SouFun's (SFUN) CEO Vincent Mo on Q4 2016 Results - Earnings Call Transcript

| About: Fang Holdings (SFUN)
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SouFun Holdings Limited (NYSE:SFUN) Q4 2016 Earnings Conference Call March 31, 2017 8:00 AM ET

Executives

Hua Lei - Chief Financial Officer

Vincent Mo - Chief Executive Officer

Analysts

Hillman Chan - Macquarie

Alvin Jiang - Deutsche Bank

Ming Xu - UBS

Tian Hou - T.H. Capital

Nora Zhang - Bank of America/Merrill Lynch

Binbin Ding - JPMorgan

Robert Cowell - 86Research

Lavender Ng - Morgan Stanley

Monica Chen - Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Quarter Four 2016 Fang Holdings Limited Earnings Conference Call. [Operator Instructions] Now, I would like to hand the conference over to your speakers for today, our CFO, Hua Lei and our CEO, Vincent Mo. Thank you. Please go ahead, sir.

Hua Lei

Thank you, operator. Hello, everyone and welcome to Fang’s fourth quarter and full year 2016 earnings conference call. I am Hua Lei, Fang’s CFO. Joining today to discuss Fang’s results is our Chairman and CEO, Mr. Vincent Mo.

Before we get started, I would like to remind you that during the course of this conference call, we make forward-looking statements, statements that are not historical factors, including statements about our beliefs and expectations. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Fang assumes no obligation to update the forward-looking statements in this conference call and elsewhere. Potential risks and uncertainties include, but not limited to those outlined in our public filings with SEC, including our Form 20-F.

Now, let me walk you through our financials. I will begin with the fourth quarter results. Revenue, Fang reported total revenues of $174.7 million in the fourth quarter of 2016, a 43% decrease from $300.7 million in the corresponding period of 2015 primarily due to the decline in the comps and the marketing service. Revenue from e-commerce services was $89.9 million in the fourth quarter of 2016, a decrease of 48% from $173.9 million in the corresponding period of 2015. The decline was primarily due to the decreased transaction volumes impacted by hiking regulations as well as the strategic change to have scaled down on the home franchise business. Revenue from marketing services was $48 million in the fourth quarter of 2016, a decrease of 42% from $83 million in the corresponding period of 2015 primarily due to less demand from developers for online advertising under the regulatory change.

Revenue from listing services was $38.6 million in the fourth quarter of 2016, an increase of 74% from $23.3 million in the corresponding period of 2015 driven by increased number of paying members and the unit price. Revenue from Internet financial services was $0.6 million in the fourth quarter of 2016, a decrease of 96% from $15.6 million in the corresponding period of 2015, primarily due to the policy impact on the new home financial services and the decreased secondary transaction volumes of the company’s own brokerage services. Revenue from other value-added services was negative $2.4 million in the fourth quarter of 2016 compared to $5.9 million in the corresponding period of 2015 primarily due to the reclassification accounting treatment of BaoAn’s revenue.

Cost of revenue was $89.4 million in the fourth quarter of 2016, a decrease of 59.1% from $218.4 million in the corresponding period of 2015. The decrease in cost of revenue was mainly due to the downsizing of the secondary agent team and the scaling down of the rental and home furnishing in the e-commerce services. Operating expenses were $94.6 million in the fourth quarter of 2016, a decrease of 18% from $114.9 million in the corresponding period of 2015.

Selling expenses was $59.2 million in the fourth quarter of 2016, a decrease of 27.2% from $81.3 million in the corresponding period of 2015 mainly due to the decrease of sales staff cost. G&A expenses was $35.3 million in the fourth quarter of 2015, an increase of 5.2% from $33.6 million for the corresponding period of 2015 primarily due to the increased bad debt expense.

Operating loss was $8.9 million in the fourth quarter of 2016 compared to operating loss of $32.6 million in the corresponding period of 2015, which is attributable to strategic change of optimization and effective cost control. Income tax expenses was $3.1 million in the fourth quarter of 2016 compared to the income tax expenses of $7.5 million in the corresponding period of 2015.

Net loss attributable to Fang’s shareholders was $10.4 million in the fourth quarter of 2016 compared to net loss of $38.8 million in the corresponding period of 2015. Loss per fully diluted ordinary share and ADS was $0.11 and $0.02 in the fourth quarter of 2016 compared to loss of $0.44 and $0.09 respectively in the corresponding period of 2015.

Adjusted EBITDA defined as non-GAAP net income before income taxes, interest expenses, interest income, depreciation and amortization, was $2.4 million in the fourth quarter of 2016 compared to the loss of $23.4 million in the corresponding period of 2015.

As of December 31, 2016, Fang had cash, cash equivalents and short-term investments of $590.5 million compared to $983.7 million as of December 31, 2015. Net cash generated from operating activities was $85.1 million in the fourth quarter of 2016 compared to cash used in operating activities of $31.6 million in the same period of 2015 primarily due to the decrease of loan receivables of $80.4 million in the three months ended December 31, 2016.

Now, here are our full year financial results. Revenue, Fang reported total revenue of $916.4 million for 2016 representing an increase of 4% from $883.5 million for 2015, primarily driven by the growth in e-commerce business. Revenue from marketing services was $165.4 million for 2016, a decrease of 34% from $249.9 million for 2015, primarily due to less demand from property developers. Revenue from e-commerce services was $577.7 million for 2016, an increase of 22% from $474.8 million for 2015, primarily driven by the growth of our secondary brokerage services in the first half of this year – of 2016, sorry.

Revenue from listing services was $118.1 million for 2016, an increase of 9% from $107.9 million for 2015 driven by the increased number of paying members and unit price. Revenue from financial services was $27.6 million for 2016, flat with $29.6 million in 2015. Revenue from other value-added services was $25.6 million for 2016, an increase of 20% from $21.4 million for 2015, primarily driven by the growth of our research related products. Cost of revenue was $687.2 million for 2016, an increase of 23.7% from $555.4 million for 2015. The increase in cost of revenue was mainly due to the increased staff cost in secondary brokerage services. Operating expenses was $381.1 million for 2016, an increase of 5.3% from $362 million for 2015. Severance expenses was $229.8 million for 2016, a decrease of 3.9% from $236.6 million for 2015, primarily due to slightly decreased stock cost.

G&A expenses was $151.3 million for 2016, an increase of 20.6% from $125.4 million for 2015, primarily due to increased bad debt expense. Operating loss was $151.5 million for 2016 compared with operating loss of $34.5 million for 2015. Income tax expenses was $25 million for 2016 compared to $5.9 million of income tax benefit for the corresponding period in 2015. That expense increase was primarily due to no reversal and accrual of withholding tax for the dividend declared in 2016. Net loss attributed to Fang’s shareholders was $169.6 million for 2016 compared to $15.1 million for the corresponding period in 2015. Fully diluted loss per ADS was $0.36 for 2016 compared to $0.04 for 2015. Adjusted EBITDA was $121.2 million of loss for 2016 compared to $9.6 million of loss for 2015.

Cash generated from operating activities was $131.2 million for 2016 compared to net cash yields in operating activities was $165.3 million for 2015, primarily due to the decrease of loan receivables of $263.6 million for the three months ended December 31, 2016. This is a look, the company is ongoing adjustments to its transformation and the company is planning to return to open platform strategy before those changes are finalized. The company will see a decrease in top line revenue, but we expect to be profitable for the full year 2017. That’s all for the financial details.

And now we are open for the questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Hillman Chan from Macquarie. Please ask your question.

Hillman Chan

Hi. [Technical Difficulty].

Hua Lei

Hi Hillman, sorry, your line is not very clear.

Hillman Chan

Is it okay now? Is it better now?

Hua Lei

Yes.

Hillman Chan

We think the secondary divestments [Technical Difficulty]...

Hua Lei

Sorry, Hillman, so we still cannot hear you very clearly.

Operator

Mr. Chan, if you are speaking on the speaker phone, can you try picking up the receiver and speak, please.

Hillman Chan

Let me try it again. The strategy for secondary – in secondary model up in partnership [Technical Difficulty] as well?

Operator

I am sorry, Mr. Chan. The line is not very clear. I am sorry, sir. Did you get the questions. Mr. Chan can you try and reconnect the call [Operator Instructions]?

Hillman Chan

Okay. I will get into queue.

Operator

Thank you, sir. Thank you. So while we have Mr. Chan dial-in back in again, we will move to the next question, which comes from the line of Alvin Jiang from Deutsche Bank. Please ask your question.

Alvin Jiang

Hi. Good morning gentlemen. Thank you for taking my question. I have one question for Dr. Mo is that our long-term strategy of two businesses, one is our traditional listing business and the other one is our kind of a new business, the transaction service business, so which one is our focus and how we allocate or balance our resource for these two businesses, going forward, how we can see the synergy of these two strategies in long-term? Thank you.

Vincent Mo

Okay. Thank you. And as you know, we are changing our strategy and adjusting – making adjustments to our transformation in two directions to clarify. One is our traditional Internet and media business, including our advertising, listing services across new home, resale and home furnishing sectors. We can also add our data business, our research business into that traditional business direction. We are going to definitely reinforce this part going forward. Other than this, I am not directing, it’s still transaction related with data everything or only in the past. And going forward, we are making adjustments to our transaction model. We are going to focus on more building up this platform, transaction platform and in providing different transaction services to our partners, agents, brokers, mostly this category of our partners to facilitate, enhance their businesses and their operations. So rather than doing it everything ourselves, we would focus more on what we are good at and to provide them with different and related tools, products, services to our partners. Those are the segment directions we will move on.

Alvin Jiang

Got it. Thank you.

Operator

Thank you. The next question comes from Ming Xu from UBS. Please ask your question.

Ming Xu

Hi, good evening Mo and Lei. So, thank you for taking my question. I appreciate – Lei, I appreciate your attentiveness and your management comment. So I just have two questions, so one is in your transformation. So in your transformation, one, you mentioned that your two core businesses going forward, one is the traditional advertising, listing, data research service, so for this business, what’s your view, so what’s our key advantage or differentiation from our key competitors in this field, particularly given they probably have support from the Internet, larger Internet companies in terms of traffic. And secondly, in the transaction platform business, so I just want to better understand the revenue model going forward and what kind of commission rate they were charged. And my second question is on this transformation or restructuring, so what kind of a cost do you expect the company will incur? Thank you.

Hua Lei

Yes. Our competitive advantage for your first question, I think, it’s in two aspects. One thing is that our platforms, whether it’s WAP or PC. The topic is still growing. And as you know, the visitors to our platforms, to our apps and PCMs, they are very accurate property buyers and sellers. That’s going to be much more accurate and much more with high efficiency if you want to get clients. So, it’s an advantage of us. And the other one is that in the past 10 plus years, we have had a very good relationship with our different partners, our clients and we also provide good services to them. So, those are the two things we have. By improving this, we believe that we can do better than now and we can improve our market shares. And for your second question, it’s about the transaction platform. We have the revenue to us is really sharing. So, we share the commission things in the transaction. And we do have some fixed income from old partners. And we also have a percentage of their commission. And cost wise, we do not expand to that. We are going to have a very heavy, very big new stuff to support that. Mostly, we are going to do this based on our system, our transaction platforms to support our partners. So, that’s why we indicated in our guidance that although revenue wise, the top line will continue to decrease, because the revenue to us we would just recognize that part, which is a small part of our partners. On the other hand, expenses will be seriously under control. So eventually, we hope that we expect that we can make this company profitable eventually for the whole year.

Ming Xu

Thank you. So, Mo, so just follow-up on this transaction platform business model. So in my understanding that’s right that you are actually adopting a business model similar to what [indiscernible] used to do?

Vincent Mo

I don’t know what are they doing, but I do know what we have been doing. We have been doing the connecting developers and the agents, brokers and we have been doing that for more than 3 years. Now going forward, I believe that we will have more partners to go with us by using our platforms.

Ming Xu

So, you mean platforms that does not only include the former employee – the former agents you hired that now you transfer – sorry convert into free agents, but also you expect more agents, more other external agents – third-party agency company to use the platform?

Vincent Mo

You are right, it’s a – we will design our open platforms in a strategy and we will open our platforms to everybody in the industry.

Ming Xu

Okay. So I am already in the question, so what level of restructuring cost do you expect from this?

Hua Lei

If I understand your meaning fully of the restructuring cost, we do not expect that we are going to have something specific restructuring cost. It will be not that big and it will be integrated into our normal operations.

Ming Xu

Do you mean that the agent – secondary housing agents you used to hire have now been, all of them have been converted to free agents?

Vincent Mo

90%.

Ming Xu

90%, okay, okay, okay. Mo, just last question, sorry about this, so on the listing platform, so could you share with us how many agents you now – paying agents you now have and given the tough market condition all over the country. So, what kind of level or what kind of growth do you expect in 2017?

Vincent Mo

We have over – currently, I believe we have over 200,000 paid agents who are using our platforms to list their properties. As you mentioned, the current regulation or the turbulence of the market, there is an issue now. Everybody is facing that. The government is very keen to put everything under control and the property market. So, there is uncertainty there. All of this said the best thing we can do is really trying to make our platform more efficient and to generate more leads to our clients.

Ming Xu

Yes, go ahead.

Vincent Mo

Okay. At the end of quarter four, we have 247,000 paying members on our platform on the listed business, which is 16% increase comparing to last year same period.

Ming Xu

247,000, right?

Vincent Mo

Yes, yes.

Ming Xu

Okay, thank you.

Operator

Thank you. The next question comes from the line of Tian Hou from T.H. Capital. Please ask your question.

Tian Hou

The question is related to the policy. The new policy started from October and escalated to – in the much higher level in terms of a restriction. So, when we transform ourselves from a current agency model to a platform and resume our – the existing – the focus before like a media listing and if there are lot of transactions, how do we benefit from our current new strategy? And what do you think the policy will play out in the 2017 in the whole year?

Hua Lei

You mean the impact from the new policy to our business, right?

Tian Hou

Yes.

Hua Lei

Okay. Yes, we are saying the government they are releasing different levels of new policies to the property market. Actually, you know during the past 5 to 6 years, we have been experiencing difference in new policies from the government. In the short-term, probably we will see the transaction volumes will go down a little bit, but in the mid-term and the long-term, we still believe and expect the property market will still keep at a good level, I mean, in terms of the transaction volumes both in the new home and the separate home. So for our business, we think in the short-term probably we were affected negatively by the new policy probably in one or two quarters, but we do believe still – the market is still there and the development is still need to launch new projects and the homebuyer and the home seller, they still need to do the transaction to sell and/or to buy the properties. So, we think as long as we can keep building up our platform to meet the needs of customers and also to provide support to our clients, we think our platform will benefit from those in the long-term.

Tian Hou

I understand. Thanks for the explanation and also for the change in the business, the agencies, which you have in-house, now you turn them into like a franchisees, so what’s the arrangement between SouFun and those franchises economically?

Hua Lei

Economically, as Mo expanded before, actually we had like the revenue sharing from the agent or our franchisees from two ways. One is we were charged like branded fee from them and also we were sharing like 3% of their revenue on each store. So yes, basically, it’s just like keep the franchise model, yes.

Tian Hou

Okay. Thank you. That’s all my questions.

Hua Lei

Thank you.

Operator

Thank you. The next question comes from the line of Nora Zhang from Bank of America/Merrill Lynch. Please ask your question.

Nora Zhang

Good evening management. Thank you for taking my question. I have a question. I have a question for Vincent, probably just now you talked about partnership strategy in transaction business, what type of feedbacks from agents and up to now, how many agent partners we have currently and how many we targeting to grow this year, do you see any difficulty in the recruiting process and additionally, which cities we are focused on, previously we were only in about 30 cities and how many cities do we operate partnership business model now and are we looking to expanding into lower tier cities, because this year, they don’t have much tightening policies? And that’s my question.

Vincent Mo

Okay. Thank you for your question. And we are testing the model at this stage. And actually, we are going to start tomorrow, April 1. Let’s see how the market responds to our initiatives. We do have an internal target, say, every city we are trying to sign up about 10 partners for the month of April. So we are now looking, we plan to work in 20 cities to start with the partnership program. That is the current situation.

Nora Zhang

Thank you. Just to clarify, is that 10 partners in each city, does that mean agency partners or 10 agents?

Vincent Mo

Agency partners.

Nora Zhang

You partner with individual?

Vincent Mo

Not individual, it’s a company. It’s an agency company.

Nora Zhang

Okay, understood, so that’s my question. Thank you. That’s very helpful.

Vincent Mo

Thanks.

Operator

Thank you. The next question comes from the line of Binbin Ding from JPMorgan. Please ask your question.

Binbin Ding

Hey, good evening Mo and Lei and thanks for taking my question. I have a question regarding our guidance. So understood the e-commerce business is actually in the transition stage with no visibility, so I am just wondering if management could give some color on the outlook of the traditional business including marketing, listing as well as e-commerce. And also, when shall we expect we could have better visibility into the full year outlook of the company as a whole. And also, I have a follow-up on the policy side, so is this one policy tightening still within the expectation of management and what is your current judgment about how long it will last. And about the recently which are widely discussed the real estate registration policy, what kind of impact shall we expect from the implement of such a policy? Thank you.

Hua Lei

Okay. So for your first question for our transition business, marketing, listing, right. Our outlook now, I think is on the transition business right. Yes, okay. So for the marketing business, actually we will very soon actually back to 2 years or 3 years ago, during this 3 years, we do have some problems on this marketing business. For this year, we are working very hard, tried to at least make our market business not decrease again I mean in the New Year. This is our target. We hope we can at least to at least target on the market business. For the listing business, actually we are seeing some good change on quarter four in last year, also considering the number there. Actually, compared to 2015, we had over 70% growth on the top line for the listing business. We expect our listed business will continue to grow in 2017, this year. Hopefully, within the same like 20% to 30% growth there if possible. For our e-commerce business, actually this part probably, I mean e-commerce business is not our company, priority in the focus, because as you know, we had our new home direct sales business there. So I personally don’t expect e-commerce business will grow a lot I mean in the New Year. So it’s for your first question, right?

Binbin Ding

Yes. And the second question about the policy side probably for Mo.

Vincent Mo

Okay. I wish I could explain things. Well, we experienced different policy seasons before. But this time, I think it’s probably my experience is the hardest throughout the whole country and it’s directly from the leadership of the government. So to me, at least for the coming 3 months to 6 months or even 12 months is the market will be as it has been for the time being, I think the market where we are under heavy regulation. And I would not expect the price and the volume increasing in the near future. That said, well, things change here, especially in Chinese property market. Last year, the first half and most part of the year, it’s everybody is supporting the industry, the market. And the last quarter, it’s a 180 degrees change of direction. So – but it looks like at least for the coming six months it’s, I think the market situation will be tough and the policies will be there, will not go away. That’s my thinking.

Binbin Ding

Okay, got it. Thanks. Thank you. That’s helpful.

Vincent Mo

Thanks.

Operator

Thank you. The next question comes from the line of Robert Cowell from 86Research. Please ask your question.

Robert Cowell

Hi management. Thanks for taking my question. I guess I have two, the first one is on the listing business, I would like to know more about how the traffic yield listing platform has changed in the last 1 year or 2 years during this transition period and then also where our pricing is a relative to other listing products available to agents, that’s my first question. And then my second question is about the core business as a whole, so that’s marketing and listing and I would like to know what your expectations are for the margin of those businesses going forward? Thank you.

Vincent Mo

Okay. For the listing business, you are talking about traffic regarding to the listing business in last year, right?

Robert Cowell

Yes, and then over the pricing?

Vincent Mo

Yes. Actually, for the traffic cost as a whole we are seeing our traffic is keeping increasing in 2016 comparing to 2015. So, our listing business – the traffic also is increasing as well. Currently – actually our listing business partner is [indiscernible] of our total traffic. So, for the unit price actually comparing to your competitors, we are still like 20% to 30% cheaper than them. So, if considering our traffic actually our listing product actually is very attractive to the clients. So this is why we are seeing more and more clients. They are returning to your platform during the past several quarters. And yes, that’s it.

Robert Cowell

Thank you. And then the other question was about your expectations for the margin of the marketing and listing businesses?

Vincent Mo

For the margin side, actually, for the marketing business, we said net margin were around like 35%. For the listing business, the net margin is like 45% to 50%.

Robert Cowell

Thank you for answering the questions.

Vincent Mo

Thank you.

Operator

Thank you. The next question comes from the line of Amanda Chen from Morgan Stanley. Please ask your question.

Lavender Ng

Hello, management. Thank you for taking my questions. This is Lavender asking question on behalf of Amanda. So, I have two questions here regarding the business outlook in 2017. First question is how do you see the property market in different tier cities this year? And for the second question, what is the listing business outlook for this year? Thank you.

Hua Lei

For the first question, still the property markets in different tier cities, actually, for this time, what I see in the new policy actually they rollout in different tier cities before normally we are saying that the new project is only for the Tier 1 cities, but actually, this time they rollout in different tier cities. So probably, we think this time Tier 1, Tier 2 cities definitely was the transaction volumes will come down very quickly. For Tier 3 cities, for some Tier 3 cities even, the transaction volumes will also go down. But for most of Tier 3 and Tier 4 cities, probably we still can see some active property marketing there for the price and still we think the price will keep stable in most cities, because we don’t think the government, they actually want to see the price drop a lot. Actually, they just want to keep stable property markets there. Okay, so this is for your first question. For the second question is about listing, as I just explained, we think because our platform’s traffic and also the price we think our listing business is very attractive to our clients. And we also under our new franchise model, we believe more and more agents, they will join our franchise model and use our listing business. So, we expect our listing business will have some good growth there in this year. Thank you.

Lavender Ng

Okay, got it. That’s very helpful. Thank you.

Operator

Thank you. There are no further questions at this time. I would like to hand the conference over to your speaker today. Please go ahead, sir.

Hua Lei

Yes, we are still Monica Chang is on the line from Credit Suisse from the system.

Operator

Yes, sir. We have her. I will announce her name. Monica Chen from Credit Suisse, your line is open. Please ask your question.

Monica Chen

Hello, hi. Our cash flow level – so, we still see we have very healthy operating cash flow. So, can management comment on what will be the cash flow level outlook for this year? And the second question will be what is our headcount planning for 2017? Thank you.

Hua Lei

For the cash flow, actually because we expect 2017 will be a profitable year for the whole company. So, we don’t think we will keep burn the cash. So we expect we will continue to say the positive cash flow from operating definitely – sorry, what was the second question?

Monica Chen

It’s the headcount planning like – secondary and the others?

Hua Lei

Yes. For the headcount, definitely our transition business, I mean, the online business market and the listing business, we will continue to grow in these two businesses. If needed, we will keep – have more people to expand our headcount. And also now we are using new technologies like big data and other technologies to improve the whole company efficiency. So, probably we will not see big growth on the headcount in 2017. Yes, we will keep like stable, I think, the headcount.

Monica Chen

Okay, thank you.

Hua Lei

Thank you.

Operator

Thank you. There are no further questions at this time, sir. Please go ahead.

Hua Lei

Okay. So, thank you all for joining us today. Thank you, operator. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all disconnect your lines now. Thank you.

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