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eLong, Inc. (LONG)

Q2 2006 Earnings Conference Call

July 27 2006, 7:00 pm ET

Executives

Tom Soohoo - Chairman and Chief Executive Officer

Derek Palaschuk - Chief Financial Officer

Raymond Huang - IR Manager

Analysts

Michael Millman - Soleil Securities

William Bao Bean - Deutsche Bank

Chang Qui – Forun Technology Research

Ming Zhao - SIG

Presentation

Operator

(Operator Instructions) Now I would like to hand the call over to the management team, and I will be standing by for the Q&A session. Thank you, you may begin.

Raymond Huang

Hello everyone. Thank you for joining eLong’s second quarter 2006 conference call. Today Tom Soohoo, our CEO, will make some remarks about the quarter; followed by Derek Palaschuk, our CFO who will provide greater detail on our financial results. Following their prepared remarks, Tom and Derek will be available to take your questions.

Before the management’s presentation, please allow me to read our Safe Harbor Statement. During this conference call, representatives of the Company will make forward-looking statements. These statements are based 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 number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements as a result of a number of factors.

eLong undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. Please refer to eLong’s filings with the SEC, including its Form 20-F as well as the risk factors described in our Form 6-K, which will be filed with the SEC in connection with our press release and this conference call, for a discussion of these important factors that could affect future results.

Our press release and this call include discussions of unaudited GAAP financial information, as well as some non-GAAP financial measures. Our release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures, and is available on the Investor Relations section of the eLong website at www.elong.net.

I will now turn the call over to eLong’s CEO, Tom Soohoo.

Tom Soohoo

Thank you, Raymond. Hello everyone and thank you all for being on this call. Today we are announcing eLong’s first quarter of profitability, an achievement that we are really pleased about. We are also announcing a couple of important executive transitions, the first being the election of Barney Harford as the Chairman of the Board of Directors, taking over for Justin Tang.

The second being the appointment of Tony Shen as interim CFO, following the resignation of Derek Palaschuk who has been our CFO up until now. I will comment on these transitions later on in my prepared remarks, after I have provided some more detail about the performance this quarter.

We are pleased to report outstanding operational results in the second quarter. On the top line, our travel revenues grew 57% year-over-year, and 26% sequentially to RMB 65 million. On the bottom line, our operating loss decreased 95% year-over-year, and 97% sequentially to RMB 509,000. Excluding the impact of non-cash stock compensation and amortization, we would have recorded operating income of RMB 2.3 million.

We had U.S. GAAP net income of RMB 10.2 million and adjusted income of RMB 13.1 million. These business results show that eLong is executing on a great business opportunity, as one of only two top tier players in the rapidly growing, but fragmented, online travel market in China. We believe we are in the right place at the right time. We believe that eLong is well-positioned to continue to take market share from the traditional travel operators.

Let me now review with you the second quarter progress we’ve made in our hotel and air businesses. On the hotel side, the solid 49% year-over-year hotel revenue growth of RMB 253.8 million confirm the strength of our hotel product. We also achieved a record high in the total number of room nights booked. In May, we surpassed 300,000 room nights for the first time.

During the second quarter, we continued to expand our hotel inventory. At the end of the second quarter, we offered our customers a wide choice of hotel rooms at discounted rates in 3,505 hotels in 282 cities across China, which was up approximately 26% from the 2,774 hotels in 220 cities in the corresponding period a year ago.

This is evidence of our continuing efforts to provide better products and services to our customers.

On May 10th, eLong, in partnership with Expedia, launched enhanced hotel inventory and website content, which gives Chinese consumers an unprecedented set of features to help them make informed decisions and choose from a selection of key properties in over 140 select destinations worldwide.

The new functionality includes 360-degree virtual tours of both international and domestic hotels; detailed property descriptions; great rates, resulting from Expedia’s worldwide network of 350 hotel market managers; enhanced booking options, including a greater range of room types and improved booking user experience. All of this is available in the Chinese language.

In June of 2006, approximately 72% of our bookings were done through guaranteed allotment, as compared to 76% in March of 2006 and 42% in June of 2005. Guaranteed allotment allows us to improve customer service by confirming the availability of rooms to our customers on a timely basis. Clearly our customers strongly appreciate our guaranteed allotment service. We intend to continue to expand this service.

In the second quarter, we also held several forums to promote our in-house developed e-booking system among hotels in the top-tier cities. The advanced e-booking system links our hotel booking systems with hotels’ networks, allowing us to obtain real-time hotel inventory and get more timely confirmation from hotels. The e-booking system also lets hotels easily adjust prices and give a special daily or weekend offers, which will enhance our competitive strength in the market.

The number of hotels participating in the e-booking system was 887 at the end of June, which is 25% of our total hotel inventory; an increase of 89% from the 470 at the beginning of the year.

With respect to the air business, our air ticketing revenues grew to RMB 9.6 million, or 93% year-over-year and 20% sequentially during the second quarter of 2006. The air segment reached a record high in the second quarter as a result of our efforts to improve the booking platform and to strengthen our cooperation with airline partners. Air ticketing represented 15% of total travel revenues in the second quarter as compared to 12% in the same period one year ago, as we continue to diversify from our lodging revenue base. At the end of the second quarter, our users were able to book air tickets in 58 cities across China. We will continue to invest in our air infrastructure.

During the second quarter, we were able to continue to expand our customer base by adding 86,000 new customers, as compared to 70,000 new customers in the corresponding period a year ago, and 75,000 new customers in the previous quarter. At the end of June, we had 901,000 cumulative customers. We will continue to invest in customer acquisition and in our brand through our sales and marketing efforts.

I believe that eLong needs to continue to invest in the business to become a world-class, full service supplier of online travel services, and to build a company that can sustain profitability in the long term.

The key areas of investment we have identified for the short- and medium-term are:

  1. To continue to make overall improvements in our product and services, and in particular to build an efficient and scalable air travel platform. We believe the air platform is a critical component of our strategy to become a full-service travel supplier, and one that will offer our customers the best travel booking experience.
  2. We believe eLong needs to increase sales and marketing spending in order to secure competitive strength in our position as one of only two top-tier online travel operators in China.

These are still early days in the online travel market in China, but the potential is huge, with China expected to become the second-largest tourism market in the world by 2016. We therefore firmly believe that eLong needs to invest back into the business to ensure the Company’s long-term success.

Now let me turn to the executive transitions that I had mentioned earlier. Firstly, eLong’s board of directors has elected Barney Harford to be its Chairman. Barney represents eLong’s controlling shareholder, Expedia, which owns 53% of eLong. As President of Expedia Asia Pacific, he has led Expedia’s investment in eLong and has been on eLong’s board since August 2004.

Former chairman and eLong founder Justin Tang is stepping down as chairman so he can spend more time on his private equity activities, which he began when he stepped down as CEO earlier this year. Justin is going to remain on the board, and I look forward to working with him in that capacity. At the same time, I am delighted that we have someone of Barney’s caliber who can step into this role.

Secondly, we also announced today that we are appointing Tony Shen as interim CFO of eLong, following the resignation of Derek Palaschuk, who has been the CFO since July 2004. I am pleased that Tony Shen has agreed to step into this role on a temporary basis while we complete a search to fill the permanent CFO role. He has extensive finance and accounting experience in both China and the U.S., recently working as a CFO for Joyzone, a division of China Netcom.

Regarding Derek, having brought the Company to profitability, Derek has decided to resign to pursue other earlier stage entrepreneurial opportunities. He has played an integral role in helping eLong develop to the position we are in today, and I want to take this opportunity to thank him for his contributions to the Company, and to wish him all the best in his future career.

Finally, on the subject of appointments, I am also pleased to announce that Sam Su will be joining the Company as an advisor to myself, as well as the senior management team. Sam is the president of Yum! Brands China, and has extensive experience in the areas of brand building, organizational leadership and management, and we are very excited that we will be able to draw upon his deep experience with the Chinese marketplace going forward.

Before I give the floor to Derek, I would like to emphasize that the opportunity for travel in China is immense. We believe eLong’s current strength, combined with our deep relationship with Expedia, positions us extremely well to take advantage of the tremendous growth potential of this market.

Now let me turn the call over to Derek who will review the financial results in greater detail.

Derek Palaschuk

Thank you, Tom. Let me just give you a quick overview of our second quarter results, starting with our statement of operations, followed by our balance sheet. Our second quarter travel revenues, which were RMB65 million and comprise 91% of total revenues, grew 57% year-over-year, and 26% sequentially.

Revenue from hotel commissions for the second quarter totaled RMB53.8 million, an increase of 49% from RMB36 million year-over-year, and an increase of 28% from RMB42.1 million sequentially.

The 49% increase in the first quarter was primarily due to higher room volumes accompanied by higher hotel commissions per room night. Hotel room nights booked through eLong totaled 832,000 in the second quarter, up 35% from 615,000 in the corresponding period a year ago, and up 25 % sequentially from 666,000 in the first quarter. Our second quarter year-over-year growth rate of 49% was yet another record high growth rate that we have reported over the past six quarters.

Hotel commissions per room night were RMB65 in the second quarter, up 10% from RMB59 in the corresponding period a year ago, and up 3% from RMB63 in the previous quarter. Our hotel commission rate has continued to improve in recent quarters, due to the better override in the commissions as a result of higher room volume. Our hotel commission rate of 14.8% was up 160 basis points year-over-year from 13.2% in the corresponding period a year ago, and flat sequentially.

Our second quarter average daily rate of RMB435 was slightly higher than RMB423 in the previous quarter, due to the seasonal uptick in the hotel industry in the second quarter.

Revenue from air ticketing during the second quarter totaled RMB9.6 million, an increase of 93% from RMB5 million year-over-year, and an increase of 20% from RMB8 million sequentially.

Volume in air segment sales continues to grow, with 247,000 air segments sold in the second quarter, an increase of 83% from 135,000 in the corresponding period a year ago and an increase of 13% from 218,000 in the previous quarter.

Commissions earned per air ticket in the second quarter were RMB39, which is RMB2 higher than the previous quarter, due to an increase in commission rate. The commission rate in the second quarter was 4.8% as compared to 4% in the corresponding period a year ago, and 4.3% in the previous quarter. The average ticket price in the second quarter was RMB822, as compared to RMD848 in the first quarter.

Our other travel revenue in the second quarter was RMB1.6 million, an increase of 209% from RMB527,000 year-over-year, and an increase of 12% from RMB1.5 million sequentially. The growth was attributable to both increased vacation package sales and other travel-related services.

Due to the May 2006 disposal of Ray Time, an operator of hotel loyalty programs, other travel revenue as reported in our earnings release excludes revenue from Ray Time which, commencing in the second quarter of 2006, has been accounted for in discontinued operations. Accordingly, we have restated previously reported other travel revenue, as well as our operating results to take out Ray Time.

Our non-travel revenue, which was 9% of our total revenue in the second quarter, consisted mainly of non-travel related short messaging revenue and online advertising on our website.

Gross margins in the first quarter (sic – see press release) were 78%, unchanged from the corresponding period a year ago and up from 76% in the previous quarter.

Service development, sales and marketing and general and administrative expenses for the second quarter were RMB51.8 million, an increase of 19% from RMB43.4 million year-over-year, and a decrease of 6% from RMB55.3 million sequentially. The year-over-year increase was mainly due to continued investments in service development, sales and marketing and G&A.

We had an operating loss of RMB509,000 in the second quarter, a significant improvement from the RMB10 million lost a year ago. After adjusting for stock compensation and depreciation, we had positive EBITDA of RMB5 million. Our adjusted income was RMB13.1 million in the second quarter, as compared to an adjusted income of RMB398,000 in the corresponding period a year ago, an adjusted loss of $3.1 million in the previous quarter.

We are also pleased to announce that our WOFE has been granted high-tech status, so our WOFE will be taxable at a rate of 15% going forward, rather than the current rate of 33%.

Just a couple of comments on our balance sheet. As at June 30, our cash and cash equivalents balance was $136.1 million. We intend to continue to use our cash balance to enhance our organic growth and consider strategic acquisitions.

During the second quarter, we had capital expenditures of RMB6.1 million and our depreciation expense was RMB2.7 million.

Finally, the business outlook.

We expect travel revenues for the third quarter of 2006 within the range of RMB69 million to RMB71 million, an increase of 38% to 42% from the third quarter of 2005.

We expect total revenues of RMB72 million to RMB74 million, an increase of 31% to 34% from the third quarter of 2005. We expect the operating loss in the third quarter of 2006 to be similar to the operating loss in the second quarter.

Before moving to the Q&A, I would just like to say that it has been a tremendous experience for me to work with the founders of eLong -- Justin, Richard, and Frank -- all of the employees and most recently over the past six months with Tom. Tom has made tremendous progress and this is evidenced in our second quarter results. I feel very good that eLong is well-positioned to take advantage of the exciting opportunities that exist in China.

With that, I will conclude the financial review 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, sir. (Operator Instructions) Our first question comes from Michael Millman - Soleil Securities.

Michael Millman - Soleil Securities

Thank you very much. A couple of questions. Could you tell us what the gross bookings were in the second quarter, and I guess the first quarter and the year-ago second quarter? Then I have some other questions.

Derek Palaschuk

Our gross bookings in the year-ago second quarter were approximately RMB400 million. Our gross bookings in the first quarter of 2006 were approximately RMB465 million. Our gross bookings this quarter were RMB565 million.

Michael Millman - Soleil Securities

Thank you. Could you also update us on what is going through the Internet in air and hotel?

Derek Palaschuk

The percentages are pretty close to the same for our hotel business; approximately 15% of our bookings are done online. For our air business, it is slightly over 20%.

Michael Millman - Soleil Securities

Could you talk about what initiatives you have to grow those numbers?

Tom Soohoo

One of the initiatives we have in our portfolio is to upgrade our technical platform and the user experience. The recent launch of the 360-degree virtual tours is an example of improving the customer experience in terms of using the Internet versus booking through a call center.

Michael Millman - Soleil Securities

But it does not seem to have had much impact yet.

Tom Soohoo

In the short-term, the impact has been nominal. Again, as we look at the future growth rates of international travel out of China, we believe that this type of technology and this type of user experience will become a strong point of differentiation for us.

Michael Millman - Soleil Securities

Ctrip has talked about their corporate or business initiatives. Can you talk about what you are doing in that arena?

Tom Soohoo

The Corporate business personnel is not our focus. We continue to focus in the areas of individual travelers for leisure, air and hotel. We are currently in the process of studying opportunities in corporate; but at this stage, we do not have any specific plans in that area.

Michael Millman - Soleil Securities

Finally, can you talk about international business, both outgoing, and I do not know if you are getting any incoming from the Expedia connection.

Tom Soohoo

Again, as I mentioned, our international business today is relatively small. The opportunities in international we think are very strong as the business and as the markets pick up, in terms of ease of travel for Chinese consumers.

Going forward, we will be looking at building and improving our air platform for international.

Michael Millman - Soleil Securities

Thank you very much.

Operator

Our next question comes from William Bean - Deutsche Bank.

William Bao Bean - Deutsche Bank

Can you talk a little bit about the seasonal trends, Q3 over Q2 in terms of your outlook? I think last year or the year before Q3 was slightly stronger. Is there a reason for a little bit of a decline in the growth rate in your outlook?

Derek Palaschuk

Q3 will be seasonally stronger than the second quarter. That has been the practice, that has been the trend in the past. We would expect Q4 to be slightly better than Q3 because of the October holiday. We are continuing to see strong growth in our business, and our healthy guidance of 38% to 42% growth in travel revenues reflects that.

Our non-travel revenue, we are actually expecting a decline in that. Most of our non-travel revenue is wireless-related. As you are aware, there has been a new regulation with China Mobile that will have a negative impact on our business, but our travel business is strong.

William Bao Bean - Deutsche Bank

So you expect fairly normal seasonality then in Q3 for the travel side?

Derek Palaschuk

Correct.

William Bao Bean - Deutsche Bank

Second question is, can you just walk us through your thinking in terms of operating expense? How you are actioning that, and any change in your strategy there?

Derek Palaschuk

I think what we said at the beginning of the year is that the current investments that we are making in service development, which is basically our technology and our products, we will continue to invest in that area. Our total investment was $11 million in the second quarter. We will continue to see that increase, but not by a significant amount.

Our general and administrative expenses will also increase slightly. We have spent a considerable amount on Sarbanes Oxley 404 compliance in the next couple of quarters, so we will see some increases in that; not large increases. Then obviously the balance is sales and marketing. As we have said, we will continue to invest in this area of the business.

William Bao Bean - Deutsche Bank

I will give somebody else a chance. Thanks.

Operator

Our next question comes from Chang Qui – Forun Technology Research.

Chang Qui – Forun Technology Research

Good morning, and congratulations with the first positive earnings.

Tom Soohoo

Thank you.

Chang Qui – Forun Technology Research

For the G&A reduction, is that one-time? Going forward, will the G&A expense stay at this relatively lower level?

Derek Palaschuk

We would expect the G&A to increase a little bit over the third and fourth quarter. As I said, we need to spend more on professional fees on our Sarbanes Oxley 404 compliance.

Chang Qui – Forun Technology Research

For the outlook, can you give clarification? I know you just answered a little bit, but if you include the non-travel business, can you give us some more color in terms of your travel business and in terms of your air business, what you see? It looks like somewhat of a slowdown in your guidance.

Tom Soohoo

The air business is, as we have mentioned in previous earnings releases, has been growing at a pretty healthy rate over the first half of the year. The focus, as I mentioned in my report, is that we are significantly building a stronger platform in there to ensure that we have a stronger and more robust customer experience and the ability to scale up. This is one of the areas of the business that we are investing in heavily to ensure that we can build the business on a more sustained basis going forward.

Other than that, the hotel business, we have seen some strong results over the first two quarters. We think the hotel business remains robust for us and we expect it to continue along the same path.

Chang Qui – Forun Technology Research

Thank you.

Operator

Thank you. Our next question comes from Ming Zhao – SIG.

Ming Zhao - SIG

Good morning Tom and Derek. Thanks for hosting this call at this early time. Two questions, one is just a general question. I want to figure out whether there is any relationship between your air booking and the travel booking for the travellers? Meaning, do you see one traveler booking hotels, and in the meantime he also books the air ticket? What pattern did you see there?

Derek Palaschuk

As you know, we started bundling mainly hotel products, so one of our key initiatives, was obviously once we get customers in the door is to sell them as many products as we can. Our air business was launched really a couple of years later, and it wasn’t until 2004 that we started focusing on air.

So currently cross sell -- I think that is what you refer to as cross sell -- is an important initiative for us. We find the air cross sell rate, air customers buying hotels is actually higher than hotel customers buying air tickets. So it is an area that we certainly need to improve on, we feel that there is leverage in our model for us to do a better job of cross selling hotels and air tickets to our customers.

Ming Zhao – SIG

I understand your answer. So let’s look at your numbers in the second quarter. Your hotel rooms is 832,000. Your air ticketing number is 147,000. Does that mean potentially there will be a lot of room for air ticketing to grow, so that one hotel booker can transform into an air ticket booker?

Derek Palaschuk

Correct, and there has been a very big improvement in that ratio. I mean if you look at a year ago it was basically five room nights to one air ticket, and now it is around 3.5 room nights to a ticket, so that number is coming down. We need to continue to bring that number down as well as start selling application packages to our existing customers.

Ming Zhao – SIG

In your guidance for travel revenue in the third quarter, do you have a breakdown between the hotel booking revenue and the ticketing revenue that you could provide us?

Derek Palaschuk

Ming, we normally don’t give a specific breakdown, but I think Tom has already answered that question on our outlook for the hotel and air business.

Ming Zhao – SIG

Let me ask it this way. I know air ticketing is growing faster than the hotel; but on a quarter-over-quarter basis, which one is growing faster into the third quarter?

Derek Palaschuk

They are both growing at healthy rates, Ming.

Ming Zhao – SIG

So we don’t have an idea of which one is growing faster quarter-over-quarter at this time?

Derek Palaschuk

They are both growing at healthy rates, Ming.

Ming Zhao – SIG

Thank you very much.

Operator

Thank you. We have a follow-up question from William Bao Bean - Deutsche Bank.

William Bao Bean - Deutsche Bank

Hi, this is a general question for Tom. In your short tenure, could you give us a sense of the lessons that you have learned and the major challenges that you are facing?

Tom Soohoo

Thanks, William. The lessons that I’ve learned, the lesson I have learned is that I should have got into the Internet space earlier. It is an alive and robust area for the future economy of China and also for eLong.

The key issues I see is that I can take learnings from -- my prior experience in China is also with large multi-national companies -- is the ability to build a strong execution base and to build a brand and build value around the core competencies and capabilities of the company is critical.

The challenges we face are similar to the ones I had mentioned to you earlier and in some of the earlier calls. it is really to build a very strong, robust platform and to have a strong culture of execution. So in all of the products and services we deliver now that we could execute seamlessly.

Another critical component for the business as we look forward is building the brand around eLong and ensuring that we communicate clearly all of the benefits and the value that the combined eLong/Expedia relationship can bring to the Chinese consumers now and in the future.

William Bao Bean - Deutsche Bank

I was just wondering if I could walk you through the usual metrics. In terms of repeat customers in the quarter?

Derek Palaschuk

Very similar to previous, for our B2C business approximately 80% of our business in any one month is from existing customers.

William Bao Bean - Deutsche Bank

Sales in top cities, your number in top 10 versus the number in top two?

Derek Palaschuk

I am sorry, William, you are breaking up.

William Bao Bean - Deutsche Bank

Just the percentage of sales in top cities, the top 10, top two cities?

Derek Palaschuk

Sure, you said the top 10 cities?

William Bao Bean - Deutsche Bank

Yes, if you have it.

Derek Palaschuk

A little over 60% of our room nights were in the top 10 cities.

William Bao Bean - Deutsche Bank

Okay, and the top two?

Derek Palaschuk

The top two, around 35%.

William Bao Bean - Deutsche Bank

Thanks. Hotels at this point?

Derek Palaschuk

Number of hotels?

William Bao Bean - Deutsche Bank

Yes.

Derek Palaschuk

3,500.

William Bao Bean - Deutsche Bank

The guaranteed allotment?

Derek Palaschuk

Approximately a little over 72%. That is the number of bookings from our allotment.

William Bao Bean - Deutsche Bank

So the number of hotels that you have guaranteed allotments with?

Derek Palaschuk

Around 1,500.

William Bao Bean - Deutsche Bank

In terms of brand, word of month or house customers?

Derek Palaschuk

Approximately 30%.

William Bao Bean - Deutsche Bank

Online transactions?

Derek Palaschuk

Online transactions, 15% for our hotel business.

William Bao Bean - Deutsche Bank

And eTickets?

Derek Palaschuk

Our eTickets were approximately 20% in the second quarter which is double of the first quarter; it has been a big push by the airlines so we are seeing a significant increase in the percentage of eTicket.

William Bao Bean - Deutsche Bank

What is the impact on your business from that?

Derek Palaschuk

The impact from our business in the long term, we will obviously see more credit card usage. The airlines are also working through the logistics in the various cities, how they are going to have the invoicing done for eTickets. We are dealing with that in our air project. So obviously in the medium and long term it is a very good thing for a company like eLong.

William Bao Bean - Deutsche Bank

Is it having any impact in terms of the numbers in the quarter? Commission rates or anything like that, or profitability? Kind of a wash, right?

Derek Palaschuk

Yes, it is not having an impact in comparison to the paper tickets, because the procedure now is somewhat similar. We need to do a delivery because you need to provide the FOB tower and tax receipts, and that has to be done by physical delivery.

William Bao Bean - Deutsche Bank

Outbound air, is it the same total? Are you doing much outbound air at this point?

Derek Palaschuk

It is around 10% of the revenue.

William Bao Bean - Deutsche Bank

Call center staff at this point?

Derek Palaschuk

We don’t normally give our – total headcount was around 1,800 at the end of June.

William Bao Bean - Deutsche Bank

Thanks guys, I appreciate it.

Tom Soohoo

Thank you very much.

Operator

Our next question comes from Michael Millman - Soleil Securities.

Michael Millman - Soleil Securities

Thank you. The U.S. hotel companies have been talking about having a number of their brands built in China. Could you talk about whether that is having any impact on the business in terms of these other expectations for direct connect or anything else they are doing?

Secondly, can you explain, when you say 72% -- I am not sure if it was guaranteed in the hotels -- if that means that you have guaranteed rooms for a certain period of time, and how much time is that? Whether there is, at some point, any inventory risk if you go beyond that time?

Tom Soohoo

To answer your first question, the international hotels are obviously aggressively looking at China. We’ve had recent conversations with Intercontinental as well as some of the other hotel chains. Our estimates are currently international hotels take up less than 10% of the total market share.

As you can imagine, because of some of the technologies we are putting in, such eBookings and also the fact that a lot of international hotels also understand the value of strong brand building, it is a good future fit for us in terms of how the hotel industry is going to evolve.

Also as one of the few national players and companies that can actually market nationally, we think that the long-term potential partnership for these types of hotel chains is very strong.

Derek Palaschuk

Let me just add to what Tom said, because obviously we see the additional supply coming in to the China market and as Tom said, most of the hotels being built in Asia are being built in China. That is a very positive thing for our business. Obviously we like to see a situation of oversupply. Currently, as Tom said, less than 10% of the hotels in China are run by chains, so we have a very strong position in terms of driving demand to these various domestic hotels.

The other thing that we are seeing on the product side is that because of the oversupply, the ADRs actually are not coming up, which again is good for us and then it gives us more leverage over our suppliers.

Michael Millman - Soleil Securities

What is the current occupancy rate, generally?

Derek Palaschuk

It depends on the season, on the city; generally in China it is around 65%. On the guaranteed allotment, it is a one-way guarantee that the hotel is guaranteeing that we will have a certain number of rooms available for them so that we can instantly confirm to our customers. It is a one-way guarantee and there is no risk on eLong.

What we said is that approximately 70% of our bookings were through guaranteed allotment. Again, this just shows you the good relationship we are having with our suppliers. Then, if you look at a year ago, the percentage of our room nights, the guaranteed allotment was around 40%.

Michael Millman - Soleil Securities

This guarantee, is this inventory made available to you on a fixed amount or is it every day, particularly as it gets closer to the date of the inventory? Are there changes? How does this work?

Derek Palaschuk

Sure. We have a fixed number of rooms per day which we negotiate with the hotels that we have guaranteed allotment with, so they keep these rooms available. We have basically the first right to book those rooms. If they are unbooked at the end of the day then they just turn back to the hotel.

Michael Millman - Soleil Securities

So it is done on a daily basis, then?

Derek Palaschuk

It is, yes.

Michael Millman - Soleil Securities

Can you tell us what the fixed number is? Or how it varies compared with previous periods?

Derek Palaschuk

I am sorry, what do you mean?

Michael Millman - Soleil Securities

The specific amount of inventory you have on a given day.

Derek Palaschuk

Michael, I don’t think that number is so meaningful. I think what is meaningful is that over 70% of our bookings are from guaranteed allotment. Now obviously the allotments that we have are greater than that. We don’t use all of our allotments every day, but we are not penalized for not using our allotments.

Michael Millman - Soleil Securities

Thank you.

Tom Soohoo

Thank you.

Operator

Thank you. We have another follow-up question from Mr. Ming Zhao – SIG.

Ming Zhao – SIG

Thank you. Just one question on Ray Time divesture. I believe that when you went public, you purchased that company and now you are discontinuing that business. Can we ask what is going wrong over there? Why did you make that decision? Why is it good for the Company?

Derek Palaschuk

Sure. We acquired Ray Time which was a provider of loyalty point programs for hotels. We weren’t able to scale the business profitably like we thought we could, and it was a very small percentage of our business. We decided it was best to focus on our core business, which is hotels, air and vacation packages.

Ming Zhao – SIG

So on the earnings statement, the loss from that, is that going to occur in the next quarter or the third quarter?

Derek Palaschuk

The loss from discontinued operations, no it won’t Ming, because we disposed of it in May of this year. So you won’t see an amount from Ray Time under discontinued operations in the future.

Ming Zhao – SIG

Got it, thanks.

Tom Soohoo

Thank you.

Operator

(Operator Instructions) Sir, there seems to be no further questions from the audience. Can I hand the call back to you for the closing remarks? Thank you.

Tom Soohoo

Thank you very much for the call.

Operator

Thank you, and that concludes today’s conference call. On behalf of the eLong management team, we would like to thank you for your participation. All participants may disconnect their lines. Thank you.

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Source: eLong Q2 2006 Earnings Conference Call Transcript (LONG)
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