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eLong, Inc. (NASDAQ:LONG)

Q3 2010 Earnings Call Transcript

November 11, 2010 7:00 pm ET

Executives

Philip Yang – IR

Guangfu Cui – CEO

Mike Doyle – CFO

Analysts

Eddie Leung – Bank of America

Fawne Kiang – Brean Murray, Carret & Co.

Michael Anthony – Promise

Operator

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

Philip Yang

Hello everyone, thank you for joining eLong’s third quarter 2010 conference call.

Today, Guangfu Cui, our CEO, will make some remarks about the company’s performance in the third quarter 2010 followed by Mike Doyle, our CFO, who will provide additional detail on our financial results. Following their prepared remarks, Guangfu and Mike will be available to take your questions.

Before the management presentations, please allow me to read our Safe Harbor Statement. During this conference call representatives of the company will make certain forward-looking statements within the meaning of the U.S. Securities Act and the Securities Exchange Act. These statements are based upon management’s current views and expectations with respect to future events and are not a guarantee of future performance. Furthermore, these statements are, by their nature, subject to a large number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements as a result of a wide variety of factors. eLong undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. Please refer to the risk factors described in our Annual Report on Form 20-F, as well as the full text of the Safe Harbor Statement in our Form 6-K, which will be furnished to the SEC in connection with our press release and this conference call, for discussion of some of the important factors that could affect future results.

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

Guangfu Cui

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

We are proud to report another quarter of strong top line growth with net revenues growing 42% year over year to RMB138 million, and income from operations growing 104% year over year to RMB12 million. Among the factors which contributed to our performance in the third quarter were: our efforts to drive online growth; strong summer travel demand in China, and the Shanghai World Expo.

We increased hotel coverage over 54% to approximately 14,300 hotels in the third quarter from approximately 9,300 during the same period a year ago, and in October we expanded our coverage to more than 15,000 hotels. In addition, eLong.com offers customers more than 130,000 hotels worldwide through our interface with Expedia. eLong.com continues to be the largest online distributor in China in terms of hotels offered which can be directly booked. We will continue to expand hotel coverage where we see demand from our customers. This effort is in line with our vision, which is to become the largest online travel marketplace in China.

We have run our “eCoupon” promotion for 12 months. eCoupon offers discounts of up to 100 Renminbi off hotel bookings made online. The eCoupon has reinforced eLong’s brand position of “real savings and a worry-free booking experience”, and rewarded customers for transacting online. In the third quarter, we increased online marketing spending to capture the summer travel demand. We are happy to see the continuing growth of our online hotel bookings in the past few quarters, and online transactions now comprise over 40% of our total hotel transactions. We will keep driving our business online going forward as we believe this represents the best opportunity for our long term growth, and we will also work to improve efficiency of our coupon and online marketing spending.

We have been improving our customer experience both online and offline. In the third quarter, we continued to upgrade our website, which provided customers with faster page loading time and better website availability. Our call center continued its high quality service with a 99% customer satisfaction rate and a 92% very satisfied rate.

In the third quarter, we took steps to increase the efficiency of our air business. We phased out air ticket cash transactions in most cities, and by November 1, we had completely eliminated cash transaction business. This move may negatively impact revenue from the air ticketing business for a few quarters; however, we believe this will improve our competitiveness in our air ticketing operations in the long run as we focus on providing outstanding service to the growing number of credit card and other non-cash transaction customers. Going forward, the key challenge for our air business is to address the ticket price competitiveness vs. airlines websites, and vs. wholesalers selling online.

Our priorities remain the same as shared with you at the beginning of the year.

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

to further improve online booking and after sales experience;

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

to work with hotel and air suppliers to procure competitively priced products for our customers.

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

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

Mike Doyle

Thank you, Guangfu. In the third quarter, strong online hotel performance drove our year-on-year revenue growth to 42% as well as drove improvement in gross margin and operating margin. Income from operations was RMB12.0 million, an increase of RMB6.1 million from our income from operations of a year ago and net income was RMB1.2 million, a decrease of RMB6.3 million from our net income of a year ago.

Our Q3 hotel booking business benefited from improved online hotel conversion, due to our broader hotel inventory portfolio, our eCoupon program and travel demand for the Shanghai World Expo.

In the third quarter, hotel commission revenue increased 46% compared to the prior year quarter, primarily due to higher volume, which was partially offset by lower commission per room night. Room nights booked through eLong increased 60% year-on-year to 1.9 million. Commission per room night decreased 9% year-on-year primarily due to the impact of our eCoupon program and mix shift to lower average daily rate budget hotels. Hotel revenue now represents 69% of our total revenues, which is an increase from 66% in the prior year quarter.

Air ticketing commission revenue increased 31% for the third quarter of 2010 compared to the prior year quarter, driven by a 4% year-on-year increase in air segments to 629,000, and an increase of 21% in the average ticket price compared to the prior year quarter. Air revenue now represents 22% of total revenues down from 25% in the prior year quarter.

Other revenue increased 37% year-on-year for the third quarter of 2010. Other revenue is primarily derived from advertising on our websites, travel insurance and packages. Other revenue was 9% of total revenues which was the same as the prior year quarter.

Gross margin increased to 73% from 70% in the third quarter 2009 mainly due to the more rapid growth of our hotel business than our air business, an increased proportion of online bookings and improved air revenue per segment.

Total operating expenses increased 43% or RMB26.5 million for the third quarter of 2010 compared to the third quarter of 2009. Total operating expenses were 64% of net revenues which was the same as the prior year quarter.

Service development expense consists of expenses related to technology and our product offerings, including our websites, platforms, other system development, as well as our supplier relations team. Service development expense increased 39% in the third quarter of 2010 compared to the prior year quarter, mainly driven by an increase in headcount and higher employee compensation. New service development hires were deployed to continue improving our online user experience, technology systems and expand our hotel coverage. Service development expense decreased to 15% of net revenues in the third quarter of 2010 from 16% in the same quarter of the prior year.

Sales and marketing expenses for the third quarter of 2010 increased 51% or RMB18.4 million over the prior year quarter, mainly driven by increased online marketing expenses, hotel commission payments to third-party distribution partners and loyalty point promotion expenses, partially offset by reduced headcount. Sales and marketing expense increased to 40% of net revenues in the third quarter of 2010 from 37% in the same quarter of the prior year.

General and administrative expenses for the third quarter 2010 increased 19% compared to the prior year quarter, mainly driven by higher employee compensation. General and administrative expenses decreased to 9% of net revenues in the third quarter of 2010 from 11% in the same quarter of the prior year.

Operating Income Before Amortization (“OIBA”) in Q3 2010 was RMB16.2 million up 84% from RMB8.8 million in Q3 2009. OIBA margin was 11.8%, up from 9.1% in Q3 2009.

Other income or expenses, which represents interest income, foreign exchange losses and others, was Other Expense of RMB8.3 million in the third quarter of 2010, compared to Other Income of RMB2.1 million in the prior year quarter. The increased Other Expense was comprised primarily of RMB9.4 million foreign exchange losses, partially offset by interest income of RMB1.7 million. Due to the appreciation of the Renminbi against the U.S. dollar, our Q3 foreign exchange losses were significantly higher than the foreign exchange losses of RMB3.9 million in the second quarter of 2010, and foreign exchange losses of RMB0.3 million in the prior year quarter.

Net income for the third quarter was RMB1.2 million compared to net income of RMB7.5 million in the prior year quarter.

Moving to our Balance Sheet, I’d like to mention that as of the end of third quarter of 2010, eLong held cash and cash equivalents, short-term investments and restricted cash of RMB1.0 billion or US$152 million. Of this balance, 68% or US$103 million was held in US dollars.

In this quarter’s release, you may have noticed the inclusion of three new non-GAAP financial measures, quarterly Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income Per Share figures. The objective of sharing these non-GAAP financial measures is to provide useful financial metrics to assess our operating and financial performance. These non-GAAP financial measures may be widely used by other companies and may be used by investors as a measure of our financial performance. For the definition of Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income Per Share and the reconciliations to GAAP measures, please review our third quarter release. Adjusted EBITDA in Q3 was RMB21.8 million up 57% from RMB13.8 million in Q3 2009. Adjusted Net Income in Q3 was RMB15.5 million, which is an increase of 45% from RMB10.7 million in Q3 2009. Adjusted Net Income Per Share for the third quarter of 2010 was RMB0.30, compared to Adjusted Net Income Per Share for the prior year quarter of RMB0.21. Historical quarterly Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income Per Share data for each quarter of 2009 and 2010 are included in the release.

And finally, let me share with you our Business Outlook for the fourth quarter of 2010. We expect Q4 net revenues, net of business tax and surcharges, to be within the range of RMB116 to RMB126 million, an increase of 15% to 25% compared to the fourth quarter of 2009.

This concludes my remarks; and, Guangfu and I look forward to any questions you may have.

Moderator, if you would now open the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question is coming from the line of Eddie Leung from Bank of America. Please go ahead.

Eddie Leung – Bank of America

Good morning, guys. I have a couple questions. The first one is regarding the deceleration in the fourth quarter, given your outlook. Could you talk about it and give us more color on how much the impact of the ending of Shanghai Expo and how much from the impact of you guys placing out the cash transactions?

Mike Doyle

Yes, sure. We can talk about our guidance. Both Expo and leisure growth has fueled our – leisure travelers fueled our growth over the last few quarters. And last quarter we did share in the call the impact of Expo and we will today as well. We believe that about 10 percentage points of our room night growth was directly attributable to the Expo. And so we have seen that portion of demand soften since the close of the event. The cash payment option on our air booking business represented anywhere from 10% to 50% of total volume depending on the branch location. And we have seen some adoption about our payment methods by our customers, but in general, much of that volume has gone away since we’ve eliminated the option.

Eddie Leung – Bank of America

Got that. And then I have one more question. We know that the decrease in commission per hotel room nights was due to the eCoupons. However, we tick away that factor. Could you also share with us the industry price trends of hotel room nights as well as any change in condition rates? Thanks.

Mike Doyle

Yes. So with our ADR growth in the quarter of about 7% year-on-year, that was impacted heavily by increased ADRs in Shanghai around the Expo and then offset by mix shift to lower ADR hotels. Since the completion of the Expo, we have seen a return to year-on-year ADR growth of low-single digits. So that’s – you can see the impact of the Expo in those numbers. We have also seen a reduction in commission and rates during the Expo period when there is – during the peak period of demand and hotels were able to increase ADR and commission rate did not always increase in proportion. So revenue per room night was increasing, but not always the rates.

Eddie Leung – Bank of America

Got that. Thank you.

Operator

Thank you, sir. Our next question is coming from the line of Fawne Kiang. Please go ahead.

Fawne Kiang – Brean Murray, Carret & Co.

Good morning, Guangfu and Mike. Two questions here. Number one, it seems like your cost of service has decreased as a percentage of revenue in the past two quarters. Just wondering whether that’s a result of you increasing online transaction. And what’s the 4Q outlook on that? Do we see a consistent improvement on the cost of services?

Mike Doyle

Thank you, Fawne. I’ll speak to the – for the gross margin. We have seen an improvement over the last few quarters year-on-year in gross margin and that is directly attributable to the growth of our hotel business and our focus in that segment of our business, as well as the migration of our demand online where we have lower settlement costs. So those areas remain our focus in the feature, but we haven’t provided any guidance on gross margin going forward.

Fawne Kiang – Brean Murray, Carret & Co.

Okay. The next question is regarding your sales and market expense. We understand that you are running promotions on the eCoupon and – like, how should we look at sales and marketing in the fourth quarter?

Mike Doyle

We are continuing to run our eCoupon promotion in the fourth quarter. We are continually optimizing that program, inviting new hotel partners in and adjusting the coupon values to have the most appeal to our customers. But our marketing focus is actually in many other channels. eCoupon is just one of many, and we continue to focus our marketing spend entirely online.

Fawne Kiang – Brean Murray, Carret & Co.

Okay. Thanks. As a last question, it seems like you guys still have a very large cash balance. I just wonder whether you have any plan to deploying the cash in the coming quarters.

Mike Doyle

So we have continued to look aggressively for M&A opportunities. We announced two, I believe, following our Q1 release. And we will be opportunistic in looking to deploy the cash to grow our business in China. We don’t have anything to share this quarter, but we’re continuing to look for new opportunities. We have put in place a plan to minimize FX loss going forward, and we will have more to share with you next quarter.

Fawne Kiang – Brean Murray, Carret & Co.

Got it. Thanks, guys. I’ll jump back in queue.

Operator

Thank you. Our next question is coming from the line of Michael Anthony. Please go ahead.

Michael Anthony - Promise

Yes, sir. So you are not giving any guidance for the fourth quarter?

Mike Doyle

We did give guidance of 15% to 25% year-on-year revenue growth.

Michael Anthony - Promise

And the lady just asked you, so you are not going to pay a dividend. So what you suppose is for growth in the company?

Guangfu Cui

Sorry, can you repeat your question again?

Michael Anthony - Promise

I believe the young lady who talked before me asked about a dividend. But you are going to use the money at this time to grow the company forward?

Mike Doyle

Yes, that’s correct. So our strategy and our focus remains around our online hotel business, expanding our share in the domestic hotel market and driving as much as that demand as possible online. We believe that there are opportunities to help consolidate the industry, whether smaller agencies that are operating at a sub-scale, those are – that was part of the investment thesis of our two acquisitions back in Q1 of this year. I think there is more of those opportunities out there and that’s what we’ll look – things like that, we would look to deploy our cash. We don’t have anything to announce on any dividend or other use of cash at this time.

Michael Anthony - Promise

Well, I know you kind of gave guidance, but this is kind of like the winter coming up for us. I’m from the United States, and this is winter coming up. So the weather don’t really affect your reservations or your combinations in the hotel industry?

Mike Doyle

We do have seasonality in our business as well. So we’ve just come out of our peak season, which is Q2 and Q3, Q3 in particular, where we have summer booking spike through the October National Day holiday in China. And then it’s very similar seasonal patterns each year, but we do have another seasonal spike around Chinese New Year in Q1.

Michael Anthony - Promise

Okay. That’s fair. Thank you. And good luck to you, the company.

Mike Doyle

Thank you.

Operator

Thank you. We have a follow-up question from Fawne Kiang. Please go ahead.

Fawne Kiang – Brean Murray, Carret & Co.

Just two quick follow-ups. One is, Mike, can you give us some update on the air commission rate? Like, what’s the new trend do you see from that perspective?

Mike Doyle

Sure. We have not seen a major change year-on-year in commission rates. There is always some seasonal decline in the air business in the peak season where commission rates do fall and probably related to just the increase in average ticket value. We have not received any new information from the airlines, so we are conservative in our planning as to what will happen to air commissions in the future. But we didn’t see a big change in commission rates in Q3.

Fawne Kiang – Brean Murray, Carret & Co.

Got it. Last question is actually, can you comment on the competitive landscape? I guess my question is, like, what are the opportunities as well as the challenges you see in the coming year, in 2011?

Guangfu Cui

We do see more competition from global, regional and local OTAs. And also we see more competition from Airline-direct and HotelDirect. We also see more competition from wholesalers online. So eLong always welcomed competition, and what we want to do is to focus to create customer value by providing more choices on hotels and by providing the best online booking experiences and by providing value of better reward for customers booking hotels with eLong. So our focus is quite clear and our opportunity is quite clear, which is to bring online hotel booking first and then eventually becoming – and our business has always been the largest online travel marketplace in China. So what we have been doing and we will continue to do is to continue to upgrade our website and continue to upgrade and make broader offers in hotels to our customers so that we can eventually bring the online booking for hotels in China, which we believe represent the best opportunity for eLong going forward. Thank you.

Fawne Kiang – Brean Murray, Carret & Co.

Got it, Guangfu. Thanks. That’s all my questions.

Operator

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

Eddie Leung – Bank of America

Hi, guys. Just a follow-up question on the way that you phase out cash transactions. Could you give us an update on the size of the things that you have done the fourth quarter and how far we have gone in the process? Thanks.

Guangfu Cui

Yes. Eddie, this is Guangfu. What we have seen is our transaction portion continued to decrease over the past three years. So when the cash portion of the business is at about 15% of our business, then we made up our mind to gradually phase out our cash transaction business, because to support cash transactions, you have to build a lot of infrastructures like itinerary delivery. I’m talking about price delivery. And you have to have branch operators to support the cash collections, and you have to have the technology systems to support it and a lot of audit has to go on to support this operation. But it’s only 15% of our business. And air business is much smaller than our hotel business.

In eLong, our primary focus will be hotel business. So in hotel business, you will see eLong go off-ramp to build customer base, to offer more hotels, to correct more options for a customer to do business with us. But for our business, we are much smaller related to our hotel business. So what we have made a decision is to simplify our air operations. That means we only provide non-cash transactions. Customer can transact with us using credit card, debit card online, online banking, third-party payments like early payout, 10 cents [ph] and the mobile payment. So we provide a range of options for customers to pay, but what we have decided is to stop cash transaction.

So until now – on November 1, we have stopped completely our cash transaction business, which means that we no longer have the branch offices in the (inaudible) operations, we longer have X price deliveries for customers. However, by focusing on the non-cash transactions, we are able to simplify our operations. We also would be able to set up a national courier agency so that all the tickets – I mean, all the itineraries can be hand delivered to our customers within eight days. So in the – overall, we will improve our customer service by focusing on the credit card customers and focusing on online banking and other non-cash transaction ways of doing business. In short run, it will negatively impact our business by 10% to 15% of our air transactions, but we believe we will come through strong because we are much focused, we are going to be providing best service to our focused customer segments. So that’s it, Eddie.

Eddie Leung – Bank of America

Got that. Thank you, Guangfu and Mike. Thanks.

Operator

Thank you. We have a follow-up question from Michael Anthony. Please go ahead.

Michael Anthony - Promise

Yes. Two questions and that would be it. Mike, on the debt ratio, how much debt do you all have on hand?

Mike Doyle

We don’t have any debt. We just have net cash position.

Michael Anthony - Promise

Okay. I thought – that's good. And are you offering – you're going to share offering anytime soon in the future?

Mike Doyle

No, we have nothing planned. Given the cash balance that we have and our cash requirements, we don’t have any plans for a follow-on offering.

Michael Anthony - Promise

How much cash on hand do you all have? I’m sorry, I have three questions.

Mike Doyle

$152 million.

Michael Anthony - Promise

That’s fine. Thank you all very much.

Mike Doyle

Thank you.

Operator

Thank you. We have another follow-up question from Fawne Kiang. Please go ahead.

Fawne Kiang – Brean Murray, Carret & Co.

Yes. Just one more follow-up question. How many people do you have in total call centers? How many employees are working for your call center right now?

Mike Doyle

A little over 1,000 in the call center.

Fawne Kiang – Brean Murray, Carret & Co.

Okay. Right. I guess the question is, do you see a pressure of expenses from in terms of potential labor cost increase in the coming year?

Guangfu Cui

Overall, our operation cost in terms of salary part has been increasing in the past because what we have been doing is trying to move more business online so that we can keep, relatively speaking, reasonable set of call center team. Our call center staff, their salary has been increased significantly over the past three years. We have seen their salary – overall income increase somewhere around 50% to 70%, which is good because (inaudible) Beijing is very expensive. So what we have been doing is trying to move more business online. So in the past three years, we were able to shift more business online. Now the business transaction online is over 40%. We will see – we are seeing still that online transaction is growing a lot faster than offline, which is good to offset our pressure on the cost of salaries in call centers. Thank you.

Fawne Kiang – Brean Murray, Carret & Co.

Got it. Thanks, Guangfu.

Operator

Thank you. (Operator instructions) Thank you. There appears to be no further questions at this point in time. And I would like to hand the call over back to the eLong management team for the closing remarks. Thank you.

Guangfu Cui

Thank you. Thank you all for being on this call. We don’t have any further comments on this, and we would like to end this call. Thank you. And see you next time.

Operator

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

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