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Fang Holdings Ltd. (NYSE:SFUN)
Q3 2018 Earnings Conference Call
Nov. 30, 2018 7:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the third-quarter 2018 Fang Holdings Limited Earnings conference call. [Operator instructions] I must advise you that this conference is being recorded today. I'll now hand the call over to your speaker, Ms. Jessie Yang.

Thank you. Please go ahead.

Jessie Yang -- Investor Relations

Thank you, operator. Hi, everyone, and welcome to Fang's third-quarter 2018 earnings conference call. Joining us today to discuss Fang's results are our chairman and CEO, Mr. Vincent Mo; and our CFO, Dr.

Hua Lei. After the prepared remarks, Mr. Mo and Dr. Lei will answer your questions.

Before we get started, I would like to remind you that during the course of this conference call, we may make forward-looking statements, statements that are not historical facts, including statements about our beliefs and expectations. Forward-looking statements involve inherent risk and uncertainty. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Fang assumes no obligation to update the forward-looking statements in this conference call and elsewhere.

Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our Form 20-F. Now I would like to walk you through our third quarter financials, after which Mr. Mo and Dr. Lei will start the Q&A session.

Fang reported total revenues of $83.6 million in the third quarter of 2018, a decrease from 25.5% from $112.2 million in the corresponding period of 2017. This is mainly due to a decline in revenues from listing and e-commerce services. Revenue from marketing services was $35.7 million in the third quarter of 2018, which is a slight decrease of 4.1% from $37.3 million in the corresponding period of 2017. Revenue from listing services was $29.2 million in the third quarter of 2018, a decrease of 38% from $47.2 million in the third quarter of 2017.

This is caused by the decreased number of paying members. Revenue from value-added services was $10.3 million in the third quarter of 2018. This is an increase of 33.3% from $7.7 million in third quarter of 2017. This is driven by the increased demand for our database and research services.

Revenue from financial services was $4.7 million in the third quarter of 2018. This is an increase of 34.6% from $3.5 million in the corresponding period of 2017. This is driven by increased demand for our financial products. Revenue from e-commerce services was $3.7 million in the third quarter of 2018.

This was a decrease of 77.7% from $16.6 million in the third quarter of 2017. This was primarily due to Fang's transformation back to a technology-driven open platform model. Cost of revenue was $17.8 million in the third quarter of 2018. This is a decrease of 49.8% from $35.4 million in the corresponding period in 2017.

This is due to the optimization in our cost structure. Operating expenses were $50.6 million in the third quarter of 2018. This is a decrease of 13.4% from $58.4 million in the same period of 2017. Selling expenses were $21 million in the third quarter 2018.

This is an increase of 24.3% from $16.9 million in the same period of 2017. This is mainly driven by an increase in advertising and promotional expenses. General and administrative expenses were $29.8 million in the third quarter of 2018. This is a decrease of 28.5% from $41.8 million in the same period 2017.

This was mainly due to effective cost controls and a decrease in bad debt expenses. Operating income was $15.3 million in the third quarter of 2018 compared to $18.4 million in the same period in 2017. This was caused by a decline in revenue from listing services. Change in fair value of securities for the third quarter of 2018 was a loss of $11.8 million.

This amount represents the change in fair value of securities in accordance with FASB ASU 2016-01, which became effective on January 1, 2018. Income tax expenses were $3.1 million in the third quarter of 2018. This is compared to income tax expenses of $4.1 million in the same period in 2017. Net income attributable to Fang's shareholders was $2.3 million in the third quarter of 2018.

This is compared to net income of $15.2 million in the same period of 2017. Earnings per fully diluted ordinary share and ADS were $0.02 and $0.00 in the third quarter of 2018. This is compared to $0.16 and $0.03, respectively, in the same period in 2017. Adjusted EBITDA, defined as GAAP net income before share-based compensation, investment income, change in fair value of securities, income taxes, interest expenses, interest income and depreciation, was $25.7 million in the third quarter of 2018.

This is compared to $24.8 million in the same period of 2017. As of September 30, 2018, Fang had cash and cash equivalents, restricted cash, including current and noncurrent, and short-term investments of $439.9 million compared to $547.1 million as of December 31, 2017. Net cash generated from operating activities was $33.5 million in the third quarter of 2018. This is compared to $57.8 million in the same period of 2017.

Based on current operations and market conditions, Fang's non-GAAP net income is expected to be profitable for the fiscal year ending December 31, 2018. These estimates represent management's current and preliminary view, which are subject to change. Thank you so much for joining us today, and we're now open for questions. Operator, please go ahead. 

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Monica Chen from Credit Suisse. Please ask a question.

Monica Chen -- Credit Suisse -- Analyst

Good evening. More [Inaudible] in Jessie. Thank you for taking my question. So I have two questions here.

No. 1, so I noticed our listing revenue declined year over year and it's lower than we expected mostly due to the decrease in paying members. Can management share more colors on this business? Do you think -- is it because the competition among different platforms that caused the decrease in the paying members? Or do you believe it's more on the macro headwinds and the demand for such listing services is lower? Yes, that's my first question. And my second question is we noticed we have seen an increase in spending on advertising and the promotions in the quarter.

And I wonder, what is our spending budget for next year? And how we're going to see our profitability target for next year? Thank you.

Hua Lei -- Chief Financial Officer

Hi, Monica. Yes, this is Dr. Lei, yes. First, I'll answer your first question about the listing business.

Certainly, we are not doing well in the listing business, so -- which has decreased compared to last year same period. For me, I think probably two reasons here. One is, we do see and observe competition in the markets. And our competitors are doing better than us in 2018.

So I think certainly it's one reason because we are seeing our competitors, are doing more marketing and the promotion expenses much more than us. That's from at the end of last year. Even we've begun to catch up on third quarter, I think -- we feel we will need to do more to put our -- with respect to that track. So I believe it's the first reason.

Secondly, we have many new products. So since the beginning of this year, I said our clients, they need more time to get used to our new products, although definitely, our new products, they are on the right direction in the long run. While in the short period, we still need to educate more both our clients and our salespeople to promote our new products. Certainly, we feel very confident in our listing business.

We said, as long as we are going to spend more on the advertising and the promotion also to create that confidence in our platform, we definitely need to increase on our traffic, which in turn will increase our listing business. So -- and this is for your first question -- or your second question. Definitely, we will spend more in the advertising and promotion on next year. And at this moment, as you can assure, you have very clear number about how much we are going to spend here.

But we're willing to share the number with the investor later. Thank you.

Monica Chen -- Credit Suisse -- Analyst

Thank you, management.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Miranda Zhuang from Merrill Lynch. Please ask a question.

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

Good evening, Mo, Hua Lei and Jessie. Thank you for taking my questions. My first question is about the marketing business. It seems that the revenue this quarter turned out stronger than expected.

Can management elaborate more on like what's the reason behind? And then my second question is a broader question, like what's the management's latest view for the property sector and the next sector in next year? And what's the implication for SouFun's marketing and listing business for next year? Can you elaborate more on your strategy in terms of, for example, providing more services and products to the agents and then property developers and your strategy to expand your user base? Thank you very much.

Hua Lei -- Chief Financial Officer

Hi. This is Lei. For your first question about the marketing service business, yes, we delivered stronger results than expected. Actually, if you look at the quarter-over-quarter growth, these are very strong growth now, although compared to last year the same period, it was still a 4% decrease.

But if we -- considering the late impact, actually we are -- increased our marketing service year over year. I think there are two reasons under the growth of our marketing business. Firstly is the -- since last year, we started to develop mainly new products in marketing service, especially in those leads products like [Inaudible] and others. We are seeing our clients mainly that buy our products, they welcome those new products.

They like the new products. So we tell them to put more capacity into our new products, which drive our marketing business to grow. That's for sure, definitely. The second reason is the -- actually, because we are seeing our marketing business we're doing better when the markets start to going down.

As you know, during the last two years, actually the market was really hard, I mean, the property market, so -- which means the developers, they have less incentive to use the -- those advertising and promotion services. So when the market began to go down since quarter 3 or the end of -- as the end of the September, we are seeing those developers, they have more incentive to use the promotion service. Certainly, our marketing service is one of the top choice for that. So we're expecting on quarter 4 and next year our marketing business will keep the strong momentum.

So this is my explanation for our marketing business. For your second question about the property sector, I think the future property sectors will depends on the economy situation largely, I would say, because many people are arguing the comment, especially in the local comments, they have more incentive to relax current restriction on those ban on selling on the -- on their properties. Actually, it will depend on the economic situation. If the economy is -- keep to -- I mean, keep on going down, probably I think there's a possibility for the government to relax the property sales.

For our new business, including marketing the -- this business, I think as long as the market is stable, I think our business will benefit from a stable market. We don't like a very hard or very bad market, which is not good for our business and also not good for the industry, I think. So this is my personal view for this part. So your third question is about the strategy, right? Can you repeat your third question?

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

Yes. What's the strategy for the marketing and listing business in terms of product -- new products and services? And then what's the strategy to expand the user base?

Hua Lei -- Chief Financial Officer

Yes. I think our strategy actually is very clear. Since we shift back to an open technology-driven platform, we want to keep developing more and more new technology to implement our platform and also to empower our partners and our clients. So our strategy is very clear.

For the marketing business, I think we are on the right direction, especially for our new products, which definitely is welcomed by our clients. So we will keep developing more new products and those -- these products. And also, we are asking our clients to use our new products. So I think definitely, this is current action.

For the listing business, I think the key issue is the traffic probably because we are seeing our competitors, they are comparing the traffic in the past. So I think we need to increase our traffic both by spending more on the promotion and branding and also by creating more brand content in our platform. And also, we want to work with our online, both off-line partners to build up our more original, the unique content in our platform, which definitely will benefit our listing business as well. So generally, I think definitely, the traffic, I think, is a very key issue for the business.

Thank you.

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

Thank you.

Operator

Thank you. [Operator instructions] As there are no further question at this time, I'll now hand the call back to today's presenter. Please continue.

Jessie Yang -- Investor Relations

Thank you, everyone, for joining, and we look forward to speaking with you for our next quarter's conference call. Thank you.

Hua Lei -- Chief Financial Officer

Thank you.

Operator

[Operator signoff]

Duration: 20 minutes

Call Participants:

Jessie Yang -- Investor Relations

Monica Chen -- Credit Suisse -- Analyst

Hua Lei -- Chief Financial Officer

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

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