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Qunar Cayman Islands Limited (NASDAQ:QUNR)

Q1 2014 Earnings Conference Call

May 15, 2014 8:00 p.m. ET

Executives

Jenna Qian – Head of Communications and IR

CC Zhuang – Co-Founder and CEO

Yilu Zhao – Chief Strategy Officer

Sam Sun – CFO

Analysts

Vivian Hao – Deutsche Bank

Eric Wen – China Renaissance

Chao Wang – Nomura

Alicia Yap – Barclays

Piyush Mubayi – Goldman Sachs

Jiong Shao – Macquarie

Dick Wei – Credit Suisse

Wendy Huang – Standard Chartered

Ming Zhao – 86Research

Henry Guo – JG Capital

Yang Zhao – China International Capital Corporation

Tian Hou – TH Capital

Na Yu – ICBC International

Roger Gu – SWS Research

Operator

Hello, and welcome to Qunar's First Quarter 2014 Earnings Conference Call.

[Operator Instructions] 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 first quarter 2014 earnings conference. 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, and Ms. Yilu Zhao, Chief Strategy Officer. After their prepared remarks, we 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 US Private Securities Litigation Reform Act of 1994. 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, along with our latest operating metrics will also be available on Qunar's IR website, investor.qunar.com or ir.qunar.com.

Now I would like to turn the call over to Qunar's Co-Founder and CEO, CC Zhuang,

CC Zhuang

Thanks, Jenna. Thank you everyone for joining us today. We had a very strong first quarter, with great performance across our -- all of our business lines. Our revenue growth has been on an accelerating path, mainly driven by a record volume growth. And we continued to solidify our position as the go-to site for Chinese travelers looking for the best price and the widest selection.

We have continued our mission to build China's leading end-to-end travel ecosystem. And our impressive growth is a testament to our strong execution capabilities.

In the first quarter, our flight revenue grew 90%, primarily driven by the strong volume growth. Our 75% volume growth rate is close to eight times the industry growth rate and more than twice that of the other large online travel players.

For hotels, we achieved 101% volume growth and 55% revenue growth, year on year. Once again, this growth rate far outstrips the industry average and those of the other large online travel players.

We were also very pleased to see our tour package GMV grow five times year on year, making Qunar the top tour package search site in China.

In mobile, we reached the landmark of 200 million accumulative application downloads, according to iResearch, and 83 million accumulative activations in the first quarter. It is a testament to our position as industry leader in mobile travel.

Our mobile revenue grew more than five times year on year, driven primarily by organic traffic. The mobile accounted for fully 8% of our hotel room nights and 32% of our flight volume, a record high. We are especially proud that we have achieved this volume, impressive results, based on the strength of our brand and the quality and breadth of our products [indiscernible] mobile users over PC users.

We continued to invest effectively, in product sourcing and development. As you all know, we live in an exciting era, in which a massive number of offline resource are moving to online mobile. And we are at the forefront of that movement.

In the first quarter, we established our travel destination service business unit and are seeing very positive initial results. We are deploying resource across [indiscernible] in China, to sign hotels onto our fast [ph] platform, to secure the best price, and to bring online multiple products from each accommodation providers, including group buy and last-minute deals.

As of the end of the first quarter, our footprint already covered almost all provinces in China and several dozen cities. As I have said before, we firmly believe in the power of technology to create the vast experience for users to realize the benefit of Qunar. We remain user centric and technology centric.

To give you more color, our product managers and engineers have been working tirelessly on the following, first, service automation. Whenever we can use technology to solve issues, we're looking to use technology, rather than rely on simple human beings. Through our engineers' efforts, we have achieved a high level of automation for flight cancellation and refund. We also confirm hotel rooms' availability automatically upon booking, and reconfirm one-day prior to check-in.

To further illustrate the point that -- about the power of technology, we have a team of around 300 people in call centers to support the fulfillment to close 200,000 tickets -- flight tickets a day.

Second, bring more product online. After our on-the-ground team sign in contracts with travel service providers, our engineer work around the clock to bring online many very exciting offline resources, accommodation providers, customs companies, local attraction providers, to name just a few. We have a huge user base, and the broadest selection offers us many new ways to monetize.

Third, mobile. We have been continuously improving our mobile applications, and we have been pleased with our results. In the long run, these enhancements will provide a foundation for new innovations to come online more quickly, making for a richer, more dynamic mobile experience. In the first quarter, we also witnessed robust user and TSP [ph] number growth.

The network effect has been strong. As of the end of Q1, we had over 240 million PC users and 60 million mobile users. That's year-on-year growth rate of 24% and 86%, respectively.

Our customer base grew to more than 95,000 at the end of Q1, from close to 87,000 at the end of last year. The number of OTA customers grew from close to 2,000, to more than 2,500 during the first quarter. China's largest two OTAs accounted only -- accounted for only about 5% of our revenue in the first quarter, a testament to the diversity of Chinese travel ecosystem.

As we have said before, the travel industry is undergoing a profound transformation, and there are many exciting opportunities, as travel resources move from offline to online. We are focused on the building our business organically first and foremost as we believe that it's often the most cost-effective way to create greater shareholder value. We are also actively looking to opportunities in the market of course, and will invest if it saves us time and resource.

With that, I will turn the call to Yilu, for additional business highlights.

Yilu Zhao

Thanks, CC. Thanks, everyone, for joining us. I'm excited to update you on our new initiatives.

On the flight side, we entered into a new strategic agreement with Qingdao Airlines in the last quarter, to help to optimize its yield management system. As China's airline industry becomes more market-oriented, more licenses are being granted to non-state-owned companies. Qingdao Airlines is an early starter in a non-state-owned airlines industry.

Under our agreement, we use our proprietary data point to help maximize yield and profit for Qingdao Airlines. Initial results have been quite positive, and we feel we have taken an important early steps to connect China's airlines directly with consumers, end to end.

In the first quarter, we also achieved a higher revenue per air ticket, thanks to our growing scale and market position. We made great strides in our Zhixin flight program. As you know, under Zhixin we offer a high level of customer service through our OTA partners. Zhixin's contribution as a percentage of our flight revenues, grew from single digits in the fourth quarter to mid-teens in the first quarter. Customer and user feedback has been very positive.

On the hotel side, we have continued to broaden our product offerings to improve user experience. The number of our hotel reviews grew to 2.3 million, up from 1.4 million a quarter ago. The number of expert reviews on our platform also grew almost 50% quarter on quarter.

Everyday more than 10,000 new reviews are uploaded onto our website. We hear from both our hotel partners and our users everyday that the high quality of our reviews creates transparency and drives hotel booking volume on our platform.

In tour packages, we have been gaining significant traction. As CC also mentioned, our tour packages GMV grew more than five times year on year, or doubling quarter on quarter. Revenue growth closely tracked GMV growth. At the end of the first quarter, we offered more than 200,000 tours, a 35% increase in comparison to the previous quarter.

On Zhixin front, the agreement started to take effect in the first quarter. We're happy to report that the progress has been on track.

With that, I would like to turn the call to Sam for a rundown of the financial highlights.

Sam Sun

Thank you, Yilu, and thanks everyone for joining the call.

As CC noted, our revenue growth for the first quarter continued to accelerate. The strong momentum gives us the confidence to push forward with investments in R&D, infrastructure and product sourcing, to make sure we are well positioned to capture the huge market opportunities ahead. We expect to maintain our current trajectory on the top line in Q2, with a year-on-year revenue growth in the range of 90% to 95%.

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

Total revenues for the first quarter of 2014 were RMB335.5 million, an increase of 83.6% year-on-year. Mobile revenues for the first quarter of 2014 were RMB106.3 million, an increase of 415.1% year-on-year, representing 31.7% of total revenues, compared to 20.5% in the previous quarter. Flight and flight related P4P revenues for the first quarter of 2014 were RMB319.1 million, an increase of 89.6% year-on-year.

Year-on-year P4P flight revenue growth was primarily due to a 75% increase in TEFT, the flight ticketing volume, and an 8% increase in revenue per ticket. Mobile revenue accounted for 32% of the flight P4P revenue. Volume-wise, mobile also contributed 32%.

P4P hotel revenues were RMB61.8 million, an increase of 54.88% year on year. Year-on-year P4P hotel revenue growth was primarily due to a 101% increase in THR, the room night volume, and was offset by a 23% decrease in revenue per room night, mainly as a result of some coupon-related promotional costs and decrease in average daily room rates.

In here, mobile accounted for 43% of revenue. Volume-wise, mobile accounted for 48% of volume. The inconsistency here is because the click-to-transaction rate on mobile has been improved in the last several months. But we didn't increase the mobile P4P price until very recently, in Q2. So our TSPs cooperating with us on mobile have enjoyed our mobile volume at a price lower than web P4P price.

Gross profit for the first quarter of 2014 was RMB262.1 million, an increase of 76.8% year-on-year. The increase was primarily due to the significant increase in overall revenues, and was partially offset by an increase in sales tax and surcharges, and an increase in short-term -- in short-message-service fees and online payment processing fees we paid to third-party service providers.

Net loss attributable to Qunar shareholders for the first quarter of 2014 was RMB183.6 million. The increase in the net loss attributable to Qunar shareholder was primarily due to continued investment in product development, marketing efforts to drive business growth, and an increase in share-based compensation expense, as well as the online marketing expenses for Baidu Zhixin cooperation agreement.

Adjusted EBITDA, defined as net loss before income taxes, interest expenses, depreciation and amortization, further adjusted to exclude online marketing expenses from the Zhixin cooperation agreement, share-based compensation expenses and non-cash expenses, relating to free user traffic contributed by Baidu, was an active RMB45.8 million for the first quarter of 2014.

As of March 31, 2014, Qunar had cash, cash equivalents and short-term investments of RMB1.479b.

Last, but not least, there is a new expense item on our P&L, which is online marketing expense for Baidu Zhixin cooperation agreement, with an amount of about RMB67 million, or $11 million. That is solely related to our Zhixin cooperation agreement with Baidu. We calculated the fair value of the total stock warrant to be granted to Baidu this year, based on the quarter-end stock price, and then recognized the expense ratably [ph] based on traffic delivered up to date, versus expected total traffic for the whole year.

Then next quarter-end, we need to run through this calculation again, for the period from January 1 through the quarter end, then recognize the difference as the expense for next quarter.

With that, we would like to open the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]

We'll now go to our first question in queue, from the line of Vivian Hao from Deutsche Bank. Please go ahead.

Vivian Hao – Deutsche Bank

Hi CC, Yilu and Sam. Thank you for taking my question, and congratulations on a great quarter. I have two questions. First one is regarding -- could you please give us a update on the competition with group buying [ph] players in local hotel booking segment? In particular, could you -- given the reclassification of revenue, what is the ex group buying year-over-year growth for our core P4P segment, and also the hotel THER growth? And also, what is the net addition of offline sales force for this segment, and the plan for the rest of the year?

I have another follow-up question after this one. Thank you.

CC Zhuang

Hi Vivian. Thanks. I'll first take the group buy question. I think group buy is a category we are very interested in because it also offer consumer a lot of choice and good value. So our hotel coverage in the group buy is actually more than 40,000 hotels right now, doubled in the quarter. And in terms of the group buy room nights percentage, as of the total hotel percentage, it's also grow very significantly in the last quarter.

However, we think in the group buy, it's only a piece of the hotel business, because if you look at it from hotel point of view, they have multiple ways to distribute their hotel room nights. Group buy is for the low end and off-peak season. And you have the agency model, merchant model, last-minute model. Especially agency model and prepaid model is still the primarily model.

I think group buy is a very good product format in off-peak season, but it's not very [fitful] for the industry, for the peak season. Sam.

Sam Sun

Vivian, as to the revenue contribution from group buy, first, it's still very small single digit. And secondly, since Q1, we decided to offer a coupon for our group buying business, as well. So that coupon also will be net off against the revenue. So from a net revenue perspective, group buy made a very small contribution to the total revenue.

In terms of the room night growth, with or without group buy room nights, I think the trend is almost the same because other parts of the hotel business also grows very fast. So we're all speaking -- almost in each area of the hotel business, we achieved the double -- we doubled the volume on a year-over-year basis.

Operator

Your next question comes from the line of Eric Wen from China Renaissance. Please go ahead.

Eric Wen – China Renaissance

Oh, thank you very much for taking my question, and good morning, CC, Sam and Yilu. Congratulations on the accelerated revenue growth and narrowing loss. I want you to give us some color on organic growth. Can you give us some guidance regarding how you plan to do, to grow a business organically, throughout the year and beyond? Thanks.

CC Zhuang

Hey, Eric. Thank you. So we are very excited about this era for the online travel and the mobile travel business. I believe the growth opportunity is a phenomenon. So we will continually to invest decisively to drive the further growth. Our investment coverage includes -- we're going to three major directions.

Number one is product sourcing. We have been seeing that a lot more offline travel resource haven't been moved to online yet. If you look at this online travel penetration, it's only about 10%. So no matter what happen in the online travel industry dynamics, it's still a small fraction of the total travel business. I believe the next few years above, you know, over 70% of the offline travel business will go to online. So let's focus to move offline travel resource online. It's our number one priority.

Then number two is product development. During the product move from offline to online -- and I think we need a lot of product development resource to [augment] the procedure to make this offline product can be able to sell online, to present to consumer very clearly. So I think that we will continue to add engineers and product people, to increase our product development.

And number three is we will continually reinvest into our ecosystem. I think with the online travel era, we need a lot of infrastructure to build and to help the offline guys, not only sell the product online but to also build the product online, operate the product online, which is very important to improve the whole travel industry efficiency.

And we're also going to continue to invest in mobile because we think mobile is the future. And a lot -- the reason those offline travel provider can move to online is because now everything can be conducted mobile. So mobile further, we will continue to add engineers and product people to increase our market share, traffic and transactions. So this is our growth rate for the organic growth.

And further, I believe that most innovations should be conducted within the company, not outside the company.

Yilu Zhao

And to add to what CC was saying, Eric, we, just to share with you some of our track record, we have invested aggressively and decisively in the past as well. We started to invest in mobile, for example, in 2010, when mobile internet was still in a nascent stage. The growth record you see today is very much a result of what we did in the past.

We very much believe that the road ahead of us is still very long, and we firmly believe that in the future quarters, you'll be able to see scale benefits.

Operator

Your next question comes from the line of Chao Wang from Nomura. Please go ahead.

Chao Wang – Nomura

Hi. Good morning. Thank you for taking my questions. So since there are several M&A deals recently, I just wonder what's your view on the change of competition landscape, as well as your strategy in the M&A and investment front. Thank you.

Sam Sun

Yes, as I said, travel industry is actually pretty fragmented. And if you look at the online travel as a total, it's only 10% of the total travel business. And the growth is primarily driven by offline to go online. So I think whenever online happens, it doesn't change the landscape at all.

Second of all, if you look at our revenue, it's pretty much fragmented. As I mentioned, the top OTA only accounted for about 5% of our revenue. And we see more fragmentation in our revenue type. So I think it's really -- doesn't change anything from my point of view.

And third of all, from our investment point of view, I think we truly believe we have super execution capability and the top engineers team in the industry. So we will primarily invest ourselves to grow the business, instead of doing financial engineering to move the loss out of the company. So that's our primary view.

Yilu Zhao

And we do -- and Chao, to answer your question, we do also actively look at opportunities in the market, of course. But at the current stage, there isn't anything material that we would like to disclose. And when such events happen, we will be disclosing.

Chao Wang – Nomura

Thank you.

Operator

Your next question comes from the line of Alicia Yap from Barclays. Please go ahead.

Alicia Yap – Barclays

Hi. Good morning. Thanks for taking my questions. I have a very quick two questions. Number one is that have you seen any change to some of the wholesaler hotel inventory, given there were some investment and acquisition by our competitors, in terms of any change of them putting the inventory or any effecting our hotel site?

And then the second part is on the pricing, on air ticketing. With the 8.4% increase, is that mainly driven by the CPC price increase? And how should we look at it for Q2 and the rest of the year? Thank you.

CC Zhuang

So hotel market is actually highly fragmented, if you consider the full hotel market as a whole. Large players only accounted for small portion of the industry. Wholesaler particularly, it only focused on high end. And we actually drive a lot of wholesale volume. So in last few quarters, we were able to see a lot of new wholesalers just come up because wholesaler is primarily a relation-driven business. So if some company will be acquired, the employee will come out to start a new business. Either they sign the contract and [indiscernible].

So this, you know, I don't really think, you know, any things will change in landscape. It's primarily [indiscernible] business. It's a natural fragmentation. And we'll be able to get a lot of traffic. So where our traffic directs, where a wholesaler can grow.

Yilu Zhao

On the flight question, we -- in the last quarter, we have been effectively monetizing -- we've been effectively increasing the revenue per ticket, thanks to our growing scale market -- greater marketing power and the additional benefits we have been able to offer to our PSP customers. And we believe it's a result of our robust market position that we've been able to do that.

We also think that in the future quarters, our -- in the -- when we look forward, our business -- other business units will follow the same path. As we grow greater -- get greater volume and get greater market share, we will be able to derive better -- greater per-unit economics. Does that answer your question?

Operator

Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead.

Piyush Mubayi – Goldman Sachs

Hi. Thanks very much for taking my question, and congratulations on the numbers. Could I just ask, we see 90% to 95% revenue guidance, is there any more -- greater promotion costs in any way for the second quarter?

And a second question, if I may. If you -- the split of revenues by CPC and CPS, we see that full-year percent hotel volume is for mobile. How much of that is transacted on the SAS platform, please? Thank you.

Sam Sun

Piyush, this is Sam. As to the revenue growth for the Q2, yes, we guided 90% to 95% revenue growth. And in terms of the marketing spending, in Q2, we will also beef up the marketing spending a little bit because we have seen pretty strong growth in the -- on the mobile side. So actually, starting from Q1, we already started to spend more on mobile, because we see very nice mobile revenue growth there. So we wanted to invest more on the mobile marketing, in order to drive more mobile volume.

As to the CPC versus CPS, I think the mix is about the same as last quarter. CPC is still the majority part of the hotel revenue.

Operator

Your next question comes from the line of Jiong Shao from Macquarie. Please go ahead.

Jiong Shao – Macquarie

Good morning. Thank you for taking my question. Could you please elaborate a bit on your mobile? I think, Sam, you mentioned earlier, you increased the mobile CPC price during the quarter. Could you just talk about -- so where -- how that compared to PC CPC now, and what was it before? And could you also talk about in terms of the coverage ratio, click-through rate, any color you can share with us on the mobile platform? And do all your customers' OTAs pretty much all participate on mobile as well? Thank you.

Sam Sun

This is Sam. In terms of the participation of our mobile, almost all our TSPs, the hotels, the OTAs, and particularly our mobile, except for a very few large OTAs. As to the mobile CPC price, as I said earlier, we increased the mobile hotel CPC price very recently in Q2, not in Q1 because we have been improving the click to transaction conversion rate and we didn’t increase the price so our TSPs actually enjoyed a better price on mobile than on web.

So that is why when we look at the conversion rate, we look at the revenue per ticket, the revenue per room night, we try to price the same way consistently between mobile and web, that is why we look at the conversion rate to whenever there is an improvement in commercial rate, then we can increase the CPC price to make sure the revenue per ticket, revenue per room night is similar.

As to the details of the conversion rate, the click-through rates, I think, first, we already shared more operating metrics on our IR website. And secondly, if you need more detail, we can discuss about it offline.

Jiong Shao – Macquarie

Okay. Thank you, Sam.

Operator

Your next question comes from the line of Dick Wei from Credit Suisse. Please go ahead.

Dick Wei – Credit Suisse

Hi, thanks for taking my questions. I wonder if you can give more color for the seller growth for next quarter. Is it mainly from the -- is it mainly from like air or from of the hotel side? If you can get more color on the volume as well as the pricing growth, that will be helpful. Thank you.

CC Zhuang

Yeah, I think the trajectory is pretty much similar to Q1. The high growth is coming from across all business line and smaller business normally grow faster, and on flight we'll be able to see some appreciation per ticket value, per ticket price, and the rest is primarily driven by the volume.

Operator

Your next question comes from the line of Wendy Huang from Standard Chartered. Please go ahead.

Wendy Huang – Standard Chartered

Thank you. First, congratulations on the strong topline growth in Q1 and the strong Q2 guidance. I have a couple of questions. Regarding your Zhixin expense. Can you remind us what kind of Zhixin expense that you agreed with Baidu for the full year 2014?

And also, you just mentioned that it was calculated based on the traffic delivery as to the date versus the total estimates for the full year so what kind of total number of the traffic that Baidu actually, the Zhixin platform actually will deliver to -- or contributed to Qunar.

And also, I just want to double-check in to clarify, so that is non-cash expense, right? And secondly, regarding your hotel coverage, and also international expansion strategy, what are your thoughts on there? In my understanding that Ctrip and eLong, they had very good hotel coverage partly because they are working with international platform like booking.com hotels, and recently, agoda.com. So do you have plan to connect your network with those international hotel booking platform? Thank you.

Sam Sun

Wendy, this is Sam. I will answer the first question about the Zhixin agreement. First, I will start with non-cash item. And we got this exclusive operating right of Zhixin travel channel from Baidu. And as a return, we issue stock warrant to Baidu.

The stock warrant is calculated -- the exercise price of the stock warrant is zero and the number of shares is calculated based on the IPO price. So that is already disclosed in our F1. And as to the traffic, of course there is a minimum traffic guarantee made by Baidu which is also disclosed in our F1.

And since we are only four to five months into the year, so when we did the estimate to -- we did the estimate of the whole year traffic, we simply used the minimum traffic guarantee number as the estimate and use the formula to calculate the attrition [ph] expense.

As to the performance of the Zhixin agreement, so far, the Zhixin traffic is trending up very nicely and we are comfortable with the cooperation with Baidu and we believe Zhixin can deliver more traffic to us in the next couple of quarters.

CC Zhuang

In terms of connect international booking platform. We actually are already in connecting works with you know, Agoda, Booking.com, Expedia, for a long time. And even more, Expedia, through the Expedia affiliate network, Booking.com and Agoda, not only participate as such, and also some of them participate our SaaS [ph] platform in a way on the mobile platform.

Yilu Zhao

And just to give you some stats, as of the end of last quarter, we covered close to 350,000 hotels, the majority of which is actually international hotels and we cover close to 70,000 cities overseas.

Wendy Huang – Standard Chartered

Just to follow up on that, if that is the case, your hotel coverage numbers seems still actually below that of Ctrip's at 100,000 and also that is below eLong's hotel network number. So where is the gap from? Is it mainly on the domestic hotels or is it mainly on the international hotels? And also, in terms of revenue contribution from the international travel, what is the contribution in the first quarter? Thank you.

CC Zhuang

I think you made the number wrong. I don’t think anybody cover 700,000 hotels. Our hotel coverage is the number one, much more than Ctrip and eLong. So you must mean number one.

And the second one is our international flight and hotel revenue grew pretty rapidly. However, we didn’t disclose the number from here.

Operator

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

Ming Zhao – 86Research

Thank you. So, CC, we heard you talk about technology-centric strategy so I was wondering, you know, the CPC pricing, are you going to do the bidding based CPC pricing? Because that is one of the duties done at Baidu, and I guess, you said that you have been testing it so I wonder when you are going to launch the full scale bidding based CPC pricing strategy?

CC Zhuang

I think you know, bidding is sometimes an interesting thing for us and we have been practicing a little bit in the beginning of Q1. However, the volume growth is so big in the Q1. Our engineers' focus is primarily focused on the building of platform supporting our volume growth.

So I think, you know, once our -- the engineer resource is a bit more fluent, we will come back to improve our bidding system. I think bidding is something we always can do. As far as we have volume, the bidding is a switch -- once we are ready, we can always turn up to improve our revenue.

Operator

Your next question comes from the line of Henry Guo from JG Capital. Please go ahead.

Henry Guo – JG Capital

Hey. Thanks for taking the question. Just a very quick one. So for gross margin, I noticed the 3 points contraction in Q1. Is this the [indiscernible] we're going to see in the near future? Thanks.

Sam Sun

Hey, Henry. This is Sam. As to the gross margin decrease, that is mainly because as we discussed, of course, there will be some increased cost such as short message services but also, since in Q1, we incurred a significant amount of payment processing fee. This is mainly because previously, I mean from Q1, we decided to bear the payment processing fee by ourselves. The purpose of doing that is first, we have -- we will have better control of the whole payment cycle. Secondly, we can provide better services through TSPs working with us. And thirdly, we believe that by bearing this cost, we can drive a better topline growth. So that is why we are willing to bear this cost. And that is also the one of the major reasons why the gross margin decreased a little bit.

And looking to Q2 and the following quarters, as we will continue to bear the payment processing fee, and based on assumption, if there is no decrease in the payment protection fee level charged by third party payment platforms, we think this number -- I mean, this amount will become bigger because in Q1, it is not full quarter effect yet. So in this sense, we think that going forward, the gross margin will further go down several percentage points.

Yilu Zhao

And to what Sam is saying, we are confident that our -- both revenue and the gross profit will be on an accelerating growth path for the next quarter.

Operator

Your next question comes from the line of Yang Zhao from China International Capital Corporation. Please go ahead.

Yang Zhao – China International Capital Corporation

Hello, CC, Sam and Yilu, I just have one question about our Zhixin cooperation with Baidu. Can I clarify one thing that Sam mentioned that we calculated the marketing expenses due to Zhixin platform, based on our IPO price of $15 per ADS. And then how are we -- Zhixin's fair value changes [indiscernible]? Thanks.

CC Zhuang

Well, the IPO price is only used to calculate the number of shares under this stock warrant. So once the number is fixed, it is fixed. I think if I remember correctly, based on that $15 per ADR, we issued about close to $15 million ADR under the stock warrant to Baidu. So that number has been fixed.

Then we need to use the stock price of every quarter-end to come up with the fair value of the stock warrant. And of course, every quarter-end, the stock price [indiscernible] so the fair value of the stock warrant will also change and any difference -- any fair value change will be absorbed into the online marketing expenses.

So this is the answer to your question. And I just want to add one point to that payment protection fee. Because we are bearing the payment protection fee, we also have better control of the whole payment cycle and for Q1, we -- the total amount passing through our payment function amounted to RMB13.8 billion, so that is a pretty significant number, a pretty significant amount. And with that, we can provide better service to our consumers and to our TSPs as well.

Yilu Zhao

And on the Zhixin front, let me add one more thing, which should be obvious to everybody, the higher the quarter-end share price for Qunar, the higher the fair value change.

Operator

Your next question comes from the line of Tian Hou from T.H. Capital. Please go ahead.

Tian Hou – T.H. Capital

Hi, Yilu, Sam and CC, good morning. Congratulations on a strong volume growth. I have a couple of questions. One is related to your coupon. Your coupon program seems like that was a pretty aggressive in Q1 relative to other quarters so I wonder what trend going forward in the second quarter and throughout the year, if you have any, you know, plans or color on that. So that is number one question.

Number two is related to your product sourcing expenses in Q1, it increased significantly and the much higher increase in other items. And you just said that primarily, due to the increase in the company product sourcing team, so I wonder if you could give us some details about you know, what those team is for, and what their immediate task and what is their, you know, long-term goals and you know, how you know, what is the KPI, how are they going to be measured?

So the third is related to your new BU for the destination, and so would you please give us some color on that one too? Thank you. That is all my questions.

CC Zhuang

Hi, Tian Hou. Thanks your the question. So the first question is about the coupon thing. As you know, our pricing strategy is always our take rate should be only one-third of our major alternative choices, major alternative channels. So our CPC rate is pretty low, you know, compared to the other players.

The effective tax rate of 4% to 6% and our coupon is aggressive, but if you compare our coupon effective take rate versus CPC take rate, it is only slightly behind. So it is not a major, you know, cash back, you know, or damage our revenue. So moving forward, I think we will continue this coupon level for at least -- for quite a long period until we reach the hotel room night number one. So this is a long-term strategy choice where we will continue with the strategy. As far as we know, we are not number one hotel room night player yet.

And in terms of the product sourcing and I think question can be combined with the destination service business -- the destination service business unit which is similar because primary [indiscernible] that business unit. Those people are ground force people, sales people who sign in the hotels, selling the hotel products for us. So you see that our group buy product has been doubling within the quarter. And we also acquired through sign-in, you know, the agency model hotel contract, prepay, you know, prepay hotel contracts, and also last-minute hotel contract.

We're also going to a broaden their level, you know, to broaden their scope to the other travel destination service including, as you know, our local destination tickets and equipment rental and car rental [indiscernible] for travel destination area, not for the local life. It's really for the destination service.

So their KPI is about each person can sign how many products one day. We measure that number very carefully because, as you know, our team is primarily hiring from Alibaba and [indiscernible] so they are very experienced, establish a culture in measurement and management style, so we pretty much just borrow their culture and management. Number one there in the travel destination business unit was, you know, Golden Medal [ph]. So a person in Alibaba, he was actually [indiscernible] the Alibaba culture when Alibaba go [indiscernible] Hong Kong. So he [indiscernible] Alibaba. So he probably will bring all the systems into our company, exactly in one night we have gained a certain capability to execute on the ground.

Tian Hou – T.H. Capital

That's very helpful.

CC Zhuang

Yes.

Tian Hou – T.H. Capital

That's very helpful. Thank you.

CC Zhuang

In terms of moving forward, I think in Q2, it's going to the peak season to add people aggressively. And starting from Q3, I think the investment level is going to stabilize, because if you go back [indiscernible] by the end of day, it's only -- we only have about 200,000 hotels, plus maybe another 100,000 travel service provider in offline, in China, so once we have established certain size of the team, we should fine with that team for the rest. So I think the increase will primarily happen in Q2 and start to stabilize starting from Q3.

Operator

Your next question comes from the line of Na Yu from ICBC International. Please go ahead.

Na Yu – ICBC International

Good morning. Thank you for taking my question. I have a very quick question, a follow-up on the cash back. Could you share some updates about the trend of cash back? And also a broader question, could you comment on the competitive landscape in the industry now and also any guidance on the tour packages and the attraction package business? Thank you.

Sam Sun

Hello, this is Sam. As to the cash back on the coupon program, first, just to make sure it's a counter revenue element and in terms of the dollar amount, I think Q1, the counter revenue dollar amount was about RMB20 million and this is actually smaller than Q3 last year when we pushed this coupon program quite aggressively and looking into Q2, I think we will keep the coupon our cash back level similar to Q1 but of course, Q2 and going forward, since our hotel volume growth, volume will grow, the absolute dollar amount of this counter revenue element will also grow together with the hotel volume growth.

As to the growth of the attraction tickets and tour packages, as CC mentioned earlier, they are relatively smaller business segment in our overall business so they start from a smaller base. Their gross rate should be a little bit higher, should be higher than the overall business growth and because they are starting from -- they started from a smaller site.

Na Yu – ICBC International

Okay, thank you. What is the company's expectation about the revenue contribution from tour packages and attraction tickets for the long run?

CC Zhuang

I think tour package, we should be able to see [indiscernible] will be a significant revenue source. Market is big and we are in a very good growth momentum right now. And also take rate is pretty fair. So I think it contribute pretty much.

Destination tickets is a unknown. The market is big, but it's not sure how much will go to mobile, going to online. Our attraction tickets primary sales go through the mobile, the mobile transaction. And the growth rate is [indiscernible] we are talking about 10, 20 times year over year. It is really hard to predict what the growth will be. So currently we can't give a very clear answer.

Operator

Your next question comes from the line of Vivian Hao from Deutsche Bank. Please go ahead.

Vivian Hao – Deutsche Bank

Hi, sorry. I think my question just got covered by the previous analyst. Thank you.

Operator

Your next question comes from the line of Jiong Shao from Macquarie. Please go ahead.

Jiong Shao – Macquarie

Thank you for taking my follow up question. You made a nice improvement on the non-GAAP operating margins in the quarter, it is still negative but it is a much smaller number than the last quarter. Are you talking about investments continue to be aggressive in Q2 but are going to taper off or stabilize in Q3. I was just wondering sort of do you have any comments on your margin trajectory going forward in the coming quarters? Is that rough timeline you see you are going to turn profitable? That is my first follow up.

The second follow-up is just a high level question, some of your peers have positioning as sort of a one stop shop for many, many things but others have said, look, we only want to specialize in hotel. We want to be the best in hotel and nothing else. I was wondering, for you, and what is Qunar's sort of long-term positioning in this space? Thank you.

Yilu Zhao

Your first question, we will guide -- given how dynamic the street -- the market is, we will provide guidance on a quarter to quarter basis. But as we were saying earlier, that 2014 will be a key year for investment. We see the opportunity being massive, and CC earlier in the call outlined the key strategic areas whereby we will make investments.

And as we mentioned earlier, that you will be able to see scale benefits in the other quarter and CC, do you want to maybe take the second question?

CC Zhuang

I think we are a platform player so we have to be a one-stop solution. I think it's also with the mobile takeoff, I think in the future you won’t be able to see a focused player. The market is going to be a one-stop solution. That's the winner strategy.

Jiong Shao – Macquarie

Okay, great. Thanks for the thoughts.

Operator

[Operator Instructions]

We'll now go to question comes from the line of Roger Gu from SWS Research. Please go ahead.

Roger Gu – SWS Research

Hi. Good morning, management, thanks for taking my question. In your annual report, I noticed that the total expenditure for 2013 will be RMB1.1 billion, so -- which is much higher than prior years, but could you please give us the breakdown? Thank you.

Sam Sun

Excuse me, what is that expenditure? RMB1.1 billion?

Roger Gu – SWS Research

The capital expenditure. In your annual report, you mentioned that the capital expenditures in 2013 were RMB1.1 billion, but in 2013 it is only like RMB39 million, so I was just wondering what -- why this increased that much?

Sam Sun

I'm sorry but I don’t know where the number comes from. I think that -- Qunar is an internet company and we always adopt light asset approach. And historically, the capital expenditure is always less than 5% of the total revenue and I believe the trend will continue this way. So I don’t think we will incur any significant capital expenditure in the near future.

Roger Gu – SWS Research

Okay, okay. Thank you.

Operator

Your next question comes from the line of Alicia Yap from Barclays. Please go ahead.

Alicia Yap – Barclays

Hi, thanks for taking my follow-up question. Quickly, I wanted to follow up on the group buy competitive dynamic. So I understand that a couple of the players are getting a lot more aggressive and you also are making pretty good improvement and inroad into the group buy volume as well. So are we, you know, what is our plan here? Are we -- will be going head to head and more aggressive or are we, similarly, we saw some of the other players actually scaling back on the group buy. So I just wanted to know what is our plan going forward.

CC Zhuang

Yes, I think, first of all, we are not a group buy site, we are a travel solution, you know, travel ecosystem so our group buy on the hotel part is primarily serving our strategic purpose of travel related business and so it may not be head to head to the other group buy business because, again, we are serving different markets.

However, just look at the group buy hotel volume, I believe we are just behind Maytuan [ph], are the number, you know, number one in terms of the online travel player. So I think we are fine with this current situation. However, we think, you know, the market potential is just so huge, there a lot of things that can be done on the hotel group buy business to expand our coverage, product offerings for consumers. So it's not driven by any competition, it is driven by our own mission.

Alicia Yap – Barclays

Thank you. Great. Very helpful.

Operator

Your last question comes from the line of Dick Wei from Credit Suisse. Please go ahead.

Dick Wei – Credit Suisse

Hi. Just a quick question about this tour packaging business, if you can give them more color in terms of like -- I guess, first of all, what is the competitive edge over other platforms and maybe if you can share also about some of the like -- destinations or the average tour prices and how do you expect kind of the growth going forward, that would be helpful. Thank you.

CC Zhuang

Yes. I think you know we are a platform, we are not OTA. So we currently is similar to our previous flight and hotel. We are a search-based platform, we allow any offline guys, OTAs to participate in our search or using our search platform to sell to the consumers. As of today, most of our services provider are using our sales transaction platform to sell the consumers.

And moving forward, that will be our continuous strategy, just open platform for everybody and we offer a multi-solutions for different kinds of business, it can be a full IT infrastructure built by us, it can be half IT infrastructure built by us, it can be a search only business cooperation. So I think this is our model and I think that model is most scalable, so far, it had been proved to be very well.

Yilu Zhao

And Dick, to just -- to give you some numbers, we offer over 200,000 tours and up by 35% from last quarter and the majority of which is for overseas destination.

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.

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. Good bye.

Operator

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

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