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Bitauto Holdings Limited (NYSE:BITA)
Q2 2018 Earnings Conference Call
Aug. 22, 2018, 8:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and thank you for standing by for Bitauto's Second Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to turn the meeting over to your host for today's conference.

Unidentified Speaker --

Thank you. Welcome to Bitauto's Second Quarter 2018 Earnings Conference Call. Speakers from the company today are Mr. Andy Zhang, CEO; Mr. Ming Xu, CFO; and Mr. Xiaoke Liu, COO. After their prepared remarks, Andy and Ming will be available to answer your questions. In addition, Catherine Liu, CFO of Yixin, will be available to answer your questions related to Yixin.

Before we proceed, please note that discussions today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities and Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties, which 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 SEC, including registration statement on Form F-1. Bitauto does not undertake any obligations to update any forward-looking statement except as required under applicable law.

This call will include discussions of certain unaudited non-GAAP financial measures. Please refer to our earnings release, which was issued earlier today for reconciliations of these unaudited non-GAAP measures to the most directly comparable unaudited GAAP measures. As a reminder, this conference is being recorded. In addition, a live and archived webcast of the conference will be available on our website.

I will now turn the call over to Andy Zhang, CEO of Bitauto.

Andy Zhang -- Chief Executive Officer

Hello, everyone, and thank you for joining us for our second quarter 2018 earnings conference call. We're pleased to deliver a set of healthy results across our business lines in the second quarter of 2018 with total revenue growth, growing 28.5% year-over-year to RMB2.56 billion. In particular, our transaction services revenue expanded rapidly with 50.2% year-over-year growth to RMB1.27 billion. We also maintained solid momentum in our advertising and subscription businesses with 15.9% revenue growth year-over-year to RMB1.07 billion driven by our ongoing revamping initiatives.

During the quarter, we rolled out initiatives in our advertising business to deepen our collaboration with key opinion leaders. This has helped us to develop more customized content and services for automakers creating win-win-win connections between automakers, self-media, and Bitauto. These new services have been well received by our customers and helped to drive our advertising revenue in the second quarter.

In our subscription business, in addition to price increases across multiple product lines, we continued to optimize our business mix by converting more subscribers to our premium package. As the penetration rate by our subscription services among auto dealers is already quite high, we have begun providing tailored services to China's vast number of unauthorized auto dealers to unlock the growth potential of this particular business.

In our transaction services business, Yixin posted resilient results amid industrywide weakness conducting approximately 103,000 financed automobile transactions representing a 19% year-over-year increase. In August, Yixin entered into strategic collaborations with WeBank for loan facilitation services. With five loan facilitation service partners in place, we expect to further expand Yixin's third-party loan facilitation services, which features strong scalability and an attractive margin profile. In the second quarter, 19% of our total financed automobile transactions were through third-party loan facilitation services, up from 8% in the previous quarter. Yixin continued to strengthen its risk control system during the quarter through in-depth collaboration with our partners, including our strategic shareholders; Tencent, JD, and Baidu. This allowed Yixin's 30-day plus past due ratio to stabilize at 1.48% in the second quarter.

Looking ahead, we will continue to focus on our three core business strategies. First, we will further develop synergies between Bitauto, Yixin, and other Bitauto family companies mainly in the form of leads, traffic contribution, and data support so as to build up more diversified offerings for consumers and our business partners. Second, we will continue to enhance the content and services that we provide to our user community to cover the entire auto mobile purchase and ownership cycle. This allows us to increase user stickiness and engagement and form more comprehensive customer profiles. Third, we will continue to leverage our big data capabilities and support from our strategic shareholders to enable more user touchpoints and data crossover in the Bitauto ecosystem. Building on our market leading capabilities, we are confident that we will achieve our goal of becoming China's top online auto media and transaction services platform.

With that, I'll turn the call over to Ming to go over the financials.

Ming Xu -- Chief Financial Officer

Thank you, Andy. Good evening, everyone. It's my pleasure to reconnect with everyone on the call. With my experiences and knowledges about Chinese Auto and Internet industry, I hope to help you better understand Bitauto's business and value. We were pleased to achieve steady topline growth in the quarter as we continued to make healthy progress within both our advertising and subscription business as well as transaction service business. Particularly in our advertising and subscription business, we have seen higher ASPs thanks to rising spending by OEM advertisers, higher price point for subscription packages, and a greater contribution from sales of premium membership packages.

In addition, we also made solid progress in improving our profitability through various measures to optimize our cost structure. This includes lower traffic acquisition costs through better technology and improvement in our methodology for selecting effective media channels. We expect to see margin improvement in our transaction service business in the second half of 2018 as Yixin further expands the proportion of third-party loan facilitation transactions completed on the platform.

Now, let's look at our Q2 2018 financial highlights before moving to Q&A. Bitauto reported revenue of RMB2.56 billion, $387.5 million for the second quarter of 2018 representing a 28.5% increase from the corresponding period in 2017. The increase in revenue was attributable to the growth of the company's transaction service business and advertising and subscription business. Revenue from the advertising and subscription business for the second quarter of 2018 was RMB1.03 -- RMB1.07 billion, $161.4 million representing a 15.9% increase from RMB921.5 million, $139.3 million in the corresponding period in 2017. Revenue from the transaction service business for the second quarter of 2018 was RMB1.27 billion, $192.2 million representing a 50.2% increase from RMB846.6 million, $127.9 million in the corresponding period in 2017, primarily driven by the fast growth of transaction volume.

Revenue from the digital marketing solutions business for the second quarter of 2018 was RMB224.6 million, $33.9 million compared to RMB227.7 million, $34.4 million in the corresponding period in 2017. Cost of revenue for the second quarter of 2018 was RMB941.5 million, $142.3 million, representing a year-on-year increase of 50.7% (sic) 52.7% from the corresponding period in 2017. The increase was primarily due to the increased funding cost related to the growth of transaction services. Cost of revenue as a percentage of revenue in the second quarter of 2018 was 36.7% compared to 30.9% in the corresponding period in 2017. Gross profit for the second quarter of 2018 was RMB1.62 billion, $245.3 million representing a 17.7% increase from the corresponding period in 2017.

Selling and administrative expenses were RMB1.4 billion, $211.3 million for the second quarter of 2018, representing a 10.8% increase from the corresponding period in 2017. The increase was primarily attributable to the increase in share-based compensation, provision for credit losses of financial receivables, salary and benefits, and offset by the decrease in marketing expenses. Product development expenses were RMB162.7 million, $24.6 million for the second quarter of 2018, representing a 25.8% increase from the corresponding period in 2017. The increase was primarily due to the increase in salaries and benefits.

Share-based compensation, which was allocated to relative operating expenses line items, was RMB151.6 million, $22.9 million in the second quarter of 2018 compared to RMB71 million, $10.7 million in the corresponding period in 2017. The increase is mainly due to options granted by Yixin to its employees in the third quarter of 2017.

Non-GAAP income from operations in the second quarter of 2018 was RMB429.1 million, $64.8 million, a 45% -- a 45.8% increase from the corresponding period in 2017. Net income in the second quarter of 2018 based on US GAAP was RMB27.4 million, $4.1 million compared to a net loss of RMB63.3 million, $9.6 million in the corresponding period in 2017. Net income attributable to Bitauto in the second quarter of 2018 based on US GAAP was RMB2.7 million, $0.4 million. Non-GAAP net income in the second quarter of 2018 was RMB353.7 million, $53.5 million, a 53.4% increase from the corresponding period in 2018. Non-GAAP net income attributable to a Bitauto in the second quarter of 2018 was RMB257.3 million, $38.9 million, a 101.1% increase from the corresponding period in 2017.

Basic and diluted net loss per ADS, each -- net income per ADS, each representing one ordinary share, in the second quarter of 2018 amounted to RMB0.02 and RMB0.05 respectively taking into consideration of the accretion to redeemable non-controlling interest amounting to RMB7 million, $1.1 million. Non-GAAP basic and diluted net income per ADS in the second quarter of 2018 amounted to RMB3.5, $0.53 and RMB3.22, $0.49 respectively taking into consideration of the accretion to redeemable non-controlling interest amounting to RMB7.0 million, $1.1 million.

As of June 30, 2018, the company has cash and cash equivalents and restricted cash of RMB7.9 billion, $1.19 billion. Cash used in operating activities, cash used in investing activities, and the cash provided by financing activities in second quarter were RMB239.8 million, $36.2 million; RMB2.56 billion, $386.6 million; and RMB319.4 million, $48.3 million respectively.

The number of employees totaled 7,889 as of June 30, 2018 including employees of entities in which Bitauto has acquired and holds controlling interest. This represents a 9.38% year-over-year decrease, primarily due to decreased headcount in the company's fast-growing transaction services business following Yixin's strategically de-emphasizing used automobile transaction facilitation services. Given Yixin's scale and significance to Bitauto, I would also share with you some of Yixin's operating and financial highlights in Q2.

In the second quarter under US GAAP, Yixin's total revenue reached RMB1.34 billion, $201.8 million; gross profit reached RMB651.5 million, $98.5 million; and net income was RMB25.2 million, $3.8 million; and non-GAAP net income was RMB149.5 million, $22.6 million. Yixin's net income and non-GAAP net income is calculated by net income including share-based compensation of RMB81.6 million, $12.3 million; amortization of intangible assets resulting from asset and business acquisition of RMB43.1 million, $6.5 million; and offset by tax impact -- tax effect of RMB0.4 million, $0.1 million.

In the second quarter, Yixin entered into certain transactions with other subsidiaries of Bitauto, which have been eliminated upon Bitauto's consolidation of Yixin. The revenue Yixin recorded from the services provided to those subsidiaries of Bitauto amounted to RMB51.2 million, $7.7 million in Q2. As of June 30, 2018, Yixin has cash and cash equivalents and restricted cash of RMB4.25 billion, $642.2 million; total finance receivable of RMB35.75 billion, $5.4 billion; and total borrowing including bank borrowing and asset-backed securitization debt of RMB29.03 billion, $4.39 billion.

As of June 30, 2018 Yixin's 31 to 90 days past due ratio, 91 to 180 days past due ratio, and 100 (sic) 180 days plus past due ratio was 0.43%, 0.58%, and 0.48%, respectively. 90-day plus past due ratio and 30-day plus past due ratio was 1.05% and 1.48%, respectively. Under US GAAP, Yixin's provision for credit loss of finance receivables in the second quarter of 2018 was RMB128.1 million, $19.4 million. The balance of provision for credit loss of finance receivables was RMB276.4 million, $41.8 million as of June 30, 2018.

With that, I'll turn to guidance for the third quarter of 2018. Bitauto currently expects to generate revenue in the range of RMB2.66 billion, $402 million to RMB2.71 billion, $409.5 million in the third quarter of 2018, representing a 22.9% to 25.2% increase from the corresponding period in 2017. If presented on a gross basis as consistent in year 2017 before we were required to adopt ASC 606, forecasted revenue would be between RMB2.87 billion, $333.7 million (sic) $433.7 million to RMB2.92 billion, $441.3 million in third quarter of 2018, representing a 22.4% to 24.5% increase from the corresponding period in 2017. This forecast takes into consideration of seasonality factors in Bitauto's business and excludes the impact of foreign currency fluctuation. It reflects management's current and preliminary view, which is subject to change.

Now let's start the Q&A session. Andy, myself, Xiaoke, and Yixin's CFO, Catherine are available to take your questions. Operator, please go ahead.

Questions and Answers:

Operator

The question-and-answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. (Operator Instructions) Our first question comes from the line of Binbin Ding from JP Morgan. Please ask your question.

Binbin Ding -- JP Morgan -- Analyst

Hi. Good evening, management. Thanks for taking my question. Congratulations to Ming on your first earnings call as a CFO. My first question is on the advertising and subscription business. So, this part actually delivered a pretty solid growth in the first and second quarters. Given the decline of the new passenger vehicle sales in the past few months, how would that impact the advertising outlook in the second half of this year and what kind of new initiative shall we expect to see in the second half? And Andy mentioned one of the reason to your advertising momentum is your deepened collaboration with KoLs to generate more customized content and services. Could you give us some color regarding your self-media strategy and how will that contribute to your advertising and subscription revenues in the second half? Thank you.

Andy Zhang -- Chief Executive Officer

Thanks, Binbin. Our COO, Xiaoke, will take your questions.

Xiaoke Liu -- Chief Operating Officer

(Foreign Language) Our overall auto sales did see some slowdown in the first half of 2018. However, based on our recent communication with OEMs, we do not see plans for cutting advertising budgets in the second half right now. (Foreign Language) So while we feel there will be some slowdown in the car market in the second half but it won't be a large impact to our business. (Foreign Language) And our understanding from the OEMs is in the second half due to budget pressure, there are plans to shift more budget allocation from pure display and brand advertising to results driven advertising and marketing. (Foreign Language) Regarding our peer companies -- two peer companies, which as you mentioned have launched collaborations with KoLs and self-media, our observation is that as Bitauto was -- has been the first in this industry to commence such IP collaboration programs beginning in the second half of 2017, we believe that this is really a reaction to our strategic initiatives.

(Foreign Language) We've seen that our initiatives in this area have really had a strong impact -- positive impact on our business over the past half year and we really see that our peer companies picking up on this and following in our footsteps. (Foreign Language) Additionally, during the first half of 2018, we've been upgrading our IP collaboration programs transforming from collaborations with a single KoL or self-media to programs that integrate collaborations with multiple KoLs and self-media. These -- their bundled IP programs have become a unique Bitauto offering that we can provide our OEM customers and we're pleased to see several OEMs already having utilized these IP programs many times on a variety of levels.

(Foreign Language) Moreover this year, Bitauto, as we begin to prioritize expanding our IP collaborations to KoLs and self-media beyond the auto industry. For instance during the World Cup period this year, we saw a large amount of outreach to car buyers beyond reached through channels beyond the typical auto media.

(Foreign Language) That concludes my response to your questions. Thank you.

Binbin Ding -- JP Morgan -- Analyst

Thank you. That's helpful. Thank you.

Operator

Our next question comes from the line of Monica Chen from Credit Suisse. Please ask your question.

Monica Chen -- Credit Suisse -- Analyst

Good evening, management. Thank you for taking my question. I also have a question on your media business, especially for the dealer subscription business, which we also see very strong performance. So management, actually can you provide the latest number of subscribers in 2Q and also what percentage of that will be purchased at the premium membership packages? In addition to that, I think management mentioned our strategy for the unauthorized dealer. So can you elaborate a little bit more of what is our next step, how we can acquire the unauthorized dealers to become the paying members on our platform? Also have a very quick question on our strategy to optimize our cost structure, especially on the sales marketing costs. So, I want to understand the savings will be mostly come from like the lower spending on user acquisition or on branding side. Thank you.

Ming Xu -- Chief Financial Officer

Thanks, Monika. So on your first question, we -- in the third quarter, our subscriber numbers reached over 23,000 -- sorry, in the second quarter reached over 23,000 dealers and over 70% of them are using our premium package, which further help us to grow the ARPU of that business. And for your question on the expanding to the unauthorized dealers. So basically the reason we're trying to look at that market is if you look at the Chinese auto distribution market, there are in total around 27,000 to 28,000 dealers in China and as you know, both we and our competitors have covered over 80% of them. So, the penetration rate in this is limited. Even if we can further grow this part of the business by further providing more -- offering services to them and raise price, but we still need to look at other growth drivers.

Now if you look at the market, there are over -- there are nearly 100,000 unauthorized dealers in China and these dealers account for roughly 40,000 -- 40% of every year's new car sales. So, that's a huge market that currently is under served by any of the Internet platforms. That's our plan to serve those unauthorized dealers. And because those dealers actually have different and actually more diversified needs from us so -- compared with the authorized dealers so what we can provide not only include sales fleet, but also services like inventory sourcing and also like financing. So, that's the approach we're trying to attack the market. Andy may want to -- ?

Andy Zhang -- Chief Executive Officer

Yes, let me jump in. I think the strategy here is -- again is to access growth, right. So ARPU-wise, the existing dealers whether or not we can upgrade them to the premium package more and more and higher and higher penetration. Simultaneously, we are also looking for the growth in the number of subscribers. There are two tiers of dealers in China, authorized and I wouldn't say unauthorized, but more like second-tier dealers. They mainly still focus on selling new cars. In China, 40% of new car sales to the C-end, to the consumer end are actually carried out by this 80,000 to 100,000 second-tier dealership. So, I think this is some -- this is part of the market that we're not allowed to overlook. So moving forward, I think the strategy is that -- I think in the last call that we've had back in June is that the initiative for BITA is to turn our Easypass platform from a simple lead-gen platform into a little bit more sophisticated SaaS-based platform that's providing variety of different services other than -- in addition to lead-gen to different types of dealerships.

So, I think Ming just mentioned a few additional services that's providing to the second-tier guys. But also for the first tier fresh dealerships, we're also looking at about aftermarket services as well as an integration of the inventory flow between the first-tier and the second-tier dealers recognizing that 40% of the market flow is from a B2B standpoint. Again, I think this is the initiative for us to grow the EP business, the Easypass business, and I think we are laying a lot of the grounds in terms of creating our products for the second tier dealers to be more attractive so we can accumulate additional members. At the current in 2018, we're not looking to charge them or charge them significantly, but I think the strategy is to have as many of those guys to use my platform by year-end and we will see whether or not 2019 will be a good year to start or begin to monetize on this second tier so called unauthorized dealers. So, that's the grand plan in terms of the Easypass. Thank you.

Ming Xu -- Chief Financial Officer

And for the question on the optimization of the marketing expenses, that's mainly driven by our effort to continuously optimize on the traffic acquisition mainly through selecting more effective channels to deploy our budgets. I hope those answers your questions.

Monica Chen -- Credit Suisse -- Analyst

Yes. Thank you very much.

Operator

Our next question comes from the line of Liping Zhao from CICC. Please ask your question.

Liping Zhao -- CICC -- Analyst

Good evening, management. This is Liping from CICC. Thanks for taking my question. My question is related to your transaction business. As we all know that the Central Bank of China is loosening the deleveraging assets recently and I'm curious what will be the impact on your Yixin business. Thank you.

Andy Zhang -- Chief Executive Officer

Yes. We've had a tough (inaudible) 2018 in terms of the Central Bank being tightening up on the monetary policy. Yes, I think in the previous Yixin call, I have mentioned in terms of what we have witnessed recently on the loosening up of that particular situation where that the ABS we had been able to distribute to the market this week, the cost of which is 50 basis points lower than the one that we carried out about a month-and-a-half ago or end of June, which is -- that's the worst timing. So basically my guess, a lower funding cost is definitely one of the positive impacts, but I think the key is that whether or not we do have enough float of money in the system to encouraging consumers to trade in their existing vehicles, to buy more new vehicles and while they are buying these vehicles, their capability of continue to leverage on that particular purchase.

So, I think the meaning has different layers to Yixin and also BITA's business. It's -- actually I think Chalco was not necessarily absolutely right in terms of the passenger car sales decline. So actually it started somewhere in early May, late April all the way up to July, which is the number that we currently have. But again I think a looser monetary policy will actually help also on the situation to ease off on where those new car sales volume for the second half of the year as well. So again even though that Yixin has been really outperforming the market in general, still we like to see the overall market to show a sign of revival in the upcoming months of the year. I think September through December during the calendar year should -- is traditionally the high season for auto sales. So, we are really looking forward to see that to be the case again this year in 2018.

In any case, this really -- it's really a bigger countrywide concern in terms of overall consumer confidence and overall consumption, as well as consumer financing. But as far as we have received in terms of message wise, CBIRC had officially come out to support -- indicating their support for the consumer financing in general. And I think auto financing as well as auto sales is really a hefty percentage of consumer financing as well as retail business in general. So hopefully, we will benefit from that. Thanks.

Liping Zhao -- CICC -- Analyst

Thank you. Very clear.

Operator

Our next question comes from the line of Wendy Huang from Macquarie. Please ask your question.

Wendy Huang -- Macquarie -- Analyst

Thank you. I have a few housekeeping questions. First is the growth trend of your digital marketing solutions versus the advertising and subscription revenue growth usually were very consistent, but now this quarter it seems that digital marketing solutions business was only flat year-over-year versus the other segment actually grew 16%. So, can you help us to understand the diverging trend behind this and how should we expect the future trends? And second is about the higher ASP of the OEM advertisers or the higher pricing for the subscription package. Do you think that there is still room for you actually to have the higher price or the ASP in the second half? And also for the unauthorized dealers or the tier-two dealers you're trying to bring your platform in, can you tell us if the pricing or membership fee are the same for them versus the authorized dealers? Thank you.

Andy Zhang -- Chief Executive Officer

I'll take the first one actually because it's easier. Well, digital marketing business is actually consulting business in general, so it really -- it's -- overall, our revenue is really based on how many different clients it has at a typical timeframe. So in other words, it's not necessarily an indicative sign of the market as well as whether or not how well it's tracking my advertising revenue. We've never looked at in terms of that kind of association because it's really, really different type of businesses. So, I think the main, it's not necessarily growing is because this is the nature of the business itself. It's a consulting oriented business. If you don't have significant large client that's coming in, you'll relatively have a flat year. I think there's always winners and losers in terms of different client type --different clients that it handles and normally the length of the contract is supposedly 12 months running.

So, it obtains different clients on a different timeframe basis. So as far as we can predict-wise, we can actually see as to probably which quarter will be fairly flat, which quarter will be doing well, which quarter will be doing bad. But other than that, it's not necessarily anything indicative of the market itself. But the bottom line is that so far, the reason that we're being able to give you the intakes of the market, I think largely also depend on how much we'd be involved with these clients on the consulting end of the business meaning that we help them to place these ads for a lot of those clients. And so far I think given that pretty hefty competition among all of the OEMs who is cranking out new cars in different models and types and new launches, we haven't seen any slowdown on these -- on ad placements.

Also I think I would like to mention that in 2018 -- year of 2018, we're looking to see new energy vehicles on the passenger vehicle side of the business, is looking to reach upwards of somewhere between 800,000 to 1 million, which is a huge leap from previous years given that the government is really pushing for this as well as the -- some of the OEMs has been opening -- openly voicing about their switching from traditional gasoline driven cars completely to new energy cars. So it's also our expectation that for year 2019, we are looking to see new energy cars to become one of the growth pillars for BITA in general as well as for Yixin. On the financing end, I think we do have a lot of good policies that's coming from the stock exchanges. Shanghai Stock Exchange, they have been opening up some green channels for our new energy car asset-backed securitization and et cetera, et cetera.

So, our take on the per vehicle sales and advertising budget for new energy vehicles only on the passenger car side is somewhere around 3,000 or so on the per vehicle basis. So if you are looking at 1.5 million vehicles being -- will be sold according to our expectation for 2019, that's a hefty amount of budget that will be spent on branding as well as advertising from these guys. So, we're also internally working quite focused on that part of the business as well in terms to hopefully grasp as much market share as possible from their future spendings. As far as the other membership questions, I'll have Ming answer that.

Ming Xu -- Chief Financial Officer

Wendy, so to give you some details -- technical details on the digital marketing solutions business. Basically as you know, the revenue model for this business is we help the automakers to spend money basically to purchase -- to spend money on the media and then the media give some rebate which we can book as revenue. So now if you look at the rebate as a percentage of the spending on those media, the number actually was pretty stable. The number in Q2 2018 was stable from the number for the full year of 2017. However, the number for Q2 of 2017 was particularly high. So, the result is although actually we help the automaker to spend more money on those media, but because of the rebate ratio, is lower year-on-year so on the rebate revenue side in dollar amount is actually lower than what we get last year. So, that's for the digital marketing solution question.

And for your ASP question, basically as you know, as we -- the contract we signed are typically on a yearly basis so -- with the dealers. So -- and also we continue to improve the ratio of premium packages within the total subscription base. So as a result, we think that our ASP for the subscription business will be stable or continue to rise. And for your question on the ASP for the non-authorized dealers. Well, actually as Andy just mentioned, we haven't really formalized a plan to -- how to monetize those dealers. It may be in the form of a subscription -- annual subscription or it may be in the form of other ad hoc charges. So, while...

Andy Zhang -- Chief Executive Officer

If you took a combination of both, actually we will formalize that sometime in the fourth quarter.

Ming Xu -- Chief Financial Officer

Right.

Andy Zhang -- Chief Executive Officer

We still have a few months to go before we reach that and we don't want to jump into any conclusion at this moment. By the end of the day, I think 2019 will possibly be the time we actually on a grander scale start monetizing from the second-tier dealers. Thank you.

Wendy Huang -- Macquarie -- Analyst

Thanks, Andy and Ming.

Operator

Our next question comes from the line of Hillman Chan from Citi. Please ask your question.

Hillman Chan -- Citigroup -- Analyst

Hi, management. Thank you for taking my question. Firstly, I want to see how you think about the competition, especially from Dhon Trade (ph) given that the year you have grown to a more meaningful scale than before. Do we expect any impact on our OEM and our dealer subscription business and how do we see the competitive landscape in 2019, please? And my other question is regarding your third quarter revenue guidance. Could you help us understand the underlying guidance for the media and the transaction business, respectively? And for the second quarter, what is the adjusted net profit from the media business excluding the Yixin business? Thank you.

Ming Xu -- Chief Financial Officer

So, let's -- give me a few seconds to divide up the job and then, we'll get to you.

Andy Zhang -- Chief Executive Officer

I'll let our COO to answer the first part of the question and I'll jump in whenever necessary to give more comments.

Xiaoke Liu -- Chief Operating Officer

(Foreign Language) I'll briefly translate for our COO. So as we know, Dhon Trade has gained some momentum in their user growth this year. But according to -- based on our knowledge, it's largely driven or supported by Total's resources and as a result, there is a quite significant overlap between Total's user and Dhon Trade's user. (Foreign Language) Secondly, as you know, the key competitor of our business, the reason why automakers want to spend money on our platform -- on the vertical platform is because we provide them and provide the dealers with self-fleet and basically help them to sell cars not just a branding ad. So even though Total has gained momentum with users, but because we don't actually know how effective or how targeted the users can be and how the conversion rate can be. And as we mentioned, because of the high overlap between Total's user and Dhon Trade's user, the conversion rate may not be as high as on the vertical auto websites. And even though -- so therefore, even though they are very aggressively hiring teams to build up their capacity in -- capability in media and also in dealer business and also even in auto finance, but we think that could take some time.

Andy Zhang -- Chief Executive Officer

So, I think the approach from us is actually we've -- we never simply just think of ourselves as a straight up media. Our realm of different services covers consumers from actually, you start to discover all the way down to the point where you recycle the entire process over again and trading as one of the -- trading of their existing vehicle to get another one as one of the turning point in terms of the cycle. So, we're covering like the different aspects of the consumer during their entire life cycle of discovering, purchasing, usage, as well as change of their vehicles. So, this is how we can position ourselves in front of all the OEMs and as well as the dealers. So in other words, we're capable of providing all of our customers with a account-based data stream where we can actually indicate to them a different stage where this particular targeted customer is and how shall we have different ways of approaching them to create the best results on behalf of either OEM or financing or bank or a dealer.

So again, I think just like Total attracting advertising customers, I think they will eventually attract some of the OEM customers as well as advertisers. But the key is that while your customer is overlapped in that kind of range and the customer is not in any different state as where they are during this cycle, how much additional value can you provide to advertisers is one of the key arguing points. So again, we -- auto industry has never been lack of competitors that's coming in and the phasing out. We've been the Top 2, so to speak in the past 18 years. So, we have more than enough confidence as to -- as far as our ecosystem goes that we're capable of bringing our customers very different positioning, actually better positioning, and more targeted consumers, not only at that vertical at their site, but also as a vertical ecosystem, so to speak.

We are having a lot of these data being formalized among the ecosystem players' BITA, Yixin, Total, and et cetera, et cetera to having -- helping us to gain these insights among these consumers. And so far I think we've been presenting them to the OEMs and the dealers on very favorable terms as well. So, this is our approach and that's how we fight our battles basically. Thank you.

Ming Xu -- Chief Financial Officer

For your second question, we cannot actually give you breakdown of the profit between different segments. But if you compare with the Yixin result, I think it's fairly easy for you to break down the profit contribution from the transaction service and also from our own media and subscription business. Now, look at the guidance for the third quarter of 2018. So if you look at the different segments, our media and subscription business, we actually expect a high single-digit to low-teens growth. But I would actually like to highlight that our core business so basically our own yixin.com or bitauto.com business continues to grow at -- continues the strong growth momentum in the first half and we actually expect that part of business to grow at high-teens year-over-year in third quarter. It's only because some of the other investing companies which we consolidate that have volatile -- have shown volatility in their performance, which cause our consolidated result of the media and subscription business to record a lower growth rate than our core business. For the digital marketing solutions business, we expect around 10% growth in revenue and for transaction business, we expect somewhere between 40% to 45% year-over-year growth in revenue in third quarter.

Hillman Chan -- Citigroup -- Analyst

Thank you. Can I ask a quick follow-up question? Actually it's about your headcount for second half of 2018, could you share that across the BITA fly? Thank you.

Ming Xu -- Chief Financial Officer

Yes, right. For the second half of the year, we expect the headcount to be relatively flat, but keep in mind that because we actually -- because of how we -- we sold Toutiao business to Yusheng so the related headcount -- the headcount related with Toutiao is actually -- will now be accounted as Bitauto's headcount going forward. Thank you.

Hillman Chan -- Citigroup -- Analyst

Got it. Thank you very much.

Operator

Your next question comes from the line of Miranda Zhuang from Merrill Lynch. Please ask your question.

Miranda Zhuang -- Bank of America Merrill Lynch -- Analyst

Thank you, management, for taking my questions. Congratulation on the results. I have a quick question about the marketing spending. So, can you talk about the magnitude of the decrease in marketing spending for this quarter and how much of that was due to the spin-off of the second, used car transaction business? And then what's the outlook for the marketing spending for the rest of the year and do you plan to launch any major upgrades for Yiche and then -- I mean Yiche's app product and then how will that impact your marketing spending in the second half of the year? And also a follow-up question. So, what's your expectation of the user growth in the second half of the year given that you will be optimizing the marketing spending and while the competition is heating up? Thank you very much.

Ming Xu -- Chief Financial Officer

Hi Monika. So I will -- Hi Miranda. I will answer the question on the expense side and our COO will briefly talk about the APP upgrade front. So for the marketing expenses, yes, that's -- I think that's one of the highlight of this quarter result. We show a very disciplined spending pattern on the traffic acquisition and the branding expenses side. So we actually -- our actual spending actually have a year-on-year decline and also it's much lower than our budget. Part of that is related with the Taoche's spin-off, but not -- but actually I will say it's more driven by the -- our cost expense optimization effort on the Bitauto's own media and subscription business. And for the second half of the year, the spending I think for the traffic acquisition side is we're really -- we're really continuing to improving -- improve on that side and I think that trend should continue. But as you mentioned because we do have a plan to -- on the upgrade of the Yiche APP side. So, the timing of that upgrade will have some impact with -- on our branding spending. So, I'll hand over to Xiaoke to talk about the APP upgrade.

Xiaoke Liu -- Chief Operating Officer

(Foreign Language) So Miranda, as you know, we have two apps now. We have two main apps and we have a pricing quote app, which have relatively higher DAU and a Yiche APP -- and a Yiche app which have relatively lower DAU. But we do think that the Yiche app have higher potential going forward. So, we do have a plan in the second half of the year to launch a major upgrade of the Yiche app and the, the guideline we are or the main thing we are trying to change or reform upgrading that app is that as you know, we launched a content strategy in the first half of the year, which basically we want to make our content more entertaining, younger, more based on community and more based on scenarios, user cases to cater to the younger users and also to the shift in the audience. And our APP upgrade will be centered around that theme. So, that's what we can give now. We will continue to upgrade with you if we have any more detailed plan.

Andy Zhang -- Chief Executive Officer

Yes. I think just to add a little bit more comment on that. First of all, we would not have less marketing spending on the cost of shrinking user growth. That's just not our strategy in general. If we were to have done that, we would have done that long time ago. So, lesser marketing spending doesn't necessarily equaling lesser user acquisition. So, optimization becomes one of the key thing that jumps in. And also if you noticed recently, the different signing process in our Yiche app, historically we never required that. Now everybody needs to sign up and needs to register. So, this -- we're progressively keeping up the pace with the current user and their behavior in terms of not only creating these accounts, but also to be able to collect as much data as possible from these accounts simultaneously. So, more data and better data usage helped us to optimize the user engagement as well as the user acquisition.

In terms of the second half of the year what we are looking to do, we're definitely going to upgrade our BITA user APP in general. The old one also with the old logo, it's just to us, is a bit outdated. So, we're looking to launch that sometime in the fourth quarter. Whether or not we're going to have a grand scaled spending on that, probably we will like to see this time to be more of a -- less of a word of mouth to be the core center, a kind of marketing strategy, but yes, it is actually part of the marketing strategy. So I don't think it will be similar to that of some of the competitors spending billions on marketing themselves, which is not something that we think it's feasible. Especially Yiche brand itself has always been there for the last 17, 18 years so I think the word of mouth will be the main way of spreading and also giving the consumers a brand new feel and experience with our app upgrade is something that we're banking on as well.

So moving forward as to how after we relaunch -- not relaunch, after we upgrade this particular APP, how we're going to increase this particular APP's customer acquisitions mainly through the big data, through all the ecosystem, and through all the word of mouth and also the existing registered members where they will help us to spread as to word of mouth. So in the Chinese term, it's (Foreign Language).

Ming Xu -- Chief Financial Officer

So basically to translate the last sentence from Andy, basically we're trying to use more social base -- a social media based method to trying to promote our app instead of spending purely on the brand advertisement -- branding ad side.

Andy Zhang -- Chief Executive Officer

Yes. Thank you.

Ming Xu -- Chief Financial Officer

Thank you.

Miranda Zhuang -- Bank of America Merrill Lynch -- Analyst

Thank you very much. That's very helpful.

Operator

Our next question comes from the line of Paul Gong from UBS. Please ask your question.

Paul Gong -- UBS -- Analyst

Good evening, management. Thanks for taking my questions. Sorry, I am a bit late, but three questions. The first one is regarding the digital consulting business you have. My understanding is this is a pretty asset heavy with a lot of receivables and accounts to a lot of working capitals as a heavy business. Given recently, do you think Chinese brand had that kind of a scandal where the advertising spenders come out not to be the employee of the company, do you see any such kind of risk in this business giving its non-receivable base?

My second question is regarding how do you foresee the (inaudible) start-up companies opportunities. Per public finding, some of these start-up companies actually spent more on the advertising and promotion than even R&D given they are trying to build up a new brand. So, does this constitute some big opportunities for your advertising business in the future?

And then my third question is regarding the Tier 2 network. The Tier 1 network is 27,000, 28,000 and you have already penetrated 23,000. How do you foresee the Tier 2 network or what would be the addressable market size? How many of them you are expecting eventually you could penetrate and what would be the ARPU like as a percentage of the Tier 1 on average? Thank you.

Ming Xu -- Chief Financial Officer

Hi, Paul. I'll take the question. Due to time limit, I'll be quite brief and actually some of the questions has been answered before early on the call. So first, regarding your question on the scandal. So, I want to clarify here. We actually have got minimal exposure to that particular automaker in terms of this particular spending. So we do have business with them, but we do have particular with this -- with those projects in question, we actually have a minimal relationship or exposure to those businesses. But of course during this -- during this market environment where a lot of the weaker automakers are under more pressure, we are becoming very careful in terms of trying to do business with them -- conducting business with them.

And on your second question, we actually mentioned before that in the 2019 -- looking at 2019, the opportunities from the upcoming electric vehicle makers and also some of the electric vehicle sub-brand from the traditional auto makers are one of our biggest growth opportunity in our advertising business in 2019. And on your third question, it's also been answered before. Basically there are -- as you know, there are roughly 100,000 second -- Tier 2 unauthorized dealers in China contributing to around 40% of total China's new car sales and their needs are very -- actually more diversified than the authorized dealers. They do not only need self-media, but they also need like outsourcing or financing. So, these are the opportunities we are trying to approach or we are trying to target in going forward to try to grow our subscription business.

Andy Zhang -- Chief Executive Officer

Yes. I think it's the sizable ones, about maybe 20,000 of them. So, we start with those and then we go from there. Thank you.

Paul Gong -- UBS -- Analyst

Thank you.

Operator

We are now approaching the end of the conference call. I will now turn the call over to Bitauto's CFO, Ming Xu, for closing remarks.

Ming Xu -- Chief Financial Officer

Once again thank you for joining us today. Please do not hesitate to contact us if you have any further questions. Thank you for your continuous support and we look forward to talking with you in the coming quarters.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

Duration: 67 minutes

Call participants:

Unidentified Speaker --

Andy Zhang -- Chief Executive Officer

Ming Xu -- Chief Financial Officer

Binbin Ding -- JP Morgan -- Analyst

Xiaoke Liu -- Chief Operating Officer

Monica Chen -- Credit Suisse -- Analyst

Liping Zhao -- CICC -- Analyst

Wendy Huang -- Macquarie -- Analyst

Hillman Chan -- Citigroup -- Analyst

Miranda Zhuang -- Bank of America Merrill Lynch -- Analyst

Paul Gong -- UBS -- Analyst

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