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eLong, Inc. (NASDAQ:LONG)

Q1 2010 Earnings Call Transcript

May 20, 2010 8:00 pm ET

Executives

Guangfu Cui - CEO

Mike Doyle - CFO

Philip Yang - Investor Relations

Analysts

Ming Zhao - Susquehanna International Group

Operator

Good day to everyone and welcome to eLong's First Quarter 2010 earnings report conference call. (Operator Instructions) I will now hand over the line to Philip Yang and I will be standing by for the Q&A session. Please go ahead, thank you.

Philip Yang

Hello everyone, thank you for joining eLong's first quarter 2010 conference call.

Today, Guangfu Cui, our CEO, will make some remarks about the company's performance in the first quarter 2010 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 full text of the Safe Harbor Statement in our 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 30% year over year to RMB101 million, and positive income from operations. We are seeing results both from our efforts to drive online growth, and from a healthy pick-up in travel industry demand in China.

We have now increased hotel coverage 44% to approximately 11,200 hotels from approximately 7,800 as of March 31, 2009. In addition, eLong.com now offers our customers more than 100,000 hotels worldwide through our seamless interface with Expedia. This makes eLong.com the largest online distributor in China in terms of hotels offered which can be directly booked. 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.

We have run our "e-coupon" promotion for 6 months. E-coupon offers discounts of up to 100 reminbi off hotel bookings made online. The E-coupon has reinforced eLong's brand position of "real savings and a worry-free booking experience," and rewarded customers for transacting online. We have been also investing on line marketing focusing on search. We are happy to see the continuing growth of our online hotel 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.

We have been improving our customer experience both online and offline. In the first quarter, our call center continued its high quality service with an over 99% customer satisfaction rate and a 92% very satisfied rate. After months of testing, today we formally launched our mobile phone booking platform, m.eLong.com.

We launched our air ticket plus hotel room dynamic packages in January 2010. Booking air tickets and hotel rooms together as a package gives consumers additional savings, and thus further enhance the eLong brand proposition of "real savings and a worry free booking experience"!

Our priorities in 2010 remain the same as shared with you last quarter.

1) to upgrade our product and service offerings such as dynamic packages, hotels, and air tickets;

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

3) to continue our efforts to launch effective online marketing programs; and

4) to 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 the first quarter, we delivered a significant acceleration in year-on-year revenue growth to 30% and continued to make progress on our efficiency improvement initiatives. As a result, we were profitable in this quarter. Income from operations was RMB6.3 million, an increase of RMB9.6 million from our loss from operations of a year ago and net income was RMB5.9 million, an increase of RMB3.9 million from our net income of a year ago.

Our Q1 Y/Y performance benefited from a weak quarter a year ago due to the impact of the global financial crisis in 2009. However, our quarterly results were also driven by improved conversion, both on and offline, due to our broader hotel inventory portfolio, improved customer service and our promotional activities. We drove further efficiencies in Sales & Marketing expenses, by increasing spend in higher efficiency on-line channels and reducing expenses offline.

We also leveraged a greater mix of online bookings and improved call center conversion to offset the lower revenue per room night in our hotel business and the lower margin of our increasing mix of air bookings.

In the first quarter, hotel commission revenue increased 23% 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 7% year-on-year primarily due to mix shift to lower ADR budget hotels and the impact of our coupon program. Room nights booked through eLong increased 32% year-on-year to 1.2 million. Hotel revenue now represents 64% of our total revenue down from 68% in the prior year quarter.

Air ticketing commissions increased 38% for the first quarter of 2010 compared to the prior year quarter, driven by a 29% year-on-year increase in air segments to 653,000 and an increase of 8% in the average ticket price compared to the prior year quarter. Air revenue grew to 28% of total revenues up from 26% in the prior year quarter.

Other revenue increased 78% year-on-year for the first quarter of 2010. Other revenue is primarily online advertising from our websites and related offline activities. Other revenue grew to 8% of total revenues from 6% in the prior year quarter.

Total operating expenses increased 10% or RMB5.8 million for the first quarter of 2010 compared to the first quarter of 2009. Total operating expenses were 62% of net revenues, down from 74% in the prior year quarter.

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 40% in the first quarter of 2010 compared to the prior year quarter, mainly driven by an increase in headcount and higher employee compensation. New Service Development hires were deployed to continue improving our technology systems and expand our hotel coverage. Service development expense increased to 18% of net revenues from 17% in the first quarter of 2009.

Sales and marketing expenses for the first quarter of 2010 increased 6% or RMB1.9 million over the prior year quarter, mainly driven by increased online marketing promotion expenses. Improvements in marketing efficiency were a result of greater conversion online and decreased headcount in offline sales channels. Sales and marketing expenses declined to 33% of net revenues in the first quarter of 2010 from 41% in the same quarter of the prior year.

General and administrative expenses for the first quarter 2010 decreased 10% compared to the prior year quarter, mainly driven by a decrease in professional fees. General and administrative expenses decreased to 11% of net revenues in the first quarter of 2010 from 16% in the same quarter of the prior year.

Other income and expense, which represents interest income, foreign exchange gains or losses and other income or expense, was RMB1.8 million in the first quarter of 2010 which was mostly interest income, compared to RMB5.7 million in the first quarter of 2009 reflecting the lower interest rate yields on our cash available in the market today. Net income for the first quarter was RMB5.9 million compared to net income of RMB2.0 million in the prior year quarter.

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 March 31, 2010 were USD139.5 million. As a reminder, the majority of our cash is held in US dollars. We are therefore subject to exchange rate risk associated with these balances based on fluctuation in the exchange rate between the USD and RMB.

In 2010, we have also acquired two online hotel booking agencies. eLong has built an efficient and scalable business both online and offline. By offering our inventory and systems to both our affiliate and our acquisition partners, we can eliminate redundant expense, help subscale players compete effectively and generate new sources of revenue for eLong. As part of this strategy, we acquired the hotel reservation businesses of SunnyChina and Sinohotel. SunnyChina.com is a predominantly online provider of hotel booking services based in Xi'an. Sinohotel.com is an online hotel booking company targeting international inbound travelers to China and is based in Beijing.

And finally, let me share with you our Business Outlook for the second quarter of 2010. So far in Q2, we are seeing ADRs in each star rating category up slightly Y/Y, though mix shift to budget hotels is holding our blended ADR flat Y/Y. In the air business, we are seeing continued improvement Y/Y in average ticket prices. We expect Q2 Net Revenues, net of business tax and surcharges, to be within the range of RMB102 million to RMB111 million, equal to an increase of 25% to 35% compared to the second quarter of 2009.

In this quarter's release, you may have noticed the inclusion of a new Non-GAAP financial measure, quarterly OIBA figures or Operating Income Before Amortization. The objective in sharing OIBA is to make investors aware of an internal metric on which our management is compensated and to provide a closer approximation of cash operating income. For a definition of OIBA and a reconciliation to Income/ or (loss) from operations, please review our Q1 release. OIBA in Q1 was RMB 10.3 million, which is an increase of RMB 11.1 million from a negative RMB 0.8 million in Q1 2009. Historical quarterly OIBA data for each quarter of 2009 is included in the release.

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

Thank you, sir. We will now move on to the question and answer session. (Operator Instructions) thank you.

Our first question is coming from the line of Ming Zhao from Susquehanna International Group. Please go ahead.

Ming Zhao - Susquehanna International Group

Okay, thank you very much Guangfu and Mike for the call. So, if I look at the airline business and the hotel business it seems like the airline ticketing business has been accelerating in terms of year-over-year growth, so could you show us why this business is growing fast, is it because of smaller base or something else you have done to drive the growth there?

Guangfu Cui

Yeah, Ming this is Guangfu. I will take the question. We did have a lower base year ago due to the financial crisis in 2009. So we have a easy comparable versus year ago and we do see the demand pick up a lot in the first quarter of 2010, so that is one of the reasons.

The second is that we are still fine-tuning our operation model for our air business being that we will be testing to get rid of cash business in several states and that you may see a massive impact as a matter of fact to our top line growth in Q2 and going forward.

But hopefully it will be offset by improved service for the target segment of credit card concessions. As of first quarter, our credit card, our online debit card payments, our third-party kind of non-cash payment method is about 84% of our total air business.

So going forward, we will gradually moving out the costly cash handling business. So that will really make eLong a big centralized e-platform kind of operator in China rather than the current hybrid of central platform plus branch-office model.

So that will really kind of set a scale about operational model for eLong going forward as we are no longer need the branch office to expand to the third level or second level status in China. So you will see some dramatic change in our business going forward.

Thank you, Ming.

Ming Zhao - Susquehanna International Group

I see. And then I have another question on the hotel side. You mentioned about the hotel ADR over the - commission trend being slightly down due to the mix shift towards more budget hotel. But, when we look at hotels booking, volume (inaudible) the OTAs, it is quite small, so could you give us the - give us some color why it is a discrepancy here, why that impacts the ADRs here?

Mike Doyle

Sure. I think you are correct in that the OTA volume into the budget hotels is a smaller portion - small portion of their demand as they have been pretty focused on building direct demand to their sites. However as a group, the budget sector for eLong is very important. It is our fastest growing sector and one of our largest which is why any mix shift in that sector can have an material impact on our ADR.

Ming Zhao - Susquehanna International Group

Okay. All right thank you. I will get into the queue.

Operator

Thank you, sir. (Operator Instructions) We will pause for a few moments, thank you.

We have a follow-up question from Ming Zhao, please go ahead.

Ming Zhao - Susquehanna International Group

Okay, still me. Let me ask you about the acquisitions you have made. It seems like those are very small if I look at - the goodwill increased, so why that's important to you or good for your future growth? Could you give us some color on those two websites?

Mike Doyle

Our immediate focus in looking acquisition target is to be able to bring more demand into the top of our funnel. As I mentioned in our prepared remarks, we have built a very scalable platform online and offline at eLong and it give us a great benefit to being able to open up that platform to new sources of demand whether that's technology or our hotel inventory.

So, in these first two acquisitions, we were able to immediately expand the inventory base of both companies and eliminate significant amount of expense in both organizations. We believe that it was prudent to start with small acquisitions to just to prove out our investment thesis as well, we believe that having these small businesses gives us a platform to try new ideas which we have - already begun to launch new initiatives.

They are slightly different models. One is focused on - Sunnychina.com is focused on domestic online hotel demand and Sinohotel is a new niche for us and their focus is on bringing inbound travelers to China and operates in several different languages.

So, they both have things that - both businesses have opportunities for us to try new initiatives and also it fulfill our requirements of bringing new demand into the top of our funnel.

Ming Zhao - Susquehanna International Group

Okay. Well, I have two more questions. So, another question is, I remember that you have some B2B business which you are de-emphasizing. Could you give us an update there? Has that already become insignificant?

Guangfu Cui

The B2B business is still a good portion of our business. It is ranging from a quarter to one-third. And it has some fluctuations quarter-over-quarter, but the Q1 has 3% jump in B2B business compared with year ago. So, we are seeing our core business, our B2C business and especially our online business growing faster than the B2B business, which is good and healthy (inaudible). Thank you.

Ming Zhao - Susquehanna International Group

Okay, thank you. And last question - a question on the - just on the industry dynamics. If we look at China's hotel booking industry, it seems like there are some emerging GDS and I believe eLong has also been working with - joined their network to cut the hotel inventories, but it seems like your biggest competitor did not use the GDS. So, maybe could you give us some thoughts on why you want to use versus competitor actually rejecting them.

Guangfu Cui

Yeah, I think there is some - let me clarify first. eLong has directly contracted over 11,000 hotels in China and we are, as a matter of fact the largest GDS in China because we also supply to more than 3,000 affiliate partners. The GDS you are talking about namely (inaudible), HUBS1, we have - you know, their number of hotels contracted is a lot less than eLong.

So normally you will have a GDS that has greater number of hotels covered in their systems. But in China, it is a contradiction - it is the opposite that eLong actually has bigger number of hotels offered. So, that is number 1.

Number 2, we work with switch-type of deals with CHINAonline and we are open also to work with other switch companies meaning that the way we will work with them, to directly connect with hotels so that we can provide better customer service for example, instant confirmation to our customers.

We work with China online, not sourcing hotels from them but connecting directly to hotels via CHINAonline. So, I hope that answer your questions Ming.

Ming Zhao - Susquehanna International Group

Oh, that's very, very clear. Thanks for the clarification. Thank you very much Guangfu and Mike.

Guangfu Cui

Thank you.

Mike Doyle

Thank you.

Operator

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

Guangfu Cui

Yes, I just want to follow up on my previous quarter's comment about online growth. I think lot of our investors do care about our online growth. And I said in that quarter that I will give more color at Q2 earnings release, this is first quarter; but I want to assure our investor that we have seen accelerated growth for online hotel bookings and we are very happy to see that type of growth rate.

Right now, our online portion of the business is over one-third. And we are working hard to continue to improve online mix and that is our goal and vision to become the biggest and the most intelligent online marketplace in China.

With that, I want to end this conference call. Thank you all for being on this call. Thanks.

Operator

Thank you. And that concludes today's conference. On behalf of eLong, we would like to thank you all for your participations. All lines may now disconnect and good day to you all. Thank you.

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