Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Tuniu Corporation (NASDAQ:TOUR)
Q2 2019 Earnings Call
Aug 28, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and thank you for standing by for Tuniu's 2019 Second Quarter Earnings Conference Call. [Operator Instructions]

I would now like to turn the meeting over to your host for today's conference call, Director of Investor Relations, Mary.

Mary Chen -- Investor Relations Director

Thank you, Andrew. And welcome to our 2019 second quarter earnings conference call. Joining me on the call today are Donald Yu, Tuniu's Founder, Chairman and Chief Executive Officer; and Maria Xin, Chief Financial Officer.

For today's agenda, management will discuss business updates, operation highlights and financial performance for the second quarter 2019.

Before we continue, I refer you to our safe harbor statement in earnings press release, which applies to this call, as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB.

I would now like to turn the call over to our Founder, Chairman and Chief Executive Officer, Donald Yu.

Dunde Yu -- Founder, Chairman and Chief Executive Officer

Thank you, Mary. Good day, everyone. Welcome to our 2019 second quarter earnings conference call. During the quarter, we remain focused on improving our products, strengthening our supply chain and expanding our distribution channels. Tuniu's long-term competitive advantage is now clearer and more defined than ever.

On the products side, we offer a complete suite of top-selling new tour products that captures the evolving demands of Chinese travelers. These products have a higher user satisfaction rating and they are potentially higher margins. We also continue to innovate new products in accordance to market demands, in order to drive new customer acquisitions.

Tuniu's offline retail stores were another driver during the quarter. Our network of stores continue to be an efficient channel of acquiring new customers. Offline retail stores contributed to approximately 22% of our packaged tour GMV during the quarter, compared to 13% during the same period last year.

In terms of the user experience, our offline stores complement our online customer service to give our customers a complete booking experience. In the second half of 2019, Tuniu will continue to expand the reach of its offline retail stores network, with an increased emphasis on efficiency of our existing stores, balancing between scale and profitability. Under our S2B2C model, we leveraged our well known and established brand asset in order to achieve growth through our distribution channels and profits through our supply chain.

Historically, Tuniu's B2C channels, such as our mobile application, tour advisors and our offline retail stores, were our main distribution channels. Over the years, our distribution channel now takes on a more balancing form. Our S2B2C distribution such as Difeng and social e-commerce continue to gain traction. This helps Tuniu evolve from a B2C-centric channel into a multi-channel distribution, allowing Tuniu to reach more customers in lower tier cities at a lower user acquisition cost.

I would like to now give an update on a few of our core focuses in greater detail. Tuniu has always approached products design and offerings with user in mind. For packaged tour products, we continue to focus on expanding the penetration of our top-selling products in destinations where we have a competitive advantage. These products are well received by users and serve as a tool to drive customer repurchases.

As a result, customers who have used the Tuniu, contributed approximately 67% of our overall GMV during the quarter, reaching a historic high. Compared to other products on the market, our core products are highly competitive in their respective destinations both in terms of quality and cost efficiency. Tunia's self-operated new tour is the centerpiece of our strategy in products. We launched our first new tour product in 2009 with idea of designing a high-quality packaged tour products that meets the demand of China's travelers. In terms of quality, Niu Tour's industry-leading as we package together high-quality products and services into every one of these products. Niu Tour utilizes Tuniu's well-known brands to offer high-quality products for popular destinations.

Compared to other products, Tuniu's has full control over the pricing of Niu Tour. This allows us to better monetize these products. Because we designed these products, specifically based on the market demand, these products have a higher user satisfaction rating and repurchase rate.

In order to keep Niu Tour competitive and industry leading, we continuously update our previous products once they reach the later stages of their product cycle. We also actively incorporate direct procurement and our local tour operators into Niu Tour in order to lower costs, while having better control over the quality.

As of the end of the second quarter, we have over 1,000 different Niu Tour products, covering 240 departure cities across China. Since inception, Niu Tour has served over 5 million trips, while maintaining a user satisfaction rating of over 97%. For customers seeking quality, Niu Tour has developed to become the number one choice for these customers.

In terms of contribution to our financials, Niu Tour contributed to approximately 20% of our packaged tours GMV, with the potential of reaching 50% in the future. While Niu Tour is fully provided by Tuniu, another brand that we recently launched is Tuniu Selection, which is the attraction of highly rated products provided by our suppliers. We closely work with our suppliers to ensure Tuniu Selection products are of the highest quality.

Going forward, we will also offer more Tuniu-branded products for themes such as family tours, youth tours, education tours, honeymoon and even travel photography. Our emphasis on self-guided tour products is another component of our emphasis on products. We divided the user demand into three types of the order to better address the needs of each type of user. The first type of user are the ones that are looking for under standardized packages,

Tuniu's dynamic packaging system addresses the demands of these users by allowing them to actively piece together individual products, such as hotel, transportation and destination-based products and services. From the users' standpoint, they are able to customize a trip based on their needs, while also saving money through the bundled price. From Tuniu's standpoint, our dynamic package -- dynamic packaging automatically creates the products without the need of human assistance, allowing us to more efficiently create products for our customers.

The second type of users pick standardized products and experience. In order to address the needs of these customers, Tuniu recommended popular and standardized destination-based products and services to these customers.

Finally, the last type of users demanded tailored products such as the chartered tour guides and the transportation themed products that has the shopping or food courts. These products typically have the highest margins because they are often tailored. As often -- as Chinese travelers become increasingly experienced and their consumption power increases, self-guided tour travelers who prefer themed activities such as shopping, healthcare or beauty, will quickly increase in numbers.

Next, I would like to talk about our efforts in developing our S2B2C model. In the tour industry, the supply chain is a vital component that connects the supply and demand. We made a strong progress during the last few years in further strengthening our supply chain. We continue to consolidate procurement across the company in order to maximize our bargaining power with suppliers and minimize risk by better sharing inventories across various business units.

On the other hand, direct procurement continues to scale, reaching 60% of our packaged tour GMV. During the quarter, we also further strengthened our service network with launch of two new local tour operators, one domestic and one international during the quarter. As of the end -- the end of the second quarter, we have a total of 33 local tour operators across the world.

For the first half of 2019, our local tour operators served 470,000 trips, increasing more than 40% year-over-year compared to the first half of 2018. Margins of our products using our own local tour operators continue to improve during the second quarter, increasing by approximately 3% to 5% compared to the same period last year. The utilization of centralized procurements across the company and the development of our local tour operators' service networks, we have improved our take rates In the long run.

We also continue to make strides in the distribution in our S2B2C channel model during the quarter. Social e-commerce continues to be a fast-growing segment. Based on initial results, social e-commerce is able to help Tuniu penetrate into regions and access customers that we have not reached before. These customers are generally located in lower tier cities. As of the end of the second quarter of 2019, we have 10,000 distributors using our social e-commerce tours with conversion rates continuously growing.

Our Difeng distribution also continue to grow on pace with our expectation, with GMV increasing by double-digits during the second quarter on a year-on-year basis. We continue to find new ways to help our distributors. For example, we recently introduced a tool in Difeng that allows our distributors to assemble tailored products for their customers.

Going forward, Difeng's distributors will play an important role in helpin Tuniu mitigate inventory risks and the lowered blended procurement costs. In the second half of 2019, we will place increased emphasis on technology and notably, our dynamic packaging system.

For our customers, our dynamic packaging system allows them to customize their own packaged products and would be able to save money on the bundle, when compared to individually booking the products by themselves. We are also making investments to increase the level of automation in our work processes in order to improve the efficiency of our employees and the overall company.

Going forward, we will also continue to develop Niu Tour for our distributors, so that they are able to leverage Tuniu's supply chain and back-end systems to distribute products to their customers. We believe our commitment through the development of our service and the sales network, coupled with our improving internal efficiency, will help Tuniu better capture the future growth of China's online air travel market and better position Tuniu to extract long-term value for our shareholders.

I'll now turn the call to Maria Xin, our CFO, for the financial highlights.

Maria Yi Xin -- Chief Financial Officer

Thank you, Donald. Hello, everyone.

Now, I will walk you through our second quarter 2019 financial results in greater detail. Please note that all the monetary amounts are in RMB, unless otherwise stated. You can find the US dollar equivalent of the numbers in our earnings release.

Starting from the second quarter of 2019, net revenues were RMB520.3 million, representing 1% year-over-year decrease. Revenues from packaged tours were down 2% year-over-year to RMB429.5 million and accounted for 83% of our total net revenues for the quarter. The decrease was primarily due to the decline in demand for travel to certain destinations.

Other revenues were up 4% year-over-year to RMB90.8 million, and accounted for 17% for the total net revenues. The increase was primarily due to a rise in commission fees received from the certain travel-related products.

Gross profit was down 7% year-over-year to RMB233 million for the second quarter of 2019. Operating expenses for the second quarter of 2019 were RMB432.2 million, up 16% year-over-year, excluding share-based compensation and amortization of acquired intangible assets.

Non-GAAP operating expenses were RMB382.5 million, representing a year-over-year increase of 23%. Research and product development expenses for the second quarter of 2019 were RMB80.2 million, up 4% year-over-year.

The increase was primarily due to an increase in research and the product development personnel-related expenses.

Sales and marketing expenses for the second quarter of 2019 were RMB224.6 million, up 29% year-over-year. The increase was primarily due to expansion of our offline retail stores and our strengthened promotional campaigns on certain marketing channels.

General and administrative expenses for the second quarter of 2019 were RMB134.4 million, up 4% year-over-year. The increase was primarily due to an increase in general and administrative personnel-related expenses.

Net loss attributable to ordinary shareholders was RMB168 million in the second quarter of 2019. Non-GAAP net loss attributable to ordinary shareholders, which excludes share-based compensation expenses and amortization of acquired intangible assets, was RMB116.4 million in the second quarter of 2019.

As of June 30, 2019, the company had cash and cash equivalents, restricted cash and short-term investments of RMB2 billion. Cash flow generated from operations for the second quarter of 2019 was RMB235 million. In the second quarter, cash conversion cycle was negative 34 days compared to negative 27 days in the corresponding period last year.

Capital expenditures for the second quarter of this year were RMB28 million. Tuniu currently expects to generate RMB763.1 million to RMB801.3 million of net revenues for the third quarter of 2019, which represents 0% to 5% year-over-year increase. Please note that all the forecasts reflects Tuniu's current and preliminary view on the industry and its operations, which is subject to change.

Thank you for listening. We are now ready for your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Ellen Han [Phonetic], a Private Investor. Please go ahead.

Ellen Han -- Private Investor -- Analyst

Hi, management. Thank you for taking my questions. I have two questions. First, can management share with us the revenue breakdown by destinations for this quarter? The second question, what is the reason for the increase in expenses during this quarter? Are we expecting the increase in expense to be a trend going forward? Thanks.

Maria Yi Xin -- Chief Financial Officer

Thank you for your questions. In terms of the destinations, we continue to be affected by the one area, the external events such as tax and internal trade tensions. According to the official travel, specificities, we are seeing declines in Chinese travelers in a number of destinations. Now, in terms of the gross booking breakdown for this quarter, the packaged tours contributed to Tuniu about 30% and the Europe contributed us 20%. Japan and South Korea together 10%, Southeast Asia 10% and islands, both the Maldives together 10% and Americas about 5%.

So to answer your second question about expenses during this quarter, from the second half last year, we opened a lot of new offline stores. Compared to same period last year, we have more than 300 offline stores opened during the second half 2018. So this is a result of the expenses increase in this year compared with the same period last year. But in second half of this year, this increasing will be reduced. So going forward, we will continue to optimize our offline store's efficiency and increase our employees -- our employees ourselves [Phonetic] in the offline stores and unlock Tuniu's profitability potential.

Thank you.

Ellen Han -- Private Investor -- Analyst

Thank you.

Operator

[Operator Instructions] The next question comes from William Yang [Phonetic] of Bluesky Capital. Please go ahead.

William Yang -- Bluesky Capital -- Analyst

Thanks, management. You mentioned S2B2C today in your opening remarks. Can you elaborate a little bit? How it's different from our previous strategy? Thanks.

Dunde Yu -- Founder, Chairman and Chief Executive Officer

[Foreign Language]

This is the first time that we mentioned the S2B2C model. So in the past few years, we have been focusing on diversifying our sales channels and we are able to effectively lower our user acquisition costs and this can be seen in our -- through our financials.

[Foreign Language]

Previously, Tuniu has primarily focused on a B2C distribution. However, as the -- as we really scaled, the marginal user acquisition costs also increased rather significantly. So in the past few years, we've been trying to diversify our channels and one of the ways we really focus on raising the amount of repeat customers and their repurchases on Tuniu, as well as we started opening a number of offline retail stores in order to really diversify our channels.

[Foreign Language]

As we really diversify our sales channels, we are trying to leverage ways to acquire new users through other means. For our overall company, we're trying to control the user acquisition costs to a suitable amount, as well as we are trying to minimize our loss, while also balancing growth.

[Foreign Language]

As our offline stores grow in scale, we have accumulated rather a large amount of experience in operating these offline stores. So, we are seeing a number of our offline stores are breaking even and a certain amount are rather profitable. These stores are generally located in first and second-tier cities. So overall, we are very confident in the health and state of these offline retail stores.

[Foreign Language]

So on the supply chain side, Tuniu has always focused on penetrating deeper into the supply chain. We started our Niu Tour product 10 years ago. So, we have a lot of experience running these products. In 2016, we also started launching a number of local tour operators across the world. As of now, we have 33 in the world. So by using our local tour operators as well as being very penetrated into the supply chain, we're able to offer good services and also to increase on repurchases among our customers, as well as having the possibility of growing our gross margins.

[Foreign Language]

In addition to our Niu Tour products, we recently also launched our Tuniu Selection. We work with a number of high-quality suppliers that we have a long historic working relationship with, and then we are able to recommend these products to our customers.

[Foreign Language]

So internally, we are -- we have consolidated our procurements among the different departments. This way we are able to really scale our purchases and be able to have a strong bargaining power when we meet with our suppliers.

[Foreign Language]

So, this consolidation of our procurements, we really started this during the second quarter of 2019. So, we expect there to be a lot more room in terms of procurement potential through this.

[Foreign Language]

By focusing on our products, we are able to provide our distributors with high-quality products. By having our own Tuniu brand of products, as well as having our own local top tour operators and doing direct procurement, we could provide all of our distributors, which includes B2C, social distributors, B2B enterprises, all these channels with high-quality products, so they are able to outgrow.

[Foreign Language]

We are transitioning from a really B2C-centric model where we have somewhat scattered procurement among the -- within the company. Now, we are dedicating more resources into other channels as well as collectively procuring products and services. We believe our strategies here will help us unlock growth potential outside as well as profitability potential.

William Yang -- Bluesky Capital -- Analyst

[Foreign Language]

Thank you.

Dunde Yu -- Founder, Chairman and Chief Executive Officer

Thank you. Is that helpful?

Operator

[Operator Instructions] We are now approaching the end of the conference call. I will now turn the call over to Tuniu's CFO, Maria Xin, for closing remarks

Maria Yi Xin -- Chief Financial Officer

Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support. And we look forward to speaking with you in the coming months. Thank you.

Operator

[Operator Closing Remarks]

Duration: 38 minutes

Call participants:

Mary Chen -- Investor Relations Director

Dunde Yu -- Founder, Chairman and Chief Executive Officer

Maria Yi Xin -- Chief Financial Officer

Ellen Han -- Private Investor -- Analyst

William Yang -- Bluesky Capital -- Analyst

More TOUR analysis

All earnings call transcripts

AlphaStreet Logo