MakeMyTrip Ltd

NASDAQ:MMYT

Earnings Call Transcript 2020-Q1

[Operator]

Good day, ladies and gentlemen and welcome to the MakeMyTrip Limited Fiscal 2020 Q1 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to introduce your host for today’s conference, Mr. Jonathan Huang. You may begin.

[Jonathan Huang, IR]

Thank you. Greetings and welcome to MakeMyTrip Limited fiscal 2020 first quarter earnings call.

I would like to remind everyone that certain statements made on today's call are considered forward-looking statements within the meaning of the Safe Harbor provision of the US Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to inherent uncertainties and 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 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 23, 2019. Copies of these filings are available from the SEC or from the company's Investor Relations department.

Today, we are joined by Deep Kalra, MakeMyTrip's Founder, Chairman and Group CEO; Rajesh Magow, Co-Founder and CEO of India; and Mohit Kabra, MakeMyTrip's, Group CFO.

Now, let me turn the call over to Deep to begin today’s discussions.

[Deep Kalra, Founder, Chairman and CEO]

Thank you, Jon, and welcome everyone to our fiscal 2020 first quarter earnings call. As we complete the first fiscal quarter of 2020, I'd like to share that we continue to believe in the long term growth opportunities available to us in India’s large and attractive travel market. India’s rising Internet penetration, fast improving digital and payments ecosystem, coupled with a very young population is continuing to change consumers’ buying behavior towards convenient online platform, a trend that is expected to only go in one direction.

Our optimism for this growth opportunity is further underscored by a recent Goldman Sachs analyst report, which has forecasted that total online travel booking, excluding rail, will reach $33 billion by fiscal 2025.

During the first fiscal quarter of 2020, we did witness temporary softness in the domestic travel market, driven by a supply crunch caused by the shutdown of Jet Airways, a general slowdown in consumer spending, leading up to the May general election and a tightening of consumer credit. However, during this tough operating environment, we have been able to deliver results in line with our plan, while using this opportunity to further strengthen our competitive modes and accelerate online growth in under penetrated outbound travel segments, which includes international air ticketing and international hotels. We've also been successful in further narrowing our operating losses year-over-year, driven by a continued scaling up of business and improving marketing and promotional efficiencies.

As I shared last quarter, owing to the shutdown of Jet Airways, we expected domestic travel growth to be impacted in the first half of fiscal 2020, but anticipate a rebound in demand in the second half of the year when the lost seat capacity is expected to be largely restored by other carriers in the domestic air market. During the quarter, we were encouraged to see other airlines quickly replacing some of the lost capacity and avert of contraction in quarterly year-on-year growth for the industry.

Historically, the Indian domestic aviation industry has taken a couple of years to regain its higher growth rate from the shutdown of a large carrier, like Kingfisher Airlines. However, with most airlines being in expansion mode, we believe the domestic aviation industry should begin to normalize for the second half of this fiscal year.

In the meantime, as demonstrated in Q1, we will continue to make investments in our technology, product supply and brand to achieve continued robust long term growth with a focus on outbound travel. We will also continue to make investments in new growth opportunities within our domestic hotels and accommodations market to increase our share of consumers that prefer alternative accommodations and expand our client base within the corporate travel market.

Now, I'd like to share some of our achievements during the first quarter of fiscal 2020. In Q1, our team continued to promote and nurture our brand in order to target and drive awareness to new and existing online users. As a result of our comprehensive marketing strategy, we've been able to grow our transacting user base to 42 million live to date customers by the end of Q1, an increase of over 26% year-on-year.

In Q1, we engaged with several international tourism boards, including Indonesia, Singapore, Australia and Dubai to drive greater awareness of outbound travel for consumers. Additionally, during India's highly popular cricket season, we partnered with two IPL teams, the Kolkata Knight Riders and Royal Challengers Bangalore, along with Bollywood stars to help generate excitement and attraction for online bookings among young Indians. We also leveraged social media to connect with the younger net users in the country to drive greater awareness of our alternative accommodations offerings.

During Q1, our team also leveraged our multiple loyalty programs to drive greater stickiness to our platform. We now have nearly 11 million MMTBLACK enrollees and 106,000 Double Black members who are rewarding us with greater repeat rate and higher number of transactions than general users of our platform. In Q1, we extended our MMTBLACK programs to corporate consumers who are enrolled under the myBiz program, further incentivizing SME users to enroll in the self-service corporate program and increasing our cross all opportunities.

Similarly, for brand, Goibibo, our go rewards program has crossed over 2 million registered users, having rewarded by actively making our platform better. This program has been very popular with our Goibibo fan base, has more than one third of daily active users upon completing this reviews and context.

During this last year, we have launched activities and experiences for the domestic market in order to increase the frequency of our app usage. I’m pleased to announce that we have also expanded our offerings to activities and international destinations to cater to our growing base of outbound travelers. As we progress through this fiscal year, we plan on enhancing the shopping experience within this vertical to help users find and book an activity experience, which will drive even greater stickiness and more frequent engagement with our brands.

Lastly, I'd like to give you a quick update on our corporate travel strategy where we are leveraging online self-serve technology to empower and address the needs for business travelers from small organizations to large corporate. Our myBiz program, which is seamlessly integrated with our B2C mobile app is already addressing the underserved needs of over 7500 small and medium enterprises. Furthermore, our recent acquisition of Quest2Travel is aimed at meeting the demands of large corporate with an online end to end enterprise grade corporate travel solution. During Q1, as part of the pilot launch of this platform, our team has successfully signed up several large and well recognized corporates within India.

With that, I'd like to turn the call over to Rajesh.

[Rajesh Magow, Co-Founder and CEO, India]

Thanks, Deep and hello, everyone. I would like to begin by highlighting our various initiatives coming into fiscal year 2020, as we continue on our efforts to become the travel super air for Indian travelers. We now have comprehensive travel offerings prominently offered on our platforms like rail, intercity cab, airport transfers, activities and experiences, ancillary products like Visa and travel insurance besides our main product offerings of hotels and accommodations, air and bus.

We've also added additional useful travel information positive like flight and train status to our redesigned app home screen and we expect to introduce more relevant and useful features going forward this year. This should help us increase the stickiness on our platform. In the past few months, we've also been making investments to grow under penetrated travel segments, like outbound flights and hotels. These segment along with domestic accommodation pockets and bus are likely to be future growth drivers for us, as they are largely booked offline today.

Our focused investment and efforts have been helping us continue to expand our already strong market leadership position even as the overall domestic travel industry is experiencing a temporary slowdown in growth.

Now, I would like to share some quick highlights from our Q1 financial results and Mohit can share additional color on our results later. For Q1 of fiscal year 2020, the MakeMyTrip group achieved gross bookings of nearly $1.7 billion, representing a constant currency growth of over 24%. Our Q1 adjusted revenue grew by 21% on a constant currency basis to $198.5 million.

From a supply standpoint, we further expanded the choice and selection for customers to over 63,000 properties bookable within India, which now includes 16,500 alternative accommodations. During Q1, our ramped up efforts on alternative accommodation has resulted in strong new user growth for customers who prefer gate passes, parking, villa, which widens our customer reach.

As for our outbound hotel growth strategy, we now have directly contracted over 8000 international properties, which account for the majority of our international hotels booked in key destinations by our customers. Furthermore, growth from this segment has also been fairly robust.

Now, I would like to share a highlight from our ongoing product enhancement effort, inspired from customer insights and driven by tech innovation to deliver a best-in-class customer experience. As an example, our hotels and alternative accommodation content to date has been vastly improved on all platforms, powered by user generated and curated content, including videos and more accurate representation of location and amenities.

As shared on our last earnings call, we have been very encouraged by the growing amount of user generated content on our platform. During the quarter, we upgraded the MakeMyTrip UGC collection point to be more customer friendly and provided incentives to further drive collection. I'm also pleased to share that more than one-third of Goibibo users are providing us with content, including ratings, reviews and pictures, which is quite an achievement, since most domestic travelers are not known to share feedback post travel.

These ongoing efforts only serve to drive greater attention on our platform, and make the shopping experience even better for future users. Additionally, we have made the experience for suppliers even better by streamlining and simplifying the onboarding process of new partners. Our mobile supplier facing app has been upgraded to help partners set up properties, establish rates, allocate inventory and manage bookings easier.

Lastly, we have rolled out a heat map to empower suppliers to make informed pricing decisions based on real time demand queues. As for our flights order, we have an improved and friendlier user flow for purchase of ancillary products like advanced seat selection. We have also improved on customer messaging, regarding Visa requirements, mandatory web checking requirements and included other add-on ancillary products like meal and extra baggage, all helping to improve customer conversions and [indiscernible].

Our work on automation in phases, leveraging machine learning and AI also continue to gain traction. During Q1, our in-house ARN system [ph] was launched across all our call centers and today, 95% of our agents are using the system to resolve customer requests with much greater satisfaction. Our postpaid chatbot, Myra, has also greatly improved its natural language processing skills and is able to understand user type advances with 89% accuracy. It can also give intent options with a mechanism in place to reconfirm if the system is not very confident of its own predictions.

Similarly, for Gia, we have been working on to leverage the latest advancements in AI and natural language processing as well as to provide a better postpaid experience. A great example of Gia in action is in the way name change requests are handled of light customers. Prior to Gia, users had to spend a significant amount of time to get the seemingly simple task done. Now, through Gia, the request can be done in a matter of seconds. I'm pleased to share that the number of users coming directly to Gia has gone from being nearly 0 to 25% of all customers who have a post booking support need.

Furthermore, as travel continues to expand across India, we also wanted to leverage the nationwide digital payment push enabled by the government’s UPI framework and gain greater access to a wider audience. We continue to expand upon our already comprehensive payment option, which now include equal monthly installment plan or EMI, enabled by third party financial institutions. We’ve also rolled out multiple options, including pays closer to travel date, where we will automatically debit customers payment cards or automatically later.

Lastly, I would like to share some details on our bus business, led by the redBus giant. During Q1, redBus continued to achieve robust growth, despite the general slowdown during peak travel month of April and May, driven by ongoing shift from offline to online bus booking. During the quarter, bus operators also launched 900 more new destinations than the same period a year ago, which helped to widen our potential addressable audience.

In Q1, our team continued to lever the ongoing digitization efforts by various local governments and successfully integrated the Telangana State Road Transport Corporation on to our platform to distribute their inventory. On the product side, we’ve also introduced the redBus open ticket, which allows passenger to travel in any class of service for a given day, which helps to accelerate the shift towards online on short duration routes. Today, Indian metropolitan cities are facing the burden of increasing urbanization migration, and paralyzing vehicular traffic, especially in cities like Bangalore. In order to help ease congestion and drive greater carpooling, I'm pleased to announce that redBus has done a pilot launch of a carpooling app called, rPool. This new application is aimed at addressing the daily commuting of working professionals by encouraging pooling of rides to help decrease traffic congestion and air pollution over time.

Now, let me hand it over to Mohit who will share more details of the quarter.

[Mohit Kabra, CFO]

Thanks, Rajesh. Hello, everyone. We’re glad to report or 21% year-on-year constant currency growth in adjusted revenue, along with the reduction of losses from $32.8 million in Q1 of last fiscal year to $29.2 million in Q1 of this fiscal year, despite the short term operating challenges already highlighted by Deep and Rajesh. The 21% growth in adjusted revenue was largely led by volume growth, as blended net revenue margins have moderated slightly from 12% in Q1 of last year to 11.7% in this quarter.

With that, let me share financial highlights by business segment, beginning with the air ticketing business. Our year-on-year segment growth of 15.7% was largely driven by international air ticketing segment’s growth of over 41%, which also helped us register a 24.2% year-on-year constant currency growth and aided at getting adjusted revenues. In the hotels and packages business, the 12.1% adjusted revenue growth was driven by about 12% growth in total segment room night stayed and reflects the current slowdown in the domestic travel market.

Excluding our holiday packages products, [indiscernible] for standalone hotel bookings grew by about 14% year-on-year. As mentioned by Rajesh earlier, our international hotels business grew quite robustly during the quarter. However, given the very early stages of this business segment, its contribution will take some time to become a meaningful driver of the overall HSB unit growth.

Our bus ticketing business had continued to grow strongly during the quarter as well. Ticket business grew by roughly 41% to nearly 21 million bus tickets traveled during the previous quarter. The business also generated over $21.3 million in adjusted revenue during the quarter, a growth of 37% year-on-year in constant currency terms. Adjusted revenue from other revenue stood at about $10.7 million, majority of which was driven by facilitation piece for travel insurance, and ancillary revenue from our travel alliances and affiliate partnerships.

I would now like to share some details on our operating leverage, which was driven by the improving scale of our business and this even more efficient marketing and promotional expense. In the quarter, our total marketing and promotional expenses were $160.8 million, which stood at about 9.5% of our gross bookings compared to 10.5% in the previous year’s similar quarter. As a result, our adjusted operating losses stand at a negative of 1.7% of gross bookings compared to a negative of 2.3% of gross bookings in the same quarter last year.

With this, I'd like to thank you for joining this call and open up the call for Q&A. Operator please?

[Operator]

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

[Sachin Salgaonkar, Bank of America]

I have three question. First question is on air ticketing margin. Mohit, on a QoQ basis, it’s comes down. How should we look at it? I know directionally, you guys have indicated that the margin could go down. So is this a new normal and going forward, we should see a sort of steady level or slight decline from these levels.

[Mohit Kabra, CFO]

I think 1Q was expected to be [indiscernible] I think there is a little bit of a seasonality in terms of good versus travel, et cetera and also the fact that, post Jet going down, some amount of segment fee that used to come in from full service carriers like Jet also kind of goes away. So there is expected to be a release of compression in the overall margins as we continue and probably this trend could largely be kind of a separated focus of the year.

[Sachin Salgaonkar, Bank of America]

My second question is on the marketing and sales promotion. So is there any one-off in this quarter and I understand the seasonality factor again in 1Q, but how should we look at spending in this quarter and overall outlook going forward?

[Mohit Kabra, CFO]

So, in terms of overall marketing spend, really the one-off is just that you typically find that pretty much every year, Q1, the brand marketing spend is a little high. For the last few years, we've been leveraging the IPL franchise significantly, which has become extremely popular and the brand tends to be extremely high. So therefore, there are brand spend, specifically kind of incurred in the quarter one, which also has a lasting effect to the quarter, to the year. So, you could see, on a year on year basis, I think, the trending would largely continue to be on similar lines by the quarter like it has been in the past couple of years.

[Sachin Salgaonkar, Bank of America]

And so directionally, it should continue to be more like a 10% of GMV or sort of go down, right?

[Mohit Kabra, CFO]

Actually kind of, of course, the target is that we kind of take it down further, it’s kind of moved down to about 9.5% of gross booking in the fourth quarter, we would definitely want to kind of take it below the 9% level in the coming quarters. And longer term probably, closer to 8%, 8.5%.

[Sachin Salgaonkar, Bank of America]

And lastly, I do understand Jet impacting and you guys have said first off a slow and things improve. On the ground, generally, if we’re seeing in some of the other consumer sector, like autos, et cetera, we are seeing a bit of an impact on overall consumption slow down. So big picture, any thoughts on how should we look at it? Do you still expect a recovery going into second half, as and how the Jet impact more or less goes below? Or this consumer sentiment has a risk of disappointing a bit?

[Deep Kalra, Founder, Chairman and CEO]

Yeah, no. I think it's a fair question. Sachin, this is Deep. I think, we have seen that in travel, market has been fairly resilient, because the outbound market is quite indicative of the fact that people continue to travel. I think what's happening is, a lot of people are just switching [indiscernible] large, durable expenditures, so whether it's automobile or others now. Maybe the renting, but pretending to spend a lot more on themselves, especially the youth, we’re seeing eating out, going out and traveling, being something, which is still growing. So we do believe that from a secular basis, these to remain strong. We have some headwinds right now, which are short term, like I called out, in nature. We think the second half of the year should bounce back. And if we just look at some of the other travel markets, particularly on the international side, we feel quite enthused that there's a lot right now, which is yet to come in this segment.

[Operator]

And our next question comes from [indiscernible].

[Unidentified Analyst]

Hi, good evening. Thank you for taking my questions. First question, just again on the hotel growth, which saw slowdown in this particular quarter. Now, from a growth standpoint, definitely, the consumer sentiment in general has been weak. But if you were to try to bifurcate this growth slowdown between the Jet impact plus, in general, consumer slowdown, how would you classify this slowdown in these two buckets? What has led to how much? And again, in terms of recovery, you called out second half of this fiscal year to start improving. In the past, you've grown at north of 20% kind of a growth, is that the kind of growth that you expect that should read in this segment by second half of this fiscal year technology or is that still sometime away?

[Rajesh Magow, Co-Founder and CEO, India]

So let's maybe talk about the recovery piece first. Let me give you some more color on it, as we see it right now, I mean, all things considered obviously, as of now. One of the reasons that, as you also mentioned, was Jet going down, right and the implication of that was that there was a supply crunch, and then the supply crunch happened on the flying side, then the fares go up. So, that was the main reason.

So why [indiscernible] growth should come back is that the supply is going to come back, given the fact that we definitely know and we've been actually very pleasantly surprised by the progress in the last quarter, and in terms of how the other airlines have been able to just quickly kind of see the opportunity and ramping up the supply lead by IndiGo and SpiceJet and it would be quite evident from the results that you would have seen earlier for IndiGo and SpiceJet, and due to an extent from [indiscernible] as well.

So, as the supply comes back, so, there will be an actual correction on the growth that was happened. And as the growth comes back, then naturally the hotel and accommodation growth is likely, at least, part of it is likely to come back as well.

I guess the other part to which is a little bit open at this point in time, which is about the overall consumer spend sentiment. As Deep was mentioning earlier, I think at least the way we see it, while there would be definitely some kind of a slowdown on the discretionary spend, but at the same time, we do see definitely consumer behavior changing in terms of spending on themselves a lot more than ever before.

So, I get optimistic and positive that from a travel segment standpoint, a combination of these two factors improving in the second half of the fiscal, we should definitely see, relatively speaking to the first half of the fiscal, a growth trend.

Now, in terms of your first question, to be honest, very hard to quantify that and split, right, how much is it because of Jet and how much of it because of overall consumer sentiment. I think, you should just look at it the combination of the two, and we have not, to be honest looked at it by splitting between the two, because we do have certain segments, which have been actually growing at a very healthy growth rate as well. And that has been for outbound segment. And large part of that is driven by the offline to online momentum. But it is also a function of people kind of aspiring to travel overseas as well. So I won’t kind of get into just breaking the or quantifying the actual numbers, because of these two reasons. And, we should just take it like more as an overall number, overall number and the reason that the combination of business.

[Unidentified Analyst]

A couple of just quick questions for Mohit. I think, one, just in terms of the cash balance or the net cash balance in the quarter. I just noticed that it saw a sharp sequential decline, am I looking at it correctly? Is there anything there?

And just second question in terms of the breakeven target, I mean, if you could just again, let us know as to when do you think from an EBITDA or adjusted EBIT standpoint, when do we think we should get to breakeven, should it still be some time in the middle of end of fiscal ’20, early fiscal ‘21? How are you thinking about that?

[Mohit Kabra, CFO]

On the calculation, apart from the operating cash flow [indiscernible] $25 million. This quarter, we had also reported certain investment in a corporate level space called Quest2Travel. So, there's been some -- a deployment on the investing side as well. So the overall cash position now is therefore factoring in the investment made in the corporate travel business and some other investments as well. So, it's a combination of the two.

Longer term, I think I was just -- like we have been saying, I think what we are kind of targeting is clearly more like a year-on-year improvement, pretty much trying to kind of do that every quarter and if you see the trending for the last probably five or six quarters or seven quarters, you would see that year-on-year, the operating losses have kind of narrowed by the quarter. That is what we’re kind of targeting.

Now, kind of whether it takes us to kind of an operating breakeven in the next year or sometime later this year, it’s difficult to call that out. It's also dependent on so many market factors like the whole, maybe a bit of a slowdown that has kind of, but that wasn't budgeted earlier, but kind of got -- it kind of came into play in the first half of this year. So I think we'll get a bit of handle of it, maybe by the second half of the year, when we expect growth to bounce back a little bit. So probably, we'll be able to share more color by then.

[Operator]

[Operator Instructions] And our next question comes from Parag Gupta with Morgan Stanley.

[Parag Gupta, Morgan Stanley]

Hi. So I just wanted to check on two things. So one is, first, to get the easy one out here, are other operating expenses seem to have gone up quite a bit this quarter relative to the previous quarter. What is this on account of? I know that this probably includes payment gateway charges and other OpEx. So if you could just give us some sense on that.

And the second is, you've been making investments in outbound, both air, hotels and in local experiences, could you just give us some sense of what are those kind of investments that you're making in? Are those increasing similar levels as previous year or are they accelerating?

[Deep Kalra, Founder, Chairman and CEO]

Sure, Parag. Maybe, I can take the first one to begin with. On the other operating expenses, largely more like incremental expenses coming in on account of one, I would say, the annual merit increase or the annual kind of inflationary increase that comes across, whether on people cost and some part of it because the call center related kind of content in the SG&A costs as well. So some portion of it is coming as part of that in SG&A, but otherwise, largely the payment is because we have increased or in line with the increase in the gross bookings as well. So, you see almost like a 24% increase in gross bookings and that gets reflected pretty much in terms of the payments, because as a percentage of gross bookings are largely remaining same. So these are more like absolute dollars going up, because, a large part of it kind of remains variable. So that's where we are on this one.

I thought the other question was more on in terms of investment on outbound?

[Parag Gupta, Morgan Stanley]

Outbound and local events and activities. Yeah. Just wanted to understand what are those investments are those accelerating versus what you've been doing? Or are they more or less in line with what you've been doing in the last few quarters?

[Rajesh Magow, Co-Founder and CEO, India]

Yeah, this is Rajesh. Let me take this, I would say largely in line. I will say that, the investments we have accelerated in a big way. What I meant was that the last few months, we've been actually netting behind, and when we invest behind any new segment, it actually creates 60 degree, which includes a lot of the work that goes into product enhancement, a lot of the work that goes into supply side, in creating awareness in the marketplace, you know, shipping those product outs and building the technology and so on. So, for the outbound segment, we've been, actually, for a few quarters, we've been kind of in the brief space and slowly and gradually we’ve been just gaining the momentum now.

As far as activities and experiences are concerned, for the last couple of quarters, we did a soft launch, we had to do some investment to build the technology platform, which is essentially a few people, our engineers getting together and product folks getting together and kind of building the product. Again, it's not necessarily significantly different from a normal course of business. So, I want the – overall, I wouldn't say that there is any serious acceleration on that front. It’s just -- over the years, over the quarters, rather, it has been an ongoing area of investment, which is kind of bearing fruit now.

[Operator]

Ladies and gentlemen, that now ends our Q&A portion of today’s conference. I would now turn the call back over to Jonathan Huang for any closing remarks.

[Jonathan Huang, IR]

I would like to thank everybody for joining our call this morning. We certainly look forward to speaking with each and every one of you shortly soon. Thank you.

[Operator]

Ladies and gentlemen, thank you for attending today’s conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.