MakeMyTrip Limited (MMYT) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the MakeMyTrip Limited Q1 fiscal 2018 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jonathan Huang. Sir, you may begin.

Thank you. Greetings and welcome, everyone, to our fiscal 2018 first quarter earnings call. We wish to remind everyone that certain statements made on the call today are considered forward-looking statements within the meaning of the Safe Harbor provision of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance and, by their nature, are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date and the company undertakes no obligation to update the information to reflect changed circumstances. Additional information concerning these statements are contained in the Risk Factors and Forward-Looking Statements section of the company's annual report on Form 20-F filed with the SEC on July 18, 2017. And copies of this finding are available from the SEC and from the company's Investor Relations department. On our call today are Deep Kalra, our Founder, Chairman and Group CEO; Rajesh Magow, Co-Founder and CEO, India; Ashish Kashyap, our Co-Founder and President; as well as Mohit Kabra, our group CFO. And now, I would like to turn the call over to Deep to start off the discussion for today.

Thanks, Jon. And welcome, everyone, to our first earnings call for fiscal year 2018. I'd like to begin today by reiterating MakeMyTrip's long-term strategic goals. As India's leading OTA with multiple popular brands, we're committed to deliver the best possible online travel research, booking and post-trails experience to our customers and to accelerate online penetration in hotel bookings. As India rapidly moves online and travel booking behavior and preferences evolve, we will drive constant and rapid innovations to ensure customers choose our brand when planning and booking travel. Concurrently, we're focused on driving increased stickiness and brand loyalty by offering a greater value proposition for both new and existing customers. I also believe our approach of leveraging technology and product innovations geared towards enhancing customer satisfaction will allow us to further widen our leadership position going forward. As you know, we consummated the ibibo Group merger in January 2017 and I'm happy to share that we have made significant progress on the various aspects of integration and also on the go-to-market approach for the different brands here in the first quarter of fiscal 2018. The positive results achieved thus far reinforces our belief in the execution of our consolidation strategy. As we enter the new fiscal year, we continue to remain more optimistic than ever of the long-term growth opportunities ahead of our company. The latest estimates from IAMAI, the Internet and Mobile Association of India, indicates that India now has roughly 420 million mobile Internet users and this base is expected to keep growing rapidly. Large opportunities for new user growth will likely come from the non-urban parts of the country where penetration levels are estimated at 16%. Affordable smartphones and data plans are easily available via the recent disruptive offers from the telecom players led by Reliance Jio. Additionally, a significant government initiative which can facilitate online penetration is the unified payments interface app called BHIM, which creates a common nationwide payments platform for simple and quick transfer of money. This will undoubtedly benefit all e-commerce companies over time by bringing in a new segment of users into their target market. While BHIM has been rolled out only recently, the app has already seen over 16 million downloads with over 4 million active users. In addition to BHIM, other UPI-based applications have also been launched by large private players. UPI facilitates payments from any bank account to any other bank account at very low processing costs and hence, coupled with recent demonetization efforts, has the potential to significantly expand online purchases and payments. In fact, we are launching our first UPI with ICICI Bank next week, a leading bank in India, and will look to integrate with other banks in the near future. Today, India is one of the fastest-growing large economies globally, which has created a strong tailwind for the travel industry. In calendar year 2016, we witnessed a very strong demand for air travel, driven by low fuel prices and strong economic growth, resulting in high load factors for the travel industry. Coming into the new fiscal year, the growth momentum has continued as air passenger traffic grew 18% year on year in fiscal Q1. This healthy demand has prompted aircraft manufacturers like Boeing to revise their forecasts upwards to more than 2,100 planes required for India over the next 20 years. Indian carriers collectively have already placed more than 1,300 new orders, with 250 planes expected to be put into service over the next two to three years. Furthermore, demand for air travel is expected to increase with the launch of the government's regional air connectivity program called Udan by operationalizing up to 100 regional airports out of a total 400 unserved or underserved domestic regional airports by fiscal year 2019. Low-cost carriers, who have recently launched such regional flights, are already [indiscernible] healthy load factors, indicating a strong pent-up demand for air travel along these routes and this should help in sustaining healthy growth in the domestic air market. Similar to the optimism witnessed in the air market, multiple global and domestic hotel chains have expressed their continued optimism and commitment [indiscernible] inbound and domestic tourism opportunity, especially in the mid-tier hotel segments, which have seen increased occupancy rates from corporate travelers and middle-class leisure travelers. We're excited about the huge headroom available for growth in the hotel industry due to the low online penetration levels at present in the segment, which will propel our growth in line with our long-term strategy. And now, I would like to highlight some of the key accomplishments in Q1 as our team delivered a strong operating and financial performance. In the quarter, we drove faster innovations in both technology and product, while optimizing our investments to acquire and retain new consumers, especially from the offline world. One project that we're particularly excited about that would allow us to harness the long-term non-urban growth potential is our MMT Lite app available now for Android devices. While India is rapidly moving online via smartphones, often what we find are that many of the cheapest smartphones have storage constraints. Therefore, we built a 1 MB Android application that's been bended to be usable and within reach of the next 100 million India mobile users that will come online and offer all the core use cases that our full app can provide. While we have just launched version 1.0, over time, we plan on adding more customized experiences for this base of users, including more affordable travel options, greater vernacular support and lower data consumption. Next, we have soft launched our corporate focused app called MyBusiness to cater to the small and medium enterprise market. We believe our approach to the corporate travel market provides us with a formal manner to serve this segment's travel needs by leveraging a user behavior that's already familiar and helping finance teams easily track and manage travel expense by their employees. We're seeing some early traction post the soft launch couple of weeks ago. Roughly 50 small companies are signing up per day at present. We believe this has the potential to scale quickly without much direct marketing or people cost. This should drive acquisition of a new consumer segment that has not been formally addressed in the past. Now, let me share our progress on mobile, which is critical to our success. We plan on making the mobile experience more personalized, highly relevant and, ultimately, an indispensable part of the customer search, shopping and travel support process. During the quarter, across all our brands, mobile bookings reached over 78% for our India standalone hotel transactions booked online, 59% for domestic flights booked online and over 47% for intercity bus transactions. At the same time, the total cumulative apps downloaded to date has now reached over 90 million downloads and we now have more than 50 million monthly average active mobile app users at the end of June across our three brands. Going forward, we plan on providing even more innovative solutions for our consumers. We believe travel is a highly specialized vertical where travel options are numerous and the use case frequency is still fairly low in India today. As a result, the stakes of winning over a traveler's repeat business are high and, therefore, requires us to have a deep understanding of the ever-changing traveler needs and preferences. Our goal is to stay ahead of this constant change and continue to make our brand synonymous with travel bookings in India. In closing, I'd just like to reiterate our optimism for the large and fast-growing online travel opportunity ahead of our company. With our portfolio of well-recognized online travel brands – MakeMyTrip, Goibibo and redBus – 25 million life-to-date consumers, tremendous online traffic scale, coupled with our culture of rapid innovation, we believe MMYT is well poised to achieve sustained high growth and widen our leadership in the Indian travel market that's expected to exceed $23 billion in online bookings by 2021. Rajesh will now share more details of our business accomplishments in the quarter, followed by a financial overview by Mohit. Over to you, Rajesh.

Thanks, Deep. And hello, everyone. I would like to begin with a few highlights of the quarter. This was the first quarter when our reported gross bookings for a quarter crossed the billion-dollar mark milestone. Our net revenue, or revenue less service cost contribution, from the hotels and packages business also reached a high of 57.5%. We achieved close to 5.8 million room nights stayed across our entire hotel and packages business. Our India standalone hotels booked online now account for 94.8% of all reported room nights. Our bus business logged close to 10.8 million tickets sold on a travel basis. Lastly, with more than 7.8 million flight segments flown in the quarter, we continue to improve our leading domestic air market share. Helping to achieve this strong performance are our ongoing efforts to enhance our customers' experience with our brands, as well as ensure we deepen our relationship with our supplier community. During Q1, we focused heavily on ensuring customers receive greater personalization in their experiences with our brands. For example, we leveraged the large amounts of data collected over the years and have built an algorithm which will feed users highly relevant flights and hotels recommendations on their app home screens. For our hotel customers, we've added the ability for them to get accurate directions to their booked properties and access our assured hotel hotline and leave reviews immediately after checking out of the hotel, all within their mobile apps. While we focus on enhancing customers' experience, we also improved the experience for our hotel supplier partners. As part of our ongoing merger integration efforts, we now have completed our rollout of one common hotel supplier experiment to help hoteliers manage rates and availability across all our brands better and have a common hotel contracting team across all brands and all types of accommodations. At the same time, we continue to ensure we deepen our business relationships with our industry-leading scale, which provides us with a strong competitive advantage relative to peers. On the hotel supply front, our contracting team increased the total number of domestic hotels, also to reach over 45,000 properties across India, up from 40,000 just a quarter ago. Going forward, we will continue to expand the selection within India at a pace that is based on customer demand and supply quality, which could also include expanding the 13,500 existing alternative accommodation properties already offered across our brands. Furthermore, during the peak travel season, consistent with the previous quarter, we have been working smartly to optimize and reduce the level of direct-to-consumer discounts since we completed our merger in January of this year. While certain level of incentives are still necessary to attract new customers to use our services, given how early the online hotel market is right now. We believe, over time, our brands' experience and commitment to servicing our customers will fundamentally drive higher stickiness and retention. As you may have noticed, we also launched several television commercials during the quarter, which were tailored by brand, target audience, and directly conveys the value proposition of booking online. Additionally, we continue to see good traction on customer acquisition, where we've been able to add another 2.6 million GoContacts users in fiscal Q1 alone via the simple and effective referral feature of the Goibibo app. More importantly, we believe that our focus on directly acquiring, retaining and owning our customers and working directly with our key suppliers is a key differentiator to our success. In addition to the great progress we have made on the domestic hotel front, we are also excited about the large long-term growth prospects outbound hotel bookings presents as more Indian travelers look towards overseas travel. Currently, we have the ability to offer over 500,000 bookable properties outside of India via our affiliate relationships and are already seeing very strong growth in room nights in the segment due to rising demand and low market penetration. Now, before I discuss our air ticketing and other lines of business, I would like to quickly comment on our holidays business, where we continue to focus on improving productivity, operational efficiencies and customer experience. During Q1, we rolled out chat-based online bookings, allowed hotel changes on certain package products, and helped customers shortlist and book packages online. Even as our packages business becomes a smaller part of the overall H&P mix, we believe it is strategically relevant, as much of India still travels via a prepackaged holiday, especially outbound destinations, where they need assistance for visa and other in-destination activities. Now, I would like to make a few remarks on our air ticketing business, which continues to witness high growth and market share gains. While we have already achieved leading domestic air market share, we still drove new user growth in this quarter. In fact, during Q1, nearly one-third of domestic flight users were brand new to our portfolio of brands. Furthermore, we continue to enhance our user experience, while launching instant flight searches on brand Goibibo, our GoInsta, which will return search results to less 300 milliseconds, thereby delivering an instant search experience and further reducing user friction. Similarly, on international outbound flights, we continue to see strong segment growth in this still highly under-penetrated market, where we believe we continue to gain share as more traditional offline customers shift towards online bookings for the first time. Our team has continued to reduce customer pain points when booking international flights by improving our product offering, payment options and flexibility and even provided free visa consultation for certain destinations. We believe there is still tremendous headroom for growth in the coming years within this segment and are excited to keep driving higher conversions going forward. Lastly, let me share some highlights of the redBus business, where we believe we are very well poised to drive rapid growth in this largely offline market. In Q1, our bus team has seen high growth coming from all geographical regions within India and the focus on helping regional bus companies understand the value that our online platform can provide to their business has been yielding positive results so far. Additionally, enabled by our robust technology platform, over 60% of privately operated buses, listed on redBus, are now trackable live by the operators by our proprietary supplier tool, called YourBus. We believe it's this continuous product and tech innovations that continues to enhance our competitive advantage in the market. Going forward, our bus ticketing team will continue to find ways to bring more of the offline bus ticketing supply online, while providing many value-added features and services to attract customers and suppliers to use our app for their travel and distribution needs. Now, let me hand it over to Mohit, who will share more details of the quarter's financial performance.

Thanks, Rajesh. And hello, everyone. Before I discuss the quarter's results, I would like to make a few call-outs. We have included new operating metrics of air ticketing flight segments booked and hotel room nights stayed, in addition to our existing transactions data for the respective segments within our latest earnings release, as we believe these should help give a better view of the operating performance. Recently, we had also filed pro forma financials of MakeMyTrip group consolidated for the ibibo Group for the year ending 31 March, 2017, which should help everyone get a good sense of the combined base of the business. Today, we have additionally provided certain pro forma key operating metrics, so that the readers can get a better view of the year-on-year growth of our combined business. However, I would like to caveat that these pro forma metrics have been provided on the basis of unaudited management's best estimates. On a pro forma basis, in quarter one for fiscal year 2018, we report over $7.8 million total air ticketing flight segments booked, which was a 22.2% growth on a pro forma basis over Q1 last year. The standalone hotel rooms night of nearly 5.5 million achieved in this quarter represents a year-on-year growth on a pro forma basis of roughly 36%. We were also able to drive better revenue realization and growth with higher average transaction values and better margins in our hotels business. I would now like to call out the current quarter's performance over the reported quarter of last year. In Q1, as a result of the merger of the ibibo Group, coupled with the strong growth momentum across all brands, MakeMyTrip group delivered net revenues of $141.2 million, which represents a constant currency year-on-year growth of 135% on a reported basis. In this strategically important hotels and packages business, we recorded $81.3 million in net revenues, which represents an increase of 139.7% on a year-on-year basis in constant currency terms. This year-on-year growth performance was derived from an increase of 192.2% from our MakeMyTrip India standalone hotels booked online room nights stayed, which was a result of our continued high growth marketing and promotion strategy and the consolidation of ibibo Group's results during the quarter. During the seasonally strong travel quarter, we are equally pleased to report over 66% quarter-on-quarter growth in the standalone hotels room nights booked online. And this gives us great confidence in pursuing our stated high growth strategy in this business for the remainder of this fiscal year. It also gives us confidence that we have been able to implement a complementary brand strategy in place within a few months of the merger of the ibibo Group. During Q1 2018, our margins in this strategic hotels and packages businesses stood at 21.7%, which was slightly better than the previous quarter's margin of 20.5% and significantly better than the reported margin of 16.9% in the same quarter of the previous fiscal year. This was largely due to consolidation of the ibibo Group, which resulted in the higher mix of standalone hotels within our hotels and packages segment and the fact that the ibibo brand is historically focused more on the independent hotels in the budget segment, which tend to provide better margins. Also, as part of our strategy of driving significant online penetration through promotional campaigns for our customers, we had been seeking active participation from our hotel partners through additional performance-driven margins as this also helps drive improved occupancy rates for our partners. We remain confident of our ability to continue pursuing this market-making strategy during the current fiscal year. During the peak holiday season, we also improved the average transaction values in our standalone hotels business, which was the result of the improved mix of premium hotels that we drove in this reported quarter within the total room nights stayed by our customers. This was made possible with the significant technology and product initiatives rolled out in the quarter, which Rajesh has already spoken about. I'll now share some details on our air ticketing business. In the quarter, net revenue increased 0.1% year-on-year in constant currency terms, driven by 65.7% increase in the air ticketing slide segments. The segment growth was driven predominantly by the consolidation of the ibibo Group and our focus on achieving very strong growth in the international air ticketing business. We will continue to focus on growing the international air ticketing business, where there is significant opportunity for driving online penetration. The margins in the air ticketing business was slightly lower at 7% versus 7.2% in the previous quarter. Going forward, we expect to continue with our strategy of maintaining our share of the domestic air market, while leveraging the growth opportunities provided by the low online penetration in the outbound air market. During the quarter, other business segments reported net revenues of $14.3 million, a majority of which was driven by the net revenue contribution from the redBus business. While the year-on-year growth metric should not be viewed as a trend in view of [indiscernible] not being a part of the reported performance, in the same quarter last year, we are very pleased with the growth in the bus ticketing business as a group. As pointed out by Rajesh, we had logged 10.8 million travel bus tickets with over $140 million in gross bookings. Our adjusted operating losses for the quarter, with the consolidation of the ibibo Group, stood at $52.3 million compared to $24.3 million for the same reported quarter in the previous year for MakeMyTrip without the ibibo Group. This was in line with our strategy to continue spending on marketing and sales promotions in travel segments, where online penetration is low, while driving efficiency [indiscernible] across the brands in the portfolio. As for other operating costs, comprising personnel cost, excluding share-based compensation, payment gateway charges, selling and general administrative expenses, we saw operating leverage from increased scale of business and these have been reflected in an improved trend on a year-on-year basis as a percentage to gross bookings. We plan to drive operating leverage across all operating costs, as the business continues to scale in the future on an annualized basis. With this, I would like to thank all of you for joining this call and open up the call for Q&A. Operator, please

[Operator Instructions]. And our first question comes from Sachin Salgaonkar with Bank of America. Your line is open.

Hi. Thank you for the opportunity. I have three questions. Firstly, selling and marketing expenses were a bit high, and this is generally versus expectation. And I heard Rajesh talk right now about directionally things going down. So, it would be great to get a sense, were there any one-offs in this quarter? And how should we look at this trend going forward? That's my first question. Second question. Any thoughts on competition from Paytm, especially on the hotel front? How do you look at it, given the fact that this company is well-funded? And lastly, we are few months from – we are a few months into the point wherein Jio has started to charge consumers. I just wanted to see if the traffic and the overall move towards consumers using a lot of data, is this something which is sustainable and you're seeing that impacting positively the uptake of general OTA services in India? Thanks.

Yeah, Sachin. Maybe I'll just take the first one, on the promotional spend, the sales and marketing spend. Essentially, as we've been calling out, we believe, with the underpenetrated online status of the hotels segment, we would continue to drive new customer acquisition in a significant manner, and therefore, continue to invest behind marketing and sales promotion on an ongoing basis, at least right through this fiscal. However, what I would like to call out is, if you look at it on a comparable basis, we have seen efficiencies come through in the marketing and sales promotion expenses, particularly in the hotel business. Now, this is the large part of the sales promotion expenses that have been made both in the previous year, as well as continue to be made in the current year. So, that's heartening to know that we're kind of on the right trajectory to be able to tweak this down and build efficiencies. Now that our new base has been set for the consolidation with the ibibo Group, which, as I have reported, are called out during the script. We will look at targeting annualized efficiencies, not only across all our element of costs, but more importantly, across marketing and sales promotion as well. But needless to say, we'll continue to have a high-spend strategy, so that the market share gains continue to be there. And this is kind of getting reflected with the significant growth that we called out, both in room nights, as well as revenues from the hotels business.

This is Deep. I'll take the second and third questions. So, I think when it comes to Paytm, what we have seen, what we have observed is that their offerings in travel, particularly in transportation – air, rail and bus – are definitely finding traction with the price-conscious customer when there's a discount, i.e. a big cash back offer. So, I think there's almost like a direct correlation with that. And we do see that the lower stack of our customers, customers who are most price sensitive, they do tend to look at these offers, they do tend to compare them. And these are the same customers, where in the past, we have seen in this cohort very little stickiness. So, we've actually seen customers shop around, move around. In fact, even before our own merger, I think we had observed that it was very hard to actually lock in 100% of their consumer base, as we all know. I think we've taken a very conscious strategy to play at the top two tiers or the top two or three quartiles of the customer base that we are looking at. So, I think we will have to contend with the fact that when there is a price discount being offered on a commodity-like product, which is transportation largely, some customers are going to move. But then, again, there is a question of sustainability there. What we have seen and what is heartening to note is that as you move to more involved and evolved products, i.e. accommodation, consumers do tend to get more – I think they consider much more deeply the different aspects of that purchase. This is not one seat in a plane, it's like any other seat, et cetera. People are bothered where they're going to go and spend the night. They do look a lot at reviews, at pictures, et cetera. And it's a far more involved purchase decision. There we have seen that we have much more stickiness. And I think we have found ourselves to be able to build reasonable motes [ph] around customers in star categories 2.5, 3 and upwards. Below that, again, yes, the price customer is there and people will shop around. But largely, we have seen Paytm traction come on transportation, which is, again, air and bus and rail. Coming to Jio, I think what we have seen is that this is a really – it validates the whole theory that online is a one-way street. I think people go online one time and they experience the power of – just the shear convenience, not just price, but convenience, selection, et cetera, and seldom go back to the offline world. We ourselves as a company experienced that when we started marketing air tickets in India way back in 2005. And the same price was available virtually everywhere even now. It's virtually the same price, notwithstanding some cash-back offers in the offline world as well, where offline travel agents are still willing to sell a ticket at very thin margins because that's their legacy business model. But the reality is people don't go back. Today, 60-plus-percent of all air tickets in the country are bought online. So, I think what aggressive offers like Jio, et cetera, especially during their initial free phase, extended free phase, managed to do is bring a lot more people online, bring another swathe of population, probably 100 million, 150 million people online for the first time. Obviously, not all are purchasers. I think we all know that people buying online today is still a fraction of the total number of people, let's say, 420 million people per IMEI online today. The actual buyers would be probably somewhere between 15% to 20% of that who have actually bought something online, but that's growing fast. So even after Jio has moved to paid, two things have happened. Some people never gone back. They have experienced again the power of the Internet, as well as other telco providers were forced to bring down the price. So, I think this growth is for real. This is a market which is going to be there, but will take time to finally start buying online, and that's a process. The only thing what we've all experienced now over the last several years is that the cycles of coming online first time, adoption and then final purchase are getting shorter and shorter. And obviously, that's because there are such concerted marketing efforts happening from all e-commerce companies, not just travel. I think getting people to buy something online is like that first kind of step. And once that happens, we found more people kind of move online and stay online.

Okay. Thanks, Deep. I have just one follow-up on that. And this is again on your selling and marketing expenses. But it looks like, for this quarter, your overall marketing, selling expenses is much higher than your overall revenues. Just wanted to understand, this is not the case even before you got guys acquired ibibo. So, what is going on here? I understand your point on Paytm. But is it also not the same thing out here, which is we are giving discounts and you are getting revenues, and the minute you start pulling down discounts, your revenue growth will go down?

Sachin, hi. This is Rajesh. Let me just build on what Mohit was trying to say earlier and kind of link it back with the comment that I was making as part of the script. There are two things that you should keep in mind and we've been talking about that in the past. On one side, there is the goal that we have to continuously and smartly and intelligently optimize the discounting offers that we've been doing in the past three merger scenarios. And we've been on course actually to do that because – yes, there could be a situation where, technically, within the quarter, that you have to react to market situation if that was the case. But on an overall basis, directionally, we continue to keep working on that, specifically, in the domestic hotel market. And you know the domestic hotel market continues to be under-penetrated as well. And we had called that out that we're not necessarily going to go super aggressively keep reducing it, but gradually keep growing in that direction. So, once you look at all the numbers, including the pro forma numbers that we've shared in an overall consolidated basis, you'll see that reflecting as part of your analysis. That's point number one. Point number two, if you would also recall, we had spoken about that there are – other than domestic hotel markets, there are other segments we feel that there is a lot of headroom and growth potential, and those are international hotels and international flights, as well as bus segment. And when you look at the KPIs on all these – this breakup not available for the international hotels, but I can tell you, both the international hotels and international flights, we've been actually focusing on growth and just making more investments in those line of businesses as well. As well as bus – and bus KPIs are also disclosed this time around. And you would see the growth momentum picking it up there as well. So, there are – so on one side, wherever there was a fierce market situation before the merger, we're rationalizing as far as possible. But on the other side, we're also making sure that we continue to keep investing wherever – on the other under-penetrated segments, so that the growth continues and the growth overall momentum continues, which is kind of reflecting in the overall growth numbers if you really look at that. So, I guess, we stand by the fact that, directionally, we will keep doing better and better. But at the same time, we have to just make sure that we're also keeping the growth momentum going, given the under-penetration. Some of these investments are going to actually, not necessarily, I would say, buying revenue or buying room nights, and you would – if you see our revenue growth, our overall room nights growth or the other KPIs growth on the, I guess, consolidated base, you would see the growth is still pretty high in that sense. And that's how you should kind of look at it. And lastly, I would say that there has been a significant supply side effort as well, which is making sure that there is also hotel participation in the promotional offers and so on. So, I guess, it's an effort, both from supply side as well as from the demand side. But all in all, just relying on analytics and relying on technology tools to make sure that we end up making promotions and offers very, very intelligently and personalized and not necessarily kind of spray and pray kind of an approach. So, I guess, that's how we should look at it. And given that overall growth momentum is there that we're not necessarily looking to just bring it rapidly down.

Okay. Thank you, Rajesh.

And our next question comes from Gaurav M from Citigroup. Your line is open.

Yeah, hi. Good evening, everyone. Just a couple of questions. Just building on what has already been asked, first is more of a micro question, which is on the net revenue margins of the hotel side. I do remember that Mohit had mentioned last quarter, when the margin had gone up, that you wouldn't want to take up these margins too significantly because you need to remain competitive in the market and there are challenges still...

Gaurav, you're not very clear. I'm sorry interrupting, just you will have to repeat that.

Okay. Can you hear me now?

Yeah.

First, on the micro question, on the net revenue margins in the H&P segment, I do remember Mohit had mentioned last time around when the margins, and they have been going up steadily, that you wouldn't want to take up these margins too much because you want to remain competitive in the market. And again, the margins have sort of gone up 120 bps quarter-on-quarter and even on a YoY basis. So, while, yes, there will be some benefit of ibibo having more budget hotels and low packages, but any sense on when we should see sort of the peak of the margins in the H&P or there is more leg for them to go? That's my first question.

So, Gaurav, maybe I’ll take that. If you'll recollect, I kind of mentioned this even in the previous quarter when we had the ibibo Group consolidated for just about two months rather than the full quarter that we have seen improvement in margins as a result of the better mix that is now coming across from the budget segment, which tends to have better margins to offer. Also, as I’ve called out this time as well, see, this whole entire – the margin piece also needs to be kind of looked at in tandem with the significant amount of promotions that we're running on the consumer side, and therefore, kind of getting the hotels to participate by offering additional performance-driven bonus or additional performance incentives, so as to drive volumes as well as drive occupancy rates for them. So, I think it's kind of works as a win-win situation both for the hotel partner as well as for us and kind of helps us take the entire industry more and more online much faster. Now, coming to your question of when do we – on my callout regarding longer-term margins, as I had called out in the previous quarter also, we do believe in the longer run, over the next three to five years, as the overall online penetration in the hotels market kind of gets into the high 30s and 40s, we should see occupancy rates kind of also going up into the 80s, and that will perhaps be the time for us to make sure that we're kind of remaining extremely competitive if we're not able to kind of provide significant headroom in terms of building better occupancy rates for the hotels and then take our margins more in the range of about 15% to 18%. But that, again, I would say, is more in the medium to long term. In the short-term, I would expect the margins to continue near about in the range that we have been during the quarter or the previous quarter.

Okay. My next question is on the competitive dynamics. As Deep mentioned, Paytm is sort of targeting the set of consumers – those consumers are being attracted to Paytm, which are more value conscious. But wouldn't that mean that for bus ticketing segment of – which is basically redBus, is much more at risk from someone like a Paytm. That's the next question.

Yes, Gaurav, in fact, I wanted to also make a further point, which I think will answer both Sachin's and your question, and then we'll come to redBus. So, I think when you look at hotels, when I say it's a more evolved product to purchase, but it's actually – there's also far more work which happens on the supply side, which is needed and it's not just wiring up 40,000 or 45,000 hotels or having direct connects with them. It's actually the intelligence that we can provide in the system. And this is to the point that Rajesh was making in his part of the script and he was trying to describe how we are layering on that extra night [ph], which is ingo, which was developed by Goibibo with additional intelligence, which was giving our hotel partners a lot more insight. So, I think there are other modes, which are probably not apparent, and therefore, that segment does not move that easily. And then again, the point that Rajesh made in terms of co-promotions that come in. And on redBus, in fact, we have Ashish here. And I think Ashish will be able to add color to the redBus question as to why – where is the inherent mote [ph] on the redBus business.

I think pretty much as Deep mentioned, redBus is a classic two-sided platform and two-sided network effect system. So, there are numerous competitive modes or differentiation, which enables the business to continuously grow. Yet whenever our competitor does unviable pricing, it does nibble, but it is not that business stops growing. So, some of these competitive modes are, number one, we have our own proprietary tracking system now in place in more than 60% private buses. This is absolutely a massive differentiation. It has been called out in the script also. And what this really means is that, on one hand, passengers are able to real-time track the arrival of the buses. Passengers are able to, once they board, get to see their estimated time of arrival, get to know the boarding points because, unlike railway stations and unlike airports, there is no real platform to board a particular bus. It is a very variable kind of a system. So, the fulfillment promise becomes extremely important to the consumers. And on the other side of the platform, it is the bus operators which are monitoring the performance of their buses, the unit economics of their buses. For example, a bus owner would have 20 buses, and he can see at what speed is his bus driving, what is the efficiency that bus is giving, is that bus idle, is that bus taking the right route. And that becomes really a very, very important window for the bus operator's demand. So, this is a huge, huge competitive differentiation. The second very important differentiation, as Deep talked about in the hotel side, we have the hotel facing system called ingo, similarly, we have a bus operator facing system called BOGDS, which enables the bus operators not only to manage their prices, not only manage their inventories, but also set up specific promotions, reply to rating reviews, get the feedback looping, compete on the platform. So, all of this – so, if you really look at it, our competitive mode comes from the fact that we are a two-sided platform, whereas our competitors are single business-to-consumer one-sided platform. So, that's really some of the stuff which we do, including ratings and reviews, including multimedia content which users are generating, which basically sets us really, really apart from any of the players.

Okay. Just last question, on the overall competitive dynamics, so there is – last time you had mentioned that booking.com has also become – it has sort of ramped up its coverage in terms of getting more and more hotels onboard. Just any sense on how booking.com is doing, what kind of discounting is being offered by booking.com. And secondly, on the budget hotel side, what are you seeing from the likes of Treebo, OYO, these guys, are they sort of picking up the competitive intensity or they're sort of – they are competing, but not as aggressively as what was the case before?

Yeah. Hi, Gaurav. This is Deep. No, fair question. I think, clearly, in the premium segments, we do see more booking. I think we have discussed that in the past. So, not just the 5 stars, but the 4 stars, particularly the chains. And booking.com is definitely, I think, getting more interested in the market and also been mentioned in their own earnings call. And I think that is actually a testimony to the fact that this hotel market is opening up. We're now at 10% penetration. There is 90% to go. And therefore, we do believe that while we don't have a big inbound business and that is, obviously, one of the strengths of booking and maybe some of the other large international brands, we will just have to go much deeper with our consumers to be able to understand their needs better, to be able to offer our selection in a multi-dimension way, so not just a particular room in a particular hotel, et cetera. But the process of selection for many people is quite different. People go through location for some. That’s actually more important than price. And we have seen those trade-offs. We have seen where people traveling in large parties, very typical of Indians. They want different rooms and different arrangements. And we've now got a solution for that where we are able to offer different rooms in the same hotel in the same kind of shopping cart. So, a lot of work happening, supply side and demand side there. And, obviously, booking is not a company which we take lightly, so we watch what they're doing. And we're, obviously, trying to not only just hold on to the strong brand that we've got positioning out here, but actually build on that. And we have found that a lot of people do tend to shop around, but then come back to one of their more preferred brands to buy it. The other very, I think, important part for India travel, just like North America, a lot of plans actually typically start with transportation need being fulfilled first. So, people tend to first think about how am I going to get there; and then when I get there, where am I going to stay. Which is fundamentally different from a lot of Western Europe, where people are first more interested with the question which is, will I get a room in that city. And then, there are typically multiple ways to get there, ranging from train option, road options and low-cost carrier, full service options, flying, et cetera. So, I think there we've got this inherent strength with combined market share of the brands now getting pretty close to a quarter of the entire market. And there to be – our ability to cross-sell to our consumers, who are, obviously, very comfortable buying air tickets from us, have bought hotel rooms from us, but we are looking at more clever interventions where we can make it in the same purchase cycle, cross-sell the accommodation need. So, yeah, there's a multi-pronged kind of strategy there. It's very clear that booking is going to be growing in this market and we will be seeing more of them. As far as the new age low-touch chain, Treebo, Fab, OYO, et cetera, they're part supply. In OYO's case, as you know, last year, we had taken them off our platform and, in fact, Goibibo had done the same when we were independent, and we maintained that position. Treebo is off our platform as well. But we're keen to look at pure supply side players. It's just where then the supply side people are also trying to become a starting point and build a brand where consumers will go directly. Obviously, that takes away the value that we want to bring to a consumer. And if you just kind of pull that string and look at the long term, perhaps not the best strategy right now for us to be helping create young new brands. So, we are looking at that space carefully. As you are aware, we've got two in-house and – now, actually three in-house brands by virtue of GoStays, and we spoke about that, and we will be seeing a lot more of GoStays in the market, which is, again, low touch. We won't be in the management of the business, but we will promote this aggressively as well as MyValuePlus and MakeMyTrip Assured. And so, we think, at that price point, consumers are less brand focused, but they are definitely amenities and quality focused. So, I think they are more interested in, can I get this offering in the right location at the right price point and with a service quality offering guarantee. And I think that service quality guarantee is what we are providing. And then, at the same time, we have got to make this worthwhile and interesting for the hoteliers. So, I think, over time, hoteliers are also understanding the economics of partnering with some of the new age chains versus staying independent and being able to control their own destiny. And we think that's a very important part of markets like ours, which are highly fragmented, 80%, 90% independent hotels. And we've seen markets like Europe stay that way. So, Europe, despite everything, despite having the largest hotel chain which is domiciled in France and across Europe, Accor, they are still largely an independent market. So, I think there's a lot of merit there. And over time, good hoteliers, we believe, will choose to stay independent and work with platforms maintaining their identity, but managing price far more intelligently and getting a lot more demand intelligence from platforms like ours. So, I think that's where we believe we will be playing. And, of course, again, off the 100,000 hotels now in the country, there will be some hotels in the 1, 2 and no star, which will not make it to our platform. And I think that's fine. We just want to make sure that we'll have all the hotels that are chosen by brand and which tend to be in the 4, 5 and boutique category. And there we're pretty clear that we will have all selections.

Okay, thank you.

And our next question comes from Lloyd Walmsley from Deutsche Bank. Your line is open.

Thanks for taking the question. Deep, you had mentioned just the notion that there are a lot of customers aggressively shopping for deals. And I was wondering if you have a sense now for how much of perhaps the ibibo business split between more loyal customers and maybe more aggressive price shoppers and how you kind of manage the business for those two kind of strategies going forward.

Yeah. Sure, Lloyd. It's a great question, Lloyd. So, I think prior to the actual merger, we had assumed on the basis of our best estimates that we are going to have an overlap somewhere between 35% to 40%, closer to maybe 35%. We were pleasantly surprised post-merger that that overlap in consumer base was actually lower and was closer to the 25% mark. And that was great for us. But we also have realized that a lot of the Goibibo customers are there because of this big push, which Rajesh spoke about on GoContacts and goCash. And that's actually given a lot of stickiness to that brand. So, they have people who are loyal to the brand. And then, over time, they have experienced the tech impact, the faster speeds and et cetera of the apps. So, I think we're definitely able to compete with some of the price customers there. So, again, if you stack this up in four quartiles, I think Goibibo has a big right to succeed as a brand, both in the second and third quartiles, and MakeMyTrip is trying to hone in more strongly in the top and the second quartile. So, that's our flanking strategy for the brand broadly. And we'll give you more details when we speak one-on-one maybe. But, yeah, I think, again, in the fourth quartile, the instructions are pretty clear to the team that we're not going to lose a lot of sleep and a lot of money trying to get purely price customer there. Mohit, do you want to add? Jon, I'm trying to be mindful of time and maybe squeeze in someone else's question. I know we are scheduled to speak later and we can do a a follow-up on there.

And our next question comes from Shaleen Kumar from UBS. Your line is open.

Hi, everyone. Thanks for the opportunity. So, just a few questions on basically your service cost side and your marketing side. So, interestingly, I was seeing that procurement cost of hotel and package has come down. That's very interesting. So, I just want to understand that what's the nature of this cost and how it has come down to our – we are seeing a meaningful jump in our hotel and package revenue.

Sure, Shaleen. We've been calling this out – just to first give clarity, the service cost is kind of largely reported in for the holidays business or the packages business. And within the packages business, as you know, we have called out, we have the domestic packages and the outbound packages. And while the focus continues to kind of grow, the outbound packages – because there is still an inherent need and demand and reason for offering these packages. As far as domestic packages are concerned, we are trying to go more and more à la carte and unbundled and let the bookings happen on an online mode as standalone hotel bookings and standalone air tickets. So, that's the reason that we were kind of calling it out that we do expect the packages business to remain flattish, more driven by growth from outbound, but lesser growth or deacceleration on the domestic side. And that's the reason you see a little bit of a downward trend on the service costs coming in from the packages business.

Right, right, right. Mohit, the other question is around marketing. Is it possible for you guys to give just a broad idea about like what are marketing costs? How much is it like pure play media advertisement? How much is allocated towards promotional offering, rough [indiscernible] idea and how much is like maybe for SEOs and...?

Actually – and this is something that I have been trying to kind of put across that what happened over the last couple of years is, if you really look at the platform through which the consumer interacts with us has changed significantly. In the traditional desktop, laptop platforms, a large part of customer acquisition used to happen through search engines and, therefore, there used to be a lot of focus on online marketing spend or the traditional marketing spends, including brand media advertising and online expense on keywords. However, with the large part of the customer base now shifting over to mobile, we believe it is much better and more appropriate to go in for direct promotional strategies or direct marketing strategies with these customers who are kind of coming on straight on to the Internet platform through smartphones and haven't had experience with the desktop or laptop. Therefore, this is this whole shift which is gradually happening from traditional marketing to direct promotional strategy. However, we kind of continue to look at both of these as customer acquisition costs. And therefore, we'd kind of prefer to see holistically because it is very difficult to kind of call out what is exactly the traditional marketing spend and whether that's any different from the consumer acquisition spend that we do on the promotional side.

All right. So, Mohit, basically, what I was seeing that for – let's say, if I look at net revenue, we have generated an additional absolute amount of net revenue of around $73 million year-on-year, but our marketing cost has gone up by $80 million. So, roughly, for every $1 of revenue, we have burning a little more than $1 in marketing. Or basically, spending, building brand, whatever. So, incrementally, I believe this ratio will change, right? And is there a sense of like – yes, please tell me.

Yes, sure. No, no, great question, Shaleen. And what I would recommend is looking at the directional efficiency gains in the marketing spend, marketing and sales promotion spend, as a standalone MakeMyTrip brand, look at it as an example, look at it over the quarters for the previous fiscal. And that will give you a trending of how we've kind of optimized efficiencies in this spend on a particular brand during the last fiscal. All I'm trying to call out is we're doing exactly the same across brands now, although what has changed is now that we've got multiple brands, each of these brands could have had a different level of marketing and sales promotion spend. And therefore, there is more like a reset in terms of the absolute dollars or spends have gone up very differentially compared to what the standalone MakeMyTrip brand used to report. So, please take it in that context. And, therefore, I had called out specifically that now that there's been a base reset in terms of consolidation of the ibibo group and our spend strategy across the brands in the MakeMyTrip portfolio, which is MakeMyTrip, ibibo as well as redBus, you should see similar efficiency gains keep coming in on an annualized basis here onward. And from a slightly medium to long-term point of view, while we're currently at about near 12% to gross bookings in terms of marketing and sales promotion spend, we expect to kind of halve these or get down to close to about the 6% level over the next three to five years. Now, the speed at which this will happen would again kind of be linked to market realities and competitive situation that prevails. Clearly, the focus is more on driving growth and then kind of driving profitability. So, that is the directional color that I could give you at the current stage.

That’s good enough, Mohit. Thank you so much. That’s it from my side.

Thanks, Shaleen.

And our next question comes from Ashwin Mehta from Nomura. Your line is open.

Yeah, thanks for the opportunity. I had one question on the pro forma numbers for your standalone hotel room nights. They have grown at around 36% YoY, which seems to be lower than what you've been historically doing. Is it possibly because you are starting to de-focus on that quartile four of your customers who have been much more price conscious?

Couple of things over there, Ashwin. As I said, often looking at it in a quarter in isolation may not be reflective of the trend, while it's about a 35%, 36% growth on a Y-on-Y basis. The other way to look at it is it's also a similar kind of growth on a quarter-on-quarter basis. And that kind of gives us equally a good amount of confidence that across the brands we've now built in enough complementarity in terms of being able to drive growth across price segments and across customer segments.

Okay. Okay. And secondly, in terms of promotions, did I get that right that essentially there is some shift in terms of promotions from standalone hotels towards international hotels, international air and bus ticketing

Yes. That is something that we've been calling out that apart from domestic hotels, we do see significant headroom and significant opportunity on the outbound business, whether it is international hotels or international air ticketing. And therefore, this kind of decline, a little bit of marketing and sales promotion strategy in driving online penetration in these segments as well.

Okay. And one of the things that we've noticed is that Paytm is currently largely discounting on the air, train, bus booking side. They haven't started it on the hotel booking side. So, do you think there could be a change in strategy in terms of promotion in the hotels if Paytm starts to react on that side?

Yeah. I guess I alluded to it earlier. I think on hotel, the dimension is not just price. Or the weightage of the price dimension is much lower than on transportation options, particularly rail, bus and probably even low-cost carrier domestic flights. We have seen that. So, I was explaining the supply side criticality there. So, I think there's a lot more out there. And it has been attempted and I'm sure there will be again some customers who will move. But I think that's the area where most of our efforts are to ensure that customers who are valuing other considerations to a hotel purchase, we should be able to hold on to most of them. So, yes, that's what we can share at this point.

Okay. Thanks a lot. And all the best.

Thank you.

Thank you. And our final question comes from Arya Sen from Jefferies. Your line is open.

Hey, hi. Good evening, everyone. Firstly, if I could go back to the issue of margins, any outlook on near-term net revenue margin for H&P? Could it go up further from the 22% that you did this quarter? And similarly, on air ticketing, historically, you've been talking about those net revenue margins coming down to about 5%. Do you think now there could be a revision in the medium to long-term outlook on that?

Hi, Arya. Good questions. As far as the margins are concerned, in the respective segments, I've been calling this out, some part of the margin improvement does come in from the improved mix of hotels within the H&P overall segment for us, more so with the consolidation of the ibibo Group. And secondly, this has also been kind of a part of our high-growth strategy and high-promotion strategy, wherein we are kind of actively seeking participation from the hotels in terms of driving significant consumer-facing promotions and driving transaction growth and occupancy rates for the hotel partners as well. So, it's kind of an intertwined approach of promotion to the customers on one side and the margins from the hoteliers on the other side in terms of market-making. So, in the short term, I do expect that we should be able to hold on to broadly about the current level of margins, plus or minus a percentage or two, in line with our current stated strategy of continuing to pursue high growth in transactions and revenues in this particular business. However, I have been calling this out, slightly longer-term out, as this segment sees significant online penetration in the high 30s or 40s, we do believe we should be getting or taking back our margins down to more competitive levels of 15% to 18%. Coming on to the air ticketing side, currently, in line with the low sales that have been prevailing in the industry for the last few quarters or the last couple of years, the margins particularly do look better at close to about 7%. But we do kind of believe, at least in the short term, the margin should kind of hold between the 6% to 7% range, but slightly longer term, through the next three to five years, we do kind of factor in these getting closer to the 5% range.

Understood. Secondly, is it possible – because you've shared the pro forma growth in transactions, is it possible to share the pro forma growth in gross booking and net revenue for the two segments? I think we have not kind of submitted the pro forma financials for the full fiscal of 2017. And by the end of this fiscal, we should be presenting the growth on a pro forma basis as well. But on a quarterly basis, we will stick to kind of presenting numbers on a reported basis.

Understood. And lastly, the $9 million of adjustment that you've done in the net revenue, just wanted to understand since you've not adjusted last year's numbers, so is it entirely to do with ibibo and what's exactly the nature of these promotions that you are adjusting separately?

No, these are some kind of – while these do currently come in more on account of the consolidation of the ibibo Group. But on – and there is no similar adjustment required in the previous years. But these are largely extensive in the nature of promotions, which from an IFRS accounting point of view have been netted off from revenue. And the whole purpose, as we had called out, if you would recollect, when we had kind of restated our numbers in terms of the way we classify them and report them on non-IFRS basis was essentially to reflect the right margins in the businesses, along with the right kind of promotional spends that we are incurring. And therefore, this is more a reclassification done, so that we can bring out the real margins being made on the revenue side and the significant amount of promotional expense that are being made on the sales and marketing side.

And would you need this sort of an adjustment on full-year basis for FY 2017 in the pro forma? I don't seem to recall this adjustment in the full year pro forma.

So, the pro forma has already been kind of published, basis any adjustments that were required both on the revenue as well as the sales promotion side. That was one of the key adjustments that was made when we put out the full fiscal 2017 consolidated pro forma.

Understood. So, the pro forma corresponds to the net revenue of $141 million this quarter rather than the $132 million or $130 million?

Absolutely, absolutely.

That’s all from my side. Thank you so much. Thank you.

Most welcome.

And ladies and gentlemen, that does conclude the program for today's call. You may all disconnect. And, everyone, have a great day.