Effie Han – IR
Henrik Kjellberg - Interim CEO
Chris Chan - CFO
Analyst for Ming Zhao – SIG
Vic Mattis - J Goldman
eLong, Inc. (LONG) Q2 2007 Earnings Call August 13, 2007 8:00 PM ET
Good morning, good evening to all participants. Welcome to the eLong Q2 earnings results call. (Operator Instructions) Now I would like to hand the call over to Ms. Effie Han, and I will be standing by for the question-and-answer session. Please go ahead.
Thank you, Michelle. Hello, everyone. Thank you for joining eLong’s second 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 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 important factors that could affect our future results.
I will now turn the call over to our Interim CEO, Henrik Kjellberg.
Thank you, Effie. Hello, everyone and thank your for being on this call. Chris will cover our Q2 results in greater detail, but I want to be clear that we as a management team are not satisfied with our current performance, particularly in the area of hotel sales. While air is doing better, we believe there is room for improvement in that product line as well. The Chinese market is simply too robust for us to be delivering the growth results that we have again this quarter.
We take these problems seriously and since we last spoke, in conjunction with a leading external consultant, have undertaken a comprehensive review of the company. The study and analysis focus on all areas of the company from organizational structure to management to operations, supplier relationships to customer relations and so on.
What have we learned from our review and how are we proceeding in light of those learnings? First, we need to dramatically improve our back end platforms for hotel and air bookings. This will require investment and development time but it is essential for us to have a scaleable platform to enable us to better serve our valuable travelers.
Second, we need to meaningfully improve our management team. We mentioned in our release that we've hired a new V.P. of Marketing, Thomas Chen and we have additional hires in IT, operations and direct sales and we anticipate adding by the end of this year. Lastly, we continue with our CEO search and we are pleased with the candidate caliber thus far and we hope to have something to announce here shortly.
Third, we must improve our call center performance. With 80% of the transactions at eLong still completed offline, this is a key focus area in the near term. The platform improvement I mentioned above will be a huge help here, but we also have basic execution improvements we can make in terms of processes, data analysis, information flow and unyielding customer focus.
Fourth, our marketing approach needs to be significantly upgraded. We have made progress in measuring efficiencies of our various channels but we need to see even more analytical discipline here. We need to build expertise in newer marketing channels and ultimately consider brand building when our customer experience is in a better position to leverage such effort.
There is no doubt in my mind that eLong can improve its performance in the Chinese market. Our problems are largely due to poor execution as opposed to strategic issues or market forces, just as the causes of our problems were within our control, we believe the solutions are as well.
I speak on behalf of eLong's entire management team in saying that we openly acknowledge and eagerly face the challenges before the company. We have a lot of work to do here and this isn't something we're going to turn around in the next few quarters. But we are focused on improving the key areas of need as quickly as possible and we look forward to updating investors on our operational and financial progress in upcoming calls.
Let me now turn the call to Chris Chen who will review financial results in greater detail.
Thank you, Henrik. Let me give you an overview of our second quarter results starting with our statement of operations, followed by our balance sheet. Our second quarter total revenues were RMB 78.4 million, a growth of 17% year over year; 96% of total revenue is now from our core travel business. Revenue from hotel commissions totaled RMB 60.2 million, a year-over-year increase of 12% due to higher room volumes.
Hotel room nights booked through eLong totaled 922,000 in the second quarter, up 11% from 832,000 in the corresponding period a year ago. Hotel commissions per room night were RMB 65, which is slightly higher than the same period last year. Our hotel commission rate of 15.1% was up 30 basis points year-over-year from 14.8%. Our second quarter 2007 average daily rate of RMB 432 was slightly lower than RMB 435 in the same period last year.
For air ticketing during the second quarter, the company achieved RMB 13.9 million, a year-over-year increase of 44% from RMB 9.6 million. Volume in our air segment totaled 347,000 an increase of 41% from 247,000 in the corresponding period a year ago.
Commissions earned per air ticket in the second quarter were RMB 40, up 2% from RMB 39 in the second quarter last year. The average ticket price was RMB 763 as compared to RMB 822 in the second quarter of 2006. The average commission rate in the second quarter was 5.2% as compared to 4.8% in the same quarter last year.
Our travel revenue in the second quarter of 2007 was RMB 1.4 million, a year-over-year decrease of 14% from RMB 1.6 million. The year-over-year decrease was due to lower vacation package revenue, which partially offset increased revenue from our providing inventory procurement services on behalf of Expedia. eLong suspended its vacation package service beginning July 12, 2007 and we estimate revenue will be RMB 1 million to RMB 2 million lower in the second half of 2007 compared with 2006 due to this suspension. Non-travel revenue accounted for 4% of total revenue in the second quarter and consisted mainly of non-travel-related online advertising on our website.
Gross margin in the second quarter was 74%, down over 300 basis points from 77% in the same quarter last year due to a higher mix of lower margin air revenue. Service development and sales and marketing and general and administrative expenses together were RMB 55.1 million, a year-over-year increase of 13% from RMB 48.8 million, mainly because of higher sales and marketing and service development expenses. I want to note for investors that in the second quarter we booked a one-time expense of RMB 0.8 million related to the suspension of our vacation package business.
Let me now make a few comments on our balance sheet. As of June 30, 2007, the company’s cash and cash equivalent balance was $153.8 million. We intend to continue to use of cash balance to enhance our organic growth and for strategic acquisitions in the future.
During the second quarter, we had capital expenditures of RMB 7.4 million compared with RMB 3.8 million in 2006. This amount increased RMB 3.6 million, mainly due to the enlargement of technical capacity and computer software purchases.
Finally, let me share with you our business outlook for the third quarter of 2007. eLong expects total revenues for the third quarter of 2007 to be within the range of RMB 79 million to RMB 87 million, an increase of 6% to 17% from the third 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.
Your next question comes from the line of Ming Zhao - SIG.
Analyst for Ming Zhao – SIG
Good morning, gentlemen. I have a questions about your other travel-related business. We know that you suspended your corporate package tours on July 12, but why is there already a decline in the second quarter? Is it going to decline further in third quarter?
We basically suspended the vacation business in July so in the second half, we won't see the vacation revenue, and the remaining amount will be related to the Expedia share of revenue.
I would like to clarify that. A lot of that revenue relates to revenue that we deduct as part of coming in from an Expedia revenue share program that we have with hotel sales that happen outside of China. Some of that is very seasonally based as well. For Q3, we don't predict a major sort of decrease in that revenue. Right, Chris?
No, we don't.
So part of that is just seasonal.
Analyst for Ming Zhao – SIG
Okay, I see. The second question is about your average revenue per ticket, there is growth this quarter. Will this be sustained going forward?
I'm just trying to clarify. Are you asking whether the increase in air tickets will be sustained going forward? Is that the question?
Analyst for Ming Zhao – SIG
Yes. Also why there's a growth for this second quarter.
If you look at that, I would clarify that on two levels. We increased our ad revenues by 44% this quarter versus a year ago. Part of that is related to the investments we've already made in the platform, and we started to make a big push on air about two or three quarters ago. We expect the growth to continue in air along the same lines we have roughly now. If you look at the actual average air ticket value, that's gone down quarter on quarter from RMB 772 to RMB 763, so a very marginal decrease; hard to predict exactly where that is going to move. We think it's going to be relatively flat.
Analyst for Ming Zhao – SIG
Okay, I see. Thank you.
The next question comes from the line of [Reed Abend].
Good morning, thank you for taking my questions. Could you talk a little bit about your marketing strategies for the Olympics and your association with Expedia, whether you plan on doing cross promotions for the Olympics coming up?
Sure, I'll take that. Thank you for being on the call, Reed. On the Olympics, we don't necessarily predict the Olympics to be a major cost during the Olympic season. We do believe the Olympics will have a major impact in promoting China, certainly after the Olympic event because it will be a big PR event. We have seen the same thing happen in Athens, Sydney, Barcelona, if you look at the Olympics statistics, that certainly was the great benefit from a tourism perspective around the Olympic event as a PR factor. If you look at the specific Olympic event, certainly a lot of people are traveling, but they are traveling from across the globe, so to capture that is hard.
We don't have any specific promotion plans with Expedia at this point and we anticipate to be delivering our Olympic plans a bit closer to the event. We also know that a lot of the suppliers for the Olympics are extremely bullish at this point and we have seen the same, I was in Europe when Athens happened last time, very hard to get deals in place at this point because there is a very high bullishness on behalf of a lot of the suppliers in the market. Typically around two, three months before the event some of the IOC rooms have not been filled, there is a much bigger openness amongst the suppliers and at that time we do intend to release our plans for people who want to come to the Olympics.
On your cash management, your currently keeping your cash balances in US dollars. Have you considered keeping them in RMB?
This topic has been brought up to the audit committee and brought up in a series of reviews of how and where we should use the US dollars. We will continue to increase our due diligence on the review of US dollar, but on the second area, it would be to find justifiable return for shareholders, so we are currently looking at areas where we can make the investment. This will include the investment in the platform, marketing, as well as hiring an outside consultant to review our organization for effectiveness. So we are looking at different areas to use the cash.
The next question is a follow-up.
Analyst for Ming Zhao – SIG
Hello. I have a follow-up question. In your report you once mentioned about there is a turnaround plan, so would you please give us more color about this plan? When do you expect to see the net profit, become positive?
As I mentioned during my script just now, we have undertaken a serious review of the company and have started turnaround plan. In fact, we made good progress on many of the areas already. I would say some of the things we have discovered is we need to look at our platform, the type of people we have and as you know, we have added somebody in the area of marketing and we have to have other good people coming in the areas of IT and operations and hopefully be able to announce those shortly. Call center I mentioned the last time as well, that is going to be internally the major organizational focus that we do in terms of how we are structured and to increase the reliability of how we deliver tickets and how we treat the travelers we have booking on our platforms.
So the first phase of our turnaround plan will end or conclude at the end of this month. That's what I would call a review phase. I think that the second phase will start right after that and that will be more implementing a lot of the changes that we've discovered. In terms of the results, you know, it's hard to know exactly when they will happen. As I mentioned, I'm very confident that we will get the results. But it's hard to predict some timings. If you read up and also knowing the size of eLong, as I mentioned earlier, I think you're looking at several quarters that we need in order to significantly turn the business.
A follow-up question coming from [Reed Abend]. Please go ahead, sir.
You said before on the call that 80% of your sales are now via call centers versus 20% online. Are we like ten years behind the US here in terms of acceptance of the internet for security and I guess, adoption? Is that why the ratio is like that? Or is it more the marketing and people not knowing eLong is associated with Expedia which is a large company here in the US? Is there anything that you can do to give consumers the confidence that eLong is part of, or almost a subsidiary of, Expedia?
Let me answer that on a different basis. On the Expedia-eLong relationship, I'm not sure that is that interesting to consumers. Expedia for one thing is a hard name to pronounce in China and eLong is a very good name and it has the symbol of a dragon so we're very confident with that brand name.
On the consumer adoption, I think it's dangerous to make the ten years behind analogies because what you see is as these markets progress, the adoption rate, in many cases, just happens a lot quicker. It may happen online, it may happen directly to mobile. It may go in different directions than what it does in let's say the US.
Now on a more will people move on to an interactive platform in China? Absolutely. Are we well-positioned when people do that? Absolutely. We think we have the best website in China if you go and compare us to many of our competitors. I think we're far ahead and we certainly leverage a lot of the work that's been done from a technology perspective with our parent company, Expedia, as well. So to the extent the Chinese consumers start migrating online, we are very well positioned.
Now in order for that to happen, a number of things need to happen, as you mentioned, as well. There is the credit cards that are being rolled out in a very aggressive way in China. Internet to households, I think China is now bigger than the US in terms of household with access to Internet. I think China is now bigger than the US. So we think the trend is like gravity, it will happen in China just like it's happened elsewhere. When that happens, we're very well positioned.
I wouldn't say ten years behind because that's just dangerous. It just may go in a different direction as well in terms of which platform is eventually adopted.
Because I mean here, I mean the ratio is probably the other way around. It's probably 80-20 in terms of online versus offline. Would you say maybe it's more of the security issues right now why the percentage is like that and just the acceptance of using the Internet for online purchases?
I’m not sure how much is security. There is also a large part that is just mindset. People like talking to people, and China’s very relationship-driven; not just China. If you look at Japan, which is a very sophisticated economy as well, you know call center-based bookings by far outnumber Internet bookings. So some of it is cultural as well and some of it is cash. People may not have credit cards, so they may prefer to do a transaction which requires them to go to a counter somewhere and pay and get the tickets in hand.
The next question comes from the line of Vic Mattis - J Goldman.
Vic Mattis - J Goldman
Can you comment about using your cash towards repurchasing your own shares? Not Expedia purchasing shares, but rather eLong cash to purchase your own shares? Thanks.
We will consider all options to maximize shareholder value. At the moment, as far as I know, we have not made any decisions on any share repurchase, but that definitely would be an option to consider.
Vic Mattis - J Goldman
Is that something the board has considered or is likely to consider?
Let me address that. Thank you for being in the call today. Yes, absolutely, we have looked at that from a board level as well, and we have not excluded that as an option. One of the problems here is just you can only buy back so much according to NASDAQ rules, and if you look at the liquidity of the eLong stock, it’s quite low. So it would be a fairly expensive endeavor for us. So again, we haven’t excluded it, but in order for that to be a meaningful exercise, it just ends up taking a lot of the resources, time of the thinly stretched resources we have within the financial and legal departments, and to frankly, not a great result in the sort to medium term. So again, haven’t excluded it, but we just haven’t considered it a priority right now given it’s hard to do it in a meaningful way with a low liquidity of the stock.
There appear to be no more questions at the moment.
If that’s the case, we’d like to conclude the call. Thank you everyone for being on the call.
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