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Leju Holdings Limited (NYSE:LEJU)

Q2 2014 Earnings Conference Call

August 20, 2014, 07:00 AM ET

Executives

Xin Zhou - Executive Chairman

Yinyu “Geoffrey” He - CEO

Min Chen - CFO

Melody Liu - Investor Relations Director

Analysts

Jinsong Du - Credit Suisse

Sisi Lu - China Renaissance

Alex Yao - JPMorgan

Jiong Shao - Macquarie

Wai (Eddie) Leung - Bank of America Merrill Lynch

Gregory Zhao - Barclays Capital

Wendy Wong - Standard Chartered

Tian Hou - T. H. Capital

Eric Wen - China Renaissance

Ella Ji - Oppenheimer & Co.

Operator

Hello, and thank you for standing by for Leju’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. Please note that today’s conference is being recorded. 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. Melody Liu, Leju’s Investor Relations Director. Please go ahead, ma’am.

Melody Liu

Thank you. Hello, everyone, and welcome to Leju’s second quarter 2014 earnings conference call. Today, we will update you regarding our financial results for the second quarter ended June 30, 2014. If you would like a copy of the earnings press release or would like to sign up for our e-mail distribution list, please go to our IR website at ir.leju.com.

Leading the call today is Mr. Geoffrey He, our CEO who will review operational highlights for the second quarter of 2014. Ms. Min Chen, our CFO will then discuss the financial results in more detail. We will then open the call to questions at which time, our Executive Chairman, Mr. Xin Zhou, will be available.

Before we continue, please allow me to read you Leju’s Safe Harbor statement. 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 statement section of our IPO Prospectus filed with the SEC for additional information concerning factors that could cause those differences. Leju does not undertake any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise expect as required by applicable law.

Our earnings press release and this call includes discussions of unaudited GAAP financial information as well as some audited 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 or otherwise stated, all figures mentioned during this conference call are in U.S. dollars.

I will now turn the call over to Leju’s CEO, Geoffrey He. Mr. He, please go ahead.

Yinyu “Geoffrey” He

Thank you to everyone for joining us on the call today. We are pleased to report another quarter of strong growth, despite challenging overall market conditions in the first half of 2014. During the second quarter and over the past few months, we have maintained our focus on incrementing our mobile strategies through various product launches and we have strived to improve the secondary listing operating environment for industry players through our promoting of the verified listing model.

We launched our Weixin mobile product with Weixin Home Promotion activities in June which attracted overwhelming participation and the positive responses from developers and the customers alike. By mid-August, over 16 million gift packs have been opened and we have accumulated more than 36 million borrowers on both our Weibo and Weixin account.

In July, we upgraded to our mobile e-commerce platform 2.0 which consolidated all of our various mobile resources and offer developers an integrated and efficient mobile marketing solution. Also in July, we signed a strategic agreement with over 100 broker agencies in 17 key cities to promote a verified listing model to further develop healthy growth of the online secondary listing industry.

Most recently this month, we launched our new version of our mobile (indiscernible) for our secondary listing services. This upgraded product offers our consolidated mobile resources being in the form of an online store or secondary agent to provide them with more efficient masking and exposure.

In terms of the overall market, we have begun to notice a gradual recovery in transactional volume in a number of markets as a result of developers’ willingness to offer more concessions and from various local governments who have relaxed the restrictions. We believe these are encouraging signs for our industry.

As traditionally, the second half of the year tends to be the stronger for the real estate sales. We placed great emphasis on building our project pipeline and the improved [activities too] (ph) positioned Leju well for upcoming opportunities. We believe that our recent launch of mobile product for both e-commerce and a secondary listing can help us to gain additional market share.

Now I will turn the call over to our CFO, Ms. Min Chen, who will review our financial highlights for the second quarter.

Min Chen

Thank you, He. Good morning and good evening, everyone. We’re very pleased to report our strong second quarter top line results with a 63% year-over-year growth. Our e-commerce services revenue of 68.3 million accounted for about 58% of our total revenues. This represents a 159% year-over-year growth, which was primarily driven by increases in discount coupons redeemed, as we expanded into more cities and increased our market share particularly in second and third tier cities.

During the quarter, we generated e-commerce revenues from 58 cities compared to 38 in the second quarter of last year and 49 cities at the end of first quarter this year. Our online advertising revenues was 44.8 million which is a 11% growth compared to the same period last year and contributed to about 38% of our total revenues. The growth was contributed from both of our new homes and home furnishing channels.

In the second quarter, as a result of the lower transaction volumes in the secondary markets, revenues from our listing service experienced a decrease of 15% to 4.2 million. The listing business had always been a smaller piece of our total revenue pie but we still see long-term growth potential in this market and continue to monitor the development of this industry and to continue to invest in product development and teams for this business. We’re hopeful that our investments will yield long-term results going forward.

Non-GAAP income from operations was 24.1 million, representing an 83% year-over-year growth from the same period last year. Non-GAAP net income attributable to Leju shareholders was 20.5 million representing a 78% year-over-year growth from the same period last year.

For the first half of 2014, we reported 196 million in total net revenues representing a 75% increase from the same period last year. Our e-commerce revenues grew 188% from the first half of last year to 118 million contributing about 60% of our total revenues. Our online advertising revenues grew 12% from the first half of last year to 69 million contributing 35% of total revenues while our listing revenues remained flat at 80% for the remaining 5%.

Non-GAAP income from operations was 33 million representing a 208% year-over-year increase from the same period last year. Non-GAAP net income attributable to Leju shareholders was 28 million, representing a 290% year-over-year growth from the same period last year.

As of June 30, 2014, our cash and cash equivalents balance was 229 million including approximately 121 million from our IPO proceeds received in April. Our net cash flows from operations for the second quarter was 18.5 million. For the remainder of 2014, we expect to continue investing further into products and market share gains to capture the opportunities ahead of us.

Looking forward at this moment, we are maintaining our previous guidance for the year of 2014 of net revenues of 500 million to 520 million, which represents an increase from full year 2013 of about 49% to 55%.

That concludes our prepared remarks. We’re now ready to take questions. Operator, please go ahead.

Question-and-Answer Session

Operator

The question-and-answer session for this conference call will start in a moment. In order to be fair to all callers who wish to ask a question, we will take one question at a time from each caller. If you have more than one question, please request to rejoin the queue after your initial question has been addressed. Your first question comes from Jinsong Du from Credit Suisse. Your line is open. Please go ahead.

Jinsong Du - Credit Suisse

Hi. Thanks for answering the questions. My question is regarding the competitive landscape. So could you – because the marketing revenue growth seems to be much slower than the e-commerce, could you explain it is because of the cannibalization between the e-commerce and the marketing? And also whether the competitions would only have put a pressure on your margins for both e-commerce and the marketing business? Thanks.

Yinyu “Geoffrey” He

Thank you, Jinsong. I think for the e-commerce, it’s still our core business and our major [directions] (ph) to develop it further. That’s why I think you can see good growth compared to a little less more growth about the traditional online advertising. I don’t think it’s a strategic choice of our company, because when we go to the developers, we first – the top priority for us is to get the project through the e-commerce. Then we are looking for opportunities to do some online advertising. So it’s actually a strategic choice for us. As to the margin, I think given the market situation, I think e-commerce we already set up a very strong position on the market and for us I think is how to grab a bigger market share as possible. That’s our top priority at current for us. I don’t know if I answered the question, Jinsong.

Jinsong Du - Credit Suisse

Right. And just I’m interested to know that when you grow your e-commerce business at full speed, will it in the process put a (indiscernible) suppress the growth of your marketing revenues? That’s number one. And number two, as you said, now your focus is to gain market share and while you continue to gain market share, will that put a pressure on the overall margin of this business as well, if you could elaborate a little bit more on that, that would be great? Thanks.

Yinyu “Geoffrey” He

I think for the market as an estimate, I think how to maintain or consolidate our number one market share is still very, very important because the way you look at the margin estimate, it really depends on the market situation and how long or when e-commerce market will continue. Especially as the market is changing, I think that the work time actually has already passed, so for us if we get more market share, get more e-commerce projects, then it will be positive for us to get more revenue and even will be helpful to our margin.

Min Chen

I think in context to add on to what He was saying, the other thing that we’re also actually looking – spending a lot of time looking at is how to further innovate and develop our products to be more efficient. So yes, we are investing into gaining more market share but we’re also spending investments onto new product development. So with better and more suitable products for the market to meet our customers’ needs, for instance, our mobile products and our Weixin and Weibo public accounts that we’ve recently launched, we hope that that would offset a part of the competitive pressure that you’re alluding to and offset a little bit of the pressure on the margins.

Jinsong Du - Credit Suisse

Right. And I think to put it in probably a better term, for your online advertising business will the online advertising business growth kind of continue to be much lower or even get affected because of your expansion in e-commerce?

Yinyu “Geoffrey” He

Yes. As I said, because when we go to developers the top priority for us is to first get the e-commerce projects. So to some extent actually the growth of both the online advertising and the e-commerce actually they’re going to happen in time. So it’s unreasonable for us to get both high growth on both sectors, so we have to strategically choice which one to be our first growth priority. And I think we are also making some preparations for us to give the developers more innovative on product offerings. I think they will be helpful both for the e-commerce and for the online advertising. Also we are still at the very early stage of the mobile product offerings but I think we have already laid a very solid foundation to get further, especially when we look at the market we see that the demand from the developers as they are looking for more innovative promotion ways to have their deals done. So e-commerce is an innovative model and I think the mobile products will also be a very interested product. So for us I think these mobile projects will either help us to get more e-commerce project and also will help us to grow the online advertising in the future.

Jinsong Du - Credit Suisse

All right, thanks. I go back to the queue.

Operator

Your next question comes from Sisi Lu from China Renaissance. Once again, if you wish to ask a question, please be reminded to ask one question per questioner. Once your question has been addressed, please rejoin the queue in order to ask another question. Sisi, your line is open. Please go ahead.

Sisi Lu - China Renaissance

Thank you. Good morning. Thank you for taking my question. Congratulations on another solid quarter. Actually my question again is related to the e-commerce business. So I understand that we have been (indiscernible) right now that developers are getting demanding and also so far mentioned about considering a new e-commerce business model where they are trying to get into the real transactions and really use their (indiscernible) to complete the whole transaction. So could you please give us any color on your thoughts and how you think that the current e-commerce model is sustainable going forward? Thank you.

Min Chen

Thank you. The way that we look at e-commerce is we still think that there is a lot of market potential for growth for the leading players. And based on our numbers, you’ve seen that we’ve been able to both increase the market share and penetration in the cities that we operate in. We primarily see our role as a marketing agent for the developers to help market and sell their residential units. So that’s something that we’ve been doing using our online and offline resources and most recently with our multi-resources as well. We’ve been relatively successful in achieving some of the results that we were hoping to achieve. So in terms of getting into the transaction value chain that some other players are moving toward, we think that the result of that remains to be seen. It’s not necessarily a proven business model yet but we’re obviously monitoring the market in general what our developer clients are demanding us to do to help them with the sales of their units and also what our competitors are doing so that we can be ahead of the curve.

Sisi Lu - China Renaissance

Great, that’s helpful. Thank you. I’ll go back to the queue.

Operator

Your next question comes from Alex Yao from JPMorgan. Your line is open. Please go ahead.

Alex Yao - JPMorgan

Hi. Good evening, everyone. Thank you very much for taking my question. I have a question on the Weibo and Weixin partnership. Can you talk about where do this partnership create value to you guys? And to what extent do they generate incremental sales leads? And then lastly, when do you guys expect to see meaningful financial contribution? Thank you.

Min Chen

Sure. Thanks, Alex. Our partnership with both Weibo and Weixin are from our perspective there is strategic. We’ve looked at the user habits of the current population of the Chinese potential home buying population and we noticed that the trend of moving from PC to mobile and the most two obvious entry points for these mobile users is Weibo and Weixin. So from that perspective, the value of having access to these entry points is tremendous for us. Currently, as you know, Leju’s operating philosophy is to keep an open platform where we are able to increase and maximize our access to potential users and potential homebuyers both for our e-commerce business as well as for the online advertising audiences. So with the access of both Weibo and Weixin, what we’ve done so far is adding these two mobile entry points as additional channels of our access to the potential users and delivering the information and content to these users so that we can promote and market our clients’ real estate units for the new houses segment. But going forward, having established the followers on our Weibo and Weixin accounts, we are looking for ways, I would say, to potentially monetize to generate revenue I guess from these specific entry points but so far the Weibo and Weixin accounts and our mobile products, the e-commerce products, version 2.0 is really an additional channel for us to drive our e-commerce business.

Alex Yao - JPMorgan

Got it, very helpful. I’ll get back to the queue. Thank you.

Min Chen

Thanks, Alex.

Operator

Your next question comes from Jiong Shao from Macquarie. Your line is open. Please go ahead.

Jiong Shao - Macquarie

Thank you for taking my question and congrats on the results particularly your results seem to be much better than the market of some of your competitors. My question is that your primary competitor in the space recently made some investments in offline agencies although it’s in the new sort of a construction primary market, but they indicated that their plan potentially is to invest in the secondary agencies as well. I’d love to hear your view on sort of the pluses and minuses investing the offline agencies whether or not that’s something that you’re thinking about doing or whether or not that may prevent you from doing since you’re part of E-House? Thank you.

Yinyu “Geoffrey” He

Thank you. I think we know that our competitors were doing something new and actually something quite surprising, but we actually don’t know what’s their strategy. But for us I think our strategy is very clear. We will stick to our strategies to develop our mobile products to further get more market share of our e-commerce business. I think this – we will not be changed actually by some competitors’ change. We will stick – still thinking how to consolidate our mobile position and how to further consolidate our number one e-commerce position. Of course, we will monitor how our competitors are doing with the new change and actually we have no comment today because they have no results from their change.

Jiong Shao - Macquarie

Okay. Thank you, He.

Yinyu “Geoffrey” He

Thank you.

Operator

The next question comes from Eddie Leung from Merrill Lynch. Your line is open. Please go ahead.

Wai (Eddie) Leung - Bank of America Merrill Lynch

Good evening. Thank you for taking my question. My question is on your geographical expansions. So I’m wondering if you could give us some more color on the plan for the rest of the year and for next year in terms of your coverage for your e-commerce and potentially secondary listing pieces? And just a related note, if you could give us some high color breakdown of your revenue mix from different tiering of cities for the quarter that would be great? Thanks.

Min Chen

Sure. Thanks, Eddie. In terms of operations geographically, I mentioned our e-commerce business for the quarter generated revenue from 58 cities and obviously the traditional four first tier, about 34 second tier cities and then about 20 cities at a third tier and then lower. For the secondary listing business, earlier in July, we actually announced that we signed strategic alliances with brokerage agencies in 17 cities, so we’re actively driving more secondary listing business in these 17 cities but we – in terms of going forward for the second half of this year and potentially into the next year both for primary and secondary business, we’re monitoring and evaluating potential new markets to enter into but those new markets expansion will be very selective. It’s not going to be large scale. In terms of revenue distribution, from an e-commerce side, our revenue from first tier cities is up 40%, our second tier cities is around 53% and the remaining is from third tiers or lower tier cities. A similar distribution for our advertising as well, for the online advertising, about 36% from first tier cities, 50% from second tier and 13% from the remaining cities that we operate in.

Wai (Eddie) Leung - Bank of America Merrill Lynch

Thank you very much, Min, very helpful. Thanks.

Min Chen

Thank you, Eddie.

Operator

Your next question comes from Gregory Zhao from Barclays. Your line is open. Please go ahead.

Gregory Zhao - Barclays Capital

Good evening, everyone, and thanks for taking my question. My question is about listing services and we have observed a decent growth in some cities like Shanghai in terms of a number of listings and if you could mention and share some color of your answers pending your agency coverage is in the first tier cities like Beijing, Shanghai and Guangzhou? And what’s our current monetization effort on the listing services? Is it like fixed package for subscription all cut-off some beating advertising? Thanks.

Min Chen

For our listing business, as you all know, our 2013 revenues for the listing segment was primarily from one city that is Beijing, so this year we’ve started our expansion into more cities. I mentioned just now that we have to be operating in at least 17 cities and are laying out the network and the teams in a few additional cities. In terms of the listing business model, currently what we’ve done very successfully in Beijing last year was a verified listing which we are promoting in all the cities that we are operating our secondary listing business in. As of now that is still going to be the primary – the verified listing it will still be the primary business model, but we’ve also announced in July that we have launched an upgraded listing product where we’ve been able to consolidate our mobile resources to better serve our broker clients as well, so that in addition to – it’s all still based on those verified listing foundations but in addition to the traditional PC channel of marketing, they’re now getting a lot more channels and resources at their hands to market their housing information.

Gregory Zhao - Barclays Capital

Okay. Thank you very much.

Operator

Your next question comes from Wendy Wong from Standard Chartered. Your line is open. Please go ahead.

Wendy Wong - Standard Chartered

Thank you. Recently we have seen the price cutting from many of your competitors on the listings as well as the primary e-commerce business. So how do you view the pricing power that you have towards new customers? And also is anyway your view for the online real estate platform to increase its pricing power to where the customers were launching? Thank you.

Min Chen

As we developed our verified listing model, our pricing model was targeted towards giving our broker clients a reasonable return on their investments, which is the advertising dollars that they spend with us. So we monitor the clicks and the phone calls and the potential visits that our listing has been able to generate for them and we price our verified listing accordingly. So obviously with what I just mentioned in addition to the PC channel of marketing with the additional mobile resources that they’re now being able to market their housing information on Weibo and Weixin on their cell phones through a (indiscernible), there is a greater chance of these agents being able to generate higher views of their housing information. So that is linked to our pricing power of our secondary listing model. Going forward as we – we launched our upgraded secondary listing product in early August just last week, two weeks ago. So as more and more of our broker clients are getting used to this product and start using it every day, we expect that the viewed and the calls that they’re receiving will increase and that internally will increase our pricing power for our listings business.

Yinyu “Geoffrey” He

Yes, adding to what Min just commented that our pricing strategy model of our existing business is based on ROI. So if we have more views, more clicks that means we get big pricing power ratings. If the market gets softer and we get lower page views then the price will go down. So it automatically changed the pricing model. So I think most agents have requested this model, so that is why we upgrade our listing model to consolidate more mobile resources into that. This will help us to get a big pricing power because we will be bringing more exposure, more calls or more clicks to the agents.

Wendy Wong - Standard Chartered

Thank you.

Operator

Your next question comes from Tian Hou from T. H. Capital. Your line is open. Please go ahead.

Tian Hou - T. H. Capital

Hi, management. Thanks for taking my questions. One question is what you mentioned regarding the relaxation of some cities on the restriction policies and certainly the weakness in China’s housing market [decamp] (ph) some cities to release a much more softer policy and less restriction on purchase. And I wonder if you have seen any kind of a result out of that policy? And so what do you think those kind of relaxation policy could do to Leju? Another question is and I wonder what are some factors stopping you from going into more cities instead of currently 50-some cities? That’s all my questions.

Yinyu “Geoffrey” He

Okay. For the first one that we actually see some signals that for some cities when they announced relapsing the restrictions and the trading volume is slightly up. But for the rest of the cities although they announced these relaxing policies but trading volumes remains almost same. So overall I think the market trading is getting changed because the overall market (indiscernible) thinks that the work time maybe is changed and we don’t know when the market will overall change to become more positive. But I think the signal is quite good for us. For our business I think when the market goes to be positive, I think it still will be positive to our revenue because it will shorten the time period for us to sell of the equipments for one project. This means it will help us to stage a costs and even get the higher revenue. So the market is changing. We expect that the changing will still continue, but we don’t know to what extent it will be changing.

Min Chen

Tian, I think just one more point to add on the market. Obviously the other – we serve a big group of our clients are developers that operate in China and so we obviously take the cue from our developer clients as well. As of now, most of the developers have been closely monitoring the market and we’re not aware of many of them changing their full year sales target by too much, so that’s also another signal to us that developers are hopeful of reaching their full year target which is another sign for us that the second half of the market will stabilize somewhat. And then to your second question about the number of cities that we operate in, for e-commerce and advertising we actually operate in about 73 cities. The 58 cities that we mentioned were cities that had e-commerce revenue contribution for the second quarter of this year alone. So depending on the developer launch schedules in various cities from quarter-to-quarter that number is going to change and then obviously a very, very good quarter will have 73 cities contributing revenue.

Tian Hou - T. H. Capital

I got it. Thank you.

Operator

The next question comes from Jinsong Du from Credit Suisse. Your line is open. Please go ahead.

Jinsong Du - Credit Suisse

Hi. Thanks for taking my question again. Just like to follow-up on the impact of the margin. So if the margin is getting better, would that be good for your margin or it is going to be the same and also if the market is getting better, will the developers be in less need of more innovative promotions or going back to the more traditional online advertising or they will still be chasing more innovative ways using your retail home promotions, for example, or other things?

Min Chen

I think overall for this year our view of the margin is that it will be relatively stable compared to last year. We mentioned that the more innovative the mobile product will help us in offsetting some of the marketing expenses that we have to incur to successfully sell these projects. But at the same time, we want to continuously invest into more of the products that we can offer to our clients. So regardless of whether the real estate market in general is getting a lot better or it kind of remains the way it is now, I think developer clients are always interested in seeing new and more effective products and we think the Weixin – the mobile products that we have launched including Weixin and Weibo accounts have actually been able to help them reach more accurate and more – our intentional buyers as compared to the traditional advertising format. So that’s something that a developer can see immediate results of. So we think that they’ll also be welcoming new products that we can show results to them. And then also from – that’s obviously a reason why we will continue investment into the product development and at the same time, as you’re aware, as you mentioned early on, the competitive landscape is also getting very interesting, so we want to maintain our market share leadership in this market to continue to serve our clients.

Jinsong Du - Credit Suisse

Right. And for your secondary listing business, do you expect the revenue in this secondary listing business to continue to decline for the rest of the year or it’s going to be rebounding in the second half? And also what’s your outlook for – just rough outlook on your secondary listing business maybe next year?

Yinyu “Geoffrey” He

I think first of all for our secondary and market study is that because we are expanding to more cities nationwide is that how many agents we have is the top priority for us no matter how much they pay, because we are having the new markets in these new cities. So that’s our top priority. And then secondly is that as to the revenues side is because our pricing model is based on the (indiscernible) and how many clicks and how many page views every agent will receive. So it will be dynamic.

Jinsong Du - Credit Suisse

All right. Thank you.

Operator

Your next question comes from Alex Yao from JPMorgan. Your line is open. Please go ahead.

Alex Yao - JPMorgan

Thank you for taking my follow-up question. I have a question regarding the investment activity in the second half. You guys mentioned in the prepared remarks you are ready for more investment for marketing share gain and new product development. Just wondering how these investments affect margins? Thank you.

Yinyu “Geoffrey” He

This investment I think, first is our mobile product innovation and these investments mainly are on the labor costs but compared to our total payroll, I think the addition of the new payroll will be very limited. And the second investment is because we are still getting more e-commerce projects and our softer markets we’ll need to invest more to do both online and offline offerings to the developers. This will also be another marketing investment for us.

Min Chen

Alex, I think to add on to that, Weixin and Weibo for us as I mentioned before, we see these as two entry points but having these resources at hand actually for us we think that there is a number of different products that we can develop and offer to our clients using these two entry points to create new marketing campaign to create new online and potentially online plus offline events for our clients. So it’s not always going to be just Weixin and Weibo public accounts. We’ve already launched the suites that have integrated product suites in July and that’s been very well received by our developer clients. So we think that there is additional possibilities and variations that we can do with these two entry points. That’s something that we will continue to look to investing to.

Alex Yao - JPMorgan

All right, very helpful. Thank you very much.

Operator

Your next question comes from Jiong Shao from Macquarie. Your line is open. Please go ahead.

Jiong Shao - Macquarie

Thanks for taking my follow-up questions. Firstly, I want to better understand the reasons and the drivers behind your much faster growth in e-commerce business than your peers, I mean your growth rate is much higher your peers. Just want to understand, is that just basically blocking and tackling or are there other reasons behind that outperformance? And secondly, for the listing business, could you talk about your pricing compared to your competitor? And could you also talk about your competitor recently cut price by 40% nationwide. Do you feel that the price in the industry today is generally okay or how can you handicap the risk that a further price cut may still be necessary for the secondary listing to sort of keep some of the offline agencies afloat per se? Thank you.

Yinyu “Geoffrey” He

To answer your first question is that because we have already set up very solid leadership on the market, so it will give more confidence to our developers to choose us to do the e-commerce projects. And especially we have very mature both online and offline we call O2O experience, especially the offline experience. That’s the first one. The second one is because we upgraded our offerings to developers especially our mobile operators with Weibo and Weixin. You can see that the event we did Weixin Home Promotion activity actually received very, very positive feedback from the developers. They are very eager to integrate this new product into the total offerings of our e-commerce project. So this will also help us to gain more e-commerce products from our competitors. So when you look at in the landscape, you can see how companies only can give the traditional online thing and the very near offline thing, but we can provide an integrated both on and off plus a very innovative mobile offerings. So that’s a key reason. That’s why we are very competitive – we have the competitive edge to get in the e-commerce product. That’s the first one. The second one is that for us you can see as I mentioned several times that our pricing model is very different from our competitors. Our competitors actually is – they’re giving a very fixed amount price to the agents and our pricing is based on ROI. So we try to remain the same ROI today. So if they see that ROI doesn’t change, they do not give us [pleasure] (ph) of the price. Of course when we see the page views and the clicks because of the markets going down, the price still going down, so our plan strategy is very dynamic, so we do not have such a strong price pressure from our competitors actually.

Min Chen

I think Jiong in other words, if you look at our pricing model versus some of the fixed type models, when markets are good we benefit from the increased volume and increased viewed and calls that the agents are repeating. But when the markets are down, such as this year, we actually – inherent in our pricing model, we actually share a part of slowdown with agents. So like He said, we haven’t seen much of a depressed demand of pricing cuts from our clients. But obviously the overall market environment is such that everybody in – all the industry players will have to share part of the pain.

Operator

Your next question comes from Eric Wen from China Renaissance Security. Your line is open. Please go ahead.

Eric Wen - China Renaissance

Good evening, He and Zhou. Thanks very much for taking my questions. Congratulations on a great quarter. I just have a follow-up question on your listing business. It seems to be that there are some regulation changes regarding the qualifications of the common risk in agency, and some of the developers like (indiscernible) is experimenting with – pondering with individuals to sell the real estate, even talk about partnership with some e-commerce companies. How do you see those developments to impact your listing business strategy as you develop your business from scratch leveraging the mobile Internet? Thanks.

Min Chen

Okay, Eric. I’ll translate this question for our Chairman and then he’ll answer your question, okay. Thanks.

First of all, the policy changes, Eric, that you mentioned was we understand a ministerial level change to relax qualifications for both the real estate agency business as well as five other industries. This to us is actually a sign of the central government being more willing to let the economy and the market drive these industries, which is positive. Secondly, regarding (indiscernible) promotion of independent brokers, again it’s a sign to us that shows us that the consumers as well as industry players are actually placing more and more emphasis on Internet and various marketing channels as a tool for real estate marketing. For E-House as well as Leju over the past decade or so for E-House, we’ve done a number of product developments and new innovations around the real estate marketing industry itself, both online and offline. So what (indiscernible) is doing this time with this new agency model we think is actually a very positive thing for the industry as well as for the developers because now they have intimately more potential agents that are helping them to do the marketing of their real estate. In terms of impact to the real estate marketing markets both for primary houses and secondary or for online for different ways of doing the marketing online and offline, we actually think that for real estate marketing and promotion in general this past couple of years has been a very rapidly changing industry especially after Internet and especially after mobile technology entered into the scene. So what we’re facing is actually a relatively and almost all new industry where we have to continue to innovate to be able to do our job real estate marketing well. We think that in a changing market, the changes are actually opportunities for those that are well prepared and are ready to grasp the changes. So, for both E-House and Leju over the past few years, we faced a number of changes and have been able to adapt to the industry changes every time, so we think that even with this changing secondary brokerage policy or with the changing industry landscape, we’re prepared to see the opportunities to come up with better products to serve our clients as well as to deliver returns to investors.

Eric Wen - China Renaissance

Thank you very much, Xin Zhou, very helpful.

Min Chen

Thanks, Eric.

Operator

Your next question comes from Ella Ji from Oppenheimer. Your line is open. Please go ahead.

Ella Ji - Oppenheimer & Co.

Good evening, management. Thank you for taking my questions. Two quick questions. The first if my calculation is correct, the average of revenue per coupon for this quarter declined moderately from 1Q. Just wonder if this is because of the mix shift to more lower tier cities? Or let’s say in the same tier 1 or tier 2 cities, are you also seeing the decline in coupon ticket size? And the second question of mine is on mobile, you currently have your own mobile app and then you have a Weixin and a Weibo. It seems that Weixin and Weibo have been a very effective marketing channel for you. Just wonder going forward how are you going to use Weixin and Weibo? Are they going to be treated just like an in-house channel or where we’re seeing maybe continued you will do more of big sales events just like what you did for the last time Weixin Home? And also if you can quickly comment on the effectiveness of Weixin and Weibo versus your own mobile app, that would be helpful? Thank you.

Min Chen

Sure. Ella, to answer your first question, you’re assumption is right. It’s actually just because our mix of cities especially we increased the number of cities that are lower tier, so the average coupon prices have declined slightly. In the same tier cities, the prices have been actually rather stable.

Yinyu “Geoffrey” He

For the second I think we have actually tried to balance the development of Weibo and Weixin. I would say that’s the mobile platforms development and also our own application Pocket Leju development. But we actually have a plan and first I think we will focus on the Weixin because it’s much easier for our users, for the homebuyers to get attached to the mobile services to be provided. And of course we also have very (indiscernible) how to develop our app but it’s the next step.

Ella Ji - Oppenheimer & Co.

Got it. Thank you.

Operator

Your next question comes from Jinsong Du from Credit Suisse. Your line is open. Please go ahead.

Jinsong Du - Credit Suisse

Yes, my original question was already asked but just a quick follow up on your Weixin Home Promotion. You have just made a second batch of a launch and which you said is upgraded. Could you just quickly mention what exactly is the additional upgrades that may make it better?

Yinyu “Geoffrey” He

I think we actually had a lot of new games into the app. The first element of this event is mainly focused on the Red Pocket as that’s a gift package and the second time I think we add, we called it – in Chinese we called it (indiscernible) crop purchasing, it’s kind of a new game. And also we will add a lot of various new interesting products we are trying to – first one is we are trying to put the house directly ahead to sale on the Weixin and we also have it in (indiscernible). And the second is that we will also put some lucky draw player games into that. So you can in Chinese we do not have only Red Pocket, we have more games on that.

Min Chen

So, Jinsong, I think the second season of the continuation of the Weixin Promotion was really when we announced the first one for the period of a month towards the second half of that promotion period, we’re getting actually increased demand from developers who want to participate in this event. So that’s why we’ve decided to extend it with the second season and with the second season, as He mentioned, we are finding – I guess creating more ways for both developers and consumers to participate in these events. If you think about the power of marketing moving from passing by an ad, a traditional advertising billboard or even an online vendor ad to something that you can participate and play games with on your cell phone, the sect of that new marketing is a lot more powerful. So that’s why we are now in our second season and I guess it’s backed by popular demand.

Jinsong Du - Credit Suisse

Great. Thanks a lot.

Operator

Your next question comes from Gregory Zhao from Barclays. Your line is open. Please go ahead.

Gregory Zhao - Barclays Capital

Thanks for taking my second question. My second question is about selling, general and admin expenses. How much shall we allocate the expenses to your investment in R&D of mobile development? And in the release you also mentioned that the increase of the selling expenses was primarily due to the increase of your e-commerce business, but I think the e-commerce business revenue is growing faster than the selling, marketing expenses. So would you please share some color about the correlation between the e-commerce revenue and the selling and marketing expenses? Thank you.

Min Chen

Greg, thank you. I’ll answer your second question first. The increase in expenses is lower than the revenue because we went from 49 cities to 58. There is a lot of synergies that we’ve been able to generate in cities where we’re operating multi projects on. And then for some of the marketing events that we organize or we’ve been able to promote multiple projects in one event. So there’s a lot of synergy within cities, within different projects, some developed by the same developer so that we can grow our revenues a lot faster than the marketing expenses. That’s number one. And in terms of your first question about investment amounts in the second half, He mentioned earlier the bulk of investment into product development is really getting the technology up and running and we think the framework has been laid out already. We’ve successfully launched Weixin Promotion which is the foundation for a lot of the other things that we’re working on. So the additional investment into development products will not be as large as before. It’s probably more incremental and it will be more bearable and changes along with the various events that we launch. I hope that answers your question.

Gregory Zhao - Barclays Capital

Yes, very helpful. Thank you.

Min Chen

Thanks.

Operator

We are now approaching the end of the conference call. I would like to turn the call back over to Leju’s Investor Relations Director, Ms. Melody Liu, for closing remarks.

Melody Liu

Thank you. This concludes today’s call. If you have any follow-up questions, please contact us at the numbers or e-mails provided on our earnings release and on our website. Thank you.

Operator

Thank you for your participation in today’s conference call. This does conclude the presentation. You may all disconnect. Thank you.

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Source: Leju Holdings' (LEJU) CEO Yinyu He on Q2 2014 Results - Earnings Call Transcript
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