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Qunar Cayman Islands Limited (NASDAQ:QUNR)

Q3 2013 Earnings Conference Call

November 19, 2013 8:00 PM ET

Executives

Chenchao (CC) Zhuang - Chief Executive Officer

Sam Hanhui Sun - Chief Financial Officer

Jenna Qian - Head of Communications and Investor Relations.

Analysts

Vivian Hao – Deutsche Bank

Jiong Shao - Macquarie

Piyush Mubayi - Goldman Sachs

George Askew - Stifel

Chad Bartley - Pacific Crest

Yuheng Fan - China Renaissance

William Huang - Barclays

Eddy Leung - Merrill Lynch

Tian Hou – T.H. Capital

Henry Guo – ABR Investments

Ming Zhao – 86Research

Operator

Hello and welcome to Qunar’s third quarter 2013 earnings conference call. At this time all participants are in a listen only mode. After Management's prepared remarks, there will be a question and answer session. Today's conference is being recorded for replay purposes. 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. Jenna Qian, Qunar’s head of communications and investor relations.

Jenna Qian

Thank you. Good day ladies and gentlemen. Thank you all for attending Qunar’s inaugural earnings conference call as a public company. Qunar distributed its earnings release earlier today and you can find a copy on our website as well as on Newswire services. Joining me today we have Mr. CC Zhuang, co-founder and chief executive officer, and Mr. Sam Sun, chief financial officer. CC and Sam will share our business updates financial and operating highlights, and our brief outlook for the fourth quarter. After their prepared remarks, CC and Sam will open up the call for your questions.

Before we continue, I should note that the discussion today will contain forward-looking statements. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. For an explanation of forward-looking statements, please refer to the section titled “Forward-looking Statements” in the press release we issued earlier today. Any remarks by the management on today’s call are made as of today, and Qunar undertakes no duty to update any forward-looking statements made on today’s call, except as required under applicable law.

As a reminder, this conference is being recorded. A webcast of this conference call will also be available on Qunar's IR website, http://investor.qunar.com, or http://ir.qunar.com.

Now, I would like to turn the call over to Qunar’s co-founder and CEO, CC Zhuang.

Chenchao (CC) Zhuang

Thanks, Jenna. Hello everyone and thank you for joining Qunar’s third-quarter earnings conference call, our first as a public company.

The third quarter saw us further consolidate our position as a clear leader in China’s travel-search market, with total revenue up by almost 60% year on year. And in mobile in particular, we’ve made substantial progress over the last few quarters. I’m pleased to note that mobile revenue accounted for almost 15% of our total revenues in Q3, and our Qunar Travel app now has over 100 million downloads, about twice as many as our closest competitor, according to iResearch.

What is really exciting is that while we’ve already become a clear market leader, our GMV is still just a small fraction of the total travel GMV in China. So the potential for growth for us is huge especially considering that Qunar is at the forefront of the industry-wide evolution towards hybrid business models. The distinction between online travel agents, travel media and search engines is becoming increasingly blurred. Look at recent developments in the U.S., for example: you have Priceline, which acquired Kayak to benefit from its travel search capabilities; and then Tripadvisor, which is transforming from a pure content provider into a hotel booking platform.

I believe there will ultimately be two main types of player in an efficient new travel ecosystem: travel platforms (or TPs) and travel service providers (or TSPs). As a platform player, Qunar has a significant advantage as this transition takes place. And to make sure we capture the market opportunities before us, we’re committed to investing aggressively, particularly in R&D and engineering personnel, to perfect our offerings. Ultimately, I’ve always believed that if we continue to produce the best travel-search user experience, customer and bottom-line growth will inevitably follow.

Our proprietary SaaS – or software as a service – system is a great example of how we’ve been able to create a better travel search experience for our users and a useful tool for our customers. Integrating a wide range of content into SaaS means we can produce a consistent user experience and ultimately bring users the information they want in a quicker and more digestible form. And on the customer side, SaaS gives TSPs superior exposure as well as essential mobile expertise, which many of them lack. To illustrate the importance of SaaS to our platform, in the third quarter, SaaS contributed approximately 86% of qualified flight clicks and 59% of qualified hotel clicks.

Let’s take a look specifically at hotels – which is a big focus of our growth for the next few quarters – we signed up 40,000 hotels for our SaaS in the last two quarters alone, and in total we had over 70,000 hotels enrolled on the SaaS platform by the end of Q3.

From a user perspective, our hotel reviews – and in particular hotel expert reviews – are especially valuable. Written by hotel test sleepers, our expert reviews provide in-depth hotel intelligence. They look at everything from service quality to room furnishings, leisure facilities, dining, and transportation. And much of this content is supplemented with pictures and videos. To date, there are over 7,500 hotel expert reviews, covering a total of over 5,200 popular hotels worldwide, on the Qunar platform.

Leisure travelers are increasingly conducting their travel research through longer sessions that begin on PC and then move to mobile to follow up on orders placed, tickets and hotels already booked or to find more travel information. Our partnership with Baidu ensures that we are able to reach users at the starting point – the PC – and then our leading mobile offering ensures that we are able to continue to engage as the users move to their mobile devices. And the rise of mobile travel also allows us to tap into a huge market opportunity of on-the-road services that is so far largely untouched. As I mentioned, we already have China’s most popular travel app, which is fully integrated with our SaaS system. This ensures that users get a truly superior and consistent mobile and PC experience.

Starting from May this year, we began to gradually integrate travel-related services such as airport drop-off, taxi search and car pick-up services, as well as restaurant and entertainment-related search, into our mobile app. We are confident that mobile will continue to be an area of strong growth for Qunar in the quarters ahead.

Before I pass the call over to Sam, I’d like to update you on a couple of recent initiatives we’ve been investing in…

First, turning to our Zhixin agreement with Baidu... As many of you know, Qunar has exclusive rights to operate the travel vertical on the Baidu platform. We are currently in the testing phase and have a Qunar team based at the Baidu Campus that is working very closely with Baidu to maximize the potential of our partnership. So far progress has been positive, but it’s still early days. We’ll have more updates for you over the next few quarters.

I am also happy to announce that we have received an insurance broker license that will, over time, allow Qunar to develop travel insurance products for our users in China. This will add to our family of existing Qunar travel products which cater to an ever broader spectrum of needs.

In summary, we are excited by the great opportunities we see before us. We’re confident that we’ve got the right strategy in place and that our focus on providing the best travel-search experience will generate exceptional long-term value for shareholders, users and customers.

With that, I now turn to Sam for the financial highlights…

Sam Hanhui Sun

Thank you, CC. Once again, thank you everyone for joining us for this call.

As CC touched on just now, our focus for the next several quarters is on aggressive investment in R&D and headcount as we look to expand our offerings, especially with mobile specific products. Our successful IPO gives us an extra injection of capital to build on our already solid cash position and we intend to allocate our resources for long-term growth.

I will now go through some select, key financial highlights for the period. For our full financial disclosure, please refer either to the F1 or to the press release issued earlier today.

Total revenues were RMB 241.1 million for the third quarter of 2013, up 57.5% year-on-year, primarily driven by our pay-for-performance, or P4P, revenues. P4P revenues for the third quarter were RMB 210.9 million, up 61% year-on-year.

For the flight and flight related business, revenue increased by 70.6% year-on-year, reaching RMB 152.9 million. This year-on-year growth was mainly driven by a 69.9% increase in flight search queries.

To help better evaluate our own performance as a platform player, we also look at our business in terms of flight and hotel business volume. We look at Total Estimated Flight Ticket volume, or “TEFT”, by dividing flight ticket volume sold on SaaS by qualified flight clicks from SaaS as a percentage of total qualified flight clicks. For Q3 2013, the calculation would be 135,008 divided by 85.9% equals 157,169 tickets per day, or about 14.5 million tickets for the quarter. This is, of course, an estimate, as we assume the conversion rates are the same for SaaS clicks and non-SaaS clicks. If we look at the TEFT, the year-on-year growth of P4P flight revenue at 70.6% was primarily due to an increase of 70.3% year-on-year growth in TEFT.

For the hotel business, P4P hotel revenue was RMB 50.1 million, up 26.6% year-on-year. The year-on-year growth was primarily due to a 49.7% growth in hotel search queries and a 15.4% decrease in revenue per thousand search queries, mainly as a result of our hotel coupon program.

Again, if we look at Total Estimated Hotel Room-night volume or “TEHR”, which is calculated as hotel room-night volume sold on SaaS divided by qualified hotel clicks from SaaS as a percentage of total qualified hotel clicks. We apply the same methodology as TEFT and we can get 58,983 room nights per day in Q3 and total of 5.4 million room nights for Q3. Again, this is an estimate, as we assume the conversion rates are the same for SaaS clicks and non-SaaS clicks since we don’t have complete data about conversion rate for non-SaaS clicks. If we look at TEHR, the year-on-year growth of P4P hotel revenue at 26.6% was primarily due to an increase of 114.0% in TEHR and a decrease of 40.8% in the revenue per TEHR, which resulted from our hotel coupon program launched in January 2013.

Gross margin decreased four percentage points to 79% for the third quarter of 2013 from 83% in the corresponding period of 2012. This decline was mainly due to the hotel coupon program that was launched in January this year as well as the increase in sales tax and surcharges and increase in short-message-service fees.

Net loss attributable to Qunar’s shareholders was RMB 48.8 million versus a net loss of RMB 8.4 million last year and a loss of RMB 41.2 million last quarter. The increase in net loss was primarily due to continued investment in product development and sales and marketing in order to drive business growth.

Adjusted EBITDA (non-GAAP), defined as net loss before income taxes, interest expenses, depreciation and amortization, further adjusted to exclude share-based compensation expense and non-cash expenses relating to free user traffic contributed by Baidu, Inc., was negative RMB18.8million (US$3.1 million) for the third quarter of 2013, compared to positive RMB4.9 million in the corresponding period of 2012 and negative RMB14.8 million in the previous quarter of 2013

As of September 30, 2013, cash and cash equivalents and short term investments totaled RMB 486.4 million.

For the fourth quarter of 2013, we expect total revenue growth to be in the range of 60% to 65%. For your easy reference, Q4 2012 revenues were RMB 144.1 million. This forecast reflects Qunar’s current and preliminary view, which is subject to change.

With that, we’ll now open the lines for questions.

Operator

The question-and-answer session 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. If you have more than one question, please request to join the question queue again after your first question has been addressed.

Question and Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Vivian Hao of Deutsche Bank. Your line is open please go ahead.

Vivian Hao – Deutsche Bank

Hi, Sam, thank you for taking my question. Actually the question is when you mentioned we have been beefing up our engineer team to actually accelerate the transition from both PC to mobile and also the SaaS system deployment. When would you expect we can see scale and also see that personnel increase in R&D will not exceed the growth of our top line. And also see some -- probably we'll see some profitability coming in the next few years.

Sam Hanhui Sun

Thanks, Vivian. So, normally we have to look at this initiative by initiative. I think that we are kind of for any initiative we look at it as a venture. So, for the first two, three years, engineer spending will be more faster than the revenue, because the first year, essentially has no revenue, first and second year have no revenue. And the revenue is going to be ramp up normally in the 3rd and 4th year.

And I think the -- for any particular venture in the travel related product, most will take four years to see the revenue as significant bigger than the investment, the R&D cost. So, that's the, you know, the general guidance for any typical venture -- new product development.

I think for the mobile, we have seen the example, the company started investing in mobile starting from 2010 and we see the revenue quickly pick up this year and I think next year, we'll see a much bigger -- we'll also see a high growth on the mobile revenue as well.

So, that gives you a flavor of normally how the life cycle of new travel related products is in for the revenue and the personnel cost.

Vivian Hao – Deutsche Bank

Okay. Thank you.

Chenchao (CC) Zhuang

And, so for the overall company, I think we have to see how many new initiatives we are going to enter.

Right now, we see some big categories, for example vacation packages, destination tickets and also the kind of Tripadvisor type of reviews for local hotels and restaurants that's been destination. And we also have initiative on the short-term rental business. So, I think moving forward, that travel essentially be new opportunity, the larger scale, new opportunity will be less and less. So, once we feel the opportunity is mostly captured, we can see that revenue grows much faster than the personnel cost.

Vivian Hao – Deutsche Bank

This is very helpful. Can I have one more follow up question? I think the company's strategy is to gain more market share on the hotel booking side versus right now, probably the other OTAs, including Ctrip and E-long has incumbent positioning in the segment. But given that the market is extremely fragmented and our target is focusing more on the lower or the mid to lower end of the market. What is our strategic positioning to make sure that we will gain market share in this segment?

Chenchao (CC) Zhuang

First of all, I think our positioning is more for the leisure travelers. So, I say for today, most Chinese consumers, leisure travelers are more in favor of the low end hotels compared to the… both Ctrip and E-Long probably I don't think, you know, their high end is particular for leisure maybe for business travelers. So, you know, I mentioned the focus is -- is focused onto these travelers not, you know, the business travelers.

So, we also see actually a pretty big growth on high-end hotels, five star hotels, on the prepaid model because that model for the high-end hotels are more fit for the leisure consumers. So, our strategy is basically just focus what the leisure travelers like. Leisure travelers like options, they want more choices, they want the best price, and the most likely, leisure travelers actually will pay less attention of the cancellation schedule change because once they fix their vacation period, it's a very difficult for them to cancel or reschedule their trip.

So, that's the direction we are going after. More budget sensitive and less cancellation and rescheduling service.

Vivian Hao – Deutsche Bank

Okay, great. Thank you. Congratulations on a good quarter.

Chenchao (CC) Zhuang

Thank you.

Operator

Your next question comes from the line of Jiong Shao of Macquarie. Your line is open please go ahead.

Jiong Shao - Macquarie

Thank you for taking my questions and congrats on your recent IPO which marks the beginning of a new chapter for Qunar. I have two questions, the first question is how much of your search query traffic in Q3 came from Baidu and how did you account for the cost associated with that on your P&L?

Sam Hanhui Sun

I think Q3 is similar to Q2. About 50 -- little bit over 50% of the total traffic comes from - came from Baidu and of course here I'm talking about the PC traffic because mobile traffic is a playing a more and more significant role in our total traffic, but mobile traffic is almost all organic.

So, for PC traffic a little bit over 50% came from Baidu in Q3 and within this part, majority of the traffic coming from Baidu is free, mainly because still a lot of users simply key in Qunar name in Baidu search box. So, this part of the traffic came to us free. But, of course, we also need to spend money on Baidu to buy the keywords and for this type of online marketing, spending -- the spending level in Q3 is the same as what we did in Q1 and Q2.

Jiong Shao - Macquarie

Okay, great. Thanks, Sam for that. My second question is to hoping that you can elaborate a bit on your qualified click or queries on your SaaS system, I think you talked about over 80% of the queries or clicks are SaaS qualified. Could you elaborate a bit on how you define SaaS qualified? And of those room night, and tickets that you highlight during your prepared remarks, what's the percentage or transacted directly on your own system? I think its use to be called (inaudible) if I recall correctly. Thank you.

Sam Hanhui Sun

Okay, Jiong, for the first question, the qualified SaaS click is actually, I mean, it's a -- and it's just a click going through our SaaS system to complete the transaction. When we say qualified clicks, we simply mean we need to exclude clicks that are mistakenly made by the consumers. For example consumers click the same links twice within, say, within 10 seconds. So just those that are mistakenly or wrongly clicked clicks we need to exclude that part.

So, after excluding those mistaken or wrongly made clicks then, all the rest clicks are qualified clicks. So then, within this qualified click pool, about 86% of the clicks went to our SaaS system in about 86% of the flight clicks went to our SaaS system. And all of the -- for this 86%, all of them went -- getting into our SaaS system and they did the click, they did the search. And some of them based on certain conversion rates, convert it to transaction, converted to flight booking or hotel booking.

Jiong Shao - Macquarie

Okay. And I understand, some of the bookings are done by your partners, the OTA partners directly, but some are conducted on your own transaction platform. I don't know if you can share with us what percentage of those total transactions done by your own system… fulfilled by your own system.

Sam Hanhui Sun

Well, you mean fulfilling the direct sales, right?

Jiong Shao - Macquarie

Yes, yes, sorry. Yes.

Chenchao (CC) Zhuang

So generally, our flight-side we do not have our fulfillments. All the fulfillments taking place by our partner-side. In hotel-side, you know, only part of our direct contract with these hotels is fulfilled by our side. Part of the direct contract with hotels is fulfill by the hotels by themselves.

And we didn't disclose a details of how many fulfillment has been done by us. But, you know, in a large -- in a big direction that we are not in an intention to provide labor intensive fulfillment service. So, the way we engage in the fulfillment business is we provide the system to help our partners do the auto fulfill.

For some of you know, individual smaller hotel, they could have difficult to fulfill themselves. So we alternatively provide the labor team to help them to do the manual fulfill. But it's not a trend, so moving forward once (inaudible). We still are help our partners to fulfill themselves. But at the same time we are continuing invest our SaaS platform to have our partners to do the auto-fulfill.

Jiong Shao - Macquarie

Okay. Great, thank you CC for that. If I may, I have a one last question. I noticed that you have partnership with bookings.com as I was playing with your app. So could you talk about a bit about of your -- the outbound travel trend you are seeing. What kind of the plans you have now to expand your sort of overseas travel business for Chinese travelers. Thank you, that's all.

Sam Hanhui Sun

Yes, I think -- actually, we have a partnership with Expedia, booking.com, Agoda. Many of the famous international OTAs, all of them participate on mobile – through the mobile SaaS system. And also participate on PC search as well. I think that in terms of the international hotel coverage, I think that we are very comprehensive and our price has a leading advantage because we pretty much approach everybody famous in the market.

And, moving forward, we still focus on the same philosophy. We feel that what leisure customers really like is number one is the coverage, the choices. Number two, the price. And number three, they're less sensitive for the cancellation or rescheduling service.

So, we are going to continue to partner with as many as partners, international OTAs, local OTA, hotel groups, and even locally individual hotels as much as possible. And at the same time we are very focused on how to serve, our budget sensitive leisure travelers. So, that's -- I think we already did a great job in Hong Kong and Macao and the we're going to expand more aggressively in Southeast Asia market in the next few years.

Jiong Shao - Macquarie

Is the percentage of revenue right now contributed from this overseas trips you can share with us?

Chenchao (CC) Zhuang

Oh, that is not disclosed at this moment.

Jiong Shao - Macquarie

Okay. That's fine. Thank you CC and Sam for the answers.

Chenchao (CC) Zhuang

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Your line is open please go ahead.

Piyush Mubayi - Goldman Sachs

CC, Sam congratulations on the results. Can I just ask you about hotel query growth versus the airline query growth? The airline growth rate is still very, very robust, hotels are picking up. Could you -- just projecting ahead, could you tell us which quarter would you think that the hotel growth rate would be able to catch up with airline query growth rate? That was my first question.

And the second, just looking at cost, I wonder if you could give us a sense of the increase that we've seen in the third quarter whether that's the peak or you think further hiring will be conducted and in terms of how do we think about that. Thank you.

Chenchao (CC) Zhuang

Thanks, Piyush. And for first question I think if we look at the query growth, flight is pretty good and hotels are pretty good. But if we look at the -- when we look at the business matrix, we are more focused the TEFT and TEHR because that was represented actual GMV of our platform.

So, if you look at our number, actually our hotel growth which is TEHR growth is much faster than the TEFT. And I think moving forward, we will continue to see that our TEHR is growing faster than TEFT. So this is more accurate to present our platform performance on categories.

And second of all, I think we do have hired a lot of people in the Q3. And I think for the -- moving forward in the next few quarters, as I mentioned previously we have couple of new initiatives running, for example the mobile and the new initiatives. If you look at the major increase on head count, it's actually on the -- so based on the cost side, it's actually on the engineers and the mobile and the new initiatives. If you look at head count where we add a lot of sales for hotel business unit in Q3 but the cost is relatively low compared to engineers.

So next year, it really depends on the market situation, competitive landscape, and also we see opportunity to grow. Maybe we will add more engineers because there's more opportunity happening on the mobile. Did I answer your question?

Chenchao (CC) Zhuang

Piyush

Piyush Mubayi - Goldman Sachs

Yes, thank you.

Chenchao (CC) Zhuang

Thank you.

Operator

Your next question comes from the line of George Askew of Stifel. Your line is open. Please go ahead.

George Askew - Stifel

You mentioned that you have over 70,000 hotels now in the SaaS program, what do you think the addressable market for that program is in China and is that a program you can take internationally?

Chenchao (CC) Zhuang

There is no accurate number for how many individual hotels in China's market. There is multiple industry statistics. I would have believed that 300,000 of individual hotels in the -- number more -- widely accepted by the industry.

So for us, we will be happy that if we have like two-thirds of the market. That's the direction we are kind of, the number we are comfortable with. And for the international hotel at the SaaS platform to direct engage with the hotels, I think it's too early to tell, we do have some Hong Kong and Macau individual hotels as well as the Southeast Asia hotel groups is enrolled with our SaaS system but that's in very small fraction and that's not going to be our focus in the few quarters.

George Askew - Stifel

Right. Okay, thank you. And then as a quick follow up, in the mobile space, are there any travel service providers on the Qunar platform who are not mobile-enabled?

Chenchao (CC) Zhuang

Well actually, with our mobile, the mobile application, many of the e-travel service, you mean on the road service, right, on the road service provider are not the mobile plat…. They are not even online companies, many of them are service companies, they're offline companies actually.

We are provider in the SaaS system and to facilitate them to go to our mobile. And, of course, we also partnership with a lot of online in the mobile enabled company as well. Since we are a search engine, we will have a very comprehensive content and service for consumers to choose.

George Askew - Stifel

Right. Well, if you think about sort of the subset of your travel service providers and the subset of your revenues that is mobile accessible or mobile-enabled, what do you think your share is about? If it's 15% of 100% of your revenue, are you at 20% of the mobile-enabled revenue, for example?

Sam Hanhui Sun

When you say mobile-enabled, you mean pure mobile?

George Askew - Stifel

Yes. Well, not pure mobile but rather your travel service providers who can do a mobile transaction excluding some of the offline that you mentioned.

Sam Hanhui Sun

George, I think we should look at this way. All the GSPs in our SaaS system, they can also do transaction on mobile because our SaaS system is linked to our -- I mean, our mobile is linked to our SaaS system seamlessly. So it's not really how many TSPs are mobile-enabled. It's more of how many consumers are choosing our mobile apps and they click, they transact on our mobile platform that is what drives our mobile revenue.

So that's why we come up with this about 15% of mobile revenue today. So from a technology infrastructure point of view, I think we are almost 100% ready for mobile revenue. It's just we are waiting for the consumer behavior to become more and more mobile friendly.

George Askew - Stifel

Okay. Fair enough. Thank you very much.

Operator

Your next question comes from the line of Chad Bartley of Pacific Crest. Your line is open, please go ahead.

Chad Bartley - Pacific Crest

I want to go back to the questions around hotel revenue growth and how we should think about that. It's growing slower than the flight revenues. So I want to ask about the rebate program and see if that’s performing in line with your expectations and then we'll we need to wait until we anniversary the launch of that before hotel revenue growth and reaccelerate maybe grow faster than the flight business?

Sam Hanhui Sun

Chad, this is Sam. Well, for Q3 as we discussed, when we actually launched this hotel coupon program in January 2013, but at the very beginning, it was a very small scale. And the peak of this coupon program was actually Q3 this year. So accounting-wise, all the cash back we gave to consumers need to be net of against our revenues. So in Q3 actually, we net off almost 20 million revenues purely on the hotel side.

So that's why we see from a net revenue point of view, we see the hotel revenue grew slower than flight revenue. But as we discussed, if we look at the business volume growth, hotel side is actually growing faster than flight side. Hotel business in terms of TEHR is growing at 1% and 14% year over year. Flight is 70% year over year in terms of TEFT.

And going into Q4, we are scaling back the coupon program to a certain extent, so we expect the growth of the hotel revenue will be more consistent with the growth of flight revenue as well as the growth of the hotel business volume.

Chad Bartley - Pacific Crest

Okay. That's helpful, thank you.

Operator

Your next question comes from the line of Yuheng Fan of China Renaissance. Your line is open, please go ahead.

Yuheng Fan - China Renaissance

I have a question regarding the Zhixing agreement. I understand it is still in the early stage but appreciate any color on the how Baidu will present the Zhixing search results in a more organized way than have divert traffic to qunar.com. Thank you.

Chenchao (CC) Zhuang

First of all, the product is still early stage we haven't -- so launched -- it's a very small scale testing mode at this moment. And the way to present this is to simply look at Google Flights or Google Hotel Finder present in the Google search result. It will be very similar, very similar format.

Yuheng Fan - China Renaissance

Thank you.

Operator

Your next question comes from the line of William Huang of Barclays. Your line is open, please go ahead.

William Huang - Barclays

I have two questions. First question, given that we may have planned to build up our own call center, if so could you share with us the rationale behind that and then my second question is we have 100 million accumulated downloads which is quite impressive. Can you comment on your marketing strategy and how we usually promote our mobile products versus our peers? Thank you.

Chenchao (CC) Zhuang

For first question, we do not have a plan to build a call center. We do have a very small scale call center to serve the consumer emergency needs and the complaints, with conflicts, complaints with the travel service provider. So we don't have the plan to enlarge the call center business at all.

And for the second question, we actually don't spend much on the mobile application download. We achieved 100 million download mostly due to the organic download. Basically, consumers going to app store, search our applications and download it.

So the marketing cost on the mobile business is relatively low. For us, we totally believe that the product is a key on the mobile business. So instead of investing heavily on TV, on offline ads, we don't use that. We shift the budget to hire high engineers and develop more functions. We believe that a superior consumer experience is the best advertisement that we can do for our mobile business.

Operator

Your next question comes from the line of Eddy Leung of Merrill Lynch. Your line is open, please go ahead.

Eddy Leung - Merrill Lynch

Just a couple of quick ones. The first one is about your revenue mix. I'm wondering if you could update us on the revenue coming from your OTA partners and how many OTA partners you have been working with in the third quarter. And then my second question is about your CPC outlook. Could you update us on how does the CPC trends are going into the fourth quarter? Thank you.

Sam Hanhui Sun

Eddy, this is Sam. For the first question, how many OTAs we're working with? Right now, we are working with over 1,500 OTAs. And in terms of the revenue contribution, I think both on the flight side and then the hotel side, the OTAs contributed more than half, the majority part of the flight P4P revenue and the hotel P4P revenue. And this number actually increased from Q2, because Q2 we worked with over 1,200 OTAs.

And the second question about the CPC trend. I think going into Q4, the CPC trend should be similar as Q3 overall speaking because we don't have any plan to increase the CPC price in Q4 this year.

Operator

Your next question comes from the line of Tian Hou of T.H. Capital. Your line is open, please go ahead.

Tian Hou – T.H. Capital

I have about a couple of questions. The first one is really related to your mobile strategy. So for the SaaS system, so Sam you mentioned, is the seamless connection of your PC -- and so how does the pay-for-performance model work for those travel service providers are not participating in such SaaS system? So that is the number one.

And also, I want to know from your experience, PC and mobile, what are the user behaviors or different, in which part they are different. So that's number two on mobile.

Number three on mobile. And we noticed that the revenue per thousand mobile search queries is lower than the revenue per thousand web search queries. So what would be the trend look like? So that's the three small questions on mobile.

Sam Hanhui Sun

Tian, this is Sam. For the -- actually on mobile because most of the TSPs, the hotels, the OTAs already on our SaaS system. As we discussed previously today already, 86% of flight clicks on SaaS and 58% of the hotel clicks are on SaaS. So already majority of the business is on SaaS. So if this TSP is on SaaS, then consumers can see their products on mobile as well because mobile and SaaS they are already interlinked.

Then consumers can search for product on SaaS, can click, can do the transaction on mobile as well. So the P4P still works. I mean P4P basically is just whether we want to price, to get the revenue from -- in the CPC format or CPS format.

So people can still work on mobile. It's just that we don't direct the traffic to a third-party website, all the transactions happen on SaaS. And as of today, only Ctrip and E-Long, two major OTAs, are not our SaaS system. Everyone else is on our SaaS, so mobile side consumer can still see very comprehensive product information and can still search, can still do the transaction.

And for the second one about the user behavior difference, I think mobile, because there are some unique characteristics of a mobile. First is, mobile is a small screen and secondly, people carry mobile all the time. So people tend to do most searches on mobile. Because screen is small, they need to more search they need to scroll down, they need to flick the pages and also they carry the mobile phone so they can do more search just for informational purposes. And also mobile has this location-based function.

So there will be more mobile searches that is for the same city or nearby hotels, nearby sightseeing places. So this are the user behavior difference, PC versus mobile. And because of this, we see on mobile travel, there's also a big opportunity out there that consumers or travelers on the go, travel information needs. Now, they are already on the road, they'll also find the information nearby and they want to follow up on their orders or their flight and hotel bookings. So then you can use mobile to have access to the information. We think that's a big opportunity out there and we want to address that opportunity.

And the last part about the revenue per thousand queries is slower than PC. Yes, that's right. But we think that's understandable because as we discussed, the user behavior on mobile is different from the user behavior on PC. Consumers just tend to search more on mobile.

So if we look at -- as consumers are searching more on mobile, the conversion rate from search to click, from click to transaction, the conversion rate will be lower on mobile than on PC, and because of that, of course, we need to when we charge the TSPs on (inaudible), we need to charge a lower percentage. But if we look at the ultimate transactions, if we look at the take rate, it's actually very similar

As I already discussed in my prepared remarks, in the hotel sector, our mobile search accounts for 53% of the search queries. But in terms of the transaction volume, in terms of the hotel room night booking, the mobile search is 31% of the total hotel on mobile, I mean, the mobile booking is 31% on the hotel.

But, the mobile revenue on hotel side is also 33% of the total hotel revenue. So you could see the 31%, 33%, the transaction percentage and the revenue percentage is actually pretty similar.

Chenchao (CC) Zhuang

Two things, as you know, to add one is from the inventory and the content point of view, mobile is the same as the PC because majority of travel services providers airlines and hotels participated our SaaS both PC and mobile side and some of the services provider do not participate on SaaS on the PC side but they do participate on our mobile side. And also that we have lot of new content exclusive for the mobile to meet the difference, so if we will just purely look onto the product coverage, the price advantage on mobiles and PC side are very similar.

And it's similar for when you look at to the coverage and ratio, it is lower from the search to transaction, but if you look at the transaction procession on mobile, it's very similar on PC side. So it's just very similar on the mobile side that the same amount of consumers tend to do more search but end up in the same amount of the transaction. So, did that answer your questions?

Operator

(Operator Instruction). Your next question comes from the line of Henry Guo of ABR Investments. Please go ahead.

Henry Guo – ABR Investments

Thank you for taking the question. A quick one, so regarding Q4 guidance, so you guys get top line acceleration in Q4. So, can you just provide some color in terms of what really drives this acceleration? Is it because of the mobile strength or maybe Baidu traffic partnership or maybe just as you mentioned, you're going to scale back the coupon program in Q4?

Sam Hanhui Sun

Henry, a couple of the reasons. Number one, of course, we see Qunar brand name is becoming more and more popular among Chinese travelers. So because of this, we do see the growth of our organic traffic and of course this successful IPO also helps spread out our Qunar brand name.

So we do see some traffic peak up. So this is the number one reason we think the revenue growth can accelerate in Q4. Number two reason is this mobile initiative. We do see stronger mobile traffic, so this can also help the mobile revenue growth and overall revenue growth.

And as to this Baidu Zhixing it's still early stage and the plan is still officially launched this Zhixing beginning of next year. And we also believe the Zhixing traffic will kick in gradually not just on day 1, the Zhixing traffic all kicks in. So, the Zhixing traffic should not have any significant impact in our Q4 revenue.

Operator

Your next question comes from the line of Ming Zhao of 86Research. Your line is open. Please go ahead.

Ming Zhao – 86Research

Well, thank you. Good morning. I have a question on your OpEx and the margin. So we understand you are in very aggressive invest mode, but if we really look at your Q3 product and development expense, it is a step up from Q2 level.

So my question is for this line, should we look for more same magnitude kind of increase quarter over quarter going forward as you hire more engineers? And also on the marketing expense, given that you have raised a lot of money from the IPO, will you be thinking about building your brand, spending more on your branding in the future, and finally your thoughts on your margin outlook in next couple of years?

Sam Hanhui Sun

Ming, for the product development expenses, yes, we've been aggressively hiring engineers and product people in Q3. We think this trend will continue, however in terms of whether the hiring will and (inaudible), the growth of the product development expenses can outpace the revenue of growth. We don't know.

And we don't want to confine ourselves from hiring more talented engineers and product people. So, we will still aggressively hire in more people, but we also need to look at how many talent people are out there in the market.

In terms of the sales and marketing expenses, as we discussed, we still believe the best way to spread out this Qunar brand name is to build the best user experience.

So we prefer more to hire people to build the best user experience, instead of spending on offline branding to marketing or branding campaign. So that's not the direction we want to go.

And regarding the net margin for next couple of years, when we look at our business, actually, there are several business units, the flight business unit, the hotel business unit and mobile and new initiative. Flight business is actually relatively more mature business inside Qunar Company.

And flight business internally, when we look at the flight business, it actually already enjoy very decent net margins. The net margin could be as good as other industry players in their best periods.

So, looking into the future, the way we look at our net margin is that flight business will continue the good performance, the high growth, and the good margin. And the hotel business, it could happen as it can continue grow as fast as it has been doing this several quarter. Then, in two to three years, hotel business will also reach the critical mass. Hotel business will be of similar size as the flight business today.

Now, hotel business will also have a pretty decent margin. And we will always have new initiatives we need to invest on. So, we will have some more mature business having a pretty good margin and we will also need to spend and invest heavily in new initiative and a more balanced and blanket net margin will be around net -- non-GAAP net margin will be around 25% to 30% going into the future.

Operator

We are now approaching the end of the conference call. I will now turn the call over to Mr. CC Zhuang of Qunar for his closing remarks.

Chenchao (CC) Zhuang

Once again, thank you everyone for joining the call today. If you have any further questions, please do not hesitate to get in touch with us. Goodbye.

Operator

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

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