eLong CEO Discusses Q2 2010 Results - Earnings Call Transcript

Aug.17.10 | About: eLong, Inc. (LONG)

eLong, Inc. (NASDAQ:LONG)

Q2 2010 Earnings Call Transcript

August 16, 2010 8:00 pm ET

Executives

Guangfu Cui – CEO

Mike Doyle – CFO

Philip Yang - Investor Relations

Analysts

Eddie Leung - Bank of America Merrill Lynch

Fawne Jiang - Brean Murray, Carret & Co

Nan Li - Susquehanna International Group

Operator

Good day to everyone and welcome to eLong's Second 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 second quarter 2010 conference call.

Today, Guangfu Cui, our CEO, will make some remarks about the company’s performance in the second 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 the U.S. Securities Act and 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 proud to report a quarter of strong top line growth with net revenues growing 45% year over year to RMB119 million, and income from operations growing 152% year over year to RMB16 million. We are also happy to disclose that our on-line hotel room nights more than doubled compared to the prior year quarter, and our on-line bookings for all products are now more than one third of our total bookings. Among the factors which contributed to our performance in Q2 were: our efforts to drive online growth; strong demand in China travel industry, and the Shanghai World Expo.

We increased hotel coverage over 40% to approximately 12,200 hotels in the second quarter from approximately 8,700 during the same period a year ago. In addition, eLong.com now offers our customers more than 120,000 hotels worldwide through our interface with Expedia. eLong.com is the largest online distributor in China in terms of hotels offered which can be directly booked. We will continue to expand hotel coverage 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 “eCoupon” promotion for 9 months. eCoupon offers discounts of up to 100 reminbi off hotel bookings made online, and in conjunction with the World Expo in Shanghai, customers can receive coupons for hotel stays in Shanghai equal to the total value of their hotel stay. The eCoupon 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 in online marketing. We are happy to see the continuing growth of our online hotel bookings in the past few quarters, and will keep driving our 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 second quarter, we upgraded our website, which provided customers with faster page loading time and better website availability. Our call center continued its high quality service with a 99% customer satisfaction rate and a 92% very satisfied rate.

Starting from June, on top of increased TravelSky GDS communication fees, our air ticketing business faces new challenges as airlines cut commissions, and as airlines aggressively promote their own websites. To embrace the new challenge, we must simplify our air operations and strengthen our focus on meeting customer needs.

Our priorities in 2010 for the remainder of remain the same as shared with you at the beginning of the year.

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

to further improve online booking and after sales service experience;

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

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 are confident 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 second quarter, we delivered a significant acceleration in year-on-year revenue growth to 45%. We were profitable and continued to make progress on our efficiency improvement initiatives. Income from operations was RMB16.1 million, an increase of RMB9.7 million from our income from operations of a year ago and net income was RMB9.4 million in line with that of a year ago.

Our Q2 year-on-year 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 hotel conversion, both online and offline, due to our broader hotel inventory portfolio, improved customer service and our online promotional activities. 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.

In the second quarter, hotel commission revenue increased 44% 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 the impact of our eCoupon program and mix shift to lower average daily rate budget hotels. Room nights booked through eLong increased 58% year-on-year to 1.5 million. Hotel revenue represents 68% of our total revenues, unchanged compared to the prior year quarter.

Air ticketing commission revenue increased 40% for the second quarter of 2010 compared to the prior year quarter, driven by a 16% year-on-year increase in air segments to 591,000 and an increase of 25% in the average ticket price compared to the prior year quarter. Air revenue now represents 24% of total revenues down slightly from 25% in the prior year quarter.

Other revenue increased 78% year-on-year for the second quarter of 2010. Other revenue is primarily online advertising from our websites. Other revenue grew to 8% of total revenues from 7% in the prior year quarter.

Gross Margin increased to 72% from 71% in the second quarter of 2009 due mainly to improved Air Revenue per Segment and a greater mix of online bookings.

Total operating expenses increased 34% or RMB17.7 million for the second quarter of 2010 compared to the second quarter of 2009. Total operating expenses were 59% of net revenues, down from 63% 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, as well as our supplier relations team. Service development expense increased 43% in the second 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 online user experience, technology systems and to expand our hotel coverage. Service development expense was 16% of net revenues, unchanged compared to the same quarter of 2009.

Sales and marketing expenses for the second quarter of 2010 increased 41% or RMB11.2 million over the prior year quarter, mainly driven by increased online marketing expenses and hotel commission payments to our third-party distribution partners. Improvements in marketing efficiency were a result of greater conversion online and decreased headcount in offline sales channels. Sales and marketing expense was 33% of net revenues, unchanged compared to the same quarter of 2009.

General and administrative expenses for the second quarter 2010 increased 7% compared to the prior year quarter, mainly driven by higher employee compensation. General and administrative expenses decreased to 10% of net revenues in the second quarter of 2010 from 14% in the same quarter of the prior year.

Operating Income Before Amortization or OIBA in Q2 2010 was RMB20.8 million, which is an increase of RMB12.0 million from Q2 2009. OIBA margin was 17.3% up from 10.7% in Q2 2009.

Other income and expense, which represents interest income, foreign exchange losses and other income or expense, was RMB2.9 million of Other Expense in the second quarter of 2010, comprised of RMB3.9 million in foreign exchange losses, partially offset by interest income of RMB1.2 million; compared to RMB3.5 million in Other Income in the second quarter of 2009. Net income for the second quarter was RMB9.4 million compared to net income of RMB9.5 million in the prior year quarter.

Moving to our Balance Sheet, I’d like to mention that the Company’s cash and cash equivalents, short-term investments and long-term investments balances as of June 30, 2010 were USD141.3 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 Q2, we had foreign exchanges losses of RMB3.9 million, compared to foreign exchange losses of RMB0.4 million in the prior year quarter.

And finally, let me share with you our Business Outlook for the third quarter of 2010. So far in Q3, we are seeing ADRs up year-on-year, though mix shift to budget hotels is holding ADR expansion at low to mid-single digit growth year-on-year. In the air business, we are seeing higher average ticket prices year-on-year. We expect Q3 net revenues, net of business tax and surcharges, to be within the range of RMB126 million to RMB136 million, an increase of 30% to 40% compared to the third 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

Thank you. At this time, we will open the floor for questions. (Operator Instructions). Our first question will be coming from the line of Eddie Leung from Banc of America/Merrill Lynch. Please go ahead.

Eddie Leung – Banc of America/Merrill Lynch

Hi, good morning, Mike and Guangfu. A couple of questions. The first one is regarding your air business. Could you share with us more color about the commission rate cuts you mentioned in the call and how should we think about this issue going forward? And a couple of related questions. Could you also talk about your air ticket volume outlook and the reason – in the second quarter, it seems like the air ticket volume on a sequential basis did not grow rapidly, even given a strong travel industry. So that would be my two questions. Thanks.

Guangfu Cui

Eddie, this is Guangfu. I will take your questions and maybe Mike can add something later. I'll just take a step back and to give a broader answer, we are closely monitoring the airline commission environment. We have met with the higher level officers in sales and marketing department of each of the big three Chinese airlines to better understand their intentions and to reaffirm our commitment to providing our airline partners value from our expanding distribution to customer base.

There are several factors impacting our current commission level. Number one, in periods of peak demand such as in the summer, the airlines needs slight assistance to distribute our inventory and reduce the incentive component of our commission. Number two, en routes originating from Beijing and Shanghai airlines have the promotion incentive component of our commission due to the Shanghai World Expo. Number three, some international carriers have reduced base commissions and other incentive commissions.

As a reminder, less than 12% of our business comes from international routes and the airlines that have taken recent actions made up the minority of our international volume. We don't know yet the duration of the air commission cuts. But we are continuing to simply our air operations to improve efficiency and margins and meet the needs of our target customers. We believe that this is the best way to ensure against any impact of potential reduced commissions.

But (inaudible), we are eliminating cash transactions in most cities in China and we expect by the end of the year we will complete eliminating cash transactions at eLong. And we want to focus on serving the credit card customers or other online banking customers and reduce the labor-intensive cash handling, express delivery of itinerary, that type of business.

As has always been the case, the supply and demand situation is constantly changing. Delivery of new planes and the World Expo, and launching of new routes and expansion of high-speed rail are just a few of the factors that can impact the market. However, it is clear that the airlines are attempting to drive more direct business. It is our objective to maintain fair pricing parity with our online partners and continue to demonstrate our value as a meaningful and cooperative decision partner.

Thank you, Eddie. And Mike, do you have anything to add?

Mike Doyle

No. Just as it pertains to our outlook, I think, as others in the industry have seen, a lot of the air growth in the last quarter did come in the back of package tours and group tours. We have just only been in the package tour business for a short time, so the volume for us is immaterial. We didn't actually see a lot of volume improvement from package volumes during this peak booking period and we don't offer group packages. And we have seen the increased aggressive actions of airlines trying to drive direct business to their websites. And as Guangfu mentioned, we did have some impact of eliminating cash as a payment option in some of our cities.

Eddie Leung – Banc of America/Merrill Lynch

Got that. I will go back to the queue. Thanks.

Operator

Thank you. Next question will be coming from the line of Fawne Jiang from Brean Murray. Please go ahead.

Fawne Jiang – Brean Murray

Good morning, Guangfu and Mike, and congrats on a very good quarter. A follow-up question regarding the airline commission rate. You mentioned that you are trying to push the users to use credit cards to complete the transaction. I just wonder, what's the percentage of credit card transaction for the air tickets for the second quarter?

Mike Doyle

Yes. We have a number of non-cash options that we offer our customers that we look at the mix of cash payment transactions and non-cash, and our non-cash is about 85% of total transactions. Non-cash would include credit cards, debit cards, and alternative payment methods such as mobile payment platform, Alipay, Tenpay, and the like.

Fawne Jiang – Brean Murray

Got you. And what's your percentage for online booking in Q2 approximately?

Mike Doyle

Our online transactions are now more than one-third.

Fawne Jiang – Brean Murray

Okay. I want to understand your hotel business a little bit better. Just want to – can you give us some color on your eCoupon program, like how effective you see the program so far and how long you are planning to keep that program?

Mike Doyle

Sure. So we launched our eCoupon program at the end of Q3 2009 and we have gradually expanded the number of hotels that are participating in that program to now more than 10,000 of our 12,200 hotels. We have also expanded the range of potential coupon discounts. We now offer coupons anywhere from 10 yuan to 100 yuan per room night. And customers have responded well to it.

We are closely tracking the number of new customers versus existing customers and the number of absolute room nights that have a coupon associated with the transaction and what we are finding is that it's a great source of new customer acquisition for us and also just providing absolute volume growth as well.

We only recently expanded the number of hotels during Q2. We are continuing to offer the eCoupons to our customers and demonstrate a real price savings to them and have no intended or no planned end date yet in mind.

Fawne Jiang – Brean Murray

Yes, thank you. That's helpful. Also, regarding your outlook, you actually guided 30% to 40% year-over-year growth. How should we look at the different components, airline versus hotel growth for the quarter?

Mike Doyle

We are seeing a continued strength in the hotel business. We – and are also assuming ADR increases as well as I mentioned that we have seen so far quarter-to-date. On the air side, the volume growth is a bit slower than previous quarters, though we are seeing average ticket values increase year-on-year. So we believe the growth is going to come from hotel.

Fawne Jiang – Brean Murray

Okay. Thank you. I'll jump back to the queue.

Operator

Thank you. Next question will be coming from Nan Li [ph] from SIG. Please go ahead.

Nan Li – SIG

Good morning, everyone. Thank you for taking my questions. I have two quick questions. Well, I think in the preparation remarks you mentioned the company is going to focus on online revenue growth. So could you share with us how fast online revenue growth as opposed to call center?

Guangfu Cui

This is Guangfu. I will take your question. We don't yet want to disclose the online growth specifically. But I can tell you, the online growth is a lot faster than the offline, because in the previous quarter our growth had been – overall growth had been slow. But now, we are growing 45%. The overall hotel room night growth is 58% and we are growing faster – a lot faster than that online. So although we can't give you the exact numbers, but you can look at our overall growth and assuming a higher rate of growth on the online part.

Nan Li – SIG

Okay, that's helpful. And my second question is, well, to what extent the Shanghai World Expo helped this quarter and how do you look at the business post the Shanghai World Expo? Thank you.

Mike Doyle

Yes, I'll take that question. So Expo is having a positive impact on our business, both on unit volume growth, as well as hotel revenue growth. It's our estimate that about 5 percentage points of our room night growth can be attributed to Expo. And on a revenue basis, we believe that impact is between 8% to 10%, given the increase in ADRs in Shanghai as a destination.

We are cautious about the post-Expo period in November and December and we will take that into consideration in giving our Q4 guidance next quarter. But we believe our customers would have traveled during this peak booking period regardless. It's just that Shanghai is the draw in this quarter and in next.

Nan Li – SIG

Okay. Thank you. I'll go back to the queue. Thanks.

Operator

Thank you. We have a follow-up question coming from the line of Eddie Leung from Banc of America/Merrill Lynch. Please go ahead.

Eddie Leung – Banc of America/Merrill Lynch

Hi, guys. Just a follow-up on the foreign exchange loss. Could you update a little bit about the reason behind this and what's the outlook – at least the near-term outlook for this one? Thanks.

Mike Doyle

Yes, the reason behind our unrealized FX loss is the appreciation of the RMB versus the U.S. dollar. We keep about $100 million of our $140 million in cash in U.S. dollars offshore. And so when the RMB appreciates, we have to recognize this unrealized FX loss. I think there is a range of estimates as to how much more appreciation there could be in the remainder of the year; anywhere from 2% to 3%, I believe, is the consensus. So that is something that we have to face in our business.

We don't believe it reflects in anyway the performance of the underlying business. It is – it's – it is something that impacts our P&L. But we would like to guide our investors to look and evaluate our performance on our core products, which is hotel, which is growing very quickly and then also at our operating income line and OIBA line, which are showing not only our top line growth, but also our improved efficiency as a team.

The other thing we are doing on the cash side is to be as aggressive as possible, looking at new M&A opportunities. We think that this is a real strategic advantage to have the amount of cash that we do. We have no issues with ever having to raise the capital and we can look at a wide range of opportunities in China to expand our business. We launched a couple of small transactions last quarter and we are aggressively looking to identify new ways to grow inorganically as well.

Eddie Leung – Banc of America/Merrill Lynch

Thank you. The $100 million cash balance thing is very helpful. Thanks.

Operator

Thank you. Does that conclude your question, sir?

Eddie Leung – Banc of America/Merrill Lynch

Yes.

Operator

Thank you. Next question will be coming from – a follow-up question from Fawne Jiang from Brean Murray. Please go ahead.

Fawne Jiang – Brean Murray

Yes, a couple of quick follow-ups. First, it's about railway. Guangfu and Mike, I actually recently read a news regarding Ministry of Railway. They are trying to like build their own online ticket distributing platform. It seems like there is going to be a transition of the rail tickets purchase offline to online. I just wonder whether you guys have considered getting to that business and how would that impact potentially the landscape.

Guangfu Cui

Yes, this is Guangfu. I want to take your question. The railway ticketing business is a bigger business than the airline ticketing business due to the travel volume of rail customers. And there is also a lot of, I would say, opportunity going to open up for this when the high-speed railway opens more routes and also the plan to make the railway ticket transaction online from the government, we definitely welcome this initiative by the government and we are looking for different ways to growing to have a piece of business in that.

But so far, we haven’t really heard whether that transaction business is going to open up to companies like eLong or OTAs. So we are closely monitoring the situation, but we are looking for different ways to prepare for these opportunities. So we hope to give you more color maybe next quarter or a quarter or two from now, because we need more information from the government and we need to clearly understand the possibility. Thank you.

Fawne Jiang – Brean Murray

Got you. Thanks, Guangfu. And next question is about your operating expenses. It seems like you – both your sales and marketing expenses, as well as G&A as a percentage of revenue has been declining. I just wonder, how should we look at the trend going forward? Would you, like, keep the current level of the expenses or do you think you will probably step up your sales and marketing initiatives?

Mike Doyle

Fawne, this is Mike. We haven’t given guidance on each individual operating expense line. But certainly driving efficiencies in our business is a key priority. I think now is not the time for us to slow down on the sales and marketing side. So I think expecting a similar level of sales and marketing expense is the right assumption to make.

On the G&A side, we are very pleased with the level of efficiency we have driven there down now to 10% of revenue. There is probably a little bit more we can squeeze there, so – but it's safe to – I think it's – you could assume that we can continue to operate at the current levels.

Fawne Jiang – Brean Murray

Got it. Thanks, Mike. One last question is about your –it's actually a housekeeping question regarding your tax rate. It seems your tax rate has been a bit higher this quarter, about 30%. I just wonder, what's the reason and how we – should we look at that going forward?

Mike Doyle

I still think our guidance for the full year is still to assume around a 20% effective tax rate. The reason it currently looks higher than that is because our unrealized FX loss and our stock-based compensation are not tax-deductible. So looking at the effective tax rate, before those two items, it looks a more reasonable level at about 18%. It's – but it's without the deduction from the unrealized FX loss and stock-based compensation, we are around 30% this quarter.

Fawne Jiang – Brean Murray

Got you. Mike, last question. Actually it's really about your hotel business. So it seems like your – it seems like the average daily rate has been going up, but your commission per room has been declining due to probably the eCoupon business program, as well as the mix towards the lower-end hotels. I guess the question is do you see the similar trends going forward for next quarter or two?

Mike Doyle

Yes, I would expect for the next quarter or two for that trend to continue. I do think that we are seeing modest improvement in ADR across all of the individual start-rated segments.

Fawne Jiang – Brean Murray

Okay.

Mike Doyle

But the lower average daily rate hotels are the segments that it's growing quickest for us. And as I mentioned, we are planning to continue our eCoupon program. So it's – you could assume that same trend.

Fawne Jiang – Brean Murray

Okay.

Guangfu Cui

Fawne, I want to add one thing also that as we continue expanding our hotel coverages and we are going to second and third-tier cities going for these lower ADR hotels, because hotels in those cities not covered yet by eLong now may have lower ADR, relatively speaking to existing eLong hotels.

Fawne Jiang – Brean Murray

Yes. I got it. That's helpful. Last question on the air commission actually. It seems like the average ticket price has been going up like substantially, in the second quarter it was 25% year-over-year. I guess do you see that increase sustainable in the third quarter or even beyond that?

Guangfu Cui

It is really hard to say now. I think it depends on how well we are working with the airlines to make sure that they are not expanding their business at the expense of their distributors, specifically make sure that the price is parity, their websites versus eLong website. So that's one of the key tasks and key challenge for our business. As online – eLong is really focusing on online and the online customers are extremely price-sensitive. So this is really something that we have to kind of fix. Otherwise, we won't see accelerated growth on the air side of the business.

So air is about 25% of our business and if our partners, suppliers continue to do things that are not helpful in making sure the relationship between airlines and air distributors is healthy and a win-win relationship, that's going to hurt the overall industry. So we are working closely with the airlines to make sure they understand that they need to build the air business and at the same time, make sure the whole supply chain is healthy for their long-term growth.

At our side, number one, we want to address the issue by working with them to make sure we procure price-competitive products for our customers, because that's the only reason we exist and if we can't do that, there is no value for us to be in this supply chain. So that's number one.

Number two is that we have to eliminate – continue to cut cost out of the air operation, so that's why we are doing the – eliminating the cash business to make sure that we simplify our operation, we focus on one segment of the customers, which is really the future customers. And last but not least, to really drive harder on the hotel part to make sure that we continue to provide our customers the best hotel offering, the richest selection, price-competitive, best service, best online transacting experience. So that's, I think, also a way to weather the challenge we have at our hand. Thank you.

Fawne Jiang – Brean Murray

Thank you very much, Guangfu.

Operator

Thank you. Our next question will be a follow-up from Nan Li from SIG. Please go ahead.

Nan Li – SIG

Hi, just a quick follow-up question. Can you give us an update on your package tour business? In how many cities are you currently offering the package tour business and what is the goal for this line? Thank you.

Guangfu Cui

Thank you. This is Guangfu. I'll take your question. We just launched our package business a while ago and it's really kind of early stage. So our focus has always been for a new business, we want to make sure that the customer experience is good. So we continue to upgrade our booking experience, and also that make sure our products are competitive in the market. So we keep adding departure cities and destination cities. In second quarter, we have now 52 departure cities and 28 arrival cities. And also at the same time in second quarter, we added 10 overseas destination countries.

We also launched our cruise business so that our product coverage continues to be expanded and customer experience continues to improve. So we are really focused on making sure products are competitive and make sure the experience is better. The growth is nice, it's – in terms of percentages, very nice. But the base is very small. So I think we have to nurture the business and keep growing it.

So that's my answer for your question. Thank you.

Nan Li – SIG

Okay, thank you. That's really helpful and congratulations on a strong quarter. Thanks.

Mike Doyle

Thank you.

Operator

Thank you. Next question, we have a follow-up from Fawne Jiang from Brean Murray. Please go ahead.

Fawne Jiang – Brean Murray

Two more quick questions, Guangfu. You guys actually launched a mobile website, right, in second quarter. Can you give us some update on that front, like how do – what's the feedback you see from the customers, do you see increasing booking volume from the mobile site?

Guangfu Cui

Right. Okay. So the – again, the growth is very nice, but the base is very small. So the – what we have seen is customers like booking hotels more than the air business, because they don't need to give credit cards there, so one step fewer than the air transaction. So we see that hotel is very nice. This once again shows that the way of booking is not really kind of – it's helpful, but the core competency is about your product competitiveness and the experience of overall booking.

So we continue to upgrade our booking platform in the mobile site. But I think the – the key to drive the business is to make sure our hotel offering is competitive. So that's, I think, going to drive the business across the three way of booking – the call centers, the website, and the mobile. Thank you.

Fawne Jiang – Brean Murray

Yes, that's helpful. And last question is, regarding your TravelSky – like booking fees, it seems like you have some dispute – disputes with the TravelSky in – for the second quarter. I just wonder, whether it has been sorted out and how do you see impact on your cost front regarding that. Also, recently I think TravelSky tried to clean up its platform by shut down the – basically, the (inaudible) connection to the platform. I just wonder, will that impact your business in any way?

Guangfu Cui

This is Guangfu. I'll take your question. So first, our philosophy in terms of working with our partners are, number one, we want to make sure that we have partners realize our value to the air business. And these are things that we do to the hotels, airlines, and also to GDS and we basically are important partners to them and also important customer to them, GDS. We have good relationship; it's just the way they price our product, we need to work with them.

So we are working in terms of improving our technology to make sure we have – use a better way of connecting so that we reduce the number of inquiries to TravelSky and also we want to work with – work together with TravelSky to come up with new ways of connection. So that will decrease the cost also.

So we are seeing – with our new technology, new connections, we are seeing decreased fees of transactions. I'm not saying that their price is lower, it's just that the way we manage our connections better and we are working with them with another new technology, which essentially can cut the cost also. So there is progress there and we want to continue to work with our partners to decrease the cost.

Last but not least, our philosophy is to build a win-win relationship with our suppliers and the – our – we really want to kind of change from the philosophy of a zero-sum mentality, which is that every part in the supply chain put themselves in the center and only consider their own benefit, not considering the interest of their partners.

So what we have called this new thinking is put the customers, the shoppers, the consumers in the center and that the eLong and the air suppliers and the hotel and the TravelSky work together to serve the customer to create the value. So that's the – a shift. I think that new thinking will address the current kind of zero-sum mentality in the supply chain.

And we have advocated this new philosophy to the hotel partners, to air partners, and to have them to understand that the current situation is that the whole supply chain, if you look at the online booking, it's very small, direct selling from the airlines website across the OTAs, the online booking is a very small percentage and there is a lot of room that eLong can help our airlines (inaudible) direct selling by providing technology, consulting, and working with them in technology side and to improve their service – and at the same time, they don't need to try to do the special pricing in their own website to grow their direct selling business. So the – and same thing for hotel and same thing for the TravelSky.

So that new thinking and new way of working to put consumer in the center, regardless of what they book, they are airline customers, they are hotel customers, they should be treated the same, they should get the same price, and they should be treated as the – really the person who brings the dollars to airlines and to eLong.

So we are continuing working with our partners to kind of align that new thinking. If everybody embraced that thinking, I think a lot of issues can be addressed. So this is something that I personally advocate to all airlines, to all hotels. I think that's the way we should work in this environment; in this dramatic change period, everybody should understand that by working together, they can create a – make the pie bigger and each of us can have a bigger share of the cake. And to have this zero-sum mentality will hurt the supply chain, will eventually hurt the customer, and eventually hurt our partners' business.

So that's something that we are working very hard to make sure everybody understands and everybody supports. And that's our work going forward. Thank you.

Fawne Jiang – Brean Murray

Got it. That's very helpful, Guangfu. And thank you again for taking my questions and congrats on the excellent quarter.

Mike Doyle

Thank you.

Operator

Thank you. (Operator Instructions) We have no further questions at this time. I would like to turn the Call back over to the eLong management team.

Guangfu Cui

Moderator, if there are no more questions, we want to conclude the call. Thanks for everyone for being on the call and Mike and I look forward to talking to you next quarter. Thanks.

Operator

Thank you. And that concludes today's conference call. We would like to thank everyone for participating in today's conference. All lines may now disconnect and good day to you all. Thank you.

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