Ctrip.com International, Ltd. (ADR) Earnings Trounce Wall Street Estimates

Ctrip's English-language homepage.

Quarter after quarter, it's becoming clear that James Liang, chairman, CEO, and founder of Ctrip.com (TCOM 1.66%) -- China's leading online travel portal -- has mastered the art of managing investor expectations.

In late 2014, Liang warned investors that price wars between Ctrip and other online travel players would continue for "a year or two years." That, plus investments the company was making for the future would mean profitability would be tough to achieve. Liang also forecast that revenue would grow by 30% during the ensuing quarter.

Since that time, revenue has re-accelerated. It grew by 46% during the first quarter, and the company announced last night that it grew by 47% during the second quarter. But the real surprise came from the fact that the company announced non-GAAP earnings of $0.30 per share. Analysts were expecting just $0.01. Shares jumped at market open.

Let's dig into the numbers to find out what went right during the quarter.

Business lines
Two of Ctrip's four business lines make up the bulk of the company's revenue. Accommodation revenues primarily come from hotel bookings, while transportation revenues come from a mix of airline, train, and bus tickets. Packaged and corporate travel round out the company's offerings, but these two accounted for just $72 million -- or 17% of revenue -- during the second quarter.

Source: Ctrip earnings release.

There are two notable tidbits to take away from this. First, airline bookings -- a division of transportation -- continued to be strong, with volume up 60% for the quarter. This also means that volume growth for bus and train tickets remain very strong.

Second, the company is starting to keep more and more of the money it makes via volume growth in accommodations. In an industry where just about everyone is trying their hardest to make a profit, this is big news.

Costs stay under control
While the company's revenue growth was nice, it was largely in-line with analyst expectations. Profitability, on the other hand, was a huge surprise. While product development costs rose faster than revenue (66%), both sales & marketing (42%), as well as general & administrative costs (34%) grew slower. That was crucial for the bottom-line beat.

Liang explained on the conference call that the company is starting to benefit from efficiencies in its investments: "We have successfully improved our efficiency by utilizing advanced technology ... [For example], air ticketing volume increased by approximately 110% [over the past two years], yet our call center's head count remained largely the same, which significantly improved our earnings." 

Mobile is the key
As I've said in previous quarters, Ctrip's investments in its mobile app remain the key to its future. In a crowded marketplace, Ctrip wants to create the easiest, most universal travel destination to meet all of its customers' needs. That's the role it hopes the app plays.

At the end of the second quarter, there were over 1 billion downloads of the app -- up five-fold from the same time last year. More importantly, the transaction value of bookings over mobile devices was up 120% year over year. Look to make sure this second number continues to grow by impressive margins in the future.

A new approach laid out
Finally, management laid out a blueprint for how it plans to attack the Chinese travel market moving forward. Essentially, it has captured a large swath of the middle-to-high-end market. As Liang stated, "For certain international routes, we sell over 40% of the business in the first-class seat." Ctrip will use its market position to leverage profitability from these customers.

At the same time, it will be investing heavily in capturing as much market share among lower-spending customers as possible. Liang said: "We'll invest the profit generated from the mid-to-high-end customers to compete aggressively to gain budget customers. In the short-term, we can generate revenue from these budget customers. ... In the long run, our investment into these customers ensures brand loyalty early on and builds the future customer base."

Investors will want to keep an eye on how management is able to balance these priorities in the quarters and years ahead.