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Ctrip.com International, Ltd. (NASDAQ:CTRP)

Q3 2010 Earnings Conference Call

November 2, 2010 9:00 PM ET

Executives

June Zhu – IR

Min Fan – President and CEO

James Liang – Chairman

Jane Sun – CFO

Analysts

Richard Ji – Morgan Stanley

Chenyi Lu – Cowen and Company

James Lee – CLSA

Catherine Leung – Goldman Sachs

Mike Olson – Piper Jaffray

Chris Zee – BNP

Jin Yu – CICC

Wendy Huang – Royal Bank of Scotland

Eddie Leung – Bank of America/Merrill Lynch

Eric Wen – Mirae Asset Securities

Alex Yao – Deutsche Bank

Ming Zhao – SIG

Muzhi Li – Mizuho Securities

James Mitchell – Goldman Sachs

Candy Huang – Nomura Securities

Dick Wei – JP Morgan

Sam Lawn – Oppenheimer

Aaron Kessler – ThinkEquity

Fawne Jiang – Brean Murray

Wendy Huang – Royal Bank of Scotland

Operator

Good day, ladies and gentlemen. And welcome to the Third Quarter 2010 Ctrip.com International Ltd Earnings Conference Call. At this time all participants are in listen-only. Later we will conduct a question-and-answer session. (Operator Instructions)

As a reminder this conference is being recorded for replay purposes. I’d like to turn the conference over to your host for today Ms. June Zhu. Please proceed.

June Zhu

Thank Shania and thank you everyone for attending Ctrip’s third quarter 2010 earnings conference call. Joining me on the call today we have Mr. James Liang, Chairman of the Board, Mr. Min Fan, President and Chief Executive Officer and Ms. Jane Sun, Chief Financial Officer.

We may during this call discuss our future outlook and performance which are forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in Ctrip’s public filings with the Securities and Exchange Commission. Ctrip does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

Min, James and Jane will provide business update, industry outlook and financial highlights for the third quarter of 2010, as well as the outlook for the fourth quarter of 2010. We will also have a Q&A session towards the end of this call.

With that I will turn to Min for our business update, please.

Min Fan

Thanks, June and thank you to everyone for joining us today on the call. As we celebrate Ctrip’s 11th anniversary, we are pleased to report that our team once again delivered strong results in the third quarter of 2010. Our net revenues grew 49% year-over-year and net income grew 70% year-over-year.

We are pleased to note that 2010 Shanghai World Expo was a big success that propelled tourism nationwide. Our team captured opportunities to provide excellent service. It helps our brand and grow our market share. Our hotel supply network continues to expand to satisfy the growing needs of our customers, with 13,700 hotels by the end of the third quarter of 2010 compared to 9,400 hotels at the same time last year. The number of hotels will guarantee a lot more rooms further increased and accounted for more than 75% of the total hotel supply.

During the third quarter, our air ticketing volume grew at a strong pace, impart by the incomparable (inaudible) capacity the Ctrip team delivered strong results and extend our market share. As household income increases, consumer confidence becomes stronger. As a result, revenue from our packages has increased significantly in the third quarter. Our leisure travel network has been expanding rapidly. Intense products encourage more customers in the great China region to travel both within China and along the world.

Corporate travel has been strengthening its branding. During the third quarter and for the second year alone Ctrip was named the best corporate travel agent in China by Travel Weekly China. Two weeks ago Ctrip launched its updated CTMS, Corporate Travel Management System. This innovative system enables our corporate clients to obtain competitive prices and to locate their employees during emergencies, supported by wider coverage and comprehensive services, Ctrip’s Corporate Travel management team is able to provide high quality and reliability to our corporate clients.

With a concentrated and energetic effort Ctrip’s IT team has continued to bring innovation to our online and mobile platforms. Ctrip has officially released the current version for iPhone, Google Android and Nokia Symbian after successful launch of the wireless mobile website. These wireless platforms will enable our customers to make reservations more convenient. Our ongoing investment in online and offline platforms extend our leadership in the market.

According to a DoubleClick Ad Planner, Ctrip.com was the most visited travel website in China during the third quarter, listed as one of the leading travel portals in the world and number one in China. Ctirp is undisputed leader in the China’s online travel market. The Ctrip service team strives to improve customer service and to provide the best solutions to our customers.

In 2010 our call center once again, won the China and Asia Pacific Call Centre Award, that call center award issued by CCA, China Call Centre and CRM Association. This made Ctrip call center fourth time repeat winner. Awarding the owner, Ctrip’s call center was also rewarded the Golden Headset Award for the best contact center in China for fourth straight year. We believe the high quality of our services is a key to our ongoing success. We aim to continuously improve our service level and thereby maintain competitiveness and steady growth over the long-term.

Through the outstanding customer service and the endless effort of the Ctrip’s sales and marketing team, a number of our cumulative active customers increased to 11.1 million by the end of the third quarter of 2010, compared to 8.2 million for the same period in 2009. At the China CEO conference held in September, the organizer (Sino-Manager) Magazine announced that Ctrip rank among the top 10 list of the most creative companies for 2010. Ctrip was also the only online travel engine to make the rankings. Ctrip won this award during its efforts to innovating the past 11 years including one hour express lane for air ticketing, CTMS for Corporate Travel and our National Disaster Relief Fund for Ctrip customers.

Recently, Ctrip team has launched an initiative called Perfecting Customer Service which is a customer-oriented approach to delivering the perfect service. The Perfecting Customer Service system integrates products and the development of process improvement, technology innovation, marketing promotion and employee training. The goal for Perfecting Customer Service is to turn both online and offline travel services into duplicable, scalable and transmittable process in order to provide the best service experience for our targeted customers. We are confident that our continuous efforts in innovation will enable Ctrip to expand its leadership in the travel industry.

Now I would turn to James for the industry outlook.

James Liang

Thanks Min. Recent market analysis published in the Wall Street Journal shows that Chinese people with 50K RMB minimum annual income exceeds 10% of nation’s total population comprising over 130 million consumers. Continued growth in the segment will provide Ctrip with a solid foundation for future growth. With the success of 2010 Shanghai World Expo, the field of travel and tourism in China has gained strength worldwide. And even more tourists are expected to visit China in years to come.

China’s strengthening currency and the relaxed visa requirements also make it easier for Chinese travelers to travel abroad, and we will continue to capitalize on these opportunities for growth by means of solid execution, excellent customer service and effective sales marketing channel.

Now I will turn to Jane for the financial update.

Jane Sun

Thanks James. I’m very pleased to report the solid results for the third quarter of 2010. For the third quarter of 2010, Ctrip reported total revenues of RMB863 million or USD129 million, representing a 48% increase from the same period in 2009 and a 16% increase from the previous quarter.

Hotel reservation revenues amounted to RMB350 million or USD52 million for the third quarter of 2010, representing a 36% increase year-on-year, primarily driven by an increase of 30% in hotel reservation volume, and an increase of 5% commission per room night year-on-year. Hotel reservation revenues increased by 11% quarter-on-quarter, primarily driven by the increase in hotel reservation volume.

Air ticketing booking revenues for the third quarter of 2010 were RMB315 million USD47 million, representing a 36% increase year-on-year, primarily driven by a 30% increase in air ticketing sales volume, and a 4% increase in commission per ticket year-on-year. Air ticketing booking revenues increased by 3% quarter-on-quarter.

Packaged-tour revenues for the third quarter of 2010 were RMB141 million or USD21 million, representing a 161% increase year-on-year and a 110% increase quarter-on-quarter, due to the increase of leisure travel volume and seasonality. Wing On Travel and ezTravel contributed 108% for the year-on-year growth for packaged-tour revenues.

Corporate travel revenues for the third quarter of 2010 were RMB34 million or USD5 million, representing a 37% increase year-on-year and a 1% increase quarter-on-quarter, primarily driven by the increased corporate travel demand from business activities.

For the third quarter of 2010, net revenues were RMB812 million or USD121 million, representing a 49% increase from the same period in 2009 and a 17% increase from the previous quarter. In the third quarter, Wing On Travel and ezTravel contributed 11% for the year-on-year growth for net revenues.

Gross margin was 78% in the third quarter of 2010, compared to 77% in the same period in 2009, and remained consistent with that in the previous quarter.

Product development expenses for the third quarter of 2010 increased by 53% to RMB123 million or USD18 million from the same period in 2009 and 13% from the previous quarter, primarily due to an increase in product development personnel and share-based compensation charges. Excluding share-based compensation charges, product development expenses accounted for 13% of the net revenues, decreased from 14% in the same period in 2009 and in the previous quarter.

Sales and marketing expenses for the third quarter of 2010 increased by 33% to RMB125 million or USD19 million from the same period in 2009, primarily due to the increase in sales and marketing related activities and share-based compensation charges. Sales and marketing expenses for the third quarter of 2010 increased by 17% from the previous quarter, primarily due to the increase in sales and marketing related activities. Excluding share-based compensation charges, sales and marketing expenses accounted for 14% of the net revenues, decreasing from 17% in the same period in 2009 and remained consistent with that in the previous quarter.

General and administrative expenses for the third quarter of 2010 decreased by 69% to RMB80 million or USD12 million from the same period in 2009, primarily due to an increase in administrative personnel and share-based compensation charges. General and administrative expenses for the third quarter of 2010 increased by 13% from the previous quarter, primarily due to an increase in administrative personnel. Excluding share-based compensation charges, general and administrative expenses accounted for 5% of the net revenues, decreasing from 6% in the same period in 2009 and remained consistent with that in the previous quarter.

Income from operations for the third quarter of 2010 was RMB308 million or USD46 million, representing an increase of 55% from the same period in 2009 and an increase of 20% from the previous quarter. Excluding share-based compensation charges, income from operations was RMB368 million or USD55 million, representing an increase of 63% from the same period in 2009 and an increase of 17% from the previous quarter.

Operating margin was 38% in the third quarter of 2010, compared to 37% in the same period in 2009, and in the previous quarter. Excluding share-based compensation charges, operating margin was 45%, compared to 41% in the same period in 2009 and remained consistent with that in the previous quarter.

The effective tax rate for the third quarter of 2010 was 17%, increased from 13% in the same period of 2009, primarily due to the normalization of the tax rate in the third quarter of 2010. The effective tax rate for the third quarter of 2010 decreased from 19% in the previous quarter, primarily due to the impact of newly acquired entities.

Net income attributable to Ctrip’s shareholders for the third quarter of 2010 was RMB320 million or USD48 million, representing a 70% increase from the same period in 2009, and a 36% increase from the previous quarter. Net income for the third quarter of 2010 benefited from higher government subsidies recorded in other income line. Excluding share-based compensation charges, net income attributable to Ctrip’s shareholders was RMB380 million or USD57 million, representing an increase of 77% from the same period in 2009, and an increase of 30% from the previous quarter.

Diluted earnings per ADS were RMB2.11 or USD0.31 for the third quarter of 2010. Excluding share-based compensation charges, diluted earnings per ADS were RMB2.50 or USD0.37 for the third quarter of 2010.

As of September 30, 2010, the balance of cash, restricted cash and short-term investment was RMB3.1 billion or USD463 million.

For the fourth quarter of 2010, the Company expects to continue the net revenue growth year-on-year at a rate of approximately 30% to 35%. This forecast reflects Ctrip’s current and preliminary view, which is subject to change.

With that, operator we are opening the lines for questions.

Question-and-Answer-Session

Operator

(Operator Instructions) And your first question will come from the line of Richard Ji with Morgan Stanley. Please proceed.

Richard Ji – Morgan Stanley

Hi James, Min, Jane and June, good morning and congratulations on a very strong quarter.

Min Fan

Good morning.

Richard Ji – Morgan Stanley

Good morning. I have – let me start with the impact of the World Expo and obviously the Shanghai World Expo indeed gave a boost to China’s air travel industry overall, and also to the performance of your company. And as the World Expo ended last week and should we expect some slow down going forward, or should we expect continued sustainable growth because the World Expo also helped to boost awareness few of the travel services in China. And on that particular note, I mean it would be helpful also if you can provide us with some granularity on the breakdown for your 4Q guidance. Thank you.

Min Fan

Yes, Shanghai World Expo just closed and as everybody knows it has been very successful and the World Expo Shanghai promoted China and also I think as well as Ctrip. I think after this great event, still for the travel and EzTravel and business travel will not be as one expect there will be a slowdown significantly because if we compare the Beijing Olympic Games – after Beijing Olympic Games and the whole leisure travel to Beijing and around China seems not to be slowdown just secondary certainly. So I think for this World Expo China and Shanghai and Ctrip will also benefit from this after Expo impacts.

Jane Sun

And Richard, to add our financial comments, I think our growth is very much linked to the China’s economy. So if China’s economy has a sustainable growth in the next few years, we are very positive on the growth for Ctrip. And regarding our guidance, we guide at net revenue growth at about 30% to 35%. And for hotel, we believe 25% to 30% – 25% to 35% year-over-year growth is achievable. For air, 25% to 35%, for packaged-tour about 100%, and for corporate travel about 25% to 35%. So if you add all these together that’s giving us aggregated growth rate for 30% to 35%.

Operator

And your next question comes from the line of Chenyi Lu with Cowen and Company. Please proceed.

Chenyi Lu – Cowen and Company

Thank you. I just have a question regarding the gross margin trend, this quarter again company delivered about 78.3% gross margin and then gross margin has been really strong over the last two or three quarters. I’m just wanting to see, whether you see the gross margin trend to continue going forward?

Jane Sun

I think 78% gross margin is very strong and our team will maintain very efficient operation to make sure we deliver strong gross margin. But conservatively I think our gross margin is somewhere between 75% to 77% in the near future, it’s very much achievable.

Operator

And your next question comes from the line of James Lee with CLSA. Please proceed.

James Lee – CLSA

Congratulations on a very good quarter. Jane, can you quantify maybe the air volume a little bit during the quarter, it seems like the volume was really strongest in the quarter and also the (inaudible) was a little bit stronger (inaudible) and maybe a little bit of lag in terms of (inaudible) from the airliners in general? Thanks.

Jane Sun

James, your voice was cutoff in the middle, but we did hear your first question which is to ask us to comment on the volume. In Q3, the volume growth is very strong. For hotel, we were able to deliver 30% year-over-year growth. For air ticketing, its similar, 30% year-over-year growth. I think our scalable platform and also our strong customer services have won us the strong volume growth. And going forward, we believe as long as the economy is holding strong, travel business will hold very strong and if the travel business is holding very strong our team will work very hard to grow our volume and extend our leadership.

And sorry James for the middle of your question, the line was cutoff, do you mind repeating that again if we haven’t addressed your question? Maybe later. Hello?

Operator

And your question comes from the line of Catherine Leung with Goldman Sachs. Please proceed. And Catherine, your line is open to ask a question.

Catherine Leung – Goldman Sachs

Yes, can you hear me now?

Jane Sun

Yes.

Min Fan

Yes.

Catherine Leung – Goldman Sachs

Okay, sorry. My question is in terms of the company’s performance relative to the market. Are you seeing stronger growth in new customers from tier one or tier two cities and is there a material difference in the customer mix from these two cities – tiers for your hotel and air ticketing businesses?

Min Fan

I think our new customers generally from the hotels and airline ticketing and also travel business are quite strong this quarter. And during this quarter, we’re happy to see the new customers generate from the leisure, leisure section is very strong. And I think this also benefited [ph] with the World Expo and we hope we can maintain the momentum in the coming quarter as you know the China recently we promote more and more leisure products among our targeted customers. So I think during this quarter we will see very good market.

Operator

And your next question comes from the line of Mike Olson with Piper Jaffray. Please proceed.

Mike Olson – Piper Jaffray

Thanks very much, good morning. A couple of quick questions, one is just, as far as the Q4 guidance, Jane, can you talk about what the pricing assumptions are built into your guidance?

Jane Sun

Sure. For our guidance, we assume the driving force, the main driving force for the growth is coming from volumes. We assume that the price will increase on a year-over-year basis between 5% to 10%, which will be partially offset by the commission rate decrease between 5% to 10%. So if you add volume times price times commission rate, the main driving force will be volume driven.

Mike Olson – Piper Jaffray

Okay and then as far as, if you look at the competitive environment for online travel compared to offline travel, will you guys face more competition in online bookings than you have in offline bookings and I guess what changes in the competitive environment have you seen over the last several months in the online sites?

Min Fan

Yes, I think that, as you know, since China travel market is so big and we always welcome more players in this field and if there are more online players in the market then that will mean that more and more customers will be educated that this would be very good for the whole industry and also I think it grows for Ctrip. Ctrip is so far still the undisputable online travel player in China and also we have the best offline service, travel service in China. I think the competition landscape has not been changed so far. Of course, we will monitor our competitors very closely and also we will go back to grow our competition age.

Mike Olson – Piper Jaffray

Okay and then one last question. What percent of bookings in Q3 were online, and what do you expect 2011 online bookings will be as a percent of overall bookings?

Jane Sun

In Q3, the online bookings increased to about 37% and every year we invest a lot of resources in online platform and every year we grow a couple of percentages. So slowly but surely every quarter, we would try to move a few percentage online.

Mike Olson – Piper Jaffray

Thanks very much.

Jane Sun

Sure, thank you.

Operator

And your next question comes from the line of Chris Zee with BNP. Please proceed.

Chris Zee – BNP

Good morning guys, congratulations on a very strong set of results.

Min Fan

Thanks Chris.

Chris Zee – BNP

I have a couple of questions. First of all, for the Shanghai Expo because 3Q was a full quarter for this event to be happening – to have happened. Can you help us to quantify what was the volume in terms of the air ticketing side both inbound and outbound in and out of Shanghai for air ticketing, as well as the hotel reservations for the volume out of your total bookings Can you help us to understand?

Jane Sun

Chris, I think normally our first tier volume including Shanghai, Beijing, Guangzhou, Shenzhen represents approximately 50% of the total.

Chris Zee – BNP

Okay, and should we expect Shanghai to be half of that for 3Q because of the Expo or do you have that for accounting in front of you?

Jane Sun

We don’t have the number in front of us but Shanghai will remain to be a very important traffic hub in China and Shanghai is well our headquarters. So with our without World Expo Shanghai will remain to be an important hub for us.

Chris Zee – BNP

Sure. Okay, I just have one more follow up, you mentioned the online booking account for 37% of total booking in the third quarter. Did that also include the mobile or iPhone or other smartphone kind of booking, is that 37% included of that?

Jane Sun

Mobile and smartphone, they represent very, very small amount. So add to the online platform with or without them the percentage doesn’t change.

Chris Zee – BNP

I see but with your company’s internal budget or outlook, what do you see online booking to account for in 2011 next year?

Jane Sun

That’s the way, I guessed that.

Min Fan

I think every year we will grow that to increase, I feel point or percentage to add more online production. As you know, this is not so easily to do in China and we do see more and more people will search online and they will find various information on Ctrip website, but a lot, quite some people will still book offline which is more convenient to them. So I think it’s gradually the process for us to migrate the offline users to online platform.

Operator

Ladies and gentlemen, as a reminder please limit your questions to one question. And your next question comes from the line of Jin Yu with CICC. Please proceed.

Jin Yu – CICC

Hi, good morning, Min, Jane and James and congratulations on that strong results.

Min Fan

Thank you.

Jane Sun

Thanks.

Jin Yu – CICC

Well I have two straightforward questions. The first one is you made eyeball-to-eyeball comparisons is namely in this quarter you partnered of Wing On Travel. What will be the growth for the packaged-tour business? That’s the first one. And the second one is to heading back [ph] our fourth quarter guidance has factored the potential impact of Olympics Games in Guangzhou?

Jane Sun

Sure. The Wing On for this quarter was very strong because Q3 is normally their strongest quarter. Without Wing On and ezTravel, our team delivered about 50% to 70% – 50% to 60% growth for packaged-tour. And for Guangzhou, the Asian Sports Meet definitely is a good event to further promote the concept of China, the concept of Guangzhou. However I think the impact is relatively minor compared to World Expo, just because it only lasts for two weeks.

Operator

And your next question comes from the line of Wendy Huang with Royal Bank of Scotland. Please proceed.

Wendy Huang – Royal Bank of Scotland

Apologies first, that I actually have more than one questions. And first management actually mentioned a lot of factors to affect the inbound and outbound travel demand in the next few years. Does that mean that the company has some strategic focus change on international travel, and currently international travel accounted for just 10%, but do you expect that to account for more than 30% in the long-term? And second question is really to just help the modeling. Your tax rate declined this quarter due to the newly acquired entities. So which entity is that, and do you expect that this low tax rate to be recurring going forward? And also can you update on your equity update in Home Inns and China Lodging, and how should we model that in the next few quarters, equity income? Thank you.

Jane Sun

So our CEO will address your first question and I will address the second and third questions.

Min Fan

I think in the coming years, both inbound and outbound travel business will be booming. As you probably know that recently the Central Government just released its 12th five-year plan. And the travel business is one of the key industry to promote this five-year plan. And I think at Ctrip we are working very hard to attract more and more inbound international travelers. And Ctrip’s English website I think is the best foreign language website to promote Chinese travel business in China and we do see the volume and unique visitors and production from our English website is growing very fast in the past years and also we do see that change is very encouraging in the coming years.

And as you know we ran out – we have around 10% of the total bookings were generated from non-Chinese residents and I think in the coming years, the percentage can be increased, by the way the total base is also increased. So I think it’s very hard to predict whether when we can reach 30% of the total booking can be generated from the inbound travelers. But we do see the trend is there. And for outbound travel business in China the home market is growing at around more than at two digits growth. So we do see in the coming five year, this trend will still be there. And as you know, recently we achieved quite good results in the leisure travel business. So we think Ctrip can be one of the major players in this leisure travel outbound business.

Jane Sun

And Wendy, your question on the tax rate. Going forward for your model, I think our tax rate are somewhere around 20% is sustainable. This quarter is a little bit lower, just because one of our overseas entity had a onetime tax benefit, that’s the main reason. Secondly on the equity income. We record 18% of Home Inns net income as our equity income, on a one quarter lag basis. So what we recorded this quarter, we’re flat 18% Home Inns Q2 net income. And they have not released Q3 earnings yet, but once they do, you can easily use their number plus our ownership and that will be our equity number.

For Hanting, we have about 9% of the ownership. So we use cost accounting which is only mark-to-market on balance sheet without any P&L pickups.

Operator

And your next question comes from the line of Eddie Leung with Bank of America. Please proceed.

Eddie Leung – Bank of America/Merrill Lynch

Good morning guys. Just a housekeeping question. Could you guys give us the industry price trends of tickets and hotels in the same quarter?

Jane Sun

Sure. The price for hotel and air when we see it in our system is somewhere around 5% to 10% increase.

Eddie Leung – Bank of America/Merrill Lynch

Jane, do you expect the same trends in the near term say in the fourth quarter?

Jane Sun

Yes we – in our guidelines, we forecasted the price will be somewhere around 5% to 10%, which will offset by the commission rate drop by almost the same rate. So on a per ticket or per room basis, the commission will stay stable on a year-over-year basis.

Operator

And your next question comes from the line of Eric Wen with Mirae Asset Securities. Please proceed.

Eric Wen – Mirae Asset Securities

Hi, good morning, Jane, James and Min.

Jane Sun

Good morning.

Eric Wen – Mirae Asset Securities

Good morning. I just have a very simple question. On Wing On, I estimated it’s contributing about RMB55 million revenue, can you comment on the seasonality of Wing On going forward?

Jane Sun

Yes, Wing On normally Q3 is their strongest quarter and when they move into winter the slow season starts and Q4 will slow and Q1 will be a little bit slower and when they more further into spring, when the weather becomes warmer, they would pick up the volumes again.

Eric Wen – Mirae Asset Securities

But Jane, can you – if you can comment on from peak to trough typically what kind of difference do we see in Wing On’s business?

Jane Sun

I think normally Wing On normalized revenue contribution to our overall pool should be somewhere around 5% to 6%.

Eric Wen – Mirae Asset Securities

I see. Thanks.

Jane Sun

Sure, thank you.

Operator

And your next question comes from the line of Fawne Jiang with Brean Murray. Please proceed.

Jane Sun

Fawne are you there?

Operator

And your next question comes from the line of Alex Yao with Deutsche Bank. Please proceed.

Alex Yao – Deutsche Bank

Hey good morning everyone, and congratulations on a very strong quarter.

Jane Sun

Thank you.

Alex Yao – Deutsche Bank

I have few housekeeping questions. The first one is can you please comment on the business tax? It looks like business tax, dropped as a percentage of total revenue. Is it because of the consolidation of Wing On? And second, and also can you comment about the trend going forward? Second question is on the other income, is it because of the government subsidy in the third quarter, and how do you expect the government subsidy in the fourth quarter? Thank you very much.

Jane Sun

Sure. First of all, on business tax, it really depending on which entity drives the volume. On average, business tax should be somewhere around 5% to 7%. This quarter it was a little bit lower because Wing On has a lower tax rate. So blended rate has decreased. Going forward, I think 5% to 7% is a sustainable range. On the other income, this quarter we got government subsidies and we do not expect any more government subsidies for the rest of the year based on the current visibility. Obviously, we will do our best but the timing of the government subsidy and also the amount of the government subsidies is not in our control. So pretty much we have probably collected everything for the year.

Operator

And your next question comes from the line of Ming Zhao with SIG. Please proceed.

Ming Zhao – SIG

Thank you very much for taking my questions. Two quick questions, the first on the Wing On acquisition, I think you already talked about the top line contribution. Could you give us some color about its margin, and expense structure as compared with your owned business. How does that look like? The second question is if you don’t mind, could you give us some color about your cash flows for the quarter, what’s your operating cash flow and your CapEx in the quarter? Thank you.

Jane Sun

Sure. Wing On, their scale is much smaller than Ctrip’s and therefore the margin is a little bit lower. The margin depending on the seasonality can be somewhere around 20% to 30%. Compared to the same level of the similar players, their margin is very high, but compared to Ctrip’s, their margin is a little lower than ours. On the cash flow for the quarter, from operating we have generated somewhere around RMB350 million cash. For investment, the CapEx is about RMB20 million to RMB30 million, but we also moved some cash to short-term investments. So if you count that, that is about RMB 250 million. And then financing activities, that’s minor about RMB30 million income.

Operator

And your next question comes from the line of Muzhi Li with Mizuho Securities. Please proceed.

Muzhi Li – Mizuho Securities

Hi, thank you for taking my questions and congratulations on a great quarter. Would you please give me some guidance about the future revenue contribution from Wing On and ezTravel, do you see that current 11% revenue contribution is sustainable in the future? Thank you very much.

Jane Sun

For the ongoing contributions from these two entities, I think the normalized revenue contribution should be somewhere around 5% to 6%. This quarter it is very high, just because seasonally Q3 is the strongest quarter.

Operator

(Operator Instructions) And your next question comes from the line of Jin Yu with CICC. Please proceed.

Jin Yu – CICC

Well thank you for taking my question again. I have two earlier stated questions. One question is can you update us on some (inaudible) figures. I wanted to know what percentage of our online traffic comes from wireless, and if possible what percentage of online congestion [ph] comes from wireless. And so what is the percentage split between like FIT and major [ph] users? That is my first question.

Min Fan

I think the percentages for online production from wireless is very small right now, and compared to our total production. And we do see that the gross rate for wireless and mobile phone production is increasing very quickly, but still we need some time to cultivate this part of business. So right now we cannot give you a very concrete number on this. And for our business travel – for our FIT business and for business and the leisure right now few around 80% generated from our business travelers and around 20% generate from the leisure travelers. This is the picture for our total segment.

Operator

And your next question comes from the line of James Mitchell with Goldman Sachs. Please proceed.

James Mitchell – Goldman Sachs

Hi great, I had a couple of questions about air commissions. I think you mentioned in your guidance in size, air ticket prices up 5% to 10% year on year in the fourth quarter, and air ticket commission was down a little bit canceling part of that out. First would you expect air commissions to rebound in Q4 as air demand normalizes, or do you think that some of the airlines have moved to structurally different air commission structures, and then in the past in Q4 you’ve got some big year-end bonus commissions delivering certain volume levels, is there any reason why you wouldn’t receive those bonus commissions this year in Q4? Thank you.

Jane Sun

Sure. On the air commission, I think we have seen the air commission has been stabilizing. And for our team, our goal is to execute our operations as efficient today as possible, which then can provide efficient distribution channel for our airline partners. How much commission airlines will pay us its mainly a decision by airlines, but what we will do is always work hard with airlines to provide good value and good channel for them. So, so far we have seen the air commission represents about 5% to 10% decrease on a year-over-year basis. And as long as we remain to be efficient channel, we believe its stabilizing.

On the pricing, you’re right. On the pricing, it’s about 5% to 10%. Regarding the last part of your question, is there any structural changes besides what we have discussed. So far there is nothing else – we haven’t discussed. I think the market – normally its very market driven phenomenon when the volume is very strong, I think the travel agencies need less sales marketing campaign to support their sales. But when the market is softening, I think everybody in the sales channel will be puts a lot of efforts to promote the tickets. From a structural perspective so far, I think it’s very stable.

Operator

And your next question comes from the line of James Lee with CLSA. Please proceed.

James Lee – CLSA

Well, thanks for taking my follow-up questions. Jane, can you help us understand maybe the second quarter for air pricing was up 4% better than expected, and can you let us know why that was better than your original guidance? And also as we head into next year, assuming the traffic pattern around the country starts to normalize without the high concentration in and out of Shanghai. How should we think about commissions in the air tickets – commission for air tickets and also for hotel from that trend? Thank you.

Jane Sun

Sure. For the hotels, we believe the commission rate is very stabilized, somewhere around 14% to 16%, which give us an average of about 15% is very sustainable. On the air ticket, next year I think it will be more evenly spread out through other major cities, rather than with heavy competition for Shanghai bounded airlines. So our team has been working very hard to make sure our fulfillment capacity can reach out to the whole country so that we can provide good services to our customers. So hopefully a more evenly distributed channel will promote the overall growth in the air ticketing business.

James Lee – CLSA

Can you also comment about Q2 air pricing being better than expected?

Jane Sun

Air pricing is overall in the market it’s about 10% to 15% increase in Q3, which is partially offset by the commission decrease. So that’s why we saw on each ticket, we were making about 4% more on a year-over-year basis. I think partially due to the strong demand in the market, the price was holding very strong in Q3.

Operator

And your next question comes from the line of Candy Huang. Please proceed.

Candy Huang – Nomura Securities

Good morning, one quick question on the quarter-on-quarter growth for the air ticket and hotel. Because I think as both sector will benefit from World Expo and the strong demand from the domestic market. I assume the quarter-on-quarter growth for the hotel is still – the growth rate is still much stronger than the air ticket. So can you give us the reason for the difference in the growth rate, and second for the World Expo, can you give some color how much percent of the revenue comes from the World Expo in the third quarter? Thank you.

Jane Sun

Sure. On a quarter-on-quarter basis, Q3 is the strongest quarter for travel industry. That is why you see a quarter-over-quarter strong growth as well. And for hotel, I think the hotel probably people start to travel by all means, not only by airlines but also by driving, by short distance highway in the nearby cities. So that’s why I think on a quarter-over-quarter basis, hotel represents a little bit higher growth rate than the air. On World Expo, in general World Expo has been very successful and its promoted to the concept of China, promoted to Shanghai and also promoted Ctrip brands. However from our perspective, it’s very hard to quantify what exactly is the volume from World Expo, just because when we make the booking, we do not ask customers the purpose of their travel.

So we know in general the market was very strong partially due to World Expo. But it’s very hard to quantify it.

Operator

And your next question comes from the line of Dick Wei with JP Morgan. Please proceed.

Dick Wei – JP Morgan

Hi, thanks for taking my question. I just have a question on sales marketing expenses. If you can give an update on your marketing strategy, and how do you allocate a budget across different channels, and any changes of your marketing initiatives in-light of so many more online competition that would be helpful? Thanks.

Min Fan

Yes, for marketing, we always focus on efficient marketing and best co-operation channels among the industry and definitely for the past quarter, we achieved good results in terms of sales and marketing. And we do see, we get very good production from our partner channels as our direct sales channels. And we will – we are still pretty disciplined [ph] to obtain long-term profitable growth in the way we try to cultivate our healthy environment and always focus on value for money, rather than price competition. And I think in the coming years, we would still focus on the marketing efficiency and the service quality in our branding.

Operator

And your next question comes from the line of Sam Lawn [ph] with Oppenheimer. Please proceed.

Sam Lawn – Oppenheimer

Hi thanks for taking my call. Just a quick follow-up on the Expo questions that were just asked before, I know it’s hard to quantify in terms of the Expo impact on your revenue, but if you look at Shanghai alone what was the difference between, in terms of revenue wise and demand on your flights and hotels? Can you give some color on that, and I’ll follow-up after that.

Jane Sun

Sure. How Expo, we do see people are interesting in travel to Shanghai more than the other travel destinations. So if we look at the volumes, Shanghai has a pickup. However, for the other regions, some other regions have a decline. So if you add all of them together, we feel the impact is not extremely significant just because our coverage for the whole country is so big and if a family has a budget to have two trips a year, if they’re coming to Shanghai, they’re probably not going to Xian or they are not to (inaudible). So that’s why from a volume perspective, we feel it’s very normal. Now on the pricing though, because of the World Expo, but also of the strong economy, the pricing on the year-over-year basis represents about 10% to 15%.

But again that’s very hard to segregate to say 2% of that is due to export, 2% of that is due to economy. Overall we feel the Expo coupled with the strong economy gave us a very strong foundation for the growth.

Sam Lawn – Oppenheimer

Okay, that was really helpful. When you say 10% to 15%, are you talking about overall pricing, is that about hotels in general or airlines or everything?

Jane Sun

Both, 10% to 15% both.

Sam Lawn – Oppenheimer

Okay. And do you expect, my follow-up question is, after the Expo now, do you expect a drop in pricing with that?

Jane Sun

Drop in price, it’s still too early to tell because in October the price didn’t changed, because we were still in the World Expo. In November – today is November the 3rd it’s a little bit too early to see but we will carefully monitor the price going forward.

Operator

And your next question comes from the line of Aaron Kessler with ThinkEquity. Please proceed.

Aaron Kessler – ThinkEquity

Great, thanks and good quarter, couple of questions. First, given you’ve had a few quarters where operating margins in the mid 40s, I mean how you think about the long-term operating margin now, I think historically you’ve had in the low 40 range. Any update on – are you seeing an increase in outbound travel besides the acquisition of Wing On?

Jane Sun

I think the margin for Q3 is 45% which is very high. In the long run, we will work had to improve efficiency. So we believe operating margin, 40% to 42% is very much sustainable. For outbound business, I think Wing On has been a very good acquisition for us because our two teams have been working closely to leverage each other’s strength to increase our expertise in outbound business. For other targets, I think we are always open to reveal all the opportunities but we have to be very disciplined and prudent when we execute M&A strategies.

Aaron Kessler – ThinkEquity

Great, thank you.

Jane Sun

Sure, thanks.

Operator

And your next question comes from the line of Fawne Jiang with Brean Murray. Please proceed.

Fawne Jiang – Brean Murray

Thank you, good morning. Just one quick question.

Jane Sun

Good morning.

Fawne Jiang – Brean Murray

Hi, just one quick follow-up question on the Wing On acquisition. You mentioned that Wing On and ez collectively contribute 11% of your top line growth. Is it possible to breakdown individual business growth?

Jane Sun

Yes, the reason we put them out combined is because the – we would like to show investors what is our core business growth rate versus the acquired business. The 11% is the total contribution from both entities. For Wing On, it’s a pure increase because last year it was not in our base. For ezTravel, they were already in our bases. Their growth rate probably is somewhere around 25% year-over-year.

Fawne Jiang – Brean Murray

Got it, thank you.

Jane Sun

Sure, thanks.

Operator

And your next question comes from the line of Wendy Huang with Royal Bank of Scotland. Please proceed.

Wendy Huang – Royal Bank of Scotland

Thanks for talking my follow-up questions. I tried to get more color on the margins of packaged-tour. So at the gross margin level, I remember you mentioned before that the long-term gross margin of packaged-tour should be somewhere between the air ticketing and hotel booking. So given that this quarter packaged-tour already accounted for 15% of revenue. So do you think you already reached that kind of long-term gross margin level for packaged-tour or how far we are away from that gross margin level? And also turning to the net margin level, is packaged-tour actually earnings accretive at the moment and if not, where is the discrepancy that your packaged-tour business versus the traditional travel agencies. And why there is such a difference? Thank you.

Jane Sun

Yes, so Wendy your understanding is correct. For our packaged tour, it’s a hotel plus air combination. So the gross margin should be in range of 70% to 80%. Right now we’re already very close to that range because of the fast growth. Giving the fast growth rate in packaged-tour, I think in the next one to two years, we’ll increase the margin due to the scalability. In terms of the comparison, our margins versus traditional tour package, I think our margin is little higher. First of all, the packaged-tour market we have is high-end leisure travelers instead of everybody. So right now the budgeted travelers is not our packaged market. So that is the precondition for very healthy margins.

Secondly is our scalability of our platform. Because we have such a big scale, the margin we can achieve is healthy compared to the others.

Operator

And your next question comes from the line of Alex Yao with Deutsche Bank. Please proceed.

Alex Yao – Deutsche Bank

Hi, good morning guys, just one last follow-up question. Can you guys talk about the headcount as of the end of third quarter and give us a breakdown of the headcount? Thank you.

Jane Sun

Sure, the headcount is somewhere around 12,000 employees and half of them are call center employees. And the others are allocated based on the business needs in each product development team, sales and marketing team and administrative staffs.

Alex Yao – Deutsche Bank

Okay, thank you.

Jane Sun

Sure, thanks.

Operator

And your final question comes from the line of Eric Wen with Mirae Asset Securities. Please proceed.

Eric Wen – Mirae Asset Securities

Thanks very much for taking my last question.

Jane Sun

Sure.

Eric Wen – Mirae Asset Securities

Jane, could you just quickly comment on corporate travel. What is the gross margin compared to your other line of business?

Jane Sun

Sure. For the business line, I think corporate travel is very close to air ticketing business, because the majority of the volumes are coming from the air ticketing business. So gross margin anywhere between 65% to 70% is achievable.

Eric Wen – Mirae Asset Securities

Okay, thank you.

Jane Sun

Thanks.

Operator

And that concludes the question-and-answer session. I now would like to turn the call back over to June Zhu for closing remarks. Please proceed.

June Zhu

Thanks everyone for joining us on the call today. A replay of the call will be available as usual on IR website shortly after the call is completed. We appreciate your interest in Ctrip and look forward to convening with you again next quarter.

Jane Sun

Thank you very much.

Min Fan

Thank you.

Jane Sun

Goodbye.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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Source: Ctrip.com International CEO Discusses Q3 2010 Results - Earnings Call Transcript

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