Thank you for standing by and welcome to the Autohome's earnings conference call for the first quarter 2016. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I must advise you that this conference is being recorded today, Wednesday, June 1, 2016. I would now like to hand the conference over to your first speaker today, Vivian Xu, Autohome's Investor Relations Manager. Please go ahead.

Thank you, operator. Hello everyone and welcome to Autohome's first quarter 2016 earnings conference call. Earlier today, Autohome distributed its earnings press release and you may find a copy on the company's website at www.autohome.com.cn. On today's call we have Mr. Nicholas Chong, Autohome's Chief Financial Officer. After the prepared remarks, Nicholas will be available to answer your questions. Before we begin, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the Securities and Exchange Commission. Autohome does not undertake any obligation to update any forward-looking statements except as required under applicable law. The earnings press release in this call also includes discussions of certain unaudited non-GAAP financial measures. The press release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures and is available on Autohome's IR website. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Autohome's IR website. Before we review our results, I want to directly address nonbinding going-private proposal we recently received. As we disclosed in our press release of April 18, 2016, our Board of Directors received a proposal on April 16, 2016 from a consortium to acquire all outstanding ordinary shares and ADS not already owned by the consortium. And the Board of Directors has formed an independent special committee consisting of Mr. Ted Tak-Tai Lee, Mr. Guangfu Cui, and Mr. Junling Liu, all of whom are our independent directors to evaluate this proposal. In addition, we notice that one of our shareholders, Telstra, announced on April 15, 2016 the sale of its 47.7% interest in the company to Ping An Insurance Group. Completion of this transaction is subject to the required Chinese regulatory approvals and Autohome's Board approval. We do not intend to comment further and we ask for your understanding so that we can focus this conference call on our first quarter operational performance and business opportunities. I will now turn the call over to Autohome's Chief Financial Officer, Nicholas.

Thank you. Hello everyone. Thank you for joining our first quarter 2016 conference call. Before I start discussing our first quarter results, our view is that for each company to succeed you must compete well in three dimensions, mainly the right market with the right product portfolio and precise execution. None of these three fundamentals have changed for Autohome as of today. For the first factor of total addressable market, we estimate that our total addressable market has increased over RMB400 billion since we entered the online market transaction space. Given Autohome's current revenue base, we still have a lot of opportunities for growth in this market. Second, our product portfolios provide the basis for long-term competitive differentiation that is obviously based on our user traffic and engagement as well as the value propositions we have provided to many of our OEMs and dealer partners over the past few years. We will continue to pursue our performance-based product development into filling each stage of our user's ownership lifecycle with the corresponding stage of our auto partner's sales cycle. Finally, precise execution. We still have the same team and employees who have dedicated and focused their professionalism in growing Autohome's revenue by 2.8 times from RMB1.2 billion in 2013, the year of our IPO to RMB3.5 million in 2015. We will continue to execute the three strategic priorities we mentioned earlier this year, which are to grow our consumer audience, to drive expansion of our core advertising and lead generation business, and finally to significantly grow our emerging transaction marketplace. So let me start the discussion of our first quarter operations. Our first quarter performance is a direct result of our structural alignment of the leading online advertising media platform, the fast growing lead generation platform, and the ramping up of…

[Operator Instructions]. We will now take your first question from Amanda Chen from Morgan Stanley. Please go ahead. You line is now open.

Hi. Good evening, Nicholas and Vivian. Thank you for taking my question. I have two here. The first one is regarding your second quarter guidance. I think the first quarter result is quite good, while the second quarter guidance seems relatively slower than the consensus numbers. So could you please elaborate the reasons behind this soft guidance? Thank you.

Okay. Amanda, on the Q2, I think the core business will continue to grow around 30%. So for the transaction business, I think for the whole year, we are still looking at 30,000 to 40,000 units. It's just that seasonality, I think is more skewed towards the second half of the year.

Got it. Thank you. So for your full year transaction volume target, it still will be around the 30,000 to 40,000, right?

Yes. Currently, we are still holding on to the 30,000 to 40,000 units. Of course, it will be based on the actual execution. In Q2, I think we are signing up two more additional OEMs. I think the volumes are more coming into the Q3.

Got it. Thank you. And the second one is a small question regarding your net profit, I think it is higher than people expectations because of a tax benefit this quarter. So can you tell us what's the benefit from and also what's the future trend in next few quarters? Thank you.

Okay. This is actually because we successfully have gotten the high-tech status for one of our subsidiaries. So from 2015 to 2017, because the formal certification came in 2016. That's why, according to the one-time wealth tax benefit in Q1. Actually, we have most of it reflected in the 20-F.

Okay. Got it. Thank you for taking my question.

Thank you.

We will now take our next question from Ming Xu. Please go ahead from UBS.

Good evening, Nicholas and Vivian. Thank you for taking my questions. So I have three questions. The first one is on the revenue breakdown of the media and lead generation business, I think the classification of that two segment is slightly different from your previous segment of advertising and dealer business. So could you maybe give us a breakdown for the, obviously in your Q1 result you gave the breakdown for Q1 2015 number of the two business lines. So for the Q2 to Q4 of 2015, what's the respective revenue was for the media and lead generation business? That's my first question.

What I can share with you is that overall, for the whole year as you grow the media and lead gen around 30% as we communicated before, and going forward because we started to change the revenue presentation effective Q1. So right now what is really meaningful, as we announced in the results, we will also show the corresponding period of prior quarters.

Okay. But could you maybe give us now the media and lead generation business revenue for Q2 through Q4 of 2015? So that maybe give us a better comparison base when we look at the revenue numbers for Q2 to Q4 of this year.

We will get back to you on that.

Okay. No problem. So my second question is on the margin of the media and lead generation business. I understand that because you only started the transaction business, so understandably the margin is lower. So could you give us some color on the margin of the media and lead generation business in Q1, and how that compares to the past few quarters?

If you look at just on the gross margin of the core business, it's about 83.2%, as I mentioned just now in the script. So last year this time, it was about 83%. So, as far as the core business, the gross margin remains at 83%-plus. And then the overall margin came down precisely because of the transaction marketplace margin being more.

So is it possible to have operating margin for the traditional business?

I think the traditional business is still running and I think the margin profile is more or less as same as previously. We have some improvement in efficiency, but at the same time we will continue to reinvest back into the business because there is some, like for example on the media side, we are continuing to invest in acquiring more users, coming out with more data content and then on the dealer business we also have some new businesses, like for example the group buy and the CPS. So as I said, the margin on the existing business, on the media and lead gen will be more or less the same as before.

Okay. Got it. A final, two small questions on the financials. So firstly, we notice that share-based compensation in Q1 actually rose significantly compared to Q1 of last year, particularly in the general and administrative expenses line. So could you maybe elaborate on that?

So your question is, our share-based compensation?

Rose significantly in Q1, particularly in the general and administrative part? So could you maybe elaborate on what is the reason for that?

Because there are some new brands in 2016 Q1.

Okay. Nicholas, one final question. So I notice from the 20-F that in full year 2015, so in the cost CPS line, the content related cost rose significantly from around 6% of revenue to around 8.6% of revenue. I think that is related with the spending on video related content last year. So how do you see that part, content related cost, the trend going forward? And also for the other parts like depreciation and bandwidth and tax, all of those actually declined as a percentage of revenue. So how do you see those parts, the trend going forward? Thanks.

If we look at the gross margin for the existing business, it will be around the 82%, 83% range. So obviously there are some items that may go up adding and some will come down. This is in line with what we have been trying to manage. Again, they are important things, like for example you mentioned about video, obviously that is important. We have more and more mobile usage. I think it is important that we enhance the video content because content is one of our differentiator and we want to continuously do well there. So we spend more, but at the same time we try to get the cost efficiency for some of our items. So overall the gross margin is intact, yes.

Got it. Thanks.

Thank you.

We will now take our next question from Terry Chen from HSBC. Please go ahead. Your line is now open.

Hi. Good morning or good evening everyone. Thank you Nicholas and Vivian for taking my questions. I would like to ask about your traditional advertising business. The combined media and lead gen revenue is growing very healthily in 1Q, up 33% year-over-year. May I know how sustainable do you think the growth will be into the next few years? I am particularly interested in your view from the ARPU expansion angle. Thank you.

Thanks. One thing we are able to continue to see is that we continue to gain market share. I think that's why we are encouraged because you can see that our first quarter numbers also we grew significantly higher than our peers. I think as we said previously, for this year, we will be able to grow about 30%, around 30%, if we have continue to work on it and improve on it. I can't say for now what it is few years down the road yet. But I think we will continue to spend and invest correctly and build the team and grow the business. So that's on the media front. On the ARPU, I think if you look at Q1 actual, just for the lead generation business, our ARPU went up by 31.6%. It's partly due to the increase in price and the subscription, but more importantly it's because we have expanded and provided more services to our dealers. Like for example, beside the subscription, we sell dealer advertising, we have CPL and CPS. So we give them more broader services and product portfolios. That's why we can see that our ARPU continue to increase.

Yes, very helpful. Thank you. Just a quick question on the operating margin level, the product development expenses increased 42% sequentially. Could you give us more color on that? And any guidance on the operating margin in the second half when you transaction business start to accelerate will be very helpful? Thank you.

I think there are two parts to your questions, right. I think the first one is on the product development. One of the cost of business is that a good internet company must have is strong and technical product development. That is exactly what we spend money on that, bringing in good people and building the system and processes trying to build [indiscernible] capabilities, big data analytics and others to make sure that especially to take advantage of our big consumer base. That's why we will continue to spend on the product development. On overall margin, I think as we shared previously, having the increase in profit from the existing business, we believe that we are able to offset the investment in new businesses. Yes.

Okay. Great. Thank you.

Thank you.

We will now take our next question from Nora Zhang from Merrill Lynch. Please go ahead. Your line is now open.

Hi. Good evening Nicholas and Vivian. Thank you for taking my question. I have two questions. First one is about the transaction business. Just now you mentioned we sold 4,900 cars in first quarter. Could you give us the breakdown of direct sales and commission based on volume?

Yes. I think of the 4,957 units, you can distribute it as half-half from a unit standpoint, half-half between the buyer and commission. But from a revenue contribution, buyer is about 93.5% of the revenue.

Okay. And my second question is about the headcount expansion. I noticed that headcount increased by 400 this quarter. How many additional headcount are we expecting this year? And how many headcount for transaction business currently? Thank you.

So by end of the year, it will be around 5,000. Of course, we will manage it tightly. So as for now, if you ask me, I will say around 5,000. Currently in the transaction business, we have about 355 headcount. So by the end of year, around 500. So we are expanding in a disciplined fashion. And that we will be discipline. Let me also elaborate, discipline also means that they will be in line with, of course, the volume that they are driving. So we will manage that closely.

So I just have a quick follow-up. If we are looking at 5,000 as a headcount until year end, so it means that we are adding a lot of the headcount in our traditional business. So our transaction business is looking at 500. So why do you have to add so many people in the traditional business?

We haven't talked about this used car business as well. Used car business, end of the year, will be around 800.

Okay. Got you. So I also have a third question about the transaction revenue. In first quarter of 2015, so I noticed that we have RMB0.6 million one year ago. So what's that revenue from?

So Nora, you are saying the RMB0.6 million in Q1 2015 for transaction? Yes, that is because of the flash sales. As you know we [indiscernible]

That's your coupon business? So we are actually recording coupon business into our transaction revenue.

Yes. Because from Q1 this year, we reclassified our revenue into media, services and online marketplace. So we went back and did our apple-to-apple comparison. So that's why there was RMB0.6 million. Of course, it is very negligible. But your question is linked to the flash sales, because we have been doing flash sales from 2014, with autohome.com with the coupon, right.

Got you. That's very helpful. Thank you.

We will take our next question from Alvin Jiang from Deutsche Bank. Please go ahead. Your line is now open.

Hi Nicholas and Vivian. Thank you for taking my question. I have two quick questions.

Alvin, could you speak louder? We barely hear you.

Okay. Sorry. Is it better?

Much better. Yes.

Okay. Great. The first question is on the margin side. I guess when you just begin the e-commerce transition, you had a target like keep the non-GAAP operating profit, I mean the absolute number stable or flat year-on-year in 2016. I am not sure if this is still a target for your target on operating profit side?

Yes. I think on the non-GAAP, yes, I said just now that the incremental profit that we get from the existing business is able to offset the investment in the new business. So, yes. So the answer is yes to your question.

Okay. The second question is on the disclosure. Actually can you give us more color on like the new business breakdown? So how many advertisers? And what's the ARPU in the first quarter of 2016?

Sorry. Alvin, could you repeat the question?

Like in the media services, could you give us a breakdown like what's the number of automaker advertisers and what's the ARPU and also for the leads generation services? So what's the number of paying dealers per quarter and what's the ARPU?

I think right now what I will say is because we have changed the way we present the revenue, but I wanted to share with you on the dealers side, first quarter, we have about more than 20,000 dealers that pay for our lead gen services. More than 20,000.

Okay. Got you.

And the ARPU, as I said just now, we saw 31.6% ARPU year-on-year increase for the whole overall dealer lead gen services.

Got you. I have a very quick follow-up as on the cash flow. I noticed in the first quarter of this year, the cash flow has year-on-year decline of 42% or 43%. So what's our long-term outlook or view on the free cash flow or the operating cash flow?

Well, you can see that Q1, the operating cash is still increasing. It's just that it's versus Q1 last year that is increasing at a slower rate. Last year we increased by RMB203 million. This year we increased by RMB162 million. So it's still increasing. So that's why you could see that right now our cash and cash equivalent has increased to RMB4.4 billion. Versus Q1 last year the operating cash has dropped a bit, the rate of increase has dropped is because we started to engage in the new car e-commerce where we have to spend some money on the inventory to buy the inventory. Hello, Alvin?

We will now take our next question from Thomas Chong from Citigroup. Please go ahead. Your line is now open.

Hi. This is [indiscernible] on behalf of Thomas. Thanks for taking my question. I have two questions. The first one is about the used car business. So could you please comment on your used car business, like how many used cars did you sell in the first quarter, just to help us to better understand how big this business is? And could you share with us any color on the market trend of used car e-commerce business in China? This is my second question. Thank you.

First of all, the used car business, we are still at early stage. So it is really not that meaningful to talk about the operating margin. So I think it is still at the early stage. But we think that this business is an important initiative that we need to work on and that's why we will work on it in a disciplined fashion. We think that it is opportunities that will come in the next few years. So we decided we need to build up for that.

My second question, is there any color on your internet financing initiatives? Like how many of your transactions are financed and total financing amount and your strategy going forward? Any color would be helpful. Thank you.

Well, I think we are working and we recognize the opportunities in internet financing. That's why we have a team working on the financing. And also we have a JV that we was formed at the end of the year to look into this opportunity. So I think right now, the business is still at a very early stage. I think we will get back to you probably in the next quarter.

We will now take our next question from Robert Cowell from 86Research. Please go ahead. Your line is now open.

Hi Nicholas. Thank you for taking my question. I wanted to ask about the mobile advertising revenue. It seems quite strong in the first quarter and actually is bucking the normal seasonal trends, if I am not mistaken where normal you would expect ad revenues to be down quarter-on-quarter in the first quarter. So my question is, what's driving the strong growth in the mobile ad revenue? And do you have a target for the contribution from mobile by the end of this year? Thank you.

First of all, we are very encouraged by the trend. I think if you look at the first two quarters of last year was about 12%, 15%, second half was about 20%. So I think right now first quarter we came in at 26.6%. I think the growth is really because of the adoptions of mobile usage by the consumer. You can see that our mobile view has superseded the PC view quite a bit, right. The mobile view has increased to 60 million right now at the Tier 1. So that's why we expect that mobile has a potential. So overall OEM advertising revenue will continue to grow. So I think we should be able to exceed 30% positively.

Okay. Thank you.

There are no further questions at this time. I will now hand the call back to Nicholas Chong for any closing remarks.

Okay. Thank you operator. So thank you very much for joining us today. We appreciate all your support and we look forward to updating you on our next quarter's conference call in a few months' time. In the meantime, please feel free to get in touch with us if you have further questions or comments on the business and on the financials. Thank you everyone.

That does conclude our conference for today. Thank you for participating. You may all now disconnect.