Tongcheng Travel Holdings Ltd

HKEX:780

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Tongcheng Travel 2022 First Quarter Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would like to hand the conference over to your first speaker today, Kylie Yeung. Please go ahead.

[Kylie Yeung, executive]

Thank you. Good morning, and good evening, everyone. Welcome to Tongcheng Travel's 2022 first quarter conference call. I'm Kylie Yeung, Investor Relations Director of the company.

Joining us today on the conference call are our Executive Director and CEO, Mr. Hep Ma; our CFO, Mr. Julian Fan; and VP and Head of Capital Markets, Ms. Joyce Li.

For today's call, our management team will provide a review of the company's performance in the first quarter. Hep will walk us through the company's business performance for the past quarter, Joyce will discuss our operational highlights and then Julian will address the details of financial performance accordingly. We'll take your questions during the Q&A session that follow.

As always, our presentation contains forward-looking statements. Such statements are based on management's current expectations and current market operating conditions and relates to events that involve known and unknown risks, uncertainties and other factors, which may cause the company's actual results, performance or achievements to differ from those in the forward-looking statements.

This presentation also contains some unaudited non-IFRS financial measures. They should be considered in addition to, but not as necessity for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of non-IFRS measures, please refer to our disclosure documents in the IR section of our website.

Now let me introduce our CEO, Hep. Hep, please go ahead.

[Heping Ma, executive]

Thank you, Kylie. Good evening, everyone. Welcome to our earnings call for the first quarter of 2022. Entering 2022, COVID resurgence has been [indiscernible] the travel industry. The past quarter remained quite fluctuated, as the first half was relatively encouraging whereas the second half was fairly discouraging. In the first 2 months of the quarter, we saw strong rebound with demand for hometown visits and back to work being greatly released during and after Chinese New Year. However, the current trend took a drastic turn in March as Omicron raged through the country, leading to harsh travel restrictions nationwide and again struck the travel industry to a new shutoff.

[indiscernible] managed to deliver solid results for the first quarter, thanks to our resilient business model, strategic advantages in lower tier cities and flexible operating strategies. More prominently our user base continued to grow amid dramatic fluctuations with 12-month paying users climbed to a new high of 206 million by the end of March.

Our accommodation business, which serves as a growth driver for the company, demonstrated its resilience amidst uncertainties caused by widespread outbreak of Omicron in March. With room nights sold in lower-tier cities continuously surpassing the pre-COVID level and registering more than 10% year-over-year growth for the quarter. Over the past quarter, we stayed focused on lower-tier cities and further established our presence in this [indiscernible] market by leveraging our in-depth consumer insights. We're further starting to users' underlying needs and act quickly to seize this demand at various scenarios. Cross-sell continued to play a key role in driving the growth of the segment as more precise efforts were made to market our hotel products and services to users from train and air ticketing businesses.

For our offline user acquisition initiative, we have adjusted our operational strategy since the fourth quarter of 2021 and placed greater importance on efficiency and user value. Besides efforts have been stepped up to develop value-added products and services to better serve users' needs during their stay at hotels, as well as more marketing tools to help small and medium hotels with more effective access to users on our platform.

Our transportation business, though materially impacted by the nationwide resurgence of virus in March, maintained reliable recovery in the first quarter, supported by impressive growth in January and February. As for our air ticketing business, we continued to enhance our market presence across the country. While strengthening our market positioning in strategically advantageous regions, we also tapped into target regions in lower-tier cities and established foothold in this market. On the other hand, consistent efforts were made to diversify our user base through in-depth study of population demographics.

With respect to our train ticketing business, we remained focused on enriching value-added products and services to provide users with easy access to travel and with convenience along their journey. Our Huixing System, [indiscernible] at the center of our intelligent transportation architecture, continued to play a vital role in satisfying users' travel demand, especially when there is no available tickets or routes. In the following quarter, more efforts will be made to integrate air ticketing service into the intelligent assistant to better serve users' needs while enhancing traffic efficiency. Moreover, with our organizational change through which all transportation ticketing services was consolidated into one business group, we made continuous efforts to enhance our operational efficiency. The consolidation has further facilitated cross-selling from train tickets to other product lines such as air tickets and car-hailing. That's better utilizing the tremendous traffic volume generated by the train ticketing business.

Our bus ticketing business, an effective instrument for the company to grow user base, maintained its prominent growth during the last quarter, even under the shadow of widespread risk offerings of COVID. Throughout the quarter, we further enhanced our geographic coverage across the countries through the rollout of smart ticketing equipment and the strategic cooperating with urban and rural bus operator. As of the end of March, we have around 14,000 smart ticketing equipment installed in almost all cities in Mainland China.

Meanwhile we continue to penetrate counties and towns by extending cooperating with urban and rural bus operators, which contributed [indiscernible] to the growth of the business. As such, the business volume witnessed more than 170% growth in the first quarter when compared with the same period in 2021. Also efforts were initiated to study users' consumption behaviors and preferences set in the past quarter and more efforts will be made in the following to dig deeper into users' underlying needs, thus gradually enhancing user value.

Entering the second quarter of the year, China is experiencing the worst ever COVID resurgence since the first quarter of 2020, bringing the travel activities to a sudden stop with restrictions imposed. Although our business remains resilient amid uncertainties, we are still inevitably impacted to a greater extent given that the core industry is fundamentally halt while taking for external opportunities amid certain adversity. We have also placed more importance on our daily operations and corporate organization, aiming for more optimized organizational structure and higher efficiency.

On the other side, we have implemented stringent cost control internally and proactively adjusted our marketing strategy based on external change to better control our expenses. We will continue to build up our core strengths with regards to organizational capability, production capability and brand influence to get better compared for the market recovery. In the short run, the uncertainties will continue and the road to recovery remains bumpy and uneven. However, for the [indiscernible], as I have reiterated many times, we stand firm on the upward trend of China's travel industry.

With that, I will hand over the call to Joyce. She will walk you through our operational highlights for the first quarter. Joyce, please?

[Joyce Li, executive]

Thank you, Hep. The widespread surge of Omicron early March did put a break on the robust recovery in the first 2 months of the past quarter, and again, was heavily on the domestic travel industry. As a veteran in the industry, we acted swiftly and adjusted our operational strategy to address external challenges. As always, we managed to deliver solid results for the quarter.

Over the last quarter, we continued to seek deeper cooperation with Tencent on multiple fronts. We were entitled to a popular IP right by Tencent and launched an eSports event for the second year, aiming to establish effective interaction with the younger users. During the quarter, we also increased our advertising placement within Tencent ecosystem to further reach out to the extensive user in the ecosystem and build up our brand influence there. We joined hands with Tencent Video to have our brand highly exposed in a series of TV programs, including a big budget travel documentary. Besides we continued to push ahead with our cooperation with QQ Music, QQ Browser, Weixin Search portal and Weixin Video Accounts.

On the other side, we made continuous efforts to diversify our traffic sources. Apart from Tencent, we're also working with China's major handset vendors and a short-video platform to have higher branding exposure to Tongcheng users. We had in-depth sharing of membership benefits with several handset vendors. We also launched [indiscernible] short-video platform to better cater to their preference and the needs. Besides more efforts were invested in our app to optimize user experience and enhance user action by integrating content on our platform.

Moreover offline user acquisition initiative continued to play a crucial role in acquiring new users for the company, as well as facilitating our penetration to lower-tier cities. During the first quarter, we continuously rolled out smart bus ticketing equipment across the country, while bringing more urban and rural bus operators onboard to help us further penetrate counties and the towns, with scanning codes on buses.

In the last quarter, we also steadily pushed forward with our branding strategy, aiming to build app and unique travel platform that understands younger users. We appointed Z-generation actress as our new brand ambassador to build up our brand recognition and influence. At the same time, we used Z-generation languages and style in our advertisements to build closer bonds with the younger users and occupy a distinct place in their minds. Besides to echo our lower-tier strategy, we rolled out massive ad placement on buses in Tier 3 and below cities to build a stronger presence there.

Moreover, our paid membership program continued to grow rapidly with a cumulative amount of Black Whale members approaching 13 million as of the end of March. Of the quarter, we further enriched membership privileges and brought more partners on board to better fulfill users' needs, as well as enhancing users' engagement. Last year we successfully tapped into a substantial student market with our customized campus card, which offers students with extensive travel benefits. To further cultivate the market, we joined hands with an e-commerce platform recently and shared comprehensive membership benefits tailor-made for students.

With aforementioned efforts, our average MAUs continue to grow in spite of the huge fluctuations caused by the recent surge of Omicron, reaching 244.8 million for the first quarter with a year-over-year growth of 4.5%. Our MPUs for the quarter maintained robust growth and achieved a year-over-year growth of 16.1%, at [ 71.7 million ], thanks to our stable traffic, our Weixin channels, customer-oriented product services as well as our effective offline user acquisition initiative. Our paying ratio also increased 13% for the first quarter of 2022, and exceeded ratio of 11.6% in the same period in 2019. More meaningfully, our 12-month paying users continue to expand as set new record of almost 206 million as of the end of March, representing a robust growth of 22% when compared with same period in 2021.

As an innovation-driven leader in the industry, we are committed to transforming from an OTA to an ITA. We consistently invest in technology and proactively adopt technological innovation to enhance not only our internal efficiency, but also to build a more efficient travel ecosystem. Our intelligent Huixing system, which offers travel combos based on users' preference and needs, continue to play a key role in satisfying users travel demand, especially when their supply shortage. With advance algorithm and the complex suppliers, it could also help the national transport network from more efficiently. Moreover, we have adopted more smart technologies in our customer service to earn high efficiency while accounting customer satisfaction. On the other hand, we are devoted to empowering our partners business about our technology and internet expertise.

In the past quarter, we have established a strategic partnership with Henan Province Airport Group to facilitate its digitalization. We will not only help the group build its information platform, but will also help attract passengers for its Zhengzhou airport through our product and market innovation. In addition, our Hotel SaaS solutions continue to help individual small and medium chin hotels run more efficiently in their daily operations. We have also continued to the digitalization of the traditional bus industry through nationwide rollout of ticketing system and smart ticketing equipment with our efficient operations. At social enterprise, we deeply understand the importance of social responsibility for the sustainable development of our company and proactively take part in social charity activities. We're established to make use of our industry expertise and Internet technology to contribute to areas such as rural revitalization, property elevation and industry recovery.

Lately, we launched a service of 3 online professional courses concerning industry knowledge, hotel operation and marketing methodologies to help individual and small chain hotels better cope with the difficulties posted by the COVID, which have received a widespread recognition from hotel professionals. In the following quarters, we'll continue to help industry partners sell through difficulties.

Meanwhile, we joined hands with the Tencent to encourage people to participate and donate in a charity activity that will set to help rebuild a flagship village in Henan Province. On the other side, we volunteered to help disseminate COVID with prevention policy in Suzhou City with our AR powered automated calling system, which greatly enhances the efficiency of information institution, with there no efforts to contribute to better society.

With this, I'll turn over the call to our CFO, Julian, who will walk you through our detailed financial results in the first quarter of the year. Julian, please go ahead.

[Lei Fan, executive]

Thank you, Joyce. Good evening, everyone. For the first quarter of 2022, we reported net revenue of RMB 1.7 billion, representing a 6.5% year-over-year increase from the same period of 2021 or a 3.7% year-over-year decrease from the same period of 2019.

We had a very good start in the beginning of the year, as Hep ad Joyce mentioned. However, since the early March, the Omicron variant rampaged through the country and again shipped the travel industry, which caused a negative impact on our business as well. Benefiting from the improvement of operational efficiency and the prompt scale back of sales and marketing investment in March, we achieved RMB 245 million adjusted net profit, with a 14.3% net margin compared with 13.6% in quarter 4 2021, and 18.5% in quarter 1 2021.

We booked RMB 32.4 billion GMV in the first quarter of 2022 with a 3% year-over-year decrease compared with the same quarter of 2021 or a 10% decrease compared with 2019, mainly because the ADR and ATV were dragged down by the COVID headwind in this quarter, while partly being offset by the significant demand release from hometown visits and back to work during and after the Chinese New Year.

Our accommodation reservation revenue achieved RMB 543 million for the first quarter of 2022, representing an 18% increase compared with 2021 or an 11% increase compared with the same quarter of 2019. The growth was mainly driven by the solid room nights growth, especially in lower-tier cities, while partially eroded by ADR decrease as a result of the temporary headwinds faced by the hotel industry as well as the increased room nights contribution from lower-tier cities.

If we compare with the same quarter of 2021, our domestic room nights growth in the whole quarter still booked a 5% growth, supported by the short-haul traveling and local consumption during Chinese New Year, in particular, since June 9 grew over 10% in lower-tier cities for the whole quarter. The take rate continuously increased compared with that of 2021 and 2019 as a result of cut down in company level in March and the increase of VEF contribution and accommodation segment. Transportation ticketing revenue for the first quarter of 2022 was RMB 1,017 million, representing a 1% decrease compared with 2021 or a 19% decrease compared with the same period in 2019.

The pent-up demand for traveling released significantly during and right after Chinese New Year while suddenly slowing after restrictions imposed in Shenzhen and Shanghai in early March, which caused a year-over-year shrink in air and train ticket volumes for the whole quarter. But ticket volumes via book over 170% growth compared with the same quarter of 2021 and contributed more revenue to transportation segment. Blended rate for transportation business in the past quarter further improved year-over-year, mainly because travelers were more willing to purchase insurance and other VAS driven by user safety concern and supply and shortage.

Other business revenue was RMB 158 million in this quarter, representing a 20% increase from the same period of 2021 or a 347% increase versus 2019, mainly driven by the big success in our Black Whale membership program expansion, PMS business and advertisement business development. We are looking forward to further monetization and contribution from new products and services in the following quarters.

Gross margin was 72.5% for the first quarter of 2022, decreased from 74.7% for the same period in 2021 and 74.6% for the previous quarter. The temporary drop for the gross margin in quarter 1 was mainly due to call center burdens arising from the huge amount of cancellation and reschedule inquiries since the beginning of March.

In the first quarter of 2022, our adjusted EBITDA achieved RMB 438.4 million, with margin increased to 25.5% from 22.8% quarter-over-quarter and decreased from 26.0% year-over-year. Adjusted net profit achieved RMB 245 million, with margins increased to 14.3% from 13.6% quarter-over-quarter and decreased from 18.5% year-over-year.

Service development and administrative expenses in the first quarter of 2022 increased by 30% from the same period of last year, mainly due to an increase in [ FPC ] spending. Excluding share-based compensation charges, service development and administrative expenses in total accounted flow 26.8% of revenue in the first quarter of 2022 compared with 22.7% of revenue in the same period of 2021 and 25.7% in previous quarter. The temporary increase year-over-year, excluding share-based compensation, was mainly because we hired more employees in production R&D for new products and service development since the third quarter of last year to further optimize staff composition.

Selling and marketing expenses in the first quarter of 2022 was nearly flat compared with the same period of 2021. During this quarter, we strategically increased investments in marketing campaigns to see the recovery opportunities during and after Chinese New Year. Meanwhile, we closely monitor the market and hold a situation to make the marketing investment more effective, aiming for better ROI. So in early March, we promptly turned to cost-saving mode and reduced most of our marketing investments to cope with the drastic headwinds and challenges facing the industry.

Excluding share-based compensation charges, selling and marketing expenses accounted for 36.5% of revenue in the first quarter of 2022 compared with 37.9% of revenue in the same period of 2021 and 39.4% of revenue in previous quarters. As of March 31, 2022, the balance of cash, cash equivalents, restricted cash and short-term investments was RMB 6.6 billion.

Lastly, let's turn to our expectations for the second quarter of 2022. The macro condition and the whole travel industry as well have been deteriorating since April and the situation has been even worse than 2 years ago. First tier cities were severely impacted by the lockdown policy, and stricter restrictions were imposed a wide spread, which fundamentally hampered nationwide mobility.

Based on what we observed, we are now expecting our revenue in the second quarter to decrease by 40% to 45% compared with the same quarter of 2021. And our adjusted net profit is expected to be in the range of RMB 50 million to RMB 100 million. This forecast reflects our current and preliminary view, which is subject to changes.

As we emphasized before, after 2 years of cultivation and preparation, the company is now in the best position to capture the post-COVID recovery opportunities, and we'll continue to outperform the market no matter what challenge we will encounter. Now facing challenges for the short run, we believe the demand for travel remains resilient and unreduced, which have been demonstrated in the past quarters and will rebound strongly as soon as restrictions are relaxed. We are optimistic that recovery will be on track soon.

Operator, we are ready to take questions now. Thank you.

[Operator]

[Operator Instructions] The first question comes from Alex Poon from Morgan Stanley.

[Chun Poon, analyst]

My first question is, can management share our strategies to maintain market share or even grow market share during this difficult time and also the post-COVID recovery? This is the first question. The second question is because of Tier 1 cities are in very tough situation right now, how is outperformance in lower-tier cities in second quarter so far?

[Lei Fan, executive]

Okay. I think we can answer 2 questions like this. First Joyce will give you some color on the performance -- latest performance in the market, especially in the lower-tier city market. And then I will try to answer the first question about the strategy to maintain the market share during the tough condition. Joyce, please?

[Joyce Li, executive]

Thank you, Alex, thank you for the question. I think everyone in the market are very concerned about the latest market situation and performance recently as the -- this round of COVID resurgence, we can have a Tier 1 after another in areas such as Shenzhen, now Shanghai and Beijing. We can see that many regions are still experiment -- experiencing the resurgence of COVID cases right now. So in generally, we can see that government's strictest measures and travel restrictions are still in place. So that's why we say the travel industry is severely impacted.

We can tell on the travel demand in terms of the air and railway passenger number in the recent May Labor Day holiday, have been down by nearly 17% to 80% and where compared to the same period of 2019 or even compared with 2021. Although it has been slightly better than the numbers in Chinese festival, as to the market in the first half of the second quarter was even worse than situation in the same period of 2020.

However, as we also mentioned, in terms of the impact to the company in April and May, we observed that the business in the low-tier cities, localization and short-haul consumptions are less impacted compared with the business in high-tier cities where they were still tightly locked down as well as the long-haul travel and business travel were severely impacted. As a result, our accommodation room nights, bus ticketing and car-hailing are still tenacious than air and train business.

And one thing that I would like to mention is that some regions are less impacted by the pandemic, and our business in this area has been relatively stable. For example, the Southwestern region and [ central Chongqing ], where we have a strong market position. And since early May, other than Shanghai and Beijing, COVID-19 was relatively well controlled in other cities, and we observed a step-by-step recovery in Guangzhou, Shenzhen and South wide region for the transportation business and the central and coastal regions for accommodation business. So we expect a better June performance than April and May.

While some areas have ended or losing the mobility restrictions, these measures and the uncertainties of opening continue to present a meaningful headwind in the short run. However, we think the demand expression will be short and temporary, and we're confident that the result will continue as what we observed during this Chinese New Year once the restrictions was relaxed.

[Lei Fan, executive]

In terms of the -- actually the near-term strategy that the company to deal with the tough market condition -- actually, the first -- the most important thing is to protect our margins in this quarter and next quarter. So we immediately implemented the cost control measures to respond to the difficult market situation as we did each time in the past 2 years. So we have proactively adjusted our marketing strategy based on the external changes to better control our expenses. And also, we carried out internal cost control measures to reduce our variable cost as well.

Moreover, we are -- at this moment, we place more emphasis on our daily operations and corporate organization so as to achieve more optimized organizational structure and higher internal efficiency. Of course, at the same time, we also closely monitor the market situation and try to actively dig more business opportunities that meet short-term adversity. For example, we noticed that some of our targeted and advantageous markets, just like Joyce mentioned, such as the Southwestern regions are less impacted by the pandemic. So we continue to explore business potentials and strive to expand our market share in those markets. And also, we're aware that some business segments, such as the 2B business like advertising business, and hotels staff solutions, the PMS, as well as bus ticketing are quite stable during this period, so we have made increased efforts to expand our business in those segments.

And also, we understand that and believe in the economic vitality of the lower-tier cities market. So we continue to study the market and conduct in-depth research on lower-tier cities on a large scale so as to grab more business opportunities and get better prepared for the market recovery. Actually, I think in May, in recent 2 weeks, our business team and product and research team visited 30 through 40 lower-tier cities to conduct the first hand market research and dig out more business opportunities. This research allows us to clearly see the immense potential and better understand the lower-tier cities market, which will benefit the company to further develop suitable products and services for our users in the future.

Yes. Just like we mentioned, while the uncertainties will continue in the short run, but we still stand firm on the upward trend of China's travel industry in the long run and continue to fortify our core competition regarding our organizational capacity, projected capability and brand influence for our long-term sustainable growth.

[Operator]

Your next question comes from Brian Gong from Citigroup Inc.

[Brian Gong, analyst]

I have 2 questions. The first one is with worsening macro, given the spread of Omicron and those strict measures by governments and how does management see recovery pace after related to resurgence under control, do you see what macro could impact people's traveling spending?

And my second question is, how does management see the recovery pace in the second half? I know the visibility is quite low right now. So can management talk about either good case, what could the revenue and profit be? And in the worst case, just like this quarter, revenue and the profit be?

[Lei Fan, executive]

I will give you some color on the recovery pace after the latest resurgence under control. Actually, we can see that the market is still very fluctuating and the user booking window became extremely short after COVID. So with the uncertainties growth by the resurgence of the COVID cases, actually, it is extremely difficult for us to give a full year guidance or full year outlook at this moment. But anyway, from our results in the past 2 years, it is very clear that we are able to recover faster than the industry and outperform other players as well.

We actually feel confidence in the recovery of the travel market and our performance in the second half of 2022. Although we cannot give you an exact guidance on the second half we are still very confident on the recovery, as the travel demand rebounded quickly every time once the COVID situation was under control in the past 2 years. For example, we experienced an extreme rebound for the pent-up demand released during the national holiday in 2020, the second quarter of 2021 and the Chinese New Year of 2022. Each time, we set another historical record on our MAU, MPU and also APU.

And for -- to be more specific, I would like to give you some color for our each product line, how we catch the recovery trend in the second half of this year. For example, for air and train business, we have superior product offering and technological advantage. For example, our Huixing system, which can smartly offer the best available and suitable travel solution to our customers. What is more the VAS app of transportation work far more welcome than pre-COVID series such as consolidation insurance, the insurance of CP, the VIP launch and membership card in telco.

For our accommodation business, we have various channels to connect with our users. Some channel sources are mature and some channel sources are new and additional to our platform. For example, we have Huixing as our main battlefield, which is very stable with rapid growth. We upgraded [indiscernible] app recently as well to better serve different user groups. Our cross-selling initiatives from transportation to accommodation still have a lot of room to improve. Offline user acquisition in the hotel and incumbent scenario, especially in lower-tier cities, help accelerate the offline penetration and target user penetration.

Additionally, we are also developing new distribution channels to attract users in different scenarios such as [indiscernible]. The last, but more importantly, we have already -- ever said a lot of times, we will persist in our one-stop shop strategy to offer more VAS in the whole process of our accommodation business, which continued to show a strong growth potential until the past quarter. The VAS contributed more than 12% of accommodation revenue right now. For those businesses that help the company largely acquiring new users, such as bus ticketing, car-hailing and service and train ticketing business, there are still plenty of face to further cultivate, so we will keep investing marketing dollars and target a higher growth in the second half of the year. But meanwhile, we will tightly monitor the monetization and ROI for a UE improvement.

Leveraging -- also leveraging the future traffic sources, the superior technology and industry knowledge, we will also explore more opportunities to better serve our supply and strive for more revenue contributions on those areas. This business includes advertisement, PMS and hotel management, as we mentioned. And hotel smart [indiscernible] for industry digitalization. Meanwhile, we will continue to expand our Black Whale membership coverage to drive user loyalty and purchase frequency. So we are still very optimistic on the top line growth when the situation will be better because our business foundation and potential are so strong.

In terms of the people traveling spending, actually, we do think people will spend that. For example, in the past Chinese New Year, we are very encouraged on the pent-up demand release and the total market recovery. For example, in January and February, the growth and recovery of the company for each product line is so strong. We achieved more than 20% growth for accommodation room nights and also 15% growth for air tickets and more than 200% growth bus ticket compared with 2021 in January and February. So we think once the restriction is relaxed, we think people will back to the travel industry as they will start to travel to do their business traveling and the natural traveling as well.

And in terms of your second question, could you please repeat it? I cannot remember your second question.

[Brian Gong, analyst]

Yes. Actually, you can answer the second question. My second question was the outlook for the second half, what could the revenue and the profit be under the good case or the worst case, respectively. In the worst case, probably like this quarter.

[Lei Fan, executive]

Yes. Actually, we think the April and May already see the bottom. We do think the second half will be even worse than the situation in the second quarter. So we're still very optimistic on the recovery on the second half.

And in terms of the profitability, nowadays, we have a very lean operation structure -- operating cost structure. For example, in the first half -- in the first quarter of this year, we have already realized a $1.7 billion revenue scale. When we reach this kind of revenue scale, we can reach a 14% to 15% of the margin. So with the revenue scale improve or increase, we are very confident that the margin -- the net margin will be improved as well because some of the costs that are fixed or relative fixed as it will be scaled by the revenue increase.

[Operator]

We'll take the final question from the line of Thomas Chong from Jefferies.

[Thomas Chong, analyst]

I have 2 questions. So first, could you please share some color on the take rate trends for accommodation in top and the lower-tier cities?

And my second question is, how should we think about the trend in operating expenses going forward?

[Lei Fan, executive]

Okay. For the first question, in terms of the take rate, actually, the trends for top and lower-tier cities, the take rate trend is relatively the same. For accommodation, actually, our blended take rate in previous quarters improved step-by-step. And also in the past quarter, slightly increased as well when compared with the quarter 1 last year or the previous quarter because we reduced the subsidies to users in March and also the contribution of revenue from [indiscernible], VAS products and services increase, thanks to the effective implementation of our accommodation one stop shop strategy.

And going forward, actually, we are very confident that our blended take rate for accommodation, both in lower-tier city and high-tier city will have some -- still have some room to improve. That is mainly because our VAS revenue contribution is still ramp up in the past quarter -- in the past several quarters. I think in quarter 1, it still very little portion, it takes like 12%. So we are very confident that will contribute more in the future. For example, the advertisement in the hotel segment and also the other VAS or the shops inside the hotels, et cetera.

In terms of the operating expense trend, actually, there's 2 major parts. One is the sales and marketing dollars. Actually, the sales and marketing dollar is relatively variable. So it takes like 35% to 40% of our total revenue for each quarter and paydown our flexible management, we can very promptly adjust these parts. So it's more related to the revenue. And for the fixed spending, for example, the staff cost and some advertisement, the fixed amount is relatively stable quarter-to-quarter because we don't have a plan to increase our headcount in the future. So that is why, as I mentioned, it will be scaled down in the future and the expense rate as a revenue will step back that improve as the revenue scale normal.

[Operator]

At this time, I would now like to hand the call back to Kylie for any closing remarks.

[Kylie Yeung, executive]

Thank you. We are closing the call now. If you wish to check out our presentation and other financial information, please visit the IR section of the company's website. Thank you, and see you next quarter.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now all disconnect.