Autohome Inc

NYSE:ATHM

Earnings Call Transcript 2019-Q2

[Operator]

Thank you for standing by for Autohome’s Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. If you have any objections, you may disconnect at this time.

It is now my pleasure to introduce your host, Anita Chen, Autohome’s IR Director. Ms. Chen, you may begin.

[Anita Chen, Investor Relations Director]

Thank you, operator. Hello, everyone, and welcome to Autohome’s second quarter 2019 earnings conference call. Earlier today, Autohome distributed its earnings press release, and you may find a copy on the company’s website at www.autohome.com.cn.

On today’s call, we’ve Mr. Min Lu, Autohome's Chairman and CEO; Mr. Haifeng Shao, Autohome's President; and Mr. Jun Zou, Autohome's CFO. After the prepared remarks, Mr. Lu; Mr. Shao; and Mr. Zou will be available to answer your questions.

Before we begin, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the Securities and Exchange Commission.

Autohome does not undertake any obligation to update any forward-looking statements, except as required under applicable law. The earnings press release in this call also include discussions of current unaudited non-GAAP financial measures. The press release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures and is available on Autohome’s IR website. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Autohome’s IR website.

I will now turn the call over to Autohome’s Chairman and CEO, Mr. Lu.

[Min Lu, Chairman and Chief Executive Officer]

Thank you, Anita. Hello everyone. Thank you for joining us today to discuss our second quarter 2019 results. I am pleased with our quarterly results amidst a soft macro economy and considerable auto market declines. Chinese new passenger vehicle sales fell for four consecutive quarters and extending to a double-digit decline in July. Despite these headwind, we still manage to deliver solid results with the total revenue increasing by 24% year-over-year to RMB2.31 billion.

During the quarter, we strove to offer high quality content to our users, while enabling our partners by leveraging our AI and its stated capacity in order to gain more [indiscernible]. Some highlights in the quarter and the most recent include: in June, the number of average DAUs who accessed our mobile websites primary application and Mini apps increased by 48% year-over-year to 37.8 million.

In July, we made a major upgrade on our main [indiscernible] by improving user interface and reclassifying our products by functions. These upgrades and the enhancements improved the overall user experience, attracting more younger demographic users. App performance experienced an encouraging trend afterwards.

For the second quarter, all of our content categories expand rapidly. DAUs for each new channel including Travelers [ph] EV, [indiscernible] and Mini Short Video all reached to [indiscernible]. We are also rolling out more car use related content such as Road Trip aiming to attract users in addition to car buyers.

As a leading online auto [indiscernible] assistant, Autohome always explore new opportunities and the [indiscernible] contributes to the auto industry. On August 18, we will hold the 818 Global Super Auto Show. This show aims to initiate a double eleven shopping festival in auto space. At this [indiscernible] event, we are [indiscernible] to deploy the integrating of our distinguished online auto show and authorize our celebration activities.

For the online segment, we will leverage our intelligent technology to present panoramic multi-dimensional shopping scenario. For the [indiscernible] I would like to highlight our partnership with the Hunan TV, one of China's most watching TV channels. The 818 Global Super Auto Show will be planned by Hunan TV's top production studio and make its debut in prime time on August 18 as the first ever auto-themed gala. We also launched various offline activities for industry experts, car owners, auto fans, in addition to a number of auto show events across China for both the new and used cars.

With all of the aforementioned, we are endeavoring to help auto makers, dealers achieve success in branding and sales performance. By the end of July, more than 80 auto brands and over 2,400 dealers have signed up for participating in event.

Regarding the data product offerings to the auto makers, we proactively upgrade [indiscernible] from analytical tools to a smart marketing solutions, helping auto makers not only identify the issues, but also providing professional suggestions to solve problems. By the end of June, 21 OEMs have purchased products. In addition, we plan to further expand our intelligent solutions portfolio with [indiscernible], a brand new [indiscernible] product designed to serve OEM R&D [indiscernible] and to help them we are positioned to capture future trades, future [indiscernible] demonstrates our strategic move to go beyond the marketing solutions and tackling to the R&D valued [indiscernible].

In terms of data products for dealers, by the end of second quarter, approximately 15,000 dealers have purchased our data products. In early July, we launched two new AI based data products which are designed to improve dealer’s efficiency as a lower level cost. With more innovative products in our pipeline, we are building a data product metrics that serve as a comprehensive CRM system to dealers. We also see potentials in overseas markets and the [indiscernible] at the preliminary [indiscernible] space.

Now please let me provide you some highlights on our business operations. For our lead generation business, in the second quarter, total lead volume increased by 30% year-over-year and for our used car C2B2C platform by the end of second quarter, we were able to grant very competitive merchant loan products to over 4,800 qualified dealers, resulting in a total cumulative credit line of R&D RMB6.8 billion.

Finally, for the auto financing business, during the second quarter, we facilitate close to RMB6.2 billion in loans and insurance, representing a 108% increase year-over-year. To summarize, Autohome has already evolved from a media vertical to an auto ecosystem [indiscernible], leveraging our in depth insights in the industry compared with our advanced technology. We are confident to further [indiscernible] our value and deliver long-term growth to our shareholders.

With that, I will now turn the call over to our CFO, Jun Zou, for a closer look at our second quarter financial results and the business outlook for the third quarter.

[Jun Zou, Chief Financial Officer]

Thank you, Min. Hi, everyone. As Min has highlighted, we are pleased to report another solid quarter. Please note that as with prior calls, we will reference RMB only in my discussion today. Net revenue for the second quarter was RMB2.31 billion, slightly above the high-end of our original guidance and which is 24% growth on a year-over-year basis.

For a detailed breakdown, Media Services revenue increased 11% year-over-year to RMB1,028 million. Despite a challenging critical auto market, Autohome continues to be automaker's partner of choice. Lead generation services revenue increased 20% year-over-year to RMB889 million, primarily driven by an increase in ARPU. Online marketplace and others revenues increased 97% year-over-year to RMB392 million, primarily due to the increased contribution from data products and auto-financing business.

Now moving on to costs. The cost of revenues increased by 26% year-over-year to RMB264 million. Gross margin remained stable at 89% in the second quarter.

For operating expenses, sales and marketing expenses in the second quarter were RMB893 million compared to RMB588 million in Q2 2018 mainly because of increased offline execution expenses to help automakers and dealers generate more leads and sales.

Now P&D expenses were RMB361 million compared to RMB313 million in Q2 last year. Again, this reflects our RMB headcount increase and it is proof of our commitment to technology and talent.

Finally, G&A expenses were RMB82 million compared to RMB86 million in Q2 last year. As a result, we delivered an operating profit of RMB835 million for the second quarter compared to RMB748 million in the corresponding period of 2018.

Adjusted net income attributable to Autohome was RMB855 million for the second quarter compared to RMB744 million in the corresponding period of last year.

Non-GAAP basic and diluted earnings per share and per ADS for the second quarter were RMB7.22 and RMB7.15, respectively compared to RMB6.33 and RMB6.23, respectively in the corresponding period of 2018.

As of June 30, 2019 our balance sheet remained very strong with cash, cash equivalents and short-term investments of RMB10.83 billion. We generated operating cash flow of RMB372 million in the second quarter.

Let me now address our third quarter 2019 outlook, which reflects our current and preliminary view on the market operating conditions that may be subject to change. At this point, we expect to generate net revenue in the range of RMB2,160 million to RMB2,190 million representing a 14.4% to 16% year-over-year growth rate.

In summary, we’re happy with our second quarter 2019 results. Each of our business lines achieved decent growth coupled with our strong balance sheet. We are well positioned to capture the future growth opportunities, drive long-term sustainable growth and maximize value for shareholders.

With that, we are ready to take your questions. Operator, please open the line for Q&A.

[Operator]

Thank you. [Operator Instructions] The first question is from Eddy Wang at Morgan. Please go ahead.

[Eddy Wang, Morgan Stanley]

My question is that we list out the Global Super Auto Show next week and I believe such events could help to maintain and further improve our long-term relationship and partnership with OEMs and dealers. So my question is that, how management expect such event could help our Media business in the short-term, say like in the second half of this year? Thank you.

[Min Lu, Chairman and Chief Executive Officer]

Okay. I would like to address this question, Eddy. Actually 818 Auto Show has been initiated since last year and for the first half of this year we’ve been preparing for this event. Actually on this auto show we include nine different categories of activities. The largest activity is our core organized together with a China trade promotion agency, which is the Auto Association enter the China trade promotion agency. The second biggest activity is the cooperation with Hunan TV, which will be a gala night performance hosted on August 18, which will have a lot of superstars do join us. The said activity was co-organized with China Auto Industrial Association on August of 19, which will be participated by 1,000 people which is a workshop. The fourth activity is that we’re going to organize offline car exhibition in almost 130 cities in China, so that we can help the dealers to sell cars. And there will be other activities which I won't go into details. For example, the [indiscernible] Festival or the Car Model competition etcetera. Actually this is a big portfolio of different activities. The major progress is to rejuvenate this industry. The second purpose is to expand the influence of Autohome among the consumers. And in terms of the financial revenue generated by this activity, I would like to say that we are not going to actually make money from this contest auto show. The major purpose are what I mentioned before. Generally speaking, we are not going to suffer losses by organizing this auto show. But our major objective is to contribute to the entire auto industry in China and also pave the way for the future development of Autohome. This is the very first time we organize such a large scale virtue auto show. And through this first time experience, we also want to expand this auto show to the global level for the second time next year. That is why we also have a English website for this auto show this time, so that people can watch their online auto show. That’s all for me, Eddy.

[Operator]

And the next question is from Miranda Zhuang at Merrill Lynch. Please go ahead.

[Miranda Zhuang, BofA Merrill Lynch]

So we’ve seen that in the past Autohome has invested in TTP car which is a C2B used car company and recently the company has been cooperating with [indiscernible], which is B2C used car company and also [indiscernible], which is C2C used car company. And also we know that the company this year is expanding the CPA model for the used car industry. So just I'd like to understand the company's latest thinking about your strategy in the used car industry? Thank you.

[Min Lu, Chairman and Chief Executive Officer]

Okay. I would like to take this question. Firstly, we are quite bullish about the future of used car growth in China. That is why we’ve been exploring this business over the past few years and now strategically it becomes more clearer. So since the second half of last year we have opened the entry for the used car business. We hope that we can extend the traffic for the used car. So far our daily DAU for the used car is about 3 million. So actually I instructed my team to hit the target of 4 million by the end of the year. So this is first a part of our strategy, which is to take very strong hold of the traffic entrants of the used car business. The second part of the strategy is that, due to the increase of the traffic the volume of the leads will also increase. Actually the merchants we are cooperating with are having very high quality, but the number of the total merchants are not very big. Let's say, almost 30,000. However, with increasing of the volume of the leads, actually we think that the number of the merchants are not enough. That is why I said that in the second half of the year and also on the Hong Kong roadshow we want to make used car an open platform which includes B2C and a C2B and C2C. For example, we have been cooperating with [indiscernible] to extend our platform cooperation and we are also expanding to some regional platforms in our cooperation strategies. In that case, we can fully digest order lead we generated. At the same time, we can also better satisfy the demand of the consumers. For example, our cooperation with [indiscernible] we have a program called [indiscernible], which is the procurement of the used car all over China, because regionally the used cars are mainly traded locally. So this a new type of service delivered to the consumers by cooperating with [indiscernible] we can actually promote more trades of the used cars nationwide. So I just mentioned about the increase of traffic and lead that certainly -- it certainly is that we are also developing the integrity alliance which is the cost loop transaction. So actually this year we have revised the rules of the game, we are going to expand this kind of cooperation because gearing the pilot period of last year we encountered some problems. And now actually [indiscernible] TTP cars have been cooperating with us in this. You also mentioned TTP cars, so I would like to mention our strategic cooperation with them. We do have a close cooperation with TTP. Every two weeks we will organize a PMO conference which I personally attend. There are three aspects in this kind of cooperation. Certainly, C2B business mainly the auction of the cars and the testing of the cars. At the same time, it will also generate leads of the new cars. And these are very accurate leads and secondly B2B corporations. And together with TTP and some [indiscernible] stores and dealers we’re doing the trading business of the used cars and have the dealers to auction their used cars. And if their cooperation is the B2C cooperation including the integrity alliance I mentioned just now and also we will put the TTP also raise [ph] the cost on our apps. So that you make the consumers assured of auto quality. So actually these are some simple philosophies by our used car business and I think the essence is to intensify the development of our user products and recently we are also iterating our user products. And after that we’re going to strengthen our traffic development for the used cars. And actually last year our used car department for the very first time, turning losses into profit. And this year we hope that end of guidance so far our used car development business, we can accelerate the used car business next year. Thank you. That’s my answer for the used car business.

[Miranda Zhuang, BofA Merrill Lynch]

Thank you very much. Very clear.

[Operator]

[Operator Instructions] The next question is from Frank Chen at Macquarie. Please go ahead.

[Frank Chen, Macquarie Group]

I will translate myself. I have a quick question on the cash. On the balance sheet you got RMB10 billion of cash on short-term investment. And I wonder what’s your plan with your cash? Any plan for the potential dividend or M&A in the future? Thank you.

[Min Lu, Chairman and Chief Executive Officer]

Okay. I will address the question simply. Yes, indeed we have abandoned cash on our balance sheet. Firstly, we are going to intensify our investment. There are two parts, internally and externally. Externally I also mentioned before, we are looking at the possibility on the off shore market including United States, Europe and Southeast Asian countries. But the final decisions are yet to be made. Internally we have several new projects going on. The 818 Auto Show is one of them. Altogether there are six or seven new projects going on. When this projects develop to a certain extent, actually Chinese market, there will be opportunities for investment. Yes, of course, and the -- this project them self also need R&D input. And secondly you also mentioned about dividends. Actually we are still steady about the plan of dividend, if there are any news we’d disclose to in the market. That’s all from me. Thank you.

[Frank Chen, Macquarie Group]

Great. Thank you. Very clear.

[Operator]

The next question is from Hillman Chan at Citigroup. Please go ahead.

[Hillman Chan]

So my first question is about the second half outlook for the auto [indiscernible] industry as well as the online OEM advertisement. And my second question is about the margin impact from offline event including August 18 and also the event for the 130 cities? Thank you very much.

[Min Lu, Chairman and Chief Executive Officer]

Okay. The first question, the OEM advertising investment in the second half of the year. You may notice that we have lowered our guidance in Q3. This is a precautious move, because the market in July is not that good. Situation also differs among OEMS. Some still have the positive growth that quite a few suffer from losses. So actually we heard that the purchase of the OEMs go in parallel with their sales volume. If these [indiscernible] from negative growth, they will be very precautious about releasing budget. And this is general as a consensus and today I also see a Moody forecast which said that at the end of this year, the auto industry in China will suffer from a negative 6.5% of growth. If this forecast come true, actually the auto market in the second half of the year is quite good. Since the first half is negative 14%, so if the full-year forecast is negative 6.5% it means that the auto market will go up in the second half. So according to the statistics from Autohome, actually the advertising investment from the top 15 OEMs still remain positive. Among the top 15, only 3 have negative growth. All the rest have a positive growth. But since [indiscernible] not very clear, because the auto market is still not very good August, we have to look to September. That is why we make so much effort at 818 Auto Show. We hope that actually 818 will become a turning point -- a turning point for the entire auto industry. Your second question is about the margin for 818. I already mentioned that we will not organize this event into loss. And secondly, we also have our budget management system. So this is also raising our budget. And I also mentioned before actually most important thing is that this auto show will impose big influence on auto market and then in the future it will generate big value. That’s my answer. Thank you.

[Operator]

Next question is from Tian Hou at TH Capital. Please go ahead.

[Tian Hou, TH Capital]

So, Mr. Lu just mentioned you hope through oldest activities and current -- and actually become a turning point for China auto industry from current quite bearish [ph] to probably possibly better situation. What is the logic behind that hope? And actually the question really behind that is what’s the major reason for the current market weakness. Is that because people do not know those auto makers, or because consumer doesn’t have enough willingness to buy auto cars. So what is the main reason? What is exactly the current situation is in your mind? Thank you.

[Min Lu, Chairman and Chief Executive Officer]

Actually the auto market is far from being saturated. Actually the auto ownership per 1,000 persons in China is still very low. And recently actually I heard from the Deputy Director General [indiscernible] from the National Information Center, he mentioned that actually in the future the selling of new car sales in China is 40 million per year. And we see that’s the negative growth we are suffering this year. It’s also the first time ever over the past eight years, because the previous years are too good and this is the very first time we have such a big drop, the things are quite special. Someone compared China to Japan in 1970s. Actually Japanese auto maker industry also experienced a lot of twists and turns. So if we look the situation in the long run, we may reach the same consensus which is the negative growth we’re suffering now is only a setback in the longer history. So in the future we’re still bullish about the auto market. As I also mentioned in the previous conference call, this year we are suffering from worse negative growth comparing with last year, I think this is related to the macro economic situation, including the trade war initiated by President Trump. And in order to promote environmental protection in China actually, they jump from National 5 to National 6 standard is too fast. So we see that actually in June of this year the National 5 standard of vehicles are all sold out. Actually now the National 6 standard are already putting into place. That is why actually the sales in July have dropped. And we also see the fading out of the subsidy policy for new energy vehicles. As a result, the consumers will actually wait and see. So we hope that through the 818 Auto Show, the voice of this industry can be maximized, it can be spread out so as to rejuvenate this industry and to consolidate the confidence of the consumers. Generally speaking, I think the Chinese auto market is very huge and enjoys a great potential. The slightly current difficulties, we can actually join hands to [indiscernible] over these difficulties. That’s all for my answer. Thank you.

[Operator]

Next question is Jamie Shen from Bank of China. Please go ahead.

[Jamie Shen, Bank of China International]

I would quickly translate my question. Just wonder if we continue to witness soft auto sales [indiscernible] where Autohome continue to increase the sales and marketing expenses related to offline promotional campaigns to support OEM and dealers? Thank you.

[Min Lu, Chairman and Chief Executive Officer]

Autohome has been developing very fast over the past few years. And our margin obviously remains high. When there is a negative growth in the Chinese auto market we can -- we cannot just purely pursue margin. So what we have to pursue is the biggest profit rather than the biggest profitability. In that way we can actually contribute the long-term return for the investors and shareholders. At the same time, we also got a mission to contribute to the entire industry. In particular, in difficult times. That is why we were engaging some lower margin businesses. Generally speaking, we hope that the auto market can be rejuvenated again and renew this -- its positive growth pathway. So that’s all for my answer. Thank you.

[Operator]

Next question is from Tina Long at Credit Suisse. Please go ahead.

[Tina Long, Credit Suisse]

So my question is actually regarding the ARPU increase which [indiscernible] for the lead generation [indiscernible]. So I want to know whether it comes from the price hikes year-on-year -- from a year-on-year basis were actually it’s because of dealers chosen more value add service. And how much of the chance that the price can continue to be high [indiscernible] given the current situation? And second is more question is about the other income and also where it come from second quarter?

[Min Lu, Chairman and Chief Executive Officer]

So I will answer the first question. Talking about the leads, actually since last year and the beginning of this year, we already have agreement the price of the leads as a package. And about the price increase and the end of last year and the beginning of this year, our cost increased by 20 times. And sometime we also add our science and technology department income into that, but this is data product and not the lead. I also mentioned that actually our price increased by 20 times. However, at the same time our leads increased by 30%. You also note that at the very beginning of this year, some actually dealers challenged about our price increase. So we will now study about the price plan for the leads of next year. Our team also discussed with some OEMs and also with some dealers. And actually the dealers and the OEMs, they also can agree on this topic. And now we developed a new plan and we will communicate with them and we already learned the lessons from last time, which means we will communicate first and then do it. And actually -- we will actually maintain the volume and also enjoy some floating. We will also disclose this information after the communication. Now it’s yet to be finalized because we’re still communicating with them.

[Jun Zou, Chief Financial Officer]

Hi, Tina. Yes, in this quarter our other income increased by 65% compared to that of last year. And the main reason is that after a careful planning, we are able to enjoy more government tax refund and rebate. And so, basically, yes, that’s the reason. Thank you.

[Operator]

Thank you. There are no further questions at this time. I will turn the conference back to management for closing comments. Please go ahead

[Min Lu, Chairman and Chief Executive Officer]

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