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Tuniu Corporation (TOUR) Q1 2019 Earnings Call Transcript

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Tuniu Corporation (NASDAQ: TOUR)
Q1 2019 Earnings Call
May 23, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and thank you for standing by for Tuniu's 2019 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After managements prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to now turn the meeting over to your host for today's conference call, Director of Investor Relations, Mary.

Mary Chen -- Director of Investor Relations,

Thank you, and welcome to our 2019 first quarter earnings conference call. Joining me on the call today are Donald Yu, Tuniu's 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 first quarter of 2019.

Before we continue, I refer you to our safe harbor statement 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 conference call are in RMB.

I would now like to turn the call over to our Founder, Chairman and Chief Executive Officer, Donald Yu.

Donald Yu -- Founder, Chairman and Chief Executive Officer

Thank you, Mary. Good day, everyone. Welcome to our 2019 first quarter earnings conference call. In 2019, Tuniu were focused on maintaining and expanding its long term competitive advantage. On the supply side, we continued to consolidate and strengthen our supply chain in order to offer high quality and competitively priced products to our customers.

During the first quarter of 2019, direct procurement as a percentage of packaged tour GMV reached 60%. We also continued to refine our local tour operators in order to provide the highest quality services to our customers. As of March 31, 2019, Tuniu operates 31 local tour operators.

For our sales channel, we continue to make strides in diversifying our distribution channels through our social marketing, offline stores and B2B distribution. As of March 31, 2019, Tuniu operates 536 offline retail stores throughout China. We also made enhancements to our offline and online experience by further integrating our professional and dedicated customer service representatives.

Technology wise, Tuniu continued to heavily invest in the development of innovative tools and the strengthening of our core system. Over the years, Tuniu invested over RMB2 billion in the development of those core technologies. Our dynamic packaging system continues to be industry-leading, allowing our customers to dynamically package various travel products such as air tickets, hotel booking and destination based products into one bundled product. Overall, our service, sales and technology networks are central to our long term ability to differentiate ourselves from our peers.

This year, we will also put further emphasis on the improvement of the customer experience. Areas such as the user experience of our proprietary products, price competitiveness of our dynamic packaging system and the service quality of our customer representatives will be key topics of focus. We will leverage our widely recognized brand and extensive data of user preference to provide a high quality products through Niu Tour, which are organized tours that are directly designed and procured by Tuniu, and Tuniu Selection, which are our best-selling products from our top suppliers.

During the first quarter of 2019, we also made adjustments to our corporate structure in order to better execute our strategies in the future. Our leisure travel division, we are primarily focused on providing high quality service to our customers. Our (inaudible) division, we're focus on the supply chain and the B2B distribution. With this adjustments in place, we are able to better align the interests of our business departments and to set more detailed strategies and goals for each divisions. In the long run, these changes will give to Tuniu the ability to better adapt to the changing era of travel industry in China.

I will now like now to give an update on few of our core focuses in the greater detail. First, I will like to talk about product offerings. We believe Tuniu's core advantage in travel products can be categorized into a three main components, diversification, quality and price. Tuniu's proprietary direct procurement products or Nui Tour offers high-quality services to medium to high end customers. Nui Tour creates tours based on the market demand and primarily focus on popular destinations. Our tours are designed based on our years of experience in each destination and provide a truly unique experience for our customers.

For our suppliers, we recently launched a new category, top products from our suppliers that how higher user ratings, repurchase rate and consistency in service quality can be categorized as Tuniu Selection. Tuniu will provide a listing priority revisions and promotions for these high quality products. In terms of catering to the diversified demands of our customers, Tuniu offers a wide selection of products SKUs to complement our Nui Tour and Tuniu Selection products.

Quality wise, Tuniu continues to reap the minimum requirements products. Products are required to maintain a user review score of more than 80% in order to remain listed on Tuniu. This is up from 75% previously. We have now reprioritized our product offerings to focus on the best-selling products in popular destinations. This allows us to further concentrate our user traffic into the top selling products SKUs, improving travel experience and increasing customer repurchasing trends (ph).

Also by collectively making procurement of these best selling products, it allows us to improve our bargaining power and effectively increase our product margins. By emphasizing products we are able to maintain our competitive advantage by offering differentiated products from our peers. Additionally, by further reclassifying our products into different categories, we are able to more efficiently recommend products to our customers based on their preference and demographics.

Tuniu's dynamic packaging system, which packages together individual products and services into one bundle continues to be refined. This system leverages our years of accumulation in consolidating the travel supply chain and the system development. Through our dynamic packaging system, the price of two products bundled together is cheaper than individually purchasing the two products. We believe the feature is highly valuable to self-guided tours to a traveler as it provides a clear way of saving money and a simplified booking process.

Next, I will like to talk about our progress in improving Tuniu's overall user experience. We continue to refine the user experience of our offline stores by further integrating our online dedicated and professional customer service into the offline experience. Tools such as our social marketing app, which had many applications and which had growth, allow our offline store employees, our online customer representatives and the social marketing retailers the ability to effectively sell Tuniu's products and services to their respective to social circles.

This further enhances Tuniu's sales network into local communities, social groups and various consumption settings. During the first quarter, offline retail stores contributed 20% of our total packaged tour GMV during the quarter. Our offline retail stores allow us to accumulate a stronger sales channel and will benefit us in the long run.

This year, we will slow down the opening of new offline retail stores compared to last year in order to enhances the efficiencies of our existing stores. Although, our offline store model is already clearly defined, we believe there continues to be room for improvements in product offerings and store management that can further unlock the profitability potential of these stores.

Social marketing was another highlight during the quarter. We started developing our social marketing distribution tool last year in order to provide our offline stores with the ability to provide a wider range of product selection and efficiently distribute our products and services through their social network. The tool has gained strong traction with external parties such as social marketing distributors, community influencers and travel distributors. Users of our social marketing tour have advantage during the sales process as they are able to easily distribute Tuniu's product to their social circle.

Our social marketing distribution app also launched during the quarter. The application provides a wider range of features for distributors allowing them to more easily browse through the available products and services and to share it into various channels. As of the end of the first quarter, over 5,000 stores have been opened on our social marketing tool March 2019, 70% of these stores were active. We have also integrated the usage of our social marketing tool to improving repurchase rate of our existing customers by engaging with our customers through (inaudible).

Lastly, I want to briefly talk about our Difeng B2B distribution. Difeng continues to be the only travel B2B distributor in China to offer the complete suits of travel products and services. As a result, Difeng continues to gain popular rating among suppliers and its distributors. During the quarter, packaged tour GMV generated on Difeng increased by approximately 50% year-over-year.

Because B2C travel is relatively low frequency consumption while B2B distribution is high frequency, we believe Difeng will help us increase the consistency of our distribution. Going forward, Difeng will continue to be a crucial part of our sales channel and in China's travel industry.

Tuniu in 2019 will focus on maintaining and further expanding its competitive advantage. We will put increased resources in key areas such as the improvement of our travel products and customer experience. We believe that the offering of higher quality and diversified the products and providing a superior customer experience are two key areas that will have Tuniu truly differentiate itself from market peers.

I'll now turn the call over to Maria Xin, our CFO for the financial highlights.

Maria Yi Xin -- Chief Financial Officer

Thank you, Donald. Hello, everyone. Now, I will walk you through our first quarter 2019 financial results in greater detail. Please note that, all the monetary amounts are in RMB, unless otherwise stated. You can find the US dollar equivalent of the number in our earnings release.

Starting from the first quarter of 2019, net revenues were RMB456.9 million, representing 5% year-over-year decrease. Revenues from packaged tours were down 9% year-over-year to RMB365.9 million and accounted for 80% of our total net revenues for the quarter. The decrease was primarily due to the decline in certain destinations.

Other revenues were up 17% year-over-year to RMB91 million and accounted for 20% of our total net revenues. The increase was primarily due to the increase in values generated from financial services and the commissions fees received from the certain travel related products.

Gross profit was down 5% year-over-year to RMN250.8 million for the first quarter of 2019, The decrease was primarily due to the decline in revenue from packaged tours. Operating expenses for the first quarter 2019 were RMB431.4 million, up 12% year-over-year excluding share-based compensation and amortization from acquired intangible assets. Non-GAAP operating expenses was RMB374.7 million, representing a year-over-year increase of 11%.

Research and product development expenses for the first quarter of 2019 were RMB80 million, down 5% year-over-year. The decrease was primarily due to the increase in efficiency, resulting from the economics of scale and the refined management and optimization of research and product development personnel.

Sales and marketing expenses for the first quarter of 2019 were RMB280.8 million, up 17.8% year-over-year. The increase was primarily due to the expansion of our offline retail stores. General and administrative expenses for the first quarter of 2019 were RMB135.1 million, up 17.9% year-over-year. The increase was primarily due to an increase in general and administrative personnel related expenses.

Net loss attributable to ordinary shareholders was RMB150.6 million in the first quarter of 2019. Non-GAAP net loss attributable to ordinary shareholders, which excluded share-based compensation expenses and amortization of acquired intangible assets, was RMB82.1 million in the first quarter of 2019.

As of March 31, 2019, the Company had cash and cash equivalents, restricted cash and short-term investments of RMB1.8 billion. Cash flow generated from the operations for the first quarter of this quarter was RMB13.5 million. In the first quarter, cash conversion cycle was negative 28 days compared to negative 22 days in the corresponding period of last year.

Capital expenditures for the first quarter of this year was RMB34.3 million, Tuniu currently expects to generate RMB472.7 million to RMB499.0 million of net revenues for the second quarter of 2019, which represents 5% to 10% year-over-year decrease. Please note that this 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 your questions. Operator?

Questions and Answers:

Operator

(Operator Instructions) And the first question today comes from Alaine He (ph), a private investor. Please go ahead.

Alaine He -- Private Investor -- Analyst

Thanks for taking my question. I was wondering if management can share the reason for the negative growth for this quarter, as well as, the negative guidance for the next quarter? Also, can you provide full year guidance for 2019? Thank you.

Maria Yi Xin -- Chief Financial Officer

Okay. Thank you for your questions. So let me answer your questions. The negative growth during the first quarter of 2019 was primarily due to a number of external factors in certain destinations and also the macroeconomic slowdown, which impact our packaged tours revenue during this quarter. For the destination side, such as the Middle East, cruise and the certain islands impact us a lot. And we also moved out the lower certification rate product in the first quarter which also impacted total transaction volume strongly during last quarter. So, we are seeing an improvement following the Chinese New Year, so the recover, will benefit packaged tours revenues during the second quarter.

To answer your questions on the guidance for the next quarter, the negative guidance is a primary due to the decline in cruise products because in this year, the supply side in China is decreasing. As we have strengthen our products of the Niu Tour and the Tuniu Selection, we will start improve our take rate during the second quarter, which will have positive impact in the second half of this year, excluding the impact of our cruise product, our packaged tours revenue is impact have a positive growth next quarter.

Unfortunately, we don't offer the full year guidance. Thank you for your questions.

Alaine He -- Private Investor -- Analyst

I understand. Thanks management. I have a follow up question. Can you also share us with the breakdown of the GMV by destination during the first quarter?

Maria Yi Xin -- Chief Financial Officer

Okay. In terms of the GMV breakdown during the quarter, domestic tours accounted for about 30% of our total GMVs, Southeast Asia was about 15%, Japan around 10%, Europe 10% and the Middle East and Africa around 10%. Maldives and other islands both around 5% each. Thank you.

Operator

(Operator Instructions) Our next question today comes from William Yen (ph) with Blue Sky Capital. Please go ahead.

William yen -- Blue Sky Capital -- Analyst

Thank you managements for taking my question. Can you share with us some key drivers for growth in the future? Also, what are some key initiatives that we are taking in order to increase the (Technical Difficulty) experience for customers?

Donald Yu -- Founder, Chairman and Chief Executive Officer

(Foreign Language) We have two main areas that we are going to focus in addition to our current business. (Foreign Language) Social marketing will be one of our core focuses going forward. We have -- based on some of the research we have noticed that our target market demographic is very similar to the audience reach via social marketing tools. So we have tested a number of products and services through -- distribution through social marketing tools. Products as such as (inaudible) and certain destination-based products have been very well associated within the community.

(Foreign Language) We have invested in the R&D for the social marketing tools in the past quarter -- few quarters. We have perfected a number of tools for our distributors so that they are more easily able to distribute products and services from Tuniu throughout base of their social circles, to their chat groups and to their local communities. (Foreign Language) For social marketing, we will leverage or establish social marketing platforms, as well as develop our own social marketing channels. So overall we will utilize both of these to reach into the local communities. (Foreign Language) Our focus on top selling products and our years of accumulation on -- in the channel supply chain will allow us to better serve our customers through social marketing.

(Foreign Language) The second main focus here is to push our dynamic packaging system, which allows users to buy new products at a discounted price. (Foreign Language) For dynamic packaging system, we recently launched a new application version for our app and we have prioritized our dynamic packaging system into a front spot, features such as air ticket plus hotel, hotel plus ex, and various combinations of these products (Technical Difficulty) allow users to buy new products at a discounted price compared to looking them separately or individually. (Foreign Language) By using our newly formed dynamic packaging system, users could experience up to 30% discount when compared to booking these products separately. So in order to have this dynamic packaging system we have our -- there is still very high demand for our system. Our current system allows us to have a clear pricing system for both our hotel booking and air ticketing.

(Foreign Language) As you know, Tuniu's revenue consists of packaged tour revenues and it is one of the largest components of our revenue. So Tuniu bundling is very important component of our business. So our dynamic packaging system allows us to differentiate ourselves from many of our competitors that usually provide single or -- air ticketing or hotel bookings solution directly. (Foreign Language) For our dynamic packaging system, the system and technology is actually the core. We have started investing in the research and development of the system starting from 2010. We have accumulated years of experience in developing this technology. So every day there's over 100 billion various data points been calculated and over 20,000 bundles are being made each day. (Foreign Language) In conclusion, the two main components are social marketing and dynamic packaging. Thank you.

William yen -- Blue Sky Capital -- Analyst

I have got follow up questions regarding your offline retail stores. Since your peers are expanding the offline stores (inaudible). How much contribution did these stores contribute during the quarter, what's your strategy for offline stores this year? Thanks.

Maria Yi Xin -- Chief Financial Officer

Offline stores in this quarter contributed us around 20% of the total GMV's production volume. So, for the --

Donald Yu -- Founder, Chairman and Chief Executive Officer

(Foreign Language) We continue to open directly operated stores this year. Last year -- as you know last year we opened a relatively large amount of stores. This year we'll be focusing on increasing the efficiencies of each store, as well as -- and for this year's time, we will open stores with a relatively more caution and slow down the pace of it.

Operator

We are now approaching the end of the conference call. I will now turn the call over to Tuniu's CFO, Maria Xin for closing remarks.

Maria Yi Xin -- Chief Financial Officer

Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day.

Duration: 36 minutes

Call participants:

Mary Chen -- Director of Investor Relations,

Donald Yu -- Founder, Chairman and Chief Executive Officer

Maria Yi Xin -- Chief Financial Officer

Alaine He -- Private Investor -- Analyst

William yen -- Blue Sky Capital -- Analyst

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