eLong's CEO Discusses Q1 2011 Results - Earnings Call Transcript

| About: eLong, Inc. (LONG)

eLong, Inc. (NASDAQ:LONG)

Q1 2011 Earnings Conference Call

May 16, 2011 8:00 p.m. EDT

Executives

Mike Doyle – CFO

Guangfu Cui – CEO

Philip Yang - Investor Relations

Analysts

Eddie Leung – Merrill Lynch

Ming Zhao – SIG

Fawne Jiang – Brean Murray

Wendy Huang – Royal Bank of Scotland

Operator

Good day to everyone and welcome to eLong's First Quarter 2011 earnings report conference call. (Operator Instructions) I will now hand over the line to Philip Yang and I will be standing by for the Q&A session. Please go ahead, thank you.

Philip Yang

Hello everyone, thank you for joining eLong’s first quarter 2011 conference call.

Today, Guangfu Cui, our CEO, will make some remarks about the company’s performance in the first quarter 2011 followed by Mike Doyle, our CFO, who will provide additional detail on our financial results. Following their prepared remarks, Guangfu and Mike will be available to take your questions.

Before the management presentations, please allow me to read our Safe Harbor Statement. During this call representatives of the company will make certain forward-looking statements within the meaning of the U.S. Securities Act and the Securities Exchange Act. These statements are based upon management’s current views and expectations with respect to future events and are not a guarantee of future performance. Furthermore, these statements are, by their nature, subject to a large number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements as a result of a wide variety of factors. eLong undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. Please refer to the risk factors described in our Annual Report on Form 20-F, as well as the full text of the Safe Harbor Statement in our Form 6-K, which will be furnished to the SEC in connection with our press release and this call, for discussion of some of the important factors that could affect future results.

I will now turn the call over to our CEO, Guangfu Cui.

Guangfu Cui

Thank you, Philip. Hello everyone, thank you for being on this call.

The highlights for the first quarter of 2011 were 41% year over year accelerated growth in hotel room nights to 1.7 million compared to 1.2 million in the prior year quarter, and the further penetration online with approximately half of our hotel bookings coming from our websites. We increased net revenue by 23% year over year to RMB125 million, and income from operations grew 111% year over year to RMB13 million.

Our domestic hotel coverage network expanded 71% to 19,200 domestic hotels as of March 31, 2011, compared to 11,200 as of March 31, 2010. In addition, eLong.com offers customers more than 135,000 hotels worldwide through our interface with Expedia. eLong.com continues to be the largest online distributor of hotels in China. During this quarter, eLong launched group buy hotel products, and continued our coupon program. To compete and win, we must provide customers with a broad variety of hotel products at competitive price and with an outstanding user experience.

We have been improving our customer experience both online and offline. In the first quarter, we continued to upgrade our website providing customers with faster page loading times, better website availability, and better usability. We are happy to see our conversion rate has been improved continuously over the past two years. Our call center has continued its high quality service. In the first quarter, we also launched our second generation iPhone application, which we believe features the fastest page download time among our competitors in China. Our iPhone application is currently in the Top 10 travel downloads in the iTunes App Store in China.

Due to the elimination of our air ticket cash transaction business, we are continuing to see a flat or slight decrease in our air ticket business, and this may continue a few more quarters. We believe this action will improve our competitiveness in our air ticketing operations in the long run as we focus on providing outstanding service to the growing number of credit card and other non-cash transaction customers.

Our initiatives remain the same as shared with you in February earnings release call:

Offer more competitively priced products for our customers;

Offer more domestic hotel choices;

Improve online marketing effectiveness and efficiency; and

Improve online booking experience and overall customer service quality.

Our objective is to win online hotel booking, which includes acquiring customers online, serving customers online, and retaining our customers online. We are executing well against our strategy so far.

To further accelerate our growth online and to realize our goal of becoming the leader of online hotel booking in China, I am very excited to report a strategic partnership formed between eLong and Tencent Holdings Limited, the largest provider of internet, mobile and telecommunications value-added services in China. On May 16, 2011, eLong issued approximately 11 million new shares, or 16.4% of total outstanding shares, to Tencent, which makes Tencent the second largest shareholder of eLong after Expedia, who also purchased an additional 5.4 million shares and remaining as our controlling shareholder. Tencent will appoint one member of our Board of Directors. In addition, eLong and Tencent will deepen our cooperation in future, including forming further business partnerships to develop online travel products and distribute eLong’s hotel supply to Tencent’s huge number of users in China.

Given Tencent’s user base and its reach across multiple platforms, including portal, mobile, instant messaging and social networking, we believe consumers throughout China will benefit from this partnership, while eLong and Expedia supply partners will enjoy significant new access to internet traffic and young customers in China.

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

Mike Doyle

Thank you, Guangfu. In the first quarter, strong online hotel performance drove year-on-year net revenue growth to 23% as well as driving the improvement in gross margin and operating margin. Income from operations was RMB13.2 million, an increase of RMB7.0 million from our income from operations of a year ago and net income was RMB7.7 million, an increase of 30% from our net income of a year ago.

Our Q1 hotel reservation business benefitted from improved online hotel conversion, due to our broader hotel inventory portfolio, website improvements and our coupon program. Room nights booked through eLong increased 41% year-on-year to 1.7 million.

In the first quarter, hotel commission revenue increased 31% compared to the prior year quarter, primarily due to higher volume, partially offset by lower average commission per room night. Commission per room night decreased 7% year-on-year primarily due to the impact of mix shift to budget hotels and our coupon program. Hotel revenue now represents 68% of our total revenues, which is an increase from 64% in the prior year quarter.

Air ticketing commission revenue increased 2% for the first quarter of 2011 compared to the prior year quarter, driven by an increase in commission per segment, which was partially offset by a 10% year-on-year decrease in air segment volume to 587,000. Commission per segment increased 14%, due to a mix shift to international tickets, an 11% increase in average ticket price and an increase in air commission rates compared to the same quarter of the prior year.

Other revenue is primarily derived from advertising on our websites, travel insurance and packages. Other revenue increased 39% year-on-year for the first quarter of 2011, mainly driven by increased advertising revenues. Other revenue grew to 9% of total revenues from 8% in the prior year quarter.

Gross margin in the first quarter of 2011 was 73% compared to 69% in the first quarter of 2010, mainly due to the faster rate of growth of our hotel business as compared to our air business, an increased proportion of online bookings and improved air revenue per segment.

Total operating expenses increased 23% or RMB14.3 million for the first quarter of 2011 compared to the first quarter of 2010. Total operating expenses were 62% of net revenues, which was the same as the prior year quarter.

Service development expense consists of expenses related to technology and our product offerings, including our websites, platforms, other system development, as well as our supplier relations team. Service development expense increased 13% in the first quarter of 2011 compared to the prior year quarter, mainly driven by an increase in headcount. New service development hires were deployed to continue improving our online user experience and technology systems, as well as to expand our hotel coverage. Service development expense decreased to 17% of net revenues in the first quarter from 18% in the same quarter of the prior year.

Sales and marketing expenses for the first quarter of 2011 increased 30% or RMB10.1 million over the prior year quarter, mainly driven by increased online marketing expenses, loyalty point promotion expenses and hotel commission payments to third-party distribution partners, partially offset by reduced headcount. Sales and marketing expense increased to 35% of net revenues in the first quarter of 2011 from 33% in the same quarter of the prior year.

General and administrative expenses for the first quarter 2011 increased 16% compared to the prior year quarter, mainly driven by higher share-based compensation charges and bad debt provisions. General and administrative expenses decreased to 10% of net revenues in the first quarter of 2011 from 11% in the same quarter of the prior year.

OIBA or Operating Income Before Amortization in Q1 was RMB14.0 million up 35% from RMB10.3 million in Q1 2010. OIBA margin was 11.2%, up from 10.2% in Q1 2010.

Other Income or Expenses, which represents interest income, foreign exchange losses and others, was Other Expenses of RMB2.7 million in the first quarter of 2011, compared to Other Income of RMB1.8 million in the prior year quarter. The increased Other Expenses were comprised primarily of RMB4.2 million Other Expense recognized on changes in the fair value of contingent consideration associated with an earn-out payment in an acquisition and RMB3.1 million foreign exchange losses, partially offset by interest income of RMB4.6 million.

Income tax expense in the first quarter of 2011 was RMB2.8 million, compared to income tax expense of RMB2.1 million in the prior year quarter equivalent to an effective tax rate of 27% as compared to 26% a year ago.

Net income for the first quarter was RMB7.7 million, compared to net income of RMB5.9 million in the prior year quarter.

Adjusted Net Income in Q1 2011 was RMB19.2 million up 100% from RMB9.6 million in Q1 2010.

Moving to our Balance Sheet, I’d like to mention that as of March 31, 2011, eLong held cash and cash equivalents, short-term investments and restricted cash of RMB1.0 billion or US$155 million. Of this balance, 27% or US$42 million was held in US dollars.

And finally, let me share with you our Business Outlook for the second quarter of 2011. We expect Q2 net revenues, net of business tax and surcharges, to be within the range of RMB137 to RMB149 million, an increase of 15% to 25% compared to the second quarter of 2010.

This concludes my remarks; and, Guangfu and I look forward to any questions you may have.

Moderator, if you would now open the call for questions.

Question-and-Answer Session

Operator

Okay, our first question is from Eddie Leung of Merrill Lynch. Your may now ask your question, sir.

Eddie Leung – Merrill Lynch

Hey, good morning, Guangfu and Mike. Thank you for taking my questions. I have a couple of questions. The first one is regarding international flights. You mentioned that in this quarter you guys were helped by the mix of ships to international flights. So just wondering how much percentage of ticketing sales would be related to outbound. And then I also have follow-up questions on some of the operating metrics regarding your strategy of going online. Could you share with us the percentage of transactions done online in the quarter, and then the percentage of payment, non-cash payment? Thank you.

Mike Doyle

Eddie, this is Mike. On the international air side, while we're seeing mixed ships into the international businesses, it's still quite small as a percentage of the total. We're seeing just over 5% of our segment volume coming in from international transactions [inaudible].

Guangfu Cui

Eddie, this is Guangfu. Let me take your question regarding the mix of website versus call center. And in the first quarter our hotel bookings over the website is about approximately 50% of our total hotel business. And we do predict that in the second quarter we will see more than 50% of hotel bookings coming from our website.

Your third question regarding the non-cash transaction for the air ticketing business right now, 100% of our ticketing transactions of the eLong customers using either credit card, online banking or online third-party tools to pay us. So there's no cash transaction at eLong right now. Thank you.

Eddie Leung – Merrill Lynch

Got that. Thank you very much.

Operator

Thanks for the question. Our next question is from Mr. Ming Zhao of SIG. Sir, you may now ask your question.

Ming Zhao – SIG

Thank you. Good morning, Guangfu and Mike. Very exciting news. So on this Tencent partnership, could you give us a little bit more color as to how you two are going to work together, you know, they have a lot of users, how are you going to leverage their user base to increase your business? And another topic on your marketing plan online, could you comment on how you have been using the social media to market your service? Any comments over there? Thank you very much.

Guangfu Cui

Ming, this is Guangfu. Let me take your question. The first question is about how to work with Tencent to promote eLong business to their users. First of all, we recognize that Tencent has a lot of user base and market platform. Most of the platform, leading platform in China, like eLong, has the broadest hotel offering in China. So those are our strengths. So the cooperation going forward will be focused on how to promote eLong's hotel products to Tencent users and help eLong to achieve number one online hotel booking provider here in China. So that's the main focus of the cooperation.

The second question, about, if I understand correctly your question, is about how to use social media to promote eLong's business going forward. So if you'll recall that we do have a series of actions to promote eLong's business via social network. For example, eLong is now the number one enterprise microblog with the most number of friends or followers in SINA microblog. So, up to date, we have about 560,000 followers in SINA alone and over 100,000 followers in Tencent microblog. So, as a matter of fact, eLong is the number one company with the most friends or followers in those -- in SINA microblog.

And with Tencent, again Tencent has the SNS, and we will promote our business working with them on this [effort]. And last but not least, we are working with Renren to promote our business in direct social network also. So those three are the most powerful players in the SNS area and we are happy to see that eLong is better positioned to promote our business in these three networks. Thanks.

Ming Zhao – SIG

Okay, thanks. Just a quick follow-up to the Tencent partnership, do we know if eLong is the exclusive partner or the most important partner in the travel area to Tencent?

Guangfu Cui

Due to our agreement with Tencent on the commercial product, we can't disclose the exact cooperation details, but we can confidently say that we got sufficient level of support and commitment from Tencent to make sure we bring in their platform and promote our hotel products to their users. Thank you.

Ming Zhao – SIG

Thanks.

Operator

Thank you. Our next question is from Fawne Jiang of Brean Murray. Ma'am you may now ask your question.

Fawne Jiang – Brean Murray

Good morning, Guangfu and Mike. Thank you for taking my question. My number one question is actually a follow-up on the Tencent partnership. If I recall correctly, Tencent is actually -- their hotel booking on their own website is actually powered by eLong. I just wonder, do you expect more volume to drive from that site specifically? Or is there any other collaboration format you're expecting?

Guangfu Cui

Fawne, this is Guangfu. Let me take your question. We have cooperated with Tencent for over a year in different platforms of Tencent, and we did have our hotel offering in QQ, travel.qq.com, and had some level of success. And I think in the future we will not only promote our products in this travel.qq.com but also promote our products in mobile, SNS and other platforms also. So, not limited only to these travel.qq.com, but of course travel.qq.com will be the main channel for us to promote our hotel products to their users. Thank you.

Fawne Jiang – Brean Murray

Got you, Guangfu. Just to follow up on that, with your partnership with Tencent, do we expect your sales and marketing overall package to step up or you're just probably shifting your sales and marketing more towards Tencent as a channel?

Guangfu Cui

Thank you, Fawne. I think we do not disclose our -- we don't predict our sales and marketing expense going forward. And our first priority is to achieve the number one online hotel booking standard or leadership. So that's the number one goal for us at this moment. I think that creates more shareholder value going forward. Thank you.

Fawne Jiang – Brean Murray

Got you. Thanks, Guangfu.

My next question is actually regarding your guidance. In the first quarter it seems like the air price -- you benefited from the air price [inaudible]. Just wonder, for April, what's the air pricing trend you have seen so far, also for the first half of May?

Mike Doyle

We haven't -- Fawne, this is Mike -- we haven't given guidance on product pricing, either the ADR or the average ticket value. I think the primary driver of our air performance in the Q2 will be related to the elimination of cash in Q4. So we do have that headwind for the next four quarters until we anniversary that strategic decision next November.

Fawne Jiang – Brean Murray

But could you comment on the year-over-year comp given what actual comp started to [tick first half of May]?

Mike Doyle

Sure. So, I think many players in the travel industry will have a challenging comp in Q2 and Q3 given the strong performance of the expo a year ago. We don't have a lot of observational data yet in comping the expo. While it did -- while the event did kick off on May 1st last year, the volumes built gradually through the month and we really didn't see too much impact from expo until the second half of May last year. So we will be watching that closely, but don't have a lot of observational data yet.

Fawne Jiang – Brean Murray

Got you. Last question is actually regarding your gross margin. It seems that your gross margin has been continuously improving over the past few quarters. Just wonder, like given you continue to shape your transactions online, do we expect similar trends for the gross margin improvement over the next few quarters?

Mike Doyle

The two most powerful trends driving our gross margin performance has been mix shift to hotel away from the air business and mix shift online. Those two trends remain our strategic focus and we would expect them to have an impact on gross margin. There's of course seasonality to our gross margin as well, and so that needs to take into account in looking at it, forecasting gross margin.

Fawne Jiang – Brean Murray

Thanks, Mike and Guangfu. Congrats on a good quarter.

Mike Doyle

Thank you.

Operator

Thank you. Once again to ask a question, please press star 1. You will be prompted to record your name. To withdraw your request, please press star 2.

Our next question is from Ms. Wendy Huang of Royal Bank of Scotland. You may now ask your question, ma'am.

Wendy Huang – Royal Bank of Scotland

Good morning, Guangfu and Mike. Thanks for taking my questions, and congratulations on the great quarter. I have a few questions.

First is still on the deal you announced this morning with Tencent, Expedia. I fully appreciate your cooperation with Tencent from a strategic perspective, but in terms of Expedia, they're already your big shareholders and why are you still issuing new shares to Expedia? And also when I look at your balance sheet, you're actually sitting on a very strong balance sheet with RMB1 billion cash. So in your statement you're saying that you're going to use the proceeds from the sale of these shares for acquisitions. So if you can elaborate why you are issuing new shares to your existing shareholder Expedia, and what kind of usage will be for those cash, that will be great. Thank you.

Mike Doyle

Hi, Wendy, this is Mike. Thanks for your questions. First, address why we're issuing new shares to Expedia. So, Expedia has been our controlling shareholder since January of 2005 and has been a very important partner to us. We obviously wanted and needed their support to enter into our strategic partnership with Tencent. They've been very supportive and cooperative of that and also want to further their -- deeper their level of commitment to travel market in China. So it was important for them to be able to maintain their level of exposure to our business and to this market.

And then separately on the cash, you are correct, so prior to the transaction we had $155 million of cash on our balance sheet. This transaction will raise approximately $125 million more. So we'll have almost $280 million of cash.

The purpose or the use of that cash will be to more aggressively pursue M&A opportunities in China. We feel we're well positioned to integrate and consolidate demand in this market, and we'll look for those opportunities.

Wendy Huang – Royal Bank of Scotland

But what kind of particular acquisition target you're looking at or what kind of area you're looking at?

Mike Doyle

I think we're going to be opportunistic with the amount of cash we have. We certainly will be opportunistic looking at targets. The deals we've done in the past have been a fairly simple investment, our deals basis, which has been demand consolidation. So of the several small deals we've done in the last 18 months, we've been trying to leverage the investment we've made in expanding our hotel product portfolio and improving our website user experience. So we believe both of those two assets are very scalable and are great competitive differentiator, particularly with smaller scale online and offline travel agencies.

Wendy Huang – Royal Bank of Scotland

So just to follow up on that, you seem to have a very strong differentiating strategy versus your competitor and you're trying to improve more volumes online. So with that kind of strategy in place, will you consider to acquire any online payment companies maybe to facilitate your online transactions?

Guangfu Cui

Wendy, let me take the question. This is Guangfu. We have no interest of any kind of third-party payment tools. I think the market has provided enough tools for us to use. And right now we think credit card going forward will be the main payment method in China, and we're happy with the current settlement. There's no need for us to enter in this market. Thank you.

Wendy Huang – Royal Bank of Scotland

Okay. Secondly, can you elaborate a little bit more on your relationship with Tencent? So apart from that travel.qq.com, how will you deepen your cooperation with Tencent at the product level?

Guangfu Cui

Wendy, allow me to answer the question. This is Guangfu.

Wendy Huang – Royal Bank of Scotland

Thank you.

Guangfu Cui

We will form an operation kind of committee together with Tencent and cooperation in other platforms will be developed, the programs will be developed, that is, operating committee, and it has to provide mutual benefit for Tencent and eLong. And I think the main objective is always to promote the largest hotel network to Tencent's 6.7 -- 670 million users here in China. So that's the main purpose. Thank you.

Wendy Huang – Royal Bank of Scotland

Okay. Finally, on your -- regarding your guidance, so, how should we break the 15% to 25% growth into two segments, i.e. the hotel and air ticketing?

Mike Doyle

This is Mike. We haven't provided a segment-level guidance, just the overall net revenue growth of 15% to 25%. Certainly our focus, strategic focus, will remain on the hotel business.

Wendy Huang – Royal Bank of Scotland

Okay. Sorry, I have one more question still about Expedia's relationship. So we know that Expedia has made a lot of other investments in China. So after this deal, how will you maybe further consolidate or collaborate with other companies with Expedia in China or there is no other -- there is no actually strong tie-up between -- among Expedia's China assets at all? Thank you.

Mike Doyle

So, Expedia has two other businesses in China, [Dowdow] which is the local TripAdvisor business, and acquired a business called Kuxun. We are an advertiser on both of those websites and don't envision that this transaction announced today will change that relationship in any way.

Wendy Huang – Royal Bank of Scotland

Thank you very much.

Operator

Thank you. At this time there are no further questions. I would like to hand the call back to the eLong management team for any other remarks.

Guangfu Cui

Thank you, moderator, and thank you all for being on this call. I look forward to the next earnings release call with you. And thank you. And see you next time. Thank you. Bye.

Moderator, you can now end the call. Thanks.

Operator

In behalf of the eLong management team, thank you for participating in today's conference call. You may all now disconnect.

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