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Qunar Cayman Islands Limited (NASDAQ:QUNR)

Q2 2014 Earnings Conference Call

August 21, 2014 8:00 p.m. ET

Executives

Jenna Qian – Head of Communications and IR

CC Zhuang – Co-Founder and CEO

Yilu Zhao – Chief Strategy Officer

Sam Sun – CFO

Analysts

George Meng – Morgan Stanley

Alicia Yap – Barclays Capital

Vivian Hao – Deutsche Bank

George Askew – Stifel Nicolaus

Yuheng Fan – China Renaissance

Henry Guo – JG Capital

Juan Lin – 86Research

Eddie Leung – Bank of America Merrill Lynch

Yi Chen – Aegis Capital

Alex Yao – JPMorgan

Tian Hou – T.H. Capital

Ida Yu – China International Capital Corp

Operator

Hello, and welcome to Qunar's second quarter 2014 earnings conference call.

[Operator Instructions] Today's conference is being recorded for replay purposes. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to you host for today's conference, Ms. Jenna Qian, Qunar's Head of Communications and Investor Relations.

Jenna Qian

Thank you. Good day, ladies and gentlemen. Thank you all for attending Qunar's second quarter 2014 earnings conference. Qunar distributed its earnings release earlier today, and you can find a copy on our website, as well as on newswire services.

Joining me today, we have Mr. CC Zhuang, Co-Founder and CEO, Mr. Sam Sun, Chief Financial Officer, and Ms. Yilu Zhao, Chief Strategy Officer. After their prepared remarks, we will open up the call for your questions.

Before we continue, I should note that the discussion today will contain forward-looking statements. These statements are made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1994. For an explanation of forward-looking statements, please refer to the section titled "Forward-looking Statements" in the press release we issued earlier today. Any remarks by the management on today's call are made as of today, and Qunar undertakes no duty to update any forward-looking statements made on today's call, except as required under applicable law.

As a reminder, this conference is being recorded. A webcast of this conference call along with our latest operating metrics will also be available on Qunar's IR website investor.qunar.com or ir.qunar.com.

Now I would like to turn the call over to Qunar's Co-Founder and CEO, CC Zhuang,

CC Zhuang

Thanks, Jenna. Thank you, everyone, for joining us today.

Q2 was a very good quarter for us. Momentum across our business lines remained strong. Revenue growth accelerated for the fourth quarter in a row, reaching 127%, the highest growth rate we have achieved in 10 quarters and multiple times the industry average.

Returns on our investment in product sourcing and product development has been coming in earlier and quicker than we expected. In Q2, we extended our leadership in mobile, which with cumulative activated downloads reaching 270 million. Our mobile platform has continued to attract consumers in large number across China whenever they might be as we look for the best deals and the broadest selection. Mobile's contribution to both the revenue and transaction volumes grew further, with mobile revenue grew over six times year on year.

In Q2, mobile accounted for 36 of total -- 36% of total revenue, 58% of our TEHR or total estimated hotel room nights, and 38% of our TEFT or total estimated flight tickets. All three numbers are industry leading.

One thing that is particularly exciting is the tremendous room for further growth. We have by far the largest user base in the industry, but online travel still accounts for just around 10% of China's travel market, compared to the around 50% in most of the markets in the west. And the mobile makes up only a portion of that 10%. The paradigm shift from offline to online, particularly to the mobile is a massive force. We anticipated this and have been at the forefront of the movement.

We remain excited about our results. Total revenue for Q2 reached RMB400 million, driven by both market share gains and the pricing leverage. Total quarterly GME reached about RMB18b, which is another new high. The results of this quarter are proof of our continued focus on executing our plan. This is the best way for us to create value for our shareholders and our users, and to achieve our mission of building China's leading end-to-end travel ecosystem.

Now let's discuss the progress we have made on our key strategic priorities, first, product sourcing, second, user experience, and third, value to travel service providers.

First, product sourcing. We have been excited about our results, and I will go through an update in sequence of the hotel, flight and then tour packages.

In domestic hotels, since a few quarters ago we have been building our network of direct selling hotels, so that our users have more selections at compelling price point. By the end of Q2, we had over 165,000 hotels in our direct network, spanning both top and the lower-tier cities and across the hotel star levels. That's an increase of over 72,000 in one quarter alone.

We have by far the broadest coverage in China. In addition to the hotel count, we are in the process of finding [ph] multiple product types for each hotel, including pay upon arrival, prepay, group by, and last minute. By doing so, adding hotel counts and adding product count, we are bringing online hotel room nights that were previously booked offline. We account for the majority of the market -- they account for the majority of the market. And in that process, we give travelers across China way more choices than they have previously imagined possible. We will continue on this path, and plan to offer our users the most comprehensive hotel coverage in China.

Internationally, we now cover over 0.5 million hotels through our relationship with both global OTAs and prominent regional players. As a measure of success for international hotels, we generated substantial traffic leads. The segment accounts for a small portion of our overall revenue, but it's growing very fast. International hotel bookings grew more than four times year over year.

Now onto flights. Domestically, we cover the largest number of routes and the most type of tickets through our partnerships with airlines, their distributors and ticket agencies. We have sustained that advantage and continued to add routes [indiscernible] in the second quarter. As of Q2, users can search as many as over 16,000 domestic flights, routes on Qunar every day, three times the industry average.

We utilize our advanced logarithm to provide users with effective routes combination exclusive on Qunar, leading to substantial savings in money and time. We also achieved the most comprehensive pricing points for domestic low-cost carriers.

For international flights, we cover close to 180,000 routes operated by close to 400 airlines, including more than 100 low-cost carriers globally, offering consumers more choice than any other platform in China, leverage our vast user base. Year on year, the number of international tickets sold through us grew more than five-fold.

Let's now turn to our tour segment. At the end of Q2, our platform grew to cover over 400,000 products, up from 310,000 at the end of Q1. In this segment, which includes group tour and sales guided tours, we worked with a broad range of travel agencies, to bring more product online. As we all know, tour is a segment with low level of online penetration, but high levels of product diversity. And online marketplace model has its natural advantage in terms offering consumers the greatest number of choices and the best value.

In Q2, our sourcing team brought online more local travel agencies whose stores populate in the streets and the shopping plazas of China's lower-tier cities. Their efforts helped to drive an over five times year-over-year increase in GMV in Q2.

Now shifting gears to my second broad point, user experience. Same as always, user experience remains key and essential to all of our endeavors. We look at every detail in user search, transaction, after sales experience, to ensure a high level of satisfaction. In the second quarter, we did many things, large and small, to continue a path of offering best experience at every stage.

In the first phase, we have further improved search speeds and made the results and displays more user-friendly and highly personalized to each individual. In transaction phase, we have further improved the confirmation speed and made the payment easier. In aftersales phase, our platforms with higher level of automation makes it extremely convenient. Now, for example, a substantial majority of our domestic flight tickets can be cancelled within just a few clicks on the PC and mobile, and the rebound [ph] speed has improved to within half an hour.

We care deeply about the user experience, and all these improvements from -- forms every basis of our substantial leadership in user numbers, in online travel.

Third, let's discuss our value proposition services providers. China's travel industry is huge, fast-growing and complex. Each player brings unique value to ecosystem, and service provider such as airlines, and hotels or distributors. We have been playing an increasingly important role in connecting China's consumers to all travel resources. Here let me give you some examples of our value to travel service providers.

To airlines, we provide substantial traffic to grow their direct to consumer sales. We have been setting up flagship store for both domestic and international airlines on Qunar platform. And in second quarter, we set up more such stores. In addition, thanks to our wealth of data and intelligent analysis tools, we have started offering user management assistance, first to Qingdao airlines and now to second customer. We will give you more detail, later in the call.

To domestic hotels that had to work previously offline, which accounted for the majority, we offered a platform to interface directly with travelers on a national scale and improve both the occupancy level and revenue.

To distributors, our highly efficient platform helps them to connect the consumers on a national scale. Furthermore, we have sought [ph] training programs -- programs to help them improve their sales through us.

That's my update. The second quarter was a very good quarter, with a solid performance and continuing momentum. Our investments have generated good returns and we will continue to make such investments for our long-term strategy growth.

This concludes my remarks. Yilu will now share with you more details on our operations. Here is Yilu.

Yilu Zhao

Thanks, CC. Welcome again, everyone, to our call today. We're excited about our second quarter results. Flight revenue grew 143% year on year, driven by both volume and the revenue-per-ticket growth. Flight volume grew 66% year on year in Q2, which is over six times that of the flight industry, or about twice of what industry peers achieved. Our TFT reached 19.1 million in the second quarter. Transportation ticket volume, which includes underground transportation, doubled year on year.

For flights revenue per ticket growth, we achieved an impressive 46% growth year on year. Traditionally, Q2 is a seasonally slow quarter for flights in China. And in the past, we normally charged lower commission rates in slower quarters.

In Q2 this year, however, we substantially raised the rate from a year ago, which is also a slight increased from Q1 2014. This pricing leverage is a testament to first the greater value proposition we bring to service -- travel service providers and second, to our growing market position.

In Q2, we continued to expand our consumer base to cover China's SME travelers. We continued to see great momentum for our flight Yuxien [ph] program. Just to refresh everyone's memory, we attached the Yuxien [ph] logo, which means premium in Chinese, to our flight partners who offer high levels of service. Having that logo next to a provider's name is a guarantee of service quality to consumers. While our business partners provide the customer service, we provide an efficient system to make things like cancellation an easy and convenient process. This program offers SME travelers compelling price points, in addition to high levels of service. It has expanded our user base.

We have also made more headway in assisting regional airlines in yield management. As the leading player in consumer-facing flight ticket distribution, we have a very comprehensive database. Our data are very useful in helping airlines determine their pricing strategy and design their marketing and sales programs.

Following our inaugural contract with Qingdao Airlines, we have also reached an agreement with Donghai Airlines, another carrier. Our partners have been very pleased with the initial results. Both airlines have achieved seat occupancy rates, or RASM, which means revenue per available seat mile, far superior to the industry average. Today, the revenue contribution of our yield management program is still small, as we are still in the early innings of that initiative, so we are very hopeful about the financial impact in the long run.

Now let's look at hotels. Revenue growth in the segment was 80% year on year, primarily driven by volume growth of 105% year on year. Total estimated room nights reached 7.3 million. We have pursued an aggressive strategy to grow our hotel business, and continue to execute on all plans.

As CC mentioned, we're excited that a number of our directly covered hotels have been growing rapidly, and these hotels span both top and lower tier cities throughout China. I'm going to discuss its strategic importance and how we have been executing on our plan.

First, importance. It is important because the majority of China's room nights booked are in the mass market. As the Chinese population grows richer and more people moving to the renter [ph] middle class and start to travel more, the mass market hotels in an Asian town next to a home province or at a lake resort that is one hour by flight away, is Chinese travelers' first choices.

People in China love to travel. There's an old Chinese saying, "To become wise, one needs to read 10,000 volumes of books and travel 10,000 miles," (Chinese language spoken).

The tremendous growth we have seen in China's travel sector is very much affected by that mentality, and domestic mass-market hotels have been the first ones in line to benefit from this trend.

Second, how have we executed our strategy? We have been following a systematic plan, as we communicated in previous quarters, led by a team of very experienced professional and aided by our proprietary CRM system. Our product sourcing team has been talking to hotel owners and management across China. They are signing deals that are compelling to our consumers and these deals, in turn, translate into room nights booked, and they improve occupancy level for hotels.

Following these efforts, the proportion of room nights booked, through our directly sourced network, as a proportion of total, went up in Q2. Momentum is strong.

In Q2, revenue per hotel room night decreased by 13% year on year, due to promotional activities that benefitted consumers.

Last but not least, within the hotel segment, in the last quarter, the number of hotel reviews on the Qunar platform grew to 3.3 million, up from 2.3 million a quarter ago. More than 27,000 reviews are loaded onto our mobile and PC platforms on peak days. About half of the reviews are uploaded through our mobile app.

Number of hotel pictures contained in our reviews more than doubled quarter on quarter.

Now let's discuss our tour packages business. This is a relatively new business for us, which we started just last year. In the second quarter, total GMV for our vacation packages business reached around RMB500 million, growing by more than five times, year on year. About half of the Q2 GMV was for outbound travels, with the remainder for local tours.

We're especially proud that we achieved this result -- this growth rate, despite political instability and other events in regions that are popular destinations for Chinese travelers. We believe our growth is attributable, again, to the size of our user base, and the choices and prices we offer consumers.

Today, revenue contribution to our tour packages has still ramped a bit more and is in the mid-single digits. It is worth noting that only a small fraction of China's total tours are booked online, so the room for growth is very significant.

With this, I will turn the forum to Sam, who will discuss our financial highlights.

Sam Sun

Thank you, Yilu, and thanks again everyone for joining the call. I will now go through some select key financial highlights for the period. For our full financial disclosure, please refer to the press release, issued earlier today.

Total revenues for the second quarter of 2014 were RMB400.4 million, or $64.5 million, an increase of 127.3% year on year and 19.4% quarter on quarter.

Mobile revenues for the second quarter of 2014 were RMB142.3 million, or $22.9 million, an increase of 511.8% year on year, representing 35.5% of our total revenues.

Pay for performance, or P4P revenues for the second quarter of 2014 were RMB378.6 million or $61 million, an increase of 137.4% year on year and 18.7% quarter on quarter.

Among the P4P revenues, flight and flight related revenues increased 143.3% year on year, primarily due to a 66.1% increase in PFP, reaching 19.1 million for Q2 and a 46.4% increase in revenue per ticket.

P4P hotel revenues increased 79.5% year on year, primarily due to a 105.2% increase in THR, reaching RMB7.3 million for Q2 and was slightly offset by a 12.5% decrease in revenue per room night, mainly as a result of coupon-related promotional costs and a decrease in average daily room rates.

Gross profit for the second quarter of 2014 was RMB294.7 million, an increase of 114.1% year on year.

Gross margin for the second quarter of 2014 was 73.6%, compared to 78.2% for the corresponding period of 2013 and 78.1% for the first quarter of 2014. The year-on-year increase in gross profit during the quarter was primarily due to the significant increase in total revenues, and was partially offset by an increase in online payment procession fee, recorded in cost of revenues.

Net loss attributable to Qunar's shareholders for the second quarter of 2014 was RMB421.6 million, or $68 million, compared to RMB41.2 million in the corresponding period of 2013 and RMB183.6 million in the first quarter of 2014.

The increase to net loss attributable to Qunar's shareholders was primarily due to continued investment in product development and sourcing, marketing efforts to drive business growth, and an increase in share-based compensation expenses.

Basic and diluted net loss per ADS for the second quarter of 2014 was RMB3.6 or $0.57.

Adjusted EBITDA, non-GAAP, defined as net loss before income taxes, interest expenses, depreciation and amortization, further adjusted to exclude online marketing expenses from the Zhixin cooperation agreement, share-based compensation expenses, and non-cash expenses relating to free user traffic contributed by Baidu, for the second quarter of 2014 was negative RMB183.2 million or $29.5, compared to negative RMB14.8 million in the corresponding period of 2013 and a negative RMB45.8 million in the first quarter of 2014.

As of June 30, 2014, Qunar had cash, cash equivalents and short-term investments of RMB1.3 billion, or $211 million. We will continue to invest decisively for the remainder of the year.

In Q2, total headcount reached over 6,000 people, in line with our expectations. This included new graduates who had accepted offers by the end of the second quarter. As we communicated in Q1, headcount additions will be more moderate in the third quarter. Our focus will primarily be adding people in product sourcing, product development, and operations, with the first two categories accounting for the majority.

For online marketing, we have shifted a greater portion of our online marketing expenditure to mobile channels. Mobile remains the fastest-growing channel, as smartphone penetration continues to rise in China.

We have seen compelling ROI from our mobile marketing expenditures in previous periods, and we will step up our investment in the mobile channels, while a proportion of PC marketing expenses will decline.

We also made significant progress under our Zhixin agreement with Baidu. The number of daily page views went up very significantly, and increasing traffic has been helpful to us across our business lines, especially to our tour package business.

Now for guidance for Q3. We expect revenue to grow 90% to 95%.

With that, I will open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Your first question comes from the line of George Meng from Morgan Stanley. Your line is open, please go ahead.

George Meng – Morgan Stanley

Hi. Good morning everyone. Thank you very much for taking my question. Congratulations on a very solid quarter. So I have two questions, if I may. The first one is related to your hotel business. I think you mentioned that you will try to target at the -- in the mass market. So if you look at the segmentation of the current hotel market in China, you have the mid or high-end, but you also have the budget chains, which I believe is hard for the OTAs or business travel aggregators to penetrate into. So in the long run, do you think you are -- you, like most of your competitors are going to target at the mid to high-end hotels, or you're also going to target at the lower than the budget chain, using, for example, the group buying? That's my first question today.

CC Zhuang

Okay. Hey, George. This is CC. So in the hotel market, I think our ultimate target is going to win each -- every sub-market. But we will do that step by step. So first, our general market share gain is focused on the low-end hotel, which means the three star, below. If you look on our number, currently I think we are actually among the leading players in the low-end hotels. We are probably very close to number one, and we grow much faster than everybody on the market.

But since that, you probably see that once we take the market leadership in low-end hotel in next few quarters, we will also start to increase our net take rate in a very dramatic way, just like what happened in our flight [ph] business. In flight [ph] business, our year-over-year take rate increased by 46%. And in the low end of hotel, I think you should be able to see that in the net take rate increase more than 30% within next few quarters.

And for high-end hotel, currently we are still relatively smaller, compared to the leading players in the market. But we are growing much faster. So for last few quarters, we did heavy investment in the low-end hotels, by hiring the destination service team, lay down the ground force to send to hotels. And you will see the results and the returns, starting from this quarter and the next few quarters.

In high-end hotel, we are currently grouping the team and putting resource, and you should be able to see some activity on that section very soon. And hopefully we will get also of [having that] section. And later on, we will take market share in the leading -- market share in the mobile as well.

So generally saying that we will not give up any segment in the hotel market. We want to be number one in every sub-market.

Also our majority of the market share is not taking from the other OTAs. The majority of the market share is taking from the offline guys, for example, walk-in guests. As of today, in many Chinese hotels, the walk-in guest is still contributing more than 30%, in most cases actually 50%. So I think that is a much bigger market [ph] to take. But the same time, obviously when our market share grows, we will naturally take market share from the other OTA as well.

Yilu Zhao

And George, since you mentioned group buy, I'm going to discussed this as well. We are in fact one of the leading players in the group buy segment. We enjoyed three-digit growth year-on-year, over two times year-on-year, and currently it's about 15% of our hotel room nights. We're also close to 150,000 hotel group buy products.

Now that growth is attributable to product selection and our large user base. And we believe that -- we are definitely in group buy but we're also in other segments as well. It is pay upon arrival, pre-pay and last minute. And we think we enjoy tremendous benefits from having multiple products. As you know, the hotel business in China is quite seasonal and having that multiple product counters seasonality. During peak season, pay upon arrival proportion goes up and during offpeak season, our discount products such as group buy and last minute go up.

So we can write a seasonality cycle very well as you can see. So we will take a balanced approach but group buy certainly is doing very well.

George Meng – Morgan Stanley

Right. Thanks. It was a very helpful comment.

So my second question is related to your new business or -- we actually noticed that your core business is growing very well because of your earlier investment. And now you are definitely investing in a lot of new business.

But can you help us to understand like about the strategic importance of all this new business. Which ones are you -- do you think that fits in to your focus on technology more so that you probably want to place more strategic importance on those business where what other business could be good to have and you may want to do more M&A in those areas. Thanks.

CC Zhuang

So for our new business, you know, we have a few initiatives and among that you already see that Unc initiative has gone up very rapidly. Tour segments is a new business units, we announced the results this quarter, starting from this quarter, and the year-over-year growth is more than five times. And if you look at GMV, it's a pretty big number already and it keeps growing very faster.

So I think our new initiative, some of them is already going to the travels and they were eating tigers [ph].

And so the other thing is you can see that we have other investments focused on the apt and the car rentals which currently are still early stage and they grow very rapidly. Later on, once this business is more mature, we will also announce the detail. But generally speaking, that is -- our new business is focused on the adding more service for our travelers and both in domestic and internationally, and also we are going to cover all travel related expense.

George Meng – Morgan Stanley

Okay, cool. Thanks a lot.

Operator

Our next question comes from the line of Alicia Yap from Barclays Capital. Please go ahead.

Alicia Yap – Barclays Capital

Hi, good morning, CC, Sam, Yilu, and Jenna. Thanks for taking my questions and congrats on the strong set of results as well. My question is related to your revenues per air ticket. So can you elaborate the increase of the revenue per ticket.

How did you manage to grow the ticketing prices, any push back from the airlines partners?

And then, you know, how should we expect the pricing trend in the next few quarters and related to that, is there anything that -- you know, the increased traffic or anything from the Baidu Zhixin helped on the pricing reach as well? Thank you.

CC Zhuang

Thank you, Alicia. So first of all, this price increase on the airline revenue is not related to the Baidu Zhixin agreement. It is a match of our strategy, our strategy is always, first to use the lowest price to prevail the market. And certainly, on a very highly efficient network. Aand third, once we think mature, we will increase the price by a step function. So we would do that continually in each and every segment as our strategy on preplanned.

But our flight business which is we are under-pricing the market for a long time in order to capture market. Once we hit the market share number one and we keep the highest growth rate, we just naturally do that, and we don’t see any push back. And by the way, you know, most of the clients is middle sector distributors and we contributed a big part of the business and continue to increase higher.

So I think for the next few quarters, since we just increased the flight revenue per ticket, we will keep stable for a few quarters and then we probably will find a time to do it again. But we didn’t have -- we will continue to gain market share and lay down more network and system infrastructure to lock the market further tighter. And once we create more value to the industry consumers and service providers, I think naturally we should enjoy our investment from the whole industry.

Alicia Yap – Barclays Capital

I see, great. I will get back to the queue. Thank you.

Operator

Our next question comes from the line of Vivian Hao from Deutsche Bank. Your line is open, please go ahead.

Vivian Hao – Deutsche Bank

Hi, CC, Yilu and Sam, thank you for taking my questions. I have two questions. My first one is what is our currently -- what is our current effective take rate for hotel and air ticketing respectively?

And what do you think is our achievable goal for the sustainable take rate in the future. This is my first question. My second question is regarding the Zhixin related revenue. What is the contribution to online revenue in the second quarter for incrementally from Zhixin. Thank you.

Yilu Zhao

Hi, Vivian, so to your first question, in terms of effective take rate, on the flight side, it's a little over 2% per flight and for hotel, it's a little over 4% for flight. And that was -- the two percent was for the domestic portion, the domestic flight portion. In total we are looking at a number that is fairly close to 2% as well.

And to your question in terms of -- your second question was related to Zhixin.

Vivian Hao – Deutsche Bank

Yes.

CC Zhuang

So for the Zhixin -- I think you know the traffic percentage actually as you know, increased a lot in the last quarter and it almost reached our traffic goal. In terms of the revenue percentage of contributions, it is still relatively small but if you look at into the relatively small -- the overall revenue, but if you look at the contribution, most of the contribution is in the tour package side. This also contribute a part of our tour package increase which we believe that it will add in more gap in the next few quarters.

And if you look at the conversion ratio, our conversion ratio in the long-term subscribers is low, relative compared to our core subscribers, so in that part, we are still -- work with that very aggressively to -- constructively to make improvements and the Baidu team also are very committed to help us to increase our you know, conversion ratio, to make the long-tail queries as good as the core search. And if you look at the --

Vivian Hao – Deutsche Bank

Thank you.

CC Zhuang

-- hotels commission ratio effective take rate, I think the next few quarters, it will definitely go up, stable or go up.

Vivian Hao – Deutsche Bank

Okay, great. Thank you very much.

Operator

Our next question comes from the line of George Askew from Stifel. Please go ahead.

George Askew – Stifel Nicolaus

Yes, thank you. Two questions. You talked about the strong international momentum in the quarter of a small base. It seems that you have you know, plenty of international hotel and air inventory so I would you know, conclude that perhaps demand creation is your challenge. What are you doing there to drive the international categories and then the second question is kind of relates to the previous question, are you finding that the gross margins of the Zhixin agreement are comparable to your overall business. Thank you.

Yilu Zhao

So for the international business, actually it is the same as we have witnessed in the domestic business. What drives the business is primarily -- first of all, product selection of prices and secondly, we have been leveraging on our very large user base. So just to put some numbers on the table, on the hotel side, it is over four times growth year-on-year, and for vacation packages, as we said earlier, about half of the GMV is for outbound, and that is -- the growth rate is similar to the overall platform which is over five times year-on-year. And for international flight, it is also five times on year-on-year.

And in total, the growth rates has been very high and actually for consecutive quarters already, we continue to see the momentum being very, very strong.

CC Zhuang

So for the Zhixin agreement comment, I think we should look at it this way. First of all, Unc is good, but more important its strategic value. I think for the long run we are looking for the largest market share and the leading platform for each and every travel segment. Any major traffic source is very important to help us to get in to that position and so especially if we look at the agreement which contributes a lot of growth for our tour packages, I think we look at a more strategic [ph] format.

George Askew – Stifel Nicolaus

Super. Thank you. And again, congrats for the very strong growth.

Operator

Your next question comes from the line of Yuheng Fan from China Renaissance. Please go ahead.

Yuheng Fan – China Renaissance

Hi, good morning. Thanks for taking m y question and congrats on strong results and guidance. My question is related to the tour package business.

You disclosed the GMV which was going very strong year-over-year. Were you able to disclose the number of trip that were sold by your platform for both domestic and outbound tour package?

And of the 28 million other people, PE revenue this quarter, in the second quarter, how much of that was contributed by the tour package business? Thank you.

Yilu Zhao

In terms of revenue contribution as we said earlier, in the prepared remarks, it is about -- mid single digits. It is about 5%. That is revenue contribution percentage. In terms of the number of trips, we haven't been disclosing that data but the number is very high and it is actually if you look at the GMV, it is actually comparable to what we will see in - for similar players of a similar magnitude.

CC Zhuang

Outbound is about half of our GMV, and if you look at tour packages, we will do the same things we did in the flight and hotel. Basically, you know, take the market share, become the number one player, lay down the right infrastructure to lock down the valued share and once we get the number one market share and the number one growth rate, we will increase the take rate.

Yuheng Fan – China Renaissance

Thank you, that is helpful.

Just a quick follow up for the domestic -- for the domestic GMV, that does not also include attraction ticket?

Yilu Zhao

Yes.

CC Zhuang

Yes.

Yuheng Fan – China Renaissance

Okay, thank you.

Operator

Your next question comes from the line of Henry Guo from JG Capital. Please go ahead.

Henry Guo – JG Capital

Hi. Thanks for taking my question. So congrats on a great result. So my question is regarding headcount so I remember management mentioned before that the headcount is likely trending down next year after the productive hotel sourcing job is pretty much done. And so is that still the case, and I mean, any color would be helpful. Thank you.

CC Zhuang

Yes, I think in the Q2, the headcount is going to the mild increase and I think the number is going to be stabilized by the end of the year and starting from 2015, you should be able to see the headcount is, you know, slowly decrease.

Henry Guo – JG Capital

Okay, thank you.

Operator

Your next question comes from the line Juan Lin from 86Research. Please go ahead.

Juan Lin – 86Research

Good morning, CC, Yilu, Sam and Jenna. Thank you for taking my questions and congratulations on a very strong results. I have two questions.

The first one is you mentioned that average revenue hotel room night declined sequentially due to promotional activities. I remember during the second quarter OTA hotel booking ARPU actually trended up. How do you observe the coupon trend in the third quarter for the hotel booking market and how do we forecast your hotel ARPU going forward?

CC Zhuang

As I mentioned, you know, hotel ARPU is already bottomed, and you know, we should see increase from that and our third quarter you know, couponing, we do it very dynamically and in some markets, we are decreased, and in some markets, it was increased. But generally, we are seeing our net take rate should increase and will increase further.

Juan Lin – 86Research

Thank you. And my second question is that your prepaid -- your prepayment as a percentage of total revenue significantly increased from -- on the first quarter level. Is it a normal seasonal pattern or are there any reasons behind the change?

Yilu Zhao

What was the question? Prepay?

Juan Lin – 86Research

Prepayment as a percentage of revenue.

Yilu Zhao

Payment processing fees or prepayment?

Juan Lin – 86Research

Prepayment.

CC Zhuang

Prepayment of hotel, right? I think it will continue. The trend will continue.

Juan Lin – 86Research

Okay, thank you.

Operator

Your next question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.

Eddie Leung – Bank of America Merrill Lynch

Hi, good morning. Thank you for taking my questions. I have two questions related to your mobile channel. It seems to be very strong. I'm just wondering if you could talk a little bit about the conversion rate of traffic you have seen on mobile versus PC and similar to that, how is the trend doing in the past, let's say a year or so of the conversion rates.

And then, also,, wondering if you could share with us the percentage of sales from mobile for your air and hotel business respectively. Even some numbers would be helpful. Thanks.

CC Zhuang

So Eddie, I think we said that our -- let me see, our percentage of the mobile in the hotel is about 50% and it is trending up.

And percentage of the air on mobile is about 38%. So that is our mobile channel -- the construction volume percentage and if you look at the -- you know, conversion, I think your mobile we look at different number of metrics and because the mobile, in our mobile business, the majority of it is actually native apps.

So if you look at native apps, you should look at the core analysis instead of the conversion. Quoho [ph] analysis means we measure the download cost versus the lifetime contribution on the revenue and we measure that by vintage in the channels. So we have that data very carefully and we measure the Quoho [ph] analysis starting from the nearly three years, more than three years ago.

And overall, seeing that Quoho [ph] analysis shows we are profitable in each area channel. And when we measure the Quoho [ph] analysis, we only measured 18 months. And we will be able to achieve profitability in most -- in every single channel within 18 months. But so we also noticed some of the channel actually the lifetime contribution as long as nearly 48 months.

And so yes, mobile channel currently is very profitable for us. And so increased the mobile marketing costs from Q2 and we are shifting many of our PC marketing costs to mobile.

Yilu Zhao

And added to that, if you are talking about click through transactions, the conversion rate on that front, on the PC side, it is slightly higher than mobile as we have seen in previous quarters because people simply click more on mobile as the interface is smaller.

And the trend has been going up very consistently quarter after quarter. And we have been -- but my second point is we determine pricing, not based on just clicks, we determine pricing based on transactions. Most of the transactions happened already on our SaaS platform as people know. It is a very high number, it is 90% for flight and over 60% for hotel.

So we based our pricing, when we determine our pricing, it is based on transactions and not based on clicks. And so that is my second point. And the third point is we have achieved these results on mobile and on PC, we pretty much monetized in the same way. It is parity on the pricing perspective. And we have achieved this without channel specific incentive.

We don’t offer extra incentives to either merchants or to consumers purely by just using our mobile.

CC Zhuang

Yes, so as I said, our Quoho [ph] data chart is a very powerful tool because normally if you do the mobile download,, you will understand our half, six months. bBut with our Quoho analysis data footprint, we have been able to identify this channel is going to be profitable or not, how profitable it will be, within just a few weeks. This will increase our reaction to market in a very big way.

Eddie Leung – Bank of America Merrill Lynch

That is very helpful. Thank you.

Operator

Your next question comes from the line of Yi Chen from Aegis Capital. Please go ahead.

Yi Chen – Aegis Capital

Hi. Thank you for taking my questions. Considering the recent agreement renewal between Ctrip and Priceline and also Expedia's statement that they have continued to support eLong, I'm just wondering those facts affect your operation strategy in the near term?

Yilu Zhao

So on this question, in relation to us, the Ctrip Priceline transaction or the eLong Expedia partnership which has existed for a very long time, they don’t effect to the industry dynamics. A few points here. Now, first, when it comes to international hotels, as people know, pure and simple, we are [indiscernible]. Because of the amount of traffic we have, we offer significant traffic leads for all major global OTAs including Expedia, the Expedia Group, Priceline Group, Orbitz, just to name a few. And also, may regional OTAs.

And the number of hotels we cover as we mentioned earlier is over 500,000 and by virtue of being a better search platform, we offer consumers a broad selection and very compelling prices. The second point is our international hotel business has been growing very well, as we said earlier and the growth rate is four times year-on-year. We definitely expect the momentum to continue.

And then finally, looking forward, we expect to continue to provide very substantial traffic leads to all major global OTAs and we are a very important partner for them as they grow their business in this part of the region. So we -- in summary, we don’t expect things to change.

Yi Chen – Aegis Capital

Okay, thank you.

Operator

Your next question comes from the line of Alex Yao from JPMorgan. Please go ahead.

Alex Yao – JPMorgan

Hi. Good morning, everyone. Thank you for taking my questions. I have two questions.

Number one is can you share with us the traffic as well as the revenue generated by the Zhixin platform, ideally, would you be able to share with us the situation on both the PC and the mobile side?

And secondly, can you talk about -- in terms of driving the mobile traffic and mobile downloads, what are the key sources or channels you are using and in terms of efficiency, what will be the top three channels? Thank you.

CC Zhuang

First of all, we are not going to disclose what is the most efficient channel for the mobile download? That is a trade secret, and we have a data footprint we can identify what is the most efficient channel within a very short period of time, which is much very much nimble and faster than any players in the market. And in terms of the Zhixin agreement, that is something, you know, you probably can reverse calculate a bit on our earnings release but we will not disclose the details but I can tell you traffic contribution is approaching our pre-determined -- pre-designed permit [ph] and that revenue contribution remained small as the overall revenue but it's a pretty significant in our tour packages.

And Baidu and us are committed to continually improve our conversion ratio on the Zhixin agreement. So we should see more lag in that agreement.

Yilu Zhao

And as you can see, we are very pleased with our revenue growth target overall, and the -- Zhixin agreement has been helpful to our tour packages business in particular.

Alex Yao – JPMorgan

Got it. Very helpful. Thank you.

Operator

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

Tian Hou – T.H. Capital

Hi, CC, Yilu, and Jenna. I have a couple of questions. One is yesterday, Ctrip announced the open platform business. I wonder what the impact could be to Qunar. That is the first question. And I will have a follow up after your answer.

CC Zhuang

So I noticed that you know, since starting this open platform strategy ten years ago, we see some weak resistance on the market from the other competitors,, but still we are searching for the results and we haven't seen any impact on business yet.

Tian Hou – T.H. Capital

Okay, so the second question is related to your operating loss. And you know, in the second quarter, the loss definitely widened and if I look at the net loss Q-on-Q incremental and it is non-GAAP wise is much higher than the growth or net increase of your revenue. So I wonder going forward, third quarter, fourth quarter, and what is going to be the trend?

CC Zhuang

So travel business is a zero or one [ph] game, either you wait or you lose. And as far as we still have the cash to support our growth, I don’t really care about short-term loss. Our target is the number one player and the dominant number one player in travel market in each and every sub-section [ph].

Tian Hou – T.H. Capital

Also, CC, in the sales and marketing, it went up a lot, and I wonder how did you spend your sales and marketing.

CC Zhuang

As I said, our marketing cost versus our total revenue is still -- remain the same percentage and we are shifting our PC you know, marketing cost to our mobile and we also see the very strong momentum on the mobile. And so I think continually, we will move to that. As I said, you know, travel industry game is zero or one game, we want to be the one. And so it doesn’t matter in the short term how much cash we burn, as long as we have enough cash to burn.

We want -- I think by the end of the day, there is only one guy left at the table.

Tian Hou – T.H. Capital

So what is the breakdown of your sales and marketing, Yilu?

Yilu Zhao

In terms of the breakdown of our sales and marketing, as you know, the -- in the sales and marketing line, there are essentially two items, and one is headcount and the other is online marketing expenses.

We have very little offline marketing as you are aware from before. So for the online marketing portion, we mentioned earlier that we are shifting more dollars, more R&D to mobile channels and we do very careful Quoho [ph] analysis, et cetera, as a percent of total, this number will stay more or less table from previous periods. And for the headcount part, it is primarily for operational staff who have been supporting the product development and product sourcing folks who had been -- the product sourcing folks who are bringing deals back home and the product development people who are building the infrastructure and doing -- bring the products online.

And so in terms of a rough breakdown, we can - you can refer to the previous periods number for online marketing and the remainder is pretty much headcount.

Operator

Your next question comes from the line of Alicia Yap from Barclays Capital. Please go ahead.

Alicia Yap – Barclays Capital

Hi, thanks for taking my follow up questions. I have a question related to the hotel coupon environment. I understand that you guys are saying it is actually bottom up seems to be on the coupon side but then we actually heard from other peers that the group order discount seems to get more intensified again starting in July. So I just wanted to get your thoughts on these and how and if Qunar is also being impacted by this and will the pricing decline or will be stable? Thank you.

CC Zhuang

So we decided to market [is now done] and so we decided you know, we can improve them, we can improve and I think you know, they are still relatively much less competitive compared to us in couponing and especially in low end hotel stay.

Alicia Yap – Barclays Capital

Well, just a follow up, have you see, you know, in general, the coupon side is more intensified in July versus the first half?

CC Zhuang

As already said, our net take rate will increase.

Alicia Yap – Barclays Capital

Okay. Great. Thank you.

Yilu Zhao

Alicia, this is a very dynamic market and in some markets, in some sub markets, the level of couponing will increase and in some sub-markets we will, actually, will be raising take rate so it's a very dynamic situation, it's a dynamic response to the market.

Alicia Yap – Barclays Capital

Great. Thank you.

Operator

Your next question comes from the Ida Yu from China International Capital Corporation. Please go ahead.

Ida Yu – China International Capital Corporation

Hi, good morning and I have a question in regard of your hotel business. So since now you are expanding your direct sales, so how will you balance your direct sells with your other third vendors on your open platform?

CC Zhuang

We don’t balance it. It is basically we focus on consumer experience and the value chain value. We will get rid of those guys who don’t create value in the value chain and we just focus on how to create more value for the consumers. That will pay off in the long run.

Ida Yu – China International Capital Corporation

How about the pricing, what is your view of direct sales price is lower than your peers and if so, it seems like -- so other people will come to a lower price and then your third party vendors won’t have so much traffic on your platform. So is it a -- so what happen if this scenario happen.

CC Zhuang

Consumer selection is our first priority.

Ida Yu – China International Capital Corporation

Okay. Thank you.

Operator

We are now approaching the end of the conference call. I will now turn the call over to Mr. CC Zhuang of Qunar for his closing remarks.

CC Zhuang

Thank you, everybody.

Jenna Qian

Thank you for joining our call today, we are very pleased to have you today and we look forward to the next quarter.

CC Zhuang

Thank you.

Operator

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

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Source: Qunar Cayman Islands' (QUNR) CEO CC Zhuang on Q2 2014 Results - Earnings Call Transcript
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