Earnings Call Transcript - ATHM Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by for Autohome’s Second Quarter and Interim 2021 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, the 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, Aggie Zhao, Autohome’s IR Director. Mr. Zhao, you may begin.

Aggie Zhao, IR Director

Thank you. Thank you, operator. Hello, everyone, and welcome to Autohome second quarter and the interim 2021 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 Chief Executive Officer Mr. Quan Long; co-President Mr. Haifeng Shao; Chief Technology Officer Mr. Xiao Wang; Vice President Mr. Jun Zou; and Finance Director Miss Hong Jiang. After prepared remarks, Mr. Long, Mr. Shao, Mr. Wang, Mr. Zou, and Miss Jiang will be available to answer your questions. Before we begin, please know 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 doesn't undertake any obligation to update any forward-looking statements except as required under applicable law. The earnings press release in this quarter includes discussions of certain unaudited 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. Now I will turn the call over to Autohome Chairman and CEO, Mr. Long.

Quan Long, Chairman and CEO

Thank you, everyone. And thank you for joining us today. We are pleased with the improving metrics across our new initiative in the second quarter, along with margin expansion. Total revenues for the second quarter were RMB1.94 billion. Revenue in our online marketplace and others business increased 10% year over year, and it contributed 30.7% to total revenue, compared with 23.4% in the same period last year. Data products maintained a strong growth momentum, generating a revenue increase of 47.1% year over year. Thanks to the higher contribution from OEM data products. We are excited to report that with steady operating efficiency improvements, TTP broke even at the operating levels for the first time in June, representing a significant milestone. We also made further progress in our cooperation with new energy vehicle automakers. During the second quarter, revenues from NEV brands jumped 238% year over year. Adjusted net margin in the second quarter continues to expand, rising 2.7 percentage points year over year to 40.8%. As the impact of the global trade shortage on the new passenger vehicle sales market gradually deepened in the second quarter, the production and sales of new EVs in May decreased by 2.7% and 1.7% year over year, respectively. This trend continues to improve with production and sales declining by 13.7% and 11.1% year over year, respectively. In addition, automakers were further impacted by the sharp rise in the cost of raw material. As automakers contend with multiple unfavorable conditions, they are adopting an even more cautious approach to plan marketing budgets, and our traditional business is facing great challenges. On the other hand, China's auto market has continued evolving with mixed performance across different segments. The market has witnessed expanding trading volume for used cars, and the new energy vehicles are moving into the fast lane, highlighted by a circular growth trend in monthly sales. As a result, the automobile industry split widened. In the wake of challenges and opportunities stemming from the industry changes, we continue to improve our consumer end user experience while implementing hierarchical management for business end customers to provide high value derivatives. All these rules underpin our effort to maintain a solid fundamental across traditional business with an industry-leading position. Meanwhile, by vigorously developing new initiatives across data products, new energy, and used car business, we are creating our second curve of growth to promote the long-term sustainable development of our company. Significantly, our constant efforts in content enrichment are preparing our progress. And we are pleased to see our traffic continues to lead the auto media sector's performance compared to the second and third players while maintaining rapid year-over-year growth. According to statistics from QuestMobile in June, the number of average daily active users who access our mobile website, primary app, and mini apps grew to 44.1 million, representing a 16% year over year increase. In addition, with the upgrade of our app, we further optimized user experience, featuring more video-form live streaming and interest-based content offering. The latest version is poised to attract a younger demographic. With regards to our traditional business, we believe we will remain as a leader in terms of market share in the auto media vertical and continue to focus on key customers, prioritizing customized solutions to meet their needs. While enhancing our service quality, we are also actively expanding our service to the non-advertising business. For example, we help automakers with user operations, offering OEM direct access to their users and aggregating their own user access. On the lead generation front, we continue to strengthen our position by providing dealers with a set of operating tools such as live streaming and instant messaging to help improve their operation and conversion efficiency. Amidst the fast-developing NEV market, we established a dedicated new energy business department to explore market opportunities. Through business model innovation, we are finding solutions to address industry pain points in branding, distribution channels, and the user operations, helping EV automakers seize emerging and growing opportunities. In the first half of this year, we cooperated with 20 NEV brands, resulting in a 238% year-over-year jump in revenues from NEV brands across our platform during the second quarter, far exceeding the growth rate of the EV industry. Now turning to the used car front, we believe 2021 is going to be a crucial year for Autohome and TTP, as we are committed to deepening our cooperation for further success. With the acquisition of TTP, Autohome's used car business has formed a C2B2C end-to-end business covering the used car lifecycle from selling to purchasing a used car, which enhances our ability to serve users and customers. And TTP, supported by Autohome, has improved its operation and transaction efficiency. In June, TTP broke even at the operating level for the first time, a significant milestone that demonstrates great synergies between Autohome and TTP. We are also looking for other opportunities that could lead to synergistic development and the expansion of our auto ecosystem. Moving on to our data products. Our consistent efforts in product optimization and effectiveness improvement have been gaining momentum among customers. In the second quarter, our total of 19 automakers utilized our data products and the total number of programs for intelligent new car launch and intelligent marketing solutions was more than 30. As for data products for dealers, we remain focused on product upgrades and enhanced product value, offering a full spectrum of services from user acquisition to transaction and payment. In conclusion, we are fully committed to maintaining our leading position in terms of traffic and market share in the auto media vertical while exploring fresh pathways in new business areas. We have achieved meaningful progress in data, used car, and EV businesses, and our strong balance sheet and profitability allow us to invest in these key areas. We plan to announce our strategic upgrade plan in detail at the upcoming Investor Day on September 15 to seize more market share opportunities and ensure our long-term growth. China is the world's largest new car market and the largest NEV market. China’s used car market is also one of the fastest growing major markets in the world. However, in contrast to developed countries, China’s car ownership per 1000 people and the used to new car sales ratio still have huge growth potential. Going forward, we believe the auto industry will gradually recover from the temporary difficulties we are facing at the moment, and the long-term growth trend remains unchanged. Looking ahead, with our strategy upgrade, our cooperation with Ping An in terms of internal resources, traffic, and technology will unleash room for further growth, exceeding ourselves and bringing more value to users and customers.

Hong Jiang, Finance Director

Thank you, Quan Long. Now, let me walk you through the key financials for the second quarter. Please note that, as with the prior quarter, I will reference RMB only in my discussion today unless otherwise stated. Net revenue for the second quarter was RMB1.94 billion. For a detailed breakdown, media service revenue came in at RMB600 million, lead generation service revenue was RMB744 million, and the online marketplace and others revenue increased by 10% year over year to RMB594 million, primarily driven by the consolidation of TTP and the increased contribution from data products. Moving on to cost. Cost of revenues was RMB262 million, compared to RMB265 million in the second quarter of 2020. Gross margin was 86.5% in the second quarter compared to 88.5% in the same period last year. Turning to operating expenses. Sales and marketing expenses in the second quarter were RMB562 million compared to RMB872 million a year ago. The decrease was primarily due to a reduction in promotional spending. Product and development expenses were RMB335 million, compared to RMB326 million in the second quarter of 2020. Finally, G&A expenses were RMB177 million, compared to RMB82 million in Q2 2020. The increase was primarily attributable to the consolidation of TTP and bad debt provision related to certain advertising customers. Overall, we delivered operating profit of RMB673 million for the second quarter compared with RMB871 million in the corresponding period of 2020. Adjusted net income attributable to Autohome Inc., was RMB790 million for the second quarter, compared to RMB881 million in the corresponding period of 2020. Non-GAAP basic and diluted earnings per share for the second quarter were RMB1.57 and RMB1.56 respectively, compared to RMB1.85 and RMB1.84 in the corresponding period of 2020. Non-GAAP basic and diluted earnings per ADS for the second quarter were RMB6.27 and RMB6.26 respectively, compared to RMB7.39 and RMB7.36 in the corresponding period of 2020. As of June 30, 2021, our balance sheet remained very strong with cash, cash equivalents, and short-term investments of RMB18.43 billion. We generated operating cash flow of RMB581 million in the second quarter of 2021. With that, we are ready to take your questions. Operator, please open the line for Q&A.

Operator, Operator

We will now begin the question-and-answer session. And the first we have Thomas Chong from Jefferies. Your question, please.

Aggie Zhao, IR Director

Thomas, please go ahead. Hello? Thomas? Operator, there's no one to ask…

Thomas Chong, Analyst

Sorry, can you hear?

Operator, Operator

Hi, Thomas.

Thomas Chong, Analyst

I'm sorry about that. The connection had some problems. The question is about the auto industry outlook. Can management share about the change going forward? Thank you.

Aggie Zhao, IR Director

We will ask Chairman and CEO, Mr. Long to answer your question.

Quan Long, Chairman and CEO

Thank you for the questions. Actually, if you look at the first half of the year, and then we make some judgments over the future outlook. So, first of all, Q1 data was really good in the auto market. Q2 we do see the data dropped sharply. And after we communicated with the industry experts, we found out that the lack of enough supply of chips as well as the raw materials increase in cost does impact the auto market. I don't think this situation will be eradicated in the short period. Maybe in Q4, the condition may ease. So, we believe that for the whole year in terms of auto sales, we would experience positive growth. However, the positive growth would be quite limited, likely single-digit growth. So, definitely, it will be less than 10%.

Aggie Zhao, IR Director

Okay, thank you for Mr. Long’s answer. Operator, we can go ahead.

Operator, Operator

Next, we have Ritchie from HSBC. Your question, please.

Ritchie Sun, Analyst

Let me translate this myself. So, I have two questions. First one is can management comment on how the regulatory environment will affect the competitive landscape going forward? And what are the costs and opportunities that we foresee from this new environment? And second question is, what is the outlook for the used car industry? And how is the competitive landscape and what are the areas that we can still improve on? And do we see any M&A opportunities in this space? Thank you.

Aggie Zhao, IR Director

Thank you for your questions. Here we have our President Mr. Shao to answer your question. Mr. Shao, please.

Haifeng Shao, Co-President

Thank you. I would like to take your second question, which is about the used car business. Just as Mr. Long has said, we believe that the room for the used car market is very promising. Actually, there are three characteristics of the used car business in China at this point. The first characteristic is that it is somewhat chaotic and segmented. Secondly, the market lacks enough trust and transparency, and thirdly, we lack sufficient financial support. So, I believe that both C2B and B2B business models have potential to be profitable. However, for the B2C business, it may incur losses sometimes as it may be on the edge of profitability. So, for Autohome, we have a few strategies in place for the used car business. The first is the asset model where we seek to leverage our assets. Secondly, we do have a long-term strategy for this market. As you know, the entire used car market in China is developing very quickly, and there are a lot of changes taking place in this market. We have to be persistent and continue until the tipping point occurs in this market. And at that time, we should be prepared with sufficient capital, capacity, experience, and branding. This way, we can be ready for this market to further grow. Lastly, I want to comment on TTP. We already have good chemistry with TTP, as we know we have a lot of resources. We also embedded internet technologies and know-hows with TTP, and together with Ping An, we empowered TTP. A significant milestone we achieved is breaking even in June, which demonstrates strong synergies between Autohome and TTP. We are also looking for other opportunities that could lead to synergistic development and the expansion of our auto ecosystem.

Aggie Zhao, IR Director

Okay, that concludes your questions. Operator, we can go ahead.

Operator, Operator

Thank you. Next, we have Eddy from Morgan Stanley. Your question, please.

Eddy Wang, Analyst

A significant milestone we achieved is breaking even in June, which demonstrates strong synergies between Autohome and TTP. We are also looking for other opportunities that could lead to synergistic development and the expansion of our auto ecosystem. Okay, that concludes your questions. Thank you. Next, we have Eddy from Morgan Stanley. Your question, please.

Aggie Zhao, IR Director

Yes, we can. Please go ahead.

Eddy Wang, Analyst

I have two questions. The first is about the competition. Can you comment on the competitive landscape within the auto vertical between us and the other players in the first half of this year? And the second part of my question is, can you provide some insights into how the dynamic between the auto vertical compared to other new channels in terms of securing budgets from these OEMs and dealers? The second question is regarding tax. As we noted, some internet platform companies did not receive approval for the lower tax rates, 10% for key software companies. I am wondering if we also face any such issues? Thank you.

Quan Long, Chairman and CEO

Thank you very much. I would like to take your first question, which is about competition. As you know, for any industry, competition is a constant. We welcome our competitors because we believe competition drives the whole industry to further develop. This presents a good opportunity for us to learn from each other. If we boost collaboration alongside competition, we can advance our technical know-hows and establish a more sophisticated market. I have mentioned in my report that our continuous efforts in content enrichment are propelling our progress, and we are pleased to see our traffic continues to lead the entire auto media vertical, surpassing the total traffic volume of the second and third players while maintaining a rapid year-over-year growth. Our average daily active users also reached a historical high of 44.1 million. So, we have achieved significant success in traffic acquisition and are maintaining a leading position. Regarding regulation, as a listed company, Autohome is fully compliant with relevant regulations, laws, and policies. In the first half of the year, we did witness tightening in regulatory compliance. However, our data security and personal privacy practices have never drawn any notice or warnings from regulators in China, indicating that we are fully compliant with laws regarding data protection and personal privacy. Additionally, we are taking one step further by ensuring even tighter compliance than required. Now, addressing your second question regarding tax policies, we are fully compliant with applicable laws, and we are eligible to apply for favorable tax policies. We will continue to monitor these policies closely and apply for any favorable tax treatments available.

Aggie Zhao, IR Director

Operator, we can go ahead.

Operator, Operator

Thank you. Next, we have Brian Gong from Citigroup. Your question, please.

Brian Gong, Analyst

Hi, management.

Quan Long, Chairman and CEO

Next, we'll ask Mr. Shao to answer your question.

Haifeng Shao, Co-President

Thank you for the question. In terms of the automakers' advertising budgets, we believe that in Q3, the shortage of chip supply will continue to affect the capacity of the automakers and their sales. In Q4, we anticipate that the situation will ease. However, for the latter half of the year, we can see that automakers' advertising budgets are closely tied to their sales volume and annual profit targets. So if sales volume is pressured, and their profit targets are under pressure, we believe their advertising budgets will also face constraints. On dealers’ numbers, we have some statistics until the end of June. The number of auto dealers connected to our internet network was 23,800 last year, and this year, at the end of June, the number is 25,600, indicating a slight increase. Overall, the coverage or penetration rate for Autohome among auto dealers is performing well, especially with paying members.

Aggie Zhao, IR Director

Thank you for your question. We can go ahead.

Operator, Operator

Thank you. Next, we have Leo from DB. Your question, please.

Leo Chiang, Analyst

So, I'll translate myself. The first question is, we saw that the sales and marketing expenses in the second quarter declined quite a bit. While our competitors are aggressively acquiring user growth, I want to ask about our user growth strategy for the future. My second question is regarding data products. We see our data products still growing robustly; what is the outlook for the second half and what new products are in the pipeline?

Aggie Zhao, IR Director

Thank you for your question. We have our Vice President, Jun Liu, to answer your question first, and then our President, Mr. Shao, will address your question. Mr. Jun, please?

Jun Liu, Vice President

Thank you. Let me break down your question. The first part is about the decline in sales expenditures in Q2 compared to our competitors, who are spending more on acquiring new customers. Our customer and traffic strategy focuses on both B2C and B2B sides, where we are number one in market share and traffic. According to QuestMobile, on mobile, our traffic surpasses the combined totals of the second and third players. Adding PC side traffic shows even greater growth advantages. Therefore, we are still in a leading position in traffic and market share in the vertical media industry. Moving forward, we aim to expand our user base by adopting a more granular approach, targeting lower-density areas. In this context, we’ve seen 70% of our incremental new members come from Tier 3 cities. Additionally, we are attracting more younger users, particularly those aged 35 and under. We anticipate that our sales expenditures will adjust dynamically based on the current market situation and competitor actions. We recently launched version 11.0, which is more video-centric and targeted at younger audiences, which we hope will drive user growth.

Haifeng Shao, Co-President

We are glad that you noticed the growth of our new data products business. In Q2, growth was about 47%. Our long-term strategy for data products is to enhance their contribution to total revenue, leveraging the high growth potential of data products for increased revenue overall. To better understand our developments, we invite you to attend our New Strategy Conference on September 16, where we will discuss our data product strategy and targeted goals. We are continuously upgrading and optimizing our data products; for instance, for dealer data products, we launched 11 modules this year, and we plan to release the 2.0 version of the intelligent new car launch module in September.

Aggie Zhao, IR Director

That concludes the answers to your questions. Operator, let's move on to the next question.

Operator, Operator

We will now be taking one last question from Ashley from Credit Suisse. Your question, please.

Ashley Xu, Analyst

I just want to check about our initiative starting this April that requires users to verify through message when they leave their contacts. I want to understand the background and impact from this initiative. Looking ahead, how might this affect the pricing in our upcoming negotiations with dealers? Thank you.

Aggie Zhao, IR Director

Thank you, Ashley. Our President Mr. Shao will answer your question.

Haifeng Shao, Co-President

Thank you very much for your question. Since April, we launched the Blue Sky plan to be a role model in the industry for implementing information protection laws and data protection laws of China. Regarding the quality of leads we generated, we pride ourselves on being the best in the industry. After implementing the Blue Sky plan in April, the number of leads improved by 10%, and we also saw an increase in lead quality. Following our initiative, in June, some of our peers have gradually introduced similar plans under different names. We have shifted our focus to optimizing the product and enhancing user experience. By August, our lead generation numbers had already recovered to the period prior to the Blue Sky plan. The Blue Sky plan is not a barrier for dealers and automakers to continue renewing contracts with us. On the contrary, it establishes a solid foundation for them to recognize that we are the market leaders with significantly improved lead quality.

Aggie Zhao, IR Director

That's all for the answers, operator. Time runs out, so let’s move on to the last part. Thank you.

Operator, Operator

Due to the time constraint, this will be the last question we take on this call. I will now turn the conference back to the management for closing comments.

Quan Long, Chairman and CEO

Thank you. Thank you, everyone, for joining us today. We appreciate your support. We look forward to updating you on our next quarter’s conference call in a few months. In the meantime, please feel free to get in touch with us if you have any further questions. Thank you, everyone. Bye-bye.

Operator, Operator

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