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Bitauto Holdings Limited (NYSE:BITA)
Q3 2019 Earnings Call
Nov 26, 2019, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

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

Unidentified Speaker

Thank you. Welcome to Bitauto's third quarter 2019 earnings conference call. Speakers from the company today are Mr. Andy Zhang, CEO; Mr. Xiaoke Liu, COO; and Mr. Ming Xu, CFO. After management's prepared remarks Andy, Xiaoke 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 know that the discussions today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. 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.

The Bitauto does not undertake any obligation to update any forward-looking statements 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 that 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 Xuan Zhang -- Chief Executive Officer and Director

Hello, everyone, and thank you for joining us for our third quarter 2019 earnings conference call. The entire auto industry continued to face severe pressure as new passenger vehicle sales in China have decreased over the past 15 months, making automakers and dealers increasingly cautious in their marketing spending.

As a result of the unfavorable environment, Bitauto's total revenue was RMB2.54 billion for the third quarter of 2019. Our transaction services business continued to gain market share. Revenue increased by 3.9% year-over-year in the third quarter to RMB1.42 billion and transaction volume increased by approximately 4% year-over-year to 128,000 units. This is as China's total sales for new and used passenger vehicles decrease by 2% year-on-year, according to the data from China Association of Automobile Manufacturers and the China Automobile Dealers Association.

Looking at our advertising and subscription business, revenue from our advertising and the subscription business for third quarter was RMB923.6 million compared to RMB1.06 billion in the corresponding period in 2018, mainly attributable to the decrease in marketing spending by automakers and dealers caused by the continued decline in our new car sales.

Nonetheless, we have been pleased to see continuous improvements in our mobile traffic and the quality and quantity of our sales leads since we rolled out our upgraded Bitauto media app in the fourth quarter of last year. In terms of our mobile traffic according to QuestMobile in October 2019 DAU of the Bitauto media app increased by 255% over the same period in 2018. The combined DAU of both the Bitauto media app and Auto Pricing app increased by 50% over the same period in 2018.

In terms of our sales leads, our number of sales leads grew by 6% year-over-year in the third quarter despite declining new car sales. In particular, we saw a significant increase in the proportion of organic sales leads, which usually feature better quality and higher conversion rates. Our organic sales leads accounted for over 60% of our total sales leads in the third quarter up from around 40% from the same period last year.

The enhancements in the quality of our sales leads are demonstrated by the increase in our conversion rates as measured by store visits and number of transactions. Thus we believe indicates that our current media strategy has placed Bitauto on the right track to gain wallet share from automakers and the dealers. We've also made steady progress in expanding our new business areas. Our AI-based marketing solution, which we launched earlier this year has received positive feedback from automakers.

We also continued to grow our network of independent dealers to over 33,000 during the third quarter with more than 4,400 paying customers at the end of October. We expect to steadily grow our network of independent dealers and see potential for monetization going forward. Despite the current industry downturn, we still believe it's critical to improve our brand recognition among automobile consumers and broaden our user base in order to further strengthen our competitiveness and better help our automaker and dealer customers.

As a result, we have recently stepped up our strategic marketing spending to enhance the Bitauto brand. We view this as an investment, which should help raise our user metrics and help lower customer acquisition costs in the long run. Now moving to our transaction services business. In the third quarter Yixin continue to gain market share with its loan facilitation services growing 213% year-over-year and contributing approximately 73% of total financed automobile transactions from 24% in the same period last year.

Yixin also further tightened its risk control standards to adapt China's general weak economic condition and changing regulatory requirements. Looking forward we will remain focused on our core business strategies. First, we will help drive higher ROI for our automaker and dealer customers by bringing them more high-quality sales leads.

Second, we will work toward rolling out our AI-based marketing solution, which provides automakers and tailor-made and result-driven marketing tools to all mainstream automakers by the end of this year. Third, we will further improve the revenue mix of our subscription business by migrating more dealer customers to premium and deluxe premium packages and expanding our network of 4S and independent dealers.

Fourth, Yixin will continue to grow its loan facilitation services, enhance risk management and improve its product offerings. In summary, Bitauto will remain devoted to enhance our brand recognition. User experience and the content to further broaden our user base and the traffic as well as continuously improve the conversion rates of our sales lead.

Through providing automakers and dealers with high quality sales leads and the results-driven marketing solutions. We're confident in strengthening Bitauto value proposition amid the industry downturn and building Bitauto into China's top online automobile media and the transaction services platform.

With that I will turn the call over to Ming to go over the financials.

Ming Xu -- Chief Financial Officer

Thank you, Andy. Good evening, everyone. In the third quarter, we continued to devote resources to enhancing content and user engagement as well as improving the quantity and quality of our sales leads. We also introduced new marketing initiatives to strengthen Bitauto's brand image among automotive consumers. While these investments will lead to higher operating expenses in the near term. We expect them to help reduce customer acquisition costs and enhance the competitiveness of our product offering over the long run.

We are confident that Bitauto is well-positioned to weather the automotive industry downturn by bringing exceptional value to our increasingly ROI-focused automaker and dealer customers. Now let's look at our Q3 2019 financial highlights before moving onto Q&A.

Please note that I will reference mainly to financial figures in RMB in the following discussion. Bitauto reported revenue of RMB2.54 billion for the third quarter of 2019, compared to RMB2.72 billion in the corresponding period in 2018.

Revenue from the advertising and subscription business for the third quarter of 2019 was RMB923.6 million compared to RMB1.06 billion in the corresponding period in 2018, mainly due to the decrease in marketing spending by automakers and dealers caused by the continued decline in new car sales.

Revenue from transaction services business for the third quarter of 2019 was RMB1.42 billion representing a 3.9% increase from RMB1.36 billion in the corresponding period in 2018, mainly attributable to the growth of the Company's loan facilitation services. Revenue from the digital marketing solutions business for the third quarter of 2019 was RMB201 million compared to RMB305 million in the corresponding period of 2018, mainly due to the decrease in marketing spend by automakers caused by the continued decline in new car sales.

Cost of revenue for the third quarter of 2019 was RMB965 million compared to RMB1.05 billion in the corresponding period in 2018. Cost of revenue as a percentage of revenue in the third quarter of 2019 was 38% compared to 38.7% in the corresponding period in 2018. Gross profit for the third quarter of 2019 was RMB1.58 billion compared to RMB1.67 billion in the corresponding period in 2018.

Selling and administrative expenses were RMB1.63 billion for the third quarter of 2019, representing a 7.4% increase from the corresponding period in 2018. This increase was mainly -- primarily due to the increasing marketing expenses associated with the Company's mobile apps and the increase in provision for credit losses of finance receivables, partially offset by the decrease in share-based compensation.

Product development expenses were RMB149.6 million for the third quarter of 2019 compared to RMB154.6 million in the corresponding period in 2018. Share-based compensation which was allocated to the related line items of operating expenses was RMB101 million in the third quarter of 2019 compared to RMB173.1 million in the corresponding period in 2018.

Non-GAAP income from operations in the third quarter of 2019 was RMB119.3 million compared to non-GAAP income from operations of RMB408.3 million in the corresponding period in 2018. Net loss in the third quarter of 2019 was RMB161.5 million compared to net loss of RMB20.1 million in the corresponding period in 2018. Net loss attributable to Bitauto in the third quarter of 2019 was RMB164.7 million compared to net loss attributable to Bitauto of RMB26.7 million in the corresponding period in 2018.

Non-GAAP net income in the third quarter of 2019 was RMB109.4 million compared to the non-GAAP net income of RMB345 million in the corresponding period in 2018. Non-GAAP net income attributable to Bitauto in the third quarter of 2019 was RMB51.9 million compared to non-GAAP net income attributable to Bitauto of RMB265.8 million in the corresponding period in 2018.

Basic and diluted net loss per ADS, each representing one ordinary share in the third quarter of 2019 amounted to RMB2.28 and RMB2.29 respectively. Non-GAAP basic and diluted net income per ADS in the third quarter of 2019 amounted to RMB0.76 and RMB0.74 respectively. As of September 30th, 2019, the Company had cash and cash equivalents, time deposit and restricted cash of RMB9.3 billion.

Cash provided by operating activities, cash provided by investing activities, and cash used in financing activities in the third quarter of 2019 were RMB256.3 million, RMB2.43 billion, and RMB1.23 billion respectively. Number of employees totaled 8,061 as of September 30th, 2019, including employees of entities in which Bitauto has acquired and holds controlling interest as of such state. This represented a 4.2% year-over-year increase.

In addition, given Yixin's scale and significance to Bitauto, I would also like to share with you some of Yixin's operating and financial highlights for Q3 2019.

In the quarter, Yixin continued to develop its loan facilitation services and further tightened its risk control standards to better adjust to China's general weak economic condition and changing regulatory environment. The total aggregate financing amount facilitated through Yixin's loan facilitation services and self-operated financing business in the third quarter was approximately RMB9.7 billion.

In the quarter, Yixin continued to develop its loan facilitation services and further strengthened its partnership by working with 12 banks and financial institutions including an auto finance company. For the three months ended September 30th, 2019, Yixin facilitated approximately 94,000 financed transactions, representing a year-over-year increase of 213% and approximately 73% of Yixin's total financed transactions.

In the third quarter of 2019 under U.S. GAAP, Yixin's total revenue reached RMB1.42 billion, representing a year-over-year increase of 3.1% net core services revenue, which include revenues from loan facilitation transactions and new self-operated financing lease transactions Yixin facilitated during the period reached RMB751.5 million, representing a year-over-year increase of 15.6%.

As of September 30th, 2019, 90 days plus including 180 days plus past due ratio and 180 days plus past due ratio for all financed transactions including the third-party loan facilitations were 1.29% and 0.66% respectively. Also there's a company update related to Yixin, which I would like to bring to your attention. Bitauto entered into a voting proxy agreement with Tencent, pursuant to which Tencent granted Bitauto among others, the right to vote certain shares of Yixin held by Tencent on the terms and subject to the conditions set out in the voting proxy agreement.

As a result of the voting proxy agreement, the financial statement -- financial results of Yixin will remain consolidated with Bitauto's financial statements. The voting proxy agreement will be effective from November 16th, 2019 to November 16th, 2020 and will be automatically extended for one year on November 16th, 2020 unless jointly terminated by Tencent and Bitauto in writing.

With that I will turn to guidance for the fourth quarter of 2019. Bitauto currently expects to generate revenue in the range of RMB2.45 billion to RMB2.55 billion in the fourth quarter of 2019. This forecast takes into consideration of seasonality factors in Bitauto's business and excludes any impact of foreign currency fluctuation. It reflects management's current and preliminary view, which is subject to change.

Please note that the non-binding "going private" proposal Bitauto received is currently under evaluation by the special committee formed by our independent directors with support from external legal counsel and independent financial advisor as previously announced. Bitauto management if not in the position to comment on the proposal in our daily operations are not influenced by the potential "going private" transaction.

Let's now start the Q&A session. Andy, myself, Xiaoke are available to take your questions. Operator, please go ahead.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Binbin Ding from JPMorgan. Please ask your question.

Binbin Ding -- JPMorgan -- Analyst

Good evening, management. Thanks for taking my question. My first question is about your traditional business. Your ad and subscription revenue had a double-digit decline in the third quarter and your 4Q guidance implied a 20% decline on total top line. Can you talk about the implication to your ad and subscription revenue moving into 4Q. And given this approaching year -- can you also give us an update on the progress of negotiations with OEMs and auto dealers on next year's contract? My second question is on your Yixin app. So your Yixin app made solid progress in terms of both user and the volume growth. Beyond that can you talk a little bit more on the development of content strategy, which helped you throughout the changes? Thank you.

Ming Xu -- Chief Financial Officer

Thanks, Binbin. And let me translate this to Xiaoke.

Xiaoke Liu -- Chief Operating Officer

[Foreign Speech] Thank you. So I'll take your two questions. Firstly about the business -- about our advertising business.

[Foreign Speech] So based on our current understanding with our customers, the OEM has increased their spend -- their advertising spending in Q4 compared to Q3.

[Foreign Speech] We believe the main reason is seasonality peak season because Q4 we have a lot of events that excluded auto events, including the Double 11 Shopping Festival, the Guangzhou Auto Show with a lot of new car, new model launches and also the promotion season toward year-end. So all these factors contributed to a increased spending by the OEMs.

[Foreign Speech] So also toward the fourth quarter, the marketing department of automakers will also use their remaining budget to help reach their sales target for the year-end.

[Foreign Speech] Meanwhile, our AI-based marketing solution, which was launched in Q2 is now gaining momentum and it's been used by more customers. So we see a expanding user -- customer base from the -- on the OEM side in Q4 and so a rising contribution from this particular product.

[Foreign Speech] So we expect sequentially from Q3 to Q4 the advertising business will recover but although on a full year basis, we still expect the advertising revenue to decline on a year-on-year basis.

[Foreign Speech] So we are still quite cautious on the outlook of the auto market and also the auto advertising -- online advertising market. We are -- I think it's still too early to say that the recovery in Q4 in automotive in marketing spend if any indicator of a improving car market or marketing spend in 2020.

[Foreign Speech] So secondly moving onto your question about the content.

[Foreign Speech] So we observed that in the past few years with the auto market becoming ever more competitive, the automakers are launching more and more models in order to capture any market opportunity in every subcategory or subsector segment.

So as a result in the last five years we noticed that the model on sale or the model available in the market increased from 350 to over 1300. So as a result the traditional content model of the editorials is not suitable to the current market environment where -- because there's not -- the editors are not like -- have sufficient knowledge about each car model.

[Foreign Speech] So from the end of Q2 we reorganized our editorial team. We launched a concept called brand specialist.

[Foreign Speech] So we basically assign each editor to a particular or several particular brand or brand, so that each of them will know the brand in detail and offer better content to the users.

[Foreign Speech] So in the meantime, we also change the format of content previously -- from previously more picture and text basis to now short videos and live streaming because we think that this new format is also more welcomed by the younger generation of internet users.

[Foreign Speech] So believe this change will make our content more professional in terms of the quality of content and also more interactive in terms of engagement with the users.

[Foreign Speech] So so far after a quarter of trial, we have received very positive feedback from both the consumers and also from the OEMs. On the consumer side, we find that the followers of those brand specialist are more active and they can help to contribute more high-quality sales leads and also user generated content.

So on the OEM side we -- also the OEM like our new format and they think that our content has improved a lot in terms of the professionalism and quality.

[Foreign Speech] So we believe that this new content, the changes in content will help us to improve further improve the retention rate of our app and help to sustain the current strong growth in the user metrics of the each app.

[Foreign Speech] So that's my answers to your questions. Thank you.

Binbin Ding -- JPMorgan -- Analyst

Thank you very much. Very helpful.

Operator

Your next question comes from the line of Gary Chen from CICC. Please ask your question.

Gary Chen -- CICC -- Analyst

[Foreign Speech] Hi, management. Good evening. Thanks for taking my question. I have two questions. First one is about our dealer subscription business. Could you please elaborate more about our next year's strategies? Second question is about our transaction business. How do we control the related risk given current week macro economy and auto market? Thanks.

Ming Xu -- Chief Financial Officer

Thank you, Gary. This is Ming. I'll take your two questions. Firstly on the pricing or product strategy of our subscription business. We understand very deeply about the difficulties that our customers are facing. So we actually held our annual dealer conference last year ahead of the Guangzhou Auto Show where more than 800 representatives from major dealers and dealer groups attended our conference.

During the -- I believe you also saw the news report about that conference. So during the conference, we have announced that we will not raise the price of the -- our subscription packages in 2020 compared to 2019. So in 2020 we will -- firstly we will continue to improve the quality and quantity of our sales lead -- provided to the dealers to help them sell more cars.

And secondly we will provide them with more value-added services to help them diversify their revenue stream and also improve their operating efficiency. We believe as long as we can further help our dealer customers, we will be able to improve our sales mix and lay a more solid foundation for future growth of our subscription business.

Your second question is regarding the risk management of our transaction services business. Yeah, so with the -- this certain macroeconomic environment and a changing regulatory background, we are adapting very proactively to this.

So for -- there are a couple of layers -- of things we're doing. Firstly, we are on the origination side we are enhancing our risk management in terms of taking new orders. Secondly is in terms of our mix between self-operated and loan facilitation as you can see we are actively increasing our loan facilitation business ratio in the total business. The purpose is to further lower our balance sheet exposure to the auto financing business.

And thirdly regarding the guarantee practice for the loan facilitation business will continue to diversify our guaranteed partners on top of Dalian Rongxin which is 100%, which is owned by Bitauto. Yixin is also looking at firstly self-guarantee they have recently acquired another guarantee company that can shift, can take some of the guarantee liabilities. And thirdly we're talking with external insurance companies to let them guarantee our some of our facilitated loans.

And lastly but not least we're actually talking with some of our financing partners about new products where they will take part of the risk and we will take part of the risk. We believe this will help us to maintain a healthy exposure to the total auto financing or transaction service business. Thank you.

Gary Chen -- CICC -- Analyst

Thank you very helpful.

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 don't hesitate to contact us if you have any further questions. Thank you for your continued support and we look forward to talking with you in the coming months.

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

Unidentified Speaker

Andy Xuan Zhang -- Chief Executive Officer and Director

Ming Xu -- Chief Financial Officer

Xiaoke Liu -- Chief Operating Officer

Binbin Ding -- JPMorgan -- Analyst

Gary Chen -- CICC -- Analyst

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