eLong, Inc. Q2 2009 Earnings Call Transcript Introductory Remarks

Aug.27.09 | About: eLong, Inc. (LONG)

eLong, Inc. (NASDAQ:LONG)

Q2 2009 Earnings Call

August 26, 2009, 8:00 pm ET

Executives

Guangfu Cui - CEO

Mike Doyle – CFO

Operator

Good day to everyone and welcome to eLong's Second Quarter 2009 earnings report conference call. (Operator Instructions) I will now hand over the line to Philip Yang and I will be standing by for the Q&A session. Please go ahead, thank you .

Philip Yang

Hello everyone, thank you for joining eLong’s second quarter 2009 conference call.

Today, Guangfu Cui, our CEO, will make some remarks about the company’s performance in the second quarter of 2009 followed by Mike Doyle, our CFO, who will provide greater details 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 conference call representatives of the company will make certain 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 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 risks discussed in the Safe Harbor Statement in the company’s Form 6-K, which will be furnished to the SEC in connection with our press release and this conference call, 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 Cui

Thank you, Philip. Hello everyone, and thank you for being on this call. We delivered the highest ever quarterly operating income of RMB 6.4 Million in this quarter. The company delivered a net income of RMB9.5 million. It is encouraging to deliver positive net income in two consecutive quarters. As in the first quarter, net revenue growth in the second quarter was a modest 1% YOY, which is unsatisfactory.

Our go on-line strategy is working well, with online bookings enjoying healthy growth in the second quarter. Moving more business on-line helps offset the margin pressure from an increasing mix of lower margin air bookings and declining hotel average daily rates. We will keep driving business online going forward as we believe this represents the best opportunity for long term growth.

Our top line was negatively impacted by the closing down of inefficient membership card distribution locations, and a decrease in B-to-B offline affiliate business, which we referred to in our Q1 conference call. These two factors may continue to have a negative impact on our revenue growth over the next few quarters. However, we do see momentum from our existing customer base and from the on-line booking segment, as well as indications of a healthy summer vacation season in July and August. Although recent trends have been positive, business travel demand in September and for the rest of the year, which is a key driver to our volume growth, is hard to predict at this point.

In Q2, our call center continued its high quality service with a 99% customer satisfaction rate and a 93% very satisfied rate. We added two new payment methods in the quarter, now accept debit card payment via mobile phones, and also have new simplified procedures for the acceptance of foreign-issued credit cards. As a result of increased payment options available to our customers, we have driven the portion of non-cash air transactions to more than 80% of our total in the second quarter. We believe continued innovation will improve customer loyalty and we have more such initiatives underway.

We also increased hotel coverage over 32% to approximately 8,700 hotels in the quarter from approximately 6,600 during the same period a year ago. We will continue to expand hotel coverage in areas where we see increased demand from our customers.

Let me close by saying that we are making solid progress in turning around the business and we believe we are on the right track. Our priorities remain the same: we will continue our efforts to launch effective marketing programs to build a strong brand; we will continue to launch technology upgrades to please our customers and supply partners; and we will continue to work with hotel and air suppliers to provide competitive products to our customers. Successful execution of our plans remains critical, and we remain

Mike Doyle

Thank you Guangfu. Despite a difficult quarter on the topline, we are very pleased to report our first quarter of positive operating income since the fourth quarter 2007 and our second straight quarter of positive net income. Operating income was RMB 6.4 million an increase of RMB 14.3 million from a year ago and up RMB 9.7 million from the first quarter.

We continue to build a corporate culture of efficiency and cost control and are keeping a careful watch over areas of incremental investment. We have expanded on the efficiency gains we delivered in first quarter which was the key contributor to our improved profitability. We significantly improved our marketing efficiency in the second quarter as we made progress in optimizing our marketing investment by channel. We also leveraged a greater mix of online bookings, improved call center conversion and achieved further efficiencies in the call center to offset the lower gross margin of our increasing mix of air bookings.

In the second quarter, hotel commissions decreased 6% compared to the prior year quarter, primarily due to lower commission per room night, which was partially offset by higher volume. Commission per room night decreased 8% year-on-year primarily due to lower average daily rates and mix shift to lower ADR budget hotels. This shift was partially offset by an increase of hotel commission rates. Room nights booked through eLong increased 1% year-on-year to 980,000. Hotel revenue now represents 68% of our total revenue down from 74% in the prior year quarter and unchanged from the first quarter.

Air ticketing commissions increased 19% for the second quarter of 2009 compared to the prior year quarter, driven by a 24% year-on-year increase in air segments to 510,000, partially offset by a decrease of 3% in the average ticket price compared to the prior year quarter. Air revenue grew to 25% of total revenue from 21% in the prior year quarter and down slightly from 26% last quarter.

Other revenue increased 31% year-on-year. Other revenue is primarily online advertising from our websites. Other revenue grew to 7% of total revenue from 5% in the prior year quarter and 6% last quarter.

We are again pleased by our ability to maintain our gross margin percentage on a year-on-year basis given the challenges of an increasing mix of lower margin air and lower average selling prices on both our hotel and air product. Total operating expenses decreased 21% or RMB 13.6 million for the second quarter of 2009 compared to the second quarter of 2008. Total operating expenses were 63% of net revenue, down from 81% in the prior year quarter.

Service development expense is composed of expenses related to technology and our product offerings, including our website, platforms and other systems development. Service development expense decreased 1% in the second quarter of 2009 compared to the prior year quarter, mainly driven by a decrease in outside service fees, and partially offset by an increase in labor costs. Service development expense decreased to 16% of net revenues from 17% in the second quarter of 2008.

Sales and marketing expenses for the second quarter 2009 decreased 29% or RMB 11.5 million over the prior year quarter, mainly driven by more focused marketing spend and stronger growth in transactions from higher efficiency marketing channels. We reduced sales commissions from our B2B channel, decreased expenses related to loyalty point awards, and decreased labor costs. Sales and marketing expenses declined to 33% of net revenues in the second quarter 2009 from 48% in the same quarter of the prior year.

General and administrative expenses for the second quarter 2009 decreased 14% compared to the prior year quarter, mainly driven by a decrease in professional fees. General and administrative expenses decreased to 14% of net revenues in the second quarter of 2009 from 16% in the same quarter of the prior year.

Other income, which represents interest income, foreign exchange gains/losses and other income/expense, was RMB 3.5 million in the second quarter of 2009, primarily due to interest income of RMB 3.9 million, partially offset by a foreign currency exchange loss of RMB 0.4 million resulting from the appreciation of the Renminbi against the US dollar during the quarter. Other income/(loss) was a loss of RMB 13.1 million in the second quarter of 2008.

Net income for the quarter was RMB9.5 million compared to net loss of RMB20.3 million in the prior year quarter.

Moving to our Balance Sheet, I’d like to mention that the Company’s cash and cash equivalents, and short-term investment balances as of June 30, 2009 were USD134.0 million.

And finally, let me share with you our Business Outlook for the third quarter of 2009. We are seeing continued Y/Y declines in hotel ADRs of similar magnitude to Q2 and continued mix shift to lower priced budget hotels. In the air business, we have seen early indications of a rebound in average ticket prices. We expect Q3 Net Revenue, net of business tax and surcharges, to be within the range of RMB88 million to RMB97 million, equal to an increase of 5% to 15% compared to the third quarter of 2008.

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. (Operator Instructions) We have no further questions at this time. I would like to turn the Call back over to the eLong management team.

Operator

Thank you. And that concludes today’s conference call. Once again, on behalf of eLong and its management team, I would like to thank you all for your participation and good day to all of you.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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