Hello, and thank you for standing by for Tuniu's 2018 Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.

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

Thank you, Anita. And welcome to our 2018 fourth quarter and full year earnings conference call. Joining me today on the call 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 fourth quarter and fiscal year 2018. 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..

Thank you, Mary. Good day, everyone. Welcome to our 2018 fourth quarter and full year earnings conference call. 2018 has been a year filled with achievements and milestones. We launched a number of initiatives across the company in order to profitable scale.

As a result, we are pleased to announce Tuniu achieved non-GAAP profitability and positive operating cash flow for full year 2018, the first time since our listing. 2018 was not a great year for the travel industry, as a number of external events contributed to decline in Chinese visitors to key destinations, such as Thailand, The Maldives, and Bali.

These events all had a negative impact on our revenue and margins during the year. Even taking into consideration all these events, we were able to find growth in other destinations, such as Europe, Australia and New Zealand. Looking back to 2018, we made strong progress in executing our cost strategies.

During the year, we profited our service network, sales network, and smart network. Our service network is a core element in our product design and procurement. It improved our presence in China's travel supply chain and has allowed us to directly service our customers at various destinations.

Our sales network allowed us to efficiently diversify our user acquisition channels, which in turn lowered our blended user acquisition cost and the required marketing expenses. Lastly, our smart network links our service and sales network through technology and big data.

Operationally, we also made strong progress during 2018 by refining our internal workflows in order to achieve higher levels of efficiency. In 2019, we will continue to refine our network through innovation. Now, I would like to give an update on our 2019 strategies in greater detail. First, I would like to talk about our core leisure travel business.

We currently divide our distribution into various sales channels. The channels are complementary to each other and cover their own respective customer growth. We continue to optimize each channel so that we are able to lower our effective user acquisition cost.

China's travel market has evolved from an offline industry into an industry consisting of both online and offline features. With the development and the diversification of our sales channels, our core leisure travel business has taken the form of a new retail model that seamlessly combines the online and offline experience.

As of December 31, 2018, we have 509 offline retail stores across 69 cities throughout China. In terms of contribution, offline retail stores contributed approximately 17% of packaged tour GMV during the fourth quarter of 2018. This is a significant increase from the 9% of packaged tour GMV in the fourth quarter of 2017.

Given the scale of our offline retail stores and the positive historic data, we believe our offline retail store model has been tested and proven. In order to combine the offline and online experience, we will continue to divide our customer service into two different types.

Dedicated customer service, we are focused on addressing the customer's basic questions and maintaining a long-term relationship with the customer, so that the next time a customer has any travel demand, our dedicated customer service will be the first point of contact.

The other type of customer service is professional customer service, dedicated to addressing more detailed destination related questions. This customer service representatives have specialized expertise in the product and the destinations and are able to answer all travel related questions.

Combining the two types of customer service, we are able to ensure all customers have a satisfactory booking experience, whether they decide to book online or offline. Another of our key channels is our social marketing distribution channel.

By leveraging the relationships of our stakeholders, we are able to provide products and service directly to their closest social networks. During the quarter, we continued to refine our social marketing tools, so that the distributors are able to more easily sign up and have access to more products variety.

For users, we are optimizing this tool so that they can have a better booking experience.

Going forward in 2019, we will continue distributing our social marketing tools to more growth, including tour guide, travel agencies and distributors, so that Tuniu can leverage their social relationships to further increase the coverage and improve conversion rate.

For our existing customers, we offer a number of events and promotions, both online and offline, to better engage with them. During the fourth quarter of 2018, existing customers contributed to 64% of our GMV, reaching a historic high. In November of 2018, we launched two new membership rewards cards available to all customers.

So far, sales have been strong as we sold over 20,000 membership rewards cards since its launch. Both new and existing customers have purchased the cards to experience its various perks. These reward cards have been able to increase user stickiness and encourage customers to book with Tuniu for their next trip.

Next, I would like to talk about our travel-related supply chain. Tuniu's supply chain is the bridge connecting supply and demand. Over the years, we have consolidated and shortened the travel supply chain by steadily moving up our position in the supply chain.

We will continue increasing our presence in the travel supply chain by sourcing our direct procurement and increasing the number of local tour operators.

Direct procurement continues to secure positively as we are able to service this product using our own local tour operators and distribute our packaged tour products using our fast-growing B2B distribution. These two factors have allowed our direct procurement to continue scaling up and deepen its influence within the industry.

As a result, direct procurement as a percentage of packaged tour product GMV reached 60% in the fourth quarter. Our local tour operators are another crucial part of Tuniu's supply chain as they allow us to directly provide services to our customers. For full year 2018, we serviced more than 870,000 trips, domestically, and internationally.

During the fourth quarter, packaged tour GMV using our low -- local tour operators reached 11%. User review and repurchase rates continue to be strong, reflecting customer demand for high-quality services. We will continue to expand our local tour operators and optimize their efficiencies.

As we continue to refine the services of our local tour operators, we will start opening up their availability to other travel agencies for B2B distribution, so that more travelers are able to experience our services.

Tuniu's Difeng Cloud B2B distribution is another key component of our supply chain due to its ability to distribute products to travel-related companies and distributors across China. As the only B2B provider to offer the complete variety of travel products, Difeng has been able to quickly scale and help Tuniu reach more customers.

During the fourth quarter of 2018, GMV of Difeng Cloud increased more than 40% year-over-year. In the future, Difeng will focus on developing distribution in lower tier cities, where product variety and coverage are lacking. Lastly, I will talk about our strategy in technology and data.

As Tuniu continues to sell more customers and increase its product offering, it is crucial for us to use technology to better connect the two. We continue to optimize our trip based on user trips and demographics so that we can have a better understanding of our customers.

By leveraging technology to better match customers with their right product, we are able to decrease manual labor during the booking process, while increasing conversion rate and their user experience. Tuniu's dynamic packaging system is industry leading.

This tour allows users to tailor specific trips based on their needs, combining transportation, accommodation and destination-based products and services into one bundled product. We plan to continue refining the bundle tour in 2019, so that more customers can tailor their trips and enjoy a package price.

We also continue to make strides in optimizing the booking experience for the simplification of our existing booking process and optimizing the UI. This way users are able to more smoothly navigate our app and have a more simplified experience even when booking complicated products.

We continue to see great potential in the Chinese travel market, and Tuniu is in prime position to capture the market growth. In terms of demand, consumption power in lower tier cities across China continues to rapidly grow. Despite this rising consumption power, the availability and selection of travel products is lacking in these cities.

We believe there is huge potential in unlocking demand in lower tier cities. Currently, approximately 50% of our GMV are from lower tier cities, significantly higher than the 40% when we first listed. In 2019, we will continue expanding into lower tier cities and increasing coverage of future travel demands in China.

Overall, Tuniu improves the customers experience has the highest priority during the implementation of our strategies. In 2019, we will push for the utilization of the new retail model in our core travel business to feature online and offline synergy and big data utilization.

We will leverage mobile payments, social networking, and big data to create a better Tuniu that combines both online and offline experiences. The focus here will be on the user experience and big data. We want to ultimately provide users with the best experience by offering the most suitable travel product at the right time.

The continuous execution of our cost strategies will allow Tuniu to capture the future of China's online travel market, as Tuniu implements the new retail model into our existing model. I will now turn the call over to Maria Xin, our CFO, for the financial highlights..

Thank you, Donald. Hello, everyone. Now, I will walk you through our fourth quarter and full year 2018 financial results in greater detail. Please note that all the 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 fourth quarter of 2018, net revenues was 471.2 million, which remained consistent with the corresponding period last year. Revenues from packaged tours were up 23% year-over-year to 357.6 million and accounted for 76% of our total net revenues for the quarter. The increase was primarily due to the growth of organized tours.

Our revenues were down 37% year-over-year to 113.6 million and accounted for the 24% of our total net revenues. The decrease was primarily due to the decline in revenues generated from financial services and services fee received from the insurance companies. Gross profit was up 15% year-over-year to 270.2 million for the fourth quarter of 2018.

The increase was primarily due to the increase in efficiency resulting from the economics of scale. Operating expenses for the fourth quarter of 2018 was 373.3 million, down 18% year-over-year.

Excluding share-based compensation and amortization of acquired intangible assets, non-GAAP operating expenses were 326.4 million, representing a year-over-year decrease of 19%. Research and product development expenses for the fourth quarter of 2018 were 75.9 million, down 32% year-over-year.

Research and product development expense as a percentage of net revenues were 16% in the fourth quarter of 2018, decreasing from the 24% in the corresponding period in 2017.

The decrease was primarily due to the increase in efficiency resulting from the economies of scale and refined management and optimization of research and product development personnel. Sales and marketing expenses for the fourth quarter of 2018 were 209.1 million, up 8% year-over-year.

Sales and marketing expenses as a percentage of net revenues were 44% in the fourth quarter of 2018, increasing from 41% in the corresponding period in 2017. The increase was primarily due to the expansion of customers loyalty program team and increased promotional campaigns in certain channels.

General and administrative expenses for the fourth quarter of 2018 were 120.5 million, down 22% year-over-year. General and administrative expenses as a percentage of net revenues were 22% in the fourth quarter of 2018, decreasing from the 33% in the corresponding period in 2017.

The decrease was primarily due to the increase in operating efficiency resulting from the economics of scale and the refined management. Net loss attributable to ordinary shareholders was 64.7 million in the fourth quarter of 2018.

Non-GAAP net loss attributable to ordinary shareholders, which excludes share-based compensation expenses and amortization of acquired intangible assets, was 17.3 million in the fourth quarter of 2018. As of December 31, 2018, the company had cash and cash equivalents, restricted cash, and short-term investment of 1.7 billion.

Capital expenditures for the fourth quarter of this year were 34.7 million. Now, moving to full year 2018 results. In 2018, net revenues were 2.2 billion, representing 2% year-over-year increase. Revenues from the packaged tours were up 15% year-over-year to 1.8 billion and accounted for 82% of our total net revenues in 2018.

The increase was primarily due to the growth of organized tours. Other revenues were down 32% year-over-year to 409.5 million and accounted for 18% of our total net revenues in 2018. The decrease was primarily due to the decline in revenues generated from the financial services and the service fees received from the insurance companies.

Gross profit was up 1% year-over-year to 1.2 billion in 2018. The increase was primarily due to the increase in efficiency, resulting from the economics of scale, which was partially [setoff] by the decrease in other revenues. Operating expenses were 1.5 billion in 2018, down 26% year-over-year.

Excluding share-based compensation and amortization of acquired intangible assets, non-GAAP operating expenses were 1.3 billion, representing a year-over-year decrease of 27%. Research and product development expenses were 315.2 million in 2018, down 42% year-over-year.

Research and product development expenses as a percentage of net revenues were 14% in 2018, decreasing from 25% in 2017. The decrease was primarily due to the increase in efficiency resulting from the economies of scale and the refined management and optimization of research and product development personnel.

Sales and marketing expenses were 778.1 million in 2018, down 13% year-over-year. Sales and marketing expenses as a percentage of net revenues were 35% in 2018, decreasing from 41% in 2017. The decrease was primarily due to the optimization of promotional expense structures and preference for marketing channels with higher ROI.

General and administrative expenses were 487.4 million in 2018, down 24% year-over-year. General and administrative expenses as a percentage of net revenues were 22% in 2018, decreasing from 29% in 2017. The decrease was primarily due to the increase in operating efficiency resulting from the economics of scale and the refined management.

Net loss attributable to ordinary shareholders was 187.9 million in 2018. Non-GAAP net income attributable to ordinary shareholders, which excludes share-based compensation expense and amortization of acquired intangible assets was 22.4 million in 2018.

In 2018, excluding the impact of the prepayment to Hainan Airline Tourism, cash conversion cycle was negative 27 days, compared to negative 20 days in corresponding period last year. Cash flow generated from the operations was 268.1 million in 2018, compared to a negative cash flow from operations of 418.7 million last year.

This was primarily due to the increase in net income and improved management of our working capital. Capital expenditure was 117.9 million in 2018. Tuniu currently expects to generate 432.5 million to 456.5 million of net revenues for the first quarter of 2019, which represents 5% to 10% year-over-year decrease.

Please note that this forecast reflects Tuniu's current and preliminary view of the industry and its operations, which is subject to change. Thank you for listening. We are now ready for your questions.

Operator?.

[Operator Instructions] The first question today comes from [Elaine Hee], a Private Investor. Please go ahead..

Hi, management. Thanks for taking my question.

Can you share with us what is the key growth drivers in 2019?.

[Foreign Language] As mentioned in the opening remarks, for 2019, our overall strategy is a continuation of our 2018 strategy.

So, notably two parts; for the sales network, we want to increase our sales channel and distribution, so that we're able to diversify our channels and for the service network, we want to increase and improve our direct procurement, as well as our ability to service customers.

[Foreign Language] In 2019, additionally, one of our more primary strategy revolves around improving and optimizing the user experience. We will dedicate more resource into increasing direct procurement, especially within the travel industry, mainly focusing on accommodation, transportation and destination-based products.

So, we will also increase our resources dedicated to R&D and the overall development of our systems. Although we have a very stable system that’s able to service most of our need, there continues to be room for improvement. Now, one of the core focus for us will be improving our dynamic packaging system.

This tool allows customers to tailor their ownership and bundle transportation, accommodation and various services and products into a bundled product, but in 2019, we will also focus on improving this tool so that – and putting in more direct procurement products, so that customers are able to enjoy better bundle price.

[Foreign Language] Just for example, currently over 95% of our long-haul domestic organized tours is already using this dynamic packaging system. 50% of our self-guided tour is using this system as well. So, we are seeing overarching of this ratio being increasing.

So being able to dynamically package this product, allows us to differentiate ourselves from other more static products that are being offered by other travel agencies. There are – another benefit is that, we are able to quickly scale the product and connect multiple departure cities into this package.

This allows us to rapidly provide products to larger cities where generally these kinds of [SKUM product] variety is lacking. Thank you..

Thank you..

Thank you. [Operator Instructions] The next question comes from Ted [indiscernible] with ICBC International. Please go ahead..

Hi, [indiscernible] from ICBC International. Just one quick question here, can the management share with us on your projections for the 2019 revenue and profit? Thank you..

Thank you for your question. We believe our ability to generate a non-GAAP breakeven year is a positive step in our ability to be profitable. In 2019, we plan to continue improve our user experience as just mentioned by Donald, because our customer is our greatest and the most important asset.

We plan to make investments in order to achieve this such as R&D investments. We will dedicate more resource into improving our presence in supply chain, lessening the direct procurement capabilities, and upgrade our dynamic packaging tours.

By improving this user experience, we will refine our competitive advantage and further improve our position, as the leading online leisure travel company in China. As your questions regarding the status [ph], we continue to see the headwinds driven by the external factors in field our core destinations.

But after Chinese New Year, we are seeing the recovery on customer's needs, which help us to impact our March and April. Also, we moved out majority of the insurance products to give our customers a better experience, but it continues to impact our other revenues.

These factors – negative factors, we are seeing new growth drivers in the lower tier cities and improve our procurement capabilities. For the yearly number, unfortunately we don't give the yearly guidance, but we are – for the longer-term, we are very confident for the travel industry..

Okay. Thank you..

Thank you..

[Operator Instructions] The next question comes from William Yen with Blue Sky Capital. Please go ahead. Hello, Mr. Yen, your line is open for question..

Yes, hi, management. Congratulations on the solid results.

I have two questions, the first one is, can you share the GMV breakdown by a destination, and what are the chairs in these destinations?.

Thank you for your question. Domestic destinations contributed around 30% of our GMV; Europe, around 15%; Japan, around 10%; Southeast Asia around 10%; Maldives and other airlines together around 9% to 10%; Australia and New Zealand around 5%; Americans around 5%.

In terms of destination, we are seeing strong recovery from the European destinations; Australia and New Zealand. Japan are also very solid in the last quarter. Thank you..

Thanks.

Second question is, what are your thoughts on this slowing economy? How we are – affect the company and the industry's outlook?.

[Foreign Language] So last year, a number of external events have impacted us and a number of our relatively key destination. This includes places such as Thailand and Maldives. So, this year, as noted by our internal data, Chinese New Year was not too great of a year, but we are seeing a very strong recovery following the Chinese New Year outbreak.

So, in terms of the external events, we believe that these events are temporary in nature and we believe that this year, there will be a relatively strong rebound from these events and on a mid-to-long-term basis, we believe the Chinese economy is fine and the travel industry, we are optimistic of the travel industry, but on a very short-term basis, we do see some temporary headwinds..

Thank you..

We are now approaching the end of the conference call. I would like to turn the call back over to Tuniu's CFO, Maria Xin 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. Thank you..

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