Ladies and gentlemen, thank you for standing by for Autohome's First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to introduce your host, Vivian Xu, Autohome's IR Manager. Ms. Xu, you may begin.

Thank you, operator. Hello, everyone, and welcome to Autohome's first quarter 2017 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. Yan Kang, Autohome's President; and Mr. Julian Jiun Lang Wang, Autohome's Chief Financial Officer. After the prepared remarks, Mr. Kang and Mr. Wang 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 discussion 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. I will now turn the call over to Autohome's President. Mr. Kang.

Thank you, Vivian. Thanks everybody for joining us today to discuss our first quarter 2017 results. I'm very pleased to report a very strong start of the year, in which our core business, including media service and leads generation, grew more than 28% year-over-year to over RMB1.1 billion, despite some seasonality of the market during the year. Our operating profit during the quarter also grew more than 80% year-over-year to RMB347 million, which translates into an operating margin of roughly 26%. The primary driver behind our better-than-expected performance, were our core media and leads generation business contributed most of the growth. They both generated very solid year-over-year revenue of 17% and 40%, respectively. These results demonstrate Autohome's leading market position and brand recognition among consumers, as well as our unrivaled advantage in leads generation. Our core strengths are being supported by three key factors, which I'd like to go over in more detail. First the current macro environment in the market and increasing intense competition is driving automakers and dealers to be very selective in their digital marketing spending. Their main focus is shifting toward new user traffic acquisition and generating higher conversion rates, those two in which Autohome are really very good at. On top of this, demand from automakers and dealers for our high-quality automotive sales leads continue to increase. Secondly we continue to deliver best user experience in the market by devoting significant resources toward expanding our ecosystem, diversifying the content on our open platform and growing our user base. We invested in technology. We developed customized user experience and innovated our dealer digital platform to enhance customer service. All this investment form a vital component of our long-term sustainable growth. They generate organic traffic growth, enhance user stickiness, support our user loyalty and increase retention, as…

Thank you, Yan. Hi, everyone. As Yan has already highlighted, we are very pleased to report another strong quarter. Please note that I'll reference RMB only in my discussion today. Net revenue for the first quarter increased 23% year-on-year to RMB1,348 million. This was above the high-end of our original guidance. Our core revenue for the first quarter was RMB1,056 million, up 28% year-on-year, which is also above our previous guidance of 25% year-on-year growth. Media service revenue once again outgrew the underlying auto sector, increasing 17% year-on-year to flat RMB18 million, accounting for 38% of total revenue. Despite perceived headwinds in the physical automobile market, Autohome continues to be automakers' partner of choice and continues to gain market share from our competition. Leads gen service revenue was up 40% year-on-year to RMB538 million, accounting for 40% of total revenue for the first quarter. This increase was primarily driven by an increase in ARPU and a strong evidence that we continue to build trust among dealers. Online marketplace revenue was RMB292 million, of which RMB275 million was related to our inventory cleanup. This was slightly above our previous expectation of RMB260 million. In April 2017, we sold another 600 units, which is the final portion of our buyout inventory. Moving onto cost. Cost of revenue was up 16% year-on-year to RMB445 million, the bulk of which is related to vehicle inventories which we cleared up. Our blended gross margin increased to 67% in the first quarter, including the impact from our inventory write-down of RMB1.5 million. Again as we are conducting less direct sales, you should expect our blended gross margin to increase accordingly. Excluding the impact from the inventory cleanup, our gross margin in our core business was 84%, which is essentially unchanged from last quarter. Now for operating…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Terry Chen from HSBC. Please go ahead. Your line is open.

Hi. Thank you, management for taking my questions. Congratulations, strong set of results. I have a question mainly on your new initiatives, so we understand that the company has launched a number of new initiatives supported by new technology. So I'm just wondering whether you can give us more details in the latest development. Also the management expectation on this new initiatives, whether it will become a new revenue driver in the next 12 months? Thank you.

Okay. Thanks, Terry, for the question. This is Yan. I will take your question. Now on new businesses, primarily we're focusing our efforts on reinventing our e-commerce platform [Technical Difficulty], as well as constructing the right model for our used car e-commerce platform as well. Now all of these initiatives where we can share with you is progressing very well. We're in the middle of very intense upgrading of our system, including those technology and also working closely with our business partners on testing and fine-tuning our model. Now as we are not in any pressure to raise outside funding for those businesses, we actually take those businesses rather conservatively in terms of when to monetize and how to monetize. First and foremost priority will be to make sure those are the right model for us. Those will generate supreme consumer value, as well as those models will be unique to our core strengths and core business model. So I have to say that for the next six to 12 months, that will remain to be the case. We are not afraid to take more time to make sure that the model is best fitted for our future, and we rather give it more time to review our commercial ambitions on those businesses. So that's basically what I can share with you so far. But toward latter part of the year, we'll have a series of events that will unveil the progress of those transaction platforms in series, and in due time, you'll get more information as they come along.

Yes, thank you. A quick follow-up, is this new initiative including the events, the major driver of your mobile revenue because the mobile revenue accelerated the growth in the last quarter - in this quarter. So I'm just wondering, what's the driver for that? Thank you.

The driver for mobile revenue is not directly related to the “new business” that I mentioned. The new business I mentioned were more transactional platform for a new car and a second car. Now our mobile revenue - well, our mobile traffic growth benefited from a number of factors. First and foremost is the initiatives that we have taken roughly starting from last August to February, where we significantly upgraded our technology platform and backbone, to make sure that we utilize the big data capability, first, to provide personalized content and advertise placements on our app and also website. As today, if you go through our website and also app, you will see that different consumer will be pushed different content based on our analysis of your likes and dislike and you can interact with that customer profile that - and then with your continuous engagement with us, it's going to be getting better and better. This has significantly improved our user interaction experience just by measure, our CTR for our content have increased almost 100% as a result of this more intelligent content pushing, which we call [indiscernible]. And we're still investing a lot - as Julian mentioned, we invest a lot of money in our R&D and technology to make sure that continue to be improving in the future of the company.

Okay. Yes, great. Thank you very much, Kang, and congratulation on the strong result again. Thanks.

You're welcome.

Your next question comes from the line of Amanda Chen from Morgan Stanley. Please go ahead.

Hi, good evening, management. Thank you for taking my question. So my first question is regarding your 17 cooperating projects with Ping An. If I didn't mishear, I think, Yan, you mentioned transaction volume of your marketplace. So I'm wondering does that number include any contribution from those projects. That's my first question. Thank you.

Sure. Now the 17 projects that we initiated roughly a year ago when we started last June, were the first wave of collaborative initiative with Ping An. Now it's no longer, how can I say, were won. We're now in business as usual. So I can say that integration of Ping An's business and also Autohome is more as a business as usual stage. So a lot of those servicing projects are now being merged into our daily operating activities. Now the transaction model that we mentioned is not directly linked to any one of those 17 projects, but it's also true that in the upgrading of our current technology platform, in fine-tuning our big data capability and making sure that we leverage Ping An strengths in financial services to better cater the user cases and scenarios that happened in Autohome's consumer engagement journey. Those have been progressing very well, and those have contributed to the increased user stickiness that I have mentioned in earlier question.

Got it. Thank you. And the first - the second question is regarding your 2017 revenue outlook. Given the sales, the new car sales, do you still expect the 25% to 30% year-on-year growth for the core business?

Yes, a short question is yes. Despite some sentiments in the market, we continue to see our position, our leadership position in the market to further consolidate. Now particularly in a rough time, you see that number one player, particularly, a dominant number one player is actually in the best position to benefit in those scenarios. This is again a testament of our unique capability in converting user traffic to very effective leads and also transactions for auto OEMs and dealers. So we see no signs of slowing down that, and actually we are very confident that after the first quarter, the latter three quarters are going to see a stronger growth as we progress into the rest of the year.

Sorry, do you mean that the next three quarters, we will see accelerating revenue growth?

Hi, Amanda, I think we are sticking to our guidance for the whole year, which is 25% to 30% year-on-year revenue growth for our core revenues. When I say core revenues, that means total revenues excluding the direct sales revenues.

Yes. I know that, but I think, Yan, you just mentioned that in the last - so in the remainder three quarters, you expect the core revenue will grow faster and faster, if I didn't miss you, right?

Well, I guess, what I'm saying is that the future is yet to be made and we're very confident that with all the set-up and capability that we're going to continue to define whatever market changes that is going to come and our leadership position will continue to consolidate. And with that, we're confident that we'll deliver superior results. Now I think it's too premature to revise any revision but I would like to give you the confidence that we are very optimistic that our strengths will be able to carry us to rather optimistic future for the rest of the year.

Got it. Very helpful. Thank you. And the final question is regarding the non-GAAP marketing expenses which was declining year-on-year in this quarter. So will this trend continue throughout 2017?

As of now, we are not giving out margin guidance and we are not giving out guidance on any particular expense items. But in general, I think we are seeing signs of margin expansion for this year, but like I said earlier, I think it's a bit too early to tell whether we really are going to see margin expansion in the next three quarters or not. But as we grow our revenues, as we provided guidance, I think there is an upside risk to our original margin guidance. But like I said, it's a bit too early to tell.

Yes. But Amanda, let me also share with you, as you can see from this earnings statement, we're getting better and better at doing what we do, and we're getting more and more efficient at doing what we do. So I hope the number tells you that this management team is very professional at identifying gross revenues and gross passed. At same time, we're very capable at containing the right cost level, even with a more extended amplified revenue base. So we hope that market and also analysts will recognize that effort and have confidence in the team's capability to continue to do so in the future.

Sure, totally. So a very quick follow-up. So I think some of your competitors is maybe well [indiscernible] or add the traffic acquisition, and if you don't increase sales and marketing expenses significantly, will we spend more on the content cost to enhance the content quality to increase traffic, or we are very confident in that our current content quality is able to attract more and more users?

Hi, Amanda, on the traffic growth expenses, we do believe that, as we - as Yan highlighted earlier, in the last two quarters, we have invested hugely in upgrading our user content, as well as user experience in terms of the product design, particularly on the mobile side. So we are actually very confident that our organic user traffic growth will continue, and that's why we are not investing as much in the user traffic acquisition that some of our competitors are doing right now. And I think this also increased our cost advantage against the rest of the market.

Got it. Thank you very much and congratulations on the strong results.

Thank you, Amanda.

Your next question comes from the line of Xu Ming from UBS. And can I please advise if you could limit yourself to one question please for today's Q&A session.

Good evening, Yan, Julian and Vivian. So first I'll congratulate on the strong quarter. So firstly I have a very quick housekeeping question. I remember last quarter - during last quarter's earning call, you mentioned that you still have around 3,100 cars to be cleared in Q1, but we see from this quarter that you actually sold 307,000 - 3,700 cars in this quarter and you still have around 600 cars to be cleared - inventory to be cleared in the next quarter. So I'm just wondering could you maybe elaborate on why there seems to be additional 1,000 cars remaining in your inventory. And I have another question to be asked.

I don't think that's the case. I think at the previous call, we did say that we had about somewhere around 4,000 units of cars left and we are going to sell around 3,000 and then we have maybe a few hundreds left for the second quarter, and I think we just did all of them by end of April.

Okay. Sorry, maybe I've got my notes wrong. Okay. Anyway, so actually my question is on the sensitivity of auto sales slowdown. So in Q1, you mentioned the sales is very slow and auto sales, so I can't understand that when the car sales is weak and automakers are still have a budget and eager to sell their cars, they spend more on marketing, particularly on the high quality platforms like you guys. However I think if you look at the latest data for April, the April wholesale is down by 2% and the year-to-date sales was only up 4%, given the high base of second half of last year. I think it's very difficult for the automakers to achieve their pockets at the beginning of the year. So my practice - my experience when I was covering auto was that during that half year review in April - sorry, in June or July, some of the automakers may revise down their full-year target, and actually as a consequence will cut their full-year spending - full year marketing budget. So my question is basically, firstly based on your interaction with your clients currently, do you feel any tension or any possibility that this could happen? And secondly, my question is if they cut their full-year guidance - full-year target, so what kind of impact will you see in your business? Thank you.

Yes. Thanks, Xu Ming. I think this is very good question. It basically gave us the opportunity to share with you a little bit about our media business model. Now as many of you, we sell advertisement to OEM client and dealers, but for the last year, there have been a lot of upgrades and changes in our core business model of media advertisement. A rough number, more than 50% of our media revenue is now combined with some sort of content marketing and integrated activity online/offline. That is to say we are becoming increasingly a solution provider to the OEM client rather than a mere media platform vendor per se. So this is why when - even when the market started to slow down, we continue to enjoy much higher growth, particularly if you compare with some of the competing media platforms. The reason is exactly that. We are providing our business partners, which is the OEM client, more and more solutions rather than a set media product. And this become even more valuable in time of difficulty, where we will work closely with them to identify unique growth opportunity and to define a customized solution, both with our media strengths, as well as our data capability to help them to compete effectively with the market, and this is really where we're able to continue to have confidence and gain even more market share even as the market experienced some seasonalities or ups and downs.

Yes, okay. So basically you don't see any downside right now on the - on your advertising business?

Advertising did - well, I'll say our media business is more than advertising now. So that's why…

Sorry, yes, the media business.

Yes, I recognized what you said. There are various things that can happen for the rest of year, which we don't have a crystal ball. We cannot foretell everything. It's also natural when market is down, OEMs may adjust their advertising revenues. But what I'm saying is that we are more and more offering them solutions rather than just advertising services, and this is where we see increasing interest [ph] for OEM partners to continue to work and collaborate with us with more and more devoted intentions to work with us.

Right, understand. Yes, sure. Okay, got it. Thank you.

Your next question comes from the line of Nora Zhang from Bank of America Merrill Lynch. Please go ahead.

Good evening, management. Congratulations for a strong quarter and thank you for taking my question. I have one question regarding leads generation. We noticed that the growth in leads generation is very strong and just wonder what is driving the revenue growth, particularly what's the growth in data subscription customers? And has dealer advertising [indiscernible] become a larger proportion of the leads generation revenue in this quarter comparing to last quarter, or let's say, last year?

Hi Nora, this is Julian. I think the growth behind the 40% year-on-year growth for the lead gen revenues are three parts, right. The first part is we do price up by about 20% this year versus last year. That's first one. The second one is starting this year we do see more and more paying dealers on our premium package as opposed to standard package. Last year, we had about 50% of our paying dealers on premium package. Going to this year, we now have about 60% of our paying dealers on premium package, so that obviously increased or improved our ARPU. And the third driver is that we do see increase in dealer advertising revenues, so these three all contributed to that 40% year-on-year growth.

Thank you. And my second question is regarding the mobile advertising revenue contribution. Could you share with us the contribution percentage in the media services?

The mobile advertisement represents roughly 48% of our total media advertising revenue, so that's quite a substantive increase from past.

Thank you. That's very helpful. I have a third question. So we understand that Autohome is working with unauthorized new car dealers in lower-tier cities this year and also encourage automakers to open more pop-shops. So could you share with us some operating metrics, like the number of unauthorized dealers we have right now and the number of automaker pop-shops?

No. Like we said earlier, we are not in the test markets for the new car e-commerce business emissions model. So right now it's still yet in very small scale test market, and we are refining our business model. And therefore, we are also refining our metrics. So at this point, there is not much quantitatively that we can share, but like Yan said earlier, going into the next few months, we shall have a lot more to share with you.

Thank you. That's very helpful.

Your next question comes from the line of Liping Zhao from CICC. Please go ahead. You line is open. May I remind you to ensure the mute function on your side has been switched off. Please state your question.

Can you hear me? Hello?

Yes, we can hear you.

Okay. Good evening, Yan, Julian and Vivian. Congratulations for another strong quarter. I have two questions. So the first one is that we saw the SG&A cost drop significantly this quarter, any reasons for that? Does this mean that your optimization of Q1 results has pretty much done by now? And my second question is about the cash position because you have generated very strong cash flow this quarter and there are already plenty cash debt [ph] on your balance sheet, and what's the managements thoughts to better use the cash in the future? Thank you.

Okay, sure. On your first question, I think you should - Liping, you can look at the headcount numbers versus last year - versus a year ago first quarter year 2016, right now we only increased total headcount by about 2%. However we do increase our net revenue by 28%, so I think that explains why SG&A, as a percentage of total revenue, has dropped significantly. And like Yan said earlier, we also pay a lot of attention to cost control. We want to grow our revenue while the cost is in check. So going forward, I think we will maintain our prudent headcount policy, so going forward you should expect very solid margin lines for the rest of the year. However like I said earlier, for the next three quarters we might be investing a bit more in our new initiatives. So overall, we are not providing the margin guidance but we do see upside risk to the margins. To your second question, we are open to all possibilities, including paying out cash dividends to investors or buyback from the market. Right now we have not come to a conclusion yet. We are evaluating all options. But in principal, we do want to create more value for our shareholders.

That's very helpful. Thank you, Julian.

Your next question comes from the line of Alvin Jiang from Deutsche Bank.

Hi gentlemen. This is Maria [ph] asking on behalf of Alvin. So I just have one question here. For the remaining cars, we still have like several hundred of cars remaining, so are we already secure the contracts, and were book the revenue for in the next quarter? And what is number of revenue from the e-commerce for next quarter? Thank you.

Okay. At the end of first quarter, we still had about 600 units of inventory left. In April, we actually have sold out all 600 units. So it's safe to say that by end of this quarter, the second quarter, we will have no inventory left from the previous buyout business and we are estimating about RMB55 million revenue booked for the second quarter for the buyout model cleanup.

Okay. Thank you.

Thank you. Ladies and gentlemen, that now concludes our question-and-answer session. I will now turn the conference back to management for closing comments.

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

Thank you. Ladies and gentlemen, that now concludes today's conference call. Thank you for your participation. You may now disconnect.