eLong's (LONG) CEO Guangfu Cui on Q2 2014 Results - Earnings Call Transcript

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 |  About: eLong, Inc. (LONG)
by: SA Transcripts

eLong, Inc. (NASDAQ:LONG)

Q2 2014 Earnings Conference Call

August 8, 2014 8:30 p.m. ET

Executives

Echo Yan – IR

Guangfu Cui – CEO

Rong Luo – CFO

Analysts

Alicia Yap – Barclays Capital

Wendy Huang – Standard Chartered

Fawne Jiang – Brean Capital

Binnie Wong – Bank of America Merrill Lynch

Yi Chen – Aegis Capital

Dick Wei – Credit Suisse

Juan Lin – 86Research

Tian Hou – T.H. Capital

Roger Gu – SWS Research

Operator

Good day to everyone and welcome to eLong's Second Quarter 2014 earnings report conference call. (Operator Instructions) I will now hand over the line to Echo Yan and I will be standing by for the Q&A session. Please go ahead, thank you.

Echo Yan

Hello everyone, thank you for joining our call. Joining me today, we have Guangfu Cui, our CEO; Luo Rong, our CFO; and Philip Yang, our Chief Accounting Officer. Guangfu will speak about the company’s performance, followed by Luo Rong who will discuss our financial results. After their prepared remarks, Guangfu, Luo Rong and Philip will be available to take your questions.

Before the management presentations, please allow me to read our Safe Harbor Statement. During this 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 views and expectations as of today with respect to future events and are not a guarantee of future performance. 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, containing our second quarter unaudited financial results, for discussion of some of the important factors that could affect future results.

In addition, we encourage you to refer to any disclosures regarding eLong which may be made, from time to time, by our controlling shareholder, Expedia, Inc., which is a separately listed company on the NASDAQ Stock Exchange. Expedia files current, quarterly and annual reports with the SEC pursuant to the rules applicable to US domestic issuers, and Expedia filings can be found in the Investor Relations section of the Expedia website, ir.expediainc.com.

I will now turn the call over to Guangfu.

Guangfu Cui

Thank you, Echo. Hello everyone, thank you for being on this call. In the second quarter, room nights increased by 44% year on year to 8.3 million; and net revenues increased by 25% to RMB292 million. Excluding our hotel group buy business, which continues to face strong competitive pressures as we have discussed in previous quarters, our room nights increased by more than 50% year on year.

We continued to execute our mobile lodging strategy and increased investment in lodging product team and mobile technology team in the second quarter. We have expanded our leading domestic lodging network. As of the end of the second quarter, eLong has more than 120,000 contracted properties in China, and 325,000 properties worldwide. We have expanded our prepaid, flash sale and last minute product and promotion offering. We continued to upgrade our apps to make them more user friendly by providing broad selection of properties, competitive prices and better usability. Mobile became our largest room night booking channel in the second quarter, comprising 45% of eLong brand room nights. Our cumulative mobile app downloads have now reached more than 80 million, and on peak days we have more than 60,000 lodging bookings through our mobile apps. Mobile and online bookings together comprised more than 85% of our total lodging bookings in Q2.

We are seeing results from our investee companies that offer free lodgings property management software or “PMS”. Zhuzhe and Yunzhanggui have contracted with more than 10,000 properties, including hotels and hostels. Both PMSs are free, cloud based, multi-device supported, and can directly connect with OTAs. We believe free PMS will change the PMS industry and enable hotels and hostels to grow their revenue and manage their businesses by going on-line and going mobile.

For the remainder of 2014, we will continue focused execution of our mobile lodging strategy. Our goal of market leadership in lodging bookings in China is unchanged.

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

Rong Luo

Thank you, Guangfu. In the second quarter of 2014, our year-on-year net revenue growth was 25%, compared with the second quarter of 2013.

In the second quarter, hotel revenue grew by 28% year-on-year, driven by 44% room night volume growth, partially offset by lower average commission per room night. Commission per room night decreased 11% year-on-year in the second quarter, primarily due to the growth of lower commission rate and average daily rate room nights. Hotel commission revenue grew to 81% of total revenues from 79% in the prior year quarter. Our Q2 room nights included approximately 0.4 million room nights from the Tongcheng cooperation agreement, which was terminated in May 2014.

In Q2 2014, air ticketing commission revenue decreased 1% compared to the prior year quarter, driven by a 5% decrease in commission per segment, partially offset by a 4% increase in air segments to nearly 700,000. Air ticketing commission revenue decreased to 11% of total revenues from 14% in the prior year quarter.

Other revenue, which is primarily derived from advertising and travel insurance, increased 33% year-on-year for the second quarter of 2014. Other revenue grew to 8% of total revenues from 7% in the prior year quarter.

Gross margin in the second quarter of 2014 was 76%, compared to 74% in the second quarter of 2013. The improvement in gross margin was driven by operational efficiencies, partially offset by lower hotel commission revenue per room night.

Total operating expenses increased 12% or RMB27.3 million for the second quarter of 2014 compared to the second quarter of 2013, and decreased to 85% of net revenues from 95% in the prior year period.

Service development expenses increased 55% in the second quarter of 2014, mainly driven by increased personnel expenses. Service development expenses increased to 21% of net revenues in the second quarter of 2014, compared to 18% in the same quarter of the prior year.

Sales and marketing expenses for the second quarter of 2014 decreased 10% from the second quarter of the prior year, due to decreased advertising expenses, partially offset by increased hotel commission payments to affiliates. Sales and marketing expenses decreased to 51% of net revenues in the second quarter of 2014 from 70% in the same quarter of the prior year.

Second quarter general and administrative expenses increased 128% to 13% of net revenues from 7% in the second quarter of 2013. The increase in G&A expense was primarily due to higher share-based compensation charges. Excluding these charges, our G&A expenses, on a Non-GAAP basis, were 5% of net revenues.

Other operating income in the second quarter of 2014 of RMB30.0 million was the compensation paid by Tongcheng for termination of the cooperation agreement.

Other income was RMB22.0 million in the second quarter of 2014 compared to RMB13.4 million in the second quarter of 2013, primarily due to increased government subsidies, partially offset by higher foreign exchange losses.

Net income for the second quarter was RMB31.5 million, compared to net loss of RMB76.1 million in the second quarter of 2013.

Turning to the Balance Sheet, I’d like to mention that as of June 30, 2014, eLong held cash and cash equivalents, short-term investments and restricted cash of RMB1.9 billion, or approximately $311 million US dollars. Of this balance, approximately 90% was held in Renminbi and 10% in US dollars.

Looking ahead to Q3 2014, we expect year on year net revenue growth of 10% to 20%.

This concludes my remarks; and, Guangfu and I look forward to your questions.

Moderator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin our question-and-answer session. [Operator Instructions]

Thank you. Our first question will come from Ms. Alicia Yap from Barclays. Ma'am, your line is open. You may proceed.

Alicia Yap – Barclays Capital

Hi, thank you. Good morning, Guangfu and Rong. Thanks for taking my questions.

My first question is I wonder if you could clarify the statement on your press release, when you say the mobile booking comprise 45% of the eLong brand name, what does that exactly mean? So does that mean the rest of the bookings come from the other partners?

Guangfu Cui

Yes.

Alicia Yap – Barclays Capital

Okay. And then -- okay.

Guangfu Cui

We only look at the eLong brand. So the brand room night is close to room nights from non-eLong brand distribution partners and resellers.

Alicia Yap – Barclays Capital

I see. So if I understand that statement correctly, so does that mean, out of the total mobile booking, there's a lot more, you know, the bookings is actually from the non-eLong brand, that means it's coming from your partners?

Guangfu Cui

So we do have affiliation partners, they contribute revenue and room nights to us, but we don't disclose how big our affiliation business is.

Alicia Yap – Barclays Capital

I see. I see. And then what about in terms of when you look at your hotel volume, out of the 8.4m room nights for this quarter, what is the percentage that comes from eLong-only brand?

Guangfu Cui

We don't comment on the split of eLong brand and affiliation business mix. But we also don't know how much of our affiliation business is contributed by their mobile business because we don't keep track of their business. We do have partners that is only mobile-only business. Thank you.

Alicia Yap – Barclays Capital

I see, I see. And then lastly is that, as we go -- as we look ahead, right, are we looking for further, you know, any potential collaborations with other OTA partners for some of the cross-promotion activities like the one that we did with Tongcheng, is there anything that we are actively looking for?

Guangfu Cui

Yes. We do have many affiliation partners, and to name a few that we partner with, Taobao, we partner up with [indiscernible] and Dangdang, and as a matter of fact, if you look at China OTAs or e-commerce companies or [indiscernible] companies, that most of these companies have inventories through eLong cooperation. Thank you.

Alicia Yap – Barclays Capital

I see. Great. Thank you. I'll go back to the queue. Thank you.

Guangfu Cui

Thank you.

Operator

Thank you. Our next question will be coming from Ms. Wendy Huang from Standard Chartered. Ms. Huang, your line is open, you may proceed.

Wendy Huang – Standard Chartered

Sure. Thank you. I just wonder if you can share your view on the changing competitive landscape given the partnership that Priceline and Ctrip just signed up yesterday, and how that may change the competition in the international hotel booking and other international travel booking front [ph] among the Chinese OTAs?

And also, secondly, if you can talk about the commitment that your existing parent company Expedia has for the Chinese business, and also in terms of the support provided to eLong, that would be helpful as well. Thank you.

Guangfu Cui

Okay. Let's look at the facts. Ctrip has used Priceline inventory for a years, and both [indiscernible] booking have on-ground salespeople to contact hotels in China. So I don't see any major change in competitive landscape in -- after their [indiscernible] cooperation. We'll compete -- continue to compete with Ctrip and continue to compete with Priceline.

As far as we have already worked out the international hotel industry from Expedia, we're also sharing our domestic PRC inventories with Expedia. We have worked closely with Expedia for several years, and we will continue to do so. So that's my answer to the Priceline and Ctrip announcement.

And in terms of our largest shareholder Expedia and their support, I think you may have seen the news release that July 7 Expedia issued a statement that Expedia remains a long-term investor in eLong and supports eLong's drive to become the leading Chinese travel site. Thank you.

Wendy Huang – Standard Chartered

Okay. Also I wonder if I can add one more question. I think in the past 12 months, eLong also has been trying to work with other median-sized travel players in the market such as Qunar as well as Tongcheng. But of those relationship came to end for different reasons. So, going forward, will you actually consider to continue to proceed with the partnership with the median-sized players?

And also, on the other hand, we actually have seen Ctrip actually step up kind of the alliance or MA with a similar size of players to strengthen their franchise. So what's your thoughts there? Thank you.

Guangfu Cui

We will be very open to work with other OTAs or metasearches in China, and we have supported inventories to Mongo City 114-1250 [ph] which is traditional OTAs. And if you look at the other OTAs in the market, there are not so many now. So I think we'll be very open to work with metasearch, work with other OTAs. We have been taking a very open position in sharing our inventories to both OTAs and new e-commerce companies, we'll continue to do so. Thank you.

Wendy Huang – Standard Chartered

Thanks, Guangfu.

Operator

Thank you. Our next question will be coming from Fawne Jiang from Brean Capital. Ms, Jiang, your line is open, you may proceed.

Fawne Jiang – Brean Capital

Good morning, Guangfu and Luo Rong. Thank you for taking my questions.

First question is actually regarding the commission per room night trend. Second quarter it was down 11% year on year. It was actually a big improvement from first quarter which was around like 21%. Just wonder, what factor contribute the smaller year-on-year I think pricing decline?

And also, wonder you could comment on the promotional environment right now.

Rong Luo

Yes. For quarter two, revenue per room night decreased 11%, which is slightly better than Q1. Key reason is because we have seen a little lower average coupon value per room night. So that's the key reason.

And this doesn't mean we'll continue that we will have the lower coupon value in Q3 because the market is dynamic. What we're willing to share you is that, starting from July, we have seen more aggressive couponing business market. So this will continue to be very dynamic and quite competitive.

Fawne Jiang – Brean Capital

Got it. Thanks, Luo Rong.

Second question is actually regarding your sales and marketing cost. For the quarter it seems like smaller, is a smaller sales and marketing amount year on year, similar, only slightly higher than the first quarter. Just wonder, in terms of your sales and marketing effort, given the second quarter is a much bigger room night quarter, just wonder what has stepped down in terms of your sales and marketing effort, and how should we look at that trend going forward.

Guangfu Cui

Yeah, let me answer this question. To give you a better picture, let me describe our approach to marketing.

Our marketing efforts generally fall into four categories: online spending -- online marketing spending which for example includes search engine marketing, offline which is normally TV advertising, LCD and other offline marketing. And the third bucket is mobile such as app download stores. And last one will be coupon. So what we do is continually adjust spending across these categories, depending on market dynamics and consumer demand, as well as our own learning in each area.

So the goal of this effort is to grow our room nights. So we adjust, continue to adjust the spending in the four categories. So that's what we can share with you now. Thank you.

Fawne Jiang – Brean Capital

Got it. Thanks, Guangfu.

I guess next question, regarding your group buy, flash sale and last-minute. You mentioned in your remarks those business continue to grow robustly. Just wonder, what's the penetration level as a percentage of your overall, say, room night for the second quarter?

Guangfu Cui

So let me split these three products and promotions. For group, we actually continue to face the strong headwinds, primarily from general group buy companies like Maytuan, and we continue to support this product and for opportunity to grow this business. But this business is declining year over year.

What we have done is to expand group buy business hotel products from approximately 44,000 in April 2014 to more than 50,000 till now. So we'll continue to look ways to grow this group buy business, but this business is facing tremendous competitive pressure.

But the prepaid business is growing very nicely. We are seeing triple-digit growth, and this business is more than 10% of our total lodging revenue. So it's becoming a very significant piece of our business and it's growing very fast. We would see -- we are seeing this product continue to grow.

As for flash sale, we don't disclose the portion of our business coming from promotion. We are running not only flash sale but also last-minute. What we can share with you is that the mobile bookings is 45% of our eLong brand volume. And for mobile, most of the, you know, majority of bookings are same-day bookings and last-minute is a very popular product to drive that same-day booking. Thank you.

Fawne Jiang – Brean Capital

Got it. Thanks, Guangfu. I will go back to the queue.

Operator

Thank you. Our next question will be coming from Ms. Binnie Wong from Bank of America Merrill Lynch. Ms. Wong, your line is open, you may proceed.

Binnie Wong – Bank of America Merrill Lynch

Hi. Thank you for taking my question. I have two questions here.

On the overseas travel, can you share with us the outbound hotel and growth as well, in terms of the volume and sales on outbound hotels?

Guangfu Cui

Yeah. The -- right now the outbound business is under 10%, so that is not mature yet, but it's growing very fast. And we continue to drive this business and we are seeing good growth out of the outbound business, but it's not yet reaching 10%. So we don't disclose the exact number yet. Thank you.

Binnie Wong – Bank of America Merrill Lynch

And that 10% is in terms of volume or it's in terms of sales?

Guangfu Cui

Let me clarify. I'm saying this business is under 10%, so we are -- it's not mature yet. So we are not disclosing that exact percentage of the business here. Thank you.

Binnie Wong – Bank of America Merrill Lynch

Sure. All right. Thank you.

And second question is, whether Expedia has been using your Chinese hotel inventory.

Guangfu Cui

Yes. Expedia is using our Chinese hotel inventory. As a matter of fact, we are integrating the Expedia lodging partner service team and eLong lodging partner service team into one team. So, going forward we'll be having one sales cost [ph] in China and [indiscernible] inventory for both Expedia and eLong. Thank you.

Binnie Wong – Bank of America Merrill Lynch

Okay. Sorry, one more follow-up question is on the mobile traffic. Can you share with us in terms of the mobile traffic and the revenue contribution as a percentage of --

Guangfu Cui

Yeah, okay. So the mobile, we have accumulated download of 80 million, and the mobile makes its 45% room night of our eLong brand room nights.

Binnie Wong – Bank of America Merrill Lynch

Okay. Thank you.

Operator

Thank you. Our next question will be coming from Mr. Yi Chen from Aegis Capital. Mr. Chen, your line is open, you may proceed.

Yi Chen – Aegis Capital

Hi. Thank you for taking the questions. First question is, can you explain to us your tax situation? How should we project your tax expenses?

Rong Luo

Okay. For the tax expenses, you can see in the last year quarter two, we had recording tax benefits of around RMB43 million, which including RMB67.4 million tax expenses [indiscernible]. And coming to this year, because we are getting more -- we are doing a little better than last year, and especially in Q2, we have coming into [indiscernible] so this will slightly change. For the whole year we forecast this tax expense impact will be much smaller than what we've seen last year. But we cannot give you the exact number [indiscernible] there are two quarters to go.

Yi Chen – Aegis Capital

Okay. Second question, if we disregard the Tongcheng payment and government subsidies, it seems your, for the second quarter your earnings per share is slightly below zero. So I don't know if -- is it eLong's strategy to actually achieve profitability in the next several quarters?

Rong Luo

-- results we can see we are slightly better in [indiscernible] but that is because of a stable coupon environment, and together with the one-time investment [ph] you have mentioned like Tongcheng, especially the -- let's go back to the coupon. You can see in Q3 and Q4, starting from July, we have already seen a much more aggressive coupon in this market. So we have to make our price competitive, and this will impact Q3 profitability, and even in future quarters.

So, looking ahead, we didn't give any profitability guidance, but what we can say is our goal is unchanged, still to become the number one in the hotel booking business. And we will -- in this very competitive markets, to achieve this goal, we have to invest more and we have to invest aggressively in product, IT, mobile and sales and marketing. So we foresee we probably will incur some quarters into the loss-making positions again, so we have no guidance on our bottom-line profitability in future quarters.

Yi Chen – Aegis Capital

Okay, thanks. Final question is, so we all know you will still continue to compete with Ctrip, but on the other hand, Qunar is also building up their presence in the hotel reservation space. So, how do you view their competitiveness against yours?

Guangfu Cui

So, Qunar is a competitor, also, you know, we are also cooperating with them in the metasearch marketplace. So we will continue to compete and we will continue to work with them in the advertising aspect. So that's our current proposition. Thank you.

Yi Chen – Aegis Capital

Thank you.

Operator

Thank you. Our next question will be coming from Mr. Dick Wei from Credit Suisse. Mr. Wei, your line is open, you may proceed.

Dick Wei – Credit Suisse

Hi. Thank you for taking my questions. I want to hear more from Guangfu about maybe some of the new business line expansions plan for eLong. I'm not sure if any expectations in terms of -- plans in terms of like going into like vacation [ph] travel or packaged tour or maybe some of the local services. Wanted to see what's the plan on that front. Thank you.

Guangfu Cui

Yeah. We are going to focus on the lodging business. We are not so much into the packaged [ph] business, local tours or other lines of business. We think the lodging business aspect, the potential is very big, the market is very big, including the hotel, hostel and also apartments. So we are going to invest in the lodging business. We are going to increase the team that is acquiring and contracting lodging properties. We are going to invest in the mobile which is growing very fast. And we are going to invest in the prepaid products and also flash sale, last-minute products to further grab [ph] mobile lodging bookings. But we are not about expanding to other lines of business. Thank you.

Dick Wei – Credit Suisse

Thank you. Maybe another question. Regarding maybe the -- I don't know if you give more of the future guidance, but maybe just directionally like what kind of the profitability plans that we have or like what is the investment phase that we think, yeah, going forward. Thank you.

Guangfu Cui

Yes. So as Luo Rong has mentioned that our goal is really not changed, and that is to become number one in lodging booking in China. We have the support of our large shareholders, Expedia and Tencent, for this strategy and the goal.

We are facing very fierce and challenging competition. To stay competitive in this market, we will continue to invest in products, technology and mobile, as well as sales and marketing, in order to grow our room nights.

And because we have big focus on volume, in a fierce competitive market, we are likely to face significant pressure on profitability and may incur losses in the future quarters. But again, our goal is expanding our market share and continue to grow in the lodging booking business. Thank you.

Dick Wei – Credit Suisse

Great. Thank you very much.

Operator

Thank you. Our next question will be coming from Ms. Alicia Yap from Barclays. Ms. Yap, your line is open, you may proceed.

Alicia Yap – Barclays Capital

Hi. Thanks for taking my follow-up questions, Guangfu and Luo Rong. I have here a couple of quick follow-up.

I think you guys mentioned on -- when you're seeing in July, you started to see a lot more aggressive on the coupon environment. So I just wonder who initiated the more aggressive couponing. Is it by some new players or other smaller OTA or is it from your big competitors? And is that on the broader coverage or is it on the amount per coupon that you are seeing more intensifying?

Guangfu Cui

We have seen both the coupon amounts per room night increasing and also the broader coverage of coupon. So we don't care who initiated the coupon, we want to be competitive in the market. So we will be -- stay competitive. We are willing to invest and to grow our volume. And we'll constant, as I mentioned, constantly adjust the four categories of marketing spending. We are investing in offline marketing in the third quarter. We are also aggressively going after couponing. So that is our -- what we have seen and that is our position. Thank you.

Alicia Yap – Barclays Capital

I see. So just to clarify, but that is not initiated by eLong, right?

Guangfu Cui

We don't comment on that. Thank you.

Alicia Yap – Barclays Capital

Okay. And then just one last one, I probably did not hear it correctly, when you say, is that a pre-sales category that you already achieved close to 10% and that is the one that's growing the triple-digit?

Guangfu Cui

What we have growing very nicely is in the prepaid hotel or merchant model.

Alicia Yap – Barclays Capital

Prepaid, okay. The prepaid, right? Okay.

And then is this a higher margin business than your other category?

Guangfu Cui

We don't comment on that. It could be high margin, it could be low margin. It depends on the market competitiveness.

Alicia Yap – Barclays Capital

I see. Okay. Great. Thank you.

Guangfu Cui

Thank you.

Operator

Thank you. Our next question will be coming from Ms. Juan Lin from 86Research. Ms. Lin, your line is open, you may proceed.

Juan Lin – 86Research

Thank you very much for taking my questions. My first question is, could you please remind us of your -- the organic growth of your hotel booking volume excluding hotel group buy business?

Guangfu Cui

Fifty percent. Thank you.

Juan Lin – 86Research

And it seems that the growth, although it's still robust, but it seems to decelerate from last quarter more than 65%. Is there any -- what is the reason for that, and what is the trend looking forward?

Rong Luo

Let's try to clarify the number first, for the non-group [ph] buy business, growth is close to 55%, which is, compared to Q1, which is quite similar. If you have more questions about group buy or the other things, please clarify and we will try to answer.

Juan Lin – 86Research

Okay, thank you. And my second question is that we have noticed some of your competitors are spending massively penetrating into lower-tier cities for the hotel booking business. Could you please share your strategy regarding penetrating into low-tier cities, and the spending we -- looking forward?

Guangfu Cui

Yeah. So we have contracted more than 120 properties in China. We believe that we are the leading lodging network in China. And we have been always very aggressive in terms of acquiring hotels in the third-tier and second-tier cities, and we will continue to do so.

Juan Lin – 86Research

Thank you. If I can ask the last question, regarding your Zhuzhe system. Are the 10,000 properties who have adopted Zhuzhe system are coming from your existing hotel partners or are some of them new hotel partners of this free system? And then how do you observe the adoption of Zhuzhe system contributing to the growth of your hotel booking model [ph]?

Guangfu Cui

So right now we have a separate team selling, you know, contracting with the hotel, and Zhuzhe has their own team to sell their TMS. So there are some hotels overlapping and most of hotels are already contracted by eLong, because we have 120,000 hotels, hostels under our network. And Zhuzhe and Yunzhanggui combined has more than 10,000 properties.

So we are seeing very fast growth of the adoption of the TMS because it's free and because [indiscernible] rather than single PC based market device supported. And also it can directly connect with OTA to really improve the hotel operations and to enable to manage our business online, and also mobile. So I think this is going to be very significant for the TMS industry in China.

Juan Lin – 86Research

Thank you very much.

Operator

Thank you. [Operator Instructions]

Our next question will be coming from Ms. Tian Hou from T.H. Capital. Ms. Hou, your line is open, you may proceed.

Tian Hou – T.H. Capital

Hi, Guangfu and Luo Rong. I've got two questions.

The first one is related to this Zhuzhe product. So, recently Ctrip also released a product called [indiscernible] a free TMS product [indiscernible]. This product is actually invested by Ctrip and it looks a lot similar to Zhuzhe. I wonder if management can share your comments regarding the difference of the two products and the competition landscape of the installment of the Zhuzhe. That's the first question, I will have a follow-up after this.

Guangfu Cui

Yes. So this is a highly fragmented market, there are many players providing TMS to hotels and hostels. But so far there's nobody providing this system in the scale we are doing and in the products we are doing. So we have two systems. One -- we have two companies. One is focused on the chain hotels and managed rooms, over 20 rooms, so which is the Zhuzhe product. And we also have a product that is focused on the guest houses, hostels and with properties under 20 rooms. So I think this TMS is actually -- start to see some segmentations, that your product has to be really focused. So Yunzhanggui is very well-positioned in this guest houses, hostels, [indiscernible] properties, rooms under 20, which is a very well-engineered product, the best in the app operation. And then Zhuzhe is positioned in managing the corporate more than 20 rooms and [indiscernible].

And so these two products each for different segments are free and are well-accepted by the property owners. Thank you.

Tian Hou – T.H. Capital

Okay, Guangfu. The second question is related to the cost. The cost on service as a percentage of revenue decreased from 25.6% in last year second quarter to 24.2% this year second quarter. So I wonder what's the reason? And what do you expect the trend of the cost in the next several quarters? And also what's the change in the headcount of your call center? So that's the second question.

Guangfu Cui

Yes. So we have decided last year that we are going mobile. So that means that we are using mobile both to -- for consumer to book and also for customer services. So we have decided to invest in product teams and mobile technology, but we want to use technology to serve our customers. So as a matter of fact that we have seen our call center headcount decrease versus last year. And we have seen more and more customers going mobile to self-serve, and we have a project that is to enable customer to go mobile and make all our service visible to them, make everything within their control. So anything is at their fingertips, so that they can do things better.

So what we have done is that anything that our call center agents can do, our customer can do. So that this has reduced our cost to after-service call centers. Thank you.

Tian Hou – T.H. Capital

Okay. Thank you so much. That's all my questions.

Operator

Thank you. Our next question will be coming from Mr. Roger Gu from SWS Research. Mr. Gu, your line is open, you may proceed.

Roger Gu – SWS Research

Hi. Morning, Guangfu. You guided 10% to 20% year-over-year growth in Q3. So I just wonder how much of that will come from the volume growth and how much come from the commission per room night growth. Thank you.

Guangfu Cui

Okay. In general, in the guidance, we didn't disclose the volume, the details. But what I can tell you is, for Q3 guidance, we actually considered a number of factors. And two things we want to draw attention. Number one is we have seen [indiscernible] coupon with higher coupon values starting from July, so probably this will happen in the whole quarters. Secondly, we also have considered our continued decline of the hotel group buy business. So we consider all of that to our guidance now.

Roger Gu – SWS Research

Okay, thank you. And regarding your coupon -- cash coupon. So, how much of them are what goes to the marketing expense and how much of them goes to the contract revenue part?

Guangfu Cui

One hundred percent to [indiscernible] our revenue for coupon.

Roger Gu – SWS Research

Okay. Okay, thank you.

Operator

Thank you. [Operator Instructions]

At this time there are no further questions. I would like to hand the call over to the eLong management team for the closing remarks.

Guangfu Cui

Thank you and thanks everybody for being on this call. And I look forward to discuss with you in the next con call. Thank you. Bye.

Operator

That concludes the eLong second quarter 2014 earnings report conference call. Thank you for participating. You may now disconnect.

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