eLong, Inc. Q4 2009 and FY2009 Earnings Call Transcript

Mar. 4.10 | About: eLong, Inc. (LONG)

eLong, Inc. (NASDAQ:LONG)

Q4 2009 Earnings Call Transcript

March 3, 2010 7:00 pm ET

Executives

Philip Yang - Investor Relations

Guangfu Cui – CEO

Mike Doyle – CFO

Analysts

Ming Zhao – Susquehanna International Group

Eddie Leung – Banc of America/Merrill Lynch

Operator

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

Philip Yang

Hello everyone, thank you for joining eLong's fourth quarter 2009 conference call.

Today, Guangfu Cui, our CEO, will make some remarks about the company's performance in the fourth quarter 2009 and full year 2009 followed by Mike Doyle, our CFO, who will provide additional detail on our financial results. Following their prepared remarks, Guangfu and Mike will be available to take your questions.

Before the management presentations, please allow me to read our Safe Harbor Statement. During this conference call representatives of the company will make certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These statements are based upon management's current views and expectations with respect to future events and are not a guarantee of future performance. Furthermore, these statements are, by their nature, subject to a large number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements as a result of a wide variety of factors.

eLong undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. Please refer to the risk factors described in our Annual Report on Form 20-F, as well as the risks discussed in the Safe Harbor Statement in the company's Form 6-K, which will be furnished to the SEC in connection with our press release and this conference call, for discussion of some of the important factors that could affect future results.

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

Guangfu Cui

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

We are happy to report another quarter of double digit top line growth with net revenues growing 18% year over year to RMB101 million and our third consecutive quarter of positive operating income.

As we shared with you last quarter, we launched our "e-coupon" promotion offering discounts of up to 100 reminbi off hotel bookings made online. The E-coupon reinforced our brand positioning of "visible savings and a worry-free booking experience", and rewarded customers for transacting online, which incurs lower fulfillment costs for eLong. Moving more business online helps offset the margin pressure from an increasing mix of lower margin air bookings and the decrease in hotel average daily rates. We are happy to see growth of our online bookings in the past few quarters, and will keep driving business online going forward as we believe this represents the best opportunity for our long term growth.

In the fourth quarter, our call center continued its high quality service with a 99.7% customer satisfaction rate and a 92.5% very satisfied rate. We also increased hotel coverage over 36% to approximately 9,800 hotels by the end of 2009 from approximately 7,200 a year ago, and more than 10,000 hotels in China by the end of January, 2010. In addition, eLong now offers its customers more than 100,000 hotels worldwide by connecting with Expedia. This makes eLong.com the largest online distributor in China in terms of hotels offered. We will continue to expand hotel coverage in areas where we see demand from our customers. This effort is in line with our vision, which is to become the largest online travel marketplace in China.

After months of preparation, we launched our air ticket plus hotel room dynamic package in January 2010. Consumers can pick the travel dates at their choice and put together their own package. Booking air tickets and hotel rooms together as a package, will give consumers additional savings. Dynamic package will further enhance the eLong brand proposition of "visible savings and a worry free booking experience"! In addition, through searching and website booking technology innovation, we have completely upgraded our online international ticket booking experience. Consumers can now book international tickets on eLong.com as easily as booking a domestic ticket.

Our priorities in 2010 are as follows:

1) to launch dynamic package, and upgrade our product and service offerings such as international and domestic hotels, and international air tickets;

2) to further improve consumer booking and after sales service experience online; and

3) to continue our efforts to launch effective marketing programs and work with hotel and air suppliers to procure competitively priced products for our customers.

Successful execution of our priorities and plans remains critical, and we remain confident and committed to the long-term growth of our business.

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

Mike Doyle

Thank you, Guangfu. In 2009, we were able to achieve revenue growth of 9%, ending the year with Q4 revenue growth of 18% Y/Y which was slightly above our Q4 guidance range. We were also able to deliver our third consecutive quarter of positive operating income and our fourth straight quarter of positive net income in 2009. Operating income was RMB2.4 million, an increase of RMB12.6 million from our loss of a year ago and net income was RMB1.0 million, an increase of RMB9.2 million from our loss of a year ago. 2009 marked our first full year of profitability since 2006.

Our Q4 Y/Y performance benefited from a weak quarter a year ago due to the impact of the global financial crisis. However, our quarterly results were also driven by a solid October National Day holiday travel period and improved conversion both on and offline due to our broader hotel inventory portfolio, a higher rate of instantly confirmed hotel bookings and our promotional activities. We drove further operational efficiencies in Sales & Marketing expenses again with some benefit of an easier year-on-year comparable given some inefficient offline and online spend in the same quarter a year ago.

We also leveraged a greater mix of online bookings, improved call center conversion and achieved further efficiencies to offset the lower revenue per room night in our hotel business and the lower margin of our increasing mix of air bookings. At the same time, we recognize that as our cost cutting initiatives began in 2009, we may experience more difficult year-on-year expense comparables as we lap those cuts in 2010.

In the fourth quarter, hotel commission revenue increased 7% compared to the prior year quarter, primarily due to higher volume, which was partially offset by lower commission per room night.

Commission per room night decreased 9% year-on-year primarily due to lower average daily rates which were down 9% Y/Y, including a mix shift to lower ADR budget hotels. Room nights booked through eLong increased 18% year-on-year to 1.2 million. Hotel revenue now represents 68% of our total revenue down from 75% in the prior year quarter.

Hotel commission revenue for full year 2009 increased 1% compared to 2008, primarily due to higher volume, which was partially offset by lower commission per room night. Commission per room night decreased 7% year-on-year primarily due to lower average daily rates, including a mix shift to lower ADR budget hotels, partially offset by an increase in hotel commission rates.

Room nights booked through eLong in 2009 increased 9% year-on-year to 4.3 million.

Air ticketing commissions increased 44% for the fourth quarter of 2009 compared to the prior year quarter, driven by a 26% year-on-year increase in air segments to 586,000, an increase of 4% in the average ticket price Y/Y and an increase in the average commission rate compared to the prior year quarter. Air revenue grew to 26% of total revenues up from 21% in the prior year quarter.

Air ticketing commissions increased 24% for full year 2009 compared to 2008, driven by a 23% year-on-year increase in air segments to 2.2 million, and an increase of 2% in the average ticket price Y/Y, partially offset by a decrease in the average commission rate compared to the prior year. Air revenue grew to 25% of total revenues up from 22% in 2008.

Other revenue increased 71% year-on-year for the fourth quarter of 2009. Other revenue is primarily online advertising from our websites and related offline activities. Other revenue grew to 6% of total revenues from 4% in the prior year quarter.

Other revenue increased 50% year-on-year for full year 2009. Other revenue grew to 7% of total revenues from 5% in 2008.

Total operating expenses decreased 3% or RMB2.1 million for the fourth quarter of 2009 compared to the fourth quarter of 2008. Total operating expenses were 68% of net revenues, down from 82% in the prior year quarter.

Total operating expenses decreased 12% or RMB32.3 million for full year 2009 compared to 2008. Total operating expenses were 67% of net revenues, down from 83% in 2008.

Service development expense consists of expenses related to technology and our product offerings, including our websites, platforms, other system development and our supplier relations team.

Service development expense increased 34% in the fourth quarter of 2009 compared to the prior year quarter, mainly driven by an increase in headcount. Service development expense increased to 17% of net revenues from 14% in the fourth quarter of 2008.

Full year 2009 service development expense increased 11% over full year 2008 service development expense mainly driven by an increase in headcount, partially offset by a decrease of professional fees. Service development as a percentage of net revenues in 2009 was unchanged compared to 2008.

Sales and marketing expenses for the fourth quarter 2009 decreased 16% or RMB7.1 million over the prior year quarter, mainly driven by more focused marketing spending and stronger growth in transactions from higher efficiency marketing channels. We also decreased labor costs and sales commissions. Sales and marketing expenses declined to 38% of net revenues in the fourth quarter 2009 from 53% in the same quarter of the prior year.

Sales and marketing expenses for full year 2009 decreased 19% over full year 2008, and decreased by 13 percentage points to 37% of net revenues when compared to 2008. The decrease was primarily driven by decreased marketing promotion expenses, labor costs and sales commissions.

General and administrative expenses for the fourth quarter 2009 increased 11% compared to the prior year quarter, mainly driven by an increase in labor costs. General and administrative expenses decreased to 13% of net revenues in the fourth quarter of 2009 from 14% in the same quarter of the prior year.

General and administrative expenses for full year 2009 decreased 11% over full year 2008, primarily due to a decrease in professional fees and lower bad debt provisions, partially offset by an increase in labor costs. General and administrative expenses as a percentage of net revenues decreased by 2 percentage points to 14% in the full year 2009.

Other income and expense, which represents interest income, foreign exchange gains or (losses) and other income or (expense), was RMB1.2 million in the fourth quarter of 2009 which was mostly interest income, compared to RMB8.0 million other income in the fourth quarter of 2008.

Other income was RMB12.4 million in full year 2009 compared to other expense of RMB31.9 million in 2008.

Net income for the fourth quarter was RMB1.0 million compared to net loss of RMB8.2 million in the prior year quarter.

Net income for full year 2009 was RMB19.9 million, compared to net loss of RMB76.6 million in 2008.

Moving to our Balance Sheet, I'd like to mention that the Company's cash and cash equivalents, and short-term investments balances as of December 31, 2009 were USD139.6 million. As a reminder, the majority of our cash is held in US dollars. We are therefore subject to a certain amount of exchange rate risk associated with these balances based on fluctuation in the exchange rate between the USD and RMB.

And finally, let me share with you our Business Outlook for the first quarter of 2010. So far in Q1, we are still seeing continued Y/Y declines in hotel ADRs though less negative than the past few quarters. We expect continued mix shift to budget hotels which will also have an impact on the ADR. In the air business, we are seeing some improvement Y/Y in average ticket prices. We expect Q1 Net Revenues, net of business tax and surcharges, to be within the range of RMB86 million to RMB93 million, equal to an increase of 10% to 20% compared to the first quarter of 2009.

This concludes my remarks; and, Guangfu and I look forward to any questions you may have. Moderator, if you would now open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is coming from the line of Ming Zhao from SIG. Please go ahead.

Ming Zhao – Susquehanna International Group

Thank you for the call. Good morning Guangfu and Mike. I have several questions here. First of all, we have seen a lot of initiatives on the online booking side. Could you share with us the percentage of booking from online? How is that trending?

Guangfu Cui

Yes, Ming, this is Guangfu. I will take your question, and what we have seen in the past four quarters is a kind of accelerated growth online, especially for our hotel business, which we put a lot of effort and promotion and online marketing to address the hotel business online. We have seen significant improvement on that. Direct now overall for the company we are seeing a slightly over one-third of transactions online, you know average. Thank you.

Ming Zhao – Susquehanna International Group

Okay. Could you remind us what is the year ago quarter in terms of the percentage?

Guangfu Cui

A year ago –

Mike Doyle

Our (inaudible) online has been around one-third of total transactions over the past several quarters. That number has increased, but we've only disclosed that it has been around one third.

Ming Zhao – Susquehanna International Group

Okay, right. And the second question is it looks like the strength of the business is more on the air ticketing side. Is there anything specifically you have done to drive that versus…?

Guangfu Cui

Factory, Ming this is Guangfu. Factory [ph] our hotel business also strengthened. The reason you see that our business is not increasing as significant as our is due to our shrinking business in hotel part due to the B2B offline affiliates, which I've mentioned that in the previous earning release, and it's really – we are growing very strongly in B2C segment, but we do have our offline affiliate which decreased, you know, double-digit rate. So that cost to slow down of growth in hotel business. So we are seeing our business strengthen across our hotel and our business.

Ming Zhao – Susquehanna International Group

When do you think the impact from the B2B segment will be minimal and not you know, impact the overall growth of hotel?

Guangfu Cui

It will be a couple of more quarters because right now our B2B business is still about 30% of our business. So that business is not growing.

Ming Zhao – Susquehanna International Group

Okay and lastly, Mike, what's the tax rate, the income tax rate, you used in the quarter? It seems a little bit different than previous quarters.

Mike Doyle

Our effective tax rate for the year was about 15% in Q4. What you’ll see in the disclosed results was evaluation allowance. So eLong has still in a cumulated net loss position, and therefore we can just take a tax evaluation allowance in Q4.

Ming Zhao – Susquehanna International Group

Okay. I see. All right. Thank you. I will go back to the queue.

Operator

Thank you, sir. Our next question is coming from the line of Eddie Leung from Banc of America. Please go ahead.

Eddie Leung – Banc of America/Merrill Lynch

Hey, good morning Guangfu and Mike. We saw that there was a decline in the commissions per room night. And you also mentioned that one reason would be the weakness in the ASP. I'm wondering how much of the weakness coming from a mix shift, and how much coming from a general decrease in hotel prices year-over-year?

Mike Doyle

Yes, this is Mike. And the decline in hotel revenue per room night is actually three factors. One is the decline in average daily rate, the other is mix shift to budget hotels, and the third is the impact of our eCoupon promotion, which began in September of 2009. The biggest percentage – the biggest impact is from the declining ADR, sort of the second impact, the second-largest impact would be from the mix shift, the budget hotels, and the third is from the eCoupon.

Eddie Leung – Banc of America/Merrill Lynch

Understood and could you also share with us the outlook on the ADR side in the industry given we are moving close to I would say some Chinese festival as well as the Shanghai Expo. Thanks.

Mike Doyle

So, what we've seen in the first quarter is ADRs that are slightly down year-on-year. So a big – it is much less negative than we saw in Q4, which was down 9% year-on-year, but we don’t know what will happen in March. On the ticket side, we have seen some positive growth year-on-year through the first two months of the quarter, single, low single digits.

Guangfu Cui

Just want to add one point to Mike's comment that we are seeing the ADR kind of getting stable, so that we increase for the four star and five star hotels actually, and you know the budget hotel is stable, but our business, mix shift has an impact of overall ADR for as we sell more rooms for budget hotels. In other words, our budget hotels sector growing faster than the rest of the hotel segment. Thank you, Eddie.

Eddie Leung – Banc of America/Merrill Lynch

Understood. Thank you. I will go back to the queue.

Guangfu Cui

Thank you, sir. We have a follow-up question from Ming Zhao. Please go ahead.

Ming Zhao – Susquehanna International Group

Thank you. Just following on that eCoupon question, so this – is my understanding correct, that this only applies to the hotel booking right?

Guangfu Cui

Yes, only apply to hotel bookings, and only apply hotel bookings online. So if you book, consumer book hotel rooms offline, via call center, they don’t have coupon incentive.

Ming Zhao – Susquehanna International Group

I see. So the impact is that mainly on the revenue line or is that impacting the sales and marketing expense line?

Mike Doyle

The coupon is recorded as a reduction in revenue.

Ming Zhao – Susquehanna International Group

Oh, reduction. So you put the net revenue in there right?

Mike Doyle

That's right.

Ming Zhao – Susquehanna International Group

Okay, I see. And also a general question is if we look at the business on the operating line, it seems like the expense structure, you know, the three lines in the Opex seems to be much more stabilized than the prior years. Can we say that you know, from now on we should look at these numbers and the financial performance will be more predictable? Is that conclusion safe?

Mike Doyle

We're not commenting on the profitability of the business in the future, but we have undertaken very aggressive cost-cutting measures throughout full-year 2009. Those are still underway and will continue through 2010. As I mentioned the, you know, lapping those cuts in 2009 will make the impact smaller in the upcoming year. You know, we are continuing to invest in the business on the technology side. So, you know, we don't expect, you know, any big changes there and we know that when we need to continue to invest in sales and marketing driving demand into the top of the funnel. So we will continue and invest in sales and marketing.

Guangfu Cui

In the cost area, just adding one comment to Mike's, in the cost area one big uncertainty is the cost increase in the Travelsky communication cost. We have seen significant increase in the cost of communication with GDS, which in China is Travelsky. Since Travelsky is the only player in the market. So we have let power to negotiate the fees, but we are actually working with them to see how we can innovate via technology to lower the cost of communication. So if we are able to control that cost, we will be able to kind of see a stable kind of our business operating costs. Thank you, Ming.

Ming Zhao – Susquehanna International Group

Okay. Thank you very much.

Operator

Thank you, sir. This does conclude your questions.

Ming Zhao – Susquehanna International Group

Yes. Thanks.

Operator

Thank you. We have a follow-up question from Eddie Leung. Please go ahead.

Eddie Leung – Banc of America/Merrill Lynch

Hi guys. Just a follow up on the Travelsky cost issue. Could you share with us the proportion of your costs related to that? How sensitive your cost structure is – would be to Travelsky’s increasing pricing?

Guangfu Cui

Yes, normally this cost is you know I'd say that you know it's not becoming, if you see very reasonable, and you know well under control last year in you know Q1 and Q2, and Travelsky increased the price in July last year and increased, the rate of increase is significant and it's now actually become a very large portion of our cost in our ticketing business. So we are working via a number of methods to lower the cost, especially on the technology innovation, and we are working with cost cuts and see how we can lower the cost. We should be able to report that probably in next earning call. Thank you, Eddie.

Eddie Leung – Banc of America/Merrill Lynch

Oh, got that. And my last questions would be about the Shanghai Expo. Could you share with us any initial signs or any initial industry trends you observed because of the Shanghai Expo?

Guangfu Cui

We too prepared for the Shanghai Expo. We have just launched our package south to Shanghai from you know. In China we have now about 30 departing cities to Shanghai as a package. We sell our plus hotel and also we sell our tickets plus hotel and plus the ticket to Expo trade fair. So that has been launched a month ago and we are seeing some orders, but we still need. I think as time getting closer, we would see more booking, but so far it is too early to tell, but apparently there are lot of media, a lot of buzz, and a lot of interest from the mass market to go there and see the trade fair. So, I think it is going to be a big event for the travel industry, and we are very optimistic to you know more business in Shanghai area this year than the previous year. Thank you, Eddie.

Eddie Leung – Banc of America/Merrill Lynch

Thank you very much.

Operator

Thank you, sir. We have a follow-up question from Ming Zhao. Please go ahead.

Ming Zhao – Susquehanna International Group

Hi, thanks. I have two more questions. The first question is you talked about the hotel plus air ticketing, the combined service. How do you record the revenue? Is that in other revenue or you break that down into Air and Hotel?

Mike Doyle

Currently, it is in other travel revenue.

Ming Zhao – Susquehanna International Group

It's in other travel. Okay.

Mike Doyle

As that segment expands we will evaluate our reporting needs, and could break it out in the future.

Ming Zhao – Susquehanna International Group

Okay, thanks for that. The last one I have is, is there any consideration on the cash on the balance sheet? Any update there?

Mike Doyle

You know, we are continuing to evaluate opportunities to minimize any future unrealized FX loss. There are a couple of different things that we can do. We have been in discussions with our board, but nothing we are ready to disclose yet.

Ming Zhao – Susquehanna International Group

Okay, thank you guys very much.

Operator

Thank you, sir. (Operator instructions) There appears to be no further questions at this point in time. I would like to hand the call over to Guangfu for the closing remarks. Please go ahead.

Guangfu Cui

No, there is not really additional information from me now, and you know we are looking forward to another good quarter, and we will be I think at the time of our second quarter release, I think a lot of investors are interested to see our quotes online, and expect percentage. I hope to report to you our second quarter earnings release, which is in the middle of the year, and give you more color on our growth online, and so I would talk to you guys in the next earning call. Thank you. Moderator you may conclude the call now. Thank you.

Operator

Thank you, sir, and that concludes this conference call. All lines may now disconnect and good day to you all. Thank you.

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