Good day, and welcome to the Tuniu Corporation Third Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Maria Xin, Investor Relations and Strategic Investment, General Manager. Please go ahead. .

Thank you, and welcome to our 2016 third quarter earnings conference call. Joining me on the call today are Donald Yu, Co-Founder, Chairman and Chief Executive Officer; Alex Yan, Co-Founder, President and Chief Operating Officer; and Conor Yang, Chief Financial Officer..

For today's agenda, management will discuss business updates, operational highlights and the financial performance for the third quarter of 2016. Before we continue, I refer you to our safe harbor statement in the 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, the figures mentioned during this conference call are in RMB. .

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

Thanks, Maria. Good day, everyone. Welcome to our 2016 third quarter earnings conference call. We had a solid third quarter performance with total travel GMV and net revenue growing 56% and 35.7% year-over-year, respectively. Number of trips from organized tours and self-guided tours increased 67.5% and 46% year-over-year, respectively.

With travel to Europe still recovering during the third quarter, our total travel GMV, excluding Europe and Maldives, increased 71.2% year-over-year, reflecting solid growth rate in other regions. .

Our growth rates continues to be higher than our peers in the industry as we strengthen our leading position in China's online leisure travel market, while expanding our offerings of additional travel-related products. .

For the fourth quarter (sic) [ third ], we have observed a notable improvement in our gross margin and our operation continues to benefit from economies of scale. As the leader in China's online leisure travel market, we are able to procure increasingly more competitively priced products from our suppliers.

Additionally, Tuniu's expansions horizontally and vertically in the travel industry have also positively contributed to our gross margin. .

As our offering of other travel-related services continue to grow, customers have access to more products for their travel needs, which increases their stickiness to Tuniu's platform. Contribution from repeat customers increased to 45.7% of total travel GMV in the third quarter.

Additionally, because we offer more products and services, our conversion rates have increased significantly. In the future, we believe the increased user stickiness and conversion rates will improve our efficiency. .

We are also pleased to see the strong contribution from lower-tier cities as it reflects the coverage and the reputation of our brand. Notably this quarter, GMV from lower-tiered cities reached more than 55% of our total GMV.

We believe that Tuniu is currently well-positioned to take advantage of the growing consumption power in both first tier cities and lower-tier cities across China. .

Now I would like to give an update on our key strategies in greater detail. First, I would like to give an update on the business side. In recent years, Tuniu has expanded its capabilities throughout the travel industry and especially for destination-based service.

By leveraging our regional and the international service centers, we have been able to greatly increase our ability to procure local products and provide additional services to our customers. For example, in Japan, we have significantly improved our procurement network with local suppliers after the opening of our international service center.

Since then, we have successfully launched our DMC business in Japan. By assembling the products ourselves, we are able to create competitively priced products under Tuniu's direct procurement plan. The new DMC divisions in both Japan and Xiamen have demonstrated positive results.

Going forward, we plan to open additional DMC divisions in Beijing, Hainan, Sichuan and Guangxi in order to provide high quality and competitively priced products to our customers. .

During the third quarter, GMV of our transportation ticketing and accommodation reservation increased approximately 500% and 300% year-over-year, respectively. We continue to make significant strides in expanding our coverage of leisure travel resources, particularly in terms of flight routes and hotels.

As Tuniu's coverage of leisure travel resources is one of the most comprehensive in China, we expect this to evolve into a core competitive advantage and differentiate it, Tuniu, from its industry peers. .

Tuniu's transportation ticketing business maintained its high-growth momentum during the third quarter, with airline ticketing, railway ticketing and bus ticketing all posting rapid growth. .

We continue to expand our product coverage and strengthen our relationship with airline companies. Our focus on flight growth to popular tourist destinations has yielded great results as we are able to offer customers competitively priced products and comprehensive growth. .

We are on pace to bring many new airline companies' flagship stores onto our platform in the near future. For the airline companies that already have stores on Tuniu, we continue to deepen our relationship with them. Recently, Tuniu formed strategic cooperation with Futu Airlines [ph] and Capital Airlines to better offer their products on Tuniu.

For example, the agreement will allow Tuniu customers to buy Futu Airlines [ph] or Capital Airlines tickets at highly effective prices and to bundle them with other Tuniu products. .

Let's move on to our accommodation reservation business. Tuniu's accommodation reservation business delivered equally impressive results during the third quarter as it utilized our established leisure travel resources to quickly expand its coverage at popular domestic and international travel destinations.

Currently, we cover over 640,000 hotels across more than 200 countries and regions. Based on our experience, customers booking accommodation for leisure purpose often prefer high-end hotels with higher ADR than business travel. That's why Tuniu's ADR is one of the highest in the industry.

In addition to coverage, we will also introduce various new services to improve the user experience. For example, we will introduce a new booking service that allows users to bundle together various hotel services, such as recreational activities or dining experiences along with the hotel booking.

Also, we will introduce new technology that will allow users to better discover and explore hotels online all through their mobile devices. Combining these innovative technologies with our leisure travel focus, we will differentiate our accommodation reservation from our industry peers. .

As we continue to expand our coverage of air routes and hotel resources, we are able to provide more customized self-guided tour products to our customers. Given the increasing demand for customized trips [ph], we believe that expanding our coverage of leisure travel resources will greatly strengthen our position in self-guided tours. .

Now I would like to talk about our branding. Tuniu has dedicated many years to forming and growing its branding in China. Our brand has one of the highest awareness and reputation within the online travel industry. .

Starting in the third quarter, our brand investments will focus on the channels that bring the highest return on investments for Tuniu. We will also monetize our existing brand assets in order to bring additional growth.

This new branding strategy will be a trend going forward as we control our expenses and make adjustments based on the overall market environment. .

I would now like to talk about our strategy in technology. In order to efficiently monetize our existing brand assets, we must continuously improve user experience and increase our overall efficiency. Technology is a central component driving these improvements.

By continuing to fine tune our customer-facing interface, we have taken significant steps in improving the user experience, features like live customer support through online messengers and booking through WeChat will greatly improve the customer experience and improve our efficiency.

We will be able to reply to customers' requests faster, and we can better utilize our customer service representatives. On the back-end, we have developed various systems that can also greatly improve our efficiency.

These technologies allow us to significantly reduce the time it takes to help customer book products and increase the utilization rate of our staff. Automating more processes and implementing innovative technology will greatly benefit our efficiency in the long run. Overall, we remain optimistic on the outlook of the travel market. .

There are several factors that continue to drive further travel demand in the long run, such as the increasingly variable global Visa policies, a growing middle class and the increase in recreational activities. Tuniu's advantage in the market is its established brand reputation in China and its large base of loyal customers.

Having established our brand, we will focus on improving the quality of our products and services, while focusing on marketing channels with higher ROI. We aim to become an increasingly global company, particularly with our expanding coverage of global travel resources.

With this in mind, we expect to be well positioned to take advantage of China's outbound growth. .

I will now turn the call over to Conor Yang, our CFO, for the financial highlights. .

Thank you, Donald. Hello, everyone. As Tuniu continue to expand both horizontally and vertically in the travel industry, GMV contribution from our other travel-related services will continue to increase. As this trend continues, our total GMV and gross profit will be a better indicator of Tuniu's scale and growth going forward.

That's why starting from third quarter, we'll start to give guidance on gross profit as well. .

In the third quarter, we have started to rescale our marketing expenses to mostly focus on channels with higher ROIs. As a result, our sales and marketing expenses have declined in the third quarter on a quarter-over-quarter basis.

We expect to continue controlling our marketing expenses going forward, as we leverage our brand asset to efficiently expand both our core business and other travel-related services. Combined with our increasing gross margin, we expect to improve our profitability in the near future. .

Now I'll walk you through our third quarter 2016 financial results in greater detail. Please note that all monetary amounts are in RMB unless otherwise stated. You can find the U.S. dollar equivalent of the numbers in our earnings release. .

Starting from the third quarter 2016, the total leisure travel GMV for the third quarter increased by 56% to CNY 7.1 billion. Packaged tour gross booking for the third quarter increased by 34.8% year-over-year to CNY 5.3 billion, including 60.2% from outbound tours.

For the third quarter, net revenues were CNY 4 billion, representing 35.7% year-over-year growth. Revenues from organized tours, substantially all of which are recognized on a gross basis, were up 33.4% year-over-year to CNY 3.9 billion and accounted for 95.1% of our total net revenues for the quarter.

The increase was primarily due to the growth in demand in travel to certain international destinations, such as Japan, South Korea, Middle East, Africa and North America.

The number of trips for organized tours, excluding local tours, increased by 67.5% year-over-year to over 1 million and the number of trips of local tours increased by 26.8% year-over-year to over 840,000. .

Revenues from self-guided tours, which are recognized on a net basis, were up 0.6% year-over-year to CNY 67.4 million and accounted for 1.7% of our total net revenue. The increase was primarily due to the growth in travel to Japan, South Korea, North America, Southeast Asia and domestic destinations.

The number of trips for self-guided tours increased by 46% year-over-year to 540,000 in the third quarter of 2016. .

Other revenues were up 191.6% year-over-year to CNY 130 million and accounted for 3.2% of our total net revenues.

The increase was primarily due to a rise in the service fees received from insurance companies, revenue generated from financial services and commission fees received from other travel-related products, such as transportation ticketing and accommodation reservations. .

Gross margin for third quarter of 2016 was 5.8% compared to 5.6% in the same period in 2015. The increase in gross margin was primarily due to the increased contribution from other revenues as a result of category expansion and the optimization of our supply chain management. .

Operating expenses for third quarter 2016 were CNY 832.3 million, up 58% year-over-year. Excluding share-based compensation and amortization of acquired intangible assets, non-GAAP operating expenses were CNY 775.8 million, representing a year-over-year increase of 58.3% and a quarter-over-quarter decrease of 7.9%. .

Research and product development expenses for the third quarter of 2016 were CNY 168 million, up 92.8% year-over-year.

The increase was primarily due to investment for implementation of additional product categories, such as transportation ticketing, hotel booking and financial services, improvement of online technology and the rise in technology and product development personnel-related expenses. .

Sales and marketing expenses for the third quarter of 2016 were CNY 499.9 million, representing a year-over-year increase of 47.9% and a quarter-over-quarter decrease of 19.8%.

The year-over-year increase was primarily due to advertisement for our mobile channels, expansion of our VIP customer service team and amortization of acquired intangible assets from the previously announced transaction with JD.com.

The quarter-over-quarter decrease was primarily due to the decline in brand promotions, such as advertisement on television and off-line advertisement campaigns. .

General and administrative expenses were CNY 168 million in the third quarter of 2016, up 61.7% year-over-year. The increase was primarily due to an increase in the headcount of our administrative personnel as a result of our business expansion, such as regional service center expansion and product category expansion. .

Net loss attributable to ordinary shareholders was CNY 568.5 million in the third quarter of 2016. Non-GAAP net loss attributable to ordinary shareholders, which excluded share-based compensation expenses and amortization of acquired intangible assets were CNY 511.8 million in the third quarter of 2016.

As of September 30, 2016, the company has cash and cash equivalents, restricted cash and short-term investments of CNY 5.5 billion. .

In the third quarter, cash conversion cycle -- excluding the impact of the prepayment to HNA Tourism, cash conversion cycle was negative 21 days. Capital expenditures for third quarter of this year were CNY 48.7 million. .

Now let me provide guidance for the fourth quarter of 2016. For the fourth quarter 2016, Tuniu expects to generate approximately RMB 2.1 billion to RMB 2.2 billion of net revenues, which represents 10% to 15% growth year-over-year, and RMB 147.4 million to RMB 155.3 million of gross profit, which represents 85% to 95% year-over-year growth rate.

This forecast reflects Tuniu's current and preliminary view on the industry and its operations, which is subject to change. Please note that this forecast reflects Tuniu's current preliminary view. .

Thank you for listening, and we are now ready for your questions.

Operator?.

[Operator Instructions] Our first question comes from Natalie Wu of CICC. .

So a couple of questions here. The first one is what's the corresponding GMV growth rate expectation in terms of organized tours, self-guided tours and also those like travel-related products, like ticketing and accommodation services in fourth quarter? And what's the GMV growth expectation for next year? That's my first question. .

I will provide guidance on fourth quarter. The revenue guidance mostly reflecting the organized tour. As you know, that most of the organized tour is recognized on a gross basis and compose most -- majority of the reported GAAP revenue. So organized tour is similar to 10%, 15% growth rate.

As we have observed, as we mentioned in the past that, overall, business momentum of our company right now, we're experiencing the self-guided tour growth rate is higher, especially for young generations that they're booking ticket or hotel with more flexibility.

That's why our overall GMV actually is growing a lot faster than the GAAP revenues, which is just mostly organized tour. So overall GMV fourth quarter will be 30-something percent year-over-year and self-guided tour will be overall higher than the organized tour. And for next year, we do not provide guidance for next year.

We provide guidance for quarterly -- next-quarter basis. And fourth quarter, actually, there are several factors also affecting that. As you know, that we are on a way of continued to -- as you can see, that we are shrinking our loss and fourth quarter especially you'll see more improvement in terms of the expenses growth rate versus GMV growth rate.

We're expecting the fourth quarter for a long time -- it won't be the first time that you see our overall GMV growth rate will be higher than the operating expenses growth rate overall. And so we're expecting a kind of reasonable growth rate, but with a more noticeable improvement on the loss side.

And we are -- we have planned that by 2018, we're going to reach a whole year of non-GAAP breakeven. So every quarter, you will see the improvement, this financial profile overall. And of course, sort of a recent event such as like in Thailand, the king passed away in October, has certain impact on one of our largest destinations, Southeast Asia.

And also in Korea, the THAAD deployment in -- this September also causing deteriorating diplomatic relationship between South Korea and China. So it had certain impact on the Korean tourist business as well.

So -- and Europe is not really recovering with the terrorist attack in Nice in the third quarter and also the Turkish kind of political turmoil in third quarter also have a certain impact. So overall, the guidance we provide reflect our current view.

And -- but in the longer term, we are still quite optimistic about overall travel -- leisure travel development in China in the overall market, especially, we'll continue to strengthen our leadership position in this area. .

Conor, so my second question is that your gross profit target for the fourth quarter is actually very high.

So is there any improvement in sight in relation with the take rate of the packaged tour? Or simply due to the low base last year, you again related inventory risk and mix shift towards higher gross profit margin business like self-guided tour and ticketing and accommodation business? And you said that you'll achieve...

yes, you said that you will achieve a non-GAAP breakeven in the year of 2018.

Just wondering what's the representing gross profit margin you're thinking about at that time?.

As we indicated, our guidance for fourth quarter, gross margin, we expect year-over-year 85% to 95% of growth rate.

And for the most part, this year so far, we have -- as we have acquired an aggressive plan in the beginning of this year, so in terms of securing the fleet, the inventory quite aggressive in the beginning of this year, so causing further inventory loss from here to like third quarter end.

And so fourth quarter, basically, most of this inventory risk or decrease, to a larger extent, and also that -- with a more reasonable growth rate expectation that we're able to continue to expand our product gross margins.

So -- and combined with the -- well, leveraging on our operational efficiency in the fourth quarter, so we are expecting high year-over-year growth rate on gross margin. And we expect that we'll continue to make effort on this gross margin improvement.

So going forward, we hope we can deliver a very positive trend on the gross margin in 2018, that our plan on the breakeven. .

Our next question comes from Alvin Jiang of Deutsche Bank. .

This is Mari Ma [ph] on behalf of Alvin Jiang. So we have around 3 questions here. The first question is on the new business.

So can we get some update on the [indiscernible] and the financial services business? And the second question is, as we see the traffic of Tuniu is ramping up very rapidly, so what is average cost for each new customer Tuniu acquires? And our last question is on the offline service centers.

So what is number of service centers in 3Q, and is there any guidance of service center expansion in 4Q or 2017?.

[Foreign Language].

[indiscernible], which is our like B2B distribution platform that we started from end of last year. Now we're covering about 10,000 customers on the business side, that we're expecting the coverage to further extend to about 30,000 coverage.

Currently, the team has about 200 people, and we have covered mostly one -- first tier, second tier, third tier cities, so we're expecting to continue to expand our coverage into the fourth tier and fifth tier cities. The rationale is really to leverage our product capability to sell to the vast network of the current offline retail stores.

And right, that's the -- on [indiscernible].

And [indiscernible]?.

[Foreign Language].

Now we'll continue to expand into the supply chain financing that we'll see more and more of. Currently, we have 16,000 suppliers, so we see more and more; our suppliers are utilizing our facility, supply chain management -- supply chain financing.

On the consumer financing, that -- we'll further utilize our network of 40 million members that many of those, after evaluation, we'll start to give them credit. And we also extend our service to like some of these business travelers. Currently, this business is growing.

That's not very sizable right now, but we're expecting this will continue to grow at a very high growth rate.

And with your second -- your second question is the customer acquisition cost, right?.

Yes.

What is the average cost for acquiring each new customer for Tuniu?.

Yes, we have a large diversified client base, such as clients buying train tickets, airline tickets and hotel bookings.

But if we just calculate that to the packaged tour customer acquisition, since we have a decreasing advertising spending on most of the offline advertisement that we were able to decrease new customer acquisition from before -- in the previous several quarters was CNY 200-something to even CNY 280 more or less per customer, and decreased to right now about RMB 140 per customer and we're expecting to continue to trend down.

Our target is to shrink the sales and marketing expenses as a percentage of our packaged tour GMV from previously 8% to 9% to eventually about 3% to 4%. So in that case, that customer acquisition cost will drop below RMB 100. .

Our next question comes from Monica Chen... .

Sorry, let me answer -- we still have a third question. .

[Foreign Language].

Right. Currently, by end of third quarter, we have about 180 regional service centers. We are evaluating their performance based on ROI. We might -- in the fourth quarter, we're closing down some of these lower-ROI places, replacing by some of higher-ROI locations. So third quarter, we have 180 similar to like the second quarter. .

Our next question comes from Monica Chen of Credit Suisse. .

I have 2 questions here. The first question is regarding the competitive landscape.

So we actually see Ctrip and Qunar, they consolidated their online leisure business in this month and I think they said they want to focus on the online leisure travel segment and also Alibaba's Alitrip is also kind of doing good and want to focus more on online travel. So I just want to understand.

Given we currently already have the leadership in online leisure travel, but how do management see the potential competition level going forward, especially will we see these potential challenges that are entering our market? And what is our strategy to keep our main strengths and keep our leading position in the market? And then I have a follow-up question.

.

[Foreign Language].

Online. In terms of the online retail side or retail market that -- for the last 10 years that Tuniu has made an effort to become the leader, #1 in this area. And we believe we'll continue to be the leader and continue to strengthen our market leadership.

And in terms of the product side that right now, currently, actually, we're facing consumer demand upgrading. A lot of consumers are demanding better products. So how to differentiate on the product side, that -- it's our main effort.

Going forward, we will continue to do our own products, a better service, better selections and also pay attention to customers' feedback that we want to differentiate our product -- on the product side.

So for the last 10 years that we have established our market leadership to like our branding, our membership system, our infrastructure technology and our service center system that has created high-entry barriers.

And we believe that our next effort that strengthens on the product side to make a product -- better product, better service to our customers, to differentiate ourselves will continue to support our growth going forward with our peers. .

Okay. And then I have a second question. So management mentioned, we actually rescaled our marketing expense this quarter and going forward, we will focus on the channels with high ROI, right? So I understand we used to do the branding like through TV programs and we seem to have stopped doing that.

So just wanted to understand a little bit more on the channels with higher ROI, so what kind of channels potentially are we targeting? And what's the strategy or the measures we will have to really ensure the efficiency or the effectiveness of this marketing tool that really delivers high ROI?.

[Foreign Language].

Right. Our internal system allows us to track ROI. On each channel, we have spent money on the online channels. We have like using hundreds of different online channels. In the past, when we were pushing very high-growth rates, of course, we spent a lot of marketing dollars.

And on the other side, that they were also content that many of the sales channels, that ROI is not so efficient. So we will start to streamline our marketing efforts and focus on higher-ROI channels that we have a system to track that.

And we will -- on the other side, there are many ways to enhance the marketing efficiency, our marketing dollar efficiency, such as we will focus on our members. We have a lot of members, many registered members or they have visited our website but not consumed yet.

We have these records through our big data, data mining that we'll be able to have a more focused targeting on these members and we will enhance this conversion rate for both old customers as well as the visitor that have visited us or registered with us but not spent money with us. We'll continue convert them into our customers.

So as demonstrated by the percentage of GMV contributed by old customer continue to increase. So this quarter has increased to about 45.7% of the GMV contributed by old customers compared to 1 year ago was only 37.2%. So these are quite efficient ways to enhance the overall marketing dollars.

So we'll continue to focus on higher-ROI channels and methods to make our marketing dollar more efficient. .

[Foreign Language].

Alex was commenting on the competition. .

[Foreign Language].

We think that in terms of competition, actually, we'll be more and more like rational compared to in the past, where lots of companies are competing purely on pricing. By now, each larger player has its own positioning, such as us on the -- focused on leisure travel, online and our peers have their own different positioning.

And I think that changing to focus on purely price competition to more focusing on the margin improvement is what we've seen. And we will also demonstrate ourselves that we have -- in the coming future, that we will have more and more improvement on the margin side as we indicated on our guidance for next quarter and onward. .

[Operator Instructions] Our next question comes from Wendy Huang of Macquarie. .

First is about your gross profit guidance. So you're guiding next quarter's gross profit to be around like CNY 150 million, which suggests a sequential decline from the CNY 236 million in Q3.

Was this purely due to the seasonality and also some of the instances that you just mentioned in Thailand and Korea, et cetera? Was there any other region leading to the pullback in the gross profit again in Q4? And the second question is about your VIP customer service team.

So how many people do you have in that team right now? And what's your expansion plan? Because you mentioned that for this quarter, you actually sped up [ph] on the VIP customer team expansion?.

Yes. The fourth quarter, in terms of seasonality -- our business, that we have a very clear seasonality with a peak on the third quarter in the summer time. So you can see every year, third quarter is increasing dramatically, a big way, from second quarter and then will fall, for example, in the fourth -- will drop through the fourth quarter.

But in terms -- so that's why it's more correct -- a more correct way to look at our business is look at it year-over-year rather than quarter-over-quarter. So in terms of the gross margin, we still demonstrate -- we have indicated that the growth rate will be 85% to 95% compared to the fourth quarter last year.

The reason you said that the number is smaller in third quarter is definitely from the seasonality factor. And the VIP team, currently, we have about [ph] 140, 150 people in the VIP team to -- cultivating the mobile from our members as well as the visitors that have visited our company and.

[Audio Gap].

[Foreign Language].

We don't have a plan to expand too much, and we're focusing more on enhancing the efficiency improvement of the VIP team, yes, as well as... 1,000 plus people. .

[Foreign Language].

Yes. After 1 year of building of the VIP team, that sales team, we have more and more clear -- on the data model that -- how to make it more efficient. So going forward, the focus will be on continuing to improve the efficiency of the VIP team members. .

This concludes our question-and-answer session. I would like to turn the conference back over to Conor Yang for any closing remarks. .

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. .

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..