Autohome Inc.
Q1 2020 Earnings Call Transcript

Published: 1 Jun 2020

[Operator:]

Ladies and gentlemen, thank you for standing by for Autohome's First Quarter 2020 Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer section will follow the formal presentation. As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to introduce your host, Anita Chen, Autohome's IR Director. Ms. Chen, you may begin.

[Anita Chen:]

Thank you, operator. Hello, everyone, and welcome to Autohome's first quarter 2020 earnings conference call. Earlier today, Autohome distributed its earnings press release and you may find a copy on the company's website at www.autohome.com.cn. On today's call, we have Chairman and CEO, Mr. Min Lu; Co-President, Mr. Haifeng Shao; Co-President, Mr. Jingyu Zhang; and CFO, Mr. Jun Zou. After the prepared remarks, Mr. Lu, Mr. Shao, Mr. Zhang and Mr. Zou will be available to answer your questions. Before we begin, please note that the discussion today will contain forward-looking statements based under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the Securities and Exchange Commission. Autohome does not undertake any obligation to update any forward-looking statements, except as required under applicable law. The earnings press release in this call also includes discussion of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures and is available on Autohome's IR website. As a reminder, this conference is being recorded. In addition, a live and archived webcast of this earnings conference call will also be available on Autohome's IR website. I will now turn the call over to Autohome's Chairman and CEO, Mr. Lu.

[Min Lu:]

Thank you, Anita. Hello, everyone. Thank you for joining us today. We kicked up 2020 with a solid first quarter reporting total revenue of RMB 1.55 billion. Notably, revenue on new initiatives increased by 32% year-over-year and that contributed to 20% of total revenues compared to a revenue contribution of 15% for the same period last year. The exceptional revenue performance achieved by the new initiative was driven primarily by robust revenue from data products, which increased by over 80% year-over-year. In the first quarter total new passenger vehicle sales fell by 45% year-over-year as a result of the COVID-19 outbreak and subsequent expansion - extension of the Chinese New Year holiday. In many cases buyers postponed their vehicle purchase plans due to the extensive quarantine measures, while the continued spread of the pandemic around the global, further prolonged the period of domestic containment efforts. All these factors resulted in a further delays in the near term marketing demands of our customers. Although consumers remained cautious during the first quarter as the containment regulations have been eased in China coped the government's stimulus policy, the market began to show a gradual improvement from April. During the quarter we witnessed increased demand for online marketing services, as automakers and dealers shift their focus from offline to online channels. To capitalize this trade we introduced three [ph] of data products and tools. For example, we upgraded our intelligent showroom and embedded live streaming functions both of which were designed to enhance the efficiency and effectiveness of online marketing programs. Our live streaming channel has been popular among automakers as well. Since the outbreak of COVID-19 about 50 automakers have delivered a total of 124 live stream programs on our platform. We also launched a three week spring virtual auto show in collaboration with China console for the promotion of international trade, Automotive Sub-Council in April. This signature event presents an attractive - presents an attractive marketing opportunity that drove sales for our customers at the time when offline auto shows are either delayed or canceled in China and abroad. About 60 auto brands and the more than 1300 dealers have signed up for the event. In addition, as we remain committed to supporting our customers and the industry, we have been offering free trial of our smart instant messaging to more than 2000 dealers. Our strategic approach to delivering our business and strengthening our technologies allows us to generate additional value to our customers, which in turn will further enhance our market leadership in the long run. During the quarter leveraging our advantages in big data analysis and industry insight, we enhanced our data products metrics that facilitates OEM decision making. In the first quarter 17 automakers purchased our data product offerings compared with eight automakers in the same period of last year. In the first quarter, we have engaged with automakers for 15 programs for intelligent new car launch and 29 projects for intelligent marketing solutions. In terms of our data products to dealers in the first quarter over 17,000 dealers purchased our data products, by the end of the first quarter close to 3,000 dealers were using our Smart Call-out and the Smart Assistant which we launched last year. Regarding our traffic in March, the number of average DAUs who accessed our mobile website, primary app and mini apps was 31.7 million, relatively stable compared with the prior year period despite an unfavorable operating environment in out of vertical. With 2020 well underway, I'm confident in our ability to maintain our indisputable market leadership, given our well defined long term strategic plan and laser-focus on delivering value to our customers and other industry. With that, I would now turn the call over to CFO, Jun Zou for a closer look at our first quarter financial results, as well as the business outlook for the second quarter of 2020.

[Jun Zou:]

Thank you, Min. Hi, everyone. As Min has already highlighted, we are pleased to report a solid first quarter to start 2020. Please note that as with prior calls, I will reference RMB only in my discussion today. Net revenues for the first quarter were RMB 1.55 billion compared to RMB 1.61 billion in Q1 last year. For detailed breakdown, media services revenue were RMB 166 million, lead generation services revenues were RMB 670 million. Online marketplace and others revenues increased by 32% year-over-year to RMB 300 [ph] primarily attributable to the increased contribution from data products. Now, moving on to the costs, cost of revenue was RMB 178 million, compared to RMB 184 million in Q1 2019. Gross margin remained stable at 89% in the first quarter. Now as for operating expenses, sales and marketing expenses in the first quarter were RMB 124 million compared to 110 million in Q1 2019. Product development expenses were RMB 292 million compared to RMB 269 million in Q1 2019. Finally, G&A expenses were RMB 89 million compared to RMB 68 million in the same period of last year. Overall we delivered an operating profit of RMB 586 million [ph] for the first quarter of 2020 compared to RMB 657 million in the corresponding period of last year. Adjusted net income attributable to Autohome was RMB 646 million for the first quarter compared to RMB 701 million in the corresponding period of 2019. Our non-GAAP basic and diluted earnings per share for per ADS for the first quarter of RMB 5.43 and RMB 5.4 respectively compared to RMB 5.93 and RMB 5.87 respectively, in the corresponding period of 2019. As of March 31 2020, our balance sheet remain very strong with cash, cash equivalents and short term investments of RMB 13.3 billion. We generated operating cash flow of RMB 499 million in the first quarter of 2020. Let me now address our second quarter outlook which reflects our current and preliminary view on the market and opening conditions and may be subject to changes. At this point, we expect to generate net revenues in the range of RMB 2,220 billion to RMB 2,320 billion. In summary, our solid financial performance once again demonstrated the resilience of our core business as well as the strength of our new initiatives and disciplined approach to managing costs. As we fulfill our commitments to maximizing shareholder value, we are very pleased to pay our first regular annual dividend to our shareholders in April 2020 as scheduled. Going forward, we'll continue to expand our footprint in auto-related sectors while enhancing operating efficiency across each of our business lines. Always ultimate goal of generating sustained long-term value for shareholders. With that, we're ready to take your questions. Operator, please open the line for Q&A.

[Operator:]

Thank you, management. [Operator Instructions] Thank you. Our first question is Miranda Zhuang from Bank of America.

[Miranda Zhuang:]

Thank you, operator. [Foreign Language] Thank you for taking my question. So as you mentioned there is an acceleration in offline to online in business activities. So my question is regarding Autohome's strategy initiatives in this process, in particular on two areas. The first one is - the first one is on the online broadcasting. So would like to get management's view on like what's the difference of that broadcasting in the auto industry which has low transaction frequency and high transaction value versus live broadcasting in like retail e-commerce platforms. When offline activities all come back to normal, due you expect live broadcasting for cars to be able to sustain a strong traction among users and dealers and what's the company's strategy to compete in this area? And then my second area is about the private domain traffic management or customer relationship management. Recently we are seeing an increasing amount of merchants using like tours such as mini program to a tracking to act with users directly to influence transaction conversion. So I was wondering what's company's strategy and product offering in this area? Thank you so much.

[Min Lu:]

[Foreign Language] First of all thank you for your question. Now to answer your questions, I have to say through the COVID-19 epidemic, we do see a clear trend that a lot activities moved online. We do see that the new car purchase loop has been transferred into this search online, they get a lot of information online and it's non-contained research plus they make the purchase in the store, so this will become a close loop and this will become a new model for the new car purchasing.

[Min Lu:]

[Foreign Language] So the three parts of this close the loop, for Autohome, we already get prepared, and we already researched a lot of our products and services based on the three parts of this loop.

[Min Lu:]

[Foreign Language] For example, the best part, the online communication, we do have a lot of tools, including 3D tool, the virtual reality, VR tools and also the virtual new car Auto Show, et cetera, to cover the online broadcasting and communication.

[Min Lu:]

[Foreign Language] Now on the second part, the non-contract based sales, we do have the live streaming and also the video-based sales [ph]

[Min Lu:]

[Foreign Language] Now you asked a question. What's the major difference between the large amount transactions compared with the regular – the smaller transactions. I do believe there are a lot of differences.

[Min Lu:]

[Foreign Language] For live transactions for the users they have to take a look of the car, and they have to make comparison of the car. These two parts are inevitable.

[Min Lu:]

[Foreign Language] Now on the broadcasting, live streaming, we do see that the anchorman or the hoster and the participation of the support of the OEM and dealers are critical.

[Min Lu:]

[Foreign Language] As you know, the cars is quite e expensive, so that's why for the live streaming we do believe that our support with data products, with good product information and also training and helping and the services for the live streaming was very important.

[Min Lu:]

[Foreign Language] In first quarter, our live streaming platform, we already worked very closely together with the OEM and the dealers. This is a already in utilization.

[Min Lu:]

[Foreign Language] So my last conclusion is for the live streaming during the COVID-19 epidemic outbreak this is very important. And also in the car purchasing loop it is one of the critical part but it is not the most important part.

[Min Lu:]

Okay. I’ll answer your question on private domain user traffic. This is Lu Min speaking. And speaking of the private domain user a traffic, actually we have already paid a lot of attention on this area and we have already started some of the projects internally but everybody is talking about a private domain. The traffic, it's difficult for the dealer, a single dealer – even OEMs to make full use of the traffic – user traffic on there. So we're doing projects hopefully in Q3 or Q4, I don't know, we're doing the projects hopefully in Q3, late Q3 or Q4. We can launch a new tools or products helping dealers, OEMs to apply more and the more user traffic, the private domain user traffics and helping them to convert the user traffic to sales leads. We’ll see. We’ll try our best.

[Unidentified Company Representative:]

[Foreign Language] Thank you.

[Operator:]

Next question is Eddy Wang from Morgan Stanley. As a reminder please ask one question at a time.

[Eddy Wang:]

[Foreign Language] Thank you for taking my question my question is regarding managements view on auto market recovery in the second quarter and in the second half of the this year. As a management that you have wins since the improvement in terms of the auto demand in – since April. What -- do you think it suggest you know, a shift of the auto you know, sales from first quarter into the second quarter or you have – seen a structure improve sentiment for auto sales in the full year 2020? And what will be the impact of your overall – revenue in the second half of the year. Thank you.

[Jun Zou:]

Okay. The pandemic to me, I think, it has huge impact on other industry and you know, right now there are so many people have last their jobs, and plus, the pandemic maybe is still there and there is some saying that there could be second wave things like that. So it hit the economy here. So I think this pandemic has a huge impact in the future as well. So may ask Shao Haifeng to address your specific questions.

[Haifeng Shao:]

[Foreign Language] Well, thank you for your question. I would love to share my view regarding the market with you. If you look at this year because of the epidemic of the COVID-19 we believe the new car sales for year-round would drop by 10% to 15% and that also – that not only our estimation, but also estimation from the China console for the promotion of international trade, the Automotive subconsol.

[Haifeng Shao:]

[Foreign Language] Now if you look at the passenger car, you can look at the sales in April, it's still a negative, but we have to wait until May and June to verify whether this negative growth would continue or not. Maybe that's due to some of dealers due to the Q1 sales quarter to April.

[Haifeng Shao:]

[Foreign Language] Q1 sales quota to April. Also as you know, the sales drivers, the marketing budgets always grow along with the total sales volume, if the sales volume go down their marketing budget will also continue to go down.

[Haifeng Shao:]

[Foreign Language] Actually this year because of the COVID-19 epidemic, we do see a new trend, which is moving offline budget to spend online. So that's why we do see this trend will continue and this is invertible.

[Haifeng Shao:]

[Foreign Language] So this year we do see a lot of opportunities with aligning our data products, as well as the new tools business.

[Haifeng Shao:]

[Foreign Language] Okay. Thank you.

[Operator:]

Next question is Thomas Chong from Jefferies.

[Thomas Chong:]

[Foreign Language] Thanks management for taking my questions. My first question is about our cost control initiatives. Can management share about our strategies in coming quarters? And my second question is about our overseas expansion strategy. Given that in overseas market we are seeing the impacts from coronavirus is still quite severe. How should we think about our overall online auto show in August, as well as our strategies for this year? Thank you.

[Min Lu:]

Thomas, I will answer your first question, and then will Jun Zou [ph] answer the second one. Regarding to cost control, we'll continue our prudent cost control programs in particular you know in traditional business as we have implemented in the last two and half years. And so we believe you know we will be able to actually you know optimize our overall operation and deliver you know good returns to our shareholders and that's our belief that we are committed to do that you know in future.

[Jun Zou:]

Okay. Regarding the development of our overseas, actually we have already set up two subsidiary companies in the UK and Germany already and the teams are already there. And actually we have already launched an application called Yes Auto, and you may download it from Apple store and if you want to see the progress maybe you should download that and take a look at it and the progress we're making. But the like because of the pandemic the whole process was being delayed because our application, there are some delays already that whole process was delayed because auto dealer was shut down you know. So it delayed our process, but we will continue our efforts. I hope you the pandemic can be ended soon and overstating we will launch the virtual auto show in China as we did last year. This year we hope hopefully we can launch the auto show the same time in the UK and Germany. We'll see. Thank you.

[Operator:]

Our next question is Frank Chen from Macquarie. As a reminder please ask one question at a time.

[Frank Chen:]

[Foreign Language] Thank you for taking my question. I understand that COVID-19 maybe a trigger for OEMs and dealers to shift their budget online. Its encouraging to say OEMs are now allocating over 50% of their budget, online in first quarter and can management share potential here looking ahead? Thank you.

[Min Lu:]

[Foreign Language] First of all thank you for your questions. What actually for the first two quarters because of the COVID-19 endemic there is actually no offline activities. So that's why the OEM moved down more budgets to online.

[Min Lu:]

[Foreign Language] In Q2 we do see the offline marketing activities gradually recover. However, compared with 2019, the percentage or outbreak in the total budget is still less than happened g in 2019.

[Min Lu:]

[Foreign Language] Why this is a case that is because in Q1 it provided a very good opportunity for the OEM to work with us. We launched the intelligent new car launch tool for them and we also work with on to do the live streaming, as well as the video and other online activities. And as the audience was very happy to see that the effect was really good with lower cost.

[Min Lu:]

[Foreign Language] So my judgment is, for the offline activity, it will not vanish it will be still be there, however, the size of the online will be gradually growing, it won’t decrease the offline budget.

[Jun Zou:]

And let me also clarify one thing, what I meant is that the online spending for this year will exceed 50% for entire year.

[Operator:]

Next question is Tina Long from Credit Suisse.

[Tina Long:]

[Foreign Language] And so my question is regarding the data products, so out of all the products that’s we have launched in the past 12 to 18 months what are the products that actually have been received as the best out of all the distributors and what kind of data to back that up and also in the next six to 12 months what are the new data products grown out plans and also what the are the expected adoption rate by the dealers? Thank you.

[Min Lu:]

[Foreign Language] Our data product covers two major parts

[Min Lu:]

[Foreign Language] We also have products for dealers, the Smart Call-Out the Smart Assistant. [indiscernible]

[Min Lu:]

[Foreign Language] For the OEMs the intelligent call out for the intelligent marketing solutions they already spend OEMs procured this, and they already used this product.

[Min Lu:]

[Foreign Language] Actually, last Q1 I mean, Q1 2019, the number was only eight, this year it was 17.

[Min Lu:]

[Foreign Language] Now talking about the Smart Call-Out and Smart Assistant offered for dealers the Q1 of this year the number was 17,000, 17,000 dealers already used that. If you with 2019 for Q1 the number was only 14,000, 14,000.

[Min Lu:]

[Foreign Language] So the core value of such products, not only offered to OEM, but also offered to dealers is to try to enhance the conversion rate. The enhancement of the conversion rate can be 20% to 35%.

[Min Lu:]

[Foreign Language] For the later half of this year, only OEM side, we are trying to run the intelligence of activities – actually we want to connect the OEMs with the dealers through such intelligent activities.

[Min Lu:]

[Foreign Language] For the dealer side, for the later half of this year we are going to launch this March sales force to help them enhance the commercial rate after customers uses this store.

[Min Lu:]

[Foreign Language] And we are going to upgrade Intelligent New Car sales. In this way this product will be more perfect side. A - Jun Zou [Foreign Language] What maybe expand a little bit more. Actually, there's a split of data products that we are developing and selling. For example, there is product called Smart R&D, which is for the use for the use of the R&D phase of the OEM when they design the new car models, things like that, we have the big data to help them and support them to design the models that supply needs of their customers and things like that, there is many. And the thing you mentioned the Smart Call-Out, for example, that’s like an AI added tools to the dealers. [indiscernible] and when they talk to the customers on the screen there will be a set of messages or the parameters that customers are talking about. For example the acceleration of what kind of model. And the system will immediately recognize his questions and pop with the answer on the screen so that the telephone guy can give a very precise answers and make a explanation and things like that. This is a very welcomed by the dealers and for example last year, the dealers that used this tool they improved their store visit rate by 20% rightly.

[Operator:]

[Operator Instructions] Our next question is Brian Gong from Citigroup.

[Brian Gong:]

[Foreign Language] I will transcript myself. So you know, first quarter the number of dealers was slightly impacted by the COVID-19, so when does – the number of dealers can recover to normal level, in managements point of view. Thank you.

[Min Lu:]

[Foreign Language] Thank you for the question. Talking about the numbers of the dealers, it always grow with the new car sales. If you look at the sales transaction volumes, its total sales the year around would go down by 15% I would foresee the dealer numbers would also go down. Q1 would be the valley, and it will gradually recover. But overall speaking, the total number of dealers will also go down accordingly while the sales volumes go down.

[Min Lu:]

[Foreign Language] We would also watch what would happen further, and we have to watch and observe. However, I think one key element is that critical, which is the profitability level of different brands.

[Min Lu:]

[Foreign Language] Now this year if you look at the Japanese trends, actually the Japanese trends their margin level will continue to remain strong.

[Min Lu:]

[Foreign Language] The German brand would be stable.

[Min Lu:]

[Foreign Language] The US brand will decline.

[Min Lu:]

[Foreign Language] For the South Korea and the French cars, they would come - they would be quite...

[Min Lu:]

[Foreign Language] So for the Chinese brand we have to wait and see to see how they evolve. I think all these trends if you look at the mixture of al the different brands, and if you look at the profitability level of different brands, you will have an idea.

[Operator:]

Our next question is from Tian Hou from T.H. Capital.

[Tian Hou:]

[Foreign Language] So the question is related to the supply chain of the OEM, so overseas pandemic is actually happened much later then China, and is just started to go back to work with, resume their business operation. So for the auto production, there are some major components that we actually need to import it from overseas vendors, so what do you see the supply situation in the second half? Will the overseas pandemic situation impact the potential manufacturing capacity? Thank you.

[Jun Zou:]

[Foreign Language] Thanks for the questions. For the supply chain you know, of course, we were also worried about that in the beginning. Most of the OEMs have usually about two months inventory of, let say auto part and what we actually see you know, most [indiscernible] in the US we’re little bit lagging behind in mid-May but they will gradually resume to work in late May to early June so that is good sign, but that being said, you know, as Mr. Lu mentioned, you know, lot of experts are warning about the second wave of the pandemic we're going to see. If that happens, you know, the supply chain will definitely be disruptive. But in the long term, I think, this will really, I guess, promote the localization of the supply chain in China. And as far as we understand, many auto OEMs in China are planning to do that. And even for test lines, they have planned 100% localize their supply chain by next year, sometime next year. So this is something I guess you know, we are sure about. Thank you.

[Operator:]

Our next question is Robin Zhu from Bernstein.

[Robin Zhu:]

[Foreign Language]

[Jun Zou:]

Okay. Let me answer your question. Autohome as we talked many times before, that we are always exploring the future opportunities while we're doing the current business. And today, we have already discussed the traditional business line advertisement and the leads generation. But in future I think there are new areas that we are going to develop. For example, the data products, we mentioned. And the used car part, I think, there's a good opportunity for us to expand our business and we actually invest a lot and two years ago we start to become profitable in terms of this business unit and hopefully in the next few years we can expand our business even bigger and then the off the market we are looking to after market and see if we can develop new product and services and things like that. Of course, these are to-be business also we are looking to the possibilities of to see. And for example, our car sales channel it grows very smoothly and actually we hope it will be even bigger in the future and also we have already launched the shared car platform where if you find several share car companies with us, and we hope we can expand this one. So in the future we will keep our tradition of business growing, of course, you will see effective by the industry but on top of that we are developing new business lines. Thank you.

[Operator:]

Ant this is the end of question-and-answer session. Now I hand back to management for closing comments. Thank you.

[Min Lu:]

Thank you very much for joining us today. We appreciate your support. And we look forward to updating you on our next quarter's conference call in few months. In the meantime please feel free to getting to us if you have further questions or comments.

[Operator:]

Thank you. This concludes our conference call. You may disconnect now. Bye.