Nicholas Chong
Analyst · Morgan Stanley. Please go ahead. You line is now open
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 our transaction platform in driving Autohome's double digit revenue growth exceeding the top end of our original expectations. Effectively, this means that we are on track in executing these three strategic priorities. First, we have continued to grow our consumer audience. The combined number of average daily unique visitors for our mobile website and mobile applications reached approximately 16 million as of March, representing about 65% year-over-year growth and about 16% quarter-over-quarter increase. Our mobile advertising revenue grew 178% compared to the same period last year accounting for 26.6% of the OEM advertising revenue. The primary reasons for the traffic growth are the increase in brand value and the differentiated offerings of our platform in retaining and attracting automobile consumers in China as well as the strong collaborations we have built with branded partners. In addition, we continue to create innovative contents, products, and services that drive the consumer audience and empower them in making the optimal decisions for their car purchases. Our multimedia contents that are originated from us or our users continue to reinforce and accelerate the overall network effects. For example, the content of our blogger program have significantly enhanced and expanded since its launch in mid-2013. These bloggers are attracted to publish on Autohome's platform because of the unique and large user base focused on automobiles. And the same user's keen interest are able to retain the bloggers on Autohome platform for increased publications. As of the end of the first quarter 2016, there were close to 1,500 bloggers on our platform with monthly publication of close to 3,000 blog posts and monthly unique visitors of over 25 million. Second, in driving the growth of our core advertising and lead generation business, we continue to differentiate our value proposition to automakers and dealers with higher ROI results. Consequently, our core media and lead generation business continued to show solid growth of over 32% in Q1 2016, which was within our expectation. Within our media services business, branded OEM advertising continued to be solid, although regional advertising by our clients slowed down a bit as some this advertising is being moved into our client's central advertising budgets. We expect such trend to continue so that our media services business growth will lag behind our lead generation business. Now to on our lead generation business, we offer a powerful value proposition to our dealers because of our ability to reach a large and engaged base of automobile consumers, thus expanding the reach of the dealer's physical showroom to millions of online users in China and generating sales leads for the dealers. This year, we are even more focused on solutions and technology development in order to fine tune our user experience in generating improved conversion rate and high ROI for the dealers. One specialization is our shopping assistant services that leverages the C2B model in providing personalized attention, customized knowledge of products and pricing in order to not only precisely match the consumers and suppliers but also to significantly enhance the efficiency of the purchasing process. For example, within shopping assistant, we first aggregate extensive vehicle inventory and pricing information for a potential shopper with enhanced transparency. Then we have a professional team of members who meticulously guide the individual shoppers through the purchasing process in order to precisely match the shopper with the vehicles of his or her dream. The shopping assistant service is currently deployed into several Tier 1 cities. We plan for an expansion by end of 2016. Now I would like to spend some time on the transaction marketplace, our third strategic priority. In 2015, we decided after capital analysis of the market, consumer trend, Autohome's intrinsic capabilities and competitive advantages and test trial in 2013 and in 2014, to enter early into this mainstream market and be an early mover advantage. Our number one position in user traffic and user engagement in our sector has allowed us to build massive and comprehensive data about consumer demand and behavior. Our data and behavior analytics will increasingly help us match consumer and supplying partners such as dealers and OEMs with whom we have a long-standing relationship. Beyond an expanded total addressable market, our transaction platform will bring us increased revenue and commission fees from OEMs and dealers. As we generally enhance customer experience, improve transparency and improve the efficiency of the sales process for all parties we will solidify our brand equity, market leadership and financial performance. We are encouraged by the 4,957 new vehicle transactions we completed on our platform during the first quarter, about half bought from direct B2C vehicle sales and the other half from commission-based facilitations. This is a strong proof that consumer demand exists. We expect consumer adoption to grow, although at this very early stage, it's still unclear how fast. Now let me give you a quick overview of how the business works currently. We select special motors from our OEM partners for which we are granted online exclusivity. Unlike traditional dealers who are typically limited to selling one brand and have a big whatever inventory the OEMs send them, there is potentially no limit to the number of brands we can sell and we have enhanced flexibly on inventory size. Meanwhile we will work to further expand our OEM partnerships and support our OEM partners with their online marketplace initiatives. Internally we will continue to focus on optimizing our transaction infrastructure in order to further reduce our cost such as logistic and inventory control, et cetera. Looking ahead, we are very focused on achieving our 2016 target. We currently estimate that our direct B2C sales volume will surpass the commission based sales volume. In addition, I do want to caution investors that given the early development of our online market business, transaction volume may be somewhat volatile from quarter-to-quarter. This is partnering work with no precedent historical or competitive data and visibility is somewhat limited. This being said, we remain strongly confident in our vision and opportunities for an early mover who has the largest user base and an extensive array of information content services, big data and behavioral analytical capabilities and well-developed ecosystems of OEMs and dealership. Now let me summarize our financial performance for the first quarter. Note that I will reference RMB only in this discussion, but you can find an equivalent U.S. dollar numbers in our press release issued earlier today. Net revenue for the first quarter increased 75.5% to RMB1,093.5 million from RMB622.9 million in the corresponding period in 2015. This surpassed the high-end of our initial guidance, primarily due to robust growth from our core advertising and lead generation business as well as the new transaction related revenue as we are capturing more of the automakers' budget with higher ROI and more diversified services. As you may recall, starting in the first quarter of 2016, we are changing our revenue reporting for better transparency as our business continues to grow. So in terms of revenue breakdown, media services revenue which primarily includes automaker advertising services and regional marketing campaign conducted by certain automobile brand's regional offices, increased 22.6% to RMB442.1 million from RMB316.8 million in the corresponding period of 2015, representing 40.4% of total revenue. This robust growth is primarily driven by an increase in average revenue per automaker advertiser as automakers continued to allocate more of their advertising budgets to Autohome's online advertising channels. During this quarter, lead generation services revenue, which was previously reported as dealer yellow page business and mainly included dealer subscription services, advertising services sold to individual dealer advertiser and the other value-added services, increased 46.8% to RMB384.1 million from RMB261.5 million in the corresponding period of 2015, representing 35.1% of total revenue. The increase was primarily attributable to a year-over-year increase of 31.6% in average revenue per paying dealers as dealers continued to allocate a greater portion of their budget to the company's services. Lastly, for the first quarter of 2016, online marketplace revenue, which is primarily composed of direct vehicle sales and commission-based services to facilitate transaction on Autohome Mall platform contributed RMB267.3 million, representing 24.4% of total Q1 revenue. This new business is mainly driven by direct vehicle sales which accounted for 93.5% of the online marketplace revenue. Moving on to cost of revenue. The 271.7% increase year-over-year to RMB383.4 million was primarily driven by the cost of goods sold of direct vehicle sales. Excluding the transaction cost of the vehicles, the cost of revenue for our core media and lead generation business has increased 34.2% year-over-year, resulting in a gross profit margin of 83.2% for the first quarter in 2016. However, given the nature of an early development stage of our transaction business, the overall gross profit margin for first quarter 2016 was at 64.9%. Now let's take a closer look at our operating expenses by line item. Note that I mentioned in the past that while we are investing into new growth opportunities in accordance with our plans, we are very cost efficient and prudent with our overall spending. Sales and marketing expense in the first quarter was RMB329.1 million or 30.1% of our revenue, down 5 percentage point as a percentage of revenue year-over-year. The increase in absolute amount is primarily due to increased headcount and related compensation costs as well as marketing expenses. Product and development expenses was RMB115.5 million or 10.6% of revenue, relatively stable compared to the corresponding period in 2015. The increase in absolute amount is primarily due to increased headcount and related compensation costs in support of our rapid growth. Finally, general and administrative cost was RMB72 million or 6.6% of revenue, relatively stable compared to the corresponding period in 2015. The increase in absolute amount is primarily due to increased salaries and benefits. As a result, total operating expenses for the first quarter increased 62.4% to RMB516.6 million from RMB318.2 million in the corresponding period in 2015. However, it is important to note that as a percentage of revenue, operating expenses were down to 47.2% from 51.1% year-over-year. Even with increased expenses during the quarter, we still delivered strong profitability. Operating profit decreased by 4.1% year-over-year to RMB193.4 million, primarily due to the gross margin profile change as I already mentioned because of the online marketplace. Adjusted net income increased 49.1% to RMB294.4 million from RMB197.5 million in the corresponding period in 2015. Basic and diluted earnings per share and per ADS for the first quarter were RMB2.16 and RMB2.11 respectively compared to RMB1.49 and RMB1.44 respectively in the corresponding period of 2015. I would like to point out that one of the reasons for our net income increases is the fact that one of our wholly owned subsidiaries was qualified for a preferential tax rate of 15% for three years from 2015 to 2017. This change in that enacted tax rate resulted in a one-off tax benefits of RMB69.4 million, which was recorded in the first quarter of 2016. As of March 31, 2016, our balance sheet remains very strong with cash and cash equivalents, restricted cash and term deposits of RMB4.4 billion. Net cash provided by operating activities in the first quarter was RMB162.2 million compared with RMB283.9 million in the corresponding period of 2015. As we have discussed in the past, we believe the strength of our balance sheet and cash position is an important competitive differentiator that provide us with great financial flexibilities. Also the inventory level for our direct B2C sales in the first quarter was relatively healthy. However, I want to point out that given the business model of our transaction marketplace, as I explained earlier, there will be some volatility in inventory turnover which is why we will continue to focus on optimizing our transaction infrastructure in order to further reduce our logistic and inventory cost as I already mentioned. Before I move on to guidance, I would like to emphasize that in order to execute our strategy in 2016, we will invest in several areas such as mobile traffic enhancement, marketing and branding of Autohome with certain event driven campaigns we have deployed historically and headcount increase in support of our business expansion. Let me now address our second quarter of 2016 outlook which reflects our current and preliminary view on the market and operating conditions that may be subjected to changes. I would like to caution investors that given the early development of our online market business, the transaction volume and the related revenue may be somewhat volatile from quarter-to-quarter although we will try our best in providing the guidance based on the current visibility. So currently, we expect to generate net revenue in the range of RMB1,323 million or $205.2 million to RMB1,376 million or $213.4 million, representing a 53.7% to 59.8% year-over-year increase. In summary, we are pleased with how the business performed in the first quarter of 2016. We continued to execute well, delivered double-digit revenue and net profit growth, managed cost effectively and make sound investment that we believe are a necessary foundation for sustained long-term growth. With that, I am ready to take your questions. Operator, please open the line for Q&A.
