Leju Holdings Limited
Q3 2016 Earnings Call Transcript

Published: 28 Nov 2016

[Operator:]

Hello and thank you for standing by for Leju’s Third Quarter 2016 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. Please note that today’s conference call 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, Ms. Annie Huang, Leju’s Investor Relations Manager. Please go ahead.

[Annie Huang:]

Hello, everyone, and welcome to Leju’s third quarter 2016 earnings conference call. Today, we will update you regarding our financial results for the third quarter ended September 30, 2016. If you would like a copy of the earnings press release or would like to sign-up for our e-mail distribution list, please go to our IR website at ir.leju.com. Leading the call today is Mr. Geoffrey He, our CEO, who will review operational highlights for the third quarter of 2016; Ms. Min Chen, our CFO, who will then discuss the financial results in more detail. We will then open the call to questions, at which time our Executive Chairman, Mr. Xin Zhou, will be available. Before we continue, please allow me to read you Leju’s Safe Harbor statement. Some of the statements during this conference call are Forward-Looking Statements made under the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. 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 SEC. You are encouraged to review the forward-looking statements section of our Annual Report filed with the SEC for additional information concerning factors that could cause those differences. Leju does not undertake any obligation to publicly update any forward-looking statement whether as a result of new information, future events, or otherwise except as required by applicable law. Our earnings press release and this call include discussions of unaudited GAAP financial information, as well as some unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. Please note that unless otherwise stated, all figures mentioned during this conference call are in U.S. dollars. I will now turn the call over to Leju’s CEO, Geoffrey He. Please go ahead.

[Geoffrey He:]

Thank you everyone for joining us on the call today. Today’s call will be quite interesting as we have solid third quarter results to report with great progress made at all of our business lines. And yet, we are now facing a dramatically changing market in the fourth quarter. First off, we are happy to report solid third quarter results with strong revenue growth, improved margins and great operational progresses. Our e-commerce business achieved new record, both in terms of revenues and the number of coupons sold. This again proves our leading positioning in this business. It also validates our commitment to developing the e-commerce business with constant product and platform upgrades which continuously provided value-added marketing solutions and the services that our customers are looking for. During this quarter, we were first of its kind in the real estate and home furnishing verticals to develop and launch Leju Live, [ph] a professional live streaming platform that features live broadcasting of product launch and the industry interviews to capitalize on the popularity of live broadcasting among Chinese consumers. Our ability to develop timely and popular products such as Leju Live [ph] has continued to enhance our media influence, brand recognition among home buyers and developers as well as our ability to win project pipelines. In the secondary market, our listing business continued a steady growth and attracted more than 40,000 paying agents as we expanded our listing service into 270 more cities. We still see the secondary market with a long-term view and believe our listing platform will gain share in these markets through our service offerings. Meanwhile, our contractor platform continued to grow in the popularity among the home owners and the contractors through strong efforts in marketing and the geographic expansion. By the end of third quarter, we have rolled out the Qiang Gong Zhang platform in close to 70 cities and had over 50,000 contracts on line. We recorded GMV of RMB 167 million this quarter, a 40% increase from the second quarter of this year. We strongly believe in the long-term opportunity of this platform and the synergies it has with our primary and secondary businesses and a plan to continue with our investments into this platform in the future. Now, let’s take a step back and review the recent change in the market sentiment and the policies that will have a significant negative impact on our business in the near-term. Beginning in the mid-September, but more concentrated in the traditional golden week of October, 22 cities’ local governments announced the various tightening [credit] [ph] measures affecting almost all aspects of the marketing activities from sales and marketing on the developer side to buying and financing on the home buyer side. Almost all cities announced or reinstated more commonly used tightening measures such as purchase restrictions and the limit on the mortgage loans which will directly affect the eligible buyer pool and cause many consumers to sit on the sidelines. Many governments also imposed price ceilings and slowed down the pace of approving pre-sale permits in order to contain the price increases and reduce the supply on the market. In addition to these policies over the transactions stage, all governments also followed directives from the central government to strictly impose limitations on the advertising and the marketing campaigns and activities. The severity of these round of tightening policies and the level of the strict implementation has been rarely seen in recent years. As a result, developers became very reluctant to promote or launch new sales into the market where they not only face close scrutiny on the marketing and sales but also have go against price ceiling with no room to offer any discount only to meet with limited buyer universe and interest. Transaction volume across major cities fell sharply in the fourth quarter so far. And demand for marketing activities, which are usually high going into the fourth quarter as developers are pushing for year-end sales also were sharply reduced. This combination of the measures had a significant impact on our business in the fourth quarter so far and we expect this operating environment to last through the year-end and into the first quarter of 2017. On the other hand, we don’t believe that fundamental structure of the demand and supply for the industry in the long run can be alerted by these measures. We continue to focus on our strategy of providing total marketing solutions for the real estate industry players, homebuyers and homeowner alike and are ready to adapt to market change together with our clients to prepare for the next stage of growth when the market normalizes. Now, I’ll turn the call over to our CFO, Ms. Min Chen, who will review our financial highlights for the quarter.

[Min Chen:]

Thank you. Good morning and good evening, everyone. I will quickly go over the numbers for the third of the year and leave some room for questions later. For the third quarter of 2016, we recorded total revenues of $183.3 million, posting 21% growth year-over-year. Our e-commerce services revenues was $143.8 million, growing 35% from the same period last year, representing approximately 79% of our total revenues this quarter. Our e-commerce business continued to see increases in the average price per coupon redeemed, but during this quarter the price increases were partially offset by the decrease in number of coupons redeemed as a result of developers changing their launch schedules. During the quarter, we generated e-commerce revenues from 58 cities. Our online advertising services revenues for this quarter declined by 15% to $33.6 million as a result of changes in property developers’ online advertising demand; it contributed approximately 18% of our total revenue this quarter. Our listing services revenues for the third quarter of 2016 increased by 9% to $5.9 million from the same period last year. The higher revenue was driven by growth in secondary home sales. Our selling, general and administrative expenses increased by 21% to $142.8 million from the same quarter last year. The increase in overall SG&A was primarily due to increased marketing expenses spent on the promotion of our listing business and home furnishing business, which we have discussed before, as well as the marketing expenses related to our e-commerce business. The third quarter non-GAAP income from operations was approximately $33.6 million for the quarter, while non-GAAP net income attributable to Leju shareholders was approximately $23.1 million. For the first nine months of 2016, we recorded $454.6 million in total revenues, representing 13% increase from the same period of last year. Our e-commerce revenues which contributed overall 77% of total revenues grew 20% from the same period of last year to $348.2 million. Our online advertising revenues decreased 8% from the same period of last year to $89.8 million contributing 20% of total revenues, while our listing services revenues increased 16% to $16.7 million driven by the growth in secondary home sales for the first nine months. Non-GAAP income from operations was $42.7 million, representing a decrease of 10% from $47.3 million for the same period of 2015. Non-GAAP net income attributable to Leju’s shareholders was $33 million, representing a 16% year-over-year decrease from the same period last year. As of September 30, 2016, our cash and cash equivalents balance was $317 million. Our net cash flows from operations for the third quarter of 2016 were $46.9 million. Now, onto our guidance revision for the year of 2016. While we believe our performance for the first three quarters tracked expectations we had set at the beginning of this year, the policy measures that were just discussed by Mr. He earlier would undoubtedly have a significant impact on our fourth quarter business operations as well as the accelerated depreciation of RMB in the quarter. As such, we have reevaluated our business and are now revising down our guidance for the year to total revenues of $510 million to $530 million, which would represent a decrease of approximately 8% to 11% from $575.8 million in 2015. Please note this forecast reflects the Company’s current and preliminary view which is subject to change. This concludes our prepared remarks and we are ready for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] We will take our first question from Hillman Chan from Macquarie. Please go ahead.

[Hillman Chan:]

Thank you, management for taking my question. Firstly, I want to ask about how much of the currency impact, the renminbi to USD impact that we have factored in the revenue guidance for 2016?

[Min Chen:]

Hillman, the currency impact is approximately 4% to 5%. So, if you look at our revenues for the first nine months in RMB terms, the average growth rate would have been higher by 4% to 5%. So, that’s the impact from the currency side.

[Hillman Chan:]

Okay. So, assuming -- same currency, what would the guidance for the full year will be?

[Min Chen:]

If the currency didn’t change, I think our guidance would probably be about 5% lower than the revenue numbers for 2015; so, roughly 550.

[Hillman Chan:]

Okay. Got it. And other question would be about the profitability, going into fourth quarter and first quarter next year, understanding that we have the impact from the tightening measures from the government and then a lot of these e-commerce and advertising business will be impacted. But then how should we think about the profitability, given that we have certain fixed overhead here?

[Min Chen:]

Yes, you’re right. When we look at our business, we do have a certain amount across other line items in terms of cost of goods sold, in terms of our staffing costs and other expenses. There is a certain amount of fixed overhead. So, we do expect into the fourth quarter, given the revised down revenue expectations that we would -- our profitability would be impacted, we will probably be looking at a loss making fourth quarter.

[Hillman Chan:]

Okay. Got it. Last question, could we talk a bit more about Qiang Gong Zhang revenue contribution and the profitability as well if possible?

[Geoffrey He:]

Okay. In the Qiang Gong Zhang platform, actually we see very strong growth in both contractor and the deals we made in the quarter. And we actually did see some revenue growth, but compared to our total revenues, it’s still a very quite small portion. But I believe that next year, we can see the increase of the revenue of the Qiang Gong Zhang. In the short-term, I think it is still in the early stage of Qiang Gong Zhang and we still need to invest because the market very huge and we still have a lot of cities to enter; and even for big cities, we still have a lot of market share to get. So, we still need to invest in Qiang Gong Zhang; it is still quite early stage, but we already generated some revenue and hope by next year the revenue to Leju will be significant, I hope.

[Operator:]

[Operator Instructions] We will now take the next question from Robert Cowell from 86Research. Please go ahead.

[Robert Cowell:]

I guess, I want to get a little bit more into the 4Q guidance, or I guess the change in the full year guidance. I understand that a lot of these policies are having a disproportionate impact on sales and marketing spend from developers and also some of the restrictions on pre-sales are having an impact there as well. I’m just trying to break down the relative impact to e-commerce as opposed to advertising. Is there stronger demand for one relative to the other in the new market environment? Thank you.

[Geoffrey He:]

I think this -- first is that the first quarter used to be our strongest quarter in the year, most important quarter. But the new policy is actually -- previously the restriction policies were most on the price saving and to the slowdown, the history of the sales permits. But this time plus these restrictions and the government also enhanced very restrictive policies on the marketing activities of the developers, especially advertising. So, both our two lines, advertising and the e-commerce were greatly negatively impacted. For most developers, they slowed down their marketing campaign; some even cancelled their advertising campaigns. And for most projects in big cities, they had to slow down their sales progress. And some projects even because of that environment plus actually they did pretty well in the first three quarters. For the time being, they closed sales, they even closed showrooms, so the impact is quite significant for us.

[Robert Cowell:]

Thank you. Maybe if I can get one more?

[Min Chen:]

I was just going to supplement, if you were looking at the revenue contributions of e-commerce and advertising to our overall revenue lines, I think it is fair to assume that both are -- in terms of percentage terms, both are going to be impacted probably to the same proportion, just similar proportion as to our overall revenue sort of guidance.

[Robert Cowell:]

Thank you. That’s helpful. Maybe just one more, when I’m looking at the total number of coupons issued, there was this pretty substantial quarter-on-quarter jump there. I guess if there is any color on that and what it means for next year as well?

[Geoffrey He:]

I think we did pretty well in the third quarter and which actually -- if without this policy change, we have very strong pipelines and we are very confident about the fourth quarter. So, I think this demonstrates our strategy for this [target] [ph] is right but actually -- the fourth quarter because of the policies. So, if without policies, we can continue this trend actually.

[Min Chen:]

Yes. I think if you look at the coupons sold, we normally look at it as an indication of our -- the number of projects we are working on e-commerce product for which is a reflection of our market share in this product. So, yes, the third quarter saw a huge jump; it’s a record number of coupons sold, which is a great number to look at. But where the policy is being put in place at the beginning of October, you know the e-commerce model well, you know a lot of the people who might have bought e-coupons in the hopes of purchasing a unit in the fourth quarter or later, may now be limited out of the qualifications. So, we are uncertain, we’re not clear as to how much, how many of those 132,000 coupons will eventually be converted into revenue booking coupon redemptions. One thing we would say is that because of these policies now being in place with -- on the consumer side, many people being now disqualified from purchasing the next unit and with developer side, a lot of them are slowing down, or cancelling launches into the fourth quarter, we don’t expect a high conversion rate of that 132,000 will be eventually converted.

[Operator:]

Our next question comes from Ming Xu from UBS. Please go ahead.

[Ming Xu:]

This is Ming from UBS. Good morning. So, I have two questions. First question is I just want to have an update on the traffic side. So, could you update on how much of the traffic is on the mobile side and also how much of the traffic goes directly to leju.com? And my second question is on the advertising business. So, aside from the policy or the general industry trend, Mr. He just mentioned. So, have you seen any maybe challenge or threat from some of the new format of advertising such as the WeChat movement which recently opened to some local advertisers, developers and also like the news advocators like [indiscernible]? Thanks.

[Geoffrey He:]

As to the traffic, currently about 37% of our traffic comes from the PC side and 63% from the mobile side. And as you know, currently, we’re still maintaining the operating of house.sina and leju.com. So, the traffic actually comes from 30%. And we are trying as we said before that we are trying to move the traffic from house.sina to leju.com. Currently, the leju.com traffic is about 30% of our total traffic PC. And for the mobile side, actually we only have leju.com. As to the advertising, currently about 40%, almost 40% of advertising revenue is coming from the mobile side. You mentioned that we’ve seen actually open some local clients actually, the [indiscernible] side. But what I should say is that we still hold a very strong and very close cooperation with [indiscernible] and we are very soon to launch some new products based on Tianjin’s [ph] products. So it’s a no problem for us. We don’t think that the mobile side advertising is just a copy of PC advertising. We think in the future, the advertising will be based on the big data and who owns the big data who can finally own clients. So that’s the strength of Leju, that is the first one. The second one is that as to [indiscernible] actually did some different advertising in some cities but I don’t think it’s a very, how to say, it’s a very big difference for us. Because most developers, actually they are trying to use that. But it is only advertising. If it is without any service package, it’s not involved in the sales chain of the developers; I think it will not be a very serious strategy, because we are actually selling the total solution to them. We have both online and offline services. So, we really know what developers know that. Of course, we also have very similar advertising products compared to [indiscernible]. So we don’t think it’s a very big threat to us.

[Operator:]

[Operator Instructions] W will now take the next question from Nora Zhang from Bank of America. Please go ahead.

[Nora Zhang:]

Good evening, management. Thank you for taking my question. So, just now you mentioned that you expect the tightening policy to last until first quarter of 2017; just one question, because we see that the last round of tightening, which started in 2013 lasted about 1.5 years. Just want to know that why you think the policy only have an active impact until first quarter? And my second question is just now you mentioned the policy has a negative impact on the new home advertising, just wondering if the secondary listing business is also affected.

[Geoffrey He:]

Okay. I should be more accurate that we think it’s already gave us negative impact in the fourth quarter. And we think that the first quarter of 2017, we guess that will be little bit changed, little bit improved for much I think we guess. So, we don’t take it’s a very long-term impact. But in the near future, at least in the coming three or four months, it will be negative impact. That we think because this round of tightening had both -- two sides as I said before, one is restricting the buyer side and the other is restricting the marketing activity of the developers. So, it’s both side effects. For the secondary listings, our secondary listing model is based on the verified listing. So, it’s unlike the terminal listings that you can put almost all listings, no matter it’s true or false onto the website. So, of course we got some negative impact, we got some big clients to have to withdraw their listings on website and gave us some revenue negative impact. But as I know, we are expanding, we are still expanding from several cities to more cities and actually we are focusing on agents. More agents are actually using our products. So, it partially offsets the negative impact on the positive side.

[Nora Zhang:]

I also have a question regarding the new home advertising business. Just now you mentioned that Leju has introduced live broadcasting for the new home projects. I am wondering if we don’t have such tightening policy next year, do we expect the advertising revenue to have decent growth because of such new products in advertising.

[Geoffrey He:]

Yes, we will soon launch seven new products which are very attractive. We already have initial talks with developers. They are really interested in our new products. And our seven new products which will be launched maybe in the earlier next month, I think maybe you can have a look of that. It is unique on a market.

[Operator:]

Ladies and gentlemen, we are now approaching the end of the conference call. I will now turn the call back over to Leju’s Investor Relations Manager, Ms. Annie Huang, for any closing remarks.

[Annie Huang:]

This concludes today’s call. If you have any follow-up questions, please contact us at the numbers or emails provided on our earnings release and on our website. Thank you.

[Operator:]

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