eLong Q1 2007 Earnings Call Transcript

| About: eLong, Inc. (LONG)
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eLong, Inc. (NASDAQ:LONG)

Q1 2007 Earnings Call

May 14, 2007 8:00 pm ET

Executives

Raymond Huang - IR Manager

Henrik Kjellberg - Interim CEO

Chris Chan - CFO

Analysts

Eddy Lang - Deutsche Bank

Ming Zhao - SIG

Presentation

Operator

Good morning to all participants. Welcome to the eLong First Quarter Conference Call. For the duration of the presentation, all lines will be placed under listen-only mode. There will be an opportunity to ask questions after the presentation. At that time, I will provide you with the instructions on how to register for your question. This call is being recorded at the request of the hosting company. If you have any objections, you may disconnect at this time.

Now I would like to hand the call to, Mr. Raymond Huang, and I'll be standing by for the question-and-answer session. Please go ahead, sir.

Raymond Huang

Hello, everyone. Thank you for joining eLong’s first quarter 2007 conference call. Today, Henrik Kjellberg, our Interim CEO, will make some remarks about the quarter, followed by Chris Chan, our CFO, who will provide greater details on our financial results. Following their prepared remarks, Henrik and Chris will be available to take your questions.

Before the management’s presentations, please allow me to read our Safe Harbor statement. During this conference call, representatives of the company will make forward-looking statements. 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 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 number 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 eLong’s filings with the SEC, including its Form 20-F, as well as the risk factors described in our Form 6-K, which will be filed with the SEC in connection with our press release and this conference call, for a discussion of the important factors that could affect future results.

I will now turn the call over to our Interim CEO, Henrik Kjellberg, Henrik?

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Henrik Kjellberg

Thank you Raymond. Nee hau everybody. Thank you for being on this call. As you are all aware by now, a month ago the Board of eLong appointed me Interim CEO. I’m well positioned to assume the CEO duties, as we are working actively with eLong since joining the board nearly two years ago.

Throughout 2007, I have lived in Hong Kong; I’ll now be spending most of my working time in Beijing. I will remain at this position until we find a high quality permanent CEO to assume long-term leadership of eLong.

Until that time I am dedicated myself to further understanding the business, identifying issues and developing a plan to take us forward. It is clear to me already that there are three high priority areas that requires senior management near-term focus, our call center, our distribution channels and our branding.

First, our call center service levels are not where we want them to be, whilst we have made improvements in scalability of our platform, we still have a long way to go and delivering a great service to our customers, which used to call and purchase ticket.

Online is strategically important to eLong over the long-term, and we believe we have a superior offerings in that regard. But the fact remains that in the near term our offline call centers haven’t received the bulk of our reservations and as such we need to give it a deserved attention.

Secondly, we need to expand our marketing distribution channels. We are still too reliant on traditional marketing vehicles such as car distribution in airports and railway stations. As the Chinese market evolves and increases in sophistication so much our marketing efforts.

Third, we need to do a better job in creating a true ground positioning for eLong in the Chinese market, what we stand for and why that matters to our travelers. Our efforts to date have been more attractively focused and this is an area I want to still invest sometime developing.

Now we are actively working on our plans to address these three issues as speak and we will provide an update on these and other areas of focus in upcoming earnings calls. I want to make it clear that we are taking a very careful look at how our operations work and what tools are needed to improve this service levels.

We are also looking at how we allocate resources in the area of sales and marketing and ensuring we are spending our funds wisely. Finally, I plan to invest in getting top shelf talent in the area of marketing.

Let me now review with you the financial progress we made in our business in the first quarter. On the top line, our revenues grew 22% year-over-year to RMB65.3 million. On the bottom line we have an operating loss of RMB5.2 million and a U.S. GAAP net loss of RMB781,000.

On the hotel side, revenue from telecommunications grew 60% year-over-year to RMB48.9 million. I am not happy with the deceleration of our hotel growth and this is another area of high priority within eLong.

On a positive note, we did make progress this quarter in our continuing efforts to provide a better product selection to our consumers. At the end of the first quarter, we offer discounted rates at a choice of 3,936 accounts and in 304 cities across China, which was up over 22% from 3,220 accounts in 278 cities in the corresponding period a year ago. I am also please to see the strong increase of our air ticketing revenues in the first quarter, which totaled RMB12.1 million, a strong increase of 50% year-over-year.

We made significant improvements through our online experience for air, we have improved the back office handling of air ticket and we have also made it a priority for our sales team. The increased focus on air adds a better result. As of the end of the first quarter, our users were able to book air tickets in 55 cities across China and we will continue to invest in our air infrastructure.

Air ticketing now represents 18% of our total revenues as compared to 15% years ago. Whilst we are pleased with seeing the growth in air and diversifying our revue streams, we believe we need to do even better in this area going forward.

During the first quarter we were able to continue to expand our customer base by adding 108,000 new customers, as compared to 80,000 new customers in the corresponding period year ago and 88,000 new customers in the previous quarter.

At the end of March we had nearly RMB1.2 million cumulative to the customers. We will continue to invest in customer acquisition and our brand through our sales and marketing efforts. So as I mentioned, we need to optimize our approach in these areas.

I would like to conclude by emphasizing that I am optimistic about the long-term prospects for eLong. We have a good team in place. We have solid industry relations and we have a good infrastructure across China. However, it will take some time to get this company delivering the kind of results it is clearly capable of delivering.

We are going to need some time to identify and map out how to better service our consumers and as is usually the case, it will take a while before they notice and start telling their friends. But, we will get there.

Let me now turn the call over to Chris Chan, our CFO who joined the company in March, and brings a lot of experience to eLong. Chris will review the financial results in greater detail. Chris?

Chris Chan

Thank you Henrik. Let me give you an overview of our first quarter results starting with our statements of operation and followed by our balance sheet. Our first quarter total revenues were RMB65.3 million, a growth of 22% year-over-year.

97% of total revenue is now from our core travel business. Revenue from hotel commission totaled RMB48.9 million, a year-over-year increase of 16% from RMB42.1 million. The 16% year-over-year increase was primarily due to higher room volume accompanied by higher hotel commission for room rate.

Hotel Room nights booked through eLong totaled 756,000 in the first quarter, up 14% from 666,000 in the corresponding period a year ago. Hotel Commission per room night was RMB65, up 3% from RMB63 in the first quarter last year.

Our hotel commission rate of 15% was up 10 basis point year-over-year from 14.9%. Our first quarter 2007 average daily rate of RMB429 was slightly higher than RMB423 same period last year. And for air ticketing during the first quarter the company achieved RMB12.1 million, a year-over-year increase of 50% from RMB8 million.

Volume in air segment totaled 326,000 an increase of 50% from 218,000 in the corresponding period a year ago. Commission earned per air ticket in the first quarter was RMB37, which is unchanged from the same period last year.

The air ticket price was RMB772, as compared to RMB848 in the first quarter of 2006. The commission rate in the first quarter was 4.8% as compared to 4.3% in a same quarter last year. Other travel revenue in the first quarter of 2007 was RMB2.1 million, a year-over-year increase of 43% from RMB1.5 million.

So year-over-year increase was due to the increase of vacation package revenue and revenue for inventory procurement services provided to Expedia by eLong.

Our non travel revenue made up 3% of our total revenue in the first quarter, consisted mainly of non travel related short messaging revenue and online advertising on our website.

So non-travel business is not a core focus for eLong going forward. Gross margin on the first quarter was 73%, down 2% from 75 in the same quarter last year. The year-over-year reduction in gross margin was a result of the increased mix of the lower gross margin air revenue as well as increased compensation expense as we invest in improvement to our call center.

Service development, sales and marketing and general administrative expenses together were RMB48.8 million, a year-over-year decrease of 7% from RMB52.5 million, mainly in the area of G&A, offset by higher spending in sales and marketing.

The fall through of gross margin from higher volume and the lower operating expenses were key contributors to those lower net loss, compared to same quarter last year.

Let me now make a few comments on our balance sheet. As of March 31st, 2007 the company's cash and cash equivalents balance was US$153.4 million. We intend to continue to use our cash balance to enhance our organic growth and consider strategic acquisitions in the future. During the first quarter, we had capital expenditures of RMB4.5 million.

And finally, let me share with you our business outlook for the second quarter of 2007. eLong expects total revenues for the second quarter to be within the range of RMB73 million, to RMB81million, an increase of 9% to 21% from the second quarter of 2006.

This concludes the financial review. And Henrik and I look forward to any questions you may have. Moderator, if you would now open the call for questions.

Raymond Huang

Operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Eddy Lang calling from Deutsche Bank. Please go ahead sir.

Eddy Lang - Deutsche Bank

Hi. Good morning guys. Can you talk about the gross margin trend going forward and could you give you the gross margin for air versus hotels for the quarter?

Chris Chan

Sure. This is Chris. I'll take that. The gross margin trend will be a mixture. Air revenue margin is lower than hotel and as we see a higher percentage of air revenue, we would see some pressure on gross margins.

However, we also will experience return on our investment in the call center as we build out the air platforms and also our call centers have sort of more experience handling the air fulfillment.

So then we will see efficiency gain and therefore that would have the gross margin. So overall we excellently managed the gross margin going forward, but that will be dynamics behind the gross margin.

Henrik Kjellberg

I think to add to that Chris, if you look at the average commission we get, compared to a year ago on the hotel side, its 14.9% this year, which is as we had a slack year-on-year and if you look at the air side, Chris, we are 4.8% versus 4.3% on air.

So we managed to increase on air and we managed to keep it broad on hotel and I think that’s the result of higher volumes and we feel comfortable with our gross margins going forward.

Eddy Lang - Deutsche Bank

Okay, thanks.

Operator

Thank you and the next question is coming from Ming Zhao representing SIG. Please go ahead, sir.

Ming Zhao - SIG

Well, thank you for taking my questions. Just two questions, one is on the hotel side. If I look at the year-over-year growth rate this year industry growth rate is down from few four, which is lowest over several quarters. So my question is, what’s the reason for that and how much is that is related to the Chinese New Year effect?

Chris Chan

Thank you Ming and I’ll take that question. As I mentioned in my statement, we are certainly not happy with the growth rate and on the hotel side. We’re happy with the 50% year-over-year on the air side. Some of that maybe due to the Chinese New Year, but we think very little and I think the other reason is that as we’ve try to diversify into the air side, we’ve put a lot of focus on that as a team and I think partly lost little bit our eye on the ball on the hotel side and that’s certainly one of the effort that I and the management team are starting to re-look at, and putting together an effort and how we can re-ignite the growth on the hotel side.

Ming Zhao - SIG

Okay. Actually my second question is on the air ticketing side, since there was a good pickup here and you said you have more keen method on this. So my questions are actually, is it industry wide same in kind or is it more sort of pump in specific to your knowledge?

Chris Chan

Sorry, could you -- I am not clear on what the question was exactly. Can you repeat that?

Ming Zhao - SIG

Yes. And my question is the air ticket growth is very good for the past quarter, is it industry wide Chan, or is it more company specific?

Henrik Kjellberg

We think the industry in China as may know always growing very aggressively. There is a lot of new supply coming.

And now on eLong specific side, I would say that we came from having started in the hotel side we came from the small base on air. So, that is I would think largely eLong specific, but again as I mentioned earlier well that is a good number, is a number that we think we have to continue to improve upon as size of this market in China is very large and we have a lot of room to grow within.

Chris Chan

And I will add to Henrik comment, in Q1 we had good success, acquire a new air customer as well and our online acquisition number have been very positive.

Ming Zhao - SIG

Okay. Just real quickly regarding your guidance for the second quarter, are you looking at the similar year-over-year growth rate for the both segments that we just discussed?

If volumes are same, it seems like you’ll be pretty high are we looking at some decline year-over-year for these two segments?

Chris Chan

I didn’t hear your last part about segments?

Ming Zhao - SIG

Briefly, my question is what are you assuming for the two segments, air ticketing versus hotel in your second quarter guidance?

Henrik Kjellberg

Actually we don't give specific guidance by product lines. And we only give total revenue guidance.

Ming Zhao - SIG

All right. Thank you very much.

Operator

The next question is coming from Eddy Lang followed by his questions. Please go ahead sir.

Eddy Lang - Deutsche Bank

Hi. I have a couple of follow-up questions. The first one is, could you talk about the competitive landscape? What are the main competitor’s design, Ctrip that you are focusing on and do you think our airlines will go direct soon?

My second question is on the marketing plans that you mentioned early in the quarter. Can you elaborate more on that one? Do you plan to do more online versus offline or is there any new channel that you guys will pursue? Thank you.

Henrik Kjellberg

Thank you, Eddy. On the competitive landscape I think, the Chinese market is gearing, increasingly sophisticated. Now there is a major player, as you know in the market, Ctrip. We have seen a number of smaller players come up. None of which we have kind of assume made real impact on our numbers.

So Ctrip remains the big competitor in this market. And as for supply direct what I would say is we do certainly think that the companies in China, both hotels and airlines long-term will start to use the channel. It is if you just have a look around the website on the market today I think its still tendency and so the position we have with our excellent web product and also our great service center.

It's still at very strong position in the Chinese market. As for the marketing plans, what we are seeing is and one of the things I alluded to earlier is the Chinese consumers and travelers are getting more sophisticated. In a way you can you could say that they are moving active very much in the same way as consumers are in other parts of the world such as in U.S. and in Europe.

eLong has for a long time remained very dependent on traditional way of -- I would call it direct sales basically hamming out cars at railway stations and airports. And so my comments in that regard refer to as we try to bring eLong to better growth going forward. We will need to spend more time in channels knows that are more sophisticated such as normal marketing, building a strong brand etcetera.

I think this is great news for eLong because to the extent that we have a position in the market, which is centering online, and a great call center to the extent we can then leverage up and grew good brand. It will put us in a very scalable interesting position in the marketplace. So that’s what I meant by that.

Eddy Lang - Deutsche Bank

Right. And do you plan to do more marketing to help your package showpieces or is it more on the traditional hotels and airlines?

Henrik Kjellberg

I think we will review all the product lines to see where we think we can develop a sustainably long-term profitable position in China.

Eddy Lang - Deutsche Bank

Right.

Henrik Kjellberg

I’m not including or excluding any options at this point. I do think as I mentioned before that we have a lot of work to be done and how we market eLong to our consumers. I think the way we are doing it has worked in the past, but times are changing in China and we need to change with those times.

Eddy Lang - Deutsche Bank

Okay. Thank you.

Henrik Kjellberg

Thank you.

Operator

(Operator Instructions).

Henrik Kjellberg

All right operator, if there are no further questions I would like to conclude this call and thank everybody who called in and everybody who listened. And we look forward to talking to you again after our Q2 results.

Operator

Thank you.

Henrik Kjellberg

Thank you. Bye, bye.

Operator

This then concludes today’s conference call. On behalf of eLong I would like to thank you for all your participation. All lines ay now disconnect. Thank you.

Henrik Kjellberg

Thank you. Bye-bye.

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China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

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