Ctrip.com International, Ltd. (CTRP) Q1 2012 Earnings Call May 16, 2012
Joining me on the call today, we have Mr. James Liang, Chairman of the Board; Mr. Min Fan, President and the Chief Executive Officer; Ms. Jane Sun, Chief Financial Officer; and Ms. Jenny Wu, Deputy Chief Financial Officer.
Min Fan
Thanks, Lin, and thank you to everyone for joining us on the call today.
Through solid execution on our business strategies, the Ctrip team has continued outperforming the industry in the first quarter of 2012. Our net revenues grew by 90% year over year, in the high end of our guidance of 15% to 20% year-over-year growth. And net income decreased by 28% year over year.
We strengthened core business sectors, expanded into more new business areas, and intensified sales and marketing campaigns. We’ve further expanded our hotel supply network which cover about 30,900 domestic hotels as of the first quarter of 2012, compared with 18,000 hotels a year ago. The number of hotels with guaranteed room allotment accounted for about 70% of the total hotel supply.
Our hotel reservation e-coupon program has received positive user feedback, helped us attract more lead customers and further strengthened our leading position in the hotel reservation sector. We will continue to closely monitor the development of competition and adjust our strategies accordingly.
As part of our innovative product offering efforts, we upgraded the Smart Choice Hotels platform in the first quarter. Compared with other discount hotel booking models, the Smart Choice Hotels are more suitable to Chinese customers. The transparent pricing information model makes it easy for customers to find a great deal that meets their expectations. The Smart Choice Hotel product has been growing healthily since its launch, covering about 2,000 hotels already. With more hotels to join the network, we expect to see its increasing popularity among leisure travelers.
[Fujia.com] is another new initiative to explore the opportunities in the leisure accommodation market. It is a vacation rental business that offers customers a great choice of accommodations, with more flexibility and lower cost than traditional hotel. [Fujia.com] targets leisure customers traveling with families and friends. We believe the vacation rental business offers a brand-new travel experience for Chinese travels, and [fujia.com] has the expertise and technology to lead growth in China for this new segment.
In order to offer full range of hotel accommodations, different travel needs, Ctrip invested in [sungko.com], and hostel booking aggregate site. [Sungko.com] provides a high quality online booking service for the fragmented hostel market, with more than 5,000 hostel listings, including smaller budget hotel chains, [boutique] hotels and hostels in historic and scenic sites. As an independent brand, [sungko.com] targets the young generation who want adventure but have limited spending power. We believe [sungko.com] will help Ctrip further penetrate a younger demographic.
To accommodate fast-growing demand for international travel, we upgraded our international air ticketing channel in the first quarter. The upgrade channel provides users with more online searching and booking options, including complex multi-destination tickets. It also offers intelligent filter to help customers find the most suitable flight.
In addition, it provides for the most transparent and competitive prices. This upgrade of international ticketing platform is a revolutionary breakthrough in the international air ticketing market. We believe it will help us extend our leadership into international air ticketing.
Ctrip’s package tour business delivered another strong quarter with revenue from Mainland China to grow 51% year over year. The high-end travel is growing fast in China. The Chinese Luxury Consumer White Paper 2012, jointly published by the industry bank and (inaudible) indicates that there are nearly 3 million Chinese people who own over RMB6 million of personal assets.
To capture this rising demand of high-end travels, in March Ctrip launched HHTravel.com a new travel brand primarily looking at high-end travelers of (inaudible) China with a personalized super-deluxe tour. We successfully tested high-end market with our [global deluxe tour] three years in a row and results overwhelmingly beat the industry’s expectation. Our 80-day group tours which cost over RMB1 million per person was sold out within 17 seconds in March.
In April, Ctrip invested in a high-quality Chinese travel company, Trip TM. Through the integration of Trip TM’s unique resources, HHTravel.com is well-positioned to bring China’s high-end travel market into a new era.
After years of efforts, Ctrip has built a premier brand name and leading position in China’s corporate travel management sector. With superior service quality and extensive resources, Ctrip has achieved solid expansion of client base and revenue growth in this business.
In the first quarter of 2012, our revenues from corporate travel increased 23% year over year. To demonstrate our commitment to delivering the best service to our customers, in early May, Ctrip and China Call Center, a BPO association, jointly announced the launch of (inaudible) Contact Center Evaluation Process Desk. Ctrip is the only online travel service company to initiate (inaudible) evaluation in China.
In addition to our industry-leading call center service, Ctrip also achieved robust growth in its online transactions. Currently, Ctrip is about 45% of total transactions conducted online. Our mobile platform is gaining strong momentum. Booking volume has been reaching record highs every quarter, and Ctrip apps are among the most appropriate travel apps in China. In March, we upgrade the mobile apps for iOS and Android systems. A number of Ctrip travel app downloads has exceed 10 million, which now offers a mobile website and multiple apps for mobiles and tablet computers. And we are elevating them to seamlessly integrate our wireless online and call center services.
During the first quarter, Ctrip enhanced investment in sales and marketing. We reached out to more new customer through various channels by the end of first quarter of 2012. Our cumulative number of customers has increased to 16.4 million compared to 12.7 million at the same time in 2011.
Contributing to society is Ctrip’s mission that will never end. In November 2012, the Ctrip founded construction of another Hope School in Guangxi Province was completed. This is the sixth Hope School founded by Ctrip senior management since 2008, and we will continue to increase our efforts and demonstrate our commitment to society.
Based on our deep understanding of China market, we have clear strategies to execute our strategic growth initiatives. Looking back on our growth so far, every move we have made has kept Ctrip in the lead of industry growth trends. Amid the booming online travel industry in China, Ctrip will continue to strive to deliver the best product with the best service at the best price to our customers.
Now I would turn to James for the industry outlook.
James Liang
China’s economy grew 8.1% in the first quarter of 2012. World Bank has projected in April that the prospects for soft landing in China remains high, with GDP to grow 8% in 2012. Although a slow growth than the previous years for China, China will continue outperforming most leading nations in the world in economic growth.
As one of the major consumption industries, China travel industry will continue to deliver robust growth, aided by the increase of household incomes and enhanced paid vacation systems, according to the China Economic Impact Report 2012 issued by the World Travel Tourism Council, China is ranked number two globally in the growth of travel revenues for compounded annual growth rate at about 10% for the next 10 years.
We believe leisure travel will be the major industry growth driver, especially China’s travel services still in its early stage of online migration. Escalating online penetration will create more opportunities for all the players in the industry. Our strategy is to offer rich diversity of products and best value for money with leading service quality for our customers.
In addition, to continue to enhance our business travel offering, Ctrip is also putting more efforts towards capturing the great secular growth of the leisure travel sector. We believe given extensive experience in the China travel industry and a solid execution team, Ctrip is well-positioned to lead the industry in the future.
Now I will turn to Jane for financial update.
Jane Sun
Thanks, James. I'm pleased to report the solid results for the first quarter of 2012.
For the first quarter of 2012, net revenues were RMB911 million or USD145 million, representing a 19% increase from the same period in 2011. Net revenues for the first quarter of 2012 decreased by 2% from the previous quarter.
Hotel reservation revenue amounted to RMB367 million or USD68 million for the first quarter of 2012, representing an 18% increase year-over-year, primarily driven by an increase of 21% in hotel reservation volume, and partially offset by a decrease of 3% commission per room night year on year. Hotel reservation revenue decreased by 8% quarter on quarter primarily due to seasonality.
Air ticketing booking revenue for the first quarter of 2012 were RMB360 million or USD67 million, representing a 10% increase year on year, primarily driven by a 17% increase in air ticketing sales volume and a 5% decrease in commission per ticket year on year. Air ticketing booking revenues decreased 5% quarter on quarter.
Package tour revenue for the first quarter of 2012 were RMB166 million or USD26 million, representing a 33% increase year on year due to the increase of leisure travel margin. Package tour revenue increased 28% quarter on quarter, primarily due to the increased travel demand during Chinese New Year. Corporate travel revenue for the first quarter of 2012 were RMB39 million or USD6 million, representing a 23% increase year on year, primarily driven by the increased corporate travel demand for business travel activity. Corporate travel revenue decreased 18% quarter on quarter due to fewer business activity during Chinese New Year.
Gross margin was 75% in the first quarter of 2012 compared to 78% in the same period in 2011 and 76% in the previous quarter.
Product development expenses for the first quarter of 2012 increased by 51% to RMB196 million or USD31 million from the same period in 2011, an increase by 14% from the previous quarter, primarily due to an increase in product development personnel and share-based compensation charges. Excluding share-based compensation charges, product development expenses accounted for 18% of net revenue, increased from 14% in the sales -- in the same period in 2011 and increased from 16% in the previous quarter.
Sales and marketing expenses in the first quarter of 2012 increased by 47% to RMB183 million or USD29 million from the same period in 2011, primarily due to an increase in sales and marketing related activities, and an increase in sales and marketing personnel. Sales and marketing expenses for the first quarter of 2012 decreased by 1% from the previous quarter. Excluding share-based compensation charges, sales and marketing expenses accounted for 19% of net revenues, increased from 15% in the same period in 2011, and remained consistent with that in the previous quarter.
General and administrative expenses for the first quarter of 2012 increased by 57% to RMB129 million or USD20 million from the same period in 2011, and increased by 14% from the previous quarter, primarily due to an increase in administrative personnel, share-based compensation charges and the incremental turnover tax due to the new value-added tax reform. Excluding share-based compensation charges, general and administrative expenses accounted for 8% of net revenue, increased from 5% in the same period in 2011 and increased from 6% in the previous quarter.
Income from operations for the first quarter of 2012 was RMB177 million or USD28 million, representing a decrease of 33% from the same period in 2011 and a decrease of 23% from the previous quarter. Excluding share-based compensation charges, income from operations was RMB277 million or USD44 million, representing a decrease of 17% from the same period in 2011 and a decrease of 15% from the previous quarter.
Operating margin was 19% in the first quarter of 2012 compared to 34% in the same period in 2011 and 25% in the previous quarter. Excluding share-based compensation charges, operating margin was 30%, decreased from 44% in the same period in 2011 and 35% in the same period -- previous [year].
The effective tax rate for the first quarter of 2012 was 28%, increased from 21% in the same period in 2011 and increased from 23% in the previous quarter, primarily due to the increase in the amount of non tax-deductible share-based compensation as a percentage of our income as a whole.
Net income attributable to Ctrip's shareholders for the first quarter of 2012 was RMB169 million or USD27 million, representing a decrease of 28% from the same period in 2011 and a decrease of 33% from the previous quarter. Excluding share-based compensation charges, net income attributable to Ctrip's shareholders were RMB270 million or USD43 million, representing a decrease of 12% from the same period in 2011 and a decrease of 22% from the previous quarter.
Diluted earnings per ADS were RMB1.11 or USD0.18 for the first quarter of 2012. Excluding share-based compensation charges, diluted earnings per ADS were RMB1.77 or USD0.28 for the first quarter of 2012.
As of March 31, 2012, the balance of cash and cash equivalents, restricted cash and short-term investment was RMB5.2 billion or USD819 million.
For the second quarter of 2012, the company expects to continue the net revenue growth year on year at a rate of approximately 15% to 20%. This forecast reflects Ctrip's current and preliminary view, which is subject to change.
As of May 16, 2012, Ctrip cumulatively purchased approximately 2.6 million ADSs with a total consideration of USD58 million from open market under two existing share repurchase plans adopted in 2008 and 2011, respectively.
Now, I would turn to Min for management promotions update.
Min Fan
Today we announced the promotion of Ms. Jane Sun, Ctrip's Chief Financial Officer from December 2005 to May 2012, to be the Chief Operating Officer of the company. Jane played an important role in building Ctrip into a leading internet travel company. Jane was awarded the Best CFO of the 2011 All-Asia Executive Team by Institutional Investor Magazine. Jane is well-respected for her expertise in financial operations, mergers and acquisitions, investor relationship, operating and managing the OTA business over the years as the CFO of the company.
We also announced the promotion of Ms. Jenny Wu, Ctrip's Deputy CFO since December 2011, to be the Chief Financial Officer of the company. Prior to joining Ctrip, Jenny was an equity research analyst covering China Internet and Media industries in Morgan Stanley Asia Limited and in Citi Investment Research & Analysis from 2005 to 2011. Prior to that, Jenny worked in the Department of Enterprises Operations and Management in China Merchants Holdings International, one of the largest SOEs in China listed in the Hong Kong Stock Exchange for three years. Jenny has a Ph.D. degree in finance from the University of Hong Kong, a Master's degree in philosophy in finance from the Hong Kong University of Science and Technology, and both a Master's degree and a Bachelor's degree in economics from Nan Kai University, China. Jenny has been a Chartered Financial Analyst since 2004.
We hold a highest appreciation to Jane's significant contribution to Ctrip during her tenure with us as the CFO, and we trust she will play an even greater role in our company for the years to come. We are very pleased to have Jenny succeed the CFO position. Jenny's extensive experience and knowledge in capital markets, internet industry and large corporate operations make her an excellent choice for CFO position. We believe that Ctrip will achieve greater success under the leadership of our expanded senior management team.
Jane and Jenny, would you like to say something?
Jane Sun
Thanks, (inaudible). I would like to take this opportunity to thank all of our investors, analysts and everyone who has supported Ctrip throughout the years. I will work very hard with our team in my new role to further strengthen our operations. With your support, Ctrip team will work diligently to capitalize the tremendous opportunity withn the China travel industry.
Jenny?
Jenny Wu
Hi, everyone. This is Jenny. I would like to thank Jane (inaudible) and the Board for offering me this fantastic opportunity to be a part of this great organization. I feel very excited to work with this superb management team to (inaudible) all the opportunities and challenges ahead. In addition, I look forward to working even more closely with all of you in the investment and research community. Thank you.
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