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eLong, Inc. (NASDAQ:LONG)

Q2 2008 Earnings Call

August 26, 2008 8:00 pm ET

Executives

Linda Gou - Investor Relations

Guangfu Cui - Chief Executive Officer

Chris Chan - Chief Financial Officer

Analysts

Eddie Leung - Merrill Lynch

Catherine Leung - Citigroup

Reed Aben - Analyst

Operator

Good morning and good evening, all sites. Welcome to the eLong conference call. (Operator Instructions) I will now hand the call over to your moderator, Ms. Linda [Gou]. Please go ahead, Madam.

Linda Gou

Hello, everyone. Thank you for joining eLong's second quarter 2008 conference call. Today, Guangfu Cui, our CEO, will make some remarks about the quarter, followed by Chris Chan, our CFO, who will provide more details on the financial results. Following their prepared remarks, Guangfu and Chris will be available to take your questions.

Before the management presentation, please allow me to read our Safe Harbor statement: during the conference call, representatives of the company will make forward-looking statements. These statements are based on management’s current view and expectations with respect to future events and are not guarantees of future performance. Furthermore, these statements are by their nature subject to a number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements, as a result of a number of factors. eLong undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Please refer to eLong's filings with the SEC, including its Form 20-F, as well as the risk factors described in our Form 6-K, which will be filed with the SEC in connection with our press release and this conference call for a discussion of the important factors that could affect future results.

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

Guangfu Cui

Thank you, Linda. Hello, everyone and thank you for being on this call. Although we had a difficult second quarter and we only grew our net revenue 9%, we had made significant improvement to our product offering and service quality. Externally, we encountered a strong headwind, specifically the travel industry has contracted year over year in May and June, caused at least in part by the Sichuan earthquake. The slowdown in the travel industry had complicated our turnaround efforts. Internally, some of our product and service improvements are newly implemented and as such are not yet fully reflected in the numbers. We expect the adverse travel industry trend will continue into the third quarter but we are cautiously optimistic about the fourth quarter.

If you’ll recall, we told you about a year ago that we are relentless in evaluating and enhancing our call center service. Today, we would like to announce two solid achievements which indicate the success of our effort in enhancing call center service.

First, our research in June 2008 indicates that 99% of our customers are satisfied or very satisfied with eLong's call center service, of which 88% are very satisfied. Let me share with you how the research is done.

Customers are asked to give immediate evaluation of our service at the end of their calls to our call center. The service quality is classified as very satisfied, satisfied, average, and not satisfied. In June 2008, approximately 30% of customers give their evaluation. We got above mentioned excellent results.

Second, in addition to our internal research, in March and April we employed an external market research company and conducted the first mystery shopper research by asking a panel of shoppers to shop and then rate the call center service of both eLong and our key competitor. Customers rated eLong call center overall slightly better than our key competitor. With these great results, our call center will be an enabler in our turnaround effort from now on.

Besides call center improvement, we upgraded our website in April. The initial result of this website upgrade are encouraging with online growing faster than offline bookings. We will continue to invest in our websites and online marketing as we believe that the online represents the future of this industry in China.

On the product front, we increased our contract hotels from approximately 5,080 hotels in the first quarter to approximately 6,600 hotels in the second quarter. This significantly improves our hotel coverage and provides a rich variety of choice for our customers.

On the marketing front, we have defined and launched our new 4G marketing strategy. 4G refers to guarantee, go online, global, and green. We kicked off the first component of this marketing strategy starting in late July 2008. This campaign promotes the guarantee theme, which includes our hotel low price guarantee, room availability guarantee, free travel insurance to customers and 24/7 services.

Having made significant improvements in the level of customer service, we are highlighting the positive changes to customers with this guarantee. As you know, there is significant opportunity for online travel in China. Going forward, we will stay on the course and strive hard for growth. We believe we have come a long way in addressing our most significant organizational and operational issues and we are now ready to promote our service and let customers know the value we bring to them. This will require us to market our products and services much more aggressively in spite of the current market conditions. We need to invest on brand awareness, top of mind, and brand equity.

We believe that we are doing the right thing and our hard work will pay off as market conditions improve.

We also know it is a long and tough journey and there is no quick fix. However, we take encouragement from our progress so far. We remain confident and committed to turn around this company.

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

Chris Chan

Thank you, Guangfu. Let me give you an overview of our second quarter results, starting with our statement of operations, followed by our balance sheet.

Our second quarter total gross revenues were RMB86 million, an increase of 10% year over year. The mix of revenue from our core travel business was 95% of total revenue, down approximately one percentage point from 96% in the same quarter prior year. Gross revenue from hotel commissions totaled RMB63.2 million, a year-over-year increase of 5%, mainly due to higher room volumes.

Hotel room nights booked through eLong totaled 968,000 in the second quarter, up 5% from 922,000 in the corresponding period a year ago. Hotel commissions per room night were RMB65.2 and our hotel commission rate was 15.1%, both of which are similar to the same period last year.

Our second quarter 2008 average daily rate of RMB432 was also similar to the same period last year.

Gross revenue from air ticketing during the second quarter was RMB18.3 million, a year-over-year increase of 32%. Total air segment was 412,000, an increase of 19% over the prior year period. Commissions earned per air ticket in the second quarter were RMB44.5, up from RMB39.9 in the second quarter last year, mainly due to higher commissions.

The average commission rate in the second quarter was 6%, compared to 5.2% in the same period a year ago.

Other travel revenue accounted for 5% of total revenue in the second quarter and consisted mainly of non-travel online advertising on our website. Gross margin in the second quarter was 71%, down approximately one percentage point from 72% in the same quarter last year, primarily due to increased personnel compensation, which was necessary to improve our call center service quality, and a higher mix of lower margin air revenue, offset partially by productivity gains in the operations as a result of our successful drive to online and workflow improvements.

Service development, sales and marketing, and administrative expenses together were RMB65.2 million, a year-over-year increase of 18% from RMB55.1 million. The increase was mainly driven by a higher sales commission and increased spending and marketing air and hotel platform investment, as well as outside service for the CRM and ERP projects.

Let me now make a few comments on our balance sheet. As of June 30, 2008, the company’s cash and cash equivalents was $156.4 million. Also, up to August 25, 2008, the company repurchased slightly over 800,000 ADS shares at approximately $6.4 million. During the second quarter, we had capital expenditures of RMB10 million, compared with RMB7.4 million in the prior year quarter. The ERP And CRM capitalized project costs and the server investment together accounted for RMB7 million, or 70% of the Q2 capital expenditures.

And finally, let me share with you our business outlook for the third quarter of 2008. eLong expects net revenues for the third quarter of 2008 to be relatively flat, within a range of RMB75 million to RMB83 million, or minus 5% from the third quarter of 2007. Additionally, although we do not give guidance on margins, I want to emphasize that we do expect to increase our marketing spend in the second half of 2008 and into 2009 for the initiatives that we outlined earlier in the call.

This concludes the financial review 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) We have a question coming from the line of Eddie Leung. Please go ahead.

Eddie Leung - Merrill Lynch

A couple of questions -- the first one is since we are getting towards the end of August, could you guys update us on the demand that you see in September so far, and how does it compare with last year?

Guangfu Cui

Okay. I think the question is regarding how the Olympics is impacting our business. You know, everyone believes the Olympics is definitely good for the travel industry long-term but the Olympic Games has had a dramatic negative short-term impact on eLong's business due to reduced travel from both leisure and business travelers pre and during the Olympic Games period. Despite our good execution in securing the hotel inventory, we saw business drop dramatically in Beijing. Just to give you a different point that our business in Beijing dropped 50% year over year in August, and the other either co-host cities, also we saw a significant decrease versus a year ago, although not at the same latitude but it’s significant.

So that is the current situation with the Olympics. We do hope that things will get better in September, although we still have the Paralympic Games in September in Beijing.

Eddie Leung - Merrill Lynch

Right, and my second question is could you elaborate slightly more on the marketing campaigns that you guys are going to do, say in the second half of ’08 and ’09? What’s the difference between this time and previously, say a couple of years ago?

Guangfu Cui

Right. This time, after many tests we refined our 4G marketing theme. Going forward, we will first drive brand awareness top of mind and brand equity centered on 4G, and then we need to drive travel via consumer promotion. Last but not least, we would need to drive loyalty via our loyalty points program, enhanced customer service, and our upcoming CRM program. At this stage, we will use both online and offline methods.

If you will recall, in the past eLong, the way eLong drove brand awareness and marketing is using direct sales channel, which is [handing cards] in the airports, railway stations, et cetera, et cetera, which does give us a quick kind of access to travelers. However, it doesn’t really build our brand in terms of brand equity and also the -- it doesn’t really skew up to the majority of the Chinese travelers. So what we have done this time is to make sure [inaudible] is different.

First, we are going to secure [inaudible] in the direct sales channel but use more of offline and online marketing vehicles. And also, our service quality is significantly enhanced. We think that we can retain our customer when they come into our service, so that’s probably the biggest difference now versus before.

Eddie Leung - Merrill Lynch

Okay. Thank you.

Operator

Thank you. We have a question comes from the line of Catherine Leung.

Catherine Leung - Citigroup

I have three questions. The first one, can you elaborate a bit more on what new products and services have been newly implemented and how this improves the service quality that eLong offers?

Secondly on the marketing campaign, have you been able to measure the effectiveness of the campaign since you launched it? And could you share with us some anecdotes on what the customer feedback has been?

And thirdly, can you disclose how man customers booked with you in the quarter and what percentage approximately of these are repeat customers? Thank you.

Chris Chan

I will answer your last question first and then hand over the first two questions to Guangfu. At the end of Q2 2008, total accumulative unique customers booked through eLong 1.7 million, and we acquired over 100,000 new customers in Q2.

Guangfu Cui

And the question regarding how do we measure marketing effectiveness, we are going to measure the marketing effectiveness in the -- first of all, it’s brand awareness. We are achieving brand awareness in target consumer groups, in target areas, and top of mind. Then we measure how many incremental calls to call centers and unique visitors to our website and then the conversion rates of that traffic into our call centers and website. That is how we are managing to measure the effectiveness of the marketing campaign.

Of course, at the end of the day, we measure by the revenue coming in to the company and the effectiveness/efficiency of the marketing program. So that’s how we measure the marketing effectiveness.

In terms of new products and new services, I’m not sure -- what do you define new products and new services? Can you just clarify a little bit?

Catherine Leung - Citigroup

I was just referring to your script where you mentioned in the beginning that some new products and services have been newly implemented and not fully reflected in the numbers. I’m just wondering what types of new products and services these are and how significant of an impact should we expect.

Guangfu Cui

Right. Sorry for the misunderstanding there. I think what we are referring to is the -- for example, the website upgrade in mid-April, so that most consumers may not know our website is upgraded and for example, the contract hotels we have increased to 6,600 hotels. However, that is gradually built up in the second quarter, not immediately at the beginning of the second quarter. So we did not implement any, for example, packaged business or business, you know, corporate business, that type, if you are thinking about that as the new business, which is a little bit different. Sorry for the confusion there.

Catherine Leung - Citigroup

Can I also ask a last question? What is not -- given your hopes that the online part of the business will be the future of the industry, what is the approximate proportion of customers who book through online versus offline? And in terms of the payment method when they book through online, do most people use credit cards now?

Guangfu Cui

I think we can give you the -- we think the online booking growth is growing faster than offline. Here is a number we can show you -- in March 31st, our hotel bookings online versus overall is 15.8% and at the end of -- in June, our percent online for hotel is 20%, so you can see there is a 3.2% difference there. And in terms of airline, in March our percent booking online is 24.6%; in June, the percentage is 32.4%, so you do see a big increase in terms of percent online.

In terms of credit card booking, right now the company has -- Chris, can you mention the number of --

Chris Chan

So percent of tickets paid through credit cards at the end of Q2 stood at 60%; in Q1, it was 56%; a year ago was 30%, so compared to year-on-year, it doubled in terms of percentage.

Catherine Leung - Citigroup

Do you know why there was such a dramatic increase? Was it because your customers gradually came to trust eLong with their credit card number, or there are some other factors, such as increased issuance of credit cards in the market?

Guangfu Cui

I think overall, there is a market acceptance -- more and more customers apparently are going online. And second of all, we make it easier for customers to transact with us online and we make it easier for them to pay using credit cards. Of course, we give them incentive -- if you book online, pay with your credit card, we give you triple points. So that also helps.

Catherine Leung - Citigroup

Okay. Thank you.

Operator

We have a question coming from the line of Reed [Aben]. Please go ahead.

Reed Aben - Analyst

Two questions -- what kind of revenue do you think you need to break even on an operating basis? And secondly, in regard to the buy-back, how much stock are you authorized to buy back? And will you be repurchasing any of the shares that Expedia owns?

Guangfu Cui

On the buy-back question, the board authorized management to buy back up to $20 million, essentially from the open market, so [authorized a broker] to repurchase shares on the company’s behalf on a daily basis, according to the SEC rule.

As far as buying shares from former shareholders or current shareholders, there are really no limitations, so any willing shareholders may contact the company about selling their shares.

About the question on what kind of revenue that we need to break even, I will address your question in two ways. One is the type of revenue that we are looking for. We are looking at growing direct customers, so our marketing spend will be firstly on branding. We wanted to let the market know what eLong is all about, our service level, our business booking online and our goal is to grow the direct customer revenue. We believe when the customers refer more and they repeat more booking with the company, we will be able to drive the top line growth and the earnings will fall through to the margin line.

And the other area would be we want to grow revenue that we can achieve efficiencies. This company has achieved a milestone. We are -- we have improved a lot in our operations and customer service level. Our technology is really getting momentum. We are getting -- we are ready and we are also improving, so the revenue we want to target is revenue that is more scalable, that we can fulfill at a lower cost. So that would be the two main focus areas in terms of what kind of revenue we want to target.

Reed Aben - Analyst

So in terms of repeat customers, can you break out what percentage of your customers this quarter versus last quarter were repeat customers or year over year? Because those customers obviously have the lower acquisition costs. I’m just trying to get a sense of how well it’s working or what you are trying to get in terms of repeat customers because those are obviously better customers. Or they are cheaper, you know, because once you market to them once, they know the product and they come back and that’s who they use to book their travel needs through.

Guangfu Cui

Right. I can let you know the -- from the current metrics, our percent of repeat customers, this will include the repeat business from our distribution partners. The company repeat rate is currently at 80%.

Reed Aben - Analyst

And what was it in the same quarter last year?

Guangfu Cui

It was about the same. It ranged from 75% to 80%.

Reed Aben - Analyst

Okay, great. Thank you.

Operator

We have another question come from the line of Eddie Leung.

Eddie Leung - Merrill Lynch

I just want to get an update on the competitive landscape outside the battle between CTRIP and eLong. What have you seen in the market from the newcomers, et cetera?

Guangfu Cui

Normally we don’t comment on initiatives from competitors. There are some new developments in the market. However, we believe it is the best interest of our customers, hotel partners, and our shareholders that eLong remains as a neutral hotel booking service provider, rather than going into the hotel business ourselves. Our mission is to provide outstanding travel service to our customers and we can do so more effectively by remaining as a neutral position so that we can recommend hotels based on customers’ demand, not our own interests.

We also believe that we can only do so by stressing better cooperation with our hotel partners and our relationships may be damaged if we compete with our hotel partners directly. So that’s our comments as of now. Thank you, Eddie.

Eddie Leung - Merrill Lynch

Okay, got it. Thanks.

Operator

(Operator Instructions) We have another question coming from the line of Eddie Leung.

Eddie Leung - Merrill Lynch

Chris, could you give us the CapEx number year-to-date and what your plans are for the rest of the year? It seems you guys have upgraded your website but I understand you still probably have certain information systems waiting to be launched.

Chris Chan

Eddie, if I recall correctly, year-to-date spend on CapEx should be between 15 million and 20 million, so this quarter is 10 million. I think we had lower spending in Q1, probably around 7 million, so 17 million would be the right number for the first half actual.

We don’t give guidance on CapEx for the total year. We should we expect higher capital expenditures spending this year versus the prior year. The prior year is around, you know, last two, three years, around 20 million to 25 million capital expenditures for this company and this year we should spend higher than that number.

Eddie Leung - Merrill Lynch

Okay, thanks.

Operator

(Operator Instructions) There appear to be no questions at this time. Over to the eLong management team for any additional or closing remarks.

Guangfu Cui

I just have a couple of remarks here also, that if you’ll recall, about a year ago the company challenge and priority is first people and organization; the second one is our service; the third one is IT platform and the infrastructure; the fourth one is marketing. And right now, we made solid progress in people and organization and also customer service. So the challenges we are facing in order in priority are first marketing; the second one is IT platform and infrastructure; and the third one is hotel partners relationships. So I hope you can see the different challenges we are facing now and a year ago and you can see the solid progress from here.

If there are no further questions, we would like to conclude the call. Thank you. Thanks for being on the call.

Operator

Thank you, and that concludes today’s conference call. Once again, on behalf of the management team of eLong, I would like to thank you all for your participation. You may now disconnect your line.

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