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

Q3 2007 Earnings Call

November 7, 2007 8:00 pm ET

Executives

Tracy Cui - Director, Investor Relations

Min Fan - Co-founder, Chief Executive Officer

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

Jane Jie Sun - Chief Financial Officer

Analysts

Catherine Leung - Citigroup

Eddie Leung - Merrill Lynch

Chun Ming Zhao - Susquehanna International Group

Jenny Wu - Morgan Stanley

George Chu - UBS

Ashish R. Thadhani - Gilford Securities

Nathan Nagara - The Hartford Group

Jason Johnson - Aurora Investments

Leah Hao - Goldman Sachs

Wendy Hung

Lu Sun - Angus Capital

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2007 Ctrip.com International Limited earnings conference call. (Operator Instructions) I would now like to turn the call over to Tracy Cui. Please proceed, Madam.

Tracy Cui

Thank you for attending Ctrip's third 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 provisions 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 third quarter of 2007, as well as the outlook for the fourth 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.

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Min Fan

Thanks, Tracy. Welcome, everybody. I am very pleased to report the strong performance we have achieved in the third quarter. We continued with a robust growth in both financial and operational terms. Our net revenues grew 55% year over year and 12% quarter over quarter, while our net income grew 70% year over year and 24% quarter over quarter.

Our hotel supply network continued to expand, with approximately 5,600 hotels by the third quarter of 2007, compared to approximately 4,000 by the same period last year. The number of hotels with guaranteed allotment rooms further increased to account for more than 50% of the total supply.

The number of cumulative active customers grew to 3.7 million by the end of the third quarter, compared to 3.3 million by the previous quarter, representing continued strong growth in new customer acquisition.

During the third quarter, we also launched enhanced destination guides. A new version was unleashed with additional tools, such as electronic maps and travel tips, as well as Web 2.0 features.

It also contained design updates that enable the user to search for destinations and navigate the site more conveniently.

More [recently], Ctrip University was officially established in September this year. The program is designed to provide both fundamental management knowledge and real-life best practice to our employees with high potential. We are dedicated to investing in the best and brightest people to prepare them to become the leaders of the next generation.

In terms of competitive landscape, we believe that we remain as the dominant online travel service provider in China. Our expanded scale in supply network and customer base as well as growing brand recognition enables us to build stronger competitive advantages in the industry.

Now I will turn to James for an industry outlook.

James Jianzhang Liang

Thanks, Min. I am very glad with the company’s results year-to-date. It’s a strong demonstration that this team is capable of delivering to our promise consistently. I am very optimistic of the potential of our company, partly based on our proven track record and partly, perhaps more importantly, base on my belief in the potential of the overall travel market in China.

What we have seen today is still the early stage of the development of the travel industry, both in terms of some infrastructure construction and service delivery. As we enter into an era when the economy grows in China rapidly, consumer consumption, I believe we should see a continued rapid growth of travel demand for years to come.

Ctrip is well-positioned in this trend. We are dedicated to bring the best travel experience to our customers during this [course]. Now let me turn to Jie for the update on our financial performance.

Jane Jie Sun

Thanks, James. I am very pleased to report the strong results for the third quarter of 2007. Our net revenues reached another record of RMB 323 million, or $43 million, in the third quarter of 2007, representing a growth of 55% year over year and 12% quarter over quarter.

Revenues from hotel reservations were RMB 176 million, or $23 million in the third quarter of 2007, up 48% year over year and 2% quarter over quarter, due to increased volume of hotel bookings.

The total number of hotel room nights booked was approximately 2.52 million in the third quarter of 2007, compared to approximately 1.82 million in the same period last year and 2.41 million in the previous quarter.

Revenues from air ticketing remained strong at RMB 138 million, or $18 million, in the third quarter of 2007, up 76% year over year and 18% quarter over quarter.

The total number of air tickets sold in the third quarter of 2007 was approximately 2.91 million, compared to approximately 1.72 million during the same period last year and 2.55 million in the previous quarter.

Revenues from packaged tours were RMB 21 million, or $3 million, in the third quarter of 2007, up 61% from the same period last year and from the previous quarter.

The gross margin was 80% in the third quarter of 2007, compared to 79% for the same period in 2006 and 80% in the previous quarter.

Product development expenses for the third quarter of 2007 increased by 75% to RMB 48 million, or $6 million, from the same period in 2006 and increased by 15% 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 13% of net revenues compared to 11% in the same period last year and 12% in the previous quarter.

Sales and marketing expenses for the third quarter of 2007 increased by 33% to RMB 63 million, or $8 million, from the same period in 2006, and increased by 8% compared to the previous quarter, primarily due to the increase of sales and marketing personnel resources and advertisement expenses.

Excluding share-based compensation charges, sales and marketing expenses accounted for 19% of net revenues, lower than 22% in the same period last year and remained relatively consistent with the previous quarter.

General and administrative expenses for the third quarter of 2007 increased by 44% to RMB 36 million, or $5 million from the same period in 2006, primarily due to the recognition of RMB 13 million or $2 million share-based compensation charges. General and administrative expenses for the third quarter of 2007 remained relatively consistent with the previous quarter with an increase of 3%.

Excluding share-based compensation charges, general and administrative expenses accounted for 7% of net revenues, remained relatively consistent with 8% for the same period last year and 7% in the previous quarter.

Income from operations for the third quarter of 2007 was RMB 111 million, or $15 million. Excluding share-based compensation charges, income from operations was RMB 134 million, or $18 million, an increase of 71% from the same period in 2006 and 13% from the previous quarter.

Operating margin was 34% in the third quarter of 2007. Excluding share-based compensation charges, operating margin was 41% compared to 38% in the same period in 2006 and 41% in the previous quarter.

Net income for the third quarter of 2007 was RMB 110 million, or $16 million. Excluding share-based compensation charges, net income was RMB 133 million, or $18 million, representing a 68% increase from the same period in 2006 and a 19% increase from the previous quarter, mainly due to higher income from operations.

The diluted earnings per ADS were RMB 1.60, or $0.21 and the diluted earnings per ordinary share were RMB 3.21 or $0.43.

Excluding share-based compensation charges, the diluted earnings per ADS were RMB 1.94 or $0.26 for the third quarter of 2007.

As of September 30, 2007, the cash balance increased to RMB 1.2 billion, or $160 million, compared to RMB 978 million as of June 30, 2007. The cash balance represented approximately 57% of our total assets as of September 30, 2007.

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

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

Tracy Cui

Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Catherine Leung with Citigroup. Please proceed with your question.

Catherine Leung - Citigroup

Good morning and congratulations on another very strong quarter. I have two questions; firstly, you mentioned on the last call that you are continuing to make upgrades to your air ticketing and hotel systems. Could you please elaborate on what types of upgrades they are and what impact you’ve seen as a result?

Secondly, could you please update us on your corporate travel initiatives and discuss some of the differentiation that Ctrip offers versus your main competitor? Thank you.

Min Fan

For our online hotel bookings system and airline ticketing booking system, recently we have already finished the upgrade on the online procedure user-friendly interface, and if you check our website, you will definitely see the change on the interface and also on the back office, on our back end, we also made more efficient our back end process and procedures.

I think what we can know from our user feedback from our survey among our users, the upgrade is very good and reached what we expected.

Regarding the corporate travel, I think the corporate travel business, right now we are growing very healthily and so far, because the corporate travel still accounts for a small portion of our total production, so we do not specify the number for this part of business. But we believe with the growth from last year until now, definitely we are one of the leading corporate business provider in the market. I am sure right now still American Express is still the number one in this field, but I am sure we are very close to what American Express is doing.

Catherine Leung - Citigroup

Thank you.

Operator

Your next question comes from the line of Eddie Leung with Merrill Lynch. Please proceed with your question.

Eddie Leung - Merrill Lynch

Good morning, guys. I would like to know about the commission rates, as well as the trends in packaged tours. Do we still see a very strong growth going into the fourth quarter for packaged tour bookings?

Jane Jie Sun

The packaged tour is a combination of both hotel and air ticket, so the commission rate should be in between the hotel commission rate and the air ticketing commission rate, so somewhere between 8% to 10% is a reasonable range. And Q4, obviously we are still in the quarter so we cannot comment too much on the quarter yet, but so far --

[Technical Difficulties]

Eddie Leung - Merrill Lynch

I see. And how about the product development expenses? Can you comment on the increase in this quarter as well as how should we look at this expense going forward?

Jane Jie Sun

Into this expense, corporate development?

Eddie Leung - Merrill Lynch

Product development.

Jane Jie Sun

Oh, product development. Product development this quarter accounted for 13% of the total revenue. The normalized range we are trying to target is somewhere between 11% to 13%. As long as the number lands within that range, we consider it’s a reasonable range.

For us, since the company is very fast growing and opportunity in the China market is huge, so we have to invest certain amounts in hiring and training the new employees to get ready for the new opportunities. So we are targeting to keep the product development within that range going forward.

Eddie Leung - Merrill Lynch

Understood. Thank you.

Operator

Your next question comes from the line of Ming Zhao with SIG. Please proceed with your question.

Chun Ming Zhao - Susquehanna International Group

Thank you for taking my question. Good morning, everyone. Congratulations on a good quarter. I have a few questions. First one, just a very detailed question about your ARPU of the air ticketing business. It seems like it continues to go up. Could you give us some explanation on that? And what trend should we expect going forward?

Jane Jie Sun

Sure. The air ticketing business, the market grew about 15% year over year based on the customer loading data. We were able to grow our volume by more than -- around 70%, which is a strong growth for our business sector. I think on one hand, our team has been executing our strategies very well and also I think the e-ticket development helped us a great deal in expanding into the new area.

The commission rate, if you do the calculation on the commission percentage, actually it’s 4.5%. Our normalized range for commission is somewhere between 4.5% to 5%, and we still think that range is sustainable going forward.

Chun Ming Zhao - Susquehanna International Group

Okay, so if I look at the two business lines, and it seems like the previous quarter, you did a very, very good job in terms of growing the hotel. Now this quarter, I think you did better on the air ticketing than the hotel. How should we look at this hotel and air ticketing growth picture going forward?

Jane Jie Sun

Sure. Hotel and air ticketing, I think both of the business lines are growing at a very rapid pace. For hotels, I think last year we grew about 30%, so this year, 40% is a very good result. So we are pleased with our Q3 delivery.

Q2 is extremely strong due to the Golden Week holiday during the May holiday, so I think going forward, we still think the Q2 results represent strong results for our team.

For the air ticketing business, also there is driven by the market volume as well as our internal execution. From time to time, these two lines of businesses might have a peak at different periods. Hotel last quarter reached a very high level and this quarter, air ticketing reached another record.

But overall, I think both of the lines of business are growing at a very healthy pace and we expect that momentum to be the same going forward.

Min Fan

Also, I think for Q3, because Q3 is normally the vacation period for Chinese people, definitely we can, with the e-ticketing process, there is more consolidation among air ticketing agencies, so I think Ctrip can gain more market share, so that’s another that we can do better for Q3.

Chun Ming Zhao - Susquehanna International Group

Okay. Thank you.

Operator

Your next question comes from the line of Jenny Wu with Morgan Stanley. Please proceed with your question.

Jenny Wu - Morgan Stanley

Hi, guys. Congratulations on another good quarter. Two questions; first one, I see there is [sequential] growth for your revenues from other products. Would you please elaborate more what is the major drivers for such a [sequential] growth?

Jane Jie Sun

Sure. The other revenue represents a very small amount of our total revenues. The main reason is advertisement revenue, miscellaneous advertisement revenue, as well as insurance related to the flight tickets.

Jenny Wu - Morgan Stanley

Okay. The second one is please elaborate more on the growth and revenue contributions from the hotel bookings from tier one and non-tier one cities.

Jane Jie Sun

The percentage of total revenue contribution from tier one to tier two remains very consistent from prior quarters. It’s almost a 50-50 split with the first tier cities, a couple of points below 50. So very consistent from quarter to quarter.

Jenny Wu - Morgan Stanley

Okay. How about the growth rate?

Jane Jie Sun

Growth rate is also similar. First tier cities probably 20% to 30%, and second tier cities, somewhere between 40% to 45%.

Jenny Wu - Morgan Stanley

Okay. Thank you.

Operator

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

George Chu - UBS

Good morning, guys. Great quarter. I just want to get an idea on the operational leverage. We’re seeing an expansion in the margin in 3Q. I know a lot of expenses, such as the [inaudible] and selling distribution are basically budgeted. I just want to get an idea of how you guys think about what kind of margin you will be maintaining going forward. Should we be factoring in a continued operational leverage in terms of margin going forward for ’08, ’09? Or is that percentage getting bigger as we go along? Thank you.

Jane Jie Sun

Our company is very prudent in terms of how we spend money, so to an extent we can spend money in a most effective way, we will. So on the gross margin, it should be a reflection of our revenue mix. As we have more and more ticketing revenue contributions, which has a relatively lower margin, our gross margin will gradually come down a little bit, but it should be stabilized at 75% as we discussed before

On operating expenses, currently before stock compensation, we are running at around 40% of total revenue and we intend to keep that percentage going forward. So on an operating margin perspective, whatever the change in the gross margin should drop down to the operating margin level.

George Chu - UBS

I see. One follow-up question on the other income; you mentioned quite a bit of that is coming from travel insurance. Do you think that would be a rising part of your profit mix going forward?

Jane Jie Sun

There are two line items. On the top line, there is other revenue. That part is related to the advertisement, as well as the insurance for the air ticketing, so that’s on the top. And then after income from operations, there is another line called other income, and the maturity of the other income on the bottom represents the government subsidies, where we try our best to get government subsidies based on our operation and the preferential treatment from the government.

And how much we can get from the government and when we can get from the government is very much dependent on how fast and how much the government allows us, so we book the other income on the bottom line on a cash basis very conservatively.

So this quarter, we have a very good number which is from the government subsidy. Going forward into Q4, that number is smaller. I think around 1 million because the government sometimes groups all the payment in one quarter, and pretty much they have paid the majority for this year in Q3. So Q4 would be a very small amount, based on our estimation.

But again, we will take a very conservative approach and only book it on a cash basis.

George Chu - UBS

That’s very clear. Thank you.

Operator

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

Ashish R. Thadhani - Gilford Securities

Good morning. Very nice quarter. I just had a question on your margin; gross margin, despite the revenue mix, has been among the highest perhaps in five quarters or so. Were there any unusual factors at play over here?

Second, sales and marketing has been declining as a percentage of revenue this year. Is there any explanation for this trend?

Jane Jie Sun

Sure. Both of the reason is mainly due to the high growth in the revenue. A certain percentage of our cost is fixed, so as our revenue grows, the percentage of these costs will drop. So our call center has reached some scalability due to the revenue growth.

And on sales and marketing, also the same reason. When we put some efforts into the sales and marketing channel, as the revenue growth is stronger than we expected, these campaigns have achieved scalability also.

Ashish R. Thadhani - Gilford Securities

Okay, and is it safe to assume, just going back to the government subsidies, that the bulk of these amounts will tend to fall into the third quarter? We’ve seen that happen for three straight years. Also, in terms of magnitude, roughly where should this figure stabilize in future years?

Jane Jie Sun

Again, the government subsidy, from our perspective we will always do our best to file the application on a timely basis, but really when we will get these subsidies is up to the government so it is hard to say what quarter exactly we’ll be getting this amount. If they have a change in policy, it might change, or if their budget is changed, that will impact our timing and amount also. For that exact reason, we book everything on a cash basis, so it is very hard to give you a sense as to which quarter, as well as the amount as of now.

Ashish R. Thadhani - Gilford Securities

Okay, and finally, the cash balance jumped by something like $30 million in one quarter. Were there any non-recurring or timing issues that impacted this change?

Jane Jie Sun

Not really. I think cash generation, we always monitor it very carefully. Cash flow from operating activities increased by -- we almost generated more than 300 million this quarter from operation activities. And our investment spend, about 40 million to 50 million, and we paid cash dividends about 70 million and we also get some proceeds from stock option exercise. So that’s the reason why our cash balance increased more than 200 million this quarter. So we always try to collect as much as possible.

Ashish R. Thadhani - Gilford Securities

Great. One final clarification; the guidance that you provide is in local currency, right, before the five to six percentage points of currency benefit?

Jane Jie Sun

Yes, you are correct.

Ashish R. Thadhani - Gilford Securities

Thank you.

Operator

Your next question comes from the line of [Nathan Nagara] with The Hartford Group. Please proceed.

Nathan Nagara - The Hartford Group

Congrats on a good quarter. I just have a quick question regarding the Olympics that’s happening next year. Do you foresee any revenue or growth through these Olympics being held in China?

Min Fan

The Olympic Games is a very big event in China. I’m sure it will provide a great opportunity for Ctrip to become a more international company and also to see how we can do in the in-bound travel business.

We are developing the strategies to take advantage of such an event. We monitor it very closely. We will see how we can cooperate with the local government to see what we can provide for those in-bound travelers as well as the domestic travelers.

Because the Olympic Games are still more than half-a-year away, so right now what we are doing is still preparing to coordinate with the concerned government bodies.

Nathan Nagara - The Hartford Group

Thank you.

Operator

Your next question comes from the line of Jason Johnson with Aurora Investments. Please proceed with your question.

Jason Johnson - Aurora Investments

Good morning. Congratulations on a strong quarter. I have a question for Jane; could you break down the accounts receivable? You have about $290 million accounts receivable as of September ’07. Could you break that down by percentage?

Jane Jie Sun

Sure. About 35% of the accounts receivable are related to the hotel revenue, so normally we will not book these AR in the revenue until we confirm with the hotels. So historically, the AR collection is very high and the write-off of these AR is literally de minimis. So 35% of these AR are from the hotels and we normally collect these AR within one month.

Another 30% of the AR related to the credit card payment for the air tickets, so we normally settle with the credit card company, some of them we settle them on a daily basis, some of them we settle on a weekly basis. So around 30% of these AR representing the AR from the credit company, which also has de minimis AR collection problems.

And the rest is for corporate travel, so these AR are related to the corporate travel business, which we monitor very carefully. So far, we have not had any problems with these AR.

So as our business is growing, I think part of it is because the timing of the collection, part of it is because of the growth of our revenue.

Jason Johnson - Aurora Investments

Thank you. My second question is about your revenue, on the revenue side. I know that the Chinese currency has appreciated significantly over the last 12 months, and I did some calculation. I looked at the net revenue of your current third quarter is $288 million, over $208 million for the same quarter in the previous year. That represents a 38% -- is that correct?

Jane Jie Sun

Are you comparing RMB to RMB?

Jason Johnson - Aurora Investments

Yes, I compare RMB and RMB, because as I said, over the last 12 months, the Chinese currency appreciated significantly.

Jane Jie Sun

Right.

Jason Johnson - Aurora Investments

If you strip the currency effect, what is your net sales or revenue growth rate?

Jane Jie Sun

In our press release, everything, when we discuss the growth rate, everything is based on the RMB. We have not taken into consideration the currency because that’s not in our control. So if you compare RMB 322 million this quarter of our total net revenue to 208, which is Q3 2007, you will get a 55% revenue increase.

Jason Johnson - Aurora Investments

My third question is you said that 30% of the accounts receivable is related to corporate travel, but just a few minutes ago, I believe it was Min who said that corporate travel is a very insignificant amount.

Jane Jie Sun

Correct.

Jason Johnson - Aurora Investments

How is it that you could have a $60 million accounts receivable from corporate travel?

Jane Jie Sun

Sure, sure. That’s a good question, because when we record revenue, everything is recorded on a net commission basis. So for air ticketing, we only record 5% of our net revenue onto the P&L. But when we extend AR for our corporate travel, if a ticket is 1,000, we have to extend our AR by 1,000, although we are only making the commission for 50 million. So the balance sheet is the gross amount and the P&L is a net amount. Does that make sense?

Jason Johnson - Aurora Investments

Yes, yes. Thank you. I have one more question, I’m sorry.

Jane Jie Sun

No, no, good questions.

Jason Johnson - Aurora Investments

My last question is about your business prospect. I listened to the analyst conference call in August and Min was asked what impact the travel search engine has on your business. I noticed that Min said that travel search engine will not impact your business significantly, but in a few days, then I looked, there’s a search engine in China is called qunar.com --

Min Fan

Qunar, yes.

Jason Johnson - Aurora Investments

Yes, qunar.com, and like I said, you said that this travel search engine will not impact your business but in a few days, I noticed that Ctrip put your advertisement, or put your air ticket on this website. Do you still think that the travel search engine doesn’t impact your business down the road?

Min Fan

I don’t think we put our advertisement in Qunar at the website. If you see any advertisement in that website, probably they -- or I don’t know the reason. In fact, I think Qunar, what they are doing in the market, I think that this model in the market still needs to be proven. I think so far, their business model does not have a significant impact on Ctrip's business model.

If you sift through most of Chinese online service, when they search on the search engine or search on the travel website like Ctrip, I think instead the price difference is not that much, as we know that mainly the hotel room rate -- because in China, for example, the hotel room rate, normally for distribution channel, you don’t have the power to decide which hotel to sell at what kind of room rate. The hotel will decide their room rate structure among the distribution channels.

So as we can see in fact, they are not too much different on the hotel room rates. So that’s why I think for our Ctrip users, still they will check Ctrip's website to know what the hotel room rates actually are.

I think so far what we can see is there is not a big impact.

Jason Johnson - Aurora Investments

Okay. You still think that there is no major impact on your business side of travel search engines, right?

Min Fan

Yes.

Jason Johnson - Aurora Investments

Okay. Thank you.

Operator

Your next question is a follow-up question from the line of Ming Zhao with SIG. Please proceed with your question.

Chun Ming Zhao - Susquehanna International Group

Thanks. Jane, I have a follow-up question; there’s an item on the balance sheet which is the advance from customers. It increased pretty significantly. Can you tell me what that line is and why it is up so much?

Jane Jie Sun

Sure. As of September 30th, when the customer has to book a packaged tour with us, they have to pay in advance and we record it as a liability on the balance sheet. And as they depart, we will release these liabilities into the appropriate line items into the P&L according to GAAP.

Chun Ming Zhao - Susquehanna International Group

Okay. I understand now. And my second follow-up question is really more a sort of strategic question for the company’s goals in the future. We have seen Ctrip is growing very, very well organically, but it seems like on the acquisition side, you are not too much focused on that and my question is, if we look at the travel or travel related industries, there might be some other companies in the entire value chain, such as hotels, for example. Would you be interested in buying Home Inn or would you be interested in getting into the private airline industry, or the car rental industry? I’m just trying to get your thoughts on that growth line.

Jane Jie Sun

Okay, that’s a very good question. As a fast-growing company, in order to maintain or increase our growth rate, we are always very proactive looking to the new product line, so that’s why I think we spend quite some money to investigate and research different possibilities, including different M&A acquisition targets. However, it’s our company policy not to comment specifically on the specific company, but a good company always has to focus on the future growth and that’s one of the very important areas where the management team spends a lot of time on.

But on the other hand, when we execute M&A opportunities, we always are very prudent because if that’s not very carefully thought out, if later on you have integration problems, that’s not a good situation anyone wants to be in.

So if you look at the history of Ctrip, every acquisition we did has brought the revenue into our business pool and has been executed with great prudence, and we will keep that tradition going forward. But we are definitely very active looking into the different opportunities.

Min Fan

As usual, we are still very focused on our main business and in the meantime, we will still keep an eye on the future potential growth and also future M&A targets.

I think what we are doing, as James, said, we are doing very prudently. Definitely we want to make sure every new acquisition will have a very good potential for Ctrip's growth and to make our product line more comprehensive, so that’s why you may not see so many acquisitions maybe like other players.

Chun Ming Zhao - Susquehanna International Group

All right. Thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of Leah Hao. Please proceed with your question.

Leah Hao - Goldman Sachs

Good morning. Nice quarter, guys. I had some problem with my phone line so I missed part of the conference call, so I apologize if my questions have been asked before. Just two questions; first of all, on the air ticketing ARPU side, can you give us a sense of the breakdown, of the basis commission rate versus the rebate you are getting at the end of the quarter, please?

Jane Jie Sun

Normally the airlines’ policy is 3% up-front and then the back-end, depending on the volume, they will give you extra incentive. So this quarter, our commission rate is around 4.5%; 3% is up-front as every ticket agent will get, the rest is depending on the volume we can bring in.

Leah Hao - Goldman Sachs

Right, so the 3% underlying up-front commission rate is pretty stable still?

Jane Jie Sun

Right, yes.

Leah Hao - Goldman Sachs

Do you see that changing?

Jane Jie Sun

No.

Leah Hao - Goldman Sachs

Okay. Thank you. And secondly, can you give us a sense for the business trend so far into Q4? What happened during the national Golden Week holiday and how does that compared with the last Q4, Q4 from last year? That would be great. Thank you.

Jane Jie Sun

Sure. Q4 so far what we have seen is within our expectation. There is no special event that will cause one way or the other. I think we are executing according to our plan.

Leah Hao - Goldman Sachs

Great. Thanks a lot.

Operator

Your next question comes from the line of Wendy Hung. Please proceed with your question.

Wendy Hung

Good morning, everyone. Thanks for taking my questions. I have two questions. First is a quick one; you mentioned earlier that in the second quarter ’07, your business jumped partly due to the May Golden holiday. I searched on the local news about your discussion on the Golden holiday, given that Golden holidays will be cancelled next year, how will this impact the seasonality of your business? Thank you.

Jane Jie Sun

Sure. I think that the Golden Holiday might change the timing of people’s habits from one quarter to another. So when you compare quarter over quarter, the comparability might be impacted. However, if people want to travel and if people are able to travel, they will travel anyway. So if they do not travel in May, they might travel in June. So the total volume should be the same, so we will see how it is going to impact our quarter-over-quarter balances.

From a resource control perspective, it’s a good thing for the companies because during -- if you have a concentrated Golden Holiday, everyone needs resources. The availability becomes a limit for us to expand, so the cancellation of the Golden Holiday should not have a major impact on our overall business but might change the timing a little bit.

Min Fan

I think still, as you can see in the newspaper and there is a discussion so far and still I think, at least according to the [associated authorities], not all Golden holidays will be changed, so maybe they will test run to change one Golden holiday period, and also they will allocate the Golden holiday, the vacation days to other Chinese festivals. So in that way, I think like Jane said, people will travel not in a very concentrated period but will still travel -- if they like to travel, they will spend their time in other festivals. So it should be no major impact on our business.

Wendy Hung

I see. So for their part, the national Golden Holiday, if we strip out this week out of the whole quarter, what kind of year-over-year growth will we see of this week versus national Golden holiday last year?

Jane Jie Sun

Fairly consistent.

Wendy Hung

The year-over-year growth of this week compared with last year’s Golden holiday?

Jane Jie Sun

Are you talking about Q3? Q3 -- there is no Golden holiday in Q3. Q4 we will have the October holiday.

Wendy Hung

Sorry, Q4 October holiday 2007 growth over October holiday in 2006?

Jane Jie Sun

Sure. Since we are still in the quarter, I cannot comment too much on the next quarter yet, but as we commented before, based on our visibility, the big economic environment remains strong and everything is in our expectation and we are executing according to our plan.

Wendy Hung

My second question is -- I wonder if there is a trend emerging of online platforms, they are consolidating hotel resources, air ticketing resources, even some [inaudible] ticketing resources for some [inaudible] sports, and they are providing the platform to many small agencies in China to [also provide] a solution to some agencies. What’s your view on the emergence of this platform and how will that impact your business? Or will you [leverage] on this kind of platform as well?

Min Fan

You mean which company?

Wendy Hung

[inaudible].

Min Fan

In fact, the [inaudible], this company, they started this kind of business model I think -- yes, at least two years ago. And what they are doing is to integrate most of the supply side from the travel agencies and also they can provide hotel bookings and I think a few air ticketing, and also destination.

What they are doing I think, as we know they mainly do the -- like the B2B model. Mainly it’s the B2B model, so I think still we need to see whether they have much impact on the end user market. So far, we don’t think there’s a big impact on Ctrip's business model.

Wendy Hung

So you have no cooperation with them [inaudible] ?

Min Fan

In fact, we do not have much competition on this because what they are doing is mainly they work with a lot of travel agencies and also they will provide hotel bookings by those travel agencies.

So what we are doing is we directly connect with hotels and we directly connect with our end users, so I think that business model is quite different.

Wendy Hung

So could I integrate this with your [inaudible] hotel network and air ticketing resources already covered in what they already have on their platform, so there is no need for me to [inaudible] as a complementary [inaudible]?

Min Fan

Yes.

Wendy Hung

Okay. Thank you.

Operator

Your next question comes from the line of Jenny Wu with Morgan Stanley. Please proceed with your question.

Jenny Wu - Morgan Stanley

I have a follow-up question. Would you please elaborate more on -- actually, there is a concern through e-ticketing; airlines may perform more and more direct sales and plus there is serious competition amongst thousands of travel agencies. So is it possible that those airlines, they will go further to cut down this combination sharing with Ctrip and other agencies? What’s your view about this?

Min Fan

I think in China right now, all airline companies they are working on direct sales, but as you may know, in China right now, still all these airline companies still rely quite much on the distribution channels. And of course, I think the direct sales by airline companies will grow. But our distribution channel still right now is a major force for their total sales production.

On the other hand, I think because most of the airlines, they will provide -- all the airline companies, they will only sell their own company’s price, so for those -- for Ctrip, this kind of comprehensive distribution agency, we definitely have a very good position that we can provide a kind of one-stop solution, one-stop provider for those end users, not only for different airline companies’ flights and also all the hotel booking choices and also vacation packages.

So still for Ctrip, I think we are in a very good position to be a kind of supplementary sales channel for those airline companies. So far, we are working -- in fact, we are working very closely with all the major airline companies and I think this kind of structure still will be [apparent] in the years to come.

In terms of the commission, I think if you see the market, still most of the production is generated from the distribution channels, so I think there not be a big change in the commission practice.

Jenny Wu - Morgan Stanley

Okay. Thank you very much.

Operator

Your next question comes from the line of Lu Sun with Angus Capital. Please proceed with your question.

Lu Sun - Angus Capital

Congratulations on the great results. I have one question on the in-bound travel business that Ctrip may want to launch going forward, because from my observation, Ctrip is already accepting foreign credit cards for some of the travel services in China. Do you think that you are going to launch inbound service for overseas travelers in the near-term? I mean, open across all the business lines?

Min Fan

We do study the feasibility and future potential in the in-bound travel business and we will -- still we will try to be well-prepared for this business. In the middle to long-term, I am sure this in-bound business definitely will be very good potential for Ctrip to grow even bigger.

Lu Sun - Angus Capital

Do you think that this will be available in 2008, since a lot of travelers will be coming to China?

Min Fan

In fact, if you are talking about the in-bound business, foreign travelers, they will book our domestic package and domestic hotels already, so it’s kind of in-bound business generated from those travelers.

What we are doing right now, we did not promote a lot on this in-bound capability and the in-bound business lines, so I think still we will definitely we will prepare on this business and in the year to come, we will see how far we can go in this field.

Jane Jie Sun

In terms of the impact on the financial results, we always test to the market very carefully. Accepting the foreign credit card is the first step we have taken to explore the market and as the Olympic Games will bring lots of in-bound travelers, we will test the market again.

But in terms of a financial impact in 2008, it shouldn’t have a major impact because all the other business lines have a much bigger pie. But we will gradually test the market, gradually develop our team and infrastructure to handle more and more volume going forward.

Lu Sun - Angus Capital

What are the biggest challenges to further develop this business line, in your view?

Min Fan

I think the very big challenge is how you can let your customers in different countries to know Ctrip products and Ctrip service. So definitely we will see how we can do in this field and how we can do this efficiently on your target customers, so this is what we are studying.

Lu Sun - Angus Capital

I see. So the logistics aspect of in-bound travelers is actually not resolved? For example, handing the ticket delivery or -- that’s not a problem? Okay. Thank you.

Min Fan

The logistics problem, there is no more problem for this and also as you said, we already opened the foreign credit card facilities in our website and also right now the e-ticketing provides much convenience for our targeted customers.

Lu Sun - Angus Capital

Okay, great. Thanks.

Operator

There are no further questions at this time. I would now like to turn the call back over to management.

Tracy Cui

Thank you. We’ll end this call.

Operator

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

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Source: Ctrip.com Q3 2007 Earnings Call Transcript
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