Full Transcript of eLong’s 3Q05 Conference Call — Q&A (LONG)

Here’s the entire text of the Q&A from eLong’s (ticker: LONG) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Q&A

Operator

Question by William Bao Bean, Deutsche Bank in Hong Kong.

Q - William Bao Bean

Hi guys; could you talk a little about your guidance, I guess you’re looking for losses slightly up. In the past Q4 has always been slightly up. Do you see any changes this 4Q versus previous 4Qs?

A - Justin Tang

Derek, do you want to answer that?

A - Derek Palaschuk

Sure; William one of the aspects that we factor into our guidance is the lower revenues from Ray Time. Ray Time’s revenue is now less than RMB1 million per month, so we’ve factored that into the guidance. Our October hotels and their business, the growth rates were consistent with what we’ve seen in the past.

Q - William Bao Bean

Okay great; and if you could just talk a little bit about the success of your marketing program, how things are going there, especially on the online side, your ability to convert traffic to revenue?

A - Justin Tang

William you said the marketing program?

Q - William Bao Bean

Marketing, yeah; customer acquisitions.

A - Justin Tang

As you can tell from our second quarter results, we added 81,000 new customers which is a record quarter in terms of new customer acquisitions. At the same time our sales and marketing expenses in the third quarter stayed relatively flat from the second quarter, so I think in general our online as well as offline customer acquisition has been pretty effective. Another good indication is we’ve been able to successfully cross our air ticket product into our hotel customer base. That’s one of the key reasons our air ticket has been able to grow has been able to grow 50% quarter-over-quarter, so I think that we will continue to expand our marketing program.

Q - William Bao Bean

Okay and saying that most people don’t really know about Avian Flu so far in China, but do you see an impact there? Have you seen any impact at all?

A - Justin Tang

Obviously we are closely monitoring the progress of Avian Flu. At this moment, I think as Derek has mentioned to you the month of October, both our hotel business and air ticket business, the patter is consistent with the prior year, or the previous seasonal fluctuation. So we have not seen any impact come from Avian Flu yet.

Q - William Bao Bean

Okay, thanks guys.

Operator

Question by Kit Lu (ph), GoldmanSachs Hong Kong.

Q - Kit Lu

Hi, thank you for the invitation. Only one question; could you please explain probably break out the airline ticket revenue and hotel revenue excluding the Fortune Trip acquisition consolidation. Thank you.

A - Derek Palaschuk

Sure, Kit we closed the Fortune Trip acquisition in the third quarter and there was very limited impact on our air ticketing from Fortune Trip because it was mainly a hotel consolidator and Fortune Trip contributed approximately 40,000 room nights or RMB2.5 million in the third quarter.

Q - Kit Lu

Great, thank you.

Operator

Question by Michael Milman, Soleil Securities.

Q - Michael Milman

It’s Michael Milman with Soleil Securities; I just have a couple of questions. One, could you tell us the amount of business that came online and how that compared and sort of relatedly, credit card usage. I have some other questions.

A - Justin Tang

As long as our business online remains constant, roughly 20% of our business comes from online and 80% of our business comes from the call center. In terms of credit card usage, we are seeing increasingly the rise of credit call usage in China, particularly in our ticket business where the customer makes the payment directly to. I think that we see approximately 15% of our air ticket payments use credit card payments. In our hotel business, because we are an agency model customers still pay the hotel price at the hotels from that at the time of checkout so we don’t take direct payment from the customer. So the credit card is a less issue, but still in some of the markets during the peak season, we do require the customer use a credit card to guarantee the booking. We’ve also seen an increase in the percentage of the customer who use credit cards to guarantee their hotel booking.

Q - Michael Milman

Okay, and also you talked generally about the booked, maybe it’s unfair but when you compare with Sea Trip, which is 3 times the revenue, you in fact had higher G&A expenses and your selling marketing expenses were not that much below theirs. Maybe you could fold into that your discussion of what types of things you’re doing in technology, like you mentioned in your press release technology spend; was that -- ?

A - Justin Tang

Yes, fir of all our technology spend is part of our service development expenses and we strongly believe the operational efficiency in this business will be achieved by additional levels of automation. And the technology is a key differentiator to enable us to operate our business more efficiently, as well as to give customers a better user experience to purchase travel product online as well as through our call center. So as a result we are investing aggressively in our technology infrastructure as well as the technology personnel and the product development process and we expect to continue to do that in the future. And we believe the necessary technology investment will give us positive returns in the future.

Q - Michael Milman

And could you just mention thought, it just seemed even taking into account what you just said, that either we should expect over the next couple of years almost no growth in your SG&A expense or should we in fact expect some reduction now again comparing with Sea Trip?

A - Justin Tang

Derek, you want to comment on SG&A?

A - Derek Palaschuk

Sure, Michael yes I would say that you should not expect the level of our investment in our business to decrease. It’s a very early stage in China’s online travel market. Our position as the number 2 gets stronger every day; we’re working with Expedia; Expedia has 5 year or 6 years where they were not profitable. They invested in their business. We’re working closely with Expedia; we also have more Expedia working here in our office in Beijing improving our only, our technology. And we believe now is the time to continue to invest in our business. So you should expect to see additional investments in the future rather than less investments.

Q - Michael Milman

So are you suggesting that we shouldn’t expect profitability in ‘06 and maybe a larger loss in ’06 at least and maybe beyond that?

A - Derek Palaschuk

Our objective right now is to continue to invest in the business. At this time we are not making a commitment to profitability in any specific quarter next year or during 2006, and we feel strongly this is clearly the right strategy for eLong.

Q - Michael Milman

Okay thank you.

Operator

Robert Rosner in the U.S.

Q - Robert Rosner

Thank you. I just want to follow up the last question; can you give just some sort of guidance as to the level of SG&A spending next year?

A - Derek Palaschuk

Sure, our objective is to be the number one player in this market in the long term, and we’re going to invest what we think is necessary to get there. And we have a very long-term horizon, and so therefore we’re not looking at the short-term quarter-to-quarter profitability.

Q - Robert Rosner

Yeah, can you please be more specific on SG&A spending for next year?

A - Derek Palaschuk

I think I already answered your question.

Q - Robert Rosner

Yeah, well I don’t think so because I guess what I’m trying to get at is the profit model for the business. You’ve done a great job of growing revenues and the top line, yet the costs of these revenues continue to be very high. So I think what I want to understand is what type of profit model do you have for this business?

A - Derek Palaschuk

As Justin mentioned, our objective is the be the largest and most profitable seller of travel in China; it’s very early; it’s no secret we are number 2, and we need to continue to make the investments; we need to continue to work with Expedia adopting their practices. As you can see, we’ve hired a number of new Vice Presidents to help us to get there, and we’re just going to continue to invest at this time.

Q - Robert Rosner

Could you be profitable as the number 2 player? How important is it to be the number 1 player? In other words, is revenue growth and market share growth more important or is profitability more important as we look out in the medium to longer term?

A - Justin Tang

This is Justin. As of this year between Sea Trip and eLong, we will account for approximately 6% to 7% of China’s 3 to 5-star hotel distribution markets.

Q - Robert Rosner

Okay.

A - Justin Tang

We will account for about 4% of air ticket distribution market and we do not see any competitor come closer to us yet so we do have a pretty good competitive advantage against other players in those markets. But at the same time, there will be more and more players coming into the market in the future; Sinden from a joint venture with EYTS, a couple of traditional travel agencies in China are going to expand to online travel. Eventually the large hotel chains as they get more presence in China they might start to introduce as a part to their side. So the key right now, the one large with the advantage we have it is we have a very large balance sheet as well as we have a highly-concentrated and supportive shareholder base. So obviously we will leverage that to continue in that and a few of our barriers. At this moment, we are trying to achieve, today our revenue scale is very small. So for us to try to achieve the kind of profitability I don’t think that serves the long-term strategic goal of the Company very well rather than to continue to increase our barriers and improve our leadership for tomorrow.

Q - Robert Rosner

If you grow your revenues by 40% next year, would you expect to be profitable?

A - Justin Tang

We do not provide guidance for next year, so we can’t discuss that.

Q - Robert Rosner

Oh I’m not asking for guidance; I’m just again trying to understand the business model, so if you can grow your revenues 40% for next year, do you think you could be profitable?

A - Derek Palaschuk

As we’ve said, we have a long-term horizon strategic support of shareholders and our objective is to continue to invest in the business. I mean hypothetically we could be profitable, we could lay off a lot of staff, there are all kinds of things that we could do; we could cut back our sales and marketing, but that’s obviously that wouldn’t be rational for us.

Q - Robert Rosner

Okay, and then, I’m sorry, just another question, do you see you’re closing the gap on Sea Trip or is Sea Trip’s gap expanding?

A - Justin Tang

I think you should look at our third quarter data. Derek already broke out actually the Fortune Trip acquisition; if you look at our hotel revenue growth on a year-over-year basis, I think you can do the math yourself. You saw Sea Trip’s announcement; I think their year-over-year growth in hotel revenues of 28% to 29%. If you exclude our Fortune Trip acquisition, you can calculate our year-over-year growth I think it should be greater than Sea Trip’s. Then our air ticket growth, both on a year-over-year as well as on a quarter-to-quarter basis, I think in terms of the rate of growth, we are much greater than Sea Trip, especially on quarter-to-quarter growth. So also you’d be able to calculate yourself, but obviously Sea Trip they are doing a good job growing from a larger base. I mean that’s no secret. We are investing aggressively to try to reduce the gap.

Q - Robert Rosner

I could belabor this point, but I think that one of the advantages that Sea Trip has is they have profits to plow back into the business.

A - Justin Tang

That’s a fact.

Q - Robert Rosner

That is a fact; well thank you and good luck.

Operator

Question by William Bao Bean, Deutsche Bank Hong Kong.

Q - William Bao Bean

Could you talk a little bit about the different channels in terms of your customer acquisition and the ROIs of the channels, especially on the online side? How is the return on your online partnerships? Thanks.

A - Justin Tang

In terms of the customer acquisition channel I think that during the third quarter we still have a very similar mix compared to the second quarter. Obviously, online channels grow faster than other channels because we sign up the new partnership with SINA. Direct sales remain the most important customer acquisition channel and they continue to grow on a year-over-year basis. Our partnership with some other large companies, such as China Telecom, China Unicom, as well as Air China Eastern Airlines; those continue to provide us with pretty rapid revenue growth. And online obviously is a faster growing important channel at both our own website as well as our partnership with SINA, Sohu and Yahoo! continue bringing a lot of customers. And we are also investing in the search engine, marketing as well. Overall in terms of our customer acquisition costs, I think that during the third quarter, our customer acquisition cost actually is lower than the second quarter as you can tell from the relatively flat sales and marketing expenses, but with a higher number of customers we acquired there. And in most of the -- we look at our customer acquisition costs compared against customer lifetime value very closely. In most of our channels, we’ve been able to acquire customers at a price lower than our customer lifetime value.

Q - William Bao Bean

Okay; can you talk a little bit about what happened with Ray Time?

A - Justin Tang

Sure; Ray Time is not core business and also Ray Time was new business for us and Ray Time started losing some money during the second quarter and in the third quarter we basically closed some Ray Time unprofitable projects. As a result, some Ray Time revenue started to decline and we are disappointed about Ray Time’s progress. That’s the reason we write off the goodwill we carry. Again, but this is not a core business and we are not focusing on it.

Q - William Bao Bean

Okay; can you give us an update on the Fortune Trip integration? Where are you now?

A - Justin Tang

Fortune Trip integration has been very smooth and of the integration between the Fortune Trip sales channel and sales for with eLong’s sales channel and sales force completed. The integration of 2 cost center Fortune Trip, Shanghai cost center and eLong Beijing cost center are completed. They have become one eLong unified cost center to serve both eLong customers and the former Fortune Trip customer. So the integration has been fairly smooth and completed.

Q - William Bao Bean

Okay, and just a last follow-up question; in terms of the marketing spend do you see a mix shift in how you’re spending your money? I guess you have some integration costs; where are you going to put more emphasis going forward?

A - Justin Tang

I think a couple of areas; one thing is I think at this moment we are more focused on channel distribution but less on brand building. In the future you could see us shift a little bit more resources into brand building. Then also the mix between offline and online, in the future you will continue to expect us to shift more resources to online customer acquisition.

Q - William Bao Bean

Okay, thanks a lot.

Operator

Operator Instructions To the speakers; we have no further questions in the queue; do you have anything to add or do you have any closing remarks at this time?

Derek Palaschuk, Chief Financial Officer

Yes, we’d just like to thank everyone for joining the call today.

Operator

Okay thank you. That concludes today’s conference call. We’d like to thank you all for your participation, and all lines may disconnect at this time. Thank you for joining.

Related:

• The prepared remarks from this call are here.
• All China Stock Blog articles on eLong.
• A list of full conference call transcripts available on the Seeking Alpha Network.
• The complete list of China stocks (and links to articles about them) covered by The China Stock Blog.

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