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eLong, Inc. (NASDAQ:LONG)

Q1 2009 Earnings Call Transcript

May 26, 2009, 8:00 pm ET

Executives

Philip Yang – Internal Audit Director

Guangfu Cui – CEO

Mike Doyle – CFO

Analysts

Eddie Leung – Bank of America/Merill Lynch

Richard Safranek – Wafra Investment Group

Operator

Good day to everyone and welcome to eLong's first 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 first quarter 2009 conference call.

Today, Guangfu Cui, our CEO, will make some remarks about the first quarter 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 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 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 important factors that, could affect future results.

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

Guangfu Cui

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

I want to first introduce our new CFO Mike Doyle, who has strong finance and travel industry experience, and has been a member of our Board of Directors since 2004. Prior to joining eLong, Mike was the CFO for the Expedia Asia Pacific Region. Prior to Expedia, Mr. Doyle worked as CFO of Teledesic. Mike started his career as an investment banker at Morgan Stanley in New York and Singapore. We are delighted to have him join us as CFO and believe he will make significant contributions to eLong’s future growth and development. Mike will review our Q1 financial results in a few minutes.

I also would like to use this opportunity to express our appreciation to our former CFO Chris Chan for his dedication, professionalism and leadership as our CFO for the past two years during which he has made outstanding contributions to the Company’s turnaround, including implementation of our ERP system and enhancements to our finance and accounting operations. We wish him the best in his future endeavors.

Now, back to our business results in Q1. We had a tough quarter and only achieved net revenue growth of 1% YOY. We demonstrated some progress in our efficiency and cost containment initiatives. While not immediately evident in our basically flat year on year Gross Margin, we were able to hold this flat with an increasing mix of lower margin air bookings and declining average selling prices. The company delivered a net income of RMB2 million with the help of interest income and a flat foreign currency exchange rate.

In Q1, we upgraded our air online booking experience and hotel user review features. Our online business enjoyed healthy growth, while the offline business was negatively impacted by closing down of membership card distribution locations, and a slow down in our offline affiliate business. We have now closed down most of the traditional membership card distribution channels over the past 18 months. Card distribution used to be a primary customer acquisition channel, but we have now developed capability to acquire customers from other channels, especially from the online channel. We expect the decline of the offline affiliate business to continue and likely to have a net negative impact on our overall revenue growth for full year 2009. Our focus is on driving the online business going forward, as we believe this represents the best opportunity for long term growth.

Our call center continues its high quality service with a 99% customer satisfaction rate and a 92% very satisfied rate. We are proud to announce that our call center has recently won a 2009 China Best Call Center Award from the International Customer Management Institute. It is the second straight year that eLong’s Call Center has been honored as one of China’s best. A 24*7 call center with outstanding service quality is also strong enabler for us to win on line. We are increasingly able to use our online data to continually improve our user experience and operations.

In Q1, we increased hotel coverage to approximately 7,800 hotels from approximately 5,500 a year ago. We will continue to expand hotel coverage where we see opportunity for increased demand from our customers and where we can provide support for our supplier partners. We have recently partnered up with hotels.com to support the hotels.cn website, and also strengthened our on line marketing presence by entering into cooperation agreements with Oak Pacific Interactive and TripAdvisor China.

We will continue our effort in developing effective marketing channels to build a strong brand. We will continue to launch technology upgrades; and we will work with hotel partners to provide competitive products to our customers. Successful execution of our plans remains critical, but we remain confident and committed to the long-term growth of our business.

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

Mike Doyle

Thank you, Guangfu. Let me give you an overview of our first quarter 2009 results starting with our statement of operations, followed by our balance sheet.

Our first quarter total gross revenues were RMB82.5 million, an increase of 1% year-over-year. Our core travel business was 94% of total revenue, essentially flat year-over-year.

Gross revenue from hotel commissions totaled RMB56.2 million, a year-over-year decrease of 2% mainly due to lower commission per room night, which was partially offset by higher volume.

Hotel commission per room night was RMB62 which was lower than the RMB65 of the same quarter of the prior year, mainly due to an increase in the mix of room nights from budget hotels and lower average daily room rates. Our hotel commission rate was slightly higher than the same period last year. Our first quarter 2009 Average Daily Rate of RMB385 was 11% lower than the RMB432 of the same period last year. Hotel room nights booked through eLong totaled 912,000 in the first quarter, up 4% from 875,000 in the corresponding period a year ago.

Gross revenue from air ticketing commissions totaled RMB21.2 million, a year-over-year increase of 8%. Total air segments were 506,000, an increase of 18% over the prior year period. Commissions earned per air ticket in the first quarter were down from in the same period last year, mainly due to an 8.4% decline in the Average Ticket Price (which dropped by RMB70 to RMB758 compared to the prior year quarter), the commission rate was unchanged from a year ago.

Non-travel revenue was approximately 6% of total revenue in the first quarter, up slightly from 5% in the same period last year and consisted mainly of non-travel online advertising on our websites.

As Guangfu noted, we are pleased with the progress we have made in transaction processing and service. We were able to hold our Gross Margin for the quarter flat even with the faster growth of our lower margin air product and significantly lower ADRs and ATPs available to cover our costs. This reflects solid efficiency gains and the strength of our higher margin online transactions.

We have maintained a strict focus on our costs and reduced our G&A expense as a percentage of net revenues from 19.3% a year ago to 16.0% in Q1 09 as a result of a reduction in bad debt expense and lower professional fees. We believe our technology and demand generation initiatives justify our increased expenditures on service development and sales and marketing. Service development increased by 3% Y/Y and accounted for 17% of net revenues, which was the same as a year ago. Sales and marketing increased by 9% Y/Y, from 38% of net revenues a year ago to 41% of net revenues in Q1 of 2009.

Due to almost no impact from unrealized foreign exchange adjustments and the interest income earned on our cash balances, we were able to report positive net income of RMB2.0 million.

Moving to our Balance Sheet, I’d like to mention the Company’s cash and cash equivalents, and short-term investment balance as of March 31, 2009 of USD141.2 million.

And finally, let me share with you our Business Outlook for the second quarter of 2009.

eLong does not expect any significant change in industry outlook in Q2. We have seen continued Y/Y declines in ADRs and ATPs similar in scale to Q1 as well as continued mix shift to lower priced budget hotels. We expect Q2 Net Revenue, net of business tax and surcharges, to be within the range of RMB77 million to RMB85 million, equal to a decline of 5% to an increase of 5% as compared to the second quarter of 2008.

This concludes the financial review, 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 a question coming from the line of Eddie Leung of Bank of America/Merill Lynch. Please go ahead.

Eddie Leung – Bank of America/Merill Lynch

Hi, good morning, Guangfu and Mike. A couple of questions. The first one is, when I look at your gross margins is pretty impressive given the mix shift and – mix shifts to lower margins air ticket fees, could you elaborate more on the measures that you guys taken to maintain the gross margin? And should we expect these trends to be sustainable?

Mike Doyle

Eddie, thank you for your question. This is Mike. The ability to maintain gross margin FY and Q1 had a lot to do with the increasing mix of online transactions, both in hotels and in air. That is one primary contributor. The second one is in efficiency improvements we have made through investments in process and training over the last year. This includes both our investment in systems, training on our call center staff, and putting in place the right incentive schemes to motivate behavior to reduce our costs.

So, we do expect to continue to improve efficiency in our call centers. There is projects underway and initiatives we have identified that we would like to focus on. Of course that will also be offset by the continued growth of the air business which is lower margin. So we have the same pressures from mix shift but the same benefit from improving efficiencies.

Eddie Leung – Bank of America/Merill Lynch

Got that. And my second question is related to the recent trends in the industry. Have we seen a slowdown in volume after the swine flu? And secondly how about the ASP trends into the second quarter, have we seen the ASPs for both air tickets and room nights stabilize?

Mike Doyle

First on the selling prices, both ADR and ATV, we have seen similar trends from Q1 play itself out in Q2. So we're expecting more of the same through the quarter. And we don't typically comment on volumes of room nights or air tickets.

Guangfu Cui

Eddie, basically our cadence has already reflected how we view the quarter. So right now, we are continuing to see the trend of volume shifting to the lower end private hotels, and also increasing of the low fare ticket volumes. Thank you, Eddie.

Eddie Leung – Bank of America/Merill Lynch

Got that. Thank you very much.

Operator

Thank you. We have a question coming from the line of Richard Safranek of Wafra Investment Group. Please go ahead.

Richard Safranek – Wafra Investment Group

Thanks for the call. My question is just regarding customer acquisition strategy, I was wondering if you could maybe discuss it in greater detail because as regards the financials this quarter, your marketing expenses increased 9%, yet your sales are essentially flat. I'm just kind of wondering where is the leverage, what is the elasticity in dollars spent in marketing for you, and how we can sort of get some idea of where the leverage of growth might be?

Mike Doyle

Right. Richard, this is Guangfu. Thank you for your question. Basically in the past, eLong's primary customer acquisition channel is the card distribution at the different locations in air paths and railway stations. That is our primary customer acquisition channel. As we closed on most of the traditional channels, it impacts our offline volume, and also another impact from this year is a slowdown of B2Bs, offline B2B affiliates business which I mentioned has a negative impact over the years over year growth in 2009.

Although our online is growing very healthy, in a very healthy way, and growing faster, however we need to come outside the slowdown of offline business and also especially the offline B2B affiliate business. So we continue shifting online and developing our capability of our primary customer online as online is really a very I'll say at the beginning stage of the online booking or online customer acquisition is still at the infant stage. So we are shifting our marketing dollars to acquire customers online and build our capability to acquire customers online. Thank you, Richard.

Mike Doyle

I would just like to add on the marketing efficiencies. Q1, we faced pretty significant headwind in the form of average selling prices. So while we are still in pursuit of volume growth which required marketing investment, the average selling price generating the revenue was reduced quite a bit year on year. So we are seeing the impact in some improved efficiencies. We believe end marketing has just not borne itself out yet in our financial results due to the headwind from average selling prices.

Richard Safranek – Wafra Investment Group

Right, okay. And the other question was just regarding the cash balance and obviously that has been a consistent issue for the company for many quarters. I mean there has been I guess some share buybacks but are there any plans to be more aggressive in terms of deploying the cash, whether it is a special dividend, a more sizable share buyback or acquisitions, could you maybe touch more on what your view on the cash is at this point?

Guangfu Cui

Firstly we have – we don't rule out the possibility of future share buyback as long as we see that value building for the shareholders. And also we want to, using this opportunity, to look at different potential targets for merger and acquisitions, so anything that is you know is deemed to increase value of shareholders, we are very open and will be looking directly at those opportunities. Thank you, Richard.

Richard Safranek – Wafra Investment Group

Okay, thanks.

Operator

(Operator instructions) We have another question coming from the line of Eddie Leung. Please go ahead.

Eddie Leung – Bank of America/Merill Lynch

Hi. One for Mike. Just one follow up on your online promotion efforts, is there a difference in the characteristic of the customers that you acquire from your online channels versus your offline channels in the past. For example, are they more sticky, are they more affluent, or are they younger, more frequent travelers, more leisure travelers, et cetera, et cetera, could you just share some of your experiences with us?

Guangfu Cui

Sure. Eddie, this is Guangfu, and I think right now what we're seeing is that online booking customers tend to be younger. We actually have a survey showed that the younger the consumers are, the more online percentage it is going to be. So meaning the younger consumers really has embraced the online booking. We see that as a clear trend. Also it doesn't look like that online travelers are like loyal to us as we have seen that our average of booking room nights from the online customers is not like then those of offline customers.

So, basically, we're seeing that the consumers like our websites and they stay logged with us. So, across the online customer, the younger tend to book hotel with lower ADR hotels. So that is what we have seen right now. And the good news is that our online is growing very fast so which way shows that our competitive advantage in the online space. Thank you, Eddie.

Eddie Leung – Bank of America/Merill Lynch

I see. Thank you.

Operator

Thank you. (Operator instructions) There seem to be no questions at this time. Over to eLong management team for any additional or closing remarks you may have.

Guangfu Cui

Thank you again for joining this call, and this is Guangfu, and we have no further comments. And moderator, you may come in this call. Thank you.

Operator

Thank you. And that concludes today’s conference call. Once again on behalf of eLong, we would like to thank you all for your participation. All lines may now disconnect and good day to all.

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