Tuniu Corporation (TOUR) CEO Donald Yu on Q3 2019 Results - Earnings Call Transcript

Nov. 19, 2019 12:25 PM ETTuniu Corporation (TOUR)
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Tuniu Corporation (NASDAQ:TOUR)

Q3 2019 Earnings Conference Call

November 19, 2019, 08:00 AM ET

Company Participants

Donald Yu - Founder, Chairman and CEO

Maria Xin - CFO

Mary Chen - Director of IR

Conference Call Participants

Operator

Hello and thank you for standing by for Tuniu's 2019 Third Quarter Earnings Conference Call. At this time, all participants are in 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 now like to 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 Third 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 third 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 third quarter earnings conference call. We had a solid quarter of performance during the third quarter of 2019 with net revenues recovering to a positive growth, while achieving non-GAAP profitability.

Packaged tours revenues increased by 18% year-over-year as the number of our key regions such as Japan, Australia and New Zealand continues to grow. We are also seeing improvements in Maldives as it continues to make a recovery.

For the third consecutive year, we are able to achieve non-GAAP profitability during our peak season in the third quarter. We expect this trend to continue going forward at a greater scale as we further increase our efficiency and achieve greater economies of scale in retailing and procurement.

We revolve our 30 days around the developments of our S2B2C model. Tuniu’s established brand and supply chain allow us to quickly scale this model. With Tuniu’s brand we can more efficiently develop our distribution channels and strengthen our supply chain.

Additionally, our B2B and social distribution further lowered our branded user acquisition cost and increased our repurchase frequency, making our distribution more stable. Ultimately, we aim to create a S2B2C model that connects supply and demand through our online channels, offline, retail store distribution, social marketing and B2B distribution.

As consumer demand for higher-quality products shifts upwards in accordance with increasing purchasing power, it is crucial for Tuniu to increase our standards. Our emphasis on the continual improvement of our product, service and technology will be key to increasing user satisfaction rating, which in turn means higher repurchase rate and pricing power for Tuniu.

On the product front, our Niu Tour brand continues to grow rapidly. As a percentage of our packaged tour GMV, Niu Tour contributed to approximately 25% of our packaged tour GMV during the third quarter.

For our service capabilities, we continue to make strides in improving our offline retail stores both in terms of service quality and operational efficiency. Technology is another focal point for Tuniu and it helps us distinguish ourselves from traditional travel companies.

During the quarter, we made progress in increasing the level of automation throughout our company helping Tuniu achieve higher operational efficiency. Overall, our dedication to the improvement of our products, services and technology will help Tuniu increase user satisfaction, achieve higher repurchase rate and improve our pricing power.

I would like to now give an update on a few of our core focuses in greater detail. First, I would like to talk about our products. With years of experience in China as the leader in travel industry, Tuniu has developed a comprehensive understanding of Chinese travelers and their preferences. We have created Niu Tour based on our understanding on the market and itself as the core product brand under Tuniu.

Niu Tour was the first independent brand under Tuniu and has been well received by customers. Over 5 million trips have been made with Niu Tour since its inception, while user satisfaction ratings reached 97% and the repurchase rate remains high.

Contribution by Niu Tour continues to increase as a percentage of our packaged tours. Niu Tour’s higher take rates as a result of our ability to independently price this product also means it will serve as an important source of income in the future.

We believe there continues to be potential room for growth both in terms of its contribution to Tuniu as well as its take rate. Going forward, we will put more emphasis on the marketing of Niu Tour brand in order to improve its brand recognition.

In terms of distribution, we will push for the distribution of Niu Tour through all of our channels including online, offline, retail and B2B distribution. To better support the development of our Niu Tour brand, we will continue to expand and improve our local tour operators.

Products using Tuniu’s local tour operators result in higher margin. For example, certain domestic products utilizing Tuniu’s local tour operators have take rates 20%. Looking forward, we will also launch more local tour operators at international destinations in order to provide better products and services to Chinese travelers at popular destinations, such as Europe.

Tuniu Selection is another important brand for Tuniu where we closely collaborate with our suppliers to ensure products quality. Since its launch in April, over 20,000 trips have been made. Products listed under our Tuniu Selection brand have strict standards in terms of satisfaction rating and the number of user views giving you the access to higher-quality products and services.

Each element of the product will be carefully reviewed from transportation to accommodation to make sure the product passes the quality assessment. Niu Tour and Tuniu Selection will both be important drivers for product improvement for Tuniu going forward.

Next, I would like to talk about the improvement to our services. Our offline retail stores continue to undergo various improvements both in terms of a service quality as well as operational efficiency.

During the third quarter of 2019, stores that have been opened for more than one year on average covered all of their direct expenses. We expect the improvement of efficiency to further scale and expand the expense coverage of our offline stores to reach over 100% for full year 2020.

In order to achieve this, we started to optimize the structure of our offline retail store network since mid-2019 by closing stores that have not achieved breakeven within the expected timeframe. As a result, we have slowed the pace of our offline retail expansion in terms of store count focusing instead on the quality of each store. Looking forward, we will continue to open additional offline retail stores at a stable pace.

During the third quarter of 2019, we also launched a new offline retail store model that allows our internal employees to partner with us for new stores. This model will be an important part of our expansion into low tier cities.

For our customers, we also added a new key feature that improves the user satisfaction rate. Previously, users were paired to a dedicated professional customer service representative through our system. Now we introduced the feature that allows all users online and offline to select their customer representatives.

Customers can now see the reviews of our customer representatives and chose according to their preference. This not only allows customers to be paired with higher review of the customer representatives but also incentivize our employees to focus more on providing high-quality service.

Our social marketing tool launched in March of this year. The tool allows us to acquire new customers at a lower cost while also interpreting our services into the social circle of our customers. By being closer to our users’ social network, we are able to more efficiently capture the potential demand of our customer before they have a clear travel plan.

During the third quarter of 2019, transaction volumes for our social marketing tool increased by over 100% quarter-over-quarter. We believe our social marketing tool will be a crucial part of Tuniu’s service quality, as it seamlessly interprets into the everyday lives of our customers.

Difeng Cloud continues to find growth during the quarter. We can see this continue to be a great potential in travel product B2B distribution in China, as there still exists many regions where product coverage and access to high-quality products is still lacking.

In order to capture this market opportunity, Tuniu also offer Niu Tour B2B distribution to give more people access to our high-quality products. Difeng Cloud in conjunction with our direct retail channels will allow Tuniu to more comprehensively cover consumers across all regions of China.

Lastly, I would like to talk a bit about the technology. When compared to areas traditional travel company, Tuniu’s background in technology is one of our most distinct features. As a result, we will continue to invest in technology and especially in the areas of automation and dynamic packaging.

For automation, we will focus on two types of scenarios. The first type is improving the efficiency of our tool. This helps employees by reducing repetitive tasks and improving the existing workflows.

The second type is the automation of the procedures that are more efficiently done through computers. This includes product pricing as well as product recommendation. Both types of automation will bring financial benefits to Tuniu in the long run, either in the form of controlling expenses and improving user experience.

The other important part of our technology advantage is our dynamic packaging tool. We continue to refine our tool to incorporate more products as well as increasing the level of cost saving when purchasing products through a bundle. Customer adoption continued to be on the rise as more and more users discover this tool.

The benefits of our dynamic packaging tool also exist for our suppliers and distributors allowing them to more easily bundle products and improving their margins. Overall, we will further enhance our technological capabilities to distinguish Tuniu from traditional peers.

We will continue to revolve our strategies around creating better products, services and technology. We are seeing strong results as Niu Tour continues to make more meaningful contributions to our financials.

In combination with our established online channels, offline retail network, B2B distribution and market leading technology, Tuniu is now even more prepared to efficiently capture China’s growing demand for leisure travel.

Following Tuniu’s restructuring business units earlier this year we have seen a number of our core units such as our Niu Tour being profitable on a stand-alone basis. Going forward, we expect the company to make more meaningful steps towards unlocking more value for our customers and shareholders.

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

Maria Xin

Thank you, Donald. Hello, everyone. Now I will walk you through our third 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 equivalents of the numbers in our earnings release.

Starting from the third quarter of 2019, net revenues were RMB552.5 million representing 12% year-over-year increase. Revenues from packaged tours were up 18% year-over-year to RMB747.1 million and accounted for 88% of our total net revenues for the quarter. The increase was primarily due to the growth of organized tours.

Other revenues were down 19% year-over-year to RMB105.4 million and accounted for 12% of total net revenues. The decrease was primarily due to the decline in revenues generated from financial services and service fees received from insurance companies.

Gross profit was down 3% year-over-year to RMB380.5 million for the third quarter of 2019. Operating expenses for the third quarter of 2019 were RMB433.3 million, up 11% year-over-year, excluding share-based compensation and amortization of acquired intangible assets. Non-GAAP operating expenses were RMB385.7 million, representing a year-over-year increase of 13%.

Research and product development expenses for the third quarter of 2019 were RMB84.3 million, down 18% year-over-year. The decrease was primarily due to the improvement in efficiency resulting from the increased level of automation applied in research and product development activities, and optimization of research and product development personnel.

Sales and marketing expenses for the third quarter of 2019 were RMB240 million, up 15% year-over-year. The increase was primarily due to the expansion of our offline retail stores.

General and administrative expenses for the third quarter of 2019 were RMB138.5 million, up 13% 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 RMB13.5 million in the third quarter of 2019. Non-GAAP net income attributable to ordinary shareholders which excludes share-based compensation expenses and amortization of acquired intangible assets was RMB38.2 million in the third quarter of 2019.

As of September 30, 2019, the company had cash and cash equivalents, restricted cash and short-term investments of RMB2.2 billion. In the third quarter, cash and cash conversion cycle was negative 28 days compared to negative 22 days in the corresponding period last year. Capital expenditures for the third quarter of this year was RMB32.1 million.

Tuniu currently expects to generate RMB438.2 million to RMB461.8 million of net revenues for the fourth quarter of 2019, which represents 2% to 7% year-over-year decrease. Please note that this forecast reflects Tuniu's current and preliminary view 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

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Elaine Hei [ph] who’s a private investor.

Unidentified Analyst

Hi, management. Thanks for taking my question. I was wondering if you can share more details on the destination breakdown for this quarter and which destinations drove the recovery of packaged tour revenues? Thanks. And later I will have a follow-up question.

Maria Xin

Hi. Thank you for your questions. As you know, our packaged tour revenues grew 18% year-over-year making a solid recovery. In terms of the key drivers for the recovery, destinations such as Japan, Australia and New Zealand all posted double-digit growth. Also, the Maldives was another important destination with GMV and especially our take rates improving. The headwind from the economic slowdown and lower demand for a number of other airlines destinations such as Mauritius, which a number of the Chinese travelers, declined during the quarter, roughly 40%. Hong Kong and Thailand regions both declined during the quarter as well. For your questions about the destination breakdown, domestic tour contributed Tuniu about 35% during this quarter and at the same level – same period last year; Europe 20%, Japan 12%, Southeast Asia 10%, Maldives and other islands better, about 10%; Middle East, Africa about less than 5%. Thank you.

Operator

Our next question comes from William Yen [ph] with Blue Sky Capital.

Unidentified Analyst

Hi. Congratulations on the results. I have two questions. The first one is, can you share with us the profitability outlook for the near future? And were you expecting to breakeven next quarter on the upcoming year?

Maria Xin

Thank you for your questions. Unfortunately, we don’t give the next year guidance. The third quarter is a peak season for Tuniu. Travel demand and product pricing are both higher during the period. Our ability to generate profit reflects clear economics of scale of our operations. As for the next quarter, it’s generally weaker than this quarter with a soft travel demand. Going forward, we believe our focus on improving our products and services and our technology will be the key to reaching profitability. As Niu Tour, Tuniu’s brand product, continue to scale both its higher gross margins and higher repurchase rate, which allowed us to have a higher financial contribution. On the distribution side, Tuniu’s B2B distribution network will also help us increase our coverage in the low tier cities and enlarge our sales channels. Automation will benefit us in better controlling our expenses. Okay. To comment, we are well positioned to approach the profitability in the future. Thank you.

Operator

[Operator Instructions]. Our next question is a follow-up from Elaine Hei.

Unidentified Analyst

Hi, management. I have one more question. Can you give a bit more color on the reason for the negative guidance for the next quarter? Thanks.

Maria Xin

Thank you for your question. The negative guidance is largely due to the expected decline in the packaged tour revenues as a result of the slowdown of the economics. A number of the key destinations such as Middle East and Africa, the cruise line and some islands such as Mauritius, as we mentioned earlier, continued to experience negative growth in Chinese travelers. These destinations tend to have higher SP [ph] and take rate, so their impact is large in our top line growth. Hong Kong and the United States also continued to experience negative growth due to the internal factors. We expect these internal factors to be temporary. Also, other revenues we expect to continue its decline as we are focused on financial services for the traveler-related factors. Yes, this is our guidance in the next quarter.

Operator

[Operator Instructions]. Our next question is a follow-up from William Yen with Blue Sky Capital.

Unidentified Analyst

Hi. Can management share with us some key revenue drivers in the strategy for reaching profitability? Thank you.

Donald Yu

[Foreign Language]

In the past few years we dedicated a large amount of resource into developing our offline retail store network. So currently we are – in terms of our network relatively developed and we have become the largest operator of direct offline retail stores in China. So, right now we are focusing on efficiency. And as these stores increase their efficiency and as we increase the number of stores in terms of store count, we expect the contribution from our offline retail stores to increase as a percentage of our revenues. We also launched our partner model and this will be an important part for us to reach down into the low tier cities. Overall, our offline store distribution channel is relatively developed but we will continue growing in the future.

[Foreign Language]

Previously, our Niu Tour products or Niu Tour branded products were only exclusively offered on proprietary premium channels. However, we see the demand for high-quality products to be needed across China. So we are opening up our Niu Tour brand to collaborate with all kinds of channels across the industry. We believe this will be an important driver for revenue in the future as well.

[Foreign Language]

In terms of technology, we have recently opened up our dynamic packaging technology to all of our suppliers and distributors. We’re sharing this technology because it helps them with their efficiency and also it allows them to leverage Tuniu’s already developed supply chain. This helps them – especially the more independent distributors or suppliers to dynamically bundle products together for better efficiency. So we look forward to distributing our technology to all of our partners in order to gain growth for both Tuniu and our partners.

[Foreign Language]

We are also actively working internally or through investments to find similar products as Niu Tour. We believe there’s a great demand for these products as they are extremely important in the development of the industry. We will closely work together with these independent brand or brands that we develop ourselves to push for the development of the travel retail industry here in China.

[Foreign Language]

These brands share similarity. They are high quality and relatively different from what the traditional market offering. So there are relatively more unique products.

[Foreign Language]

By achieving high satisfaction ratings, we are able to try for a higher repurchase rate and we have the ability to independently price these products. Thank you.

Operator

[Operator Instructions]. As we have no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Maria for any closing remarks.

Maria Xin

Once again, thank you for joining us today. Thank you for your continued support. We are looking forward to speaking with you in the coming months. Thank you.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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