Autohome - Earnings Call - Q2 2020

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by for Autohome's second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

As a reminder, this conference call 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 second 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. Min 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 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 may 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 discussion 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 broadcast 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. I'm pleased to report a solid quarter with total revenue of RMB 2.31 billion. Revenue from new initiatives increased by 38% year over year and contributed to 23% of total revenue, driven by strong growth from Data Products as well as the auto financing and transaction business.

Adjusted net margin increased year over year to 38.1%. In the second quarter, we made steady strides in building an open and diversified automotive ecosystem with our unique product metrics and ongoing innovations. June traffic saw the number of DAUs who accessed our mobile website, primary app, and mini apps increased to 38 million. A slight improvement compared with the same period of last year and up to 20% compared to March 2020.

Regarding livestream, in the second quarter, over 40 brands delivered 93 livestream programs on our platform, with average viewership reaching 420,000 for each program. We also integrated livestream into large activities such as the 818 Global Super Auto Show and provided training courses to dealers. Our road trip business also achieved a rapid ramp-up with the cumulative GMV in the first seven months of the year, totaled RMB 230 million, more than doubled compared with the number for the full year of 2019, despite the unfavorable market conditions.

In addition, we've accumulated about 1 million pieces of trip reviews and short video posts, further diversifying our content library and establishing a solid foundation for our To-C business. Our Data Products continue to post strong growth in both revenue and the number of paying customers.

In the second quarter, revenue from Data Products increased by nearly 70% year over year for the first half of 2020. A total of 25 automakers were engaged with us. Our Intelligent New Car Launch and Intelligent Marketing Solutions collectively brought us about 70 programs in the first half of 2020, equivalent to the total number of the programs for the full year 2019, demonstrating the value of our intelligent product series.

Our continuous efforts in product innovation have been translated into improved monetization, as we saw a considerable increase in average revenue per automaker. In terms of our Data Products to dealers, in the second quarter, over 17,000 dealers used our Data Products. We've continued to strengthen our service quality and enhance our competitiveness by optimizing existing products and rolling out new ones in the meanwhile.

For example, I'll further upgrade our online showroom and launch the Smart Store 2.0 as the next step. We plan to release Smart Sales and Smart After Sales products. The former one helps dealers manage the user's in-store visit process and assist in conversions, and the latter aims to generate service leads for dealers through content and interactive tools.

With the expanded Smart Series product portfolio, we are able to provide end-to-end closed-loop services from pre sales to after sales. To further support OEM's digital transformation, we expanded our offerings beyond project-based services, with the annual performance-based comprehensive marketing solutions now available, helping our automaker partners plan and carry out their marketing campaigns more efficiently. We have already engaged with some of our strategic automaker partners regarding this solution by now.

As the flagship event for the year, the 818 Global Super Auto Show attracted broad attention from OEMs and dealers, in addition to massive auto consumers and enthusiasts. As a result, a total of more than 70 brands and over 2,400 dealers have joined the event. In terms of our used car platform, in the second quarter, our used car business unit as a whole achieved a rapid revenue ramp-up with nearly 30% year-over-year growth.

As for the auto financing business, in the second quarter, total GMV for consumer loans increased by 45% year-over-year. Finally, for the overseas business, we continued to refine our YesAuto products. Our VR and 3D products are unique in overseas regions, thus attracting a broad user base. In August, the total monthly unique visitors for YesAuto exceeded the 1 million mark and continues to grow.

Alongside the ramp-up in traffic, dealer customer expansion showed strong traction. As of last count, we have connected with over 2,200 dealers and a total SKU on our overseas platform, reaching 450,000. Following our recent 818 Auto Show, we plan to organize our first dedicated overseas online auto show next month to support our customers and further promote our brand in overseas markets. In conclusion, Autohome will continue to leverage its competitive advantages in content, technology, and big data to provide customers with results-driven marketing solutions.

We believe that in facing new market dynamics, we remain focused on expanding the breadth and depth of our offerings while providing customers with highly efficient intelligent services that generate even more value for the automotive industry. With that, I will now turn the call over to our CFO, Jun Zou, for a closer look at our second quarter financial results, as well as the business outlook for the third quarter of 2020.

Jun Zou (CFO)

Thank you, Min. Hi everyone. As Min has already highlighted, we are pleased to report a solid second quarter. Please note that, as with prior calls, I will reference RMB only in my discussion today. Net revenues for the second quarter were RMB 2.31 billion, a slight increase compared to Q2 last year.

For digital breakdown, media services revenues were RMB 932 million. Lead generation services revenues were RMB 841 million. Online marketplace and others revenues increased by 38% year-over-year to RMB 540 million, primarily driven by growth of Data Products as well as auto financing transaction businesses.

Moving on to costs. Cost of revenue was RMB 265 million compared to RMB 264 million in Q2 of last year. Gross margin remained stable at 89% in the second quarter. Turning to operating expenses, sales and marketing expenses in the second quarter were RMB 872 million compared to RMB 893 million in Q2 2019.

P&D expenses were 326 million compared to 361 million in Q2 2019. Finally, G&A expenses were 82 million, roughly stable compared to data for 2019. Overall, we delivered an operating profit of 871 million for the second quarter compared to 875 million in the corresponding period of last year. Adjusted net income attributed to Autohome was 881 million for the second quarter compared to 855 million in the corresponding period of 2019.

Non-GAAP basic and diluted earnings per share and per ADS for the second quarter were RMB 7.39 and RMB 7.36, respectively, compared to RMB 7.22 and RMB 7.15, respectively, in the corresponding period of last year. As of June 30, 2020, our balance sheet remained very strong with cash equivalents and short-term investments of RMB 13.43 billion. We generated operating cash flow of RMB 466 million in the second quarter of 2020.

Let me address our third quarter 2020 outlook, which reflects our current and preliminary view on market and operating conditions and may be subject to changes. At this point, we expect to generate net revenues in the range of RMB 2.24 billion-RMB 2.28 billion. In summary, our second quarter results reflect solid progress in executing our key growth strategy. Data products, together with auto financing transaction business, achieved double-digit revenue growth, contributing to strong year-over-year growth of 38% in the online marketplace and other revenue sources.

Core business has also registered sequential improvements, which indicate the gradual recovery of auto market. Meanwhile, net margin for the quarter improved on a year-over-year basis as we remain committed to enhancing operating efficiency across the platform. We will continue to explore new growth opportunities while keeping a disciplined cost structure in order to deliver positive returns for our shareholders in the long run. With that, we're ready to take your questions. Operator, please open the line for Q&A.

Operator (participant)

Thank you. Now we will begin our Q&A session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question.

If you find your question is answered before it is your turn to speak, you can dial zero two to cancel your question. Do remind that you may only ask a question. Should you have follow-up questions, you may do so by rejoining the queue. One moment, please, for the first question. Our first question is from Thomas Chong from Jefferies. You may begin the question, sir.

Thomas Chong (Managing Director)

Hi, good evening. Thanks, management, for taking my questions and congratulations on a solid set of results. My question is about the auto industry outlook in the second half, as well as how we think about the competitive landscape in coming quarters, and another follow-up is more about the Data Products that we have just talked about. How should we think about the Data Products that are going to be launched in the second half, and how many products do we expect in 2021? Thank you.

[Foreign language]

Haifeng Shao (Co-President)

[Foreign language]

Yes. For the first question, I would like to invite Mr. Shao to take the first one, the outlook of the auto industry for the second half of the year.

[Foreign language]

Now, if you ask my comment about the whole overall market outlook and related to competition, I would say if you look the year round, the second half of the year would be better than the first half of the year.

[Foreign language]

My reasoning behind this is because if you look at the first half of the auto business in China, the overall industry dropped by 20%, and the year-round outlook would be flat or single-digit growth, so if this is the case, we can draw a conclusion that the second half would be better than the first half.

[Foreign language]

Now, talking about the competition, this is in accordance with what we have expected at the beginning of the year. That is, a lot of automakers, they are moving their budgets from offline to online. So there will be a lot of digitalized and online-based activities in the marketing.

[Foreign language]

We also see the second trend, which is more budget would be allocated to the top players in the industry.

[Foreign language]

The third feature is that people pay more attention to the quality and the effectiveness of the activities.

[Foreign language]

Okay. That's all for my answers. Thank you.

Min Lu (Chairman and CEO)

Okay. [Foreign language]

Now, thank you for the question. In relation to the answer of your question about our Data Products, for the first half of the year, actually, we already signed a contract with 25 automakers. And actually, we launched about 70 projects, which is comparable to what happened in 2019.

[Foreign language]

For the latter half of the year, we do have a plan to further upgrade the Intelligent Auto Launch, Intelligent New Car Launch into the version 2.0 upgrading.

[Foreign language]

For the Data Products for the dealers, actually, we already signed the contract with 17,000 dealers. They are all 4S Store dealers. For the later half of this year, we are going to further consolidate our business in Smart Sales, Smart Store, and Smart After Sales for the dealers.

[Foreign language]

For the data product blueprint for next year, actually, we already did some basic research as well as R&D for next year's data product. We are going to transform from the single scenario into a more integrated, more macro picture scenario, which would echo with the Industrial Internet business. This would be our new strategy for the data products next year.

Okay. [Foreign language]

That's all for my answers. Thank you very much.

Operator (participant)

Thank you. Now moving on to the next question, we have Miranda Zhuang from Bank of America. You may begin the question.

Miranda Zhuang (Equity Research Analyst)

Thank you, Operator. [Foreign language]. Thank you for taking my question. So my question is about the profit margin and cost control. So we have seen that companies achieved year-over-year improvement in margin in second quarter, and the non-GAAP Sales and Marketing, R&D expenses in second quarter both declined year-over-year.

So my question is wondering what's the outlook for the profit margin in second half this year. And also, I would like to understand more details about how we are doing the cost control. So we understand the direction is to control Sales and Marketing costs, especially those related to offline expenses, and also control the Headcount.

But my question is wondering if the company can share with us your approach to manage the cost, and how do you decide which costs need to be reduced and which costs need to be retained, and how do you balance the need to reduce the cost of doing cost control versus the need to expand your business, invest your new business, and attract the best talent in the industry? Thank you.

Jingyu Zhang (Co-President)

Thank you, Miranda, for the question. Well, you actually asked a question that probably needs two hours to address, but in a nutshell, in the last three years, we have gradually streamlined our cost control process, our budgeting process, and we have set up cost expense standards for each type of expenses. And we have been able to stick to our flexible budgeting process and always keep actually ROI in mind.

And we always actually evaluate ROI, but still we actually look at our different businesses into three different sort of types. One is traditional businesses. These are the type of business that we want to maximize return, optimize the operating efficiency. And the second category is growing businesses.

And in those kind of businesses, there are different standards that we will actually strengthen on growth rather than, let's say, just the profit itself. And then the third type is incubations. And we do have a pipeline of new products, new business, new initiatives that each year we invest quite extensively to sort of prepare for future growth. And so we treat those three types of business initiatives differently.

And so all our sort of effort is always to try to save more in traditional business and then to reinvest in new initiatives so that we can continue to grow. Yeah, that's what we have been doing, and we have delivered actually on that approach. That's my answer. Thank you, Miranda.

Operator (participant)

Thank you. Please be reminded that you may only ask a question at each turn. If you have follow-up questions, you may do so by rejoining the queue. Next question, we have Eddy Wang from Morgan Stanley. You may begin the question.

Eddy Wang (Executive Director)

[Foreign language]. Thank you for taking my question. My first question is just want to clarify that Mr. Shao just mentioned that in the first half, auto sales in China have been down like 20% year-over-year.

But given the recovery in China auto market, you expect that for the full-year basis, auto sales will be flattish or may record a single-digit growth on year-over-year basis. And on top of that, have you witnessed the strong recovery of OEM to do more advertising, and this will boost our overall media service revenue growth in the second half, especially if we look at a base effect. Second half of this year, actually, we have a quite easy comp. Yeah. Thank you.

Jingyu Zhang (Co-President)

Eddy, thanks for the question. Let me add to what Mr. Shao has just said. I think Mr. Shao was referring to that the industry view for second half new car sales will be slightly, we'll see a slight increase, like single-digit increase. And for full year, the current industry estimate is still there will be maybe a minus 5% to minus 10% growth.

We might see different sort of development later in the year, which is something we hope to see, of course. And as for auto makers' budget, of course, if their sales start to recover, I think their spending will recover. And as the leader in the online marketing sort of space, we will get more market share with our overwhelming sort of number of users and influencers overall industry, and also with our performance-based sort of approach to help OEMs get more leads and sales. Yeah, that's our view. Thank you, Eddy.

Operator (participant)

Thank you. Please be reminded that you may only ask a question at each turn. Should you have a follow-up question, you may do so by rejoining the queue. Next, we have Brian Gong from Citigroup. You may begin the question.

Brian Gong (Internet and Media Researcher)

[Foreign language]. My question is regarding how is the reopening progress of dealers so far given the auto sales has improved a lot. And do you have the plan for the price hike for dealer subscription for next year after the market is stabilized? Thanks.

Haifeng Shao (Co-President)

[Foreign language]

Thank you for your wonderful question. In terms of the number of dealers, actually, the dealers, they would actually grow or shrink according to the sales revenue. If the sales go up, there may be more entry of the dealers. If the sales go down, there may be exit of the dealers.

So there will always be an up and down, and it's quite normal in this market. Regarding to your second question, whether we are going to raise the price for next year, actually, we have not decided yet. We will go into this assessment in September and October this year, so we would be able to know until that time. Thank you.

Operator (participant)

Thank you. Next, we have Yiting from CICC. You may begin your question.

Yiting Zhang (Human Resources Generalist)

[Foreign language]. Good evening, Management. I have two questions here. My first question is related to the 818 auto show.

Could Management share the investment in the auto show and its expected contribution to the top line? And my second question is about the DAU as China is gradually recovering from COVID-19. So what's the DAU level of our PC and Mobile users? Thank you.

Min Lu (Chairman and CEO)

[Foreign language]

Now, thank you for the question. The first one is related to the 818 Super Auto Show. Let's look at the participant ratio. Actually, almost all the active OEMs participated proactively in this 818 Super Auto Show.

There are more than 10,000 actual merchants as well as 2,400 dealers who also participated in this 818 Super Auto Show. We also see that there are more than 100 dealers. They also launched a similar online version of this 818 auto show on their mini-city level.

[Foreign language]

Also, during this 818 Super Auto Show, together with the China Association of Automobile Manufacturers, we launched the Auto Consumers Forum. In this Auto Consumers Forum, we helped to come up with 17 billboards for different rankings. A lot of automakers were selected in these billboards, and this also reflected the Chinese consumers' preference of the auto consumption.

[Foreign language]

We also helped to launch the traditional online auto show, actually improved it and upgraded it into the auto festival. This has become the biggest event for the Chinese auto industry.

[Foreign language]

We also throw a very grand gala evening for the auto show. Actually, we invited 47 superstars who participated and performed during this gala evening. In terms of the viewership, we are number one in terms of the viewers at that time. Also, this helped Suning become an even more successful e-commerce giant during this 818 Super Auto Show.

Jingyu Zhang (Co-President)

Yes. What Jing mentioned is that we have actually attracted a much more bigger audience during the same night as the e-commerce giant gala on the same night, and so that's definitely demonstrated our success. Yeah.

If you look at the social media, the most popular one, like the Weibo and the TikTok and the Kuaishou, this has become a very important hot searches and buzzwords. We are among the top second buzzwords for the hot searches.

Min Lu (Chairman and CEO)

[Foreign language]

As you know, this year is the second time we have thrown such a very big Super Auto Show. This year we get more matured and accumulated more experience. This year is even more successful than last year.

[Foreign language]

Jingyu Zhang (Co-President)

[Foreign language]. Let me address the second question about traffic. We actually have seen that our mobile traffic slightly increased on a year-over-year basis and increased by 20% on a sequential basis. And number of, let's say, visits per user per day on our app and the time spent on our app also increased on a year-over-year basis. This is sort of a result of our more enriched portfolio of content, which includes road trip reviews, short videos, live video streamings, and all different sort of contents now contribute to our growth in terms of traffic. Thanks, Brenda.

Operator (participant)

Thank you. Next, we have Tian Hou from TH Capital. You may begin the question.

Tian Hou (Founder and CEO)

Good evening, Management. [Foreign language]. Management just mentioned auto market in the second half is likely to be better than the first half. So I wonder what's the driver? Is that organic growth or some kind of a government stimulus plan?

And in terms of a government stimulus plan, previous years whenever the auto market was weak, we could see a lot of stimulus policy from the government. But this year we seem like we didn't see much effective ones. So what's the management insights in that front? Thank you.

Haifeng Shao (Co-President)

[Foreign language]

Thank you for the question. First of all, let me define why the second half of this year would be better than the first half of the year. We would compare this year over the same period of last year. If you look at the OEMs, actually, especially May, June, and July, their sales, car sales have improved, and also they even achieved positive growth.

Achieved positive car sales, then their budgeting would be increasing, and there'll be more promotions. We also see that for the second half of this year, the impact from the COVID-19 epidemic would be less severe as the first half of the year. Those are the reasons why we say the second half would be better.

[Foreign language]

Jingyu Zhang (Co-President)

[Foreign language]. Okay. Let me ask you what Mr. Shao has just said. Of course, part of the sort of recovery from May to July was because of delayed demand during COVID-19, the first four months. But then, of course, we believe current auto penetration in China is only 170 cars per 1,000 people, which is much lower than Thailand, Malaysia, or South Korea, which range from 240 to 400.

And the overall industry estimate is that Chinese auto penetration should be able to reach 400 cars per 1,000 people in the midterm. And so we believe it's about time for us to see some growth. And you're right. We do see a lot of different stimulus packages from local government, from central government, ranging from recovered subsidy to NEVs, or reduction of, let's say, sales taxes for used cars, or actually the removal of sales tax for NEVs.

From different cities, you also have subsidy to buy cars or swap used cars. All those, let's say, efforts helped a little bit as well, of course, to promote new car sales. Overall, as mentioned, we do have confidence in the sort of Chinese auto market in the long term. That's our view. Thank you. Thanks.

Operator (participant)

Thank you. Next, we have Frank Chen from Macquarie. You may begin your questions.

Frank Chen (Analyst)

[Foreign language]. I'll translate myself quickly. Just want to get a sense on your view on the increasing geopolitical tension and how would that impact on your internationalization strategy. What's our investment budget on that? And could you quickly, given we have launched our YesAuto platform in U.K. and Germany for several months, could you quickly share some of the KPI on it? Thank you.

Min Lu (Chairman and CEO)

[Foreign language]

Let me take this question. Actually, the overseas strategy is one of our long-term strategies. Ever since last year, we had made a lot of researches and analyses, and we decided to make investment in Europe.

[Foreign language]

Currently, we see that our progress in Europe is even better than what we had expected.

[Foreign language]

Actually, due to the COVID-19 epidemic this year, we thought that the overseas market may not be as promising as what we expected. However, ever since we launched the YesAuto Go Live in May, after three months, we accumulated MAU of 1 million. After we break the 1 million mark end of August, we already achieved 1.3 million MAU. We expect the year-end MAU can reach to 2 million.

[Foreign language]

The type of our products are very popular and widely welcomed by the overseas OEMs as well as dealers. For example, we launched the VR showroom, which are very innovative and which was very warmly welcomed by them.

[Foreign language]

We can say that till today, we don't see the geopolitical complexity had made impact on our business, because what we basically do is trying to establish a very good platform and serve the customers well.

[Foreign language]

Some of the local governments even offered a lot of support to us.

[Foreign language]

Thank you for your questions.

Operator (participant)

Thank you. Next question we have Robin Zhu from Bernstein. You may begin a question.

Robin Zhu (Senior Analyst)

[Foreign language]. I have two questions. One, just on the online share of advertising, presumably up in the first half, will that now dip in the second half given offline activity is resumed? What's a long-term plateauing kind of level for online advertising penetration? And then secondly, on Data Products, does the management have any medium-term financial targets for this business? To you, Haifeng.

Jingyu Zhang (Co-President)

Let me address your question. Thank you. And now, first of all, according to our survey, with most of the OEMs in the first half, they spend about 50% or more online actually this year. And that's definitely an increase compared to the past. And for now, what we have learned from them is that they have been able to experience how efficient online digital solutions are, and they're happy with our actually overall solution, whether it's a new car launch or it's intelligent marketing or it's the data services that we provided to help dealers to convert more customer needs.

And those online digital solutions have proven to deliver better ROI than those offline solutions. And we believe, I mean, they will certainly still reserve a certain portion of offline spending, but then the trend to shift up to online is definitely going to happen. Sorry, your second question was about data products, right?

Robin Zhu (Senior Analyst)

Medium.

Jingyu Zhang (Co-President)

In the midterm, yeah, data products will easily replicate our traditional businesses, and this is our goal. Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I will turn this conference back to management for closing comments.

Min Lu (Chairman and CEO)

Okay. Thank you very much for joining us today. We appreciate your support, and we look forward to updating you on our next quarter's conference call in a few months' time. In the meantime, please feel free to get in touch with us if you have any further questions or comments. Thank you.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.