E-House Holdings' Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug.16.13 | About: E-House (China) (EJ)

E-House (China) Holdings Limited (NYSE:EJ)

Q2 2013 Earnings Conference Call

August 16, 2013 7:30 AM ET

Executives

Michelle Yuan - Director, IR

Li-Lan Cheng - COO

Bin Laurence - CFO

Xin Zhou - CEO and Co-Chairman

Analysts

Jinsong Du - Credit Suisse

Ella Ji - Oppenheimer

Tian Hou – T.H. Capital

Operator

Hello and thank you for standing by for E-House's Second Quarter 2013 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a Q&A session. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Ms. Michelle Yuan, E-House Director of Investor Relations.

Michelle Yuan

Hello, everyone, and welcome to E-House earnings conference call for the second quarter ended June 30, 2013. To download a copy of the earnings press release or to sign up for the investor distribution list, please go to the IR section of our website at www.ehousechina.com.

Leading the call today is Mr. Li-Lan Cheng, our COO, who will review highlights for second quarter; Ms. Bin Laurence, our CFO, will discuss our financial results. We will then open the call to questions, at which time, our Co-Chairman and CEO, Mr. Xin Zhou will be available.

Before we continue, please allow me to read you E-House’s Safe Harbor statements. Some of the statements during this conference call are forward-looking statements made under the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are 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. E-House does not undertake any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.

Our earnings press release and this call include discussions of unaudited GAAP financial information as well as some unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. 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 COO, Mr. Li-Lan Cheng. Mr. Cheng, please go ahead.

Li-Lan Cheng

Thank you, Michelle, and hello everyone. Thank you for joining us today. We delivered solid results in the second quarter and reached a number of strategic milestones in the first half of the year as well, including the upgrading of our e-commerce platform, the launch of our new mobile real estate application, development of the CRIC Home Price series of products, and establishing a solid base of customer orientation call center.

I want to specially emphasize, that after two years of investment and improvement efforts, our e-commerce platform is now a truly open platform, facilitating real estate transactions, that developers can use, with or without our other online services.

We began marketing the upgraded 3.0 version of the platform on June 18, and it has already been well received by many new and existing clients. As of August 15, we have signed 986 e-commerce service contracts with our developer clients.

On the regulatory side, the Chinese government recently announced a new goal of promoting stable and healthy development of the real estate market, as well as furthering the country's urbanization process. We believe that this signifies a new direction for the real estate industry in China that will bring new opportunities for us. The milestones we achieved in the first half of this year have set a solid foundation for us to capitalize on these opportunities, and will support our next round of growth and create more value for our shareholders.

I will now turn the call over to our CFO, Bin Laurence, who will review our financial highlights for the second quarter.

Bin Laurence

Thank you, Li-Lan, and hello to everyone on the call. I will now walk you through our second quarter financial results in more detail. We have generated much better profits this year, compared to last year, thanks to a stable policy environment and solid execution by our key business units. In addition, we have completed a cost structure realignment that we started last year, and have been able to keep our operating expenses stable, while growing our revenues. We will continue our cost control measures, in aiming to further improve our operating margin.

Our second quarter total revenues were $163.4 million an increase of 43% compared to last year. For the first half of 2013, total revenues were $280 million, an increase of 62% compared to the same period of 2012. Both increases were primarily driven by our real estate brokerage services and real estate online services.

Our second quarter revenues from real estate brokerage services, which include primarily agency services and secondary brokerage services were $65.6 million, an increase of 32% compared to last year. For the first half of 2013, real estate brokerage service revenues were $124.9 million, an increase of 71% from the same period of 2012.

Second quarter revenues from our primary real estate agency services were $62.6 million, an increase of 38% compared to last year. This increase was mainly due to a 30% increase in total GFA of new properties sold and a 44% increase in the total transaction value of new properties sold.

For the first half of 2013, revenues from our primary real estate agency services were $119 million, an increase of 80% from the same period of 2012. This increase was mainly due to a 66% increase in the total GFA of new properties sold, and then 82% increase in the total transaction value of new properties sold.

Second quarter revenues from secondary real estate brokerage services were $3 million, compared to $4.1 million last year. For the first half of 2013, revenues from our secondary real estate brokerage services were $5.9 million, compared to $6.9 million last year. The decreases were mainly due to a reduction in a number of physical brokerage stores compared to the same period last year, as we have shifted our secondary real estate focus from offline to online.

Second quarter revenues from our real estate online services were $71.9 million, an increase of 79% compared to last year. For the first half of 2013, revenues from real estate online services were $111.7 million, an increase of 83% compared to last year. The increases were mainly due to the growth in online advertising, and particularly, e-commerce revenue.

Second quarter revenues from our real estate information and consulting services were $16.4 million, an increase of 12% compared to last year. For the first half of 2013, revenues from real estate information and consulting services were $28 million, an increase of 14% compared to last year. The increases were [related] mostly to increased revenue from information services.

Second quarter revenues from our other services, which include offline real estate advertising services, promotional event services, and real estate fund management services were $9.6 million, mostly flat compared to $9.9 million last year. For the first half of 2013, revenues from other services were $15.4 million, a slight increase from $14.3 million last year.

As for cost and expenses, second quarter cost of revenues were $69.7 million, an increase of 40% compared to last year. For the first half of 2013, cost of revenue was $121.7 million, an increase of 39% compared to last year. The increases were a result of greater salary expected for additional staff and higher commissions associated with increased revenues from primary real estate agency services, as well as higher fees paid for content and services associated with our real estate online services.

Second quarter SG&A expenses were $88.5 million, mostly flat compared to $86.3 million last year. For the first half of 2013, SG&A expenses were $163.5 million, also flat compared to $133.8 million last year.

Moving to operating and net income. Second quarter operating income was $6.3 million, compared to operating loss of $19.8 million for the same quarter of 2012. Second quarter non-GAAP operating income was $16.8 million, compared to non-GAAP operating loss of $2.9 million for the same quarter of 2012. For the first half of 2013, operating loss was $4 million compared to operating loss of $74.4 million for the same period of 2012.

For the first half of 2013, non-GAAP operating income was $17.6 million compared to non-GAAP operating loss of $42.6 million in the same period of 2012. Second quarter net income was $6.7 million compared to net loss of $11.6 million for the same quarter of 2012. Second quarter non-GAAP net income was $15.8 million compared to non-GAAP net income of $4.6 million for the same quarter of 2012. For the first half of 2013, net income was $0.6 million compared to net loss of $45.6 million for the same period of 2012. Non-GAAP net income for the first half of 2013 was $19.3 million compared to non-GAAP net loss of $15.4 million in the same period of 2012.

Second quarter net income attributable to E-House shareholders was $6.4 million or $0.05 per diluted ADS, compared to net loss attributable to E-House shareholders of $7.8 million or $0.07 loss per diluted ADS for the same quarter of 2012. Second quarter non-GAAP net income attributable to E-House shareholders was $15.3 million or $0.11 per diluted ADS, compared to $6.8 million or $0.06 per diluted ADS for the same quarter of 2012.

For the first half of 2013, net income attributable to E-House shareholders was $1 million or $0.01 per diluted ADS compared to net loss attributable to E-House shareholders of $33.7 million or $0.36 loss per diluted ADS for the same period of 2012. Non-GAAP net income attributable to E-House shareholders for the first half of 2013 was $19.5 million or $0.15 per diluted ADS compared to non-GAAP net loss attributable to E-House shareholders of $10 million, or $0.11 loss per diluted ADS for the same period of 2012.

On the cash flow front, as of June 30, 2013, our cash and equivalents totaled $188.2 million. Second quarter net cash generated in operating activities was $8.2 million, mainly attributable to non-GAAP net income of $15.8 million, and increasing accrued payroll and welfare of $17.7 million and increase in accounts payable of $6 million, a decrease in restricted cash of $6.9 million; a decrease in customer deposits of $5.1 million and an increase in income tax payable and other tax payables of $5 million, partially offset by an increase in accounts receivable of $49 million.

Second quarter net cash used in investing activity was $8.2 million, mainly comprised of an $8.1 million deposit paid for investments in affiliates. Second quarter net cash used in financing activities was $20.1 million, which was mainly $20 million in dividends paid to our shareholders in the second quarter.

I will now provide our business outlook; I am pleased to report that we are again raising our fiscal 2013 total revenue guidance to approximately $630 million from the guided amount of approximately $600 million announced last quarter. This would represent an increase of approximately 36% from $462.4 million in 2012. This forecast reflects our current and preliminary view, which is subject to change.

Now we are happy to take any questions you may have. Operator?

Question-and-Answer Session

Operator

Thank you. The Q&A section of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. (Operator Instructions). And your first question comes from the line of Jinsong Du from Credit Suisse. Please go ahead.

Jinsong Du - Credit Suisse

Hi. Thank you for taking my question and congratulations for the good results. Just like to understand from Chairman Zhou what is his view on the markets in the second half of the year, and as a result, will that still be for the upside to the full year guidance of E-House? And also, what will be the margin trends? Obviously we have seen the margin improvement right now, but would that margin trend improvement continue into the second half of the year, and also if you could elaborate on what's the outlook for next year, that will be great as well. Thank you.

Bin Laurence

[Foreign Language].

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

So, we don't even need to say too much about the second half property market outlook. We are already seeing from a lot of media reports, that the government recently cut their goals of promoting a healthy and stable real estate market, as well as to further the urbanization process. This is also reflected by the increased passion of developers to acquire more land. We believe that this could represent a relatively long term trend for a stable and healthy market, and which will create opportunities for players in the industry.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

Let me translate Mr. Zhou's answer into English. So through the last cycle of real estate market, we took the opportunity to complete quite a few milestones, one of which is upgraded our e-commerce platform to 3.0 version. We also developed our mobile application, as well as launched our CRIC Home Price series of products, and establishing a cloud-based customer origination call center. In addition, we completed our cost realignment, so that we are now well positioned to take the opportunity of next round of development in the market, because we have completed all these milestones.

Since the second half of last year, we have had a consistent better operation results, beating expectations most of the time. As you know, we raised our full year outlook by $50 million in the first quarter, and now raising the whole year again by an extra $30 million this quarter, and we are hoping that we could continue to beat our own expectations in the second half of the year.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

As for margin update, we have improved quite a bit since the second half of last year, and this is mainly resulting from two major elements. The first element is from the brokerage agency services. As you know, in the last few years, with the declining commission rates, our conversion rates did not go up enough to compensate for the declining commission rates. However, through the cost structure realignments last year, we are now able to maintain profitability with the relatively low conversion rates, and that's definitely something very good to see in the brokerage agency services, and we are hoping that, whenever conversion rates goes up, we will be able to [add that] directly into our margins.

The second element is from our online services. As you know, we completed the change from mostly outsourced model to directly operating model. During this process, it took a lot of operating expenses, and as we now mostly completed this process. We believe that you could see the associated increase in margin leverage, which is something that's already shown in the last few quarters.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

As for the property market outlook for next year, we have already mentioned before that we are relatively optimistic about mid to long term property markets, due to the recent government's announced policies; and we believe that next year, the market is now going to change as frequently as we have seen in previous cycles, and therefore we expect to see a relatively stable industry market outlook.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

As for E-House's performance, we have already mentioned that since the second half of last year, the company has consistently improved it's -- not only top line, but also profitability. We believe that we are -- this is a trend that we could still push forward to, and we are relatively optimistic about our outlook for next year.

Xin Zhou

Thanks.

Bin Laurence

Thanks Xin Zhou.

Operator

Thank you. And our next question comes from the line of Ella Ji from Oppenheimer. Please go ahead.

Ella Ji - Oppenheimer

Thank you. Good evening. Congratulations on the strong quarter. So my first question is with regards with the e-commerce business. Obviously, it achieved very strong results. I wonder if you can provide a little more detail for this line of business, for example, how much is described as a percentage of the total online revenue, and how many cities do you cover? And then, also you said that your -- 986 contracts signed, how many are unique customers versus customers you involve online and offline and (inaudible). Discuss your next targets you want to achieve in the e-commerce services.

Bin Laurence

[Foreign Language].

Ella, let me answer your first part of the question, regarding how much percentage e-commerce contributed to our total online revenue. This quarter, it has contributed approximately 35% of online revenues.

Xin Zhou

[Foreign Language].

Bin Laurence

We also have increases in our traditional online advertising, and that percentage increase is roughly 16%.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

As for e-commerce platform, at the end of second quarter, we have roughly 400 ecommerce projects that's online. Since we launched our 3.0 e-commerce platform on June 18, we have an increase of approximately 700 projects. Roughly 100 of those were completed projects now. So we are expecting towards the end of the third quarter, and beginning of the fourth quarter, we are going to see roughly 1,000 projects on our e-commerce platform.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

The core of our upgraded 3.0 e-commerce platform, is that we separated our transaction facilitating platform from the other value added media services.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

This is not to say that we are only now charging the platform transaction fees, and not going to have any revenues from other services.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

A lot of resources we have, such as our Sina property website, as well as Baidu websites, are the resources that developers are looking for.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

Previously, we have a combined [condo] package for platform services, as well as other media services. Now, since the launch of the 3.0 e-commerce platform, we still have a lot of developers who choose to use both our other media services, as well as our transaction platform, and some new clients now have the choices to either use our other services or not. We are just giving back the choice to developers in terms of who they choose to use for value added services.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

We are hoping that in our future releases, we are going to be able to outline, not only how much we make from our e-commerce platform, but also outline how much we are able to receive, in terms of revenue from our other value added services, as well as how much we are spending on those content.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

We do not separate the cost of our e-commerce from traditional online, because with this year, a lot of personnel costs in between [these two], and that's the majority ballpark of our online cost structure, as well -- plus the spending on media resources on Sina and Baidu. And we are hoping in the future, more and more developers will use not only our e-commerce platform, but also increase the usage of our resources, which will bring additional profit margins for us.

Xin Zhou

Thank you.

Operator

Thank you. Our next question comes from the line of Tian Hou from T.H. Capital. Please go ahead.

Tian Hou - T.H. Capital

So I got question with -- regarding your guidance. You have been reaching the guidance consistently. However, what has not been changed out of your recent guidance, is the outlook for second half? So if I just -- you look at your newly revised guidance at $30 million. $30 million has purely come from the upside, the 2Q. So I wonder what's the reason for now to actually give guidance, that also indicates the upside in the second half? So is that because, you want to be conservative, or is that because the market is still not clear, and I just wonder what's the reason, that's my first question.

Bin Laurence

[Foreign Language].

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

When we gave our last quarter's guidance, which was increased by $50 million, how does that reason with, because we have better expectation of the second quarter results, and so part of the better second quarter performance was reflected in the raised $50 million from last quarter, and now we feel that, again, we -- positive for the second half performance, and therefore we have raised full year guidance by another $30 million.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

As to whether our guidance is on the conservative side, we are hoping that with stable market environment, E-House can consistently beat our own expectation in the future quarters.

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

As to whether there are any uncertainties for the market in the second half. So far, we haven't seen anything negative from a direction point of view. I think we should all watch closely of the national Congress meeting that's coming up later.

Xin Zhou

Thank you.

Operator

Thank you. (Operator Instructions). And our next question comes from the line of [Wendy Law] from Barclays. Please go ahead.

Unidentified Analyst

Hi Chairman Zhou. Hi Laurence, Li-Lan. I have a question on dividends. So I explore that the net cash used in dividend payments is about $19.9 million, while we have -- given our non-GAAP net income attributable to the shareholders, 19.5, why do we pay such a big dividend? Thank you.

Bin Laurence

[Foreign Language].

Xin Zhou

[Foreign Language].

Unidentified Company Representative

(Interpreted)

There are two common ways of this form of dividend. I think most of the fund (inaudible) companies have to pay dividend, as a percentage of that per year, net profit, there is another way of determining dividend -- I think most of the U.S. based companies have to have a stable dividend level in absolute terms, stable sense or whatever, on a certain amount per share. Based on what the company views as a sustainable level of profit over the medium to long term period, and that's how E-House thought about -- thinks about second dividend. So when we started paying dividend two years ago, that was the view we took, and it was to try to maintain a relatively stable dividend in absolute terms, rather than having it fluctuate every year with a level of profit.

Bin Laurence

Did that answer your question Wendy?

Operator

I believe we will just go on to the next question on the line of [Gregory How] from Citi. Please go ahead.

Unidentified Analyst

Thanks for taking my question, and congratulations on the strong quarter. My question is about your online service. Starting with management, the revenue from e-commerce was about 35% after online revenues, so later on in that piece -- I think last quarter, management also talking about the gross revenue, I mean, before the revenue sharing, we have -- that are from brokers. So in terms of gross revenue, what's revenues from e-commerce this quarter, and my second question is about secondary real estate brokerage services. I think early on the call, the management also talked that through the migration of the brokerage services from offline to online. So with revenue contribution to the online part of revenue this quarter, and then what's the company's strategy here. Thanks.

Bin Laurence

I will first translate your question in Chinese.

[Foreign Language].

Xin Zhou

[Foreign Language].

Bin Laurence

(Interpreted)

Okay Gregory, I will answer your question regarding the e-commerce percentage. The number I gave earlier was on that -- the other reported revenue numbers here, is our net revenue numbers, and there is no growth numbers here. As I mentioned earlier, for our second quarter, we have roughly $25 million in total e-commerce revenues, which is about 35% of the total online revenue. As to the contribution of our secondary brokerage online, we did have a tremendous increase for our online secondary, but the sale remained relatively small in the second quarter. Our secondary online services increased from roughly $1 million from the second quarter of last year, to roughly $5 million this quarter.

Thank you, hello?

Operator

We are now approaching the end of the conference call. I will now turn the call over to E-House's Director of Investor Relations, Ms. Michelle Yuan for her closing remarks.

Michelle Yuan

This concludes today’s call. If you have any follow-up questions, please let us know. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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