from our fund management fee and also revenue from our advertising consulting and design services. These are revenues and there associated costs are in the cost and expense line items.

Echo Hi - Oppenheimer

Okay. Not other revenues -- I’m talking about other income from the --

Li-Lan Cheng

No, no, that’s a different thing -- other income --

Echo Hi - Oppenheimer

Right, that’s what I am asking.

Li-Lan Cheng

Most of the other income is gain we achieved from holding, from investment in the developer’s shares that I briefly talked about earlier, so that was -- that was an investment gain.

Echo Hi - Oppenheimer

Okay, I understand. Is that going to be --

Li-Lan Cheng

That’s a one-off thing. That’s a one-off item.

Echo Hi - Oppenheimer

Okay, I understand. Thank you so much for taking my questions. That’s it.

Operator

Your next question is from the line of Brandon Dobell with William Blair. Please proceed.

Brandon Dobell - William Blair

Thanks. I wanted to get a sense of your confidence in the commission rates going forward, given the mix of business and the developers -- should we still be comfortable that it is going to trend back towards that 2% level by the end of the year or are you seeing things that would change that trajectory?

Xin Zhou (Translation)

As Mr. Zhou said earlier, the commission revenue we achieved in, we recorded in the first quarter, contained very little in the form of bonus. It was mostly just all basic commission. But as we achieve higher transaction volume, there were a number of contracts that we are executing now that contained the bonus commission that we can earn, we can recognize upon achieving certain sales targets. So as the volume increases -- in fact, some of the projects that we sold in the first quarter in March already have these clauses but you need to -- for these [products], you need to reach the end of a period or end of a phase and then you calculate the total amount sold and then the developer can recognize the bonus.

So looking at our current project mix that we are confident our commission rate will gradually increase, particularly by the fourth quarter, we are confident that we can go back up to the level around 2%.

Also, in the first quarter our commission contained almost no bonus tied to average price, for obvious reasons. But as the market recovers, there will be some projects that start to raise prices and that will provide room for us to earn that form of a bonus commission.

Brandon Dobell - William Blair

Okay, and then one follow-up -- as you look at the second and third quarter in particular on the SG&A, or the G&A line for your operating expenses, should we expect that you have kind of maintained this focus on costs or cost containment? Or do you think reinvesting more dollars back into that SG&A line is going to make more sense? Just trying to gauge how we should follow that --

Li-Lan Cheng

It will be pretty much along this line. As you can probably see, our overall SG&A level peaked in Q3 and Q4 last year and we were able to bring it down actually quite a bit for the first quarter. As the market recovers, there will be areas within the company, within our operations that need more resources and need to hire people but overall, we will keep a very tight lid on the overall expense level, so you shouldn’t see major increases in that line.

Brandon Dobell - William Blair

Okay, great. Thank you.

Operator

(Operator Instructions) Your next question is from the line of Colin Sebastian with Lazard.

Colin Sebastian - Lazard Capital Markets

Thanks. Good evening and congratulations on the quarter. Your revenue guidance for Q2 on the high end I believe would be a record quarter for E-House, so my first question is more specifically perhaps what gives you confidence that this is more than a temporary release of pent-up demand stimulated by the lower prices, that what we are seeing here is a sustained recovery in the market? And I have one follow-up question.

Xin Zhou (Translation)

First of all, our estimate and guidance for the second quarter is based on actual sales that we already achieved in March, April, and so far in May and by looking at the activities that are already recorded, we have a fairly high level of confidence that we can achieve this. And then going forward -- and overall, as we observe in the market, the overall situation is still stable, healthy, and is still improving, the overall market situation.

And also in terms of E-House’s own project pipeline for this year, in terms of project launch, the new projects starting, we haven’t reached a peak yet. A lot of our projects slated to launch this year haven’t happened, haven’t started. They are scheduled to happen towards the -- at the end of second quarter and into the third quarter. So given the current market situation, we are confident that when that time comes, we will actually be able to do better in the third and fourth quarters than we are doing now.

Colin Sebastian - Lazard Capital Markets

That’s helpful, thanks. And my second question, if I may, is regarding the CRIC business -- you mentioned providing some equity incentives for employees in that division. I am just wondering what that might imply for your longer term plans for that segment.

Xin Zhou (Translation)

We discussed earlier that our consulting and information services, which is under CRIC, has already become the second most important business line for us after the primary agency service. We granted options to employees of CRIC to provide them with the incentives to develop and grow just that business segment, from their standpoint. And also to provide an additional boost for that business segment. So everything -- granting options and other things we are doing now, we are -- we are very keen to grow that business segment and -- because we believe it has a very bright future.

Colin Sebastian - Lazard Capital Markets

Okay. Thank you very much.

Operator

(Operator Instructions) Your next question is a follow-up from the line of Brandon Dobell with William Blair. Please proceed.

Brandon Dobell - William Blair

Thanks. Last quarter, both of you talked about the pipeline of maybe $15 million to $17 million GFA -- is that pipeline still the right number that we should think about? And it seems like you are quite confident in your ability to convert 40% or 50% of that pipeline -- is that still the way we should think about it?

Xin Zhou (Translation)

This is still a valid number -- the growth in our pipeline always is greater, always outstrips the growth of the revenue because the revenue achieved is actually a digestion of the pipeline, so we are always on that -- we are still on that same trajectory.

If we sold 1.4 million square meters for the first quarter this year, we will then -- we will need to build up maybe twice that much for this quarter next year, so that’s what we are doing.

Brandon Dobell - William Blair

And then one related question -- the new contracts that you are signing with developers now, are the terms of those contracts relative to performance bonuses and incentive bonuses, or the structure of those contracts, are they similar or different to the ones that you signed historically?

Xin Zhou (Translation)

The overall structure remains the same. If there’s any difference, it’s that because last year overall the market condition was very bad, sales speed was overall slow, so in more contracts, we have requested a structure that we had requested additional bonus that we can earn upon achieving certain sales targets, sales speed, or sales volume. So we have more of those contracts with that clause in there.

So if the market were to recover back to the level, the peak that was in 2007, then I would say our current mix of contracts would be able to provide more bonus in addition to what we had before.

Brandon Dobell - William Blair

Okay. Thank you. Very helpful.

Operator

Ladies and gentlemen, we are now approaching the end of the conference call. I will now turn the call back over to E-House’s investor relations manager, Ms. Michelle Yuan, for closing remarks.

Michelle Yuan

Once again, I would like to thank all of you for joining us on today’s call. If you have any follow-up questions, please don’t hesitate to contact us. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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