Earnings Call: Q1 2021

May 19, 2021

Earnings release

Thank you for standing by, and welcome to the trip.comgroup2021Q1 Earnings Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Michelle Key, Senior IR Director of Trip.com Group, please go ahead. Thank you. Good morning, everyone, and welcome to Trip.com Group's 2021 Q1 earnings conference call. Joining me today on the call are Mr. James Lam, Executive Chairman of the Board Ms. Jane Sam, 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 As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in trip.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, Jim and Cindy will share our strategy and business updates, operating highlights and financial performance for the Q1 of 2021 as well as outlook for the Q2 of 2021. After the prepared remarks, we will have a Q and A session. With that, I will turn the call over to Jim. Jim, please. Thank you, Michelle. Thank you, everyone, Thank you for joining us on the call today. Due to China's successful containment of the pandemic, the recovery of China's domestic travel market continues The borders still shut many have turned to domestic travel to high quality scenic spots and destinations. During the May's Day holiday, approximately 230,000,000 trips were made by tourists domestically, We're presenting a 3% increase compared to the same period in 2019 before COVID, setting a new all time high for the holiday. In our platform, long distance travel across provinces Mainland China has made a full recovery and short distance local travel continues its strongest growth trajectory. Ships.comgroup's submission is to pursue the perfect trip for a better world. Throughout the past 2 decades, We are continuously exploring and innovating to further improve our offerings. We have established a leading global one stop travel Platform where users can easily find comprehensive products with reliable services and guarantees and differentiated travel content All reachable within a few taps on mobile application. Following the strong recovery of China domestic travel market, We have successfully launched our 2nd listing secondary listing in Hong Kong in April. This marks a milestone in our development from which we embarked on a new journey. Currently, our market share in China domestic market It's only in mid teens, while global market share is still in the low single digits. We're excited for the potential about growth. Going forward, we'll continue to focus on the following major areas to sustain the group's long term development as well as bring New value to the industry. 1st, continue to improve our power offerings and service quality. We'll be pushing ahead with more in-depth tour products to meet the evolving needs of the post pandemic travelers. While strengthening collaboration and cross sells between business lines to provide a comprehensive yet hassle free one stop travel experience. 2nd, use content oriented innovation To engage users and stimulate travel, you will continue to see trip.comgrouptransform from solely purchasing platforms to hubs of travel inspiration hosting the best travel deals. By hosting more comprehensive travel content Such as live streaming, enhanced information feeds and short videos, we are able to ignite greater interest In travel and facilitates new trends, such as significant increase in short distance travel and trips to long haul destinations witnessed in the past year. 3rd, foster a content ecosystem with our travel marketing hub, StarHub, As a centerpiece to boost our partners' marketing capability on our platform, Starhub functions as a flagship store for our partners, We are able to integrate differentiated travel content and a wide variety of tailored product offerings, drive huge traffic volume and develop exposure with enhanced promotions, thereby bolstering their Brand image and boosting customer engagement. 4th, maintain and expand our global perspective. Every maneuver and initiative we've tested and proved successful in our domestic market It is an invaluable asset for our global development. We are putting this advantageous position to use in our Preparation for the upcoming global travel recovery. Progressing in these areas will require investments In technology and R and D as a driver for efficiency and growth, we believe our investments will create long term value not only for our users, But also for our shareholders, the travel industry and the society as a whole, we want to thank our users for their loyalty and trust, our business partners For their understanding and support and our more than 30,000 employees around the world for their hard work and commitment to customers and partners during such a difficult time. They are the ones driving us to greater success. With that, I will turn the call over to Jane for operating highlights. Thanks, James. Good morning, everyone. I would like to first quickly walk through our Q1 results and then touch base on our post pandemic growth drivers and the future opportunities. First, Q1 overall highlights. Due to the travel restrictions in Mainland China to contain virus in January February Of 2021, around Chinese New Year, our top line decreased by 13% year over year and about 50% as compared to the same period in 2019. Despite such challenges, China's domestic travel market rebounded strongly in March and with even great momentum in April May. Both hotel and air ticket have grown strongly. Cross sales between air to hotel products in Q1 increased significantly compared to the same period in 2019. We are also delighted to see revenue from other business lines in Q1 exceeded the same period in 2019. Revenue from corporate Travel Management has completely recovered compared to 2019 pre COVID and new initiatives such as travel financing services and domestic travel advertisement have both delivered strong results. 2nd, May Labor Day holiday highlights. As China control pandemic Effectively, accelerate vaccination significantly and removed domestic travel restriction, The pent up demand travel volume has been unleashed during the May Labor Day holiday. Our total number of domestic bookings for 5 day break show year over year growth of approximately 2 70% compared to 2020 and represent a more than 30% increase compared to the same period in 2019 pre COVID. Significant increase were recorded across many business areas. Daily average data were used since the 2019 May Labor Day weekend were one day shorter than it was for 2020 2021. Daily average domestic hotel GMV during the Labor Day weekend, saw a surge of 3 90% growth compared to 2020 and close to 50% growth compared to 2019 pre COVID. Daily Domestic Hotel GMV recorded a historic high in the 1st 3 days for the holiday season. Daily average domestic air ticket booking also saw a 190% year over year growth Compared with 2020, an approximately 30% growth compared to 2019 pre COVID. During this period, we also observed new trends in customer behavior. 1st, With the national borders remain short shut, domestic cargo has become the best solution to meet the pent up outbound travel demand. We believe this has driven the rapid growth Of quality leisure travel, bookings for mid to high end hotels has spearheaded The growth in the past 12 months, the rising demand for quality travel is also shaping the supply side. In the past year, we have strengthened our product offering. We believe our newly expanded inventory We'll continue to contribute to the long term growth of quality leisure market after the reopening of the national borders. 2nd, long distance travel across provinces have completely recovered. In addition, Short distance and intra province travel represents a new growth driver. In the May Labor Day weekend, average daily domestic hotel GMV for intra Provincial fee increased more than 60% compared to 2019 pre COVID and average daily GMV for domestic attractions and activities doubled compared to 2019 pre COVID. 3rd, content strategy. When travelers are seeking an elevated travel experience, They also are increasingly enjoying the excitement of discovery, sharing and being inspired by the rich content. Nowadays, we are all digitally connected and technology constantly drives the evolution of the industry. The binary between offline and online engagement has blurred. A true one stop platform should Transcend the convention search to book model, trip.comgroup is not only only focusing on the development of the best purchasing platform, but also becoming the hub of inspiration. As we continue to implement our content strategy, our Ctrip mobile app has undergone Significant updates over the past months. The live stream channel is now an open platform Featuring KOLs and industry partners, hundreds of live events were streamlined in April And DAU for the live streaming section on app doubled month over month. We also launched Starhub over travel marketing hub. In late April, Through StarHub, partners and suppliers are given the tool to deliver differentiated and tailor made travel content and a wide diversity of marketing activity to interact with our high quality users and gain exposure With StarHub and existing trip.comgroupmarketingchannelintheirarsenals, Partners can expand and enhance their marketing performance to drive traffic volume and conversion. In less than 1 month, more than 150 destinations, hotels, theme parks and attractions have already joined StarHub. We expect to see it growing into a rich content Ecosystem. During the past quarter, number of travel KLLs on our platform increased by more than 50% sequentially. The enriched content resulted in high number of users' visits and longer user time spent on the content channel. During the Labor Day weekend, More than 40% of the app users visited our content channel. We will continue to focus On the improvement of the content generation and delivery and create information feeds, our users go to source for travel destination and ideas and inspirations. 4th, corporate travel management. While the leisure travel is growing healthily, we are also excited to see Corporate Management Business also fully recovered from the negative impact of the pandemic. Despite the alternative use of video conferences, business travelers recovered strongly Along with the economic growth in the domestic China market, we also see shifting trends With business travelers turning to corporate management services from other channels, this We'll form the strong cornerstone for the long term development of our corporate travel management. 5th, overseas market. Although the world We're still facing uncertainty due to the COVID-nineteen. We're encouraged by the development of vaccine. On one hand, we are fully prepared to take advantage of the approaching international travel recovery. On the other hand, we also continue to support different destination markets to promote Local domestic travel under the current situation before the border opens. For our overseas market, Hotel reservation for the domestic travelers in the countries outside of China have already recovered to pre pandemic level in the recent months, driven by increased number of domestic space in respective markets. We expect to see volume bouncing back at a greater scale once cross border restrictions are lifted and global travel reopens. With that, I will now turn the call over to Cindy. Thanks, Jane. Good morning, everyone. To avoid comparing with the same period in 2020, When the pandemic outbreak first appeared, I will instead compare our earnings performance in the Q1 with the same period in 2019 Q4 of 2020. For the Q1 of 2021, trip.comgrouprecorded Net revenue of RMB4.1 billion, representing a 50% decrease from the same period in 2019. The first half of the quarter was significantly impacted by the resurgence of COVID cases in China and the travel restrictions that followed. However, our domestic business showed strong resilience and quickly rebounded after the Chinese New Year holiday. Both our domestic hotel and air business have fully recovered to pre COVID level since early March and achieved double digit growth During the month compared with the same period in 2019, revenues from corporate travel business grew 6% in Q1 compared with 2019, mainly driven by the expansion of its client pool and increase of cross selling to accommodation products. Revenues for our other business grew 17% In Q1 compared with 2019, thanks to the fast development of our new initiatives such as travel financing services and domestic travel advertisement business. Gross margin was 75% For the Q1 of 2021 decreased from 82% for the previous quarter, largely due to the travel restrictions at the outset of 2021. Excluding share based compensation charges, our adjusted operating expenses decreased by 30% compared with the same period in 2019 and were flattish compared to the previous quarter. Adjusted product development expenses for the Q1 increased by 9% to RMB2.1 billion from the previous quarter, primarily due to fluctuation Expenses related to product development personnel. Total headcount in our product and development team is largely stable, and the average salary increased modestly as we entered into 2021. Adjusted sales and marketing expenses for the Q1 decreased by 22% to RMB930 1,000,000 from the previous quarter, mainly due to the decrease in expenses related to sales and marketing promotion activities in response to the decreased travel demand in the quarter. Adjusted G and A expenses for the Q1 increased by 20% from the previous quarter, mainly due to the fluctuations in the allowance for the expected credit loss. Following the common market practice, we start to disclose adjusted EBITDA from this quarter. The difference between adjusted EBITDA and non GAAP operating income represents the Depreciation and amortization expenses, which is available on our 6 ks form. Adjusted EBITDA was negative RMB 2 at $16,000,000 and adjusted EBITDA margin was negative 5% for the Q1 of 2021. Diluted earnings per ordinary share and per ADS were RMB2.88 or $0.44 for the Q1 of 2021. Excluding share based compensation charges and fair value changes of equity security investments and exchangeable senior notes, Non GAAP diluted loss per ordinary share and per ADS were RMB0.34 or US0.05 dollars for the Q1 of 2021. As of March 31, 2021, The balance of cash and cash equivalents, restricted cash, short term investments, held to maturity, time deposits and financial products was RMB66,100,000,000 or US10.1 billion dollars With the successful dual listing in Hong Kong in April, We have further strengthened our cash balance by around US1.2 billion dollars As a listed company, our Hong Kong stock exchange, we need to comply with regulations and follow the common practices adopted by for the coming quarters. Instead, we would like to provide some recent colors of our business. Mainly driven by the growth in domestic accommodation and air ticket reservations, While international revenue was still under pressure, compared with the same period of 2019, Domestic accommodation and air ticketing reservations were both up by more than 20% quarter to date. Also, the fast recovery of domestic China travel is gradually making up the loss of our business. Recently, our total hotel reservations have returned to pre COVID level, While price is still under pressure, we remain committed to deliver sustainable growth and create long term value for our shareholders. With that, operator, please open the line for questions. Thank We do ask that you please limit your questions to 1 per queue today and rejoin the queue if you have further questions. Your first question comes from Alex Poon with Morgan Stanley. Thanks management for taking my question. Congrats on the very strong results and rebound in travel demand. My question is regarding the resurgence of COVID-nineteen globally. Travel international travel remains uncertain. So how will trip.com prepare the strategy and focus in this environment? Thank you very much. Thanks for the question. We have full confidence in the complete resumption of international travel. We have already seen the promising recovery of travel in some countries and regions with widespread vaccination rollouts. Across all markets, we have seen domestic travel market rebound and gradually make up the loss of cross border travel. Recently, Our total hotel bookings have reached pre COVID level, while prices remain under pressure. In Q1 overseas hotel bookings by non Chinese customers, our trip.com platform have already recovered to the pre pandemic level. Our teams are utilizing this time to enhance our fundamentals in price, product, service and our user experience for overseas users. With that, we'll be best positioned to capture the pent up travel demand Your next question comes from Ronald Keum with Goldman Sachs. Thank you, James, Jane, Cindy and Michelle. I guess following on that recovery path, could management share just how we see the forward, say, a few quarters and maybe into 2022? Just how are we Expecting that international recovery path maybe, if not quantitative, maybe qualitatively that Recovery path. And how would we plan our sales and marketing strategies on our spending alongside that Eventual international recovery path. And are we thinking about how domestic will shift or Domestic strength that we see now actually maintain while international will be incremental and then recovering with that expectation? Thank you. Thanks for your question. We look at our business in 3 segments. The first one is domestic travel. The second one is for the areas outside of China, The domestic travel within each respective countries. The third one is cross border travel. So first of all, for domestic travel With China, we have full confidence that our government has very effective control procedures to make sure Mainland China's economy will grow strongly. And normally, when the economy is growing strongly, travel market will outpace the GDP growth in that market. And we will work very hard to serve our customers to capitalize on this strong momentum. So that's the first thing within domestic travel for Mainland China. The second thing is Outside of China, we also have seen a strong recovery in each respective markets we are targeting at. So based on the numbers we are looking at for the most recent events, these are the mass travel in the respective areas outside of Mainland China have already recovered to pre COVID level. So we have very Strong confidence that applying for whatever worked in the Mainland China will also be capitalized some of the markets we are targeting at. The third one is cross border travel. That is a little bit it takes more of coordination between nations. But we are encouraged by the development of the vaccination. I think each government is pushing very hard to make sure the people within each country are well protected. So for what we have seen, U. K, Europe and the United States are moving very fast in that front. And also Asia, most of the country have demonstrated their ability to control and also Control and handle these kind of crisis quite well. So we are hopeful that Asia, Europe, America gradually will be opening up and with more vaccination is taken, hopefully the passport will indicate The passengers information and therefore gradually, we will be able to capitalize on the pet type demand for cross border Your next question comes from Alex Yao with JPMorgan. Thank you, management, for taking my question. I would like to follow-up with Ronald's question, but from slightly different angle. So I think ultimately COVID will be behind us. It could be the end of this year, it could be mid of next year. When we enter into the post COVID stage, how do you think about The normalized growth rate in the next couple of years, what are the new revenue Trinity, you are seeing post COVID as a result of perhaps a consumer behavior change or business behavior change? Thank you. Yes. I think we are all very excited to wait for the pass of the COVID From our search results on our sites, the pent up demand is very strong. So we are confident eventually the scientists Around the world, we have come up with very strong method to contain this virus and governments also through the past year have accumulated lots of experience to make sure that going forward, the virus will be well contained. And our team works very hard to accumulate our knowledge and experience to handle different situations. So within our domestic travel, there are also lots of opportunity. Our market share still is quite It's in the teens. In 2019, our market share is around 13%. There were still A lot of unaddressed market that we have not tapped into. So for example, our Content driven strategy is a new area. The market will grow quite nicely in the next 3 to 5 years. And if we can address and take about 3% share to 5% share, that's quite significant already. Secondly, we also saw the short haul travel, which is serving as an alternative when people are content within their own borders. And thirdly, corporate travel, as we discussed, It's growing very strongly. Traditionally, it's adjusted by the other Channels, but we ought to use very good services to address the customers We need to travel from cities to cities and frequently on the road. So with our strength In hotel, air and the other area, we will be able to help the customers who travel so frequently around China. And 4th, also the cross sale opportunity Our WinStar platform represents a good opportunity to make sure our customers' needs are addressed very nicely Rather than having our customers to search all around the website to find the right product, We ought to provide better services for them when we use our technology and one stop shopping platform to provide the best service for our customers. And these new initiatives are mainly centered around the domestic travel for China. And in addition, I think the cross border travel, Inbound travel and for the customers around the world will also add another layer of the And our team is working very hard with our global team just to make sure that our strength in the Mainland China eventually will be duplicated in the global places. So we are excited for the future growth. Thank you. Your next question comes from Thomas Chong with Jefferies. Hi, good morning. Thanks I have a question relating to the expense side. Given that we have done a lot of work to How should we think about the trend in expenses going forward after COVID? Thank you. Thank you, Thomas. Yes, thanks to our largely flexible cost and the expenses structure During past year, we actually further streamlined our operations across business lines. In addition to certain adjustments related to COVID, our improvements on content And cross selling going forward will further help us to lift our marketing efficiency. We expect in terms of the cost trend in the year 2021, we expect comparatively modest increase In personnel related expenses and sales and marketing expenses are largely And discretion and adjusted in accordance with our business recovery, and we will continue to adopt And ROI driven strategy, we furthermore, we believe our improvement Our content and cross selling will help us improve our marketing efficiency in general. But at At the same time, we will also reserve certain budgets in the short term to development content ecosystem And to prepare for recovery and growth of the international market. Thank you. Thank you. Your next question comes from James Lee with Mizuho. Great. Thanks for taking my questions. My question is regarding advertising opportunity. I was hoping maybe Jane, you already spoke about Live streaming and StarHub, they all sound very interesting. And can we maybe get an early sense about The friction that you're experiencing with advertiser when they try to adopt the new content platform And how you plan to resolve it specifically? And also maybe early learnings from consumers, if they have any? And then what do they like about your new content platform and what needs to improve? And lastly, maybe over longer term, can you talk about what kind In terms of users and engagements and that will lead to ultimately improved monetization? Thanks so much. Sure. From a long term perspective, the content And also advertisement market currently is about 90,000,000,000 market. And by 2025, the market size is expected to be around 140 percent RMB140 1,000,000,000. And our target is that if we work very hard to address about 3% to 5% of the total market, That can be quite significant for our top line and bottom line as well. Secondly, the strength of our platform is that The quality of our customers is very strong and they're looking for inspiration when they decide where to go, particularly during the holiday seasons, summer vacations, Chinese New Year, etcetera. So when we post our content onto Our platform, we already seen the users doubled for that channel and also the stay for the time spent In this channel also doubled significantly in this channel. So that give us a very strong indication That customer needs the content and we will also offer a very customized match between the customers, what they are looking for to be suitable for their family needs, for their interest. Thirdly, with the strong customer interest as well as their spending power, The areas, the hotels, travel destinations and attractions, if we do a very good Analysis, we ought to offer the best opportunities for customers to look at. So that also is a strength for our platform. We have seen very strong conversion Our platform, when we post the relative and very carefully Analyzed matching for our customers. So these are the strengths for our platform. And of course, we only started this system 1 month ago. The momentum is strong, but it takes us, Our team for our strong execution and to make sure the product is suitable for both to our customers and partners, but we are confident as long as we keep up with our strong execution, We'll be able to offer the best product for both of our consumers as well as the partners. Thank you. Your next question comes from Joyce Ju with Bank of America. Good morning, James, Jane, Cindy and Michelle. Congrats on Very strong results this quarter and thanks for taking my questions. My question is related to government's recent antitrust push. We have seen couple of segment leaders recently being expected and also some of them even paid the penalties antitrust movement. So just want to ask like if we have been we had related like risk and if we have been in any Communications with the regulators in this perspective, given I think the antitrust You know, Bruce, at very beginning, there are a couple areas of expectations like they actually include like Price discriminations like in the monopoly power of the marketplaces. Just trying to understand how we actually avoid be into a situation like being Fine or like get penalty from this. Thank you. Thank you. We fully support Our government for their efforts to create a healthy and sustainable growth market, our belief is that The market if we can create a market that is healthy and sustainable, We the industry will grow in a very healthy manner. Secondly, our market share is quite small still. The market share for 2019 is around 13%. There are the travel industry is faster growing. We need Qualitate service provider to address our customers' needs. So we'll work very hard with the government, with our partners to make sure our customers' demand is very well addressed. Thank you. Your next question comes from Tian Hu with T. H. Capital. Good morning, management. Thanks I have two quick questions. On the income statement, for the corporate travel, So I saw like a year on year 100% growth and it's really outstanding. So I really want Want to understand what are the drivers behind the 100% year on year growth? And what could be the future growth In this line, at least the outlook for that. The second one is for other business. So it is actually showing the year on year Positive returns. So can management give some color to tell us what are within the others And what item within the others are driving force for this part of revenue to grow that fast? That's my two questions. Thank you. Thank you. Tian, The Ctrip is always the leader and especially in the business travel space. Of course, the 100% growth, The first reason is the lower comparatively low base of last year because last year the Q1 of last Sure is the outbreak of the pandemic. Basically, there is a very low traffic, It's actually for the business travels. Therefore, we had 100% growth. And secondly, it's actually reflect the fact that once there is pandemic Or any emergencies, a market leader will always consolidate or have growing our market share very quickly. This also reflected in our high growth in the business travel, especially the corporate And the third reason, as Jane explained, our hotel business in the corporate travel Grow very fast significantly. Firstly, because we have a very Competitive pricing or competitive product offering to serve our corporate travel needs. Secondly, we also successfully cross sell hotel product From the Air business, from the Air customers, from the corporate travel, these are the three reasons why you see a very strong growth in the corporate travel. And the second question, the other base others basically is the reflect of the market value adjustment for the available for sale Investments, the first actually, this basically reflect the grand trend of the market pickup For the Q1, all our investment classified as available for sale, They have to do revaluations on a quarterly basis. So compared with the Last year Q4 last year, all the market pricing grow significantly. This is the reason why we had a one time gain on this category. Your next question comes from Brian Gong with Citi. Thanks management for taking my question. Congratulations on the solid results and recovery. So with The strong return of domestic travel, management's expectation for following quarters by different segments, Especially for upcoming summer break and the Golden Week National Day? Thank you. Yes. The Golden Week holiday is very strong. As we discussed, the pent up demand have drive the growth. As previously discussed, the volume growth for the Hotel is more than it's a 3 digit growth for year over year. For 2019, it's also grown more than 50% year over year. For air ticket The growth is also 3 digits compared to the last year, but also for the Next year, it's for the 2019, it's more than 30% year over year growth. For the Q2 number, I will turn it to Cindy for highlights. Yes. We will not provide Quarterly guidance anymore in order to comply with the Hong Kong Stock Exchange Regulations, But we would like to share some recent colors with our investors. For the quarter to date, Our total revenue was up more than 80% year over year, driven by the strong domestic travel recoveries. But at the same time, the international revenues remain still remain under pressure. So compared to 2019, both our domestic hotel and air ticket reservations grew more than 20% compared quarter to date. Specifically, during the past Labor Day holiday, our total domestic reservations grew by more than On 2 70% year over year and 30% compared with 2019, among which domestic hotel and air reservations were up by more than 50% 30%, respectively compared with 2019. The faster recovery of our domestic China travel will gradually and fully make up the loss of outbound business. Recently, our total hotel reservations have returned to pre COVID level, but price is still under some pressure. Thank you. Thank you. That does conclude our question and answer session. I'll now hand back to Michelle Key for closing remarks. Thank you. Thank you, everyone, for joining us today. You can find the transcript and webcast of today's call on investors. Sys.com. We look forward to speaking with you on our Q2 2021 earnings call. Thank you and have a good day. Thank you very much. Thank you. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.