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Ctrip.com International, Ltd. (NASDAQ:CTRP)

Q3 2009 Earnings Call

November 11, 2009 8:00 pm ET

Executives

Lin Zhang - Investor Relations

Min Fan - Co-founder, Chief Executive Officer

James Jianzhang Liang - Co-founder; Chairman of the Board

Jane Jie Sun - Chief Financial Officer

Analysts

Catherine Leung - Citigroup

Cathy Chen - Goldman Sachs

Wendy Hung - RBS

Mike Olson - Piper Jaffray

Aaron Kessler - Kaufmann

Richard Ji - Morgan Stanley

Analyst for Eddie Leung - Banc of America

Ashish Thadhani - Gilford Securities

Marisa Ho - Credit Suisse

Ming Zhao - SIG

Elinor Leung - CLSA

Michael Holdano - GGHC

Jill Fan - Blue Site

Zim Yin - Wiskel Research

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Ctrip.com International Limited earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Ms. Lin Zhang. Please proceed.

Lin Zhang

Thank you, Tanya. Thank you for attending Ctrip's third quarter 2009 earnings conference call. Joining me on the call today we have Mr. James Liang, Chairman of the Board; Mr. Min Fan, Chief Executive Officer; and Ms. Jane Sun, Chief Financial Officer.

We may during this call discuss our future outlook and performance, which are forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in Ctrip's public filings with the Securities and Exchange Commission. Ctrip does not undertake any obligation to update any forward-looking statements except as required under applicable law.

Min, James, and Jane will provide business updates, industry outlook, and the financial highlights for the third quarter of 2009 as well as outlook for the fourth quarter. We will also have a Q&A session towards the end of this call.

With that, I will turn to Min for a business update.

Min Fan

Thanks, Lin and thank you to everyone for joining us today on the call. As we celebrate Ctrip’s 10th anniversary, we are pleased to report that our team once again delivered solid results in the third quarter of 2009. Our net revenues grew 47% year over year and net income grew 8% year over year. We are glad to see that the global financial crisis our team has captured the opportunity of the economic recovery. Each business line of Ctrip leads historic records of the highest quarterly volume during the third quarter.

The strong financial performance also demonstrates our ability to effectively control our costs and expenses. Our hotel supply network continued to expand at a rapid pace, with approximately 9,400 hotels by the end of September 2009, compared to approximately 7,600 by the same period of last year. The number of hotels with guaranteed allotment rooms further increased and accounted for approximately 70% of the total hotel supply.

Air ticketing business had a resilient growth during the third quarter this year, primarily due to the increased business and leisure travel volume driven by the economic recovery. Our packaged tour business grew 93% due to higher consumer confidence. The comprehensive tour products, high level service and competitive prices along with our new established transparent quality standards are well accepted by our customers.

By the end of the third quarter of 2009, Ctrip has reached to 8.2 million active customers, compared to 5.6 million by the same period of last year. And our customers’ loyalty toward services has also been enhanced.

We feel honored that Ctrip’s call center was rewarded the golden handset award for the best contact center in China in September this year for the third straight year.

We believe high quality of services is a key for its success. We will continually improve our service level and to maintain our competitiveness for our long-term growth. Not only do we have a high qualified call center, we have been enhancing our online platform to provide our customers with a robust and comprehensive travel site. Ctrip’s website is the most active and popular Internet space for travelers in China. This is a great asset for our company and we will continuously invest in the future.

By delivering the high quality of services, transparent information, and flexible arrangements, Ctrip was awarded the best online travel agency in China by leisure travelers polled by Travel Weekly during the third quarter. We believe our advanced technology system and customer tailored tour products are well-received by our leisure travelers.

Additionally, in the third quarter Ctrip had been awarded the best corporate travel agent in China. Corporate travel management sets [high standards] for information management and customer service. With three years experience, our team has won this prestigious award. We are confident that we will position to compete in the emerging and fast-growing corporate travel management market.

In September this year, Fortune China announced that Ctrip was on its list of 2009 China’s Most Admired Companies. This is a great recognition of our leadership in the online travel industry.

Looking forward, we will fully utilize our advantage in new technology to deliver excellent service to our customers and bring strategic values to our customers’ partners.

With Ctrip’s branding becoming stronger in China travel market, our team is more confident and passionate about our growth in the coming future.

Now I will turn to James for an industry outlook.

James Jianzhang Liang

Thanks, Min. As we are celebrating our 10th anniversary, we are proud to see that Ctrip has become the leading brand in the online travel markets in China. Ctrip is going to continuously challenge and improve ourselves through all fronts, including customer service, product offers, technology, sales and marketing, and more importantly, developing our people.

The travel market in China is fast growing. Ctrip is still young and small compared to the global players. We look forward with excitement to the opportunities the China travel industry presents us in the future.

We want to take this opportunity to thank everyone for their continued support to Ctrip. I believe with the passion, commitment, and diligence our team has, Ctrip is going to grow with the China economy and to the China travel industry.

Now let me turn to Jane for the update of our financial performance.

Jane Jie Sun

Thanks, James. I am very pleased to report the solid results for the third quarter of 2009.

Net revenues were RMB545 million, or $80 million for the third quarter of 2009, up 47% year-on-year. Excluding net revenues attributable to ezTravel, Ctrip's net revenues were RMB518 million, or $76 million, for the third quarter of 2009, up 40% year-on-year.

Hotel reservation revenues amounted to RMB262 million, or $38 million, for the third quarter of 2009, representing a 41% increase year-on-year and a 16% increase quarter-on-quarter. Excluding revenues attributable to ezTravel, Ctrip's hotel reservation revenues were RMB257 million, or $38 million, representing a 38% increase year-on-year, primarily driven by a 47% increase in hotel reservation volume, which was partially offset by a decrease in commission per room. Excluding revenues attributable to ezTravel, Ctrip's hotel revenues increased by 15% quarter-on-quarter, primarily driven by an increase in hotel reservation volume.

Air-ticketing revenues for the third quarter of 2009 were RMB241 million, or $35 million, representing a 45% increase year-on-year, and an 8% increase quarter-on-quarter. Excluding revenues attributable to ezTravel, Ctrip's air-ticketing revenues were RMB234 million, or $34 million, for the third quarter of 2009, representing a 40% increase year-on-year and a 9% increase quarter-on-quarter, primarily driven by an increase in air-ticketing sales volume.

Packaged-tour revenues for the third quarter of 2009 were RMB55 million, or $8 million, representing a 93% increase year-on-year and a 53% increase quarter-on-quarter. Excluding revenues attributable to ezTravel, Ctrip's packaged-tour revenues for the third quarter of 2009 increased by 53% year-on-year and 61% quarter-on-quarter, due to the increase in the leisure travel volume.

Gross margin was 77% in the third quarter of 2009, remaining consistent with that in the same period in 2008 and in the previous quarter.

Product development expenses for the third quarter of 2009 increased by 32% to RMB81 million, or $12 million, from the same period in 2008, and by 6% from the previous quarter, primarily due to the increase in the number of product development personnel. Excluding share-based compensation charges, product development expenses accounted for 14% of net revenues, remaining consistent with that in the same period of last year and in the previous quarter.

Sales and marketing expenses for the third quarter of 2009 increased by 32% to RMB94 million, or $14 million, from the same period in 2008 and by 13% from the previous quarter, primarily due to the increase in sales and marketing activities and the number of personnel. Excluding share-based compensation charges, sales and marketing expenses accounted for 17% of net revenues, compared to 18% in the same period last year and remained consistent with that in the previous quarter.

General and administrative expenses for the third quarter of 2009 increased by 5% to RMB47 million, or $7 million, from the same period in 2008 and 4% from the previous quarter, primarily due to the increase in the number of the personnel. Excluding share-based compensation charges, general and administrative expenses accounted for 6% of net revenues, compared to 7% in the same period last year and remained consistent with that in the previous quarter.

Income from operations for the third quarter of 2009 was RMB199 million, or $29 million, representing an 87% increase from the same period in 2008 and a 22% increase from the previous quarter. Excluding share-based compensation charges, income from operations was RMB226 million, or $33 million, representing a 64% increase from the third quarter in 2008 and a 19% increase from the previous quarter.

Operating margin was 37% in the third quarter of 2009, compared to 29% in the third quarter of 2008 and 34% in the previous quarter. Excluding share-based compensation charges, operating margin was 41% in the third quarter of 2009, compared to 37% in the third quarter of 2008, and 40% in the previous quarter.

Net income attributable to Ctrip's shareholders for the third quarter of 2009 was RMB189 million, or $28 million, representing an 80% increase from the same period in 2008, and a 19% increase from the previous quarter. Net income attributable to Ctrip's shareholders for the current quarter included an equity income of RMB12 million, or $2 million, from our investment in Home Inns. Excluding share-based compensation charges, net income attributable to Ctrip's shareholders was RMB215 million, or $32 million, representing a 59% increase from the same period in 2008, and a 16% increase from the previous quarter.

The effective tax rate for the third quarter of 2009 decreased to 13% from the same period of 2008 and the previous quarter, primarily due to the preferential tax treatment to certain of Ctrip's PRC subsidiaries.

Diluted earnings per ADS were RMB2.65, or $0.39, for the third quarter of 2009. Excluding share-based compensation charges, diluted earnings per ADS were RMB3.03, or $0.44.

As of September 30, 2009, the balance of cash and short-term investment was RMB1.4 billion, or $207 million.

For the fourth quarter of 2009, Ctrip expects a year-on-year net revenue growth rate of approximately 25% to 30%. This forecast reflects Ctrip's current and preliminary view, which is subject to change.

With that, Operator, we are opening the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Catherine Leung with Citigroup.

Catherine Leung - Citigroup

My first question is if you can please discuss the pricing trends in the third quarter and what you have seen so far in October and November and any difference in dynamics you are seeing between the hotel and the air travel business.

And my second question is whether you can update us on your developments of your leisure travel initiatives. Thank you.

Jane Jie Sun

I will take the first question and [inaudible] will answer the second one. On the price trend, for the hotel business in Q3 the volume growth was very strong. However, the price was still having a 5% to 10% decrease compared to last year’s. For air ticketing, the price has been increased at approximately 5% to 10%, depending on different airlines and different routes, and that trend still holds very similar for Q4 as of today.

Min Fan

In terms of the leisure market, we do see the financial crisis and in China the economy has seen some recovery, the leisure travel demand is growing quite significantly and also in this Q3, it’s normally a seasonal period for leisure demand, so we do see quite some pick-up from the leisure side and that’s why we also see our hotel rooms grow quite significantly this quarter.

Catherine Leung - Citigroup

Thank you.

Operator

Our next question comes from the line of Cathy Chen with Goldman Sachs.

Cathy Chen - Goldman Sachs

Thanks for taking my questions. The first one is actually a follow-up on the comments regarding the hotel trends during the quarter. Can you give us a bit more color on how much of the volume growth came from leisure versus corporate during the quarter?

And the second question on the air side, it looks like the volume growth was a bit slower, given the acceleration in the industry traffic that we saw during the quarter. Can you talk about whether you are seeing any changes in the relationship between your growth and the industry trends going forward? Thanks.

Jane Jie Sun

Sure. The rates in the hotel, I think both sides grow very strong. I think our business activities from the corporations have demonstrated its growth due to the economic recovery. And also on the leisure side, our team has put lots of efforts to make sure the weekend travelers are increasing their spending, so both sides are increasing very healthily during the past quarter.

For air ticket, the industry data shows approximately maybe 20% increase on the volume. The main reason is that Q3 is a very strong quarter for leisure travelers, particularly for a group tour. However, last year during Q3, due to the Olympic Games, most of the people were staying home to watch the Olympic Games, so in the base of last year, group tours was not there. So if you compare the industry data from this year versus last year, the group tour was one of the very important reasons for the industry growth rate.

For Ctrip though, our targeted market is not in group tour. Our targeted market is mainly in FIT -- frequent independent travelers, so if you take out the group tour, our growth rate still is at very healthy multiple of the industry growth rate.

Cathy Chen - Goldman Sachs

Thanks, that’s very helpful.

Operator

Our next question comes from the line of Wendy Hung with RBS.

Wendy Hung - RBS

My first question is regarding your top line guidance -- is it still including the 5% contribution from ezTravel, so the organic growth is 20% to 25%?

Jane Jie Sun

Yes, Wendy, I think our guidance includes the ezTravel piece.

Wendy Hung - RBS

Historically I think in terms of Q4, it is kind of weak seasonality but historically, the weak seasonality was always surpassed by the strong sector growth you achieved, so are you expecting to see kind of sequential growth this quarter, a very strong sequential growth you achieved in the past?

Jane Jie Sun

For the travel industry, I think the strongest quarter is the Q3 because it’s very warm and kids are out of school so that travel volume has been very strong in Q4 -- Q3, but obviously our team will do our best to deliver a strong result by capturing more market share. So we will work hard on that but the normal trend is Q3 is stronger than Q4 for the industry.

Wendy Hung - RBS

Okay, and my second question is regarding operating margins -- this quarter operating margins expanded quite decently. Do you expect this kind of current operating margin to sustain?

And also for 2010, have you [bartered] any special branding expenses for the 2010 Expo?

Jane Jie Sun

For the margin, I think based on the current rate, operating margins should be sustainable somewhere around 38% to 40%. That’s a sustainable range. For 2009, we do not want to spend too much money on a one-time event. We would rather spend money on the sustainable growth strategy but we will give a detailed guidance at the Q4 conference call.

Wendy Hung - RBS

Okay, great. Thank you.

Operator

Our next question comes from the line of Mike Olson with Piper Jaffray.

Mike Olson - Piper Jaffray

A couple of quick questions -- one on the pricing side, you mentioned hotel was down 5% to 10% year over year and air was up 5% to 10% year over year. Does that imply that hotel pricing was flat sequentially and air was up sequentially from Q2 to Q3? And what are you expecting for sequential price changes from Q3 to Q4?

Jane Jie Sun

Okay, for hotel, I think the price in Q3 was a 5% to 10% decrease on a year-over-year basis. In Q4, it’s the same compared to last year -- we still see a 5% to 10% range of the decrease, so which means it’s probably flattish on a sequential basis.

On the air, in Q3 the price was 5% to 10% increase and in Q4, compared to last year, it’s flattish. So air is -- the price can change on a daily basis. We are monitoring it very carefully.

Mike Olson - Piper Jaffray

Okay, and then on -- a quick question on the modeling. There’s this line item, equity income and affiliates -- what should we assume for that in Q4 if you do wind up providing the guidance there?

Jane Jie Sun

Sure. We use equity method to pick up Home Inns’ equity income on a one quarter lag basis, so they just announced their earnings and since we own approximately 18% of their shares, so that gives us about RMB15 million for next quarter in the equity income line.

Mike Olson - Piper Jaffray

Okay. Thanks very much.

Operator

Our next question comes from the line of Aaron Kessler with Kaufmann.

Aaron Kessler - Kaufmann

A quick question on the tax rate -- what should we expect going forward for either Q4 2010? Is this kind of a one-time tax benefit or would you be -- is kind of a 13% rate the right rate going forward here?

Jane Jie Sun

Most of our entities have a high and new technology status, which enables us to get 15% tax rate, so for your modeling purposes, I believe a 15% tax rate is a sustainable rate. From time to time, certain entities will get special preferential tax treatment and only when we confirm with the government, we book it during the quarter when we confirm with the government agencies. But for your model purposes, I think 15% is a reasonable number to use.

Aaron Kessler - Kaufmann

Okay. Great, I will jump back in the queue. Thank you.

Operator

Our next question comes from the line of Richard Ji with Morgan Stanley.

Richard Ji - Morgan Stanley

Congrats on a very strong quarter and the many awards your company has received recently. Quite a team. I have two questions -- let me start with the hotel business. Can you elaborate to us what portion of that growth comes from your budget hotel versus star hotel, especially given that you are one of the large shareholders of Home Inns and so far, how does that synergy play out?

And also a related question is about hotel booking commission -- obviously it declined and on a lower price and it is -- is that due to the overall weak price environment or the rising contribution from lower priced budget hotels? So that would be helpful.

Jane Jie Sun

I think our revenue for different star hotels are very evenly spread out, so for five-star, four-star, three-star and budget hotel and below, each one of them gets a very even spread.

For Home Inns, I think they are one of the many, many chain hotels in the market, so the revenue contribution from that specific hotel is not significant compared to the overall revenue.

On the commission per room, I think it’s determined by two factors -- the first one is the hotel price. The second one is the commission rate. Our commission rate is holding at a very steady rate, which is 15%. The main decline, the reason for the decline is because the room rate had declined between 5% to 10%.

Richard Ji - Morgan Stanley

That’s helpful. And the second question is regarding the impact of pandemics, and obviously H1N1 swine flu impacted your performance in the previous quarter and going forward, have you implemented any preemptive measure barring any further outbreak of swine flu, and what do you think the impact might be?

Min Fan

For the H1N1, I think this quarter since the government has controlled this disease to a certain degree and we don’t see there is a very severe impact on the travel pattern and consumer behavior. And for Ctrip’s business, I think among our businesses in Q3, we don’t see a significant impact from H1N1 and we will monitor the situation prudently in the coming quarters.

Richard Ji - Morgan Stanley

Thank you. That’s very helpful.

Operator

Our next question comes from the line of Eddie Leung with Banc of America.

Analyst for Eddie Leung - Banc of America

I am asking questions on behalf of Eddie Leung -- just a couple of quick questions; the first one is can you give out the percentage for the increase in air ticketing volume in this quarter? And secondly, can you talk about the opportunities for Ctrip for the Shanghai Expo next year? Thanks.

Jane Jie Sun

Sure. I will answer the first question and Min will answer the second one. For the air volume, we were able to achieve 40% volume growth on a year-over-year basis for Q3.

Min Fan

For the Shanghai Expo next year, I think this event will be very helpful for Shanghai and even for China and we are working very closely with the government organization and the industry to provide their best products for leisure customers and I think for this coming event next year, both Ctrip and the China travel industry will benefit from this event.

Analyst for Eddie Leung - Banc of America

I see. Thanks.

Operator

Our next question comes from the line of Ashish Thadhani with Gilford Securities.

Ashish Thadhani - Gilford Securities

I have a quick question -- on the balance sheet, how have you accounted for the Home Inns investment? Specifically, is there a value that is marked to the market?

Jane Jie Sun

On the balance sheet, Home Inns investment is recorded as a long-term investment. Currently because our percentage already requires us to account it for under the equity method, so we are -- we do not mark it to the market.

Ashish Thadhani - Gilford Securities

Okay, so to the extent that Home Inns stock rises or falls, that will not really be reflected on the balance sheet, right?

Jane Jie Sun

You are right, you are correct. We will not book any fluctuation on the stock in balance sheet but rather we will pick up 18% net income from their income statement and book it as an equity income in our income statement.

Ashish Thadhani - Gilford Securities

So that would be 18% of roughly $13 million, which they reported recently and that would go with a one quarter lag, right?

Jane Jie Sun

Correct. So for Q4, we will pick up approximately RMB15 million in the equity line.

Ashish Thadhani - Gilford Securities

Excellent. Thank you very much.

Operator

Our next question comes from the line of Marisa Ho with Credit Suisse.

Marisa Ho - Credit Suisse

I just have two follow-up questions -- when you mentioned just now that the air ticket volume increased by 40% year-on-year in the third quarter of 2009, is that including or excluding ezTravel?

Jane Jie Sun

Including.

Marisa Ho - Credit Suisse

Including ezTravel, so if we strip it out, roughly how much would that be?

Jane Jie Sun

No, 40% is without ezTravel.

Min Fan

That’s excluding -- excluding.

Jane Jie Sun

Yes, because when we compare, we always have to compare to ourselves because ezTravel is the first time.

Marisa Ho - Credit Suisse

And am I correct in saying that the air ticket revenue in the third quarter of 2009 without ezTravel increased by also 40% on a year-on-year basis?

Jane Jie Sun

That’s correct.

Marisa Ho - Credit Suisse

Right, but you are saying that the ASP increased by 5% to 10%, so the effective ASP was flat on a year-on-year basis or are we looking at an increase on a year-on-year basis?

Jane Jie Sun

On a year-over-year basis, depending on the airlines and routes, if you compare to last year’s Q3 price, it is somewhere around 5% to 10% increase.

Marisa Ho - Credit Suisse

Okay, right. And also to follow-up on your earlier comment on the fourth quarter air ticketing ASP trend and you were saying that they are roughly showing flattish on a year-on-year basis. If I remember correctly, the first half of the fourth quarter 2008 actually saw a lot of ASP pressure, I mean, probably a bit worse compared to the third quarter of 2008, so the base in fact should actually sequentially become a bit easier but it looked like the ASP trends are kind of weakening a little bit, I mean, compared to the third quarter of this year so are you looking at any particular industry trend or competitive pressure within the airline industry that caused that to happen?

Jane Jie Sun

From a seasonality perspective, when we move into Q4, I think the airlines will make a decision to adjust their price based on the seasonality, based on the capacity they have, and also based on how strong the volume is in the industry to make sure their revenue is maximized, so that’s what we have seen so far.

Marisa Ho - Credit Suisse

But in your conversation with your airline partners, are you picking up any trends that you think we should be concerned about or is anything basically just fluctuating on a week to week basis?

Jane Jie Sun

Nothing specifically -- I think if the economy is holding very strong, the volume will hold strong and the price is sustainable, but obviously airlines have to consider many factors -- capacity is one consideration, how they can -- if they have new routes, they might have special strategies. So so far what we have observed is on a year-over-year basis the price is flattish.

Marisa Ho - Credit Suisse

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Ming Zhao with SIG.

Ming Zhao - SIG

I have two questions -- the first question is just can you give us some update on the online versus offline in terms of the revenues for call center versus Internet, give us an update on that -- any change there?

Min Fan

For the online versus offline, around one-third of our productions are generated from online and versus two-thirds are generated from offline and we do see the online portion is growing steadily year by year with a certain percentage but still in China as you may know, quite some people will still tend to go for offline and we have around 18% business travelers and most of the travelers, they are used to -- by phone when they travel around and even in the office.

So I think we are working -- still we are working very hard to improve our online platform and also as we will still prepare our call center platform to be more user friendly.

Ming Zhao - SIG

So let me ask you -- which part grows faster, relatively?

Min Fan

Online is growing steadily. If you see the percentage change, perhaps we have 1%, or around a 1% increase every year in the past years.

Ming Zhao - SIG

Okay, good. Jane, two questions on the balance sheet items -- the first one is [inaudible] and other current assets, it went up pretty big quarter over quarter and I wonder what is that -- what is the cause there?

And also, if we look at the property equity in the software line, it also had a big increase. I just wonder what is happening there.

Jane Jie Sun

Sure. The first item is the prepaids. As of September 30th, 2009, we have to prepay our vendors for the tour packages that is going to take place for the October holidays, so normally that specific date, we normally always have to increase the prepaids. The flip side is also if you look at the accruals and custom advance account -- the customer also needs to put down a deposit with us because they need to go out and use our packaged tour. So that is a seasonality phenomenon in these two accounts.

The second one is on the property line. The increase is mainly for the payment we have made for our [Nantung] call center. It’s still being built so we made certain payments for that building.

Ming Zhao - SIG

Okay. Thank you.

Operator

Our next question comes from the line of Elinor Leung with CLSA.

Elinor Leung - CLSA

Thank you for the call. I have two questions -- the first question is regarding the guidance. Is it possible to give more breakdown in terms of guidance in terms of what do you expect in terms of volume and price trends for 4Q for both hotel and air ticketing business? And the second question is regarding the packaged tour -- given that the leisure travel volume is growing very strongly in China, do you have any plans in terms of strengthening the packaged tour business in terms of maybe even M&A in the area? Thanks.

Jane Jie Sun

Okay, I will answer the first question and Min will answer the strategy on the packaged tour business.

The guidance overall is somewhere around 25% to 30% year-over-year growth for Q4, which includes hotel revenue probably will be somewhere between 20% to 25% volume growth probably will be around 30%, which will be offset by a price -- a decrease in the price. For air ticket, the revenue probably will be somewhere around 30% to 35% and we forecast the volume growth to be around 30%. And for packaged tour, the revenue growth probably will be in the range of 30% to 50% year-over-year increase.

Min Fan

For the leisure business, Ctrip this year, we do see quite a healthy growth in this field and also we provide more products to our customers and for example, last year we have 11 departure cities. This year we have more than 20 departure cities. That means we have more coverage geographically and I think during growth, we will be open to any good opportunity for M&A but we will be quite prudent to evaluate and as you know, it can be easy to buy a company but it is very hard to integrate so for the M&A opportunities, we will always focus on whether it’s a travel related business, whether it can bring a new business line for Ctrip, and whether it can penetrate -- help Ctrip to penetrate into a new geographic area and also whether this M&A can add more key value-added service to our main business line.

So I think we will monitor very carefully.

Elinor Leung - CLSA

Thanks.

Operator

(Operator Instructions) Our next question comes from the line of Michael [Holdano] with GGHC.

Michael Holdano - GGHC

I had a question on the commission rates for air ticketing -- I remember, I think it was about a year ago they were deregulated and I guess I was kind of hoping if you could give us some guidance of where they are going, where they were this quarter as a percent -- I think it’s in between 4% or 5% but if you could just give us some granularity, that would be great.

Jane Jie Sun

Sure. The commission rate right now is in the range of 5% to 6% excluding surcharge and that range has been very consistent. The elimination for the government required commission rates did not have too much impact on our business, so that’s the current vision.

From Ctrip’s side, we will work very hard to improve our efficiency and to make sure we are the most cost effective sales channel for all our business partners to make sure we bring the best value to all the airlines. So we will -- our team is very focused on how to bring the best value to airlines. But obviously the commission rate is determined by the airlines at the end of the day.

Michael Holdano - GGHC

And sorry, market share in the hotel and air ticketing across the board -- is there a way you guys could break that out for us?

Jane Jie Sun

Yes, for hotel, it is very hard to do -- we only can give you a very -- the best estimation we have. It’s probably around [2% to 3%] in the hotel market. For air ticketing, the number is somewhere around 7% to 8%.

Michael Holdano - GGHC

Great. Thank you very much.

Operator

Our next question comes from the line of Marisa Ho with Credit Suisse.

Marisa Ho - Credit Suisse

Could you give us an update on the progress on the [Nantung] call center and also your plan for the new call center in 2010 and 2011, please?

Min Fan

The [Nantung] call center is still under construction right now and we plan to use this new call center by next year and for our call center seats in Shanghai, we will still remain the existing seats for some key business and also we will allocate our increased volume to the [Nantung] call center next year and from the year beyond. And I think the similar to [Nantung] call center will be a -- like a second headquarters for Ctrip but this call center will mainly focus on the offline business solution.

Marisa Ho - Credit Suisse

For 2010 and 2011, how much of a volume increase do you think [Nantung] can handle?

Min Fan

For the volume increase, I think at least three to five years, the [Nantung] call center can handle all the incremental business of Ctrip.

Marisa Ho - Credit Suisse

Right. Okay, great. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Jill Fan with [Blue Site].

Jill Fan - Blue Site

I just have a question regarding the balance sheet on the accounts payable and deferred revenue, seems to vary quite a bit from quarter to quarter, so can you state a little bit what contributes to the variance?

Jane Jie Sun

Sure. Just as we discussed with Ming, October is a very big holiday in China because we have 10 days off, or eight days off, so most of the customers will take the long distance tour to travel. As of September 30th, in order to book their packages, they have to put down deposits with us and we will not recognize revenue until they use our services and they come back from these tour packages. So the accounts payable and as well as the accrued revenue, deferred revenue represents the advanced payment the customer has made but we have not recognized the revenue yet.

Jill Fan - Blue Site

Okay. Thank you very much.

Operator

(Operator Instructions) We have a follow-up question from the line of Eddie Leung with Banc of America.

Analyst for Eddie Leung - Banc of America

Just a quick follow-up on the air ticketing side -- we are looking for some color about the direct sales by airlines, the competitive landscape in this area. And do you see any [inaudible] happening in the third quarter of 09? Thanks.

Min Fan

I think from last year, the airlines are working very hard on the direct sales. I think because the China market is big enough for airline to grow their direct sales, as well as Ctrip to grow its own air ticketing business and I think what airline direct sales and Ctrip, we can acquire much share from the whole market, so we don’t see there’s a significant impact on Ctrip’s business so far.

Analyst for Eddie Leung - Banc of America

Thanks, so actually the impact of these swine flu did not impact on the air ticketing side as well? Is that correct?

Min Fan

No significant impact.

Analyst for Eddie Leung - Banc of America

Okay, thanks.

Operator

Our next question comes from the line of [Zim Yin] with [Wiskel] Research.

Zim Yin - Wiskel Research

Just a quick question -- could you tell me what is the gross margin of your packaged tour segment? And going forward, what do you see the trend of the margin will be? Thanks.

Jane Jie Sun

Sure. The gross margin for each line of business is quite different. For packaged tour business, it’s somewhere around 70% to 75% to 80% gross margin. There is a combination of hotel and air ticket.

Zim Yin - Wiskel Research

Okay, so do you see that the trend, that the margin will expand in the future?

Jane Jie Sun

I think that range probably is sustainable for the near future.

Zim Yin - Wiskel Research

Okay, thanks.

Operator

That concludes our question-and-answer session for today. I would now like to turn the conference back over to Lin for closing remarks.

Lin Zhang

Thank you for participating in this conference and see you next quarter.

Operator

Thank you for attending today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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Source: Ctrip.com Q3 2009 Earnings Call Transcript
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