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Executives

Guangfu Cui - CEO

Mike Doyle – CFO

Philip Yang - Investor Relations

Analysts

James Lee – CLSA

Fawne Jiang – Brean Murray

Catherine Leung – Goldman Sachs

Alicia Yap – Barclays Capital

Eddie Leung – Merrill Lynch

Lawrence Auriana – Kaufmann Fund

eLong, Inc.(ELONG) Q4 2011 and Full Year 2011 Earnings Call February 23, 2012 7:00 PM ET

Operator

Good day to everyone and welcome to eLong's Fourth Quarter and Full Year 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 fourth quarter 2011 conference call.

Today, Guangfu Cui, our CEO, will make some remarks about the company’s performance in the fourth quarter 2011 and full year 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.

In the fourth quarter, we continued to see customers respond strongly to our market leading hotel network, easy-to-use hotel website, coupon program, and hotel group buy product. Hotel room nights grew 50% year over year to 2.6 million. Approximately sixty-three percent of our customers now book online at eLong.com and through our mobile applications. As a result, we believe we are gaining market share in the online hotel booking segment.

The highlight for 2011 was that hotel room nights grew 44% to 9.2 million room nights compared to 6.4 million in the prior year. We are very pleased to see that we are making good progress in our core business.

Our domestic hotel coverage network expanded 48% to over 25,500 domestic hotels as of December 31, 2011, and our international hotel coverage totals 149,000 through our affiliation with Expedia giving eLong the largest selection of online direct booking options in China. In 2011, eLong invested heavily in hotel product innovation and launched several new products. Our hotel group buy product exceeded 100,000 booked room nights for the first time in December. eLong group buy is a heavily discounted hotel product and the customer prepays eLong to get electronic voucher that is redeemable for a future hotel stay. We expanded our last minute hotel product available on our mobile phone applications. We have also recently released the updated versions of our iPhone and Android applications as well.

To compete and win, we must continue to provide customers with broad hotel product choices at competitive prices and an outstanding user experience. In 2012, we plan to continue executing on our online hotel strategy. We will execute the following initiatives:

1) offer more competitively priced hotel products via innovative selling methods;

2) offer more domestic hotels;

3) aggressively attract online customers while striving to improve marketing efficiency;

4) improve the online booking experience and overall customer service quality; and finally

5) make IT infrastructure investments to support our growing business and improve website performance.

There is no doubt that competition is intensifying in China’s online travel market. However, we have been executing a consistent online-hotel strategy for over four years. We believe that the knowledge gained during this period and our continued sharp strategic focus will serve us well in responding to the efforts of any competitors which may attempt to copy us.

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 fourth quarter, strong online hotel performance drove an acceleration in our year-on-year net revenue growth to 27%.

Our hotel business benefited from our continued product investment and innovation. We added new hotel inventory, launched new booking models such as group buy and mobile, as well as ongoing website improvements. Room nights booked through eLong increased 50% year-on-year to 2.6 million, which was an increase from the 42% year-on-year that we saw in Q3.

In the fourth quarter, hotel revenue grew by 39% year on year due to increased room night volume and a change to our coupon program, partially offset by lower average commission per room night. Commission per room night decreased 7% year-on-year primarily due to lower ADRs which were a result of mix shift to budget and group buy hotels which together now represent more than 40% of our room night volume. A challenging Shanghai World Expo comparable in October and the success of our coupon program also led to a decrease in commission per room night. During Q4, in an effort to improve our coupon program, we eliminated the RMB50 minimum threshold that customers had been required to meet before they could use their cash rebates. As a result, under US GAAP, we no longer defer additional hotel revenue from our future coupon transactions but only book hotel deferred revenue as coupon usage occurs. Approximately RMB5.9 million in hotel deferred revenue was released to hotel revenue in Q4 as a result to this change, and the year-on-year growth in hotel revenue would have been 32% without this change. Hotel revenue now represents 76% of our total revenues, which is an increase from 69% in the fourth quarter of 2010.

For full year 2011, strong online hotel performance drove our year-on-year room night growth to 44% or 9.2 million room nights. This volume growth resulted in a 29% year on year increase in hotel revenue, partially offset by lower average commission per room night. Commission per room night decreased 10% year-on-year also due to lower ADRs, growth in the coupon program and Shanghai World Expo comparable. There was no impact to full year hotel revenue from the accounting change to the coupon program discussed previously as the deferred revenue released in Q4 was generated earlier in the same fiscal year. For the full year, hotel revenue comprised 72% of our total revenues, which is an increase from 68% in 2010.

Air ticketing commission revenue decreased 4% for the fourth quarter of 2011 compared to the fourth quarter of 2010, driven by a decrease in commission per segment, which was partially offset by a 1% year-on-year increase in air segment volumes to 571,000.

Commission per segment decreased 4%, due to an 8% decrease in air commission rates as a result of lower incentive bonus received, which was partially offset by a 4% increase in average ticket price compared to the same quarter of the prior year.

For the full year 2011, air ticketing commission revenue increased 2% compared to 2010, driven by a 7% increase in commission per segment, partially offset by a 5% decrease in air segments to 2.3 million. Commission per segment increased due to a 5% increase in average ticket price and an increase in commission rates compared to the prior year.

Other revenue, primarily derived from advertising on our websites and travel insurance, increased 20% year-on-year for the fourth quarter of 2011. Other revenue decreased to 7% of total revenues from 8% in the prior year quarter.

For full year 2011, other revenue increased 22% compared to 2010. Other revenue is 8% of total revenues, consistent with the prior year.

Gross margin in both the fourth quarter of 2011 and full year 2011 was 74%, compared to 72% in both the fourth quarter of 2010 and full year 2010, as gross margin improvements from mix shift to hotel and online bookings were offset by higher personnel expenses and lower hotel commission revenue per room night.

Total operating expenses increased 38% or RMB29.1 million for the fourth quarter of 2011 compared to the fourth quarter of 2010. Total operating expenses increased to 66% of net revenues in the fourth quarter of 2011 from 62% in the fourth quarter of 2010.

Total operating expenses increased 28% or RMB84.0 million for full year 2011 compared to 2010. Total operating expenses increased to 65% of net revenues in 2011 from 62% in 2010.

Service development expenses increased 26% in the fourth quarter of 2011 compared to 2010, mainly driven by an increase in personnel expenses. We continue to invest in improving our online user experience and technology systems, as well as expanding our hotel coverage. Service development expenses decreased to 17% of net revenues in the fourth quarter of 2011 from 18% in the same quarter of the prior year.

Service development expenses for full year 2011 increased 21% over full year 2010, also mainly driven by higher personnel expenses. Service development expenses were 17% of net revenues, consistent with 2010.

Sales and marketing expenses for the fourth quarter of 2011 increased 56% or RMB23 million over the fourth quarter of last year, mainly driven by increased hotel commission payments to third-party affiliates and distribution partners and higher online marketing expenses. Sales and marketing expenses increased to 40% of net revenues in the fourth quarter of 2011 from 33% in the same quarter of the prior year. We continue to invest aggressively in order to acquire new customers and promote our brand online.

Sales and marketing expenses for full year 2011 increased 38% or RMB64 million over full year 2010, mainly driven by the same reasons in the fourth quarter of 2011. Sales and marketing expenses increased to 39% of net revenues in 2011 from 35% in 2010.

Q4 G&A expenses increased 3% compared to the fourth quarter of 2010, and fully year G&A expenses increased 7% over full year 2010. G&A expenses were 9% of net revenue for both Q4 and full year 2011, which was down from 11% and 10%, respectively.

Other Income in the fourth quarter of 2011 and full year 2011 increased year-on-year were primarily due to a higher cash yield and lower foreign exchange losses as a result of a lower mix of USD in our cash balances.

Income tax expense in the fourth quarter of 2011 was RMB2.8 million, compared to income tax benefit of RMB1.7 million in the fourth quarter of 2010 as a result of the reversal of a deferred tax assets valuation allowance due to the accumulated profitable position of one of our major entities.

Effective tax rate in 2011 was 21% compared to effective tax rate of 25% in 2010.

Net income for the fourth quarter was RMB15.0 million, compared to net income of RMB4.2 million in the fourth quarter of 2010.

Net income for full year 2011 was RMB39 million, compared to net income of RMB21 million in 2010.

Moving to our Balance Sheet, I’d like to mention that as of December 31, 2011, eLong held cash and cash equivalents, short-term investments and restricted cash of RMB1.9 billion or approximately US$303 million. Of this balance as of December 31, 2011, 86% was held in Renminbi and 14% or US$42 million was held in US dollars. In February 2012, eLong converted US$37 million from US dollars to Renminbi. We now hold 98% of our cash balance in Renminbi.

Now, let me share with you our Business Outlook. We expect Net Revenue growth of 15% to 25% in Q1 2012.

I’d also like to make a few general comments on the current market environment. Headwinds to our continued strong performance include intensifying competition, mix shift to lower ADR hotels, rising labor and marketing costs, and potentially a slowdown in our mix shift to online and to hotel as we reach higher absolute percentages. As a result, we face gross margin pressure in 2012 and don’t currently expect gross margin and operating margin improvement in the near term.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from James Lee of CLSA. Sir, you may begin.

James Lee – CLSA

Thanks for taking my question. Mike, can you maybe help us understand the framework of your coupon program? Is it a pretty much nationwide program or is it more or less by region? And how do you determine kind of where to offer your program? And is it determined where you see most competition or is it by maybe new targets or new markets you want to go after? Thanks.

Michael Doyle

Sure. So our coupon program has been pretty consistent now for the last six quarters or so in its size and scope. We have coupons at a little more than half of our hotels. The competition of the program is distributed across all provinces and cities in the country, all-star categories and in all key districts within those cities. We’ve done that very deliberately to make sure that we have a coupon product that’s appealing to all customers.

James Lee – CLSA

And maybe as a follow up Mike, maybe can you talk about the program success in terms of conversion rate? How much qualify versus how much people actually use? And maybe you can help us understand where on a regional basis where you are seeing the most conversion. Is it mostly Tier 1 markets or is it mostly Tier 2? Thanks.

Michael Doyle

Thanks James. We haven’t shared that level of detail about the coupon program. We’ve just shared that it’s been a successful program for us and one that we have continued to invest behind.

James Lee – CLSA

Okay. And last question here, I’m so sorry taking so long. Can you give us a sense how long do you intend to continue to support this program? Obviously, it’s been very successful and you deliver a very good top line growth, and also in terms of hotel booking, but looking at your margin, it is lower than your peers and domestically/internationally. I was wondering how comfortable you are running at the current operating margin?

Michael Doyle

Yeah, so the motivation behind our coupon program is to provide customers value by saving the money and introducing them to our market leading hotel networks and our improved hotel website. So we feel like we’re still meeting those objectives.

We’re still acquiring new customers. And the program still makes financial sense for us. We view the coupon program like we do any other marketing channel. And we are measuring the efficiency of those channels. We constantly reallocate marketing resources to their best and highest use. And the coupon program is no difference. So we will continue to invest there until we feel differently about the opportunity.

James Lee – CLSA

Great. Thanks so much.

Operator

Thank you. Our next question comes from Fawne Jiang of Brean Murray. Ma’am, you may begin.

Fawne Jiang – Brean Murray

Good morning, Guangfu and Mike. Thank you for taking my questions. First question is actually regarding your fourth quarter hotel commission per room night. It seems like on both year-over-year or quarter-over-quarter you did have some improvement there, although it’s still – I think year-on-year minus 7%. I also noticed that in terms of ADR actually it was minus 8%. So your commission revenue per room night I think was better than the average ADR for the first time in the past eight quarters. Just wondering what’s the driver for that?

Also, I think Mike also mentioned that you still see shifting towards lower ADR hotels and you also have coupon program plus your increasing growth on the Group Buy. Just wondering whether you could prioritize the negative impact of those factors on your ADR?

Michael Doyle

Sure. First on the revenue per room night. You’re correct. The revenue per room night did decline 7% year-on-year in the fourth quarter. As the hotel revenue was impacted by the accounting change to the coupon program. So was revenue per room night. So without that change in the quarter, the revenue per room night was actually down a bit further than the decline in ADR.

So no real difference in trends to speak to this quarter on that metric. As far as the impact on the reduction in revenue per room night from coupon, from mix shift to budgeting Group Buy and to the ADR declined from Expo or otherwise. The biggest driver is mix shift to budget and Group Buy.

Fawne Jiang – Brean Murray

Okay, got you. I also have a quick question on your commission revenue per air segment. It seems like we also have a minus 4% year-over-year decline even though the average ticket pricing should increase year-over-year. Just wonder what’s the driver behind that and do you see commission rate cut here or...

Michael Doyle

So the trend this quarter I think is a bit unique and not necessarily useful to draw a trend from. We recognize our incentive payments from the airlines on a cash basis when received. And we received lower incentive bonuses in the fourth quarter. So we don’t expect that that’s a trend, but it does impact the current quarter. So Q4.

Fawne Jiang – Brean Murray

Got it. My next question actually regarding your Group Buy business, it seems like it really has been taking very good momentum. Just wonder what’s the trend you have seen earlier this year in January or February so far. Do you still see great momentum going there or is it more like a temporary hike on the Group Buy business in hotel overall?

Guangfu Cui

This is Guangfu. I want to take your question. In January, actually the Group Buy business continued to grow and accelerate. Just give you one example, that we in January run a Group Buy deal with Hanting, one with the broader chain in China. And this single deal we sold close to 20,000 room nights in a few days, which shows how well consumer respond to the program and the product. So basically, Group Buy products is heavily discounted, normally 50% of what eLong sells at a reasonable price.

The program is right now, according to our census, based on the open figures from our key competitors including the – not only OTA but other Group Buy websites. And eLong is clearly number one in terms of room nights booked in the market. We are happy to see that we are very well positioned. And the other expected with that eLong has better partnerships with Tencent and Renren and other big Internet giants in terms of distributing Group Buy products to a broad audience, which our competitors cannot match. So that’s my answer to your Group Buy questions. Thank you.

Fawne Jiang – Brean Murray

Thanks, Guangfu. One follow-up on that is, regarding your Group Buy hotels, what’s the scope of that? What I mean is, do you see more focus on lower-end hotels or is actually across board from different start of star rated hotels?

Guangfu Cui

As a matter of fact right now if you go to our website you can see over 1,500 hotels participating in our Group Buy product offering. And in terms of star rankings, you can see it varies from the high- to mid-tier to low-tier. So it’s a broad selection of products. And eLong has provide – been able to continue to release the number of hotels offered and also the most competitive products in the market.

Fawne Jiang – Brean Murray

Got it. Thank you very much. I’ll jump back to the queue.

Michael Doyle

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Catherine Leung of Goldman Sachs. Ma’am, you may begin.

Catherine Leung – Goldman Sachs

Hi, good morning. I have two questions. The first one is I think you made several referrals in your remarks on competition intensifying. And I suppose this includes your competitor also launching a hotel coupon program in the fourth quarter.

Yet I think your hotel volume growth actually accelerated in the fourth quarter. Do you think this reflects the relative intensity of your coupon programs or you think it reflects some of the other factors such as your platform quality? And then my second question is around your customer acquisition costs. Would it be possible to rank the relative efficiency of your various marketing channels? Thank you.

Guangfu Cui

Catherine, let me take your question. This is Guangfu. We think that our recent progress in our hotel room net growth attributing to the fact that we have been executing an online hotel strategy for over four years. The position of eLong is that book hotel use eLong, which is very simple. The company has allocated most of our resources in hotel business and allocated most resources marketing dollars in online marketing.

So we have not changed over the years anything regarding the online hotel strategy. And we have established a competitive advantage in the marketing in terms of number of hotels offered, easy to use hotel websites and also keep innovating in the market and introducing new products to the market such as hotel group buy product, last minute program and recently we have upgraded our mobile applications for iPhone and Android applications. And as a matter of a fact, our new app called, Sesame Open the Door is one of the best online booking applications in the market. And the coupon is only one of the factors that drives the online hotel growth. Thank you.

Michael Doyle

Catherine, this is Michael. If I could just add the – when we spoke last quarter I think we also mentioned that we expected easier year-on-year comps in November and December after we got out from under the tough comp from World Expo. So that was true as expected. So our room night volume growth I don’t think we attribute to any big difference in the coupon program or any change to key strategy or initiatives, but overall market growth and improvements in comps. And your second question on channel efficiency, we haven’t shared that level of detail probably at this time.

Catherine Leung – Goldman Sachs

Okay. Thank you.

Operator

Thank you. Our next question comes from Alicia Yap of Barclays Capital. Ma’am, you may begin.

Alicia Yap – Barclays Capital

Hi good morning, thanks for taking my questions. Two questions. First of all, on the margins guidance comment that you gave, you say do not expect for a margin expansion this year. For that, did you take into considerations the more competitive landscape and some of the step-up investment by your competitor that you are maybe feeling a little bit pressure to react to spend a little bit more sales marketing this year?

Michael Doyle

So with regards to my margin comments, we were fortunate to see very robust expansion in gross margin through almost all quarters of 2011. I think on average about 200 basis points, which was a result of positive impact from mix shift to hotel and online being partially offset by higher costs in the call center and lower revenue per room night.

Those same four factors will be in play in 2012, but we think that the mix shift from revenue and online will have a harder time outrunning the offset from the two negative factors that I mentioned. Certainly increased competition is one factor, but there are other things at play. So a mix shift to budget and Group Buy remains a headwind. Increasing cost in the call center, and then as I mentioned we’re now at 63% of our business online and 76% of our business from hotel. So adding incremental percentage points to those absolute numbers gets more challenging as time goes on.

Alicia Yap – Barclays Capital

I see. And then maybe the second question is that can you comment on the Last Minute program? How was the tractions during the fourth quarter? It seems that auto players in this space also launching the program. And then also a follow up on that regarding the coupon program is that given that the more competitive dynamic has been taking place, have you seen any impact at all on your volume or your demands from you customer? Thank you.

Guangfu Cui

This is Guangfu. I’ll take the first question regarding Last Minute. We have as matter of fact, we are the first one launching the product. And right now we offer more than 1,200 Last Minute products via our mobile apps. So we didn’t offer the Last Minute program in our website. So basically this is like most products that get 30% discount, at least 30% discount, and consumer can only book after 6 o’clock.

As time going we see more hotels trying to move up – move early to set the (inaudible) but there were some hotels that may want to sale after 12 noon. And so we see a good trend in terms of hotel adapting this new selling measure to sell more distressed inventory. And after we launched the new apps recently we see a good acceleration in terms of our Last Minute product volumes. Thank you. Michael do you want to...

Michael Doyle

Yeah, I will take the second part on the coupon impact. So our coupon room night growth was very similar to prior quarters. We didn’t see a big change there. So certainly, it seems reasonable to expect that there was some impact from the competition copying the program, but we haven’t been a very clear impact today.

Alicia Yap – Barclays Capital

Okay, thank you.

Operator

Thank you (Operator Instructions) Our next question comes from Eddie Leung of Merrill Lynch. Sir, you may begin.

Eddie Leung – Merrill Lynch

Hey good morning. Guangfu and Mike thank you for taking my question. I just have one question. Could you comment on whether you have seen the coupon programs to be adopted by more of your competitors? And do you expect these become more top layer mainstreamed marketing tool for other OTAs as well? Thank you.

Guangfu Cui

With the coupon program, we think that these recent actions that competitor took to copy our hotel products and marketing initiatives is a strong endorsement of our first move online hotel strategy. And which way proved what we are doing is right. And whether more competitor will adapt that, we can’t comment on that and neither can we stop competitors copying eLong doing that.

Whether we will continue our marketing programs such as coupon will be based on marketing efficiency, not whether competitor will do it. Our RI will always be focused on consumers if we think of programs such as coupon or Group Buy or Last-Minute creates consumer value, give consumers better discounts, encourage them to try eLong products and become a loyal eLong customer. We will definitely do it, but we will keep an eye on marketing efficiency. So, that’s our position regarding coupons. Thank you.

Eddie Leung – Merrill Lynch

That makes sense. Thank you.

Operator

Thank you. Our next question comes from Lawrence Auriana of Kaufmann Fund. Sir you may begin.

Lawrence Auriana – Kaufmann Fund

Yes, thank you for taking my question. The impact of the coupon program, where does it show on the income statement? Does it impact revenues or cost of services?

Michael Doyle

Lawrence, this is Mike. The impact of the coupon program is entirely hit against revenue as it comes to revenue entry.

Lawrence Auriana – Kaufmann Fund

So the declining gross margin doesn’t reflect the cost of the impact of the coupon program, but higher customer acquisition cost. And what does the higher customer acquisition cost reflect?

Michael Doyle

Let me take that in two parts. So the expansion of the coupon program has been a headwind in at the revenue line because of the contra-revenue accounting and as also is reflected in our revenue per room night metric that we share each quarter. It does impact gross margin, though we’ve seen an expansion in gross margin over the last several quarters. The coupon impact has been a headwind there.

It’s just been more than offset by the benefit of mix shift to hotel and online. The higher marketing costs, you’ve mentioned customer acquisition costs, we haven’t broken about separately, but marketing costs are up due to increased cost in our affiliate channel to affiliate commission payments and also in general online marketing spend channels such as marketing and others.

Lawrence Auriana – Kaufmann Fund

Do you see this trend moderating (inaudible) the marketing course?

Michael Doyle

No, not in the near term. We’re continuing to aggressively invest in acquiring customers and bring in those customers to book online.

Lawrence Auriana – Kaufmann Fund

I assume you’re – the affiliates, the marketing affiliates are charging higher rates?

Michael Doyle

Yes, in addition with the overall increased level of competition in the market, it has impacted the affiliate channel as well. And the competition is bidding up the commission payments available to affiliates.

Lawrence Auriana – Kaufmann Fund

Thank you very much.

Michael Doyle

Thank you.

Operator

Thank you. (Operator Instructions) At this time there are no further questions. Now I’ll turn the call back over to the eLong management team.

Guangfu Cui

Thank you, Jeffrey. And we heard a lot of questions regarding coupon and seems like a lot of high interest regarding what’s in the position on coupon, et cetera, et cetera, but I don’t want the coupon program to kind of, as they say, overshadow the key initiatives that we are trying to do.

And I want to remind everybody that eLong, our primary, the only strategy of the eLong over the past four years’ online hotel strategy. And I want to remind everybody our initiatives in 2012, whether we were being in the market and gain market share, we would be up to how well we execute these five strategies of public initiatives.

The first one is to offer more competitively price for hotel products. We’ve innovative standing measures, which are very important initiatives like Group Buy, Last Minute and mobile apps upgrade. Number two, offer more domestic hotels. We keep expanding our hotel networks to meet ever increasing consumers’ demand for more choices. Number three, aggressively attract online customer while striving to improve marketing efficiency. Number four, improve the online booking experiences and overall customer service. And finally make IT infrastructure investments to support our growing business and improve website performance.

So thank you all for being on the call. And the management team of eLong looks forward to talk to you in the next quarter. Thank you. Moderator, you may now terminate the call. Thank you.

Michael Doyle

Thank you.

Operator

Thank you. That concludes today’s conference. Thank you for participating. You may now disconnect.

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