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eLong, Inc. (NASDAQ:LONG)

Q2 2012 Earnings Conference Call

August 20, 2012, 20:00 p.m. ET

Executives

Guangfu Cui - CEO

Mike Doyle – CFO

Echo Yan - Investor Relations

Analysts

Alicia Yap - Barclays Capital

Jiong Shao - Macquarie

Fawne Jiang - Brean Murray, Carret & Co.

James Lee - CLSA

Wendy Huang – CIMB

Muzhi Li – Citigroup

Tian Hu - T.H. Capital LLC

Ming Zhao - 86Research

Operator

Good day to everyone and welcome to eLong's Second Quarter 2012 earnings report conference call. (Operator Instructions) I will now hand over the line to Echo Yan and I will be standing by for the Q&A session. Please go ahead, thank you.

Echo Yan

Hello everyone, thank you for joining eLong’s second quarter 2012 conference call.

Today, Guangfu Cui, our CEO, will make some remarks about the company’s performance in the second quarter 2012 followed by Mike Doyle, our CFO, who will provide additional detail on our financial results. Following their prepared remarks, Guangfu and Mike will be available to take your questions.

Before the management presentations, please allow me to read our Safe Harbor Statement. During this call representatives of the company will make certain forward-looking statements within the meaning of the U.S. Securities Act and the Securities Exchange Act. These statements are based upon management’s current views and expectations with respect to future events and are not a guarantee of future performance. Furthermore, these statements are, by their nature, subject to a large number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements as a result of a wide variety of factors. eLong undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. Please refer to the risk factors described in our Annual Report on Form 20-F, as well as the full text of the Safe Harbor Statement in our Form 6-K, which will be furnished to the SEC in connection with our press release, for discussion of some of the important factors that could affect future results.

I will now turn the call over to our CEO, Guangfu Cui.

Guangfu Cui

Thank you, Echo. Hello everyone, thank you for being on this call.

Hotel room nights grew 65% year over year to 3.7 million in the second quarter. It is the first time that our quarterly room nights exceed 3 million. 72% of our customers now book online at eLong.com through our websites and mobile applications. Again, online order mix is at historical high.

Our domestic hotel coverage network expanded 52% to over 32,000 domestic hotels as of June 30, 2012. In addition, our international hotel coverage totals 155,000 hotels through our direct connection to Expedia.

Despite intensified competition, our hotel groupbuy product growth accelerated in the second quarter, and remains the clear market leader in China. We expanded groupbuy daily hotel deals from approximately 3,000 to 4,500. Hotels typically offer discounts about 50% or more for groupbuy deals. The hotel groupbuy products provide significant consumer savings, and our leadership in this product segment reinforces our overall hotel business competitiveness.

We continue to see high growth from mobile booking channels. We now provide full range of mobile service for our customers. eLong applications now cover iPad, iPhone, Android and Winphone. Customers can also use mobile website m.eLong.com to book hotels and air tickets. We will continue to invest to strengthen our position in this important segment.

To support our growing hotel business, we have made significant investment in improving our IT infrastructure in recent quarters, and expect to continue these investments for the remainder of 2012. We also invested in our second customer service center in Hefei which opened in Q2, and we will continue to expand its capacity for the next few quarters.

In Q2, we began advertising and branding efforts. In Q3, we launched our biggest ever marketing campaign featured with brand advertising and aggressive coupon promotion. We believe now is the right time to drive awareness of our brand, and our innovative products and services.

eLong launched air coupon program in June 2012. The air coupon rule is similar with hotel coupon. We want to use air coupons to incentivize our customers to book air tickets online. This will help us to reduce fulfillment costs. We are seeing our air ticketing business stop declining and start to grow in the third quarter. We want to reapply what is successful in hotel to the air business.

Now, I would like to hand the call over to Mike for a review of our financial results.

Mike Doyle

Thank you, Guangfu. In the second quarter, strong online hotel performance drove our year-on-year net revenue growth to 33% compared with the second quarter of 2011.

Our hotel business benefitted from our continued product investment and innovation in emerging hotel booking models such as groupbuy as well as developing channels such as mobile. Q2 room nights booked through eLong increased 65% year-on-year to 3.7 million.

In the second quarter, hotel revenue grew by 47% year on year due to increased room night volume, partially offset by lower average commission per room night. Commission per room night decreased 11% year-on-year primarily due to lower ADR, resulting from mix shift to groupbuy and budget hotels, which represent a growing proportion of our room night volume. The rate of year-on-year revenue per room night decrease lessened from Q1 partially due to an accounting estimation change related to the expiration of some users’ benefits in our coupon program. Hotel revenue now represents 78% of our total revenues, which is an increase from 70% in the second quarter of 2011.

Air ticketing commission revenue decreased 7% for the second quarter of 2012 compared to a year ago quarter, driven by a decrease in air segment volumes to 525,000, that was partially offset by a 1% increase in commission per segment driven mainly by increased airfares. Air revenue decreased to 15% of total revenues from 22% in the prior year quarter.

Other revenue, primarily derived from advertising on our websites and travel insurance, increased 14% year-on-year for the second quarter of 2012. Other revenue decreased to 7% of total revenues from 8% in the prior year quarter.

Gross margin in the second quarter of 2012 was 75%, compared to 74% in the second quarter of 2011, as gross margin improvements from mix shift to hotel and online bookings were partially offset by higher personnel expenses and lower hotel commission revenue per room night.

Total operating expenses increased 50% or RMB45.3 million for the second quarter of 2012 compared to the second quarter of 2011. Total operating expenses increased to 73% of net revenues from 65% a year ago.

Service development expenses increased 34% in the second quarter of 2012, mainly driven by an increase in headcount. We continue to invest in improving our online user experience and technology systems, as well as expanding our hotel coverage. Service development expenses were 16% of net revenues, consistent with the same quarter of 2011.

Sales and marketing expenses for the second quarter of 2012 increased 65% or RMB35.6 million over the second quarter of last year -- roughly in line with the increase in our room night volume -- as we increased investment in online marketing and advertising and grew our affiliate business. Sales and marketing expenses increased to 49% of net revenues in the second quarter of 2012 from 40% in the same quarter of the prior year. We continue to invest aggressively in order to acquire new customers and promote our brand.

Q2 G&A expenses increased 14% compared to the second quarter of 2011, mainly driven by higher personnel expenses. G&A expenses decreased to 8% of net revenues in the second quarter of 2012 from 9% in the same quarter of 2011.

Other Income in the second quarter of 2012 increased year-on-year primarily due to a higher cash yield and lower foreign exchange losses as a result of a lower mix of USD in our cash balances.

Effective tax rate in the second quarter of 2012 was 6% compared to effective tax rate of 24% in the second quarter of 2011, mainly due to an income tax benefit of RMB1.8 million related to a government sponsored technology investment initiative that was booked in the second quarter of 2012.

Net income for the second quarter was RMB16 million, compared to net income of RMB7.1 million in the second quarter of 2011.

Moving to our Balance Sheet, I’d like to mention that as of June 30, 2012, eLong held cash and cash equivalents, short-term investments and restricted cash of RMB1.9 billion or approximately $300 million US dollars. Of this balance as of June 30, 98% was held in Renminbi and 2% in US dollars.

Now, let me share with you our Business Outlook. We expect Q3 Net Revenue growth of 10% to 20% year on year.

As Guangfu noted, given the momentum in our online hotel business, we have decided to increase our level of investment in brand, marketing and promotions in order to further strengthen our market position in the hotel sector. In Q3, we launched our largest ever branding campaign and further expanded our coupon program. This investment in expanded promotions and building eLong brand awareness may take several quarters to generate a return. Due to this, we may face pressure on our profitability in upcoming quarters.

This concludes my remarks; and, Guangfu and I look forward to any questions you may have.

Moderator, if you would now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ms. Alicia Yap from Barclays. Ma’am your line is now open, you may begin.

Alicia Yap - Barclays Capital

My first question is regarding your guidance, it looks like the growth rate for 3Q guidance decelerated to about 10 to 20% compared to close to 33% that you deliver in the second quarter. So, given 3Q should be seasonally strong quarter for travel, so can you give us some color on that?

Mike Doyle

We haven’t provided the breakdown by product for our guidance, but let me make a couple of comments. We are most focused of growing volume to gain market share in the online hotel business, and as a result we are making big investments in brands and in expanding our coupon program. Due to the current aggressive online hotel coupon environment, our effective commission rates or commission rate less our coupon rebate is decreasing year-on-year more quickly than in prior quarters. So, that is what’s really driving the year-on-year growth in revenue.

Alicia Yap - Barclays Capital

And on the competitive front, given that your competitor has step up more aggressive marketing campaign. So, can you comment if you have seen any impact and would you react to a more discounted pricing?

Guangfu Cui

We have competitors [talking] eLong’s online marketing initiative. They are seeing very aggressive raising coupon rebate. So, in the third quarter 2012 eLong launched our largest ever marketing campaign combined with an aggressive coupon promotion. Certainly our motivation behind our coupon program is to incentivize customer to book online and introduce them to our network of 32,000 [center] hotels and 155,000 international hotels. You may know that coupon is not our strategy but a promotion program. We evaluate all our marketing programs from [10 times] to ensure this is the part of our strategy. Now coupon has become actually a price [wall]. So, this is no longer proper marketing kind of going forward and effective marketing vehicle for us. So, we are reviewing our marketing strategy going forward.

Operator

The next question comes from Mr. Jiong Shao from Macquarie. Sir your line is now open you may start.

Jiong Shao - Macquarie

I have a couple of questions as well, first just follow-up on competition. Could you talk about just the environment that really know that many large competitors, in terms of the potential rationalization of the competitive environment you just mentioned that perhaps you are reviewing a coupon program. How long how severe are you seeing the current price war is going to last?

Guangfu Cui

Right now the market is entering a new space that eLong has been developing very fast gaining market share on hotel that create new dynamics in the market and so the eLong’s online hotel strategy has been executed both the four years in the past, we continually to expand our hotel coverage we marketed our product online. So, we are quickly accumulating our site as you can notice that our hotel room nights is now over 3.7 million room nights in the second quarter, so there are certain reactions to our quick growth in the hotel room nights. We can’t predict how long the price of competition will be but I think we will set out when the new market dynamics kind of happens. So, eLong’s strategy our objective is to becoming the online hotel booking leader in China market. So, our primary focus now is continue to grow our hotel business.

Jiong Shao - Macquarie

And my second question is another similar the issue for the entire industry for you and your competitors. Could you talk about sort of how the wholesaler situation has evolved over the last few months in terms of the wholesalers perhaps selling some of the rooms directly on some independent third-party e-commerce platforms?

Guangfu Cui

This style of hotel inventory to retail customers through public channels generally is a violation of the agreement between the wholesalers and the hotelier and if this continues over a period is a threat to the hotel direct selling channel and to all disputant channels. Hoteliers should take actions to ensure that our wholesaler abated by the terms of our agreement, in addition, hotels can act to reduce the price difference by lowering the [borrow] rate and raising the wholesale rate. This issues I definitely a consideration in our strategic planning going forward.

Jiong Shao - Macquarie

What you estimate on a market share of this (inaudible) sales like wholesaler is selling to retails directly, what is the market share for the whole group in the OTA market. And also are hotels doing anything about it, what are they doing if they are not doing anything, why not?

Guangfu Cui

It is in the hotel’s interest to crack down the wholesalers risk setting in their retail format, apparently any hotels want to manage their revenue should fight against these type of practice and we see some hotels that internet (inaudible) fighting more aggressively with the wholesaler citing this retail price. However, there are independent hotels who are less able to crack down this wholesale rates. So, that’s the current situation, eLong continues to work with the hoteliers trying to work with them and see how this situation can be tensed going forward and also it's hard to estimate we don’t have all the data in terms how big this market is, but we closely monitor the situation and work with the hotel to attract this. Of course, we are also this issue is certainly a consideration in our strategic planning as I mentioned.

Operator

Our next question comes from Ms. Fawne Jiang from Brean Murray. Ma’am your line is now open.

Fawne Jiang - Brean Murray, Carret & Co.

First question just regarding your second quarter hotel growth, it was very strong volume growth, just wonder what growth the highest growth segment you saw in the second quarter? Whether it's budget, group by or how is (inaudible) income growth?

Mike Doyle

Budget hotels remained our fastest growing segments in the hotel market; our group by hotel growth rate now that we are six quarters into the launch of that product is becoming a more reasonable number to look at but in prior quarters the year-end number didn’t really make (inaudible).

Fawne Jiang - Brean Murray, Carret & Co.

What is the total percentage of budget ended group by?

Mike Doyle

Budgeting group by now is just over 50% of [our earnings].

Fawne Jiang - Brean Murray, Carret & Co.

Second question is regarding your on 3Q guidance. So, you mentioned that the lower guidance is aggressive promotion you are running for third quarter, just wonder what percentage of hotels are either the coupon program [train out] portfolio. Also what is the percentages differs from segment to segment, say budget was just higher after hotel.

Guangfu Cui

In the third quarter we have seen that the markets going more aggressive against price competition and actually all our hotels are now on the coupon program across each hotel coupon value is decided by eLong and somewhat also we have considered the market competition to set our coupon value. So, the market is going as I mentioned very aggressive in couponing. So, for eLong to continue our online strategy we will continue to be aggressive in this trend unless we see things change in the market.

Fawne Jiang - Brean Murray, Carret & Co.

Just a follow-up on that one, so just wanted to confirm you said, basic all hotels right now are under coupon programs, but just very different levels of coupon promotions. I just have a follow-up question here is what segment are you running the most aggressive promotion?

Guangfu Cui

It's different from time to time, we could run promotion or give higher coupon value to [branded] hotel, we could run the wholesale to next months. It's really are dynamic, we just our coupon value according to the marketing efficiency of each channel and also our strategy of where we want to focus.

Fawne Jiang - Brean Murray, Carret & Co.

So, related question to that is, like for 3Q well already happened to August, I guess in terms of aggressive (inaudible) under promotion, are we seeing driving the most expressive and then we are starting to see a less level promotions later on in the fall?

Guangfu Cui

This is hard to say because each player in the market have a different agenda or different strategic purpose using price competition, but if you look at all of the e-commerce business here in China, I think we get up in favor of (inaudible) in the market. Overall that I think the market base and the potential opportunity for the winner is huge, so that everybody is trying to beef up and make sure that being the market start [including] this high growth period and it's important for eLong to become the online hotel leader going forward. So, we definitely want to fight harder in this hotel business.

Fawne Jiang - Brean Murray, Carret & Co.

Last question is actually regarding your brand advertising in 3Q, just wonder how much resource you guys are planning toward the brand advertising and also what are the key channels and what are the key message you are trying to coverage to the market?

Guangfu Cui

Our key market branding message is book hotel at eLong, in Chinese that is, [Foreign Language]. It's a very short message, we have now developed several ad co pays basically on the mobile booking of our hotel product and ad pack booking our group by dealers and we are adding to launch our third commercial next week. So, it's a series of commercials but the message is same, book hotel at eLong. In terms of how many resources or how much resources we devote into this marketing campaign we couldn’t really disclose any figures just for competitive reasons but we want to have the target audience in the key cities be aware of our plan to position and remember eLong when they book hotel. So, that our key message to the customer and we want to introduce customer suite our large hotel network and easy to use website. So, that’s our brand focus right now.

Operator

(Operator Instructions) Our next question comes from Mr. James Lee from CLSA. Sir, you are line now open, you may begin.

James Lee - CLSA

Just a couple of question here; number one, can you help us understand how widely the coupon program was used during the quarter, especially within your booking space? And also secondly regarding the stepping of the marketing program and can you help us think how to think about it in terms of how you want to go approaching this new program. Is it more marketing within your existing market or you think you are extending your brand recognition with the new markets. And you also talked about coupon is not effecting tool marketing going forward, can you help us think about what are you thinking in terms of adding incremental value to the customers. And lastly in the wholesalers, I was wondering obviously this is not a good situation for the industry, why are doing specifically to manage this situation, are you going back to the wholesaler and potentially acting for matching price or are potentially thinking about a merchant model. Thank you.

Guangfu Cui

The wholesaler situation as I mentioned is, we have seen it getting little bit more serious versus previous quarter so that we are at current stage there are, we first consider working with the hotels and trying to work with the hotel. And see how we can act to change of the situation so that either the hotels opened the wholesaler rates with all the disputant channels of selling their own direct spending platform, so that everybody got the same rate so that no discrimination against the channels, because wholesaler rates having certainly kind of actually hurting the hotel setting directly over their own website and also the OTA channel. So, it's like whoever is trying to break the agreement, we will benefit the wholesaler rate setting. So, that’s the one part. So, we are working with the hotel and to see either we can stop the wholesaler rate or open the rates to all parties in the market so that everybody can sell the same rate in the market. So, then last but not least we are working with the hotel to try to reduce the price difference by lowering the [borrow] rate and risen the wholesaler rate so that not so much are they charged for wholesaler to play in the retail space. So, those are the things we are working with the hotel across, this is definitely as I mentioned consideration in our strategic planning.

Mike Doyle

I’ll the take question on the efficacy of the coupon program, I think when Guangfu mentioned the effectiveness, really we are talking about the efficiency. So, it's a very effective program, it drive volume and it's also delivering a lot of value to our customers, so we are not looking for new ways to drive value to the customer, this is a great deal for them. But as we measure all of our marketing channels efficiency, we are looking to reallocate our resources to more efficient channels.

Guangfu Cui

To put in another way, that in the past we may use, like (RMB 30) coupon to get one room nights but you probably need (RMB 30) to get one room night now, because everybody using coupon, everybody is trying to risk coupon value, so that the efficiency actually decrease, of the marginal utility actually decrease going forward. So, that’s why I say it as ineffective now. It's really marketing efficiency wise.

James Lee - CLSA

Just few follow-up, Mike can you talk about, you talked about alternative channels that can create more effective in terms of customer acquisitions. Maybe can you talk about that a little bit based on your study of the customer behavior, what other channels they find attractive right now for you to reallocate your resources. And also secondly, can you get a sense how widely the coupon program was used during the quarter, maybe as a percentage of your total hotel bookings for the quarter?

Guangfu Cui

Let me take first part of your question regarding what are the channels we are looking at, one channel definitely we are looking at is the [Tansen] so that we have been working with them in the past to let them to do hotel bookings in their own platform. And they have seen increasing hotel volumes from those (inaudible) over the past several quarters. Secondly, we now work closely with Tansen to use its various platform, be it advertising platform or multi download platform or other platforms to advertise our product and to serve its potential users. And also we used Tansen social media to try to draw followers and eLong now has close to 20 million followers than (inaudible). So, that is just to give you very simple, we couldn’t give you all of the channels that we are looking at in terms of marketing, but this is just one channel we are looking and also working closely to attract new customers to our product and service. Mike you want to take other questions?

Mike Doyle

Yes, I just we haven’t shared the efficiency by marketing channels, we are working with larger the same mix of marketing channels we have in prior quarters, but are increasing our investment in those same channels.

Operator

The next question will come from Ms. Wendy Huang from CIMB. Ma’am your line is now open you may begin.

Wendy Huang - CIMB

My first question is follow-up on your comment regarding your co-operation with Tansen, so what percentage of your traffic and also booking volume coming from Tansen service channels?

Guangfu Cui

We don’t give numbers of specific channels or traffic or volumes right now for competitive reasons, but we are looking to work co-operate with Tansen to advertising their platform and to build a brand awareness and also to address traffic to our website.

Wendy Huang - CIMB

So, your hotel booking volume increased by 65% year-over-year are you seeing maybe a faster growth in volume that you generated from Tansen?

Guangfu Cui

In the past several quarter Tansen have to generate more room nights each quarter, we had seen growth each quarter for the past several quarters. And actually our hotel room night growth of 67% in the second quarter.

Wendy Huang - CIMB

My second question is regarding your mobile strategy, so can you give us some update on your mobile booking platform.

Guangfu Cui

In the past few quarters what we have been doing is trying to make sure that our applications or service to our all the key channels. So, we first introduced iPhone applications then we introduce Android applications then we introduced Win Phone applications and we launched and update our (inaudible) and latest one is iPad, after we launch our iPad applications we were selected at the back applications by Apple, iTunes and we were featured as best ad in the market. And also that our iPhone applications was nominated as Editors Favorite Software and also the several other nominations all selections by the Apple [store] editors. So, we are being our volume coming from the mobile channel growing very fast each quarter and we are seeing consistent new record being setup from this channel. So, we want to continue to invest in this key channel and we have a high expectations for this channels.

Wendy Huang - CIMB

Just a follow-up on that, so when you say that 72% of your hotel booking order are coming from online does that include a mobile volume. And if so, you mentioned that we were to step up the sales marketing, so were you step up the sales marketing effort in the mobile front as well.

Mike Doyle

On the online mix, our online it does include the online portion of mobile bookings, there are both online and offline mobile booking for those users who call our call center. For the online portion of the mobile it is included in the mix we shared at 72%.

Wendy Huang - CIMB

Okay, how about sales marketing effort?

Guangfu Cui

If we do increase our sales and marketing effort in the mobile, we are using various platform to drive download of our applications and also our mobile website. We want to keep (inaudible) website in this channel because we see high growth out of this channel and that we believe the future of this mobile channel. And the strategic important role this channel can play and to help us win in this online booking segment.

Wendy Huang - CIMB

And also can you provide the average commission rate enter so the respective commission rates are of the different hotel segments.

Mike Doyle

We haven’t shared that, our average commission rate has remained close to 15% versus that is prior to any reduction from our coupon rebate, I’m not seeing much change in that number.

Wendy Huang - CIMB

Finally, I wonder if you can give us some color on your call center, so the total headcount of your current call center and those what percentage of volume coming from the call center right now.

Mike Doyle

So, the cost of volume from our call center is the remaining 28% of our business. we haven’t shared the headcount regularly by each of our key departments, but we are right about 2500 total employees across the business. I think you may be aware we now have the second call center location in Hefei and are continuing to add staff in both locations according to needs of the business.

Operator

Our next question comes from Ms. Fawne Jiang from Brean Murray. Ma’am your line is now open you may begin.

Fawne Jiang - Brean Murray, Carret & Co.

First, one is actually regarding the gross margin in second quarter, it was a pretty significant improvement despite a promotion you are running second quarter. Just wonder what are the key factors to drive the improvements. Also what are the gross margin in second quarter level is sustainable going forward.

Guangfu Cui

The highly price competition it really start from July. So, in the second quarter we do see some competition on the couponing and also price competition on the group by business, but (inaudible) the price serious competition is starting from July. And Mike do you want to add?

Mike Doyle

Yes, just each quarter the interplay or fore factors really drive the gross margin results and that’s on the positive side are mix shift online bookings and mix shift to hotel booking, both increased gross margin. And then that have been offset by increases in staff expense as well as lower revenue per room night in the hotel business. So, in Q2 obviously the two positives outweigh the two headwinds but as Guangfu mentioned in Q3 given a much more aggressive couponing environment, there is likely to be pressure on gross margin.

Fawne Jiang - Brean Murray, Carret & Co.

The second question is actually regarding your 3Q guidance, I guess given the aggressive promotion, you are running 3Q, so would you likely expect bigger decline on commission per room night on hotel side. Just wonder like what’s the implied volume growth in 3Q, are we going to see similar volume growth in second quarter or just given your hotel base is getting bigger and bigger. Do, we see decelerating growth on the hotel volume.

Mike Doyle

So, we haven’t provided any volume outlook, I’d say I think we are still at a very stage early stage development of the market and we don’t control a very large portion of the market. So, we close a lot of (inaudible). But we can’t comment that year-on-year decline in revenue per room night is likely to be greater than we have seen in prior quarters given the aggressive couponing environment, but we are not prepared to provide volume guidance.

Fawne Jiang - Brean Murray, Carret & Co.

Last question is actually regarding your cash flow, I just wonder what’s operating cash flow for the quarter and what’s the total (inaudible) for the quarter?

Mike Doyle

We haven’t shared operating cash flow by quarter, we are cash flow positive, but I’m not providing quarterly cash flows.

Operator

And we have a question from T.H. Capital, Ms. Tian Hu, you may begin.

Tian Hu - T.H. Capital LLC

The question is regarding your marketing sales expense, and what’s there like the second quarter this time one of the large and not only on the absolute basis that also on the percentage of revenue basis. So, what will be trend going into second half in this item?

Mike Doyle

First, let me comment on Q2, our sales and marketing spend most closely tracks our room night volume growth and so we are very interested in growing volume and improving our market share and so we are pursuing new customers and new orders accordingly. And so I think that’s the key driver there. Each quarter there is we can look at the efficiency by channel, as well as the mix of channels and so in each quarter we often see changes in both some channels are more efficient than others and so depending on where are the highest rates of growth are coming it does impact the overall growth in sales and marketing expense. Going forward in the second half there are a couple drivers here; one is we are increasing our level of investment in all channels and also as Guangfu mentioned in improving brand awareness, but the other driver is that and many of those transactions will be keeping a smaller portion of the commission revenue given the higher couponing and so that’s likely to make the sales and marketing expense as a percentage of revenue to increase that even outside of the additional investment.

Tian Hu - T.H. Capital LLC

So, another issue is for you’re the inter sales and I know your emphasis is to increase your internet sales and to decrease your call center sales, but you are building new call centers, so is there a confliction between reality and what you said?

Mike Doyle

No, I don’t think that there is, so, we are very much focused on building the online business and we now looking to decrease our offline business, it's just our incremental attention and investment is on the online business. So 28% of our 3.7 million we met in the quarter are booked offline and that’s an important part of our business, but importantly there are many processes in the call center in the fulfillment process that do scale with online room nights as well, things like after sales support and service. So, we are needing to make additional investment there to support our growing online business. In addition there op savings to be realized as well in additional locations.

Tian Hu - T.H. Capital LLC

So, one more question is regarding your co-operation with (inaudible), so we saw that you are selling hotels on (inaudible) platform. So, can you talk little bit about the co-operation and also the traffic that you have generated. How is that going?

Guangfu Cui

eLong is gaining through become vertical hotels to all of the targets who want to place or sell hotels in our (inaudible). So, we have many affiliates in China, if you look at all of the famers and of e-commerce platform like 265, China Merchant Bank and Tansen, lot of group by websites, there are hotel booking inventory powered by eLong. So, we are becoming one of the largest hotel inventory supplier to those B2C platform, B2B to B2C platform. So, (inaudible) has a lot of traffic, and is open market anybody can come (inaudible) and open shop and eLong has the largest hotel networks in China. So, that it's not (inaudible) we just opened the shop, lot of work to do to understand (inaudible). So, we opened the shop, we want to test and see what consumer like, what don’t and how should we merchant marketing, merchandising our product. It take a lot of learning to be done before we can see any significant volume coming from this.

Tian Hu - T.H. Capital LLC

My last question is what percentage of your clients come from business travel, others for leisure travel?

Mike Doyle

We don’t have very accurate information in that regard, it's not a question that we answer our customer upon check out. We feel like these are businesses is currently a key driver of our business and that’s just based on booking trends and patterns that we observed throughout the year.

Operator

And we have another question from Citigroup from Mr. Muzhi Li. Sir, your line is now open.

Muzhi Li – Citigroup

Something I just want to clarify, first of all you mentioned that in the third quarter and going forward a couple of quarter that you brand advertising and the marketing expenses, on the second level I heard Guangfu mention that the coupon program is not being very effective or do you need to allocate a different channels. So, does that mean the coupon program might be terminate or even lower the level of price competition regarding the coupon program. I just need the clarification.

Guangfu Cui

Yes, I have a belief that wherever we go, it's up to the consumers, how we do it's up to the competitors. For example, if consumer really like coupon product, eLong will provide that. And eLong is actually one of the company t do group by hotels in China and eLong is also the first company to provide guest house type of product booking in China. So, what our consumer need we want to be there. Whatever channel we want to buy we want also to be there, be it 365 or China Merchant Bank or [Telfa or Tansen]. So, whatever consumer we want to put in front of our product service level consumers and in terms of how we compete in the market that is our dynamic, it's really up to the competitors, if competitors speaks up their coupon and eLong could not just sit here and allow the market being (inaudible) competitors. But that doesn’t mean that eLong will not monitor and exchange our coupon program from time to time. It's too early to call it we are going to terminate the coupon, but as I mentioned the market dynamic we will change and it's a period of time I think the market will go through, but eventually it's the new dynamic, we will set in and everybody will think about different ways to compete rather than just giving all the profit to consumer everybody it's not making a sustainable return on this business.

Muzhi Li – Citigroup

So, that means even the coupon program may not last for as quite long, but the price competition is on the different front may still last even going forward. Is that right?

Guangfu Cui

So, coupon is just a form that in the past is to transform customer from the offline to online, certainly like them to book online. But coupon is used as price competition, it's just coupon it's just a form and without coupon there would be other form of price competition. So, I’d say that price competition is a period of time that this market will go through, but on going price competitions I doubt that it will be the case because the more market dynamics we expect in and people have to figure out what they do going forward.

Muzhi Li – Citigroup

And my last question is regarding the sales and marketing. I saw the sales and marketing has increasing significant, almost like 45% of the total revenues, do you see this trend as still going up or in the next few quarter?

Mike Doyle

Yes, given our increase in sales and marketing investment in the quarter, we do expect the year-on-year growth rate to exceed revenue and become a larger portion of our revenue in the third quarter.

Operator

And the next question will come from Mr. Jiong Shao from Macquarie. Sir, your line is now open you may start.

Jiong Shao – Macquarie

Just following up on the coupon or the price competition front. Is there any internal metric you are looking at in terms of your market share in hotels or on your downside your minimal operating margin you want to keep, just so we know if you reach your target and then you may think of it's getting back perhaps a little bit of those marketing activities or there sort of a bottom level of profitability or margin, is there, look I’m not going to drop below this level regardless.

Mike Doyle

There is no metric for us to share but as we mentioned already today our objective is to become the largest online hotel booking company in China and we are prepared to make the investments required to achieve this. I think there are number of ways to measure the business, but I think we shared the key ones and how we look at your own performance.

Operator

And our next question comes from Ms. Wendy Huang from CIMB. Ma’am you may go ahead.

Wendy Huang - CIMB

I wonder if you have data regarding the number of the customer growth and also which marketing channel is mostly (inaudible) in bringing fresh new customers.

Mike Doyle

As of the end of Q2 we had just over 4 million cumulative active customers, we measure customers here of transaction with us in the last 12 months, but we have not shared and will not be sharing customer accessing in by channel.

Wendy Huang - CIMB

Second follow-up is regarding the mobile sale and you just mentioned that your online order includes those from own version of the mobile booking. Do, you have any booking coming from the mobile apps. If so which side is growing faster, I mean between own version of the mobile booking or the volume from the mobile apps.

Guangfu Cui

We are not prepared to provide the mix of our mobile platform, but what we can see in that we are moving along very well in all front in terms of applications, in terms of (inaudible) and so we are getting traction in all channels in mobiles.

Operator

(Operator Instructions) Our next question comes from Ming Zhao from 86Research.

Ming Zhao - 86Research

I have two questions, not sure if you have already touched upon this, but first thing is on the macro impact, just wonder from your end, what’s your insight about the macros impact on the hotel suppliers in terms of volume and pricing trend there. And the second question is on the price competition. I think everybody is going for the cheaper costing right now, what’s your observation on the use of loyalty or stickiness, are they just looking for deals or do they really stick to some platform as major booking platform.

Guangfu Cui

Eventually product and service we were being out of the competition, but this period of time that if competitors are using aggressive price to compete I don’t think that anybody can afford not participating in this. And trying to how to say, because our goal is to become the online hotel booking company in China, so we are prepared to making (inaudible) required to achieve this. So, meaning we are waiting to be more aggressive in marketing in terms of branding and also coupon to achieve our goals. Also but at the same time on the technique level, we do frequently adjust our marketing spend and to seek, optimize and yield our results as fitting as possible. So, this is again it's hard to put a timeline of this price competition because it is really not only up to eLong, but what we can say is that we are prepared to make necessary investment to grow online hotel business to achieve our strategic objective. So, that’s probably the key message I want you to take.

Mike Doyle

I’d just say regarding your question on the impact of any macroeconomic trends, we don’t have any additional impact, but I think the overall markets and the news there, I think it will be difficult to argue that travel is not impacted by macroeconomic headwinds, but we don’t under weigh that clearly measure that impact on our business. We have been able to achieve fairly high rates of unit volume growth year-to-date.

Operator

There are no further questions at this time. I will now turn the meeting over to the eLong management team for the closing remarks.

Guangfu Cui

In closing, I’d like to note that in a highly competitive environment we remain confident and our online hotel strategy is unchanged, and our objective is unchanged. We will continue to focus on our key 2012 initiative which have led to reiterate we include; the first one, to competitively priced hotel products via innovative spending method; number two, to offer more domestic and international hotels; number three, to aggressively attract online customer whilst driving to improve marketing efficiency; number four, to improve online booking experience and overall customer service quality and finally to make IT and operation infrastructure to support our growing business. Thank you. Moderator please conclude the call.

Operator

Thank you. That concludes the eLong second quarter 2012 earnings report conference call. Thank you for participating, you may now disconnect.

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