Leju Holdings Limited
Q2 2017 Earnings Call Transcript

Published: 31 Aug 2017

[Operator:]

Hello. And thank you for standing by for Leju's second quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a Q&A 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 Director.

[Annie Huang:]

Hello, everyone. And welcome to Leju’s second quarter 2017 earnings conference call. Today, we will update you regarding our financial results for the second quarter ended June 30 2017. 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 Web site at ir.leju.com. Leading the call today is Mr. Geoffrey He, our CEO, who will review operational highlights for the second quarter 2017. Mr. Li-Lan Cheng, our acting CFO, will then discuss the financial results in more detail. We will then open the call to questions. Before we continue, please allow me to read you Leju’s Safe Harbor statements. 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 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 reports 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 statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Our earnings press release and this call includes 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. He-dong, please go ahead.

[Geoffrey He:]

Thanks everyone for joining us on the call today. We continue to face a challenging operating environment, but market conditions didn't show significant improvement during this quarter. Restricted policies were announced in late 2016 and early this year to change price ceilings require a holding period and to tighten the mortgage lendings, as well as limitations on marketing activities, were strictly enforced in this quarter and the further expanded into some lower tier cities. As a result, demand for marketing activities was sharply reduced in both primary and secondary markets, which continued to place a negative impact on our operating and results. Despite the headwinds we faced, we remain committed to enhancing our brand recognition and raising our market share through a continuous investment in product innovation and the strategic partnerships, while continuing to invest in our strategic initiative in the home furnishing market. In the primary debt market, we continued to improve and to diversify our content offerings through expanded partnerships to further enhance our media interest. In return, our differentiated product and the service offerings helped us secure long-term relationships with leading developer clients as they recognize our value as a leading marketing platform. Meanwhile, we were also pleased to see our mobile marketing strategy achieve good results as our mobile advertising continue to top our advertising revenues. In home furnishing business, our contractor platform continued its healthy divestment. During this quarter, we focused on empowering the constructors through effective marketing and the innovative products along the home furnishing product chain. In the future, we will continue to improve our platform to provide more streamline and reliable services to consumers and the constructors. Looking ahead, we don’t expect market conditions to improve significantly in major cities in the near-future. But we believe that our solid market position and the differentiated service and the product offering have laid a solid foundation for our future growth. In the near-term, we will continue to closely monitor market divestment and the regulatory change to make necessary adjustment to reduce cost and operating losses. I will now turn the call to our acting CFO, Mr. Li-Lan Cheng, who will review our financial highlights for the quarter.

[Li-Lan Cheng:]

Thank you, Geoffrey. Good morning and good evening, everyone. For the second quarter of 2017, we recorded total revenues of $92.7 million, a 41% decrease from the second quarter of 2016, as a result of restricted policies implemented by local governments. Our ecommerce services revenues decreased by 46% year-over-year to $63.7 million due to increases in both the number of discount coupons redeemed and the average price per discount coupon. During this quarter, we generated ecommerce revenues from 51 cities, and it contributed approximately 69% of our total revenue. Our online advertising services revenues for this quarter declined by 28% to $24.8 million as a result of a decrease in property deals developers’ online advertising demand. It contributed 27% of our total revenues this quarter. Our listing service revenue decreased by 26% to $4.2 million from the same period last year, as a result of a decrease in secondary home sales. Our cost of revenues increased by 31% to $19.2 million from the same quarter of 2016, as a result of increased cost of advertising resources we purchased, partially offset by a decrease in staff cost of the editorial department as a result of headcount change. Our selling, general, and administrative expenses decreased by 12% to $117.9 million from the same quarter last year. This decrease in overall SG&A was primarily due to a decrease in marketing expenses and commission expenses related to our ecommerce business. As changes in marketing environment continued to have a negative impact on our operating conditions and business outlook, we incurred goodwill impairment charge of $41.2 million based on the impairment assessment review. Non-GAAP loss from operations was $37.4 million for the second quarter of 2017 compared to a non-GAAP income from operations of $16.5 million for the same quarter of 2016. Non-GAAP net loss attributable to Leju shareholders was $42.3 million compared to non-GAAP net income attributable Leju shareholders of $15.2 million for the same quarter of 2016. For the first half of 2017, we recorded $161 million in total revenues, a 41% decrease from the same quarter of last year. Our e-commerce revenues decreased by 50% to $101.8 million from the same quarter of last year, as a result of a decrease in both the number of discount coupons redeemed and average price per discount coupon. It contributed 63% of our total revenues for the first half of 2017. Our online advertising revenues contributing 31% of our total revenues, decreased by 10% from the same period of last year to $50.6 million due to a decrease in developers’ market and demand; while our listing revenues decreased by 20% to $8.6 million as a result of decrease in secondary home sales for the first half of 2017. Non-GAAP loss from operations was $79.2 million compared to non-GAAP income from operations of $9.2 million for the first half of 2016. Non-GAAP net loss attributable to Leju shareholders was $66.5 million compared with non-GAAP net income attributable to Leju shareholders of $9.9 million for the same period last year. As of June 30, 2017, our cash and cash equivalents balance was $192.5 million. Our net cash flows used in operations for the second quarter of 2017 were $29.5 million, mainly attributable to non-GAAP net loss of $42.5 million, partially offset by an increase in accrued marketing and advertising expenses, and other current liabilities of $13.2 million. Looking ahead, we estimate that our third quarter 2017 total revenues will be approximately between $85 million to $95 million from the same period last year which represent a decrease of between 48% to 54% from the same quarter of last year. Please note down this forecast reflects our current and preliminary review, which is subject to change. This concludes our prepared remarks. We’re now ready to take your questions. Operator, please go ahead.

[Operator:]

Thank you [Operator Instructions]. We will take an opening question from Tian Hou of T.H. Capital. Please go ahead, your line is open.

[Tian Hou:]

I have questions. The performance of the business results has been not really satisfaction in the last couple of quarters. And as the company indicated, you guys don’t think the policies front is going to have a meaningful or some kind of structural, I would say, turnaround. So in that case, so I was wondering, how do you guys going to cope with the current sectors. So, on the one hand, the business continues to fly. And on the other hand, I want to know what you guys going to do to really change the current perspective to resume potential growth. So, that’s my question.

[Geoffrey He:]

Actually, our business is divided into three parts; one is the primary sector; second is the secondary sector; and the third one is the home furnishing sector. And our major revenue source is from the primary sector, e-commerce business, which actually was greatly impacted by the policies and the current market. But we think that from the developers’ side, actually, we’re in need is that e-cost model. So the model itself is very stable. The problem is because of the price ceilings and the selling price of the houses space so to the home buyers, actually they don't give discounts. But I think the situation itself is short-term. Although. we don't know how long it will be. But for the long term, I think that the model itself is stable and a normal market discount works here. Whenever the discount appears I think our business model, our e-comms business, will go back to normal. On the other hand, actually, we enhanced our efforts to the advertising, especially the mobile advertising market. So the way you can see that, the decreased ratio of our market advertising revenue is much smaller than the e-commerce side. We also invest in our multiple platform strategy to provide a total solution to the developers, which actually we already see, very encouraging efforts from the developers. So from the business model side, I think we make all what we can do and do our best to actually maintain our leadership market position with our developers. On the other hand, given that the very low visibility of the market change in the near future, we actually -- we are doing some internal adjustments, including the team adjustment and also the cost structure. I think this will also help us in the next few quarters, you can see from results.

[Tian Hou:]

The other question is related to what you guys see before Qiang Gong Zhang. So how does that go?

[Geoffrey He:]

Actually I think the Qiang Gong Zhang platform itself is gaining very healthy development. And also, from this quarter, I think we will also provide more innovative tours to the contractors. Currently, more and more contractors are joining our platform. And I think the revenue from the revenue side you can see that we are gradually increased revenue from the contractors. So later on, I think we will further invest in this platform, but give us some time. I think it will be a very interesting platform of our Leju business. And from long turn, it was a very strategic investment.

[Operator:]

We will take our next question from Binbin Ding of JPMorgan. Please go ahead, your line is open.

[Binbin Ding:]

I have few questions regarding the overall real-estate at-market. So first is, does management think the overall online plus offline real-estate end market is still growing? Because for the first half of '17, the transaction value of the commercial properties in China is actually still growing at over 10% in China. So I'm assuming they are putting equal to your percentage some budget from their revenue into the online advertising, the entire advertising market. The second question is when we talk about the ad market, at one point we usually may guessed the online media or platforms are actually taking the market share of budget from offline. I'm wondering if it is the same case within the real-estate end market. The third one is, within the online real-estate end market, given both and so for we’re seeing a decline in advertising revenue. Who do you think are taking revenue from us? Thank you.

[Geoffrey He:]

So the first one is that we think that the online advertising market, the key to win this market is the mobile sector. Actually, more and more developers, especially the big brand developers, they are gradually be familiar with the mobile advertising model. So it is still in a transition period that they are, the entire developers, actually they are shifting their budgets from the PC to mobile. Second one is that we think the mobile advertising -- from the mobile advertising markets, we already have a very -- actually innovative way to provide total solution mobile -- total mobile solutions rather than only advertising on the platform. We actually, through partnerships with a lot of frequent mobile platforms like Tautiao, like UC, we actually are creating new solution and that help the developers that can put adds on the multiple mobile platforms rather than only on Leju. So it is -- we think it's the trend for the industry, because developers actually in need for those solutions. For advertising market most, actually the other problem because of the price ceiling in big cities, especially in the first tier cities that developers actually they don’t have a problem to find the consumers. And so this greatly reduced their intents into ads. But we still think it's a short-term situation. Actually, we already see that the phenomenon that in some cities, the demand of the market is changing. And we think the market is still changing. For the advertising growth, I think when the market goes to a normal it will go back to normal. For the second one it is at it is true that the developer needs our total solution, including that online and offline services. But it really depends on how effective your online services can bring leads to the developers, if your online and services can provide effective leads, then they will reduce your cost offline. So it is balanced for your second question. As to the third question, I think it is true that all the developers -- other platforms like SouFun, our competitors, we are also concentrating on the advertising market from now on. But I think we have a strategies that, from the last year, we release that our multiple mobile strategy. This will help us to gain leading positions in the future competition.

[Li-Lan Cheng:]

Just to follow up Geoffrey’s -- regarding your last question, I don’t think anyone is taking market share away from Leju or SouFun. You see advertising revenue decreasing for both Leju and SouFun, but also for -- I mean, first of all, even new home market at least there is no other major competitors that contribute a meaningful market share. But even them, for instance, Baidu, their new home advertising revenue was also -- this is more of a reflection of what Geoffrey talked about, is that the overall reduction in the demand for advertising by developers when they were forced to sell new homes at below market price and buyers were sliding up to buy. So there was no -- that took away a lot of demand for adverting.

[Operator:]

[Operator Instructions] We will take our next question Ming Xu of UBS. Please go ahead, your line is open.

[Wei Zhang:]

So I just have one question. So with the second quarter past and third quarter almost past us, so what’s your feeling on the, I would say, the impact on the -- from all the property restricted policies. Is it getting tighter or actually if it’s -- there is no further restriction in Q3. And then now at where we’re currently spend so what’s your expectations for 2018. And particularly, are we going to see any meaningful recovery in the property market in 2018? Do we have that visibility now? Thanks.

[Geoffrey He:]

In the second quarter, it is true that policies were further tightened in most of the big cities and even the lower cities. And for this quarter, for the third quarter, we see several lower tier cities Tier 3 or Tier 4 cities, local governments imposed some policies. But overall, I think it’s a stable quarter for the policy restriction. For the market movement, I think we already see some cities -- as I said, the demand for the homes, the balance is a bit changing because some cities -- some developers in some biggest cities begin to offer discounts. And more importantly, because the policies on the mortgage, the home buyer mortgages that potential buyers -- the number of the potential buyers in getting decrease. So we think that the situation will be a little improved in the next quarter. And from long term, I think the next year, there will be some change.

[Li-Lan Cheng:]

I’ll get into follow up. We don't expect, on the policy front, things will reverse course. I mean government will not -- I don't think in the short term, in a near to medium term, relax any of these policies unless there's some major collapse in the macroeconomic front, which is unlikely. It's more about the market, both developers and consumers, adjusting to the new regulatory environment and finding a new balance. From the end of last year through the second quarter of this year, was all about imposing limits on pricing, imposing various limits. And it was quite sudden and quite severe. But if these restricted policies have their intended effect, which in our past experience, after a period of time transaction volumes start to fall and stabilize at a lower level. And then the developers realized they still need to push their products out, they still need to complete their operating target. So developers start to think about marketing under the new environment, in the new environment and including advertising strategy, including discounts; that's when, at least for us, opportunities will begin to come. Because then we can talk to developers about how to implement their new marketing strategies. So like He-dong just said, we're seeing in some select cities, things start to, they are beginning to move. But realistically, I think for our operating environment to have major improvement you’re looking at next year.

[Operator:]

[Operator Instructions] As we appear to have no further audio questions, I would like to turn the call back to the speakers for any additional or 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 Web site. Thank you.

[Operator:]

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.