Fang Holdings Limited (NYSE:SFUN) Q1 2017 Results Earnings Conference Call June 20, 2017 8:00 AM ET
Dana Cheng - IR Manager
Vincent Mo - Chairman and CEO
Dr. Hua Lei - CFO
Ming Xu - UBS
Robert Cowell - 86Research
Alex Yao - JPMorgan
Nora Zhang - Bank of America Merrill Lynch
Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2017 Fang Holdings Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this call is being recorded today, 20th of June 2017. I would now like to hand the conference over to your first speaker today, Ms. Dana Cheng, IR Manager. Thank you and please go ahead.
Thank you, Operator. Hello, everyone and welcome to Fang’s first quarter 2017 earnings conference call. Joining today to discuss Fang’s results is our Chairman and CEO Mr. Vincent Mo; and our CFO, Dr. Hua Lei. After their prepared remarks, Mr. Mo and Dr. Lei will answer your questions.
Before we get started, I would like to remind you that during the course of this conference call, we may make forward-looking statements, statements that are historical facts, 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 including but not limited to those outlined in our public filings with the SEC, including our Form 20-F.
I will now turn the call over to Dr. Lei, our CFO, to discuss the financial results. Dr. Lei, please.
Dr. Hua Lei
Thank you. Good morning and good evening everyone. Thanks for joining us for our conference call today and business parley. Let me walk you through our financials firstly, then Vince and I will answer your questions.
I will start with revenues. The Company reported total revenues of $109.8 million in the first quarter this year, a 46.3% year-over-year decrease, primarily due to the decline in e-commerce services revenues. Revenue from e-commerce services was $39.9 million in the first quarter, a decrease of 69.5% from $130.9 million in the same period of last year, primarily due to the decreased transaction volumes generated by downsized self-owned and operated brokerage team.
Revenue from marketing services was $27.3 million in the first quarter, a decrease of 10.2% from $30.4 million in the corresponding period of last year, primarily due to the continued impact of the tightened government policies affecting the real estate market in China. Revenue from listing services was $34 million in the first quarter, an increase of 41.3% from $24.1 million in the corresponding period of 2016, primarily driven by the increased number of paying members.
Revenue from internet financial services was $2.2 million in the first quarter, a decrease of 78.9% from $10.6 million in the corresponding period of 2016, primarily due to the impact of the tightened government policies affecting, in particular, the new home financial services and the decreased secondary transaction volumes of Fang’s own brokerage services.
Revenue from other value-added services was $6.3 million in the first quarter, a decrease of 25.9% from $8.5 million in the corresponding period of 2016, primarily due to the re-classification accounting treatment of BaoAn’s revenue. In the first quarter of 2016, revenue from other value-added services net BaoAn’s revenue was $6.3 million, which means the pure OVA services revenues stay flat year-over-year.
Cost of revenue was $60.7 million in the first quarter, a decrease of 71% from $209.6 million in the corresponding period of 2016, primarily driven by the downsizing of the secondary brokerage team.
Operating expenses were $55.2 million in the first quarter, a decrease of 47.4% from $105 million in the same quarter last year. Selling expenses were $23.4 million in the first quarter, a year-over-year decrease of 62%, primarily driven by the decrease of advertising and promotion fee, as well as the sales commission fee. G&A expenses were $31.4 million in the first quarter, a year-over-year decrease of 27.7%, primarily due to the effective cost control measures.
Operating loss was $6.1 million in the first quarter of this year, compared to operating loss of $110 million in the same quarter last year, primarily attributable to the downsized e-commerce services and effective cost control.
Income tax expenses were $4.8 million in the first quarter this year, compared to income tax expenses of $5.2 million in the first quarter last year.
Net loss attributable to Fang’s shareholders was $12 million in the first quarter this year, compared to net loss of $113.7 million the same period last year. Loss per fully diluted ordinary share and ADS were $0.14 and $0.03 in the first quarter of 2017, compared to loss of $1.20 and $0.24, respectively, in the corresponding period of last year.
Cash as of March 31, 2017. Fang had cash, cash equivalents, and short-term investments of $542.6 million, compared to $590.5 million as of December 31, 2016. Net cash used in operating activities was $11 million in the first quarter of 2017, compared to cash flow used in operating activities of $67.2 million in the same period of 2016. The decrease in cash flows used operating activities was primarily due to $101.7 million decrease of net loss as compared to the first quarter last year.
Thank you for joining us today. And we are now open for the questions. Operator, please go ahead.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Alvin Jiang of Deutsche Bank. Please ask your question.
Hi, management. This is Maria Ma, [ph] asking on behalf of Alvin Jiang. We have two quick questions here. The first one is about the revenue contribution and the revenue growth of Tier 3, Tier 4 cities. And the second one is about the margin outlook for FY17 full year and also next year. Thank you.
Dr. Hua Lei
Yes. Actually, we are seeing stronger growth from lower tier cities, especially, first quarter this year. For example, our listing services, we grew over 50% in Tier 3 cities compared to last year the same period. For the overall revenue, we are seeing Tier 2 and Tier 3 cities, growth pattern in our Tier 1 cities. For your second question, for the margin size, we expect when the company comes back to the open platform strategy, our margin will be much improved compared to last year definitely, maybe will be similar to before our overall business like 2014. So, personally, I expect our listing business probably will reflect over 40% net margin; our marketing services probably will reflect over 20% margin.
Your next question comes from the line of Ming Xu of UBS. Please ask your question.
Good evening. So, I have two questions. The first one is on the policy side. So, we noticed that Q1, actually the sales were pretty good, particularly in lower tier cities, but since then the government, center and local government have introduced a lot of new restricted policies. So, how do you see the market in second quarter and in second half? And also what’s your expectation now for the market in 2018? We will see rebound or just a slow recovery? Second question is on your marketing business. I think, if you look at the marketing business actually, although it’s declined another 10% year-over-year, but I think it is still pretty resilient compared to the last year’s declining trend. So, how do you see the competition between us as a -- like a vertical property network with those emerging new kind of property advertising solution makers, such as the social media and also the -- like some of -- I know some of the big data companies are also offering location based solutions for property development. So, how do we see -- so maybe can you share with us your like vision on how do we maintain our competitiveness in this new competition? Thanks.
Okay. Question one is about the market situation, right? And frankly, the regulations from the central government and down to local government have been very tough in my experience in this industry. And there is no sign that these kinds of policies are reaching its -- or even close to its end. So, I am very neutral or negative toward the market situation for the next half of this year, at least to the end of this year. So, I think the market will be under pressure for some time, for the coming two quarters. There are uncertainties there. So, that’s my experience, which told me – which leads me to my -- this judgment. As to the competitiveness, second question, competitiveness of our marketing and listing and other business lines, I think we are still one of the leading players in the market but we do need to reach out to absorb the new technologies, big data and other new things into our products. We need to do more innovation to keep our momentum or keep our leadership to be competitive in the market. So, we have pressure there and we are under pressure but with our efforts we are still confident to catch up with all the competition.
So, just a quick clarification. You’re saying that you are bearish on the market, property market for the rest of the year, right?
Yes, I’m not confident with the improvement of the -- market improvement to the end of the year. The policies this year are very tight; regulations are still there and there is no sign...
What about next year? Because I remember earlier this year, a lot of people in the market or in the property industry feel that there may be a loosening or rebound in the market after the leadership change. So, how do you feel now?
Yes. I don’t think there is precondition there because I believe the government is going to be very stable. And so, I think -- according to history of the regulations of this industry, there is possibility that policies are going to be changed after some time. So, there will be expectations about change, but at least at this point, to my knowledge, I think I have not seen any signs of this change.
And the next question comes from the line of Robert Cowell of 86Research. You may ask your question.
I noticed that you had a big cut in the selling expense during the first quarter down to $23 million from almost $60 million last quarter, and it’s the lowest it’s been in the number of quarters. So, I guess I’d like to kind of get some color on what items you’ve been cutting within the selling expense line and kind of which are the ones that you’re not willing to cut. And then going forward, how are you thinking about the spending on sales and marketing? Thank you.
Dr. Hua Lei
The biggest decline of items in our operating expenses I will say is advertising and promotion expense. In quarter one 2016, it was close to $34 million; for quarter one this year, it’s only, this was only $8 million. So, one definitely is the big decline in items. Also, we’re seeing the staff cost and other items like the offline users expense and office expense, all of the items actually declined. So, yes, we had a much better control on our operating expenses compared to last year. Thank you.
If I could follow up, going forward, how do you think about that advertising spend?
Dr. Hua Lei
I would say, this year, we will keep a reasonable spend on advertising and promotion. So, probably, we’ll not spend as much as last year we did.
The next question comes from the line of Alex Yao of JP Morgan. You may ask your question.
Two questions here. The first one is, can you give us your latest thoughts on the transaction service in the off-line market? We understand this is a cyclical tough situation for you guys and it’s in the middle of the transition from in-house approach to open platform approach. Is something that you want to further pursue in the next few years or if the market recovers in the next few years, you guys will potentially move back to the principal model? And then secondly, if we three to five years’ view take out the cyclicality and regulatory impact, where do you see the biggest driver for SouFun? Are you seeing some vertical mix given that transactional e-commerce business initiatives and refocus to the lapsing media as business. We’re also seeing some of the vertical names that are ruthlessly [ph] pursuing new initiatives such as the financial services in the vertical area. So, if we take a relatively little longer term view, would you say you guys will be more focused back to the lapsing media business or transaction services will remain one of the largest potential driver to the company or is it something else that you guys are currently thinking where you can start incubating that will potentially become the key growth driver? And to pursue that growth driver, what are the incremental efforts and investments you will need to do over the next few years?
I will try to answer and Dr. Lei support. It’s all about now we have been experiencing a turbulence two plus years try to transform this company from a traditional internet model to a transaction based model. And we admitted that with did not make it and we failed the transformation and we are getting back to our platform business from three months ago. We’re still in the process frankly and I’m not very confident to say, we have transformed back to our platform business yet. We’re still in this process, we’re still trying to clean-up those things left from the transaction business. So, it’s far more substantial than expected. So, we hope after another three months to six months, we can clean-up everything we did in the past two years. And at the same time, the direction is clear that we do want to transform this company back to the open platform. Although, there are uncertainties there and there are things which we may not have been able to expect at this stage. So that is the answer to part of your question. Could you come up with more color to this?
Dr. Hua Lei
Yes. I mean, here, it’s more easier to do the transaction business as Mo mentioned. So, first, I think one of -- as mentioned whether we will shift back to the principal model, it might come back one year or two years later?
Okay. So, I can follow-up on that and continue my answer. We do not have any plan at this point to go back to the principal, as principal to the transaction business. As I mentioned, we are still cleaning up our mass we made in the past two years and which is much more than expected. So, I expect that we need another one quarter, two quarters to make sure we are coming back to the light assets business model again. So, it’s still very early for us to talk about whether we are going to get back to the principal transaction business or we keep our current thinking about the open platform business. So that’s what I can say now.
Dr. Hua Lei
Okay. So second question is about future’s driver for Fang business after three or five years. So, I will try to answer these questions. Yes, currently, maybe this probably is the marketing and the listing business and also we’re trying to do transaction business through our franchise and we try to add more value-added services on our franchise model in the future and try to again more revenue and profit from there. At this stage, to be honest, as Vincent mentioned, it still is not very clear in the future which part will become our key driver in the long-term. Maybe, if we can be successful in our projects model, maybe projects model will be our new driver, but it still is not very clear at this stage.
Thank you, for your insight for answer, and wish you guys the best luck for the transition, and hope you guys will retain the growth momentum soon. Thank you.
The next question comes from the line of Nora Zhang from Bank of America Merrill Lynch. You may ask you question.
Hi. Good evening, management. Thank you for taking my question. I have a question regarding the franchise business model. Do these franchise stores list their inventories on SouFun exclusively and do they pay for the same price for listing? And as we transform into franchise model, how do other agencies, for example Homelink and VIE [ph] were just still viewed as competitors and how do we make sure we allocate traffic to those agents, to external and internal agents fairly?
Our franchise business frankly is still in its very early testing stage. After we decided to hold on our principal transaction business, we have been in the process of developing our franchise model, the product and try to test in multiple cities. Up today, we have 200 plus partners who are walking with us to test the model among about 20 cities. I still cannot conclude how are we going to go next or it’s still not quite clear yet to me but the direction I think is right. This is part of our open platform strategy. But the current situation is that we need more partners, we need more franchisees to prove the creativeness or the durability of our franchise model. We need to be different from the traditional franchise model. So, if I can say that we started the business, it still needs to be proved to be a sustainable business. It is in line with our open platform business. So that’s the kind of situation.
We treat our franchisee partners as equal to other of our clients in doing listing business. They are equal. As I said it is part of our open platform business and we treat all of them. Whether they are franchisees, company’s partners or they are our listing partners, they need to pay the same fee if they are going to use our listing products.
[Operator Instructions] Currently, we don’t have any more questions from the line Please continue.
Thank you guys for joining the call today and we’ll look forward to discussing the results next quarter. Thank you.
Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may all disconnect.
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