Tuniu Corporation (TOUR) CEO Donald Yu on Q2 2019 Results - Earnings Call Transcript

Aug. 28, 2019 2:24 PM ETTuniu Corporation (TOUR)
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Tuniu Corporation (NASDAQ:TOUR) Q2 2019 Earnings Conference Call August 28, 2019 8:00 AM ET

Company Representatives

Donald Yu - Founder, Chairman, Chief Executive Officer

Maria Xin - Chief Financial Officer

Mary Chen - Director of Investor Relations

Conference Call Participants

William Yen - Blue Sky Capital

Operator

Hello and thank you for standing by for Tuniu's, 2019 Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] 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 now like to turn the meeting over to your host for today's conference call, Director of Investor Relations, Mary.

Mary Chen

Thank you, Andrew and welcome to our 2019 Second 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 second quarter of 2019.

Before we continue, I refer you to our Safe Harbor statement in the 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 second quarter earnings conference call.

During the quarter we remain focused on improving our products, strengthening our supply chain and expanding our distribution channels. Tuniu’s long term competitive advantage is now clearer and more defined than ever.

On the product side we offer a complete suite of top selling New Tour products that captures the involving demands of Chinese travelers. These products have a higher user satisfaction rating and the potentially higher margins.

We also continue to innovate new products in accordance to market demand in order to drive a new customer appreciation. Tuniu’s offline retail stores were another driving during the quarter. Our networks of stores continue to be an efficient channel of acquiring new customers.

Offline retail stores contributed to approximately 22% of our packaged tour GMV during the quarter compared to 13% during the same period last year. In terms of the user experience, our offline stores complement our online customer service to give our customers a complete booking experience.

In the second half of 2019, Tuniu has continued to expand the reach of this offline retail stores network with an increased emphasis on efficiency of our existing stores, balancing between scale and the profitability.

Under our S2B2C model, we leveraged our well know and established brand asset in order to achieve growth though our distribution changes and profits through our supply chain. Historically Tuniu’s B2C changes such as our mobile application, tour advisors and our offline retail stores were our main distribution channels.

Over the years our distribution channels now takes on the more benefit form. Our S2B2C distribution such as Difeng and social e-commerce continue to gain traction. This helps Tuniu evolve from a B2C centric channel into a multi-channel distribution, allowing Tuniu to reach more customers in lower tier cities as a lower user acquisition cost.

I would like to now give an update on the few of our core focuses in greater detail. Tuniu has always approached products designed and offering with the user in mind. For Packaged Tours

Products, we continue focus on expanding the penetration of our top-selling products in definitions where we have a competitive advantage.

These products are well received by users and serve as a tour to drive customer repurchases. As a result customers who have used Tuniu contributed approximately 67% of our overall GMV during the quarter reaching a historic hights.

Compared to other products on the market our core products are highly competitive in their respective definitions, both in terms of quality and the cost efficiency.

Tuniu’s self-operated New Tour is centerpiece of our strategy and product. We launched our first and New Tour product in 2009 with the idea of designing a high quality package tour products that meets the demand of China's travelers.

In terms of quality, New Tour is industry leading as we package together high quality products and the services into every one of these products. New Tour utilizes Tuniu’s well-known brands to offer high quality products for popular destinations.

Compared to other products, Tunui has full control over the pricing of New Tour. This allows us to better, monetize this product. Because we designed these product specifically based on the marketing demand, this product has a higher user satisfaction rating and a repurchase rate.

In order to keep New Tour competitive and industry leading, we continuously update our previous products once they reach the later stages of their product cycle. We also actively incorporate the acumens and our local tour operators into a New Tour, in order to lower costs while having better control over the quality. As of the end of the second quarter, we have over 1,000 different in New Tour products covering 240 departed cities across China.

Since inception, New Tour has served over 5 million trips while maintaining a user satisfaction rating of over 97%. For customers seeking quality, New Tour has developed to become the number one choice for these customers. In terms of contribution to our financials, New Tour contributed to approximately 20% of our package towards GMV, with the potential of reaching 50% in the future.

While New Tour is fully provided by Tuniu another brand that we recently launched is Tuniu Selection, which is an attraction of highly rated products provided by our suppliers. We closely work with our suppliers to insurance Tuniu Selection products are of the highest quality.

Going forward, we will also offer more Tuniu branded products for things such as Family Tours, Youth Tours, Education Tours, Honeymoon and even travel [inaudible]. Our emphasis on self-guided tour products is another component of our emphasis on products.

We divided the user demand into three types in order to better address the needs of each type of user. The first type of user are the ones that are looking for unstandardized packages. Tuniu's dynamic packaging system addresses the demand of these users by allowing them to actively put together individual products such as hotels, transportation and definition based products and services.

From the users standpoint, we are able to customize a trip based on their needs while also saving money through the bundle price. From Tuniu’s standpoint, our dynamic packaging automatically creates the product without the need of human assistance, allowing us to more efficiently create products for our customers.

The second type of users pick standardized products and experience. In order to address the needs of these customers, Tuniu recommended popular and standardize destination-based products and services to these customers.

Finally, the last type of users demand tailored products such as chartered tour guides and transportation; products such as shopping or food tour. These products typically have the highest margins because they are often tailored.

As often times – as the Chinese travelers become increasingly experienced and their consumption power increases, self-guided toured travelers who prefer same activities such as shopping, health care or beauty, we are quickly increasing in numbers.

Next I would like to talk about our efforts in developing our S2B2C model. In the travel industry, the supply chain is a vital component that connects the supply and demand. We made strong progress during the last few years in further strengthening our supply chain. We continue to consolidate procurement across the company in order to maximize our bargaining power with suppliers and minimize risk by better sharing inventory across our various business units.

On the other hand, direct procurement continues to scale reaching 60% of our packaged tour GMV during the quarter. We also further strengthened our service network with the launch of two new local tour operators; one is domestic and one international during the quarter. As of the end of the second quarter, we have a total of 33 local tour operators across the world.

For the first half of 2019, our local tour operators served 470,000 trips, increasing more than 40% year-over-year compared to the first half of 2018. Margins of our products using our own local tour operators continue to improve during the second quarter, increasing by approximately 3% to 5% compared to the same period last year. The utilization of centralized procurements across the company and the development of our local tour operators service networks, we improved our take rates in the long run.

We also continue to make strides in the distribution in our S2B2C model during the quarter.

Social e-commerce continues to be a fast-growing segment. Based on initial results, Social e-commerce is able to help Tuniu penetrate into regions and access customers that we have not reached before. These customers are generally located in lower tier cities. As of the end of this second quarter of 2019 we have 10,000 distributors using our social e-commerce tours with conversion rates continuously growing.

Our Difeng distribution also continued to grow on pace with our expectations. With GMV increasing by double digits during the second quarter on the year-on-year basis, we continue to find a new way to help our distributors.

For example, we recently introduced a tour in Difeng that allows our distributor to assemble tailored products for their customers. Going forward, Difeng’s distributers, we are playing an important role in helping Tuniu mitigate inventory risks and the lower blended procurement costs.

In the second half of 2019, where we have placed increased emphasis on technology and notably our dynamic packaging system. For our customs, our dynamic packaging system allows them to customize their own packaged products and to be able to save money on the bundle when compared to individually booking the product by themselves.

We are also making investments to increase the level of automation in our work processes, in order to improve the efficiency of our employees and the overall company.

Going forward we will also continue to develop new tours for our distributors, so that they are able to elaborate Tuniu’s supply chain and back-end system to distribute products to their customers.

We believe our commitment to the development of our service and the sales network, coupled with our improving internal efficiency, we have Tuniu better capture the future growth of China's online year travel market, and better position Tuniu to extract long term value for our shareholders.

I'll now turn the call to Maria Xin, our CFO, for the financial highlights.

Maria Xin

Thank you, Donald. Hello everyone. Now I will walk you through our second 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 second quarter of 2019, net revenues were RMB520.3 million representing 1% year-over-year decrease. Revenues from packaged tours was down 2% year-over-year to RMB429.5 million and accounted for 83% of our total net revenues for the quarter.

The decrease was primarily due to the decline in demand for travel to certain destinations.

Other revenues were up 4% year-over-year to RMB90.8 million and accounted for 17% for the total net revenue. The increase was primarily due to a raise in commission fees received from certain travel-related products.

Gross profit was down 10% year-over-year to RMB233 million for the second quarter of 2019. Operating expenses for the second quarter of 2019 were RMB432.2 million, up 16% year-over-year. Excluding share-based compensation and amortization of our acquired intangible assets, non-GAAP operating expenses were RMB382.5 million, representing a year-over-year increase of 23%.

Research and product development expenses for the second quarter of 2019 were RMB80.2 million up 4% year-over-year .The increase was primarily due to an increase in research and product development personnel related expenses.

Sales and marketing expenses for the second quarter of 2019 were RMB224.6 million, up 29% year-over-year. The increase was primarily due to expansion of our offline retail stores and our strengthened promotional campaigns on certain marketing channels.

General and administrative expenses for the second quarter of 2019 were RMB134.4 million, up 4% 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 RMB168.0 million in the second quarter of 2019. Non-GAAP net loss attributable to ordinary shareholders, which excluded share-based compensation expenses and amortization of acquired intangible assets, was RMB116.4 million in the second quarter of 2019.

As of June 30, 2019, the company had cash and cash equivalents, restricted cash and short-term investments of RMB2.0 billion. Cash flow generated from operations for the second quarter of 2019 were RMB235 million. In the second quarter, cash conversion cycle was negative 34 days compared to negative 27 days in the corresponding period of last year. Capital expenditures for the second quarter of this year was RMB28 million.

Tuniu currently expect to generate RMB763.1 million to RMB801.3 million of net revenues for the third quarter of 2019, which represents 0% to 5% year-over-year increase. Please note that all the forecast reflects Tuniu's current and the preliminary view of 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 Instructions] The first question comes from Aline Ha, a private investor. Please go ahead.

Q - Unidentified Analyst

Hi management. Thank you for taking my questions. I have two questions. First, can management share with us the revenue breakdown by destinations for this quarter? The second question, what is the reason for the increase in expenses during this quarter? Are you expecting the increase in expenses to be trend going forward? Thanks.

Maria Xin

Thank you for your questions. In terms of the destinations, we are continuing to see an effect by the one area of external events such as service tax and internal trade tensions. According to the official travel, this peak phase, we are seeing declines in Chinese travelers in a number of destinations.

Now in terms of the gross booking breakdown for this quarter, domestic tours contributed to nearly about 30% and the U.S. contributed 20%; Japan and South Korea together 10%; South East Asia 10%; and the islands and both the Maldives together 10% and Americas about 5%.

So to answer your second question about the expenses during this quarter, to start on the second half last year, we opened a lot of new off-line stores. Compared to the same period last year, we have more than 300 off-line stores opened during the second half 2018. So this is a result of the expenses increased in this year compared to the same period last year.

But in the second half of this year, so this increase will be reduced. So going forward, we will continue to optimize our off-line store efficiency and increase our employees, average employees ourselves in the off-line store and unlock two new profitability potential. Thank you.

Unidentified Analyst

Thank you.

Operator

[Operator Instructions] The next question comes from William Yen of Blue Sky Capital.

Please go ahead.

William Yen

Thanks management. You mentioned the S2B2C [ph] in your opening remarks. Can you elaborate it a bit, how it’s different from our previous strategy? Thanks.

Donald Yu [Interpreted]

This is the first time that we mentioned S2B2C model. So in the past few years we have been focusing on diversifying our sales channels and we are able to effectively lower our user acquisition costs and this can be seen through our financials.

Previously Tuniu has primarily focused on B2C distribution, however as we’ve really scaled the marginal user acquisition costs also increased rather significantly. So in the past few years we've been trying to diversify our channels and one of the ways we really focused on raising the amount of repeat customers and their repurchases on Tuniu’s as well as we started opening a number of off-line retail stores in order to really diversify our channels.

As we really diversify our sales channels, we were trying to leverage ways to acquire new users through other means. For our overall company we are trying to control the user acquisition costs to a suitable amount, as well as we are trying to minimize our loss while also balancing growth.

So our off-line stores grow in scale. We have accumulated a number – a rather large amount of experience in operating these off-line stores. So we are seeing a number of our off-line stores are breaking-even and a certain amount are rather profitable. These stores are generally located in the first and second tier cities. So overall we are very confident in the health and state of these off-line retail stores.

So on the supply chain side, Tuniu has always focused on penetrating deeper into the supply chain. We started our New Tour products 10 years ago, so we have a lot of experience running these products. In 2016 we also started watching a number of local tour operators across the world; as of now we have 33 in the world. So by using our local tour operator as well as being very penetrated into the supply chain, we were able to offer good services and also to increase the amount of repurchases among our customers, as well as having the possibility of growing our gross margins.

In addition to our New Tour products, we recently also launched our Tuniu Selection. We worked with a number of high quality suppliers that we have a long history of working relationship with and then we are able to recommend these products to our customers.

So internally we have consolidated our procurements among the different departments. This way we are able to really scale our purchases and be able to have a strong bargaining power of when we meet with our suppliers.

So this consolidation of our procurements, we really started this during the second quarter of 2019. So we expect there to be lot more room in terms of procurement potential through this.

By focusing on our products we are able to provide our distributors with high quality products. So by having our own Tuniu brand of products, as well as having our own local tour operators and doing good direct procurements we can provide all of our distributors which includes B2C, social distributors, B2B enterprises, all these channels with a high quality products so they are able to grow.

We are transitioning from a really B2C centric model where we have somewhat scattered of procurement within the company. Now we are dedicating more resources into other channels, as well as collectively procuring products and services. We believe our strategies here will help us unlock growth potential as well as profitability potential.

Thank you.

William Yen

Thank you. It’s very helpful.

Operator

[Operator Instructions] 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 for your continued support and we look forward to speaking with you in the coming months. 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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