Tuniu Corporation
Q3 2017 Earnings Call Transcript

Published: 27 Nov 2017

[Operator:]

Good day. And welcome to the Tuniu Corporation Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Maria Xin. Please go ahead.

[Maria Xin:]

Thank you. And welcome to our 2017 third quarter earnings conference call. Joining me on the call today are Donald Yu, Co-Founder, Chairman and Chief Executive Officer; and Maria Xin, Chief Financial Officer. For today’s agenda, management will discuss business updates, operational highlights and financial performance for the third quarter of 2017. Before we continue, I refer you to our safe harbor statements in earnings press release, which applies to this call as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that, unless otherwise stated, all figures mentioned during this call are in RMB. I would now like to turn the call over to our Co-Founder, Chairman and Chief Executive Officer, Donald Yu.

[Donald Yu:]

Thank you, Maria. Good day, everyone. Welcome to our 2017 third quarter earnings conference call. We are pleased to report solid results for the third quarter of 2017. Net revenues increased by 53.5% year-over-year, while gross profit increased by 73.5% year-over-year. During the quarter, we actively improved the efficiency of our operations by focusing on technology and by leveraging our presence in the travel industry supply chain. Gross margins improved to 54.7% in the third quarter of 2017, compared to 48.4% during the third quarter of 2016. We also continued to optimize our expense structure by controlling branding expenses and diversifying our sales channels with offline distribution. As a result, we generated a non-GAAP net income of RMB40 million during the third quarter of 2017, the first profitable quarter since our listing. This quarter demonstrates Tuniu’s ability to be profitable and serves as a meaningful step towards achieving long-term profitability. In the future, we expect to maintain this trend and continue unlocking value for our customers and shareholders. On the strategic side, Tuniu continues to make exceptional progress with our core strategies of expanding our three networks

[Maria Xin:]

Thank you, Donald. Hello, everyone. Now, I will walk you through our third quarter 2017 financial results in greater detail. Please note that all the monetary amounts are in RMB unless otherwise stated. You can find the U.S. dollar equivalents of numbers in our earnings release. Starting from the third quarter of 2017, net revenues were RMB806.1 million, representing 53% year-over-year growth on a non-GAAP basis. Revenues from package tours, which are mainly recognized on a net basis, were up 53% year-over-year on a non-GAAP basis to RMB604 million, and accounted for 75% of our total net revenues for the quarter. The increase was primarily due to the growth of organized tours and self-guided tours. Other revenues were up 55% year-over-year on a non-GAAP basis to RMB202 million and accounted for 25% of our total net revenues. The increase was due to a raise in revenue generated from financial services and commission fees received from certain travel related products. Gross profit was up 74% year-over-year on a non-GAAP basis to RMB440.9 million for the third quarter of 2017. The increase in gross profit and gross margin was primarily due to the improved economies of scale, increased operational efficiency and optimized supply chain management. Operating expenses for the third quarter of 2017 were RMB506.9 million, down 39% year-over-year, excluding share-based compensation and amortization of acquired intangible assets. Non-GAAP operating expenses were RMB440.5 million, representing a year-over-year decrease of 43%. Research and product development expenses for the third quarter of 2017 were RMB124 million, down 26% year-over-year. Research and product development expenses, as a percentage of net revenue, were 15% in the third quarter of 2017, decreasing from the 32% as a percentage of non-GAAP net revenues in the corresponding period in 2016. The decrease was primarily due to the increase in efficiency, resulting from the economies of scale and implementation of operational system and optimization of research and product development personnel. Sales and marketing expenses for the third quarter of 2017 were RMB224.8 million, down 55% year-over-year. Sales and marketing expenses as a percentage of net revenues were 28% in the third quarter of 2017, decreasing from 95% as a percentage of non-GAAP net revenue in the corresponding period in 2016. The decrease was primarily due to the decline in brand promotions and preference for marketing channels with higher ROI. General and administrative expenses were RMB165.9 million in the third quarter of 2017, down 1% year-over-year. General and administrative expenses as a percentage of net revenues were 21% in the third quarter of 2017, decreasing from the 32% as a percentage of non-GAAP net revenues in the corresponding period in 2016. The decrease was primarily due to the increase in efficiency resulting from the economies of scale and optimization of administrative personnel. Net loss attributable to ordinary shareholders was RMB29 million in the third quarter of 2017. Non-GAAP net income attributable to ordinary shareholders, which excludes share-based compensation expenses and amortization of acquired intangible assets, was RMB37.4 million in the third quarter of 2017. As of September 30, 2017, the Company had cash and cash equivalents, restricted cash and short-term investments of RMB4.4 billion in the third quarter, excluding the impact from the prepayment to HNA Tourism. Cash conversion cycle was negative 23 days. Capital expenditures for the third quarter of this year was RMB51 million. Now, let me provide top-line guidance for the fourth quarter of 2017. For the fourth quarter of 2017, Tuniu expect to generate RMB450.4 million to RMB456.5 million of net revenue, which represents 40% to 45% growth year-over-year comparing non-GAAP net revenues in corresponding period in 2016. Please note that the forecast reflects Tuniu's current and preliminary view on the industry and its operations, which is subject to change. Thank you for listening. We are now ready for questions, Operator?

[Operator:]

We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Alvin Jiang with Deutsche Bank. Please go ahead.

[Alvin Jiang:]

Congratulations on the strong quarter, and also congratulations on various new goals. I have a couple of questions. First question is on the destination group, how is the different destination’s contribution to your revenue, and in the last quarter, did you see any specific destination lift or did you see any turnaround from those specific destinations? Thank you and I have a follow up.

[Maria Xin:]

Okay. In terms of the GMV breakdown by geographic regions, domestic tours this quarter contributed about 35% of our GMV; Europe at around 15%, Islands contributed us 5% and Maldives 5%; Southeast Asia around 9%, Japan and South Korea together around 8%. The increase for this quarter is Europe and compared, it was about 12% in the same period last year, and we also see the higher growth rate in long/short outbound destinations such as Australia and Middle East and Africa are some destinations.

[Alvin Jiang:]

And my next question is about your local stores. How many local stores do you have, and how much is the contribution to revenue of GMV and what’s your future [technical difficulty]?

[Donald Yu:]

[Interpreted] So as of now, Tuniu currently has around 198 offline retail stores. By the end of the year, we target to have 220 stores overall . We expect this number to continue growing going forward next year. Currently, GMV from our offline retail store is in the high-single digits, but we expect this ratio to continue increasing to a level around 10% by next year.

[Operator:]

The next question comes from Natalie Wu with CICC. Please go ahead.

[Natalie Wu:]

A couple of questions from me, just one regarding the gross profit margin improvement. Just wondering, how much is driven by the Europe recovery and how much by financial related business, and how much by price hike and how much by the increased economies of scale. And how far can our gross profit margin go, how should we think of your profitability in longer term? Second one is with the resignation of your COO and CFO, will there be any change regarding the strategic focus in the company’s governance. Will company continue to operate as an independent entity or will you be open to be acquired in future? And last one is more like a housekeeping I was just wondering what’s your headcount plans next year, and also the brand related advertising expenses in the last quarter and also the plan of next year? Thank you.

[Maria Xin:]

Our gross margin has improved on a year-on-year basis largely due to the economies of scale of our operations and better supply chain management. During this quarter, direct procurement was contributed at 40% of our total GMV and has positively contributed to our margins. In the future, further increases to the ratio of direct procurement may be around 50% next year, [indiscernible] continue to improving our gross margins. Also, the expansion of our service networks have -- on local tour operators have benefited Tuniu’s margin as well, so Donald will answer the second question.

[Donald Yu:]

[Interpreted] In terms of our strategy, there has not been any major changes in our strategy since we listed on the NASDAQ. So our strategy has always been in the right direction. We are one of the first players to go offline and increase our penetration in offline channel. We are expanding our service and sales network, and we think that will be a positive direction for us. And in 2014, we started our direct procurement and so far we have seen pretty positive results. So overall, we think our strategies have been in the correct direction. And in terms of M&A, there are none that we have to disclose at this time. Thank you.

[Operator:]

The next question comes from Ivy Ji with Credit Suisse. Please go ahead.

[Ivy Ji:]

I have two questions, first is a follow-up on the gross margin outlook. Specific in the fourth quarter this year, are we expecting the gross margin to improve sequentially or whether be that’s more affected by the weak seasonality? And my second question is could we talk a little bit more about for further net revenue growth in the past quarter, what was the progression on GMV and tax rate? Thank you.

[Maria Xin:]

Since we only provide top-line guidance for the fourth quarter and currently we don’t have the guidance for the gross margin in the quarter. But as we are seeing more and more direct procurement and initiate ourselves local tour operator, we believe in the long run, we still have room to improve our gross margins. For this quarter take rate was around 9% so slightly higher than last quarter. We currently don’t provide GMV numbers. Thank you.

[Operator:]

[Operator Instructions] The next question comes from Chun Choi with 86Research. Please go ahead.

[Chun Choi:]

Few questions may be first one is may I ask what is management’s view on next year market outlook? Is this market turning better next year, especially after the reopening of South Korea? Second question is on the competition, so one of your major competitors is pushing forward on the strategy of opening more offline franchise stores. So will this create competitive pressure due to -- what is our -- can management remind us what was our strength compared to or advantage compared to others peers? Thank you.

[Donald Yu:]

Currently, we believe South Korea will be better. Although, there has been no definitive announcements but we believe for next year this will be a positive step for outbound travel and especially for our business. And for your second question, Ctrip also has their own offline stores but they are different. Tuniu stores are all run by Tuniu and this allows us control the quality and our products and services. So another advantage of Tuniu's offline store is that we integrate our booking advisors with our professional advisors. So in the offline stores, it's extremely hard to train an advisor to be able to be familiar with all the destinations and products but with Tuniu's model, we are able to integrate those advisors with professional advisers in Tuniu. And then this kind of establishes ecosystem that allows the offline clients to access Tuniu’s core expertise.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Maria Xin for any closing remarks.

[Maria Xin:]

Once again, thank you for joining us today. Please feel free to contact us if you have any questions. Thank you for your continued support and we look forward to speaking with you in the coming months. Thank you.

[Operator:]

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