IFM Investments Limited (NYSE:CTC)
Q2 2014 Results Earnings Conference Call
August 19, 2014 8:00 a.m. ET
Donald Zhang - Chairman and Chief Executive Officer
Harry Lu - Vice Chairman and President
Steve Ye - Chief Financial Officer
Nick Beswick - Brunswick Group
Good evening and thank you for standing by for Century 21 China Real Estate's Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now like to turn the call over to your host for today, Mr. Nick Beswick.
Thank you everyone for joining us for Century 21 China Real Estate's second quarter 2014 earnings conference call. With us today are Donald Zhang, Co-Founder, Chairman and Chief Executive Officer; Harry Lu, Co-Founder, Vice Chairman and President; and Steve Ye, Chief Financial Officer.
Before we continue, please allow me to read you IFM Investments safe harbor statement. Some of the statements during this conference call are forward-looking statements made under safe harbor provisions of section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to, those outlined in our public filings with the SEC. IFM Investments Limited does not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
For those of you unable to listen to the entire call at this time, a recording will be available via webcast until August 27 on the company's corporate website at www.century21cn.com/english.
At this point, I would like to turn the call over to Mr. Donald Zhang.
Thank you. Hello everyone and thank you for joining the call. Market conditions in the second quarter were even more challenging than we had expected. Transaction volumes stayed at low levels across the country, particularly in our core business, our core market of Beijing and Shanghai where they were down around 50% from the same period last year.
As has been the case for long time, we do not see signs of any change in regulatory policies that would create a shift in market dynamics. The surprisingly poor market in the second quarter was reflected in our top and bottom line performance as well as across the brokerage industry in general. Our response was to proactively make additional store closure. The additional costs this created (inaudible) net loss remained flat on a sequential basis. But we felt that it was necessary to position us better for the rest of the year.
While we had hoped to make progress on our bottom line, our effort to develop our franchise network and our mortgage management service segment have driven growth in this higher margin business segment. In the long-term, alongside a leaner corporate brokerage network, we see this part of the business contributing to greater and more consistent profitability. The changes we are making will have a near-term impact on revenue but we are hopeful that it will bear fruit on the bottom line and to pave the way for more stable, more profitable business that we track in a challenging market.
With that, I will turn the call over to Harry for a close look at our second quarter performance and more details on the work we are doing to improve our fundamentals.
Thanks, Donald. Once again, the market has a great impact on our core business than we had expected in second quarter. While revenue of RMB 122 million appear low, it still compared favorably given the severe market conditions.
Our response to the challenging environment facing our core business came in two parts. Firstly, we step up effort to optimize our company-owned network which contributed to the decline in revenue and lead to more store closure related costs that affected our bottom line. We feel strongly that this was a necessary step (indiscernible) our business to thrive in the new reality of the Chinese real estate market. Secondly, we made substantive progress in higher margin area of our business we have been talking about for last few quarters, namely our franchise network and our mortgage management services segment.
Particularly we have been looking at opportunities to develop partnership with leading P2P lending platform to gain from the growing demand of O2O financial service. The agreement we signed recently with Dianrong.com, a company often referred to as the Lending Club of China, is an exciting initiative in this area.
We are well aware that our traditional business model, depends on consistently higher transaction volume. That is why going forward we are transitioning to a more asset light business model. That means a leaner core and brokerage network complemented by a broader franchise base and the higher margin of our mortgage management services segment. This will be challenging but we are confident our strategy will significantly improve our profitability in the near-term and ultimately create a business that is more efficient, more resilient towards market fluctuations and more profitable.
Now we will go through the performance of our business segments in the second quarter. Our company owned brokerage segment reflected the general weakness of the market in Q2. Revenue here was down about 5% on a sequential basis and over [43% down] (ph) from the same period last year.
A bigger concern this quarter was our performance in the primary segment where revenue declined over 44% quarter-on-quarter accounting for around 11% of total revenue, a long way below where it has been historically. This was mainly due to a decline in commercial property sales, again driven by market dynamics.
On a more positive note, we saw encouraging signs in our mortgage management service business during this quarter. Revenue was up 8.7% sequentially and over 34% year-on-year. As mentioned just now, we see exciting opportunities in financing services. The moves we have made here show [accessory] (ph) growth in the part of our business in coming quarter.
Franchise service revenue almost doubled quarter-on-quarter as we are recognizing the initial fee from sales of franchise rights in Lanzhou. We are planning a gradual rollout of our franchise business going forward which should give us a steady stream of revenue with a more solid margin base.
To sum up, it's still a very challenging time for Century 21 China Real Estate but we are focusing on gradually adjusting our business to generate higher margins in a tough environment. By the end of this year, we now hope to have significantly improved our profitability and in the long-term we expect to have more stable, healthy business that is differentiated from our competitors and better suited to the current market.
Now I would like to turn the call over to Steve, our CFO for a closer look at the financial performance in Q2. Steve?
Thank you, Harry. Now I would like to share with you our unaudited financial results for the second 2014. Please note, all revenues and expenses are denominated in RMB.
The company's total consolidated net revenue in Q2 2014 was 122.6 million, down 9.1%, quarter-over-quarter and 42.2% year over year. The sequential decrease was primarily due to a decrease in revenue from primary and commercial services provided by our Shanggu business units, resulting from the depressed market. Project delays were also a factor. The year-over-year decline was a result of lower revenue from company-owned brokerage service and primary and commercial service due to a continual nationwide slowdown in transaction volumes across the property market.
Revenue from our company-owned brokerage services segment was 88.7 million in the second quarter of 2014, representing a 5.1% sequential increase, a 43.2% year-over-year decrease and a 72.4% of our overall revenue in the quarter. The sequential and year-over-year decrease was due to weak sales and purchase transaction volumes as a result of the nationwide market slowdown. The company's share of transaction volumes in the second quarter of 2014 was also somewhat impacted by our ongoing efforts in network restructuring and cost reduction as we cut the number of sales offices in the second quarter of 2014.
The average number of company-owned sales office in operation decreased to 192 in Q2 of 2014 from 225 in Q1 of 2014 and 322 in Q2 of 2013. We completed 1,673 sales and purchase transactions during the second quarter of 2014 compared to 1,906 in Q1 2014 and 3,706 in Q2 2013. Our average monthly net revenue per operating sales office for Q2 was 153,706. While this was a decrease from 161,483 in Q2 of 2013, it represents an increase from 138,765 in Q1 of 2014. This is an encouraging sign that our efforts to restructure our network are improving our overall efficiency.
Revenue from our primary and commercial service segment in Q2 2014 was 14.5 million representing a 44.7% sequential decrease, a 66.9% year-over-year decrease, and 11.8% of our total revenue. The sequential and year-over-year decrease was mainly due to the fact that fewer new commercial properties were sold as a result of the depressed market. Project delays were again a factor. However, we had a RMB 32 million worth of commission pending for our Shanggu business unit as of June 30, 2014, relating to certain commercial properties sold which were not yet eligible for commercial mortgage requirements according to PRC banking regulations. Management expects that this commission revenues will be recognized in the coming quarter. Shanggu has a pipeline of 2.3 million square meter as of June 30, 2014.
Revenue from mortgage management services in Q2 2014 was 12.5 million, representing an 8.7% sequential increase and 34.4% year-over-year increase. Thanks to growth in the overall amount of mortgage credit loans provided by the company. We expect this growth momentum to continue through 2014 as we pursue opportunities within this segment more aggressively.
Within our mortgage management services segment, revenue from service fees and interest earned from mortgage credit loans in Q2 2014 was 9.4 million, representing a 23.7% sequential increase and 203.2% year-over-year increase and accounting for 75% of total mortgage services segment revenue as compared to 66% and 33% in Q1 2014 and Q2 2013 respectively.
Revenue from advising consumers for traditional home mortgage loans, home equity loans and other kinds of loans was 3.1 million, representing a 20.5% sequential increase and a 50% year-over-year decrease, and accounting for 25% of total mortgage service segment revenue in Q2 2014 as compared to 34% and 67% in Q1 2014 and Q2 2013 respectively.
Revenue from our franchise service segment in Q2 2014 was 6.9 million, representing a 97.1% sequential increase and 146.4% year-over-year increase. These sequential increases were primary due to higher initial franchise fees received as we signed an agreement with new sub-franchises in Lanzhou. On the cost side, our commission and other agent related costs in Q2 2014 were 88.8 million, representing a 10.5% sequential decrease and a 37.9% year-over-year decrease, and a 72.4% of total revenue. These decreases were mainly due to a reduction in variable costs.
Specifically, variable costs decreased by 10.9 million from Q1 2014 and by 41.7 million from Q2 2013, as a direct result of lower revenue generated from our company-owned brokerage service and primary and commercial service segments. Additionally, fixed salaries and benefit costs for sales staff decreased by 12.3 million from Q2 2013 mainly due to a decrease in the number of staff employed in our company-owned brokerage segment. Average sales staff numbers decreased to 4,143 for Q2 2014 from 4,528 for Q1 2014 and 6,548 for Q2 2013.
Total consolidated operating costs for Q2 2014 were 41.5 million, representing a 5.9% sequential decrease and a 12.6% year-over-year decrease. The year-over-year decrease was primarily due to lower rental cost resulting from a reduction in the number of sales offices, partially offset by higher costs relating to sales office closure. Total depreciation and amortization expenses for Q2 2014 were 4.9 million.
Our total SG&A expenses in Q2 2014 were 42.1 million, representing an 18.1% sequential decrease and a 21.9% year-over-year decrease. The sequential and year-over-year decrease was mainly due to decrease in marketing expenses, in provisions for bad debt related to our company-owned brokerage service segment, and salary and benefits for back-office staff as a result of headcount reductions. In the future quarters we expect marketing expenses to continue their gradual decrease as brokerage firms continue to gain greater voice in the China's real estate ecosystem.
Net loss in Q2 2014 was 41.1 million compared to net loss of 47.4 million in Q1 2014, and a net loss of 29.6 million in Q2 2013. Net loss including one-time restructuring costs and primary store closure-related costs of 7.1 million in Q2 2014. Excluding share-based compensation expenses, goodwill impairment loss and a net change in fair value of contingent consideration, non-GAAP net loss attributable to IFM Investments Limited for Q2 of 2014 was 38.8 million, compared to a non-GAAP net loss of 47.4 million in Q1 2014 and a non-GAAP net loss of 25.2 million for Q2 2013.
In terms of our balance sheet and cash flows, we had 36.9 million in cash as of June 30, 2014. If we would include 35.2 million of net short-term loan receivables, balance outstanding as of June 30, 2014, we would have 72.1 million or 11.6 million in USD equivalent in cash and cash equivalents. For Q2 2014, net cash used in operating activities was 62.2 million compared to net cash used in operating activities of 48.2 million in Q1 2013 and net cash used in operating activities of 33.6 million in Q2 2013, mainly due to the expansion of the company's property refinancing activities in the second quarter of 2014.
Net cash provided by investing activities for Q2 2014 was 5.9 million, mainly including net cash of 9.5 million received from providing and receiving repayments on mortgage credit loans and the purchase of equipment of 3.6 million. Our net accounts receivable balance as of June 30, 2014 was 148.1 million, a decrease from 155.2 million as of March 31, 2014. Our average AR turnover was 113 days for Q2 2014.
Before we talk about the Q3 guidance, I would like to go through a couple of updates that we recently announced. Firstly, as detailed in today's release, in Q2 we discovered that a portion of goodwill impairment related to our subsidiary Genius National Investments Limited acquisition of Shanggu needs to be reclassified between controlling interest and a non-controlling interest in the company's Annual Report of 2013. Please refer to this quarter's release for details of the revision.
Finally, as you will be aware, our plan for continued listing on NYSE has been accepted. We remain focused on improving the fundamentals in our business.
Moving on to guidance for the third quarter of 2014. Based on the current market conditions, we estimate that our total net revenue for the third quarter of 2014 will be in the range of RMB100 million to RMB110 million. This forecast reflects our current and preliminary view which is subject to change.
This concludes our prepared remarks. Operator, we are now ready for questions.
(Operator Instructions) There are no further questions at this time. We are now approaching the end of the conference call. I would now turn the call over to the CFO of Century 21 China Real Estate, Mr. Steve Ye, for his closing remarks.
Thank you everyone for joining us for our earnings call today. We look forward to speaking to everyone again soon. Good day.
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