Earnings Call Transcript - ATHM Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by for Autohome's First Quarter 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, 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 Aggie Zhao, Autohome's IR Manager. Ms. Zhao, you may begin.

Aggie Zhao, IR Manager

Thank you, operator. Hello, everyone, and welcome to Autohome's first quarter 2021 earnings conference call. Earlier today, Autohome distributed its earnings press release, and you may find a copy on the company's website. On today's call, we have Chairman and Chief Executive Officer, Mr. Quan Long; Co-President, Mr. Haifeng Shao; Chief Financial Officer, Mr. Jun Zou; and Chief Technology Officer, Mr. Xiao Wang. After the prepared remarks, Mr. Long, Mr. Shao, Mr. Zou, and Mr. Wang 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 US 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 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 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. Now, I will turn the call over to Autohome's Chairman and Chief Executive Officer, Mr. Long.

Quan Long, Chairman and CEO

Thank you, Aggie. Hello, everyone, and thank you for joining us today. I'm pleased to report a solid quarter with total revenues growing 19.1% to RMB1.84 billion. Revenues from our online marketplace and other business increased by 74% year-on-year and contributed to 29.3% of total revenues. Data Products continued its strong growth trajectory with revenues increasing 64.9% year-on-year, primarily driven by increased contributions from OEM data products. In particular, TTP's revenue contribution was larger than our prior expectations. Adjusted net income in the first quarter continued to expand at 13.7% year-on-year. Before we start discussing our results in detail, I'd like to share some thoughts about industry trends as a whole and some of our recent developments. We are witnessing changes in the automobile industry due to a challenging macro environment and fluctuations in automobile sales stemming from the pandemic. The auto industry has begun accelerating digital transformation efforts. The emergence of new electric vehicle brands and investments in new energy vehicles by traditional manufacturers have propelled growth in the NEV sector. Additionally, new players with expertise in internet services are entering the smart automobile market, intensifying competition. These trends are reshaping the automotive market landscape, including the overall industrial value chain. Against this backdrop of new market and industry dynamics, we have been consistently optimizing and trimming low-margin businesses such as offline insurance while avoiding price competition to maintain a high-quality business portfolio. We rolled out our 4.0 strategies last year, focusing on AI, Big Data, Cloud Capability, and SaaS Strategies. We are now planning to upgrade these strategies by fine-tuning our action plans for better execution in order to seize industry opportunities and continue high-quality development. We expect to announce updates on these action plans in the second half of this year. As a platform with a large and engaged user base of over 40 million daily active users, solid business fundamentals, industry-leading innovative capabilities, and strong execution capabilities, we are confident that Autohome can grow beyond its current standing and tap into new growth potentials. Next, let's move to our Q1 results. In the first quarter, the new energy vehicle market continued its upward trend that began in the second half of last year, with sales volumes increasing year-on-year and accounting for over 9% of total new passenger vehicle sales compared to about 6% for the full year 2020. The growth in the NEV market has created new opportunities for us. In the first quarter, we expanded our cooperation with NEV automakers, with revenue from these partnerships increasing by nearly 170% compared to the same period last year. Regarding our used car business, we are exploring further opportunities in this area by leveraging our e-financing capabilities and related support services to empower our customers. In the first quarter, TTP Car Inc.'s transaction volume increased by 160% year-on-year. Moving on to our product advancements, we recently launched a new version of our Intelligent New Car Launch, which integrates VR showroom and mini video products while combining our intelligent activities with offline operations. This allows new car model debuts to gain more precise exposure and attract more auto enthusiasts. In the first quarter, 31 automakers utilized our data products, and we had over 30 programs for Intelligent New Car Launch and Intelligent Marketing Solutions, adding automation functions including WeChat Mini Program and promotional tools to our existing offerings. Our new Smart Shop 3.0 version acts as a marketing platform for dealers to capture private traffic and obtain incremental leads. On the product and user front, we upgraded our main app to provide a streamlined user interface while optimizing designs for younger generations. These efforts have further enhanced the user experience. We also improved the quality of our sales leads by ensuring excellent execution when users submit their phone numbers, which enhances user privacy and security. In conclusion, we have had a strong first quarter driven by our resilient core business as well as robust new initiatives. Data Products once again delivered strong revenue growth, while TTP supported our used car business line. We also accelerated product innovation to enhance our overall service quality. These achievements reflect Autohome's leading position in key areas. Going forward, we remain committed to better serving the interests of our users and customers and delivering long-term value to our shareholders. With that, I will now turn the call over to our CFO, Jun, for more business details and a closer look at our first-quarter financial results.

Jun Zou, CFO

Thank you, Quan. To start, let me go through some business metrics. In March 2021, the number of average daily active users who access our mobile websites, primarily through app's mini-apps, grew further to 42.3 million, representing an increase of 33.3% compared to the prior year. For the first quarter, all of our OGC, PGC, UGC, and other content categories showed solid user contraction. Now I will talk you through the key financials for the first quarter. Please note that as with prior calls, I will reference RMB only in my discussion today unless otherwise stated. Net revenues for the first quarter were RMB1.84 billion, a 19.1% increase compared to the corresponding period last year. For a detailed breakdown, media services revenue was RMB605 million, lead generation services revenue was RMB698 million, and online marketplace and others revenue increased by 74% year-on-year to RMB539 million, primarily driven by the impact of the consolidation of TTP and increased contributions from data products. Now, moving onto costs. Cost of revenues was RMB243 million compared to RMB178 million in Q1 last year. The increase was primarily attributable to the impact of the consolidation of TTP. Gross margin was 86.8% in the first quarter compared to 88.5% in Q1 last year. Turning to operating expenses, sales and marketing expenses in the first quarter were RMB683 million compared to RMB524 million in Q1 last year. The increase was primarily attributable to the impact from the consolidation of TTP and increased execution costs to support customers in business development. Now, P&D expenses were RMB305 million compared to RMB292 million in Q1 2020. The increase was primarily driven by higher investment in research and development activities. Finally, G&A expenses were RMB129 million compared to RMB89 million in Q1 2020. The increase was primarily attributable to the impact of the consolidation of TTP. Overall, we delivered operating profit of RMB567 million for the first quarter compared to RMB586 million in the corresponding period of 2020. Adjusted net income attributed to Autohome Inc. was RMB735 million for the first quarter compared to RMB646 million in the corresponding period of last year. Non-GAAP basic and diluted earnings per share for the first quarter were RMB1.52 compared to RMB1.36 and RMB1.35, respectively, in the corresponding period of last year. Now, non-GAAP basic and diluted earnings per ADS for the first quarter were RMB6.08 and RMB6.06 respectively compared to RMB5.43 and RMB5.40 respectively in the same period last year. As of the end of Q1 2021, our balance sheet remained very strong with cash, cash equivalents, and short-term investments of RMB17.27 billion. We generated operating cash flow of RMB546 million in the first quarter of 2021. As a listed company on the Hong Kong Stock Exchange, we will follow the common practices adopted by public companies in Hong Kong market. As a result, we will no longer provide guidance on revenues going forward. In March, Autohome successfully listed on the Hong Kong Stock Exchange. Additionally, Hong Kong Autohome's stocks will be added to Hang Seng TECH Index and Hang Seng Composite Index, marking a key milestone in our history and opening a new journey for Autohome. In the past few years, Autohome has been leading the development of the industry. As we move forward with our strong balance sheet and profitability, we are confident that Autohome will bring more value to both our users and customers and deliver long-term return and value to our shareholders as well. With that, we're ready to take your questions. Operator, please open the line for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question is from Miranda Zhuang at Bank of America Securities. Please go ahead.

Miranda Zhuang, Analyst

Thank you for taking my question. Can management share their thoughts on the business outlook for the second quarter and the second half of this year? I'm particularly interested in the second half because management previously mentioned that the company would announce action plans for strategic upgrades during that time. Could you provide some insight into the areas the company is focusing on and what types of product or service upgrades might be implemented? Thank you.

Quan Long, Chairman and CEO

Thank you for your question. I’d like to address the strategic upgrade. The auto market in China is evolving rapidly, presenting three key characteristics. First, Autohome's sales volume has been quite volatile, experiencing significant fluctuations over the past few quarters. In the first quarter, we recorded a 69% growth compared to the same time last year, largely influenced by the COVID-19 pandemic. However, in April, this growth decreased to about 12%, and for the first three weeks of May, we even saw a year-on-year decline. The second characteristic is that the pandemic has greatly accelerated the digital transition among automakers. Thirdly, the sales of new electric vehicles have surged, with a remarkable 288% increase from January to April of this year. Numerous new entrants, including intelligent premium brands and established internet service-focused carmakers, are now part of the NEV market. Concurrently, the auto industry is evolving swiftly. We are actively engaging with automakers and original equipment manufacturers to understand these shifts. Many automakers are directly connecting with users and engaging in user operations, while product iterations are occurring at an accelerated pace. At Autohome, we are committed to the long-term, sustainable, and healthy development of the auto market, which is why we will continue to refine and upgrade our strategy. Last year, we introduced our 4.0 strategy, and in light of the current market changes, we are looking at further upgrades this year. As for our plans, we will announce adjustments to our action plan for execution in the second half of this year. We are focused on long-term stability and quality development. For this year, we continue to estimate about 10% growth in the Chinese auto market. Initially, this seemed reasonable, but we must take the market changes into account. The two major factors we are monitoring are the current shortage of automobile production inputs and how the easing of COVID-19 restrictions in specific areas impacts the market. Additionally, the annual budgeting of auto OEMs is closely tied to vehicle sales volumes, which is another important point to consider.

Aggie Zhao, IR Manager

Operator, next question, please.

Operator, Operator

Thank you, Miranda. Next question is Eddy Wang from Morgan Stanley. Please go ahead.

Eddy Wang, Analyst

Thank you, Long and Zou, for taking my question. My first question is about your comments on the new car sales in April, which experienced a slight slowdown. Additionally, in the first three weeks of May, there was a year-over-year decline in new car sales volume. Can you provide insight on how this will affect our revenue in the second quarter? My second question is regarding TTP Car, which you've mentioned has made a largely expected contribution to your top line. Could you elaborate on the performance of the used car industry this year and explain how you achieved the expected topline growth for TTP Car, as well as your strategy for the overall used car sector? Thank you very much.

Quan Long, Chairman and CEO

To address your first question, in the first two months of this year, particularly from January to April, as well as the first three weeks of May, new car sales have been declining. I believe there are essentially two reasons for this. The first reason is the chip shortage, and the second reason is the ongoing impact of the COVID-19 pandemic. Based on our initial estimates for the entire year, we anticipated around 10% growth, but so far, we have observed a downward trend compared to our expectations. At Autohome, we recognize that automakers' value chains are closely tied to sales volume, which has affected our advertising business; however, we are still exploring the potential of other ventures. Your second question pertains to the used car business. Currently, the growth of the used car market is outpacing new car sales. Last year, we acquired TTP, and now we are considering how Autohome and TTP can collaborate. Specifically, we aim for synergy between the used car operations of Autohome and TTP. Our model emphasizes platform-based operations with a focus on a light asset approach.

Haifeng Shao, Co-President

Regarding the used car business, we are providing lead generation and auction services to assist sellers. For buyers, we are offering lead generation and SaaS platform services. In the future, we are also considering launching trade-in services and related projects to better integrate our used car business with TTP.

Quan Long, Chairman and CEO

I would like to add two points. Firstly, as Mr. Shao mentioned, the advertising budget of automakers is closely linked with auto sales. We are also exploring the acquisition of other businesses by offering more products to our clients. Additionally, we are focusing more on user engagement to assist those automakers. In terms of NEV, I should note that our clients are willing to pay much higher premiums for leads compared to those from traditional automakers. I won’t provide specific details on the difference, but the premium is significant. Thus, through advertising and PPS, we will continue to empower traditional automakers as well as emerging premium EV brands.

Jun Zou, CFO

Yes, as mentioned, we offer a comprehensive suite of services to both EV makers and traditional automakers through advertisements, leads, orders, and PPS.

Aggie Zhao, IR Manager

So thanks, Eddy. Operator, next question, please.

Operator, Operator

Thank you, Eddy Wang. Next question is Brenda Zhao from CICC. Please go ahead.

Brenda Zhao, Analyst

Thank you to management for addressing my questions. I have a follow-up regarding NEV. Could management provide more details on the cooperation model of NEV automakers and our future potential models for this business? Thank you.

Quan Long, Chairman and CEO

In response to your question, we have strong collaboration with NEV automakers and premium EV brands. In 2019, we began working with well-known companies such as Xpeng, Nio, and Li Auto, establishing a sustainable and stable partnership. Our cooperation model is based on demand-driven lead generation, with lead pricing determined by quality. We provide a comprehensive package of sales enhancement solutions to our clients. The strategies we adopt will also evolve our collaboration with NEV automakers. First, we will improve our services, particularly in order placement and online test drive reservations. Second, we will help NEV automakers expand their presence in various geographic areas and major Tier 1 cities.

Brenda Zhao, Analyst

Okay, thanks.

Aggie Zhao, IR Manager

Operator?

Operator, Operator

Thank you, Brenda Zhao. Next question is Thomas Chong from Jefferies. Please go ahead.

Thomas Chong, Analyst

Thank you to management for addressing my questions. I would like to inquire about the trend in our operating expenses. Can management provide insights on our cost strategy for this year and our spending on headcount? Additionally, I am curious about our overseas expansion strategy, especially considering the ongoing uncertainties related to COVID outside of China, and how our strategic upgrades might impact this expansion. Thank you.

Haifeng Shao, Co-President

Okay, I would like to take the first question, and Mr. Long will address the second question. Just as our Chairman mentioned in the opening presentation, we are planning the upgrade of our strategy. Thus, it's challenging for me to provide a forecast about changes in costs or expenses. However, we traditionally have been effective in controlling costs and enhancing operational efficiency. As for the cost of sales in our business, we will use them to incubate new business. I believe this principle will remain unchanged.

Quan Long, Chairman and CEO

Regarding the overseas business, we will continue to focus on empowering our users through content. This will include providing rich online materials that allow users to explore different models, schedule test drives, and make online reservations. When we talk about output, we refer to our technical capabilities. We will improve our 3G plus Auto Show capabilities to facilitate various online activities, making it more convenient for online users. Through these channels, we will enhance our support for dealers and distributors with our SaaS platform. In our collaboration with automotive OEMs, we will assist them with our lead generation and content creation capabilities. As of March, our total NEV stands at approximately 3.12 million, and we are connected with 6,550 dealers and have 1.2 million SKUs.

Jun Zou, CFO

I would like to add one point to our CTO's answer. For other markets, we are open to looking into investment or acquisition opportunities to expedite our entry into those local markets. We are still confident that our overall technology content and our ability and experience working with OEMs and dealers will help us penetrate those markets. Thank you. Next question, please?

Operator, Operator

Thank you, Thomas. Next question is Brian Gong from Citigroup. Please go ahead.

Brian Gong, Analyst

I will quickly translate for myself. Can management share some insights on the enhanced collaboration with Ping An Health and the role Ping An will play in our strategic upgrade in the second half of this year? Thank you.

Quan Long, Chairman and CEO

Regarding our cooperation with Ping An, there are three main dimensions to discuss. The first is technology collaboration, where we have been significantly empowered by Ping An in AI automation technology and machine learning. The second is traffic collaboration, where we have partnered with Ping An to establish our presence on various mini-apps on their website, including Good Owner, Good Doctor, and Pocket Bank. The third is product collaboration, which focuses on specific products, such as the data products we mentioned earlier. This allows us to implement precise marketing strategies based on accurate user profiling, as demonstrated by the campaign on August 18, where we leveraged Ping An’s communication and media resources.

Haifeng Shao, Co-President

I would like to add one point: this year, Ping An has intensified collaboration and support with Autohome for all subsidiaries related to the auto ecosystem. Ping An is fully engaged in cooperation with Autohome, and we have received substantial support from Ping An in terms of daily operations.

Aggie Zhao, IR Manager

Thank you, Brian. Okay, due to time constraints, I will turn the conference back to management for closing comments.

Quan Long, 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 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 or comments. Thank you.

Operator, Operator

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