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Ctrip.com International, Ltd. (NASDAQ:CTRP)

Q2 2007 Earnings Call

August 6, 2007 9:00 pm ET

Executives

Tracy Cui - Director, Investor Relations

James Jianzhang Liang - Co-founder; Chairman of the Board

Min Fan - Co-founder, Chief Executive Officer

Jie Sun - Chief Financial Officer

Analysts

Aaron Kessler - Piper Jaffray

George Chu - UBS

Eddie Leung - Deutsche Bank

Catherine Leung - Citigroup

Ashish R. Thadhani - Gilford Securities

Michael Millman - Soleil Securities

Jenny Wu - Morgan Stanley

Leah Hao - Goldman Sachs

Cindy Shi - Emerging Markets Management

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter Ctrip.com International earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Tracey Cui, Director of Investor Relations. Please proceed.

Tracy Cui

Thank you for attending Ctrip's second quarter 2007 earnings call. Joining me on the call today, we have Mr. James Liang, Chairman of the Board; Mr. Min Fan, Chief Executive Officer; and Ms. Jie Sun, Chief Financial Officer.

We may during this call discuss our future outlook and performance, which are forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in Ctrip's public filings with the Securities and Exchange Commission. Ctrip does not undertake any obligation to update any forward-looking statement except as required under applicable law.

Min, James, and Jie will provide business updates, industry outlook, and the financial highlights for the second quarter of 2007, as well as outlook for the third quarter. We will also have a Q&A session towards the end of this call.

With that, I will turn to Min for a business update.

Min Fan

Thank you, Tracey. Welcome, everybody. I am very glad to report another outstanding quarter achieved by our team. During the quarter, we were able to realize accelerated development in the hotel reservation business and maintain robust growth in the air ticketing business. Our dedication to delivering the best customer experience continued to yield significant results in both operational and financial terms.

Our hotel supply network continued to expand, with approximately 5,300 hotels by the second quarter of 2007, compared to approximately 3,800 by the same period last year. The number of hotels with a guaranteed allotment of rooms further increased to account for more than 50% of the total supply.

The number of acquired new customers also grew at a rapid pace. As of the second quarter of 2007, there were a total of approximately 3.3 million cumulative active customers in our network.

In June, we officially launched International FRT tour business in Beijing, following a successful review in Shanghai. The new business enables Ctrip to more aggressively penetrate the international travel market in Beijing and better address the needs of high-end consumers.

On the technology front, we continue to invest in this area to improve the user experience with our website. As of Q2, we have implemented a series of upgrades to our hotel and air ticketing reservation systems and already received many favorable feedbacks from our customers. We intend to continue with our efforts on system and platform upgrades.

Overall, we continue to dominate the online travel market with a competitive advantage in brand, service, scale, and products. With our expansion into tier-two cities, our market share of the overall travel market continued to grow at a significant pace.

Now I will turn to James for the industry outlook.

James Jianzhang Liang

Thanks, Min. The overall economy and travel industry in China continued to exhibit the trends with strong growth. Recently the government announced that China’s GDP grew 11.5% in the first half of 2007, compared to the same period last year. We continue to witness great change that is happening every day and everywhere in China.

As the industry leader in the vibrantly developing market, we feel fortunate that Ctrip is well-positioned to capture the unprecedented opportunities presented. We will continue to devote ourselves to providing the highest quality services and products to the ever-growing customer base.

Now let me turn to Jie for the update on the financial performance.

Jie Sun

Thanks, James. I am very pleased to report the strong results for the second quarter of 2007. Our net revenues reached another record of RMB 288 million, or $38 million, in the second quarter of 2007, representing a growth of 52% year over year and 24% quarter over quarter.

Revenues from hotel reservations were RMB 171 million, or $23 million, in the second quarter of 2007, up 45% year over year and 28% quarter over quarter, due to increased volume of hotel bookings.

The total number of hotel room nights booked was approximately $2.41 million in the second quarter of 2007, compared to approximately $1.70 million in the same period last year and $1.92 million in the previous quarter.

Revenues from air ticketing remained strong at RMB 117 million, or $15 million, in the second quarter of 2007, up 67% year over year and 24% quarter over quarter. The total number of air tickets sold in the second quarter of 2007 was approximately 2.55 million, compared to approximately 1.49 million during the same period last year, and 2.22 million in the previous quarter.

Revenues from packaged tours were RMB 13 million, or $2 million, in the second quarter of 2007, up 49% from the same period last year, and decreased 20% from the previous quarter due to seasonality.

Excluding revenues from lower end group tours that were directed in the latter part of last year, revenues from FIT packaged tours grew approximately 100% year over year.

The gross margin was 80% in the second quarter of 2007, compared to 81% for the same period in 2006 and 79% in the previous quarter. The change in gross margins was largely related to the revenue mix from our hotel reservation, air ticketing, and packaged tour businesses.

Product development expenses for the second quarter of 2007 increased by 69% to RMB 42 million, or $5 million, from the same period in 2006 and increased by 22% compared to the previous quarter, primarily due to the increase of product development personnel resources. Excluding share-based compensation charges, product development expenses accounted for 12% of net revenues, compared to 11% in the same period last year and 13% in the previous quarter.

Sales and marketing expenses for the second quarter of 2007 increased by 42% to RMB 59 million, or $8 million, from the same period in 2006 and increased by 22% compared to the previous quarter, primarily due to the increase of sales and marketing personnel resources. Excluding share-based compensation charges, sales and marketing expenses accounted for 19% of net revenues, slightly lower than 21% in the same period last year and 20% in the previous quarter.

General and administrative expenses for the second quarter of 2007 increased by 58% to RMB 35 million, or $5 million, from the same period in 2006 and increased by 16% from the previous quarter, primarily due to the incurrence of RMB 14 million, or $2 million, for the share-based compensation charges. Excluding share-based compensation charges, general and administrative expenses accounted for 7% of the net revenues, remained relatively consistent with 7% for the same period last year and 8% in the previous quarter.

Income from operations for the second quarter of 2007 was RMB 95 million, or $13 million. Excluding share-based compensation charges, income from operations was RMB 118 million, or $16 million, increased by 49% from the same period in 2006 and 32% from the previous quarter.

Operating margin was 33% in the second quarter of 2007. Excluding share-based compensation charges, operating margin was 41% compared to 42% in the same period of 2006 and 39% in the previous quarter.

Net income for the second quarter of 2007 was RMB 88 million, or $12 million. Excluding share-based compensation charges, net income was RMB 111 million, or $15 million, representing a 51% increase from the same period in 2006 and a 33% increase from the previous quarter, mainly due to the high income from operations.

The diluted earnings per ADS were RMB 1.30, or $0.17, and the diluted earnings per ordinary share were RMB 2.60, or $0.34. Excluding share-based compensation charges, the diluted earnings per ADS were RMB 1.64, or $0.22, for the second quarter of 2007.

As of June 30, 2007, our cash balance increased to RMB 978 million, or $128 million, compared to RMB 866 million as of March 31, 2007. The cash balance represented more than 50% of our total assets as of June 30, 2007.

For the third quarter of 2007, the company expects to continue the year-on-year net revenue growth at approximately 35%.

With that, Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Aaron Kessler with Piper Jaffray. Please proceed.

Aaron Kessler - Piper Jaffray

Good quarter. A couple of questions for you; first, can you give us a sense for -- the hotel bookings were very strong in the quarter. Do you think that was more macro related or more share gains? Also, hotel pricing went up a decent part on a sequential basis. Is that inflation or is that just you’re getting some higher priced hotels? How should we think about that going forward as well?

Jie Sun

Thanks, Aaron. Hotel bookings had shown a very strong growth in Q2 mainly due to two reasons. First of all, for the internal factors, we have been executing our strategy very successfully. We have been focusing on expanding further into the second tier cities and that has yielded great results for us.

Additionally, we have been expanding our hotel network supply to support our further growth in the second tier cities. So those are the internal factors that are driving our business.

For external factors, I think the general economy in China is very good in Q2 and also the GDP growth is very strong in Q2, so these are all helping us to have a very good result from the hotel perspective.

In terms of internal factors versus market share growth, I think it is both. The overall market growth rate is probably between 5% to 10%. In Q2, we were able to grow at 40% so the outpaced portion is a market share growth.

Aaron Kessler - Piper Jaffray

And was the increase in the hotel pricing, what would you attribute that to on a sequential basis?

Jie Sun

The hotel pricing actually has remained very consistent from quarter to quarter, with a slight increase. The commission rate for right now is between 68 to 70, 71 -- it is normal, like the range we would expect.

Aaron Kessler - Piper Jaffray

Right. Okay, I’ll jump back in the queue. Thank you.

Operator

Your next question comes from the line of George Chu with UBS. Please proceed.

George Chu - UBS

Good morning. Congratulations on the strong numbers. One question regarding airline ticket pricing, I am beginning to hear on the news that airlines in China are raising prices. Does that mean they would not need as much third party agents as they did before? Would this mean relatively weaker pricing power for you guys? Thank you.

Jie Sun

For the airline business, we are an agent model, so if the airlines are raising their prices, it is good for Ctrip because as a percentage of total revenue we will be able to achieve a higher commission. So the increase in the air ticket price is good for Ctrip.

The reliance on third party agents is still very strong because currently, airlines only sell approximately 20% of their total tickets directly to their end users, and we take about 5% and the rest of it are taken by small travel agencies. So the airlines still are using third party agencies as their main sales force to distribute their tickets.

George Chu - UBS

That’s great. Thank you.

Operator

Your next question comes from the line of Eddie Leung with Deutsche Bank. Please proceed.

Eddie Leung - Deutsche Bank

Good morning. Can you talk a little bit about what you see from the economic hotel chains? After a few quarters, they have set up their own call centers and distribution networks. Do you think that will be a threat to you guys in the coming year?

James Jianzhang Liang

In terms of budget hotel chains, if you look at our selection, more than 80% of the hotel bookings are from the independent hotels and less than 10% of the total hotel bookings are from budget hotel chains. So the impact on budget hotel chains is limited for Ctrip.

Of course, the budget hotel chains, they have their own call centers and also they will try to enlarge their direct sales, but still the budget hotel chains are fairly fragmented with many brands in the market. Also, Ctrip is still a very good partner sales channel for those budget hotel chains, so we don’t think there is a very big impact on Ctrip's production.

Eddie Leung - Deutsche Bank

Okay, thanks. I will go back to the line. Thanks.

Operator

Your next question comes from the line of Catherine Leung with Citigroup. Please proceed.

Catherine Leung - Citigroup

Good morning. Congratulations on a strong quarter. My first question is we saw material acceleration in the air ticketing revenue growth this quarter. Can you please discuss the progress of how e-ticketing has helped you to gain market share in this market this quarter, and if you have any long-term targets in terms of where you expect your market share to be in the longer term in the air ticketing market?

Secondly, for the hotel segment, can you discuss how your hotel network has expanded in the tier two cities, and what is the revenue contribution from that this quarter? Thank you.

Jie Sun

Sure. For the air ticketing business, the e-ticket development has continued to be a strong driving force for our growth in this area. Based on the customer loading data for the three major airlines, the industry probably grew about 15% in Q2. We were able to achieve more than 70% growth in Q2 in terms of volume. The portion on top of the 15% is the market share growth.

In the long-term, I think right now Ctrip takes about 5% of the market share and airlines take about 20%, and the other 70% to 75% are still currently held by small travel agencies. In the long term, we will work very hard to make sure we get new market share and get more market share from the small travel agencies. Our target is very rapidly get the market share from the small travel agencies.

In terms of the hotel bookings, the hotel network has grown to be more than 5,000. Right now, it is 5,3000 and most of them, more than 50% of these hotels give us an allotment, so we are still seeing strong growth in this area.

In terms of revenue contribution between first tier cities and second tier cities, in the old days, first tier cities contributed more than 50% of the hotel revenue. Right now, the second tier cities started to contributed a little bit more than 50% of the revenue into the total hotel revenues.

Catherine Leung - Citigroup

Thank you.

Operator

Your next question comes from the line of Ashish Thadhani with Gilford Securities. Please proceed.

Ashish R. Thadhani - Gilford Securities

Good morning. I was wondering why your guidance is unchanged at 35%, even after you outperformed that mark in the June quarter by some 20 percentage points. Is there any reason for the reluctance to raise that bar?

Jie Sun

The 35% guidance is a conservative guidance and if you look at our performance in Q2, we were able to achieve very high growth rate at 52%. Mainly it is driven by two factors. One is internal factors, one is external factors.

The internal factors we can control and our execution strategy will be kept very swiftly and effective as we always have, so we will keep up our strategy as we are moving forward.

For external factors, I think the general economy is doing really well. The stock market is doing well. GDP is growing well. However, we have no control on the external factors. Therefore, we built certain conservativeness in our guidance.

But if you want us to point at a specific event, if we see any slowdown, we currently do not see anything.

Ashish R. Thadhani - Gilford Securities

That’s helpful. Moving on to the packaged tour business, revenue declined quarter on quarter. What kind of pattern should we be looking for in this business, either on a year-over-year trajectory or quarter-on-quarter seasonality?

Jie Sun

Sure. Packaged tour business, if you look into our history, normally Q1 and Q3 are our two stronger quarters. Q2 and Q4 are relatively slower quarters. From a year-over-year perspective, you can see our FIT packaged tour has grown 100% year over year, so the growth is still very strong.

Ashish R. Thadhani - Gilford Securities

And the FIT is what percentage of that line item?

Jie Sun

In the current year numbers, 100% is FIT. If in the prior number, there were about $2 million non-FIT related, so if you want to compare FIT apples-to-apples, you have to take out $2 million lower end tour out, and then you get approximately 100% year-over-year growth.

Ashish R. Thadhani - Gilford Securities

Great. And finally, could you bring us up to date with Rakuten’s plans, just the key details on the thinking behind this action?

Jie Sun

You mean Rakuten’s sales?

Ashish R. Thadhani - Gilford Securities

Yes.

Jie Sun

Okay. We fully respect Rakuten’s decision to sell the share of Ctrip. Rakuten owns a diversified range of businesses and investments in Japan and currently needs cash for internal investments in some of their other businesses, as well as repayment of existing investments.

Our fundamental of the business remains to be very strong and Rakuten’s position on sales of their shares should not have an impact on our operations. If you would like to have more details regarding Rakuten, we would refer you to their IR department.

Ashish R. Thadhani - Gilford Securities

Thank you very much. That’s very helpful.

Operator

Your next question comes from the line of Michael Millman with Soleil Securities.

Michael Millman - Soleil Securities

Thank you. I would like to maybe slice and dice some of the hotel numbers, and I would be interested if you could break out the growth or at least the volume between existing hotels that were in your portfolio and the new ones. And secondly, if you could also, on the existing hotels, give us some breakdown on an age-adjusted basis.

Jie Sun

Michael, I’m sorry. Can you repeat the question? The line was not very clear here.

Michael Millman - Soleil Securities

Sorry. The first question is for your hotel business, how much of the volume came from existing hotels that were in the portfolio a year ago and how much of the volume came from hotels that you newly signed. Secondly, of the existing hotels, if you could talk about that on an age-adjusted basis.

Jie Sun

The hotel revenue -- normally we don’t, you know, the existing hotels versus newly established hotels because the newly established hotels normally take a while to ramp up and to catch up with established hotels. But what we can compare to is the total network. Last year in Q2, we had 3,800 hotels and this quarter, we have increased to 5,300 hotels. So it is an increase of 1,500 hotels, about a 30% increase in the hotel chain.

Revenue increased by these newly added hotels normally should be below the volume because normally when we add a new hotel into the chain, the revenue generation from the newly established hotel is relatively lower than the matured hotels.

Michael Millman - Soleil Securities

That was kind of the second part of the question. Can you give us an idea of how typically your business ramps up and how much business you might get on average in the first year, second and third year?

James Jianzhang Liang

Generally speaking, for those newly signed hotels because they are just newly signed, normally they would take half to one year to be mature. In fact, we do not track very carefully for every hotel the new production from the newly signed hotels. In fact, I think the contribution from the newly signed hotels will be close to the mature hotels, around one to one-and-a-half years. So I think then that will be quite comparable.

Michael Millman - Soleil Securities

So by the time you have a hotel one-and-a-half years, it generates an average amount of business?

James Jianzhang Liang

Yes.

Michael Millman - Soleil Securities

Thank you.

James Jianzhang Liang

For most of the hotels, for most of the newly signed hotels.

Michael Millman - Soleil Securities

And do they continue to grow at -- would a hotel that is three years old generate a lot more business than one or --

James Jianzhang Liang

It is very hard to say whether the newly signed hotels will grow even more production than the older hotels because it depends on the different location and also a different star level, so I just can’t give you a rough general idea.

Michael Millman - Soleil Securities

So basically, after one-and-a-half years, a hotel is reasonably mature?

James Jianzhang Liang

Yes.

Michael Millman - Soleil Securities

Thank you very much.

Operator

You have a follow-up question from the line of Aaron Kessler. Please proceed.

Aaron Kessler - Piper Jaffray

Thank you. Just a couple of follow-up questions. First, can you give us a sense for the depreciation on the building going forward here? I think that starts in Q3, and then one follow-up question after that.

Jie Sun

Sure. The depreciation for the new building is pretty much evening out to our rental expenses, so there is no incremental cost for the depreciation.

Aaron Kessler - Piper Jaffray

Okay, so it’s pretty -- would it be capitalized versus -- the rental cost before probably would have been expense versus might be depreciated?

Jie Sun

Yes, the whole building cost will be capitalized and then amortized through 30 years.

Aaron Kessler - Piper Jaffray

Great, and can you give us a sense for the leisure versus maybe the business mix? I don’t know if you already went over that but that would be helpful. If the growth rates are relatively the same or was leisure starting to grow a little faster? Thank you.

Jie Sun

Leisure versus business remains very consistent. About 80% of our revenue contributed from business travelers and 20% are from leisure travelers. Both sectors have been growing quite rapidly.

Aaron Kessler - Piper Jaffray

Thank you.

Operator

(Operator Instructions) You have a follow-up question from the line of George Chu. Please proceed.

George Chu - UBS

Yes, could you just comment on the competition, particularly the newer type of business models, such as [Trinar], Qunar, and Sohu Hotel? These are new booking platforms, third-party booking platforms. Could you just talk about if they have any impact on your business at all? Thank you.

James Jianzhang Liang

I think both Qunar and Sohu Hotel, those kind of new search platforms or direct sales engine platforms, those kind of new business models still are yet to be proven in the market. We do not see any material impact on Ctrip production, Ctrip's operations so far.

George Chu - UBS

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Jenny Wu with Morgan Stanley. Please proceed.

Jenny Wu - Morgan Stanley

I have a question regarding your premium guided tour. Can you give us some update on that business and when you expect it will become a material revenue contributor?

Jie Sun

High end tour?

Jenny Wu - Morgan Stanley

Yes, the premium guided tour.

James Jianzhang Liang

Last year, late last year we launched a high-end guided tour in Shanghai and only the first half of this year, we launched this high-end tour group in Beijing. So far we see very good feedback from the market and also, we set up a brand new industry high-end tour group standard, which will come not only by the consumers but also by the industry government. Still we are in the process of enlarging this part of our operation and especially I think in Q2 and in the coming Q3, those folks are gaining a very good reputation from our customers. I think this kind of high-end tour groups, what we are doing is quite different from the traditional travel agencies and I think this will be one of our competitive edges from other industry players.

Jenny Wu - Morgan Stanley

Any expectation on its revenue contribution?

James Jianzhang Liang

Yes, of course those high-end tour groups contribute to the growth of our packaged tour business and we would like to see there would be more high-end consumers who will recognize Ctrip's service and Ctrip’s product, and in this way we can occupy more, we can gain more high-end market share in the industry.

Jenny Wu - Morgan Stanley

Thank you.

Operator

Your next question comes from the line of Leah Hao with Goldman Sachs. Please proceed.

Leah Hao - Goldman Sachs

Good morning. I guess swinging here a little bit towards the balance sheet, it seems like the DSO grew a little bit during the past two quarters. Can you comment on what’s behind it and also what is the trend going forward, please? Thank you.

Jie Sun

Regarding the AR, I think it is very much driven by our increased business volume, particularly in the last month of the business. If you compare June business volume versus March and versus December, the June number has increased quite significantly. That’s the first reason.

Secondly, when you look at the details of the AR, basically there are three parts. The first on is the AR from hotels and we normally do not book AR until we confirm with the hotels that our commission is ascertained. So historically, the AR from hotels has literally very minimal write-off. That part of the AR represents approximately 35% of the total AR, with no risks of collection.

The second part is the AR from credit card companies, so when we book air tickets, we will get the credit card information from our customers these are the ARs from credit card companies. We normally settle with the credit company within one week’s timeframe. So depending on the time of the settlement, it is the month end, you know, before month end we just have one settlement, then the AR would be very small but if we haven’t settled with a credit company, then the AR would increase. But literally, that part of the AR is also no risk of collection and that represents about 40% of our total AR.

So if you take out these two major pieces, the rest of the 28% to 25% is the AR that we extended to corporate travel businesses, and we screen our corporate travel clients very carefully to make sure they have an excellent credit rate. So that’s the detail behind all the AR.

Leah Hao - Goldman Sachs

That’s very helpful. Thanks very much.

Operator

Your next question comes as a follow-up from the line of Michael Millman. Please proceed.

Michael Millman - Soleil Securities

Thank you. Could you give us some idea of what type of typical churn you see in customers and two, how important are repeat customers? In other words, typically how much business do you get from repeat customers versus new customers?

Jie Sun

Sure. The loyalty from our customers is very high -- 80% of our total revenue is contributed by existing customers. So because our service level is very good, it is very hard for customers who are used to using Ctrip's services not to use it again, so the customer loyalty has been maintained at a very high level and 80% of our customers contribute to our revenue pool.

Michael Millman - Soleil Securities

So the repeat customers contribute 80% of revenue, and what do those repeat customers represent of your total customers?

James Jianzhang Liang

Repeat customers represent more than half of our total customers.

Michael Millman - Soleil Securities

Great. Thank you very much.

Operator

You have no further questions at this time. Pardon the interruption, actually you have a question from the line of Cindy Shi with Emerging Markets Management. Please proceed.

Cindy Shi - Emerging Markets Management

I have two questions on the margin front. The tour package business, what is usually the margin in that segment? The second question is on the proliferation of credit cards. Do you actually get lower margin as the percentage of credit card usage increases?

Jie Sun

Okay. Cindy, the first question regarding the margin, we share lots of resources among product groups so it is sometimes very hard to give you exact margin splits between lines, but in order to help our investors to understand our business, we do our best.

If you look at our three major business lines, for hotels normally the gross margin is around 85% to 90%. For air tickets, it is about 65% to 70% gross margin, and tour packages is a combination of hotels and air tickets, so once it reaches the normalized volume, the margin should be in between these two, so somewhere around 75% to 80% gross margins is for the tour packages.

Cindy Shi - Emerging Markets Management

Would it be the same for the high-end tour packages?

Jie Sun

The high-end tour packages, yes, we can achieve a little bit higher margin.

Cindy Shi - Emerging Markets Management

Okay. On the credit cards? How will the credit card adoption impact your margin?

Jie Sun

The credit card charges, it is part of the cost of sales, so when customers use a credit card, our margin will be impacted. However, for air ticketing bookings, we will be able to save some deliberate costs with the development of e-ticket, and these two costs should be evening out pretty much. The margin should be very stabilized.

Cindy Shi - Emerging Markets Management

Thank you.

Operator

You have no other questions at this time.

Jie Sun

Okay, if there are no further questions, we will conclude this call. Thank you, everybody.

Tracy Cui

Thank you very much.

Operator

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

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