Qunar Cayman Islands Ltd. (NASDAQ:QUNR) Q1 2016 Earnings Call Conference June 16, 2016 8:00 PM ET
Zhenyu Chen - Chief Executive Officer
Qiang Zhang - Chief Operating Officer
Xiaolu Zhu - Chief Financial Officer
Alicia Yap - Citigroup
Jason Hua - Goldman Sachs
Amanda Chen - Morgan Stanley
Alvin Jiang - Deutsche Bank
Natalie Wu - CICC
Binnie Wong - Bank of America Merrill Lynch
Wendy Huang - Macquarie
Ming Xu - UBS
Hello and welcome to Qunar's First Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, we will have a question-and-answer session. Today's conference is being recorded for replay purposes. If you have any objections, you may disconnect at this time.
I would now like to turn the meeting over to your host for today's conference, Ms. Chi Gua [ph], Qunar's Senior Legal Director.
Unidentified Company Representative
Thank you. Good day, ladies and gentlemen. Thank you all for attending Qunar's first quarter 2016 earnings conference call. Qunar distributed its earnings release earlier today and you can find a copy on our website as well as on newswire services.
Joining me today, we have Mr. Zhenyu Chen, Chief Executive Officer; Mr. Mark Qiang Zhang, Chief Operating Officer; and Mr. Xiaolu Zhu, Chief Financial Officer. After their prepared remarks, we will open up the call for your questions.
Before we continue, I should note that the discussion today will contain forward-looking statements. These statements are made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1994. For an explanation of forward-looking statements, please refer to the section entitled forward-looking statements in the press release we issued earlier today.
Any remarks by management on this call are made as of today. Qunar undertakes no duty to update any forward-looking statements made on today's call except as required under applicable law. As a reminder, this conference is being recorded. A webcast of this conference call will also be available on Qunar's IR website, investor.qunar.com or ir.qunar.com.
Now I would like to turn the call over to Qunar's CEO, Zhenyu Chen.
[Foreign Language] Thanks, Chi [ph]. Thank you everyone for attending Qunar's first quarter 2016 earnings conference call. Joining me today we have Mark Qiang Zhang, Chief Operating Officer; and Xiaolu Zhu, who is the Chief Financial Officer.
Hi, everyone. I'm Mark. Welcome to our earnings call.
And this is Xiaolu speaking. I'm interpreting for Zhenyu today. Again, welcome.
Q1 2016 was a challenging quarter for Qunar as we faced uncertainty in our flight business, a time of transition under the new competitive landscape and not to mention the transition of the management team. I am very proud of what Qunar as a company and what the team have achieved during the quarter.
In the first quarter our total revenues increased 48% year on year to RMB 1 billion. Gross profit, another important barometer of our business, increased 52% year on year. Together with the strong revenue growth, our operating margin has also improved significantly.
Operating losses narrowed to RMB 237 million, compared to RMB 291 million for the corresponding period in 2015, and RMB 453 million for the fourth quarter of 2015.
Mobile revenues continued its rapid expansion with a year-on-year increase of 88%. Mobile continued to be the key driver of our business growth as it represented over 75% of our total revenues in the quarter, compared to less than 60% in the corresponding period in 2015.
As one of the most active services and transaction mobile apps in China, we are very happy to see that the momentum on the mobile front continues to be very strong for Qunar.
Hotel is another bright spot for our business in Q1. Revenue for our Asian [ph] business, where revenues were booked on net basis, more than doubled year on year. Accommodation volume also increased nicely despite the reduction in coupons and other user incentives.
Total number of hotels signed with Qunar's own direct hotel network increased again to over 380,000. And we are also delighted to see that the cooperation with our partners in the accommodation industry has progressed well in the quarter. Looking forward, we see a strong accommodation business for Qunar, with more regional competition and big volume and revenue potential.
As we have said before, Qunar as an organization, has always believed in the power of technology and innovations. In 2016 we will continue to focus our efforts in providing efficiency to the entire travel industry.
We are delighted to see new products we have launched in ground transportation and car services, interactive travel reviews and tour guides, financial products for travelers as well as service providers. These new services will continue to add value to our partners and our users, and it will be a more important revenue source for Qunar in coming quarters and coming years.
We have also added new partners this quarter. Yesterday we announced our partnership with Uber China to bring their car services to our platform where our users can order airport pick-up and drop-off services, as well as other car services to all kinds of travel destinations, whether they are planning their trip at home or on the go. And we are also delighted to see the grand opening of the new Disneyland in Shanghai, which will be this morning. As a travel partner, we are happy to offer ticketing, lodging and transportation services to Chinese travelers who want to go there.
Lastly, let me address the question regarding our current situation with airlines. As we have discussed during our last earnings call, we are actively working with major domestic airlines to address their concerns. However the process is longer than we previously expected. This has a negative impact on our flight volume and flight-related revenues. We have seen the impact in Q1. And given it's already mid-June, we expect this situation will continue to impact our flight business going into the second half of 2016.
However, Qunar is committed to be a long-term partner for airlines in China and around the globe. We strive to provide travelers the most comprehensive product selection with services of high quality. The current situation will help us to focus more on these goals, and we believe this will help the company to achieve sustainable growth over the long run.
We will continue to improve our service qualities and to innovate, to offer better products and services to our users. And we believe that, together with the airlines, we will be able to create a more efficient and a healthier flight distribution ecosystem for Chinese travelers.
2016 is a new start for Qunar. With the shift in industry landscape, change within our own organization and with the support of our shareholders, our employees, our partners and our users, I am confident that Qunar will have a very bright future.
With that, I will turn the call over to Xiaolu, who will share with you financial highlights of Q1 2016. Thank you again.
Thank you, Zhenyu. Thanks again everyone for joining the call. As Zhenyu said, with revenues up 48% and gross profit up 52% year on year, Q1 was another strong quarter for Qunar despite some of the headwinds we faced in the flight business.
Today I would like to discuss first some of our key operating and financial metrics. Then I will share with -- our financial and margin outlook for the rest of the year.
On the hotel side, as Zhenyu just mentioned, volume growth continued at a rapid pace. And under the new competitive landscape, we have started to reduce coupon intensity and other consumer incentives, especially on the high end. This will obviously help us to increase our post-coupon metric rates and give us an opportunity to increase net revenue for our accommodation services.
For lower-end hotels, we still apply a certain level of coupons and also offer incentives, such as offline programs, to further penetrate our hotel business into more cities and to enlarge our mobile user base. There are also potentials in further reduction of coupons and an increase in gross commission we can get from our hotel partners. Overall, the average gross commission level for our hotel business is still low compared to both domestic and international peers.
Separately, this quarter we have phased out the merchant model hotel program. Together with our partners in the hotel business, we have either terminated or modified the contract we have for the program. You can see from our financials, the residual amount is already very small for Q1. And we don't think this will be a material factor for our hotel business for the rest of 2016.
As we have stated when we first started this program in large scale from Q3 last year, we booked revenues from merchant hotel program on gross basis, as we take inventory risks and are the merchant of record under this program.
Revenue growth from the merchant model does not reflect actual pace of growth of our hotel business volume of overall transaction value through the Qunar platform. We have since suggested the market to look at our gross profit as a more important indicator of our business growth.
Now with the merchant program no longer a material factor in our financials, we can once again look at the revenue growth and gross profit margin on an apples-to-apples basis.
On the flight side, take rates have increased steadily over the last few quarters. And the increase in revenue per ticket has more than offset the impact we had in terms of volume growth in the last quarter. Here again we see opportunities to further increase our flight take rate. Despite the increases for the last two years, our average flight take rate is still lower compared to industry peers.
I would also like to discuss a bit here the recent change in flight ticket distribution commission structure announced by domestic airlines. As many in the market already knew, the process to change flight ticket commission structure started more than two years ago. And the latest move did not come as a surprise to us.
We don't rely on commissions to generate revenue for our flight business to begin with. And we believe, on top of our existing revenue sources, technological innovation and a better utilization of user data will allow us to -- will allow us more cross-sell opportunities to compensate the reduction in commissions.
On the flight volume side, as we are still working with the airlines and trying to figure out a sustainable cooperation model going forward, there are still some headwinds for us. As Zhenyu has just stated, the process has taken longer than we previously projected. And given it's already mid June, we believe this impact will continue going into the second half of 2016.
The outlook -- financials and marketing outlook for the rest of the year. First, gross profit margin. As I said, with the end of the merchant hotel program, our gross profit margin was back to the normalized 70% plus level and we expect it to be stable for the near term.
On operating expenditures which for Qunar has always been decided by the size of our workforce and the size of our marketing program. Total headcount for Qunar was 8,000 by the end of first quarter. This represented a less than 10% decrease compared to year-end 2015 and a continuation of the previous trend. Despite the fast expansion of our business, we plan to keep the size of our workforce stable for the rest of 2016 and we will continue to scale through automation and technological advancements.
As previously mentioned, we see good opportunities in further penetrating our business into marketing and to further enlarge our user base. And we will conduct our marketing strategies through rigorous ROI control as before.
For the rest of 2016, we don't expect a big increase in quarterly marketing spending compared to the size of the program we had in the first quarter.
Overall, with the situation on the flight side putting more pressure on our revenue growth for the next few quarters we will continue to take a balanced approach for growth and profitability and continue to improve our operating margin throughout the year.
One more item in our financials that I would like to discuss here is the share-based compensation expenses. We announced a new 2015 share incentive plan in Q4 last year. And the SBC expenses were a result from insurance under this new plan and our privately announced employee share exchange program with Ctrip that became effective starting on December 14, 2016. The package includes acceleration of existing options, granting of new options and other incentives to retain and motivate Qunar employees after the transaction in Q4. This one-time-impact result from this program constitutes the majority of our SBC expenses in the last quarter.
Given the structure of the plan, although the vesting schedule will last a couple of years, but with accounting treatment, most of the impacts have been recognized in Q4 2015 and in Q1 2016. As I have said in our last earnings call, these were one-off and deal-related charges, and we expect our SBC expenses as a percentage of our total revenue to fall back in the second half of 2016 to a normalized level.
I will now go through some selected key financial highlights for the first quarter. For our full financial disclosure, please refer to the press release issued earlier today.
Total revenues for the first quarter of 2016 were RMB 993 million, an increase of 48% year on year. Mobile revenues for the first quarter of 2016 were RMB 753 million, an increase of 89% year on year, representing 76% of total revenue.
Flight and flight-related revenues for the first quarter were RMB 558 million, an increase of 22% year on year and a decrease of 12% quarter on quarter. Year-on-year flight and flight-related revenue growth was primarily due to an increase in revenue per ticket and a slight increase in flight ticket volume. Quarter-on-quarter flight and flight-related revenue decrease was primarily due to a decrease in flight ticket volume, which was partially offset by an increase in revenue per ticket.
Accommodation reservation revenues were RMB 300 million, an increase of 134% year on year. Excluding revenues generated from the merchant model program where revenues are booked on a gross basis, accommodation reservation revenues were RMB 293 million. Year-on-year accommodation reservation revenue growth was primarily due to an increase in revenue per room night and an increase in hotel room night volume. The quarter-on-quarter decrease on accommodation reservation revenue was primarily due to a decrease in business volume from merchant model hotel program, as I have already explained.
Gross profit for the first quarter of 2016 was RMB 747 million, an increase of 52% year on year. Gross margin for the first quarter of 2015 was 75% compared to 73% for the corresponding period of 2015, and 61% for the fourth quarter of 2015. The quarter-on-quarter increase in gross margin was primarily due to the decrease in business volume from the merchant model program, which has a lower gross margin. The year-on-year increase in gross profit was primarily due to the significant increase in total revenue and the change in gross profit margins.
Product development expenses for the first quarter were RMB 812 million, an increase of 183% year on year, primarily due to a significant increase in non-cash share-based compensation expenses resulting from new options granted under our new 2015 share incentive plan in the last quarter, which have higher fair values compared with outstanding options under our past incentive program. This increase was also due to higher salary, welfare, and other expenses associated with increase in average headcount and average salary.
Excluding share-based compensation expenses, product development expenses were RMB 283 million, an increase of 6% year on year, and accounted for 29% of our total revenue, compared to 40% for the same period last year and 25% for the fourth quarter of 2015.
Product sourcing expenses for the first quarter were RMB 172 million, an increase of 39% year on year, primarily due to a significant increase in share-based compensation expenses resulting from the new options granted under our 2015 incentive program. Excluding share-based compensation expenses, product sourcing expenses were RMB 122 million, a decrease of 1% year on year, and accounted for 12% of total revenue, compared to 18% for the same period in 2015 and 15% for the fourth quarter of 2015.
Sales and marketing expenses for the first quarter were RMB 621 million, an increase of 89% year on year, primarily due to stepped-up discretionary expenditures to acquire new mobile users through offline channels, an increase in share-based compensation expenses resulting from new options granted under our 2015 incentive program and to a lesser degree, an increase in salary and welfare expenses as a result of increased headcount, which was slightly offset by a decrease in online marketing expenditures as a result of controlled expenditure.
Excluding share-based compensation expenses, sales and marketing expenses were RMB 506 million, an increase of 58% year on year, and accounted for 51% of our total revenues, compared to 48% for the same period last year and 46% for the fourth quarter of 2015.
General and administrative expenses for the first quarter of 2016 were RMB 181 million, an increase of 37% year on year, primarily due to a significant increase in share-based compensation expenses resulting from new options granted under our 2015 incentive program. Excluding share-based compensation expenses, general and administrative expenses were RMB 73 million, an increase of 3% year on year and accounted for 7% of our total revenues, compared to 11% for the same period last year and 10% for the fourth quarter of 2015.
Operating loss for the first quarter of 2016 was RMB 1.039 billion, compared to RMB 411 million for the corresponding period in 2015 and RMB 4.956 billion for the fourth quarter of 2015. Operating loss on a non-GAAP basis, which excludes share-based compensation expenses of RMB 802 million, was RMB 237 million for the first quarter compared to RMB 291 million for the corresponding period in 2015 and RMB 453 million for the fourth quarter of 2015.
Operating margin non-GAAP for the first quarter of 2016 was negative 24% compared to negative 43% for the corresponding period in 2015 and a negative 35% for the fourth quarter of 2015. The year-on-year and quarter-on-quarter decrease in operating loss were primarily due to strong revenue growth and controlled operating expenditures.
Net loss attributable to Qunar's shareholders for the first quarter of 2016 were RMB 1.077 billion compared to RMB 701 million for the corresponding period in 2015 and RMB 5.091 billion for the fourth quarter of 2015. The quarter-on-quarter decrease in net loss was primarily due to a decrease in one-time charge of share-based compensation expenses resulting from our previously announced employee share exchange program. Basic and diluted net loss per ADS for the first quarter of 2016 was RMB 7.44 or $1.14.
As of March 31, 2016, Qunar had total cash and cash equivalents, restricted cash and funds available of RMB 4,583.8 million or $710.9 million. Given the current situation we have on the flight side, as we continue to work with airlines and try to sort everything out, we will not provide a revenue guidance this quarter.
The team here at Qunar remains focused on growing the number of people who use our services, especially on mobile, broadening the comprehensiveness of our products and improving the quality of our services. Across these dimensions, we continue to see strong momentum and healthy growth opportunities.
With that, operator, we will open up the call for questions.
[Operator Instructions] Your first question is from the line of Alicia Yap, Citigroup.
Thanks for taking my questions. I have two quick questions. Number one is that what is the take rate for your hotel business this quarter given the removal of the high-end hotel coupon, and then also as a percentage of the direct sales business roughly, I know it's been rising, but what is the percentage now? And also second is on when you mentioned on the impact from the air business will continue into the second half, just trying to get a sense when should we get -- when should we expect to get back to a little bit normal, because I think earlier, during the Ctrip call, management there seems to imply starting 3Q we should get some of the adjustment get back to a little bit more normalized level. So just wanted to get from you -- seems that you're implying into the second half will still be quite -- it will still be impacted by that and there's not a lot of visibility. So just wanted to get some color. Thank you.
Thank you, Alicia. To your first question, as we said during the prepared remarks, our hotel take rate has been on the rise for the last few quarters. And with the reduction in coupons and other incentives, our net take rate, which is the post-coupon net commission rate, is now in the high teens. And we expect this take rate will continue to grow for the rest of the year. And as I said, we think there’s also room for us to increase our gross commission level, but this obviously will take more time as we only need to reduce our coupon stream, which is our net commission, but we have to renegotiate with hotels for higher gross commission. But we do believe there is still room to grow compared to industry peers, both domestic and international peers.
In terms of our hotel direct percentage, I think that ratio has been quite stable given the shift in the industry landscape, in the competitive landscape. We have added more partners the last two quarters, like Ctrip and eLong. So now we have more partners and more selection for our users on our platform. But I would say that both direct hotels and the platform part are growing nicely right now.
To your second question regarding the process with the airlines, as Zhenyu said, already mid June so we do believe that this impact will go into the second half of 2016.
In terms of exact timing, currently we are not that sure. We are working closely with airlines to try - to find a way to work with them over the longer term. And yes, we are making adjustments. And if you look at our Q1 numbers, our flight business was impacted but still stable. And we are here to -- we will continue our effort in innovation and technology advancements and we believe that's better with airlines. We will be able to create a more efficient and healthier flight distribution ecosystem for Chinese travelers. Thank you.
The next question comes from the line of David Jin, Goldman Sachs.
Thank you for taking my questions. This is Jason Hua asking on behalf of David Jin. Zhenyu, you're saying that our competitors [indiscernible] and Alitrip, their volumes are growing fast. So can management share with us your view on the competitive landscape and also, the impact on the take rate going forward? Also how would you work with Ctrip on this regard?
Thank you, Jason. Regarding your question, the first, the competition on the lower-end hotels, I think if you look at the competition with the group buyer players, it's nothing new. They've been in this industry for several years now. But I think the competition is still in the ultralow end and in lower-tier cities. And for us, I think we look at the local need and group-buy business are relatively based from our own current booking services. And we don't see any real competition pressures in the travel market. And our focus, our plan is still to extend our hotel business as fast as we can. We cannot comment on other people's numbers or volumes. But so far our hotel business continues to be very strong, with very robust volume growth even with less coupons.
On the flight side, as I said, we did have some negative impact in the first quarter. And we believe there will be some spillover to other platforms, like Ctrip and airlines on direct channels. But our position in the flight market is still very strong. We will focus more on service quality as our business becomes more mature, to further increase our lead in terms of things like confirmation speed, visibility and convenience on mobile while our users are on the go, and also to increase the level of customer satisfaction. And I think over these areas, there will be the cooperation opportunities and synergies with our partners too. Thank you.
The next question comes from the line of Amanda Chen with Morgan Stanley.
Thank you, Zhenyu and Xiaolu. So my question is regarding your hotel business. I think, Xiaolu, you mentioned that you now have some new partners like Ctrip and eLong . So could you please share now how much hotel volume is from Ctrip and eLong inventory? And also especially for the Ctrip inventory, how do we book revenue from our side and from Ctrip side? That is my first question. Thank you.
Thank you, Amanda. In terms of hotel volumes contributed by our partners, as I said, we added those partners back at the beginning of last quarter. So the mix is still in a shift, and we will probably have a better sense after we finish the process. Right now I would say that both direct hotel business and the platform part are growing very nicely for us. And we believe this trend will continue for the rest of the year.
In terms of our revenue recognition, we share the hotel revenues with Ctrip and we book our part at our revenue. And I believe that given that Ctrip consolidates our financials, there is no difference to their financials. Thank you.
Got it. Thank you. And also a follow-up on the coupon of your hotel business. What's the coupon rate as percentage of the gross commission revenue for the hotel business? And I think you commented that you didn't see real competition from other newcomers. But I think, put it this way, do you think if the competition becomes more intense than before, will we increase our coupon in second half 2016? Thank you.
Okay. First, in terms of coupon and our marketing program, I think, I said, we have already said that we will take a balanced approach between growth and profitability. And we will still apply certain level of coupons in the lower-end market and for third and fourth tier cities. But on the higher end the coupon density will be less and less. And overall we are quite happy to see that we will be able to reduce our coupon level and to generate more revenue.
And in terms of competition, as I said, we will continue to penetrate into new markets and new cities as the online penetration for hotels is still low in China, but with focus on ROI and efficiency. In terms of competition, I think the key competition in the lower-end market and in the new cities are still the traditional offline channels. For out-of-town travel services, we don't see any real threat from newcomers, at least for now. Thank you.
The next question comes from the line of Alvin Jiang, Deutsche Bank.
Hi Good morning, Zhenyu and Xiaolu. Thank you for taking my question. We can see Qunar is starting very many new initiatives. Can we have more color on the revenue contribution of different initiatives and what's the plan to develop this new business and how we can see the revenue contribution to ramp up to a significant part? Thank you.
Thank you, Alvin. If you look at our financials, within our revenue, there is a line called other services. For the last quarter, revenue from other services is RMB 111 million and represented about 90% year-over-year increase compared to the same period last year. These include ground transportation services, vacation packages, attraction tickets and all the new services we just mentioned. And you can see the trend is still very strong. And we believe that the trend will continue. And if you apply the math as our flight business and hotel business became more mature, this will be a larger contributor to our revenues. But I should point out that even as of today, our hotel business is still growing very strong. If you take out the impact from the merchant model hotels, the year-over-year growth rate is well over 100% and I think this trend will continue as well.
Your next question is from the line of Natalie Wu, CICC.
Hi, Zhenyu and Xiaolu. Thanks for taking my questions. I just want to clarify, you did mention publicly that take rates of your hotel business has grown to high teens. And can you share with us the split of lower-end hotels and 4 to 5-star hotels? I guess for the 4- to 5-star hotels, you used inventory of Ctrip, so the take rate could be similar. But what about the lower-end hotels? And I just wanted to get a sense of the volume growth rate for the hotel business excluding merchant model. Thank you.
So let me clarify first. Our net take rates for our hotel business is in high single digit. I probably said that wrong during the previous question. So high single digits and on a steady rise compared to previous quarters. In terms of hotel volume growth, despite the phase-out of the merchant model hotels, we still see very strong hotel volume growth. And if you look at our hotel revenue, it increased more than double year over year in the last quarter and it’s a contribution from both volume increase and take rate expansion.
So what about lower-end hotels? What about the take rate currently?
Well, it also has been increasing. We think that as we are still applying some coupons and incentives in the lower-end market, obviously lower compared to our high-end hotels, but the trend is also very healthy.
Great. Thank you. Can I have a very quick follow-up, if I may? Do you still maintain a breakeven target for the third quarter?
I'm sorry, what's your question?
Do you still maintain the breakeven target for third quarter of this year?
Yes. I think that's still our plan. As I said, given the situation on the flight side, I think that obviously puts some pressure on revenue growth. But we will definitely be more prudent and put more effort in terms of cost control and we will apply more stringent cost control and be more prudent with our investment. I think [indiscernible] company. Thank you.
Your next question comes from the line of Binnie Wong, Merrill Lynch.
Hi. Good morning, Zhenyu and Xiaolu. Thank you for taking my question here. I have two questions here. First is on the -- you said that in your opening remarks that the take rate you think will increase steadily and you see possible to further increase the take rate. But I was just thinking that in terms of the airline commission structure change, potentially some of the agencies on your platform could get impacted with lesser commission. So what are the drivers we see? Do you think that overall the take rate we can increase here?
And second question is just on the allocation of the traffic. We see that some of the volume, like the order that you placed will be directed to Ctrip. Do you see the slower growth in flight? Is it more due to the earlier dispute with airlines, some of the agencies getting put down, and then the volume will be compensated by increased -- by directing the traffic to Ctrip's open platform too? Or what are your thoughts here? Thank you.
In terms of the commission structure, yes, we do believe that there will be some impact to the agencies on our platform. But if you look at the revenues Chinese [indiscernible], the airlines started the process over two years ago. And the latest move didn't come as a surprise to us or to our partners. So we are prepared to that.
And if you look at our numbers, if you look at our business, today I think that the cross-sell opportunities and the revenue generated from those cross sales are already a very large part of our flight revenue. So we do believe that with our continued innovation and better utilization of our user data and our traffic, we will have more opportunities to cross sell more products to our flight users and to generate more revenue from there. So for us, we do see that there are still room for us to increase our flight take rate, especially considering that our take rate is still low compared to our industry peers. But this will be a gradual process. We cannot achieve that overnight. And also given the current situation with the airlines, we would have to do it step by step. But overall we are happy with the take-rate trend.
For your second question regarding volume and traffic, as I just said, we will see some spillover to other platforms operators, such as Ctrip, and also to the airlines' own direct channels. But overall I think our position in the flight market is still quite strong. And we are also very happy to see our mobile continue to grow very nicely. On mobile, even with the increase coming from other partners, we still handle the card transactions ourselves. So this helps us to retain our users to help us to retain our traffic. Thank you.
I just have a quick follow-up here. In terms of the cross selling, can you just quantify how much percentage is from the cross selling and how much is this from the fees we used to get from directing traffic to the agencies? So I just want to get a sense of how -- what is the magnitude of cross selling we have in our platform. And second is that we were talking about earlier in terms of the percentage of the -- how much is the percentage of your air in terms of volume, in terms of revenue is to airlines' flagship store? That will be very helpful. Thank you.
Okay. So two questions. First regarding the cross-sell revenue percentage. I think it's difficult for us to give an exact number because sometimes we share the cross-sell revenues with our partners on the platform side. But overall as I said that cross-selling revenues are already a very big part of our total flight revenues.
For the second question regarding the flagship stores, presently flagship stores contributed -- I think the contribution to our total take rate volume is broadly in mid teens, and in Q1 it's obviously much lower. And -- but this month we already have Air China and China Eastern back with their flagship stores on Qunar. So we think that this will help us to restart the flagship store business for Qunar for the remainder of second quarter and for the second half. Thank you.
Thank you. So maybe I just have one quick follow-up, just very lastly. On the percentage of users overlap between Ctrip and Qunar, just a rough percentage, if you can give a sense? Thank you.
Sometimes it's difficult for us to know because we don't have their data. And -- but based on our own surveys that we have done through comparing users' mobile phone numbers and also from other marketing channels, I think the overlap is not that big. And our users tend to be younger, more tech-savvy, and they have more business users, more high-end users, especially in the first and second tier cities. But I think that overall the overlap is not that big. Thank you.
Your next question comes from the line of Wendy Huang, Macquarie.
Thank you. I have two questions. The first, in our conversation with some hotel operators recently, it looks like their RevPAR has improved compared to last year as well as sequentially. I just wonder if you are also observing this kind of health situation in the hotel market and also how well Qunar could benefit from this hotel maybe ASP increase? And secondly, previously you have been talking about the breakeven on the non-GAAP OP level for the second half. Are you still sticking to this guidance? Thank you.
Okay. So for your first question, yes, we are very happy with the progress we have made on the hotel side for the first quarter and we think our trend will continue to be very strong for the rest of the year. The increase of our hotel revenues comes from both the increase in take rate and the increase in hotel volume.
In terms of ASP, I think we need -- probably need more time to see because there are always fluctuations quarter to quarter due to seasonality, especially considering Q1 is spring festival time. So we probably need more time to see more clearly the trend.
In terms of your second question regarding breakeven in second half 2016, the previous plan was to achieve that on a quarterly non-GAAP OP basis in the second half. I think that's still our goal. But as I have said, given the current situation with the airlines, it is more challenging as this adds more pressures on top-line growth for us for the second half. So we probably will apply more stringent cost control and be more prudent with our investment and we will try to stick to our own plans. Thank you.
Your next question comes from the line of Ming Xu, UBS.
Hi, thank you management for taking my question. So my first question is on the hotel side. We noticed that the hotel revenue declined quite significantly quarter on quarter, so I just want to better understand what are the drivers for this decline. How much is from volume of the merchant model and how much is from other factors? And I'm just wondering, is there any reason caused by accounting treatment between you and Ctrip? This is my first question. And I have a follow-up on the airline business.
I think we could build the revenues we generated from the merchant model last quarter. It's over RMB 200 million. So -- and this quarter it's less than RMB 10 million. So if you look at the difference, I think the quarter-on-quarter decrease in hotel revenue is all due to the termination of the merchant model hotels for one. So that's to answer your first question.
Okay. Thanks. So on the airline business, so my first question is we noticed that two of the major Chinese airlines, China Eastern and Air China, have resumed the flagship store operation on your platform. So -- and when you talk about the uncertainty or the remaining overhang in the airline business, so are you mainly referring to the other major two airlines or are you referring to even for these two airlines that have resumed the operations, the business cooperation or the take rate you can get is actually still lower than you previously could get? That's the first question.
I think for air, as we said, we are looking for a total solution, an all-round solution that can support our sustainable long term growth for the rest of the year and for the years to come. So the reopening of Air China and China Eastern flagship store was just the beginning of this process. And we are working very hard with airlines, trying to find a way to work with them long term.
So not only the flagship stores, we also need to figure out whether we have other opportunities on the platform side with the agents, cross-selling opportunities, commission structures, and et cetera. And I think if you look at the airlines, they are also in the process of changing their distribution structures in recent years. So I think this will be a gradual process. But the reopening of the two flagship stores is obviously a very good start and we are looking forward for more for the second half.
Okay. Got it. And my second question is -- sorry, I have a quick follow-up. And so basically you just mentioned that currently flagship stores only account for maybe mid teens of the total airline volume, which is not so big. But do you really -- do you expect that going forward, as the airlines actually cut commission to their agents, so the agents may have a harder time and may be squeezed out of the system so that -- for you -- the impact for you is that the contribution from the flagship store will actually rise? Is this something that you expect? And if that's the case, will this have an impact on the overall take rate of the business because maybe the take rate on the flagship stores are different or lower than the take rate on the smaller agents? Thanks.
I think it's obviously the intention of the airlines to further drive up their direct channel sales. So they have started this process few years ago and I think that they will continue. In terms of take rate and revenue potential, as we said before, I think given that the cross-sell revenues are already a big part of our total flight revenue, we think that we will have enough tools to adjust to this new change – new shift in the industry and continue to generate more revenue from each ticket results. Thank you.
End of Q&A
We are now approaching the end of the conference call. I will now turn the call over to Mr. Xiaolu Zhu of Qunar for his closing remarks.
Once again, thank you all for joining the call today. If you have any further questions, please do not hesitate to get in touch with us. Goodbye.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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