Earnings Call: Q3 2019

Nov 14, 2019

Earnings release

Thank you for standing by, and welcome to the trip.comgrouplimitedq3 2019earningsconferencecall. All participants are in a listen only mode. There will be a presentation followed by a question and answer I would now like to hand the conference over to Ms. Michelle Chi, Senior IR Director. Please go ahead. Thank you, Ashley. Thank you all. Good morning and welcome to Trip.com Group's 2019 Q3 earnings conference call. Joining me today on the call are Mr. Jun Tiang, Executive Chairman of the Board Ms. Jun Zhang, Chief Executive Officer and Ms. Cindy Wang, Chief Financial Officer. During this call, we will discuss our future outlook and performance, which are forward looking statements made under the safe harbor provisions the U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve interior risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in q.comgroup's public filings with the Securities and Exchange Commission. Trip.comgroup does not undertake any obligation to update any forward looking statements except as required under applicable law. James, Jen and Cindy will share our strategy and business update, updating highlights and the financial performance for the Q3 of 2019 as well as the outlook for the Q3 of 2019. After the prepared remarks, we will have a question and answer session. With that, I will turn the call over to James. James, please. Thank you, Joe. Thank you, everyone, for joining us on the call today. Let's begin with a quick update on business growth and performance. We continue to deliver solid results for the Q4 of 2019. Net revenue grew 12% year over year, reaching RMB10.5 billion. Features in Q9 have continued to gain market share among Chinese consumers in both the domestic and abroad markets. In the international markets, the flight center and ship platform brand also saw strong growth among overseas travelers. We continue to achieve operating leverage across all expense lines. In the 3rd quarter, operating profits increased by 50% year over year. On October 29, we celebrated the company's 20th anniversary with our global strategic partners and launched the new brand identity for trip.com with limited. By continuing to expand our share in the China domestic travel market, we aim to become the leading international travel brand in Asia, ex men and travel destination over the next few years. To realize this goal, we will fully leverage the advantages that we have built over the time, which are our large scale advanced mobile technology, multi cloud operating and open platform capability. Moving forward, our vision will focus on risk quality and globalization. Risk quality includes our extensive mobile products, standard user interface to reliable services and advanced mobile technology. Globalization requires us to think global and act the local. While part of logistics, supply chain, service standards and technologies are generally universal across geographies, Local marketing and operations will always adhere to the regulations we need to have with each respective markets. We are pleased to see our efforts have already become have already grown through in our outbound and overseas cities, led by continuous effects of chips.com brands, as well as the increasing synergies with this. And further increase the indirect booking ratio of sales centers. As our new name indicates, we hope to become the most reliable travel companion for our customers and make every trip the perfect trip. To realize this mission, like the way we have always been doing, our team will continue to execute relentlessly and always strive to provide the best travel experience for our customers worldwide. With that, I will turn the call to Jane for our operating highlights. Thank you, James. Good morning, everyone. We are pleased to report the trip.com's solid results in terms of market share gains and increased profitability despite the challenges from a macro perspective globally. In China, we continue to acquire high quality users with travel demand through effective marketing channels. In the public sector, we again deployed aggressive yet disciplined pricing strategy for low end hotel products, capturing an important and growing user base. In addition, our net promoter scores increased nicely across all business lines, which again demonstrated our increased service quality. Our revenue growth came under pressure due to recent macro and industry headwinds, especially in destinations such as Hong Kong. However, as we have always been in the past environment, trip.comgroup will continue to be laser focused on our business fundamentals and take advantage of the market condition to further enhance our leadership. Next, I would like to share some of the recent highlights in product expansion, supply empowerment and international business growth. Firstly, the expansion of our product and service. In the Q1, our product coverage continued to expand in both and VAPS. In recent years, we have seen a spending increase in customer facilitation activities. To take advantage of this, we have further expanded our product range both in China and abroad. Ctrip recently became the 1st OTA in China to launch a voice guide on our platform. By integrating multiple voice guide suppliers, their service now covers around 8,000 attraction sites in over 800 cities around the globe. In addition, to better serve Chinese outbound tourists and overseas travelers, we recently opened our partnership with 3 groups by launching their Europe Indestination Activity product on C2P platform, of which more than half have been designed exclusively for our customers. Going forward, TUI Group will continue to expand their range of the products on Ctrip and will launch their products on trip.com brand in the first half of twenty twenty. Secondly, our empowerment of supply network. On October 29, we held the 2nd Global Strategic Partners Summit in Shanghai. At the summit, all the major business units shared their vision with respective industry partners. Our team continued to bring our 300,000,000 users to our business partners around the world through open platform. The hotels participating in our Trix Plus program have seen 40% incremental growth in traffic. Also, as financing has become a bottleneck for numerous suppliers on our platform, we have recently introduced a new online financing product tailored for small and micro packaged tour suppliers. Together with financing service, we have empowered our partners with urgent financing needs by leveraging our ability for data analysis. Going forward, we will continue to utilize chip.comgroup's resource, insight traffic, platform data, operating training and back end tools to empower our partners the world. Thirdly, on the progress of our international business. In the Q1 of 2019, excluding certain area in the Greater China destination, our revenue growth for overseas hotels accelerated to 50% year over year in the Q3. We are confident to reach that 40% 50% of international business will contribute to the total revenue with being 3 to 4 years target. With our large customer base, the comprehensive product offering and extensive market expertise, we have demonstrated our ability to send incremental travelers to global travel destinations. To date, we have signed strategic partnerships with over 50 travel destinations. In the Q3, the trip.com brand at the air traffic volume delivered triple digits year over year growth for the 12th consecutive quarters with its hotel booking growth continued to accelerate. In October, trip.com was awarded a Google Material Design Award tailored to global users. This recognition is reflective of increased recognition of the core market brand. In summary, we are encouraged by the performance of our international business. However, our journey in the overseas market has just begun. Currently, only a portion of the functionality on Ctrip's Chinese app are available for global users through trip.com, and we will work hard to increase the functionality and make trip.com app as comprehensive as the Chinese version. Last week, we announced a strategic partnership with TripAdvisor to expand our global cooperation, consisting of a joint venture as TripAdvisor China, Global Content Collaboration and a governance agreement, which we have previously disclosed. Through this partnership, we will gain access to TripAdvisor's 100 and millions of online reviews and pictures for accommodations and activities worldwide. Equipped with the helpful information generated by global travelers, our customers will have great confidence in what they are going to book through our platform and have a more comprehensive idea of what to expect upon their arrival and will enhance their users' experience. Just 2 weeks ago, we celebrated our 20th anniversary. We are pleased at our past achievements and we are even more excited about what we will accomplish in the future. In order to create value for our customers, our partners and for the industry, we are working hard to provide the most innovative and reliable services for our customers, both in China and abroad. With that, I will now turn the call over to Cindy. Thanks, Jim. Thanks, Robin. For the Q1 of 2019, trip.com grew reported net revenue of RMB10.5 billion, representing a 12% increase from the same period in 2018. Net revenue for the Q3 of 2019 increased by 21% from the previous quarter. Revenue growth decelerated from the previous quarter, mainly due to recent macro and industry headwinds. Accommodation reservation revenue for the Q3 of 2019 was RMB4.1 billion, representing a 14% increase from the same period in 2018. During the Q3, low end low staff hotels sustained strong high growth for Citrus despite selecting a low comparison base. This continued to reflect the effectiveness of our aggressive pricing strategy and we will continue to proactively acquire targeted users in this segment. In the domestic mid to high end hotel, we also maintained healthy growth momentum from previous quarters. It is worth mentioning that the total number of high end hotels joining our trip plus program has exceeded 10,000 bringing more booking discounts and a wide range of hotel benefits to our members. The recent macro and industry headwinds in destinations such as Hong Kong have put pressure on related travel demand and hotel prices. Excluding Great China destination, our revenue growth for overseas hotel accelerated to 50% year on year in the Q3. Transportation ticketing revenue for the Q3 of 2019 was RMB3.7 billion, representing a 3% increase from the same period in 2018. The slower year over year revenue growth compared to Q2 was mainly due to the weak outbound travel demand in certain destinations and a decrease of international air ticket price. Our international air ticketing business achieved a higher multiple against industry growth during a slow quarter. The trip.com brand air ticketing volume recorded triple digit growth for the 12th consecutive quarter. Petit tour revenue for the Q3 of 2019 was RMB1.6 billion, representing a 19% increase from the same period in 2018. In the Q3, GMV from our authorized stores continued to see strong growth. In August, we announced that the total GMV of all offline stores reached RMB 10,000,000,000 year to date, having reached a milestone 4 months earlier than the previous year. Corporate travel revenue for the Q3 of 2019 was RMB335 1,000,000, representing a 26% from the same period in 2018. This was primarily driven by expansion in corporate customer base and optimize the product mix trend. Revenues for other businesses increased by 37% year over year in the Q3 of 2019, reaching RMB 688,000,000. This was primarily driven by strong growth in our advertisement and financial service business. Gross margin was 79% for the Q3 of 2019, which is consistent with that in the same period of last year and in previous quarter. Excluding share based compensation charges, total non GAAP operating expenses grew 4% year over year and 10% quarter over quarter in the Q3 of 2019. Total headcount in IT, supplier management and administration was largely consistent with the previous quarter. Marketing efficiency continued to improve. This was primarily due to our ROI driven marketing strategy and continued efforts in customer services, product cross selling and content meetings. Average new customer acquisition costs continued to decrease in the Q3, while conversion and cross sell ratios continued to improve due to the enhanced competitiveness of products and services. Non GAAP operating profit in the quarter was RMB2.6 billion, growing 40% year over year and 53% quarter over quarter. Non GAAP operating margin for the Q3 was 25%, increasing from 12% in the same period of 2018 and the previous quarter. The increase is mainly due to improvement in operational efficiency. Diluted earnings per ADS were RMB1.35 or US0.19 dollars for the Q3 of 2019. Excluding share based compensation charges and fair value changes of equity security investments, non GAAP diluted earnings per ADS were RMB3.7 or US0.52 dollars for the Q3 of 2019. As of September 30, 2019, the balance of cash and cash equivalents, restricted cash, short term investments and healthy maturity deposits and financial products was RMB 61 1,000,000,000 or US8.5 billion dollars On September 16, the company announced the completion of its previously announced put rights offer relating to its 1.25 percent convertible senior notes due 2022, approximately $924,000,000 aggregate principal amount of the notes were validly surrendered and not withdrawn prior to the expiration of the purchase rights offer. Following the settlement of repurchase of these notes, the total number of ordinary shares of the company on a fully diluted base was reduced by 1,800,000 shares. On August 26, the company's shareholders approved the proposal to change the name of the company from ctrip.cominternationaltotrip.comgroupltd. The annual general meeting the amount in depository shares of the company have started to trade under the new company name since November 5, 2019, and the company's ticker has been changed to TCOM. On November 6, Trip.com Group announced a strategic partnership with TripAdvisor, including operational cooperation and a planned investment. This investment will be financed through cash on hand that will be classified as long term investments on the balance sheet. We are happy with the potential shareholding and the corporation and the related global partnership and have no intention to further increase our stake beyond our contractor obligation. Now turning to the future outlook. For the Q4 of 2019, the company expects net revenue growth to continue at a year over year rate of approximately 8% to 13%. This forecast reflects a 600 to 700 basis points in tax related to recent macro and industry headwinds, in particular related to events in Hong Kong. Excluding share based compensation, the company expects non GAAP operating income will be in the range of RMB800 1,000,000,000 to RMB1 1,000,000,000. This forecast reflects trip.comgroup's current and preliminary view, which is subject to change. With that, operator, please open the line for questions. Thank Your first question today comes from Ronald Kim with Goldman Sachs. Please go ahead. Thank you. Thank you, James, Cindy and Michelle. And congratulations on the very strong margin performance. My question would be on the revenue guidance and sort of what's your view on the normalized growth rate? Because on the Q4, you just mentioned there will be an impact around 6 to 8 percentage points. This is more than the 45 percentage points that you mentioned in the Q2 results. So as we head into the Q4, so that the impact from the macro in Hong Kong has increased. Can you just, if you can, can you just figure out what's the impact from Hong Kong given the current situation in Hong Kong? Is that the main delta to that bigger impact into the Q4? And if you can then provide the revenue growth by segment, that constitutes to the Q4 revenue guidance. And once we lapse this Hong Kong impact, what do you see the business to grow on a normalized growth rate, let's say, from the second half of next year to beyond? Where do you see the business growing in terms of value? Is it low teens, mid teens or high teens once we lap seed impact? Thank you. Your question probably can be separated in 2 parts. Our Chairman, Jin Tian, will address the macro forecast and our view on it, and Jin Yu will address the detailed questions about our guidance. Yes. Certainly, the recent events in Hong Kong really certainly have a negative impact on our outbound business, not just to Hong Kong, Hong Kong Macau, also Taiwan, Greater China regions, they were negatively impacted. And also, not just from China, inbound to Hong Kong is almost completely gone. I think in the long run, people readjust their travel plans in 3 to 6 months. Horizon will be the effect will be limited. So people readjust the travel plan and instead travel to destinations like Japan. So we see we will see a pickup in other destinations. So I think in the long run, in the 6 month period, 3 to 6 month period, the effect will be much more limited. Thanks. And regarding the guidance, compared with Q3, the guidance for the Q4 reflected additional 2% to 3% impact on the growth rates related to macro and regional headwinds due to the assumption of the full quarter impact in Q4 based on the latest guidance. Because if you recall in the Q3 actually the impact was starting from August, which is not the beginning of the Q3. And in the Q4, we assume there will be a full quarter impact. Therefore, we included the additional 2% to 3% impact on the growth rate. Thank you. Your next question comes from Gregory Dow with Barclays. Please go ahead. Hi, Benjamin. Thanks for taking my question. First, considering your future expansion to bring more international tourists to China, so what's your plan to attract overseas user traffic to trip.com? And as we see Google still at the top of the user traffic funnel in the overseas market, so we will do more marketing search engine or more promotion inside App Store for your trip.com app? A quick follow-up on your 2020 margin outlook. If we see the Hong Kong issue keeps expanding into 2020, so do you still maintain the above 20% operating margin target? Thank you. Okay. Let me first address your question of the Indial market. Yes, I think the Indial market has a lot of potential, but still there's quite a few bottlenecks. From the China side, the REIT, the online payments and the like the hotel for restrictions for foreign foreigners and also the like Internet access or the bottlenecks. Yes, we are working very closely with the Chinese government. Our Chinese government is quite proactive in solving these issues. And from the SORT market, we are actually working with many governments and to promote China, for example, Japan cross country tourism, so both from Japan to China and China to Japan and working with the best major destination markets in China like Xi'an government. So we're working closely with the Chinese government and other government other countries to promote tourism. And our trip.com has actually increasingly become the venue for people to book international travel in Asia. So that's really we have the ability to promote actually major destinations, not just just China and the major destinations in Asia. So that's really our overall strategy to, on one hand, to promote our brand, but also need to work with other governments to invest in resource in branding and other facilities to promote cross country cargo. Yes. I'll address the margin question. Chip.com group, we have a very scalable business model. And with our business side continues to increase, We can achieve higher efficiencies across all expense and liabilities which was already reflected in this quarter's financial statements. But given the huge growth opportunity ahead of us, it's probably not the optimal strategy for us to maximize margin at this moment. In the future, we will continuously to make investments in our products and services, especially in the international market. And our marketing spending will continue to be purely ROI driven. But thanks to our dominance in the mid to high end markets, especially in China, Even with our continuous investments in the future, our book can still achieve healthy margin. And I think next year 20% margin is the target we are going to we will do our best trying to achieve. Thank you. Your next question comes from Benny Wong with HSBC. Please go ahead. Hi, good morning, management. Thank you for taking my question. So with the update in terms of the strategy we have in the overseas market And also, we are seeing a step up actually in the cross selling ratio, right, from air activities to hotels and to the other products. And also with the large volume we have on the Skyscanner, so how do we see the international growth trends? And also in terms of any uptick in terms of cross selling? Because I think recall in the Investor Day we had earlier, that has already been improving quite significantly from 20% last year to around 30% on the cost selling ratio. I think that is very encouraging. So can you update us in terms of the international growth, how you're going to see it? And also, when will you see kind of like a turnaround in terms of the situations that potentially the shift away the impact from Hong Kong will be going into like tourists maybe going into the Arab market? Where are we seeing that we are adjusting impact and how we are overcoming it? Sure. Thanks, Penny. I think for Ctrip, our strength is really the one stop shopping model and our ability to cross sell the transition to be used. And since our international air tickets normally is the first product of our customers select. Once they make the reservation, we will immediately know where the customers are going. And by taking that knowledge, we'll be able to target these customers by providing the relevant hotels and in destination, tour tickets, transportation, etcetera, to them to increase the cross sell and the conversion rate. So that effort is day in and day out. We were in different paths to make sure we provide the right product based on customers' preference and make sure our accuracy for the reference is improving every day. So that effort is very much under the way and it's very concerted effort by all the business units. And as we are expanding globally, we are only in selected destination right now. So as our air ticketing business is moving further into the global business, the opportunity for us to do cross selling will be enhanced. So we also look at different indexes such as traffic volumes from China to different destinations and to enhance our pricing offering and product comprehensiveness. So, AWatch is a very comprehensive strategy to ensure whatever customers need is looking for our product to be suitable for our customers abroad. So I think that the question will impact throughout the year in the future. Thank you. Your next question comes from Jed Kelly with Oppenheimer. Please go ahead. Great. Thanks for taking my question and congratulations on the 20th anniversary. It was nice to see all your suppliers at the event, generally happy for your success, so well done. So my question is just on the accommodation, it did decelerate. I mean, how much of that is a mix between lower volumes versus lower commissions or lower ADRs? You touch on that? And then on your sales and marketing, it actually was down again 8%. Given your ambitions for trip.com, I mean, are you waiting to build up the product to a certain amount of domestic of international supply before you accelerate marketing that brand? Just how should we think about your marketing strategy both domestically and internationally? Thank you. A slower revenue growth than expected, which is mainly due to the slower than expected travel demand due to the macro headwinds, especially in certain regions like Hong Kong, Taiwan, the big China region. For example, during the October holiday and the weakened regional travel momentum, the travel demand year on year change during the October holiday was the lowest level for both domestic and outbound in the past 8 years, especially for outbound travel industry, which was decreased by 15% year on year. And outbound traffic to Hong Kong declined by more than 50% in recent months, which also resulted in a steep decline in the accommodation and air ticket prices. Overall, the outbound travel volume decrease from 13% to 14% year on year in the first half of this year to just 1% year on year in the Q3. However, as always, we will continuously to outpace the industry growth. For example, in the accommodations, it's revenue from the overseas hotel excluding Great China destination. Our overseas hotel grew about 50% year on year. And the Ctrip brand low end hotel delivered close to 40% volume growth and revenue for our domestic high end hotel may take a very strong growth momentum. Similar to our accommodation business, our international air tickets business achieved a higher even higher multiple against the industry growth during a slow quarter. And the Trip.com's very particular wallet continuously to deliver triple digit growth. Regarding the sales marketing strategy, as I said, we will continue to have truly ROI driven marketing strategy, both domestically and internationally. We will continuously to be more focused as to our strength, more advanced mobile or app based products. We will continuously to promote more in the mobile marketing channels. Thank you. Your next question James, I was wondering then if you can comment on the competitive situation. We recently heard that one of your key competitors recently stepped up on their discounting, maybe especially in the low tier hotels, low star hotels. Just wondering if you can talk about that a little bit, how you guys responding? And do you expect the competition to stabilize and also to expect that to continue going to 4Q? And also Cindy, I'm not quite sure if you provided operating margin guidance for 4Q and also you can break down the segmentation guidance for 4Q as well, that would be helpful. Yes. We have been always pursuing a quite aggressive pricing strategy at the low end of the market. I think on the high end of the market, customers are generally not that price sensitive and we generally value quality of the service in advance. But on the lower end, customers are quite price sensitive and we can hope quite aggressively pursuing pricing strategy to gain market share. And that's going to be our long term strategy, so intent to maintain this strategy. Regarding the guidance for the margins, so excluding share based compensation charges, the company expects non GAAP operating income in the 4th quarter will be in the range of RMB600 1,000,000,000 to RMB1 1,000,000,000. On the top line guidance, in the accommodation reservation business, in the 4th quarter, estimate that it will continue to have a healthy growth rate at about 10% to 15%. And for transportation, Sydney business, the Q4 guidance will be in the range of 0% to 5% year on year growth. And the packaged tour revenue will continue to have a 15% to 20% growth rate. And corporate travel will have a 20% to 25%. In total, our net revenue will grow in the range of 8% to 13%. Thank you. Your next question comes from Natalie Wu with China International Capital Corporation. Please go ahead. Hi, good morning. Thanks for taking my question. Just curious, can you help us 1 year since you upgraded your open platform strategy and launched the 3.0 version system. Just wondering, would you mind sharing with us more details on the progress regarding that initiative in the past 11 months, especially with respect to those ones contributed to your financials the most? Thank you. Sure. First of all, on TripAdvisor, we are very excited about the partnership because our users will be able to access millions of the reviews and pictures generated by global users. And when they make the reservation, they will already see what they are going to see in the destination. And that will enhance our user's experience. So we are very excited to collaborate with TripAdvisor team to make sure our user experience is enhanced. Secondly, on open platform, it's a very innovative strategy. Ctrip was the first one to do that. And we by leveraging the open platform, it enables us to have the coverage we want to have across the world and timeliness of the product that is offered to our customers and also have the best pricing structures that is available for our platform. So far, I think that the platform has offered anywhere depending on the different product lines, it can be anywhere between 20% to 45% of the volume are coming from the open platform. And the challenge for us is to make sure the quality is very well controlled and Ctrip will be behind the scenes making sure all the service level is not by all the suppliers on the open platform. So every day, we run different projects to make sure not only we get the best price, coverage and products, but also we offer the best services to guarantee the user experience for our customers when they go abroad. Thank you. Your next question comes from Chen Hu with T. H. Capital. Please go ahead. Good morning, management. I have two questions, two quick ones. One is, last year, we actually mentioned a lot about going down to the lower tier cities. But look at what we actually did this year, a lot of them is rather going abroad. So I wonder, have we changed our strategy? Or is this going downstairs going down to the lower tier cities has already finished? So what's the future strategy in terms of expansion? That's number 1. Number 2, there is a theory that if someone wants to go abroad to travel, if Hong Kong has something, they can actually alter their destination to other places. So I wonder how to reconciliate the impact we're experiencing and to the theory I just mentioned. Thank you. That's the 2 questions. Sure. For T Ship, we are based in China. So further penetrate into the lower tier cities has always been our strategy and will be in the future. However, we have seen great potential abroad as well. So the 2 campaigns and 2 fields are moving simultaneously. Our domestic team is moving very aggressive by opening up offline stores and they're making very good progress further penetrating into the 3rd tier 4th tier cities. And our pricing structure supports our strategy and has seen very positive growth in the lower tier cities. Our international team, on the other hand, also moves very rapidly to make sure we capitalize on the opportunity for outbound travel as well as the other opportunities globally. So these two strategies coincide with each other and moving simultaneously very rapidly into both our loyalty activities as well as abroad. And your second question is the replacement of Hong Kong. Yes, so people will gradually look for alternatives. Now Hong Kong is not a valid place to go. However, it takes time. And what's going on in Hong Kong is not only impacting Hong Kong, also it makes people pause and think. So it has peripheral impact in general market. But again, Ctrip, because we are so diversified, we will work very hard to make sure gradually we're able to divert certain traffic to other alternatives. But it takes time. Yes. As a service provider, we have the most comprehensive product to capture any travel demand from the users. But in terms of the target that we give to the team, we always ask them to outpace the industry goals. So given this now our growth rate slowed down, but compared with the industry growth rates, we have still outpaced the industry growth in a much faster way during the slow time. Thank you. There are no further questions at this time. I'll now hand back to Ms. Chi for closing remarks. Thank you, Ashley. Thank you to everyone for joining us today. You can find the transcript and webcast of today's call on investors. Troops.com. We look forward to speaking with you on our Q4 2019 earnings call. Thank you and have a nice day. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.