Autohome - Earnings Call - Q1 2020
June 1, 2020
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by Autohome's first quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. The question-and-answer session will follow the formal presentations. As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to introduce your host, Anita Chen, Autohome's IR Director. Ms. Chen, you may begin.
Anita Chen (IR Director)
Thank you, operator. Hello everyone, and welcome to Autohome's first quarter 2020 earnings conference call. Earlier today, Autohome distributed its earnings press release, and you may find a copy on the company's website at www.autohome.com.cn. On today's call, we have Chairman and CEO Mr. Ming Lu, Co-President Mr. Haifeng Shao, Co-President Mr. Jingyu Zhang, and CFO Mr. Jun Zou. After the prepared remarks, Mr. Lu, Mr. Shao, Mr. Zhang, and Mr. Zou will be available to answer your questions. Before we begin, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that 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 Securities and Exchange Commission. Autohome does not undertake any obligation to update any forward-looking statements, except as required under applicable law. The earnings press release in this call also includes discussions of current and audited non-GAAP financial measures. Our press release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures, and is available on Autohome's IR website. As a reminder, this conference is being recorded. In addition, a live and archived webcast of this earnings conference call will also be available on Autohome's IR website. I will now turn the call over to Autohome's Chairman and CEO, Mr. Lu.
Min Lu (Chairman and CEO)
Thank you, Anita. Hello everyone. Thank you for joining us today. We kicked off 2020 with a solid first quarter, reporting total revenue of RMB 1.55 billion. Notably, revenue from new initiatives increased by 32% year-over-year and contributed to 20% of total revenues, compared to a revenue contribution of 15% for the same period last year. The exceptional revenue performance achieved by the new initiative was driven primarily by robust revenue from data products, which increased by over 80% year-over-year. In the first quarter, total new passenger vehicle sales fell by 45% year-over-year as a result of the COVID-19 outbreak and subsequent extension of the Chinese New Year holiday. In many cases, buyers postponed their vehicle purchase plans due to the extensive quarantine measures, while the continued spread of the pandemic around the globe further prolonged the period of domestic containment efforts.
All these factors resulted in further delays in the near-term marketing demands of our customers. Although consumers remained cautious during the first quarter, as the containment regulations have been eased in China, coupled with the government's stimulus policy, the market began to show a gradual improvement from April. During the quarter, we witnessed an increased demand for online marketing services as automakers and dealers shift their focus from offline to online channels. To capitalize on this trend, we introduced a suite of data products and tools. For example, we upgraded our Intelligent Showroom and embedded live streaming functions, both of which were designed to enhance the efficiency and effectiveness of online marketing programs. Our live streaming channel has been popular among automakers as well. Since the outbreak of COVID-19, about 50 automakers have delivered a total of 124 live stream programs on our platform.
We also launched a three-week spring virtual auto show in collaboration with China Council for the Promotion of International Trade, Automotive Sub-Council, in April. This signature event presents an attractive marketing opportunity that drove sales for our customers at a time when offline auto shows are either delayed or canceled in China and abroad. About 60 auto brands and more than 1,300 dealers have signed up for the event. In addition, as we remain committed to supporting our customers and industry, we have been offering free trial of our Smart Instant Messaging to more than 2,000 dealers. Our strategic approach to delivering our business and strengthening our technologies allows us to generate additional value to our customers, which in turn will further enhance our market leadership in the long run.
During the quarter, leveraging our advantages in big data analysis and industry insights, we enhanced our data product metrics that facilitate OEM decision-making. In the first quarter, 17 automakers purchased our data product offerings, compared with 8 automakers in the same period of last year. In the first quarter, we have engaged with automakers for 15 programs for Intelligent New Car Launch and 29 projects for intelligent marketing solutions. In terms of our data products to dealers, in the first quarter, over 17,000 dealers purchased our data products. By the end of the first quarter, close to 3,000 dealers were using our smart call-out and smart assistant, which we launched last year.
Regarding our traffic in March, the number of average DAUs who accessed our mobile website, primary app, and mini apps was 31.7 million, relatively stable compared with the prior year period, despite an unfavorable operating environment in the auto vertical. With 2020 well underway, I'm confident in our ability to maintain our indisputable market leadership, given our well-defined long-term strategic plan and a laser focus on delivering value to our customers and auto industry. With that, I would now turn the call over to our CFO, Jun Zou, for a closer look at our first quarter financial results, as well as business outlook for the second quarter of 2020.
Jun Zou (CFO)
Thank you, Ming. Hi, everyone. As Ming has already highlighted, we are pleased to report a solid first quarter to start 2020. Please note that, as with prior calls, I will reference RMB figures in my discussion today. Revenues for the first quarter were RMB 1.55 billion, compared to RMB 1.61 billion in Q1 last year. For detailed breakdown, media services revenues were RMB 566 million. Lead generation services revenues were RMB 670 million. Online marketplace and other revenues increased by 32% year-over-year to RMB 310 million, primarily attributable to the increased contribution from data products. Now, moving on to cost. Cost of revenue was RMB 178 million, compared to RMB 184 million in Q1 2019. Gross margin remained stable at 89% in the first quarter.
Now, as for operating expenses, sales and marketing expenses in the first quarter were RMB 524 million, compared to RMB 510 million in Q1 2019.
Product development expenses were RMB 292 million, compared to RMB 269 million in Q1 of 2019. Finally, G&A expenses were RMB 89 million, compared to RMB 68 million in the same period of last year. Overall, we delivered an operating profit of RMB 586 million for the first quarter of 2020, compared to RMB 657 million in the corresponding period of last year. Adjusted net income attributable to Autohome was RMB 646 million for the first quarter, compared to RMB 701 million in the corresponding period of 2019. Non-GAAP basic and diluted earnings per share and per ADS for the first quarter were RMB 5.43 and RMB 5.40, respectively, compared to RMB 5.93 and RMB 5.87, respectively, in the corresponding period of 2019. As of March 31st, 2020, our balance sheet remained very strong, with cash equivalent and short-term investments of RMB 13.3 billion.
We generated operating cash flow of RMB 499 million in the first quarter of 2020.
Let me now address our second quarter outlook, which reflects our current and preliminary view on the market and operating conditions and may be subject to changes. At this point, we expect to generate net revenues in the range of RMB 2,220,000,000 to RMB 2,320,000,000. In summary, our solid financial performance once again demonstrated the resilience of our core business, as well as the strength of our new initiatives and disciplined approach to managing costs. As we fulfill our commitment to maximizing shareholder value, we are very pleased to pay our first regular annual dividend to shareholders in April 2020 as scheduled. Going forward, we'll continue to expand our footprint in auto-related sectors while enhancing operating efficiency across each of our business lines, all with the ultimate goal of generating sustained long-term value for our shareholders. With that, we're ready to take your questions.
Operators, please open the line for Q&A.
Operator (participant)
Thank you, Management. We now begin our question and answer sections. If you have questions, please press zero one on your telephone keypad. You will enter a queue. After you are answered, please ask your question. If you find that your question has been answered before it's your turn to speak, please press zero two to cancel the questions. So once again, zero one on your telephone keypad now to ask your questions. And one more reminder, please ask one question at a time. Thank you. Our first question is Miranda from Bank of America.
Miranda Zhuang (Analyst)
Thank you, operator. [Foreign language].
Thank you for taking my question. So as you mentioned, there is an acceleration in offline to online in business activities. So my question is regarding Autohome's strategy and initiatives in this process, in particular on two areas. The first one is on the online live broadcasting. So we would like to get management's view on what's the difference of live broadcasting in the auto industry, which has low transaction frequency and high transaction value versus live broadcasting in retail e-commerce platforms. When offline activities all come back normal, do you expect live broadcasting for cars to be able to sustain a strong traction among users and dealers? And what's the company's strategy to compete in this area? And then my second area is about the private domain traffic management or customer relationship management.
Recently, we are seeing an increasing amount of merchants using tools such as mini programs to attract and interact with users directly to improve transaction conversion. So I was wondering what's company strategy and product offering in this area? Thank you so much.
Haifeng Shao (Co-President)
[Foreign language]
First of all, thank you for your questions. Now, to answer your question, I have to say, through the COVID-19 epidemic, we do see a clear trend that a lot of activities have moved online. We do see that the new car purchase loop has been transferred into the search online. They get a lot of information online, and it's non-contaminated research, plus they make the purchase in the store. So this would have become a closed loop, and this would become a new model for the new car purchasing.
[Foreign language]
For the three parts of this closed loop, for Autohome, we already get prepared, and we already researched a lot of products and services based on the three parts of this loop.
[Foreign language]
For example, the best part, the online communication. We do have a lot of tools, including the 3D tools, the virtual reality, VR tools, and also the virtual new car auto show, etc., to cover the online broadcasting and communication.
[Foreign language]
Now, the second part, the non-contact-based sales, we do have the live streaming and also the video-based sales.
[Foreign language]
Now you ask the question, what's the major difference between the large amount transaction compared with the regular, the small transaction? I do believe there are a lot of differences.
[Foreign language]
For large transactions, for the users, they have to take a look at the car, and they have to make a comparison of the car. These two parts are inevitable.
[Foreign language]
Now, on the broadcasting or live streaming, we do see that the anchorman or the host and the participation of the support of the OEM and the dealers are critical.
[Foreign language]
As you know, the cars are quite expensive, so that's why for the live streaming, we do believe that our support with data products, with the product information, and also training and helping and services for the live streaming was very important.
[Foreign language]
In the first quarter, our live streaming platform, we already worked very closely together with OEMs and the dealers. This is already in utilization.
[Foreign language]
So my last conclusion is, for the live streaming during the COVID-19 epidemic outbreak, this is very important. And also in the car purchasing loop, it is one of the critical parts, but it is not the most important part.
Min Lu (Chairman and CEO)
Okay, I'll answer your question on the private domain user traffic. This is Ming Lu speaking. Speaking of the private domain user traffic, actually we have already paid a lot of attention on this area, and we have already started some of the projects internally, but everybody is talking about the private domain user traffic. It's difficult for the dealers, a single dealer or even OEMs to make full use of the user traffic down there. So we're doing projects, hopefully in Q3 or Q4, I don't know. We're doing the projects. Hopefully in Q3, late Q3 or early Q4, we can launch new tools or products helping dealers or OEMs to acquire more and more user traffic, the private domain user traffics, and helping them to convert the user traffics to the sales lead. We'll see. We'll try our best.
Miranda Zhuang (Analyst)
[Foreign language]. Thank you.
Operator (participant)
Next question is Eddy Wang from Morgan Stanley. As a reminder, please ask one question at a time.
Eddy Wang (Analyst)
[Foreign language]. Thank you for taking my question. My question is regarding management's view on the auto market recovery in the second quarter and in the second half of this year. As you mentioned that you have witnessed improvement in terms of the auto demand since April. Do you think it's just a shift of some auto sales from first quarter into the second quarter, or you have seen a structure improved sentiment for auto sales in the full year 2020? And what will be the impact of your overall revenue in the second half of this year? Thank you.
Min Lu (Chairman and CEO)
Okay. The pandemic, to me, I think it has a huge impact on the auto industry. And right now, there's so many people who have lost their jobs. And plus the pandemic maybe is still there, and there's some saying that there could be a second wave, things like that. So it hit the economy heavily. So I think this pandemic has a huge impact in the future as well. So I may ask Shao Haifeng to address your specific question.
Haifeng Shao (Co-President)
[Foreign language]
Thank you for your question. I would love to share my view regarding the market with you. If you look at this year, because of the epidemic of the COVID-19, we believe the new car sales for year-round will drop by 10%-15%. That's not only our estimation, but also the estimation from the China Council for the Promotion of International Trade, the Automotive Sub-Council.
[Foreign lnaguage]
Now, if you look at the passenger car, if you look at the sales in April, it's still negative growth. But we have to wait until May and June to verify whether this negative growth will continue or not. Maybe that's due to some of the dealers put the Q1 sales quota to April.
[Foreign language]
For the OEMs, as you know, their sales budget, marketing budgets always grow along with their total sales volume. If the sales volume goes down, their marketing budgets will also continue to go down.
[Foreign language]
Actually, this year, because of the COVID-19 epidemic, we do see a new trend, which is moving the offline budgets to spend online. So that's why we do see this trend will continue, and this is irreversible.
[Foreign language]
So this year, we do see a lot of opportunities with aligning our data products as well as the new tools business.
[Foreign language]
Jun Zou (CFO)
Yes. Let me just add one point. Actually, I think for the first time, online budgets will exceed 50% of the total OEM marketing budget this year. Yeah, definitely it's a great opportunity for us.
Eddy Wang (Analyst)
Okay, thank you.
Operator (participant)
Next question is Thomas Chong from Jefferies.
Thomas Chong (Analyst)
Thanks, Management, for taking my questions. My first question is about our cost control initiatives. Can management share about our strategies in coming quarters? My second question is about our overseas expansion strategy. Given that in overseas market, we are seeing the impact from coronavirus is still quite severe, how should we think about our global online auto show in August as well as our strategies for this year? Thank you.
Jun Zou (CFO)
Hi, Thomas. I will answer your first question, and then Mr. Lu will answer the second one. Regarding to cost control, we'll continue actually our prudent cost control programs, and in particular in traditional business, as we have implemented in the last two and a half years. We believe we will be able to actually optimize our overall operation and deliver good returns to our shareholders. That's our belief, and we are committed to do that in the future.
Min Lu (Chairman and CEO)
Okay. Regarding the development of our overseas, actually we have already set up two subsidiary companies in the U.K. and Germany already, and the teams are already there. Actually we have already launched an application called YesAuto, and you may download it from the Apple Store.
If you want to see the progress, maybe you should download that and take a look at it and the progress that we are making. But you're right. Because of the pandemic, the whole process was being delayed because our application, there are some dealers already, but the whole process was delayed because all the dealers have shut down. So it delayed our process, but we will continue our efforts. Hopefully the pandemic can be ended soon. And August 18th, we will launch the virtual auto show in China as we did last year. This year, hopefully we can launch the auto show the same time in the U.K. and Germany. We'll see. Thank you.
Operator (participant)
Next question is Frank Chen from Macquarie. As a reminder, please ask one question at a time.
Frank Chen (Analyst)
[Foreign language]. Thank you for taking my question. I understand that COVID-19 may be a trigger for OEMs and dealers to shift their budget online. It's encouraging to say OEMs are now allocating over 50% of their budget online in the first quarter. And can management share with us what's the potential here looking ahead? Thank you.
Haifeng Shao (Co-President)
[Foreign language]
First of all, thank you for your question. Well, actually for the first quarter, because of the COVID-19 epidemic, there is actually no offline activities. So that's why the OEMs moved their budgets to online.
[Foreign language]
In Q2, we do see the offline marketing activities gradually recover. However, compared with 2019, the percentage of offline in the total budget is still less than what happened in 2019.
[Foreign language]
Why this is the case? That is because in Q1, it provided a very good opportunity for the OEMs to work with us. We launched the Intelligent New Car Launch tool for them, and we also worked with them to do the live streaming as well as the video and other online activities, and as the OEMs were very happy to see that the effect was really good with the lower cost.
[Foreign language]
So my judgment is, for the offline activity, it will not vanish. It will still be there. However, the size of the online will be gradually growing in what's squeezed the offline budget.
Jun Zou (CFO)
And Frank, let me also clarify one thing. What I meant is that the online spending for this year will exceed 50% for the entire year. Thank you, Frank.
Operator (participant)
Next question is Tina Long from Credit Suisse.
Tina Long (Analyst)
[Foreign language]. So my question is regarding the data products. So out of all the products that we have launched in the past 12-18 months, what are the products that actually have been receptive the best from all the distributors, and what kind of data to back that up? And also in the next 6-12 months, what are the new data products rollout plans? And also what are the expected adoption rates by the dealers? Thank you.
Jingyu Zhang (Co-President)
[Foreign language]. Sorry.
Let me explain to you and clarify what is the data product.
[Foreign language]
Our data product covers two major parts. One is Intelligent New Car Launch and Intelligent Marketing Solutions. These two are for OEMs.
[Foreign language]
We also have products for dealers, the Smart Call-Out and the Smart Assistant.
[Foreign language]。
For the OEMs, the Intelligent New Car Launch and Intelligent Marketing Solutions, there are already 17 OEMs procured this, and they already use this product.
[Foreign language]
Actually, last Q1, I mean Q1 in 2019, the number was only eight. This year it was 17.
[Foreign language]
Now talking about the Smart Call-Out and the Smart Assistant offered for dealers, the Q1 of this year, the number was 17,000. 17,000 dealers already used it, and if you compare with 2019 Q1, the number was only 14,000.
[Foreign language]
So the core value of such products, not only offered to OEMs but also offered to dealers, is to try to enhance the conversion rate. The enhancement of the conversion rate can be 20%-35%.
[Foreign language]
For the later half of this year, on the OEM side, we are trying to launch the intelligent activities. Actually, we want to connect the OEMs with the dealers through such intelligent activities.
[Foreign language]
For the dealer side, for the later half of this year, we are going to launch the smart sales tools to help them enhance the conversion rate after customers visit the store.
[Foreign language]
We are going to upgrade the Intelligent New Car Launch. In this way, this product will be more perfect sized.
Okay，[Foreign language].
Min Lu (Chairman and CEO)
On top of what Jingyu has said, maybe I can explain a little bit more. Actually, there are a suite of data products that we are developing and selling. For example, there's a product called Smart R&D, which is for the use of the R&D phase of the OEM when they design the new car models, things like that. We have the big data to help them and support them to design the models that suit the needs of their customers, things like that. There are many. And Jingyu mentioned the Smart Call-Out, for example. That's like an AI added tool to the dealers. You know, once they receive the sales lead from us, and their call center guys will make a phone call to the lead.
When they talk to the customers, on the screen, there will be a set of messages or the parameters that the customers are talking about. For example, the acceleration of what kind of a model. The system will immediately recognize his questions and pop up the answer on the screen so that the telephone guy can give very precise answers and make the explanation, things like that. This is very welcomed by the dealers. For example, last year, the dealers that used this tool, they improved their stock rate by 20% roughly. Okay.
Operator (participant)
As a reminder, please ask one question at a time. Our next question is Brian Gong from Citigroup.
Brian Gong (Analyst)
[Foreign language]. I will translate myself. So in the first quarter, the number of dealers was slightly impacted by the COVID-19. So when does the number of dealers can recover to normal level in management's point of view? Thank you.
Haifeng Shao (Co-President)
[Foreign language]
Thank you for the question. Talking about the numbers of the dealers, it always goes with the new car sales. If you look at the sales transaction volume, if the total sales, the year round, would go down by 15%, I would foresee the dealer numbers would also go down. Q1 would be the valley, and it will gradually recover. But overall speaking, the total number of dealers would also go down accordingly with the sales volume go down.
[Foreign language]
We will also watch what will happen further, and we have to watch and observe. However, I think one key element is very critical, which is the profitability level of different brands.
[Foreign language]
Now this year, if you look at the Japanese brands, actually the Japanese brands, their margin level would continue to remain strong.
[Foreign language]
The German brands would be stable.
[Foreign language]
The U.S. brands would decline.
[Foreign language]
For the South Korean and the French cars, they would go, you know, they would be quite the worst.
[Foreign language]
So for the Chinese brands, we have to wait and see to see how it evolves. I think all these brands, if you look at the mixture of all the different brands, and if you look at the profitability level of different brands, you will have an idea.
[Foreign language]
Thank you.
Operator (participant)
Our next question is Tian Hou from TH Capital.
Tian Hou (Analyst)
[Foreign language]. So the question is related to the supply chain of the OEM. So overseas pandemic is actually happening much later than China, and they just started to go back to work, resume their business operation. So for the auto productions, there are some major components that we actually need to import it from overseas vendors. So what do you see the supply situation in the second half? Will the overseas pandemic situation impact the potential manufacturing capacity? Thank you.
Jun Zou (CFO)
Tian, thanks for the question. For the supply chain, you know, of course, you know, we were also, you know, worried about that in the beginning. Most of the OEMs have usually about like two months inventory of, let's say, auto parts. And what we'd like to see is that most European actually manufacturers have resumed to work. And the U.S., you know, were a little bit lagging behind in mid-May, but they are gradually resuming to work, you know, in late May to early June. So that is a good sign. But that being said, you know, as Mr. Lu mentioned, you know, a lot of experts are warning about a second wave of the pandemic, you know, we're looking to see. If that happens, you know, the supply chains will definitely be disrupted.
But in the long term, I think, you know, this will really, I guess, you know, promote the localization of the auto supply chain in China. And as far as we understand, you know, many auto OEMs in China are planning to do that. And even for Tesla, they have a plan to 100%, you know, localize their supply chain by next year, sometime next year. So this is something, I guess, you know, we're sure about. Thank you, Tian.
Operator (participant)
Our next question is Robin Zhu from Bernstein.
Robin Zhu (Analyst)
[Foreign language]
Min Lu (Chairman and CEO)
Okay, let me ask you a question briefly. Autohome, as we talked many times before, that we are always exploring the future opportunities while we're doing the current business. And today we have already discussed the traditional business line, the advertisement, and the lead generation. But in the future, I think there are new areas that we're going to develop. For example, the data products we mentioned. And the used car part, I think there's a good opportunity for us to expand our business. And we actually invest a lot. And two years ago, we started to become profitable in terms of this business unit. And hopefully, in the next few years, we can expand our business even bigger. And then aftermarket, we're looking to aftermarket and see if we can develop a new product and services, things like that. Of course, these are to-be business.
Also, we're looking to the possibility of to see, and for example, our coverage channel. It grows fairly smoothly, and actually, we hope it will be even bigger in the future, and also, we have already launched the shared car platform, where you can find several shared car companies with us, and we hope we can expand this way, so in the future, we will keep our traditional business growing. Of course, it'll be affected by the industry, but on top of that, we'll develop the new business lines. Thank you.
Operator (participant)
And this is the end of question and answer sessions. Now I hand back to management for closing comments. Thank you.
Min Lu (Chairman and CEO)
Thank you very much for joining us today. We appreciate your support, and we look forward to updating you on our next further conference call in a few months' time. In the meantime, please feel free to get in touch with us if you have further questions or comments.
Operator (participant)
Thank you. This conference call is ending the record now. Bye.