Earnings Call Transcript - ATHM Q1 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by for Autohome’s First Quarter 2023 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, Sterling Song, Autohome’s IR Director. Mr. Song, please go ahead.

Sterling Song, IR Director

Thank you, Operator. Good evening, everyone. I’m Sterling Song. Welcome to Autohome’s first quarter 2023 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; and the Chief Financial Officer, Mr. Craig Yan Zeng. After the prepared remarks, our management team will be available to answer your questions. Before we continue, 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 U.S. Securities and Exchange Commission and the stock exchange of Hong Kong Limited. Autohome doesn’t undertake any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Autohome’s earnings press release and this conference call includes discussions of certain unaudited non-GAAP financial measures. Please refer to our press release, which 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 call 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. Long, for opening remarks. Please go ahead.

Quan Long, Chairman and CEO

Thank you, everybody. Hello, everyone. This is Quan Long, Chairman and CEO of Autohome. Thank you for joining our earnings conference call today. We got off to a solid start in the first quarter with total revenue increasing by 4% year-over-year despite a challenging auto market. Media services saw robust revenue growth of 35.5% year-over-year. Notably, revenues from TPP and data products returned to their growth track and the revenue contribution from new energy brands continue to rise with the growth rate once again outperforming the market. We not only made solid progress in our businesses, we also improved our profitability. Adjusted net income attributable to Autohome for the first quarter was up by 10.5% year-over-year and our adjusted net margin remained at a comparatively high level of 31.5%. We began the year by rolling out a series of initiatives to broaden the reach of our dual ecosystem, comprised of user service and customer service. On the user side, we launched our C-end user-centric strategy to enrich our platform services, expanding from our previous focus on car consumption to capture all aspects of cars’ life span. This shift is transforming our platform’s overall content to address a wider range of automobile consumers’ needs. On the customer side, we have fully implemented our new Autohome Energy Space retail model and initiated franchise stores to quickly replicate the service model according to plan. We have also made strides in product and technology creation, augmenting the application scenarios for our digital products and new AI-powered data products for dealers. These advancements have broadened our business horizons with more comprehensive service offerings that help us maintain our competitive edge. Moreover, we also connected to Baidu’s ERNIE Bot becoming its first ecosystem partner in the automotive information industry. Going forward, Autohome and Baidu will jointly explore and propel the application of large language models. Looking into 2023, we are seeing positive trends in the automobile market and expect to maintain a steady upward trajectory. The penetration rate of new energy vehicles will continue to rise and greater consumer demand will be released. We also look forward to additional supportive government policies, which will help further stabilize the auto market and encourage auto consumption. Meanwhile, we will strive to create a healthier and more vibrant ecosystem, serving our continuously expanding user groups and increasing our influence among top buyers and users. We remain committed to our open and inclusive development concept, leveraging our core business and technological innovation to reduce decision-making and transaction costs to our partners and achieve long-term high-quality development in this ever-changing environment. Now, with that, I will turn the call over to our Chief Financial Officer, Craig Zeng for a closer look at our first quarter operating and financial results.

Craig Yan Zeng, CFO

Thank you, Mr. Long. Hello, everyone. I am Craig Zeng, the CFO of Autohome. During the first quarter, we continued to implement our C-end ecosystem strategies. On one hand, we drive to advance content innovation and enhance product experience to provide users with exceptional services. On the other hand, we focus on our content creator ecosystem, empowering creators across the areas of content, incentives, tools, and services to holistically encourage high-quality content creation. We’ve also formed a diversified content metrics to drive multichannel user growth through new media and small program alliances. For example, at the beginning of the year, we introduced a series of incentives at the Autohome Creators Conference, resulting in a significant increase in the number of new orders and the daily amount of new high-quality content posted on our platform. On the content front, we launched Made in China in the first quarter on a regional IP combining auto evaluation with cross-border elements. It attracted a massive audience, generating more than 130 million views and over 840,000 interactions across the entire network. In addition, for the Shanghai Auto Show we utilized AR and holographic car reading technology to provide users with an immersive experience. The Auto Show generated over 24,000 pieces of content, resulting in a total exposure of over 4.8 billion. According to QuestMobile, Autohome’s traffic scale has expanded rapidly since the beginning of the year. In March, our mobile DAUs increased by 42% year-over-year to reach a record high of 64.5 million, demonstrating our continuous leadership in the automotive media vertical. For our traditional business, our lease subscription package provides customers with a comprehensive range of products, ranging from direct connection with users to intelligence empowerment of daily operations and competitive landscape insights. By leveraging our advantages in traffic and data technology, we are able to support our dealer customers’ optimization and transformation with respect to user operations, expansion on profit front, operating decisions, and more. As we enhance our core business, we use our deep understanding of the industry to identify trends that support our ability to explore new opportunities to create innovative models and expand our business to address potential growth avenues. For our new energy business, we have been continuously optimizing and adjusting the operations process as our first offline experience store in Shanghai since its launch last September by enriching user test driving scenarios and shortening user decision-making cycles. Our increased number of cooperative customers clearly demonstrate the efficiency of our multi-brand services model. We’ve already reached cooperation with more than 30 brands and have started the construction of franchise stores aiming to further expand the scale of our new retail services this year. In the fourth quarter, the revenue contribution from new energy vehicle brands continue to rise with a year-over-year increase of 67% significantly outperformed the growth rate of broader industry sales. Moving on to digital products. In addition to continuously upgrading our existing data products in the fourth quarter, we launched our EV Smart Cloud, a new product designed to address gaps in new energy vehicle data and provide manufacturers with integrated base solutions. This product will greatly enhance the value of our digital offerings. As for data products for dealer customers, we increased and integrated new technology to launch Smart Selection, an AI-driven tool, which helps dealers quickly identify high-net-worth users effectively enabling them to release more production capacity and improve service quality. During the first quarter, we experienced a rapid upward trend in all of our key indicators for our data products for dealers. The number of dealer customers for data products, the average revenue of the data product per dealer store, and the average number of data products adopted by each dealer store all grew by double digits compared to the prior year period. We are now entering the era of active intelligence operations where model decision-making and human collaboration come together to create a powerful and efficient system. Regarding the used car business, fluctuating new car prices in the first quarter put some pressure on the used car industry. However, Autohome’s used car business unit, together with TTP, achieved year-over-year growth, demonstrating the synergy between our businesses. Our used car business as a whole also maintained profitability. In the fourth quarter, through Autohome’s matching and auction services, our platform accounted for about 21.8% of all used car transactions in China, representing year-over-year growth of nearly 2%. In terms of products, we’ve taken our comprehensive vehicle conditions improved tool for used cars to the next level. The tool supports queries, including general car repairs and maintenance, collision repairs, and new energy battery conditions, providing sellers and buyers with a transparent and reliable consumption environment. Going forward, we’ll remain at the forefront of the used car industry, creating a one-stop full-service platform for used car users and dealers supported by our SaaS products. Overall, Autohome is staying ahead of the curve by tracking the evolving markets and user needs. We consistently push the limits of quality service, providing users with more comprehensive and diversified content tools and services in addition to auto information. As an industry pioneer, we are committed to the concept of development through scientific and technological innovation. As such, we are rapidly advancing our core technologies and introducing new models to lead industry developments. Looking ahead, we will continue to devote ourselves to empowering the industry with cutting-edge technology, amplifying our competitive advantages, opening up new business areas, and achieving long-term high-quality development. Next, let me walk you through the key financials for the first quarter of 2023. Please note that as with prior calls I will reference RMB only in my discussion today unless otherwise stated. Net revenues for the fourth quarter were RMB1.63 billion, up 4.2% year-over-year. For a detailed breakdown, media services revenue came in at RMB361 million, an increase of 53% to 35.5% year-over-year. Lease generation services revenues were RMB681 million and the online marketplace and other revenues were RMB492 million. Moving on to costs, cost of revenue in the first quarter was RMB340 million, compared to RMB255 million in Q1 2022. The increase was primarily attributable to the growth of operational costs. Gross margin in the fourth quarter was 77.8%, compared to 82.7% in Q1 2022. Turning to operating expenses, sales and marketing expenses in the first quarter were RMB523 million, compared to RMB592 million in Q1 2022. The decrease was primarily attributable to a decline in marketing and promotional spending. Product and development expenses were RMB324 million, compared to RMB355 million in Q1 2022. Finally, general and administrative expenses were RMB149 million, compared to RMB137 million in Q1 2022. So we delivered operating profit of RMB263 million in the first quarter, compared to RMB241 million in the corresponding period of 2022, representing an increase of 9.1% year-over-year. Adjusted net income attributable to Autohome Inc. was RMB484 million in the first quarter, compared to RMB438 million in the corresponding period of 2022, representing an increase of 10.5% year-over-year. Non-GAAP basic and diluted earnings per share in the first quarter were both 0.98%, compared to both 0.87 in the corresponding period of 2022. Non-GAAP basic and diluted earnings per ADS in the first quarter were RMB3.92 and RMB3.91, respectively, compared to RMB3.47 for both in the corresponding period of 2022. As of March 31, 2023, our balance sheet remained very strong with cash, cash equivalents, and short-term investments of RMB22.71 billion. We generated net operating cash flow of RMB1.03 billion in the first quarter of 2023. On November 18, 2021, our Board of Directors authorized a share repurchase program under which we were permitted to repurchase up to US$200 million of Autohome ADS for a period not to exceed 12 months thereafter. On November 3, 2022, our Board of Directors authorized an extension of the share repurchase program for another 12 months expiring on November 17, 2023. As of May 5, 2023, we have repurchased approximately 3.94 million ADS for a total cost of approximately US$119 million. With that, we are ready to take your questions.

Operator, Operator

Certainly. Our first question comes from the line of Brenda Zhao from CICC. Please go ahead.

Brenda Zhao, Analyst

Hey, guys. Thanks, management, for taking my questions and congratulations on the strong quarter. First of all, could you please share your views on the structural opportunities for the automotive market in the upcoming quarters? Also, could you update us on the progress of the new retail model for NEVs and your expansion plans for the offline experience store for the rest of the year? Thank you.

Quan Long, Chairman and CEO

Okay. Mr. Long is taking the first question. In the first quarter, the auto market appears to be somewhat sluggish. According to CPCA statistics from January to March, cumulative retail sales of passenger vehicles decreased by 13.4%. One reason for this is the early spring festival, and another is that some car purchase subsidy policies expired at the end of 2022, leading to earlier purchases last year. Additionally, since March, the impact of the Domestic 6b Policy has been significant, accompanied by price cuts, promotions, and a price war that has worsened consumers' wait-and-see attitudes. As a result, passenger vehicle sales remained flat in March. However, looking at the CPCA statistics released in April, there was a year-over-year growth of 55.5% and month-over-month growth of 2.5%. The price war seems to be subsiding as consumers return to more reasonable spending habits, and the wait-and-see attitude is also easing. Overall, the auto market is starting to stabilize and recover. You asked about the comparison between internal combustion engine cars and new energy vehicles. Generally speaking, the internal combustion engine car market continues to weaken, and sales reductions are expanding. In 2022, sales of internal combustion engine cars dropped by 13.3% year-over-year, and in the first quarter of this year, there has been a year-over-year decrease of 23.4%. Since March, due to product delays, production cuts, and promotions, many other original equipment manufacturers across the country started to react, leading consumers to hold off on purchases and adopt a wait-and-see approach. Consequently, these factors are negatively impacting internal combustion engine car sales. At the same time, as the penetration of new energy vehicles improves, we expect the sales of internal combustion engine cars to be further pressured. In terms of the NEV, sales growth has begun to slow down. However, the momentum remains strong and penetration continues to rise. Since the fourth quarter of 2022, new car sales of NEVs have started to decelerate, but in the first quarter of 2023, year-over-year sales increased by 22.4%, with penetration reaching 30.8%. The CPCA also predicted that in 2023, domestic NEV penetration is anticipated to reach 36%. At the recently concluded Shanghai Auto Show, around 150 new car models were launched, nearly 100 of which were NEVs, and more than half of the 1,500 exhibited cars were NEVs, indicating they are becoming the mainstream at the event. Therefore, we believe the NEV market still holds significant growth potential, and we are quite optimistic about its future evolution. In April this year, the NDRC indicated they would swiftly enhance the policy system and announced plans to introduce tax incentives for new car purchases after 2023. Following the end of April, a series of key working conferences by the Central Government emphasized the need to strengthen and expand the growth of NEVs, as well as expedite infrastructure development, including charging stations, energy storage, and the supporting power grid. Additionally, several local governments are initiating consumption incentive policies in the first quarter to boost auto sales. With the stimulation of various factors and policies, we believe that car purchase demand will gradually increase among domestic consumers. We are optimistic about future trends in the domestic automotive market and anticipate that since Q2, both national and local governments will continue to implement thoughtful policies to support the development of the entire auto industry, resulting in stable growth in the auto market. We are also working towards an even more promising future.

Craig Yan Zeng, CFO

Thank you, Mr. Long, for taking the first question, and Mr. Zeng will take the second question. This question is about the new retail model. Last year in Shanghai, we launched our new energy offline experience store, introducing a completely new model that received excellent feedback from our consumers. Users can enjoy an immersive holographic experience in the Autohome energy space. We provide a comprehensive 360-degree experience of various new car models and detailed insights into the NEV. Additionally, we enable horizontal comparisons between different types of car models. This new retail model significantly reduces the decision-making time for consumers and improves corporate efficiency. It has also been well-received by consumers. This model has gained significant recognition from our OEM clients. Currently, the retail experience store is collaborating on holographic modeling with over 30 brands. We plan to launch the franchising model in Q2, with two franchise stores gradually launching online. Additionally, we will begin developing franchise stores in other cities across China, and everything is progressing well. In the second half of the year, all franchise stores will gradually open, and we will provide more information about our franchise initiatives. We think this represents a new trial for Autohome regarding the online and offline convergence model within the new retail space. We believe it will become one of our core competitive advantages. Moving forward, we will continue to focus on this online and offline convergence model.

Sterling Song, IR Director

Thank you. Operator, next question, please.

Operator, Operator

Thank you. Our next question comes from the line of Ritchie Sun from HSBC. Please go ahead.

Ritchie Sun, Analyst

Thank you. I will translate it myself. So, first of all, can I ask about the used car business revenue growth and the current recovery trend? Also, what is the current profitability level, and how should we think about the drivers of revenue and profit growth for this part of the business in 2023? The second part of my question is about AIGC and large models. How should we consider the challenges and opportunities these present for online vertical platforms like Autohome, and what is our strategy to take advantage of this opportunity? Thank you.

Quan Long, Chairman and CEO

Okay. The first question is about the used car business. In Q1, the price cuts for new cars put some pressure on the used car market as a whole, but we have a strong synergy between our used car business and the TTP business, which has become highly efficient. Both our used car and TTP businesses saw revenue growth, with TTP revenue increasing by 25% year-over-year. In terms of margin, for our traditional used car business, we have seen good growth in marketing while at the same time, TTP also generated profit and achieved its first profitable quarter. TTP adopted the auction plus testing model. Previously, the used car business's margin was lower. However, we believe that in the future, we will continue to enhance TTP’s gross margin. Talking about the factors driving revenue and margins, firstly regarding the used car business, its growth is largely dependent on car sales. Car sales in China have been steadily increasing, which means the used car business will also grow. In recent years, the COVID-19 pandemic has restricted offline communication, which is crucial for the used car sector. We believe that over the next two years, the used car business will show very promising development. Another important driver comes from Autohome itself. We have been taking the lead in the second-hand car business. Moreover, we plan to create synergy within our traditional used car business, TTP business, and Ping An Group as a whole. So we will continue to build a one-stop service platform for car buying and selling along with SaaS product whole chain services to expand our competitive edge and attain a leading position in the entire industry. The second question is about AIGC. Firstly, AIGC is just a tool. The sooner you familiarize yourself with this instrument and adopt it, the sooner you will gain competitive advantages. That is why we have entered into cooperation with Baidu as the first step. However, AIGC alone is not enough. We also need to integrate auto components across the entire ecosystem, including OGC, UGC, and PGC to create better content. Together with content creators, we’re going to develop a strategy for a consumer-facing ecosystem. Additionally, we have other AI-powered tools like Smart Outbound, Smart Selection, and AI-assisted dialogue assistance. These AI tools will assist dealers in reducing costs and enhancing efficiency.

Sterling Song, IR Director

Thank you. Operator, next.

Operator, Operator

Thank you. Our next question comes from the line of Thomas Chong from Jefferies. Please go ahead.

Unidentified Analyst, Analyst

Thank you for taking my question. I have two questions. First, can management provide insights on our target for the data products and the plan for the new product launch? My second question is regarding the use of cash; can management share future plans? I will translate myself.

Quan Long, Chairman and CEO

Let me first address the question about the data products. In terms of our existing products, we will continue to optimize and iterate our current data products to further improve their effectiveness and usability, as data products differ from others. Users need to integrate these products with their own businesses to extract the most value. We will expand our client base and enhance penetration of our data products. Regarding new products, we will continue launching new offerings. For example, in Q1, we launched the EV Smart Cloud targeting OEM clients, as well as Smart Selection and other data products targeting dealer clients. In the future, we plan to combine our modeling capabilities and synergies for more proactive smart operation products. In the first quarter of this year, the number of paying users for the dealer data product exceeded 20,000. Both the average revenue per store and the average number of collaborative products per store experienced double-digit growth. We are very optimistic about the future of data products for dealers. We have already created a SaaS plus CRM product matrix. We will enhance our investments and improvements in data technology and product research and development to maintain our competitive advantage and assist clients in their digital upgrades and transformations. Your second question is about cash usage and future plans. Autohome is financially sound. We have been increasing our dividend payout ratio and will continue to consider increases in returns to shareholders. Regarding the share buyback program, I have already provided details, and I don’t need to repeat them. In terms of business investments, we keep a close watch on potential opportunities. If favorable chances arise, we will increase our investments, particularly in new retail.

Sterling Song, IR Director

Operator, maybe we take the last since time is limited.

Operator, Operator

Okay. Our last question comes from the line of Brian Gong from Citi. Please ask your question, Brian.

Brian Gong, Analyst

Thanks for taking my question. Despite the weakness in auto sales during the first quarter, our OEM revenue saw decent growth. Can management provide insight into the expected OEM growth for the second quarter, considering that auto sales remain weak but many new models were introduced at the Shanghai Auto Show? Thank you.

Quan Long, Chairman and CEO

To add to this topic, I want to highlight that the auto industry tends to operate on a long-term basis. The short-term fluctuations in sales will not have a significant effect on the OEMs and their marketing budgets. If you look at Autohome’s ad-related revenue, over the past several quarters, despite market fluctuations, our revenue from the ad business has remained stable. In terms of market opportunities, the Shanghai Auto Show featured numerous new car models, indicating a steady stream of new car releases in the future. This will necessitate increased advertising and marketing expenses, creating additional opportunities for us. For traditional ICE vehicles, the situation is more complicated. In Q1, the sales dropped by 23% year-over-year. We believe the Q2 scenario will also be intricate, impacted by National 6B policy. OEMs will face various choices, such as price cuts or other measures to navigate the circumstances. Overall, in Q2, regarding the ad business, we see both opportunities and challenges. Just as I mentioned for our used car business, two drivers will support our growth: the overall market performance and our expansion into new areas by offering new services to our clients. Therefore, we aim to better serve our clients and improve our performance in the ad business.

Sterling Song, IR Director

Okay. Thank you, Operator. That is the end of the Q&A session. Operator?

Quan Long, Chairman and CEO

Overall, in Q2, regarding the ad business, we see both opportunities and challenges. Just as I mentioned for our used car business, two drivers will support our growth: the overall market performance and our expansion into new areas by offering new services to our clients. Therefore, we aim to better serve our clients and improve our performance in the ad business. Thank you, Operator. That is the end of the Q&A session. Operator?

Sterling Song, IR Director

Thank you, everyone. Thank you very much for joining us today. I appreciate your support and look forward to updating you on our next quarter’s earnings conference call in a few months’ time. So, in the meantime, if you have any questions or comments, please feel free to contact us. Thank you very much. Good-bye.

Quan Long, Chairman and CEO

Good-bye.

Unidentified Company Representative, Unidentified

Thank you.

Operator, Operator

That concludes today’s conference call. Thank you for participating. You may now disconnect.