Tuniu Corporation (TOUR) CEO Donald Yu on Q1 2019 Results - Earnings Call Transcript

May 23, 2019 11:42 AM ETTuniu Corporation (TOUR)
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Tuniu Corporation (NASDAQ:TOUR) Q1 2019 Earnings Conference Call May 23, 2019 8:30 AM ET

Corporate Participants

Mary Chen - Director of Investor Relations

Donald Yu - Founder, Chairman and Chief Executive Officer

Maria Xin - Chief Financial Officer

Conference Call Participants

William Yen - Blue Sky Capital

Operator

Hello and thank you for standing by for Tuniu's 2019 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to now turn the meeting over to your host for today's conference call, Director of Investor Relations, Mary.

Mary Chen

Thank you. And welcome to our 2019 first quarter earnings conference call. Joining me on the call today are Donald Yu, Tuniu's Founder, Chairman and Chief Executive Officer; and Maria Xin, Chief Financial Officer. For today's agenda, management will discuss business updates, operation highlights and financial performance for the first quarter of 2019.

Before we continue, I refer you to our Safe Harbor statement in earnings press release, which applies to this call as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB.

I would now like to turn the call over to our Founder, Chairman and Chief Executive Officer, Donald Yu.

Donald Yu

Thank you, Mary. Good day, everyone. Welcome to our 2019 first quarter earnings conference call.

In 2019, Tuniu focused on maintaining and expanding its long-term competitive advantage. On the supply side, we continue to consolidate and strengthen our supply chain in order to offer high-quality and competitively priced products to our customers.

During the first quarter of 2019, direct procurement as a percent of our packaged tour GMV reached 60%. We also continued to refine our local tour operators in order to provide the highest quality services to our customers.

As of March 31, 2019, Tuniu operates 31 local tour operators. For our sales channel, we continue to make strides in diversifying our distribution channels through our social marketing, offline stores and B2B distribution. As of March 31, 2019, Tuniu operates 536 offline retail stores throughout China.

We also made investments to our offline and online experience by further integrating our professional and dedicated customer service representatives. Technology wise Tuniu continued to heavily invest in the development in innovative tours and the strengthening of our ecosystem.

Over the years Tuniu invested over [RMB2 billion] [ph] in the development of [indiscernible] technologies. Our dynamic packaging system continue to be industry-leading allowing our customers to dynamically packaging where we have our products such as air tickets, hotel booking and destination-based products into a one bundled product.

Overall, our service sales and the technology networks are essential to our long-term ability to differentiate ourselves from our peers. This year we are also put further emphasis on the improvement of the customer experience. Areas such as user experience of our prior tired products, price competitiveness of our dynamic packaging system and the service quality of our customer representatives will be key topics of focus.

We will leverage our widely recognize the brand and extensive data, our user preference to provide high quality products through a new tool which are organizing tours that are directly designed and procured Tuniu. And Tuniu section which is our best selling products from our top suppliers.

During the first quarter of 2019, we also made adjustments to our corporate structure in order to better execute our strategies in the future. Our leader travel division. We are primarily focused on providing high quality service to our customers.

Our Difeng system, we are focused on the supply chain and the B2B distribution. With these adjustments in place, we are able to better align the interests of our business departments and to set more detailed strategies and goals for each division.

In the long run these changes will give Tuniu the ability to better adapt to the changing in travel industry in China.

I would like now to give an update on a few of our core focuses in greater detail. First, I would like to talk about the product offering. We believe Tuniu's core advantage in travel products can be categorized into three main components; diversification, quality and the price. Tuniu's direct procurement products, our new tour offers high-quality services to medium to high-end customers.

Tuniu creates tours based on the market demand and primarily focus on popular destinations. Our tours are design based on our years of experience in each destination and provide a truly unique experience for our customers.

For our suppliers, we recently launched the new category, top products from our suppliers that's how higher user ratings, repurchase rate and consistency in service quality can be categorically [read] [ph] as Tuniu selection. Tuniu will provide listing -- priority revisions and promotions for these high quality products.

In terms of catering to the diversified demands of our customers, Tuniu offers a wide selection of products SKUs to the commitment of our new tour and Tuniu selection products.

Quality wise, Tuniu continues to raise the minimum requirements products. Products are required to maintain a user review score of more than 80% in order to remain listed on Tuniu. This is up from 75% previously. We have reprioritized our product offerings to focus on the best selling products in popular destinations. This allows us to further concentrate our user traffic into the top-selling products SKUs improving the travel experience and increasing customer repurchase rate.

Also by collectively making procurements of these bestselling products, it allows us to improve our bargaining power and effectively increase our product margins. By emphasizing products, we are able to maintain our competitive advantage by offering differentiated products from our peers.

Additionally by further reclassifying our products into different categories, we are able to more efficiently recommend products to our customers based on their preference and demographics.

Tuniu's dynamic packaging system, which packaged together individual products and services into one bundle continues to be refined. This system leverages our years of accumulation in consolidating the travel supply chain and the system development. Through our dynamic packaging system, the price of two products bundled together is cheaper than individually purchasing the two products. We believe the feature is a highly valuable to [sub-guiding] [ph] tour traveler's as it provides a clear way of saving money and simplifying booking process.

Next, I will like to talk about our progress in improving Tuniu's overall user experience. We continue to refine the user experience of our offline stores by further integrating our online dedicated and professional customer service into the offline experience. Tools such as our social marketing app, which have many applications and which had growth allow our offline store employees, our online customer representatives and the social marketing retailers, the ability to effectively to sell Tuniu's products and services to their respective social circles. This further enhances Tuniu's sales network into local community, social growth and various consumption settings.

During the first quarter, offline retail stores contributed to 20% of our total package tour January during the quarter. Our offline retail stores allow us to accumulate a stronger sales channel and will benefit us in the long-run.

This year we will slowdown the opening of a new offline retail stores compared to last year in order to enhance the efficiencies of our existing stores although our offline store model is all already clearly defined. We believe this continues to be room for improvement in product offerings and in store management that can further unlock the profitability potential of these stores.

Social marketing is another highlight during the quarter. We started developing our social marketing distribution tool last year in order to provide our offline store with the ability to provide a wider range of products selection and efficiently distribute our products and services to their social networks. The tool has gained strong traction with actionable parties such as the social marketing distributors, community influencers and the tower distributors.

Users of our social marketing tour has advantage during the sales process as they are able to easily distribute Tuniu's product to their social circle. Our social marketing distribution app also launched during the quarter. The application provides a wider range of features for distributors allowing them to more easily browse through the available products and services and to share into various channels. As of the end of the first quarter over 5,000 stores have been opened on our social marketing tool.

During March of 2019 78% of these stores are active. We have also integrated the uses of our social marketing tool to improving repurchase rate of our existing customers by engaging with our customers through WeChat.

Lastly, I want to briefly talk about our different B2B distribution. Difeng continues to be the only travel B2B distributor in China to offer the complete suits of our travel products and services. As a result, Difeng continues to gain popular retail among suppliers and distributors.

During the quarter packages tour generated on Difeng increased by approximately 58% year-over-year. Because B2C travel is a relatively low frequency consumption, while B2B distribution is high frequency. We believe Difeng will help us increase the consistency of our distribution. Going forward, Difeng will continue to be a crucial part of our sales channel and in the Chinese travel industry.

Tuniu in 2019 will focus on maintaining and further expanding its competitive advantage. We will put increased resources in key areas such as the improvement of our travel products and the customer experience. We believe that in the offerings our higher quality and diversified products and providing a superior customer experience our two key areas that we have in Tuniu truly differentiate itself from market peers.

I will now turn the call over to my Maria Xin, our CFO for the financial highlights.

Maria Xin

Thank you, Donald. Hello everyone.

Now I will walk you through our first quarter 2019 financial results in greater detail. Please note that all the monetary amounts are in RMB, unless otherwise stated. You can find the U.S. dollar equivalent of the numbers in our earnings release.

Starting from the first quarter of 2019 net revenues were RMB456 million representing 5% year-over-year decrease. Revenues from packaged tours was down 9% year-over-year to RMB365.9 million and accounted for 80% of our total net revenue for the quarter.

The decrease was primarily due to the decline in certain destinations. Other revenues were up 17% year-over-year to RMB91 million and accounted for 20% of our total net revenue. The increase was primarily due to the increase in revenues generated from financial services and the commission fees received from the certain travel related products.

Gross profit was down 5% year-over-year to RMB250.8 million for the first quarter 2019, the decrease was primarily due to the decline in revenue from packaged tours. Operating expenses for the first quarter 2019 were RMB431.4 million, a 12% year-over-year excluding share-based compensation and amortization from acquired intangible assets.

Non-GAAP operating expenses were RMB374.7 million represented a year-over-year increase of 11%. Research and product development expenses for the first quarter of 2019 were RMB80 million about 5% year-over-year, the decrease was primarily due to the increase in efficiency resulting from the economics of scale and refined management and optimization of research and product development personnel.

Sales and the marketing expenses for the first quarter of 2019 was RMB280.8 million up 17.8% year-over-year, the increase was primarily due to the expansion of our offline retail stores.

General and administrative expenses for the first quarter of 2019 was RMB503.1 million up 17.5% year-over-year, the increase was primarily due to an increase in general and administrative personnel related expenses.

Net loss attributable to ordinary shareholders was RMB150.6 million in the first quarter of 2019. Non-GAAP net loss attributable to ordinary shareholders which exclude share based conversation expenses and amortization of acquired intangible assets was RMB82.1 million in the first quarter of 2019.

As of March 31, 2019, the company had cash and cash equivalents restrictive cash and the short-term investments of RMB1.8 billion cash flow generated from the operations for the first quarter of this year was RMB13.5 million. In the first quarter, cash conversion cycle was negative 28 days compared to negative 22 days in the corresponding period of last year.

Capital expenditures for the first quarter of this year was RMB34.3 million. Tuniu currently expect to generate RMB472.7 million to RMB499.8 million of net revenues for the second quarter of 2019, which represent 5% to 10% year-over-year decrease. Please note that this forecast reflects Tuniu's trend and the [premier reveal] [ph] on the industry and its operations which is subject to change. Thank you for listening.

We are now ready for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And the first question today comes from Elaine He a Private Investor. Please go ahead.

Unidentified Analyst

Thanks for taking my question. I was wondering if management can share the reason for the negative growth for this quarter as well as the negative guidance for the next quarter. Also can you provide rate -- full year guidance for 2019? Thank you.

Maria Xin

Okay. Thank you for your questions. So let me answer your questions, the negative growth during the first quarter of 2019 was primarily due to a number of the external factors in certain destinations and also the macro economic slowdown which impact our packaged tour revenue during the quarter.

For the destination side such as the Middle East cruise and the certain island impacted us a lot. We also moved out the lower certification rate product in the first quarter which also impacted total transaction volume strongly during the last quarter even through -- so we are seeing an improvement following the Chinese New Year. So the recover will benefit packaged tour revenues still in the second quarter.

To answer your questions on the guidance for the next quarter, the negative guidance is primarily due to the decline in tour products, because in this year, the supply side in China is decreasing. As we are [indiscernible] our product of the new tour and the Tuniu selection, we have started to improve our take rate during the second quarter which will have positive impact in the second half this year excluding the impact of our core product, our packaged tours revenue is expected to have a positive growth next quarter.

Unfortunately, we don't offer the full year guidance. Thank you for your questions.

Unidentified Analyst

Understand. Thanks management. I have got a last question. Can you also share us -- the breakdown of the GMV by destination during the first quarter?

Maria Xin

Okay. In terms of the GMV breakdown during the quarter domestic tour accounted for about 30% of our total GMVs. Southeast Asia was about 15%, Japan around 10%, Europe 10% and Middle East and Africa around 10%, Maldives and other islands was around 5% each. Thank you.

Operator

[Operator Instructions] Our next question today comes from William Yen with Blue Sky Capital. Please go ahead.

William Yen

Thank you management for taking my question. Can you share with us some key drivers for growth in the future? Also what are some key initiatives that we are taking in order to protect the external customers?

Donald Yu

[Foreign Language]

We have two main areas that we are going to focus in addition to our current business.

[Foreign Language]

Social marketing will be one of our core focuses going forward. We have based on some of the research we have noticed that our target market demographic is very similar to the audience reach via social marketing tools. So we have tested out a number of products and services through distribution, through social marketing tools, our products such as Difeng and our certain destination based products have been very well associated within the community.

[Foreign Language]

We have invested in the R&D for the social marketing tools in the past quarter -- few quarters. We have perfected a number of tools for our distributors. So that they are more easily and able to distribute products and services from [indiscernible] to their social circle, to their chat rooms and to their local communities.

[Foreign Language]

For social marketing, we will leverage establish social marketing platforms as well as develop our own social marketing channels. So overall, we expect both of these to reach into the local communities.

[Foreign Language]

Our focus on top selling products and our years of accumulation on -- in the channel supply chain will allow us to better serve our customers through social marketing.

[Foreign Language]

The second main focus here is to push our dynamic packaging system which allows users to bundle products at a discounted price.

[Foreign Language]

For dynamic packaging system, we recently launched a new application version for app and we have prioritized our dynamic packaging system into front spot. Features such as air tickets, plus hotel -- hotel plus [indiscernible] and various combination of these products allow users to bundle products at a discounted prices compared to booking them separately [indiscernible].

[Foreign Language]

By easing our newly formed dynamic packaging system, users could exchange up to 30% discount when compared to booking these products, I believe. So, in order to have this dynamic packaging system, we have our -- there is a very high demand for the system. Our current system helps us to have a clear pricing system for both our hotel booking and air ticketing.

[Foreign Language]

As you know, single revenue consists of packaged tour revenue and it is one of the largest components of our revenue. So, Tuniu bundling is a very important component of our business. So, our dynamic packaging system allows us to differentiate ourselves from many of our competitors that usually provide single or air ticketing or hotel booking solutions directly.

[Foreign Language]

For our dynamic packaging system, the system and technology is actually to go for. We have started investing in the research and development of the system starting from 2010. We have accumulated years of experience in developing this technology. So, every day there is over [100 million] [ph] core -- various data points being calculated. And over 20,000 bundles are being made each day.

[Foreign Language]

In conclusion, the two main components are social marketing and dynamic packaging. Thank you.

William Yen

I have got follow up questions regarding your offline retail stores since your peers are expanding their offline stores rapidly. How much contribution did these stores contribute during the quarter? What's your strategy for offline stores this year? Thanks.

Maria Xin

Offline stores in this quarter, [indiscernible] around 20% of the total GMV transaction volume. So, for the clarity…

Donald Yu

[Foreign Language]

We continue to open direct -- directly operate store this year, last year, as you know last year we opened relatively large amount of stores. This year, we will be focusing on creating efficiencies of each store as all -- for this year, we will open store with relatively more caution and slowdown the pace of that.

Operator

We are now approaching the end of the conference call. I will now turn the call over to Tuniu's CFO Maria Xin for closing remarks.

Maria Xin

Once again thank you for joining us today. Please don't hesitate to contact us, if you have any further questions. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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