E-House's (EJ) CEO Xin Zhou on Q2 2014 Results - Earnings Call Transcript

Aug.20.14 | About: E-House (China) (EJ)

E-House (China) Holdings Limited (NYSE:EJ)

Q2 2014 Results Earnings Conference Call

August 20, 2014 8:15 AM ET

Executives

Michelle Yuan - Director, Investor Relation

Li-Lan Cheng - Chief Operating Officer

Bin Laurence - Chief Financial Officer

Xin Zhou - Co-Chairman and CEO

Analysts

Jinsong Du - Credit Suisse

Anne Shih - Brean Capital

Tian Hou - T.H. Capital

Wendy Huang - Standard Chartered

Operator

Hello. At this time, all participants are in a listen-only mode. After management’s prepared remarks there will be a question-and-answer session. Please note that today’s conference call is being recorded and if you have any objections you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Ms. Michelle Yuan, E-House’s Director of Investor Relation. Please go ahead, ma’am.

Michelle Yuan

Hello, everyone. And welcome to E-House’s Earnings Conference Call for the Second Quarter ended June 30, 2014. To download a copy of the earnings press release or to sign up our distribution list, please go to the IR section of our website at www.ehousechina.com.

Leading the call today is Mr. Li-Lan Cheng, our COO, who will review highlights for the second quarter; Ms. Bin Laurence, our CFO, will then discuss our financial results. We will then open the call to questions, at which time, our Co-Chairman and CEO, Mr. Xin Zhou will be available.

Before we continue, please allow me to read you E-House’s Safe Harbor statements. Some of the statements during this conference call are forward-looking statements made under the 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.

You are encouraged to review the forward-looking statements section of our annual report on Form 20-F filed with the SEC for additional information concerning factors that could cause those differences.

E-House 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.

Our earnings press release and this call include discussions of unaudited GAAP financial information, as well as some unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. Please note that unless otherwise stated, all figures mentioned during this conference call are in U.S. dollars.

I will now turn the call over to E-House’s COO, Mr. Li-Lan Cheng. Mr. Cheng, please go ahead.

Li-Lan Cheng

Hello, everyone, and thank you for joining us today. We are pleased that E-House continued its overall strong growth in the second quarter despite softness in China's real estate market. In particular, our online services unit Leju continued its strong growth momentum.

The real estate market in China experienced -- had experienced a substantial slowdown this year, which has prompted local governments in many cities relaxed some of the restricted policies. This has resulted in a moderate recovery in transaction volume in some cities.

At the same time, many developers have shown flexibility in pricing and have increased their marketing efforts. We are hopeful that these initiatives by the government and developers will gradually improve market sentiment and transaction volume in the second half of this year.

In July, E-House officially launched multiple new products and services, including our real estate financial services platform, Fang Jin Suo, our O2O mobile community services app, Shi Hui and our home price ratings website and related mobile app, Fangjiadp. In addition, Leju completed its mobile e-commerce platform 2.0 upgrade and expanded its strategic alliances with secondary brokerage firms.

As a result, we have now successfully set up five independent yet synergistic platforms, namely, online services, brokerage services, information and consulting services, financial services and community value-added services.

In the second half of this year we will continue to focus on enhancing the content and features of the new products we've launched and on expanding our service coverage and user base. We will also strive to establish clear revenue models for those new services and believe they will create new value for our shareholders.

I will now turn the call over to our CFO, Bin Laurence who will review our financial highlights for the second quarter and first half of 2014.

Bin Laurence

Thank you, Li-Lan, and hello, everyone. As a result of our strong execution and our development of innovative products that are sought after by the market, we delivered continued revenue growth in the second quarter. In addition, we achieved strong year-on-year profit growth along with revenue increases.

During the second quarter, our total revenue increased 29% to $210.1 million, primarily driven by revenue increases from our real estate online services. Revenues from real estate online services increased 63% to $117.3 million, driven by revenue increases in e-commerce and online advertising services revenues.

Revenues from real estate brokerage services were $65.5 million, which remains stable compared to $65.6 million for the same quarter of 2013, despite a challenging overall property market environment. Revenues from real estate information and consulting services increased 9% to $17.9 million, due to increased revenues in both information and consulting services.

Moving to operating and net income, non-GAAP income from operations was $23.7 million, an increase of 41% from $16.8 million for the same quarter of 2013. Non-GAAP net income attributable to E-House shareholders was $20.6 million or $0.14 per diluted ADS, an increase of 34% from $15.3 million, or $0.11 per diluted ADS for the same quarter of 2013.

I will now reiterate go through our first half financial highlights. Our total revenues increased 33% to $373.5 million, driven mostly by revenue increases in real estate online services and real estate information and consulting services.

Revenues from real estate online services increased 75% to $195.8 million, contributed by growth in both e-commerce and online advertising services revenues. Revenues from real estate brokerage services increased slightly from $124.9 million for the same period of 2013 to $126.6 million.

Revenues from our online information and consulting services increased $27 million, I mean, sorry, 27% to $35.6 million, due to revenue increases from both information and consulting services.

Non-GAAP operating income increased significantly from $17.6 million last year to $33.8 million. Non-GAAP net income attributable to E-House shareholders was $32.4 million or $0.22 per diluted ADS, an increase of 66% from $19.5 million or $0.15 per diluted ADS for the same period of 2013.

As of June 30, 2014, the company's cash and cash equivalents balance was $607.9 million. Second quarter 2014 net cash used in operating activities was $1.6 million. Net cash used in investing activities was $25.4 million, mainly comprised of a $15.6 million purchase of preferred shares of a private third-party wealth management company during the second quarter, a $5.7 million payment to Baidu related to our previous agreement and $5.7 million in CapEx.

Net cash provided by financing activities was $89 million, mainly comprised of $121.1 million in Leju IPO proceeds, partially offset by $27.6 million in dividends paid to our shareholders during the second quarter and by $3.3 million paid for acquiring the remaining minority interest in our listing business.

I will now provide an update on our business outlook. We are maintaining our previous fiscal 2014 revenue guidance of $910 million to $930 million, which represents an increase of approximately 24% to 27% from $731 million in 2013. This forecast reflects the company's current and preliminary view which is subject to change.

This concludes our prepared remarks. We are now happy to take any questions you may have. Operator, we are ready to take questions.

Question-and-Answer Session

Operator

Sure, Ma’am. (Operator Instructions) Your first question comes from the line of Jinsong Du from Credit Suisse. Please go ahead.

Jinsong Du - Credit Suisse

Hi. This is Jinsong Du from Credit Suisse. Thanks. And my question is regarding our service -- and service broker margins and how would be overall housing market changes effect those? So whether it will -- the margin will continue to be stable or going up or going down? And if that’s a case, what is your view on the overall housing margin in the second half of the year and next year? Thank you.

Bin Laurence

Sure, Jinsong. We are actually very pleased to see that E-House’s overall business maintained very stable margin this year, despite very challenging market environment. Our traditional brokerage business not only maintained a very stable revenue, it also remained profitable and so we -- I think this is attributable to our very solid execution by our team.

In terms of outlook for the second half of the market as we mentioned in our press release, we have observe recent relaxation in certain city local governments in terms of previously restricted real estate policies.

We believe that this helps the overall sentiment of the market and we are monitoring the market closely and we are hopeful that this will bring translate into further sentiment and potential demand in the second half.

Li-Lan Cheng

If I can just add a little bit Jinsong, this is Li-Lan. Obviously, I’d say, very depressed market is bad for our margin -- bad for our traditional agency business and doesn’t help the online business either.

So to that extent, if the market sentiments of the overall transaction volume activity recover in the second half of the year, basically in the next couple of months, it should help.

But market conditions are not the only thing that affects our margin. How much we spend on new products and platforms. How much we spend on marketing as we do during the Leju cost, those are also impact our margins.

Jinsong Du - Credit Suisse

All right. Thank you. I will go back in the queue.

Li-Lan Cheng

Thank you.

Operator

The next question comes from the line of Anne Shih from Brean Capital. Please go ahead.

Anne Shih - Brean Capital

Hi. I have two questions, one just a follow-up on the margins and second on financial services. So, you achieved really strong improvement in operating margins, which appears to be primarily from the growth in e-commerce? And I mean, I think, information and consulting services? I’m just wondering if you see a similar trajectory even with continued investments on the new products and marketing sides through the second half of the year and into 2015.

And then, for my second questions, just wanted to follow-up, find out more about the monetization model for your financial services product and kind of revenue contribution from there? Thanks.

Li-Lan Cheng

Yeah. The margin improvement this -- the second quarter compared to a year ago, yes, you are correct, a lot of that is the result of the rapid increase in scale and revenue for our e-commerce business.

I don’t think you can extrapolate that forward and say that the market will continue to improve with that trajectory. First, the revenue increase will not be in the 300%, 500% range, that as the base, I will say increases the further growth that the rate will come.

Two, the -- as we increase revenue and expand the scale of e-commerce business, we’re also increase spending, one, in marketing and in project-related market spend and the other is, new product, new platform investments.

So, all those will slowdown at least the rate of margin improvement. Yeah, your next -- for the next question, regarding what we’re doing with the financial services industry, yeah, the financial services platform we can, I want to turn this to our CEO, Mr. Zhou, who can give you an update.

Xin Zhou

Good afternoon.

Bin Laurence

[Foreign Language]

Xin Zhou

[Foreign Language]

Bin Laurence

In March, we announced the company’s overall strategic plan including five synergistic, independent service platform. And at the same time, we announced that we’re adding the financial services platform as well as the community value added services platform. We are happy to say that we recently already launched those new services platform. And in terms of financial services platform, we not only completed order design and the product design and procedure design. We recently tested with two new products.

Those were overwhelmingly received by consumers. The first product was finished that we sold out to the first product in 36 seconds, and we sold the second -- sold out the second product in 48 seconds. So we‘re very happy to see that the platform is working and there is lot of interest for our products. And so far what we can report is that the platform is in place and the products are being launched and they are well received.

Xin Zhou

[Foreign language]

Bin Laurence

I’d like to -- in terms of financial service revenue model, I’d like to illustrate three points. First, we believe there is huge potential for the combination of internet and real estate financing. And two, that this is pure P2P real estate financial service platform and we are not going to use our own balance sheet. And three is, there are lots of new products and services on the market right now for real estate financial services platform. And we’ll maintain our innovation and come up with innovative product and services.

So in terms of the actual financial revenue model, we’d like to ask for some additional time. And we’re hopeful that by the third quarter or fourth quarter of the year, we will be able to let you guys know more clear revenue model and product offering.

Anne Shih - Brean Capital

Thank you.

Xin Zhou

Thank you.

Bin Laurence

Thank you.

Operator

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

Tian Hou - T.H. Capital

Good evening management. I have two questions. One is regarding, Xin Zhou [Foreign Language]. Okay, so the first question is for Mr. Zhou. As some cities have already released the relaxation of the restriction policies, I wonder if there are any impact or if there are any initial results to the real estate business and what could be the impact to E-House? So that’s number one question.

Number two is, potentially you have ecommerce business in about 70 some cities. What step you go into more cities? [Foreign Language]

Xin Zhou

[Foreign Language]

Bin Laurence

Okay. I’ll translate Mr. Zhou’s answer to your questions. In terms of how much effect we have seen with regard to the recent relaxation in some of the cities. You have observed as we mentioned before that we have observed many cities recently after the very soft first half of the year, that is relaxing restrictive diversity policies and in some cities even some credit policies.

What we’ve observed is so far some cities achieved certain results while other cities’ results were lukewarm. The cities that do have some results reaction to those policy -- relaxed policies are those with more incoming population. And the cities that has almost no effect in terms of the relaxed policies are those that has populations that are still going out.

So in terms of the -- so we’re positively optimistic about the overall real estate market for the second half of the year. But we’ve observed that many developers this year so far hasn’t really changed their overall target -- sales target for the whole year. And we believe that they will continue to be very active, marketing their product in the second half of the year.

So the overall market should be relatively stable. For E-House and Leju, we think that we need to be -- the challenge for us is to be well prepared for the various -- for the changing market environment and we’re constantly working on that.

Xin Zhou

[Foreign Language]

Bin Laurence

For your second question, it’s a very good question. In order to provide effective ecommerce services, you need three major elements. One is you need to have online platform which has meaningful media impact.

Second is you had to have good offline services that corresponds to this online impact. And lastly, you need to have enough your own people -- staff on the ground to provide the actual services.

Xin Zhou

[Foreign Language]

Bin Laurence

Even though we have operations in more than 250 cities for our online services, we have direct operations in 73 cities. So currently we’re focusing on those 73 directly operated cities and to enter those cities as well as increase penetrations in those cities.

Obviously, we’re getting prepared to enter additional cities after that. And we’re trying to increase our markets power in those additional cities currently and so that when we’re ready we would be able to enter effectively.

Xin Zhou

[Foreign Language]

Bin Laurence

So our near-term, we’re going to focus on those 73 directly operated cities. We will be in the future going into additional cities and we are getting prepared to enter those cities.

Xin Zhou

Thank you.

Bin Laurence

Thank you.

Operator

The next question comes from the line of Jinsong Du from Credit Suisse. Please go ahead.

Jinsong Du - Credit Suisse

Hi. Thanks for taking my question again. Just like to understand a little bit more on the -- your offline business, the agency business. Could you share with us, are there any changes on the commission rate and also when the developers now there seems to be more willing to get the secondary housing agents to bringing customers. Does that put a pressure on how much the developers are paying you as the primary estate agent? Thanks.

Bin Laurence

Okay. Jinsong, I’ll answer your first question and Li-Lan will answer your second question. In terms of commission rate, as you can see, it remains very stable in the first half of the year for both first quarter and second quarter. It obviously fluctuates from quarter to quarter but overall this is in the same range as what we had last year. So it remains stable currently.

Li-Lan Cheng

Jinsong, regarding your second part question, it doesn’t really work that way because, yes, developers when touched (indiscernible) that sales are going slow. They want to use any one. They want to leverage all the distribution channels or tools that are available in the market including the real estate brokers who usually are only focused -- mainly focused on secondary sales and rental.

But in this process, we as the primary agent on the ground, we are actually shouting developers extend that marketing arm. We help them find and organize these secondary brokers, get them onsite, get them into the showroom and introduce the product. So to the extent, developers want to utilize the secondary brokers’ network in the local cities.

We help them organize this process and when they do that, developers will need to pay an extra commission to those secondary brokers to achieve the sales because the nominal broker commission for the secondary brokers is actually lot higher for our primary agent. So mathematically, it’s not possible for us to share our commission with the secondary broker. Even developer, if the product is out to use as the local broker network, they’ll need to agree to pay them a separate broker fee.

Jinsong Du - Credit Suisse

Great. I’ll go back in the queue. Thank you.

Operator

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

Wendy Huang - Standard Chartered

Thank you. You mentioned the community value-added services as one of the five independent (indiscernible) you are developing for the long-term. However, would it be better to actually have this feature function as a value-added services to your, for example, online services or brokerage services, so that you can actually increase the new stickiness or your pricing power in those two core existing segments? If you have any thoughts on that, please feel free to share. Thank you.

Li-Lan Cheng

If I understand your question correctly …

Wendy Huang - Standard Chartered

Actually, what I’m wondering is actually more about whether it would be independent revenue stream in the long term or it will be more a function…

Li-Lan Cheng

It is, it will be. It will have its own revenue stream and we are in thoughts of developing this revenue model. If anything -- it serves the people who at a different space of their real estate related life cycle if you will. The community service platform mainly aid to serve those people who have already purchase their homes and who have built a new community in those home and their aim to provide continued service for those residents.

So at any given moment in time, it serves a different group of people from those -- I would say, agency service or online service whereby our current agency business unit and our online unit mainly serve to facilitate transactions -- to serve the new home -- facilitate new home transactions whereas the community service platform aims to provide service to those people who have already bought their homes. So it won’t have a distinct revenue stream independent of what were the revenue we’re making for our other platforms -- our other business units.

Wendy Huang - Standard Chartered

So just to clarify, do you actually intend to charge end users on those community value added services, given that those users would be the users who already purchase their home at a different stage or different part of the home purchase in the value chain already. So that’s different from value-added services we offered…

Li-Lan Cheng

The revenue model, the exact revenue model for the community service platform has many possibilities. So it may or may not involve something where the end user pays. I mean, first of all the community service platform in terms of end user, you’re not really -- it doesn’t have really -- it is limited to those people who live in the community and pay service. It could include -- the end user of this platform could include merchants, local service providers.

But first of all the platform aims to bring those parties and people together. So the definition of end user here is already much wider than home buyers. So I wouldn’t limit the idea of end user first of all to home buyer. So it continue along that line then, yeah, I mean, obviously, the revenue will come from somebody. But it’s not necessarily for those people who pay for services, maybe could be the people who or the companies that provide services.

Wendy Huang - Standard Chartered

Okay. Thank you.

Operator

And the next question comes from the line of Jinsong Du. Please go ahead.

Jinsong Du - Credit Suisse

Hi. Just a follow-up question on the market for Mr. Zhou. You mentioned that the market has stabilized and you see some cities improving. So do you think that in the second half both the housing prices and the housing transaction volume with the capital or you were just talking about transaction volume? [Foreign Language]

Xin Zhou

[Foreign Language]

Bin Laurence

First of all, many people at the beginning of the year were worried about price increase -- price decline for home price and so far at this point, we observed, starting to observe stabilize home price.

And for -- in terms of volume, as mentioned before, many developers actually have not changed their whole year sales targets, where I think, many of them are focusing a little bit more on volume versus price, which means that volume is potentially going to be relatively positive in the second half.

And in terms of weather, the sequential volume change in the second half of this year versus the first half of this year, compared to the year-over-year change, the second half of this year versus the second half of last year, I would say that, the improvement in volume change in the second half versus the first half of this year will be better than the year-over-year change from second half of this year versus last year.

Xin Zhou

[Foreign Language]

Bin Laurence

And overall, I mentioned that we are still cautiously optimistic about the overall market. Thank you, Jinsong.

Jinsong Du - Credit Suisse

All right. Thank you. Thank you.

Operator

The next question comes from the line of [Alan Wang from Sparks Group] (ph). Please go ahead.

Unidentified Analyst

Hello. Thank you for taking my call. I just have very small question regarding the numbers. On looking at this quarter’s number, you have $3.8 million of U.S. coming from other operating income, compared with same quarter last year is only $1.1 million. This is one and the second number is on other income and loss, you have $2.9 million in this quarter, compared with same for the last year is a $0.5 million loss? So these two items seems to be a little large because the net profit itself is distinct? So the proportion is very large, I would like to know what is actually causing the difference, what are those numbers in detail? So that’s my question. Thank you.

Bin Laurence

Okay. I just want to clarify, is it $7.8 million -- $3.8 million in the second quarter of this year versus $1.1 million in the second quarter of last year…

Unidentified Analyst

Yeah.

Bin Laurence

… is that what you’re referring to…

Unidentified Analyst

Yeah.

Bin Laurence

… other operating income?

Unidentified Analyst

Yeah. Right. This is the first item $3.8 million this quarter versus $1.1 million last quarter. And the second item is, below the operating margin line it is called other income and loss, which is $2.9 million this year.

Bin Laurence

Okay.

Unidentified Analyst

And also, yeah, these two items? Yeah. Thank you.

Bin Laurence

Okay. Sure. So the other operating incomes are actually various small operations that that falls outside of those three -- out of those three major divisions right now. For example, some the smaller subsidiary income that are outside of those three major divisions and that’s why we categorized them as other operating income, for example, we have -- we sometime have some training that we do on behalf of developers, for example, those type of income.

And for the line that’s below the operating income. This is mainly some times, for example, we have some investment securities, for example, that we sale or buy and sale in (indiscernible) and that’s causing to this category.

Li-Lan Cheng

Just want to supplement that, other operating income also includes government subsidies we receive for some of our subsidiaries. We get these subsidies from local government as incentives and they are cerotic basically regular income that whenever we receive them in the quarter it gets recorded.

Bin Laurence

Yeah. And that could be relatively random from quarter-to-quarter.

Unidentified Analyst

Okay. Thank you.

Operator

We are now approaching the end of the conference call. I will now turn the call over to E-House’s Director of Investor Relation, Ms. Michelle Yuan for her closing remarks.

Michelle Yuan

This concludes today’s call. If you have any follow-up questions, please let us know. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!