Fang Holdings Limited
Q1 2015 Earnings Call Transcript

Published: 20 May 2015

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2015 SouFun Holdings Limited Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday 20 of May, 2015. I would now like to hand the call over to Dr. Hua Lei, Thank you. Please proceed.

[Hua Lei:]

Thank you, operator. Hello, everyone and welcome to SouFun first quarter 2015 earnings conference call. I am Hua Lei, Deputy CFO. Joining me today are SouFun's Chairman and CEO, Mr. Vincent Mo; and CFO Mrs. Guan Lanying. This conference call is being broadcasted on the Internet and is available through our IR website at ir.fang.com, together with our earnings release. Before we carry on, I'd like to remind you that during the course of this conference call, we may make forward-looking statements, statements that are not historical factors, including statements about our beliefs and expectations. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. SouFun assumes no obligation to update the forward-looking statements in this conference call and elsewhere. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC, including our Form 20-F. Before the financial numbers, I want to give update for our recent business developments. In recent markets SouFun sold 7270 units through the traditional model with January 7.85 billion during the first quarter, 4339 of which units was sold by our in-house sales team. Unit sale market SouFun launched online brokerages with 3.5% commission rates since January. In the first quarter 1189 units was sold by the in-house sales team with GMV RMB 3.07 unit. SouFun also launched franchise business since March. At the end of March, they were 2143 franchise partners to join our platforms from 680 in order to support the fast growing online brokerage business, SouFun was accelerating to build up our inventory data base in resale market. At the end of March, our data base included 850,000 inventories across 27 major cities in China. The inventory market SouFun started to provide rental transactions service with free commission fee in Beijing and Shanghai since January. In the first quarter, our in-house rental team finished 7,900 city transactions totally in those two cities. In the home furnishing market, SouFun continued to provide unbilled [656] home furnishing packages. In the first quarter, SouFun received 566 decoration orders from homeowners with GMV RMB$24.7 million and had 212 sites on managing in ten cities. SouFun continued to offer financial services to homebuyer in purchasing new homes and the secondhand homes. During the first quarter, 1,122 homebuyers received RMB$ 825 million in mortgage loans from different commercial bonds through SouFun's platform and RMB$ 270 million loans was issued to 870 homebuyers directly. Now, let's look at the numbers. Revenue, SouFun reported total revenues of $123.5 million for the first quarter representing an increase of 1.8% from $121.2 million for the corresponding period in 2014 primarily driven by the growth in e-commerce services, partially offset by the decline in marketing services and the listing services. Revenue from marketing services was $40.6 million for the first quarter 2015, a decrease of 13.5% from $47 million for the corresponding period in 2014, primarily due to the weakness of the resale market. Revenue from e-commerce services was $51.5 million for the first quarter, a 75.2% increase from $29.4 million for the same period in 2014, primarily due to the growth of the direct sales services for new homes. Revenue from listing services was $23.6 million for the first quarter, a decrease of 43.9% from $42.1 million for the same period of last year, primarily due to discounts which SouFun offered to agency clients beginning in June last year and the decline of the number of paying account members. Revenues from the Internet financial service was $3.5 million for the first quarter. Internet financial service was separated from other value-added services and recorded as new revenue segment starting from this quarter. SouFun began to offer Internet financial services in August 2014. Revenue from other value-added services was $4.1 million for the first quarter, an increase of 53.3% from $2.7 million for the corresponding period in 2014, primarily due to the rapid growth of our research related products. Cost of revenue was $43.6 million for the first quarter, an increase of 75.2% from $24.9 million for the first quarter of 2014. The increase in cost of revenue was mainly attributable to the direct sales, which were launched in August last year. In addition, increased staff cost also contributed to the increase in cost of revenues. Gross margin was 64.7% for the first quarter, compared to 79.5% for the same period last year. Operating expenses was $71.8 million for the first quarter, an increase of 53.3% from $46.9 million for the same period last year. Selling expenses was $48 million for the first quarter, an increase of 74.4% from $27.5 million for the corresponding period in 2014, primarily due to the direct sales services which were launched on last year, under the increase of staff cost, and the advertising and promotional expenses. G&A expenses was $23.8 million for the first quarter, an increase of 23.2% from $19.3 million for the same period last year, primarily due to increase of staff cost. Operating income was $7.5 million for the first quarter, a decrease of 84.9% from $49.5 million for the same period last year. Income tax expense was $5.6 million for the first quarter, a 53% decrease compared to $15.2 million for the corresponding period in 2014. So far, the effective tax rate was 48% for the first quarter as compared to 26.8% for the same period last year. The increase in the effective tax rate was primary due to the interest expenses for our convertible senior notes due 2018, and certain costs and expenses of our subsidiaries outside of China for this first quarter were not deductible for income tax purpose. Net income attributable to SouFun's shareholders was $6.1 million for the first quarter, an 85.3% decrease from $41.5 million for the corresponding period in 2014. Fully diluted earnings per ordinary shares and per ADS was $0.07 and $0.01 respectively for the first quarter, a 90% decrease from $0.48 and $0.1 for the corresponding period in 2014. Adjusted EBITDA, defined as non-GAAP net income before income taxes, interest expenses, income tax, depreciation and amortization, was $11.3 million for the first quarter, a decrease of 79.4% compared to $54.8 million for the corresponding period in 2014. As of March 31, 2015, SouFun had cash, cash equivalents, and short-term investments of $667.7 million, compared to $809.9 million as of December 31, 2014. Cash flow issued in operating activities was $54.7 million for the first quarter compared to cash flow generated from operating activities of $126.2 million for the same period in 2014. The decline in cash flow is from operating activities was primarily due to $35.4 million decrease of net income as compared to the first quarter of 2014. Approximately, $28.6 million decrease in cash flows due to a decrease of deferred revenue and net cash outflows of $25.5 million in loans provided to home buyers under our Internet financial programs. SouFun adjusted its revenue guidance for 2015, from $773.2 million representing a year-over-year increase of 10% to $808.3 million representing a year-on-year increase of 15%. This forecast reflects SouFun's current and preliminary view which is subject to change. Operator, please go ahead.

[Operator:]

[Operator Instructions] Your first question comes from the line of Hillman Chan from Macquarie. Please ask your question.

[Hillman Chan:]

Thank you, Management, for taking my question. Firstly, I wanted to have more color on your home furnishing business. Could you just share more on the investment on these new initiatives since I looked at it myself, you are pretty much recruiting interior designers, recruiting contractors, and in some cases even have the whole part outsourced to you, I just want to see how many sales people are out that you have to commit? And then also what about the partners, local partners that you can have with to recruit the contractors, interior designers and so? And also could you talk about your monetization model, how do you make money out of the home furnishing business? And then lastly, how should we look at the profitability on this new business? That's my first question, and I have another question afterwards. Thank you.

[Hua Lei:]

Thank you for your questions. Regarding our home furnishing business, decorating business actually, SouFun acts as the manager of the homeowner. We hire - we manage the whole decorating process for the homeowner. We have our own internal design, at a lower used house items the laborers to do the decorating. Also we provide combined services for the homeowner to process these contracts home furniture and the materials. So overall, actually constantly, regarding to the margin accounting because our scale is not big enough, so kind of the margin is very low, but we are seeing the momentum for the home decorating business is very good, we are seeing it's growing very fast, so we expect that our volume to reach that, at certain point we will have better margin in the Company.

[Vincent Mo:]

Yes, this is Vincent, and for the home furnishing part, we formerly started at the beginning of this year and now it is six months. The business model, the revenue model, is very simple. We just want to have 5% of the growth in a month of each onsite project. So that's how much we want to get, 5% for the project itself and 5% for all the materials, decorating materials, the homeowners that buys through our platform, so that's how we are going to generate our revenue from.

[Hillman Chan:]

Okay. Just to clarify, you are not sitting on any inventory, you're just recruiting - you're just contacting the home buyers to all these brand suppliers for the decoration material and you charge based on the transaction amount, is that what you're trying to say?

[Vincent Mo:]

Some of them and then we qualify, and we take the title for the whole project. But internal calculation stuff, we have only 5% of gross income to us, the 95% is the expenses, so that's how we do it now at this stage so that we can make the whole transaction very transparent to the homeowners. They know how much we're making out of the project and all the products, decorating products, the price are transparent to the homeowners.

[Hillman Chan:]

Got it. What's the headcount so far on the home furnishing business?

[Hua Lei:]

Company-wide, over 1000 in sales force in the home decorating business.

[Hillman Chan:]

Okay. Could you break it down by functions if possible?

[Hua Lei:]

Functions, may be that the sales people to approach the potential homeowners.

[Vincent Mo:]

I think we have 1,000 sales people, right? And how many people we have for the back, the supporting people, the engineering people?

[Hua Lei:]

Engineering people were -

[Vincent Mo:]

Yes we're going to check and I'll get back to you on this number.

[Hillman Chan:]

Sure, okay thank you. And quickly my second question would be on your listing business. How many paying subscribers do we have for this quarter?

[Hua Lei:]

You mean for the listing business right.

[Hillman Chan:]

Yes, yes the paying subscribers.

[Hua Lei:]

114,000 paying members for listing subscribers.

[Hillman Chan:]

Okay. Got it. Thank you. I'll get back in the queue.

[Operator:]

And we have the next question coming from the line of Vivian Hao from Deutsche Bank. Please go ahead.

[Vivian Hao:]

Hi Vincent and Guan, thank you for taking my question. My first question is regarding our primary e-commerce segment, two parts, one is for the e-coupon part. Our main competitor [indiscernible] manage to improve their ARPU in first quarter given that they have higher contribution from first tier cities recall we probably have weaker contribution from second tier cities. Just wondering what is the distribution among different tier cities right now. And also what do you see as the trend for the take rate for the e-coupon segment. And the second part for the primary e-commerce segment is for within our direct sales model. What is the volume sold by the third-party agencies and also the in-house? And also for the in-house sales part the homebuyer subsidy probably has reduced upon 80% to 50% in 4Q, what is our current rebate rate this is my first question. Thank you.

[Vincent Mo:]

Thank you, Vivian. For your first question, I think regarding to the revenue contribution, I said currently for the e-coupon business tier two cities has over I think 45% of the revenue contribution tier one cities evolve 35% something. So while seeing the tier two cities they are contributing more than before, our e-coupon business in terms of the revenue. Regarding to the tick rate, tick is declining to 45%, and other commission fees similar to last year. For your question for the direct sales model, I said currently we're still rebating the similar portion to the home buyer compared to Q4 last year.

[Vivian Hao:]

Right. What is the split between our third-party sales versus the in-house sales in first quarter within the direct sales model?

[Hua Lei:]

First quarter our in-house throughput is about 50%, 4339 units for our in-house team, and so far EBITDA less than 3000 about 40%.

[Vivian Hao:]

Right. Can I have one follow-up question. I guess we have seen very encouraging trend on the GMP growth for different new initiatives. Just wondering what is the management's goal in terms of our long-term margins because we're probably growing heavier and hiring massive as well, should we take the offline agencies as the lower bound of the benchmark?

[Vincent Mo:]

Vivian this is Vincent. Frankly at this stage, at least for this year 2015 we're focusing very much on the transformation from a traditional Internet information portal to transaction model or transaction platform. So we care more about the scale of the new business as long as we get to the point, I think and its also my belief that eventually it’s no problem that we can get out to at least the minimum traditional agencies medium. But definitely with the use of the mobile, it's a PC and our transaction platform technologies we're sure eventually we can have a much higher margin than the traditional agency model, that's the originally thinking of this model and of this company. And we also believe that that's the direction we’re heading to.

[Vivian Hao:]

Thank you very much.

[Operator:]

Thank you. The next question comes from the line of Anne Shih from Brean Capital. Please go ahead.

[Anne Shih:]

Hi Vincent and Lei, thanks for taking my question. Just two questions here. The revenue guidance for the year was raised by at least 15% year-over-year. I was just wondering if you can provide broader color on each segment or an outlook by segment?

[Hua Lei:]

Yes. We think the e-commerce business definitely is the one which can bring most growth to our business, especially the transact model in the new home also we’re seeing a very good momentum in our brokerage business inside the home. So we would be able to pass will contribute most of the growth in our business. Also we expect our marketing business, our traditional hedging business will still grow personally I believe from 5% to 10 year-over-year. So yes, this is our concern - thinking regarding to the supply for the full year.

[Anne Shih:]

And I guess just separately on the new employees, I think the release mentioned that 11,000 new employees were added during the year. Just wondering what the target maybe for the full year and if there is a certain investment level associated with the new headcount that will be brought onboard. Thank you.

[Vincent Mo:]

You're right. We added more than 11,000 people in the first half to-date since the beginning of the year. We saw expansion graph into new home resale rental and home furnishing sectors across China's major cities. This is our focus and our new thing for this company in now and into the coming years. Going forward, we're going to hire or keep on hiring people to keep the kind of momentum moving forward and also to make sure that eventually we can be the major players in each of the factors including new home resale rental and home furnishing sectors. So that's the purpose. But frankly we don’t have the definitive number for the whole year. As I said as long as we are as leaded in for the growth purpose we're going to continue to add people and at same time we’re also going to train more qualified people from the poor so that going forward and we will be relying more on technology on mobile, and our information Internet platform to do our e-commerce business.

[Anne Shih:]

Okay. Thank you.

[Operator:]

Thank you. The next question comes from the line of [Avon John] [ph] from Credit Suisse. Please go ahead.

[Unidentified Analyst:]

Hi good evening Vincent and Lei Hua. Thanks for taking my questions. First question is regarding, I think we're starting to disclose the GMV by segments starting from this quarter, I was wondering like if you could share us any thoughts on the kind of the GMV volume outlook for 2015. And also what kind of the longer term target of the GMV market share that we’re targeting to grade over the entire China property market, any thoughts on that direction will be appreciated. Thanks.

[Vincent Mo:]

We started using GMV to - as a measure of our business from this quarter. As I said transaction related to e-commerce business will be a major play for this company and together with our traditional Internet business. However that said, going forward how much we'll be - we can make this year, we don't have a productive number there yet, but there is one thing which is very clear for us is that we, hopefully, not very long future that SouFun, our e-commerce business in new home, resale, rental and home furnishing, we can be the number one and the number two of this country. So that's definitely in our mind and we are heading to that point, that's why we are going to invest heavily in our people, in our technology platform to make sure that we can be there as soon as we could. We have seen very good signs from local markets like in the rental market in Beijing and Shanghai, we are the number one players now for the rental market and for the resale market like Wuhan, Guangzhou, and hopefully in not very long future, that we will be the major players, the number one players in those markets as well. So, to be the number one, number two players across the country, that's definitely the goal in our mind and that's the goal of the Company. So, we are moving towards that target.

[Unidentified Analyst:]

Thanks and I just want to clarify on that, number one, number two, in each segment that we are operating, are we referring to a kind of the ranking combining the online, offline players together or it's more like online only market share target?

[Vincent Mo:]

I would say it's a combination of both online and offline, and because in doing this e-commerce business, transaction business, you have to combine the offline and online together, which is so called O2O [ph] in a style.

[Unidentified Analyst:]

Understood. Second question is on the Internet financial service revenue, now you said you would break it down this quarter as well, can we have some more color on say, regarding the – is it more predominantly in loan products at this point, any other financial product we are distributing? And also within the loans that we disclosed, are we mainly operating on the distribution model where we earn the referral fee or how much from the kind of the credit part are we offering with our balance sheet?

[Vincent Mo:]

Up to this point, the financial services going on, so it is still a mixed model including referral fees and including mortgage or lending to small lending and to probably buyers, mostly that's been less than one year and especially for the resale market it's mostly for one month, so two months for those transitions, so that's the current situation. And going forward we're going to all financial, Internet financial services mainly going support our e-commerce business, support our transaction business including the new home sector, resale, rental sector and as where I say the home furnishing sector so that we can combine things together within this whole SouFun Group, and each part or each transaction sector can benefit from our Internet finical services.

[Unidentified Analyst:]

That is great. Thanks for the color Vincent. Thank you.

[Vincent Mo:]

Thank you.

[Operator:]

Thank you. The next question comes from the line of Tian Hou from TH Capital. Please go ahead.

[TianHou:]

Hi, Vincent and Lei, I have a question related to your secondary home market business. And actually there is a common doubt among the investors about this part of business. And I do believe many people have this question mark, and I think about you're going to grow this business into a profitable business and big market share and to you look at this market and certainly it's not as appealing as the new home market. And plus business model wise, you're like almost built from scratch, build up your agencies across the country and lot of things, definitely is not so clear to investors. I want to ask you a question, why you are determined to do this type of business, what do you see in this market that if you said you'll have to do it and how do you mission feel for the future in this part of business and how you will be stationing yourself from others, how you will win this market? That’s my question.

[Vincent Mo:]

Well this is a very broad question. Retail market is definitely the future of China's property market, so that will become - it is moving in that direction, which is very apparent now. So to emphasize or to put in a retail market as one of our major thing into the future that definitely I think is right for us. And since we have started doing this transaction through our online platform we are seeing very good signs in the past four months. And we can deliver at a very high growth rate months by months. So it is tough and we started from scratch, but you know, we know how to learn to do things quickly and we also hired, as I mentioned in our press release, we hired qualified executives from traditional agency business. And we hired 11,000 people and most of them are experienced agents. And by combining SouFun's Internet and mobile advantages and its technology platforms and with traditional brokerage or agency businesses so that is going to make sure that going forward we can move quickly and occupy or take the market share from traditional players in the market. So with all of those in mind, it is the Company's also myself's determination to move forward definitely without doubt. Of course the only thing which I think which may make the things difficult is that is execution, whether we can execute efficiently and whether we can deliver on time or efficiently. So that’s the Chinese advice. I don’t have one you can send a guarantee of that execution, but as we did in the past from top to the bottom we are trying and we are working as hard as we could to make sure we can deliver.

[TianHou:]

Okay Vincent. It seems very helpful and good luck and one more question. So Lei, if I model your full-year basis operating margin non-GAAP at breakeven is that okay?

[Vincent Mo:]

Expansion and transformation and to make sure we take the medium role in this transformation and to take more market shares those are our targets this year. We will try to make this company comfortable for the whole year, but if needed for expansion purpose and we bear also to suffer own profit for future bigger scale profit or big scale business.

[TianHou:]

Okay, that’s very helpful. That’s all my questions. Thank you.

[Vincent Mo:]

Thank you.

[Operator:]

Thank you. The next question comes from the line of Nathan Snyder from CLSA. Please go ahead.

[Nathan Snyder:]

Thank you. Hi, Vincent, hi Hua Lei and Guan. I have a quick question in terms of our pricing. How do you think about the ability to rise pricing for both the rental and the secondary housing commission rates?

[Vincent Mo:]

Actually it’s not difficult to do that. Currently, we are charging 0.5%, which is about one quarter to one fits of the market rate and for the resale market, for the rental market we are charging almost 0, 5%, 10% of the – from 0 to 10% of the market price. As a new guy as a new company into this market by using new technologies, Internet, thinking thinks and tours into this market, we want to at the beginning we want to give out some benefits to our end users, the consumers and the property owners so that we can penetrate into this market as quick as we could. So that's the strategy we are implementing now. Directing back to your question, how easily we can increase the rate, it is not difficult we can easily increase, double the currency rate going forward if we want to. But in the foreseeable future, it’s the company's strategy I promised to my people to my teams inside and it's also a promise to the outsiders to our consumer, to our property owners that we will not increase the 0.5 rate in the coming five years. We're going to make sure that we're going to dominate this market and we’re going to take the number one spot in this market. So that’s really the goal of the company at this stage.

[Nathan Snyder:]

Okay. So no price increases for at least five years. So then how do you think about your cost event relative to offline particularly the secondary agencies. Obviously we have some of the mobile technology, as well as customer acquisition through the platform. But how are you thinking about that cost of management?

[Vincent Mo:]

Definitely that's why we can charge only 0.5%, because our topic each day we have around 5 million unique visitors to our mobile and our PC websites and our WAP sites as well. So we don't need to spend money on acquiring probably buyers, so other people or traditional agency companies they have to do they have to pay. On the other hand, we also have a huge database of the property sellers or the property owners for rental purpose. So the acquisition from that party is also very low. So the same our online agents they need to do is really trying to put the buyers and sellers together. We have the property listings here and we do have the property buyers here but we do need people they’re making use of the SouFun's resources to make things happen. So that's why even if we’re charging a very low rate, we can still move ahead aggressively.

[Nathan Snyder:]

That's great. Thank you. And just one small follow-up question, so with the 11,000 new hires that we've announced, how many of those are e-commerce direct or secondary?

[Vincent Mo:]

We have about 3,000 around that but it changes everyday. So at this moment about 3,000 for the resale market.

[Nathan Snyder:]

Thank you.

[Operator:]

The next question comes from the line of Gregory Zhao from Barclays. Please go ahead.

[Gregory Zhao:]

Hi Mo and Lei, thanks for taking my questions. I have several follow-up questions. First one about our guidance that we change our guidance and that later reflected the changes of the management's view on China’s property market only because of our business changes from the traditional media business to the current transaction business model. And my second question is about the competitive landscape. So, we’re seeing some merger and acquisition was occurring in both online, offline in the primary and secondary market. We see some for example, csda.com and Homelink now doing some M&A in some cities like Shanghai and other cities. So do you think this kind of M&A will create some threat to us? and compared to these competitors, how do we differentiate our services and our product and what's the best way to attract the most talent offline agents to our platform. Thank you.

[Vincent Mo:]

The first question the answer will be increase or the just up of the annual growth rate. It’s completely from our new business from e-commerce business with four months passed, with four months this numbers in our hand. So we're pretty sure that we can have our topline growth faster than we expected and we're still very cautious in adjusting our topline up. Hopefully there we can adjust again when we get to the end of our quarter two. With respect to your second question is that frankly when we’re doing acquisitions as we’re, 11,000 people that's really the acquisition, it’s equivalent to acquisition. We don’t want to acquire company, but we want to acquire the talents, the qualified experienced agents. So really it is not a simply hiring one by one, we’re hiring 10, 20, 50, 100 at one time.

[Gregory Zhao:]

Okay. Thank you very much. And I have very quick follow-up question. As I think some vertical companies the other sectors building some alliance and teaming up with some big Internet names and do you think in the future there’s some potential opportunity to work together with those larger Internet companies. Thanks.

[Vincent Mo:]

Definitely yes. So we have been working with those different kinds of Internet companies including those big guys Baidu, Tencent, and even Alibaba and including the 360. Other than those big guys, we’re also partnering with the local Internet players as well.

[Gregory Zhao:]

Okay, thanks Mo. Thank you very much.

[Vincent Mo:]

Thank you.

[Operator:]

Thank you. The next question comes from the line of [indiscernible] from Citigroup. Please go ahead.

[Unidentified Analyst:]

Good evening Vincent and Lei. This is [indiscernible]. I just got one quick question regarding your e-commerce business. Could management give us some colors regarding the revenue mix of this revenue segment, say how many percent did the revenue driven from your new e-commerce business say directly a sales business and how many percent of the revenue driven from the traditional business in Q1 and what's the future trend from management’s perspective. Thank you very much.

[Hua Lei:]

Regarding to the percentage - from the percentage from the direct sales business is around 43%, in our e-commerce business, so the remaining is from the coupon model. Actually since we launched the direct sales business, the portion of this revenue keep increasing very fast. And we expect this year definitely our direct sales model - that the revenue from direct sales will go at least 50%, I mean half in our total e-commerce revenue.

[Operator:]

[Operator Instructions] There are no further questions in the line at this time. I'd now like to hand the call back to Mr. Tianquan for closing remarks. Please continue. Hi management, please continue. Thank you.

[Vincent Mo:]

We have no more remarks for the earnings. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect.