Earnings Call Transcript - ATHM Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by for Autohome's First Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to introduce your host, Anita Chen, Autohome's IR Director. Ms. Chen, you may begin.

Anita Chen, IR Director

Thank you, operator. Hello, everyone, and welcome to Autohome's first quarter 2020 earnings conference call. Earlier today, Autohome distributed its earnings press release and you may find a copy on the company's website at www.autohome.com.cn. On today's call, we have Chairman and CEO, Mr. 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 the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the Securities and Exchange Commission. Autohome does not undertake any obligation to update any forward-looking statements, except as required under applicable law. The earnings press release in this call also includes discussion of current 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. I will now turn the call over to Autohome's Chairman and CEO, Mr. Lu.

Min Lu, Chairman and CEO

Thank you, Anita. Hello, everyone. Thank you for joining us today. We kicked off 2020 with a solid first quarter, reporting total revenue of RMB 1.55 billion. Notably, revenue from new initiatives increased by 32% year-over-year and contributed to 20% of total revenues compared to a revenue contribution of 15% for the same period last year. The exceptional revenue performance achieved by the new initiative was driven primarily by robust revenue from data products, which increased by over 80% year-over-year. In the first quarter, total new passenger vehicle sales fell by 45% year-over-year as a result of the COVID-19 outbreak and subsequent extension of the Chinese New Year holiday. In many cases, buyers postponed their vehicle purchase plans due to the extensive quarantine measures and the continued spread of the pandemic worldwide. Furthermore, domestic containment efforts resulted in further delays in the near-term marketing demands of our customers. Although consumers remained cautious during the first quarter, as the containment regulations were eased in China, coupled with the government's stimulus policy, the market began to show a gradual improvement from April. During the quarter, we witnessed an increased demand for online marketing services, as automakers and dealers shifted their focus from offline to online channels. To capitalize on this trend, we introduced a suite of data products and tools. For example, we upgraded our intelligent showroom and embedded live streaming functions, both of which were designed to enhance the efficiency and effectiveness of online marketing programs. Our live streaming channel has been popular among automakers as well. Since the outbreak of COVID-19, about 50 automakers have delivered a total of 124 live stream programs on our platform. We also launched a three-week spring virtual auto show in collaboration with the China Council for the Promotion of International Trade, Automotive Sub-Council in April. This signature event presented an attractive marketing opportunity that drove sales for our customers at a time when offline auto shows were either delayed or canceled in China and abroad. About 60 auto brands and more than 1,300 dealers have signed up for the event. In addition, as we remain committed to supporting our customers and industry, we have been offering a free trial of our smart instant messaging tool to more than 2,000 dealers. Our strategic approach to delivering our business and strengthening our technologies allows us to generate additional value for our customers, which in turn will further enhance our market leadership in the long run. During the quarter, leveraging our advantages in big data analysis and industry insights, we enhanced our data product metrics that facilitate OEM decision-making. In the first quarter, 17 automakers purchased our data product offerings compared with eight automakers in the same period of last year. Additionally, we engaged with automakers for 15 programs for intelligent new car launch and 29 projects for intelligent marketing solutions. In terms of our data products to dealers, in the first quarter, over 17,000 dealers purchased our data products. By the end of the first quarter, close to 3,000 dealers were using our smart call-out and smart assistant, which we launched last year. Regarding our traffic in March, the number of average DAUs who accessed our mobile websites, primary app, and mini apps was 31.7 million, relatively stable compared with the prior period despite an unfavorable operating environment in other verticals. With 2020 well underway, I am confident in our ability to maintain our indisputable market leadership, given our well-defined long-term strategic plan and laser focus on delivering value to our customers and other industries. With that, I would now turn the call over to our CFO, Jun Zou, for a closer look at our first quarter financial results, as well as the business outlook for the second quarter of 2020.

Jun Zou, CFO

Thank you, Min. Hi, everyone. As Min has already highlighted, we are pleased with the solid first quarter to start 2020. Please note that as with prior calls, I will reference RMB only in my discussion today. Net revenues for the first quarter were RMB 1.55 billion compared to RMB 1.61 billion in Q1 last year. For detailed breakdown, media services revenue was RMB 566 million, leads generation services revenues were RMB 670 million; online marketplace and others revenue increased by 32% year-over-year to RMB 310 million, primarily attributable to the increased contribution from data products. Now, moving on to the costs. Cost of revenue was RMB 178 million, compared to RMB 184 million in Q1 2019. Gross margin remained stable at 89% in the first quarter. Now as for operating expenses, sales and marketing expenses in the first quarter were RMB 124 million compared to 110 million in Q1 2019. Product development expenses were RMB 292 million compared to RMB 269 million in Q1 2019. Finally, G&A expenses were RMB 89 million compared to RMB 68 million in the same period of last year. Overall, we delivered an operating profit of RMB 586 million for the first quarter of 2020 compared to RMB 657 million in the corresponding period of last year. Adjusted net income attributable to Autohome was RMB 646 million for the first quarter compared to RMB 701 million in the corresponding period of 2019. Non-GAAP basic and diluted earnings per share/per ADS for the first quarter were RMB 5.43 and RMB 5.40 respectively compared to RMB 5.93 and RMB 5.87 respectively in the corresponding period of 2019. As of March 31, 2020, our balance sheet remained very strong with cash, cash equivalents, and short-term investments of RMB 13.3 billion. We generated operating cash flow of RMB 499 million in the first quarter of 2020. Let me now address our second quarter outlook, which reflects our current and preliminary view on the market and opening conditions and may be subject to changes. At this point, we expect to generate net revenues in the range of RMB 2.220 billion to RMB 2.320 billion. In summary, our solid financial performance once again demonstrated the resilience of our core business as well as the strength of our new initiatives and disciplined approach to managing costs. As we fulfill our commitment to maximizing shareholder value, we are pleased to pay our first regular annual dividend to our shareholders in April 2020 as scheduled. Going forward, we will continue to expand our footprint in auto-related sectors while enhancing operating efficiency across each of our business lines, all with the ultimate goal of generating sustained long-term value for our shareholders. With that, we’re ready to take your questions. Operator, please open the line for Q&A.

Operator, Operator

Thank you, management. Thank you. Our first question is from Miranda Zhuang at Bank of America.

Miranda Zhuang, Analyst

Thank you, operator. I appreciate the opportunity to ask my questions. As you mentioned, there is potential for transitioning from offline to online in business activities. My inquiry pertains to Autohome's strategy and initiatives in this regard, specifically focusing on two areas. First, I would like to hear management's perspective on the differences in live broadcasting within the auto industry, which typically has low transaction frequency and high transaction value, compared to live broadcasting on retail e-commerce platforms. When offline activities return to normal, do you anticipate that live broadcasting for cars will maintain strong appeal among users and dealers? What is the company's strategy to remain competitive in this field? My second area of interest is regarding private domain traffic management or customer relationship management. We have been observing a growing number of merchants utilizing tools like mini programs to engage with users directly for transaction conversions. I'm curious about the company's strategy and product offerings in this space. Thank you very much.

Haifeng Shao, Co-President

First of all, thank you for your questions. To address them, I want to mention that throughout the COVID-19 pandemic, we've observed a significant shift towards online activities. The process of buying a new car has transitioned to online searches where consumers gather information before making their purchase in-store. This will create a closed loop and form a new model for purchasing cars. For the three components of this closed loop, we at Autohome have prepared extensively and developed many of our products and services accordingly. For instance, in the first part, online communication, we offer various tools, such as 3D tools, virtual reality options, and virtual auto shows, to facilitate online broadcasting and communication. In the second part, which involves non-contract-based sales, we provide live streaming and video-based sales. Regarding your question about the main differences between large transactions and regular smaller ones, I believe there are significant distinctions. For larger transactions, users need to see the car and make comparisons, which are essential steps. Additionally, when it comes to broadcasting and live streaming, having a skilled host and support from OEMs and dealers is crucial, especially since cars represent a considerable investment. That’s why we consider it vital to provide data support, product information, and training services for live streaming. In the first quarter, our live streaming platform already collaborated closely with OEMs and dealers, and this initiative is currently in use. In summary, during the COVID-19 outbreak, live streaming plays a critical role in the car purchasing process, although it may not be the most crucial element.

Min Lu, Chairman and CEO

Okay, I’ll answer your question on private domain user traffic, this is Lu Min speaking. Regarding the private domain user traffic, we have already paid a lot of attention in this area and have already started some projects internally. But it's difficult for a single dealer or even OEMs to make full use of the user traffic. So we are doing projects, and hopefully in Q3 or Q4, we can launch new tools or products, helping dealers and OEMs to apply more and more user traffic, converting the private domain user traffic to sales leads. We'll see; we try our best.

A – Unidentified Company Representative, Representative

Thank you.

Operator, Operator

Next question is Eddy Wang from Morgan Stanley. As a reminder, please ask one question at a time.

Eddy Wang, Analyst

Thank you for taking my question. My inquiry pertains to management's perspective on the auto market recovery in the second quarter and the latter half of this year. You mentioned some improvement in auto demand since April. Do you believe this is merely a shift in auto sales from the first quarter to the second quarter, or have you observed a fundamental enhancement in sentiment regarding auto sales for the entire year? Additionally, what impact do you anticipate this will have on your overall revenue in the second half of this year? Thank you.

Min Lu, Chairman and CEO

Okay. The pandemic, to me, has a huge impact on the auto industry. Right now, there are so many people who have lost their jobs, and plus the pandemic may still be there and some are saying that there could be a second wave, things like that. So it has hit the economy heavily. I think this pandemic will have a huge impact in the future as well. So, I may ask Shao Haifeng to address your specific question.

Haifeng Shao, Co-President

Thank you for your question. I would like to share my view regarding the markets. This year, due to the COVID-19 pandemic, we anticipate that new car sales will decline by 10% to 15%. This estimation aligns with that of the China Car Sales Promotion of International Trade, the Automotive Sub-Council. Currently, passenger car sales in April are still showing negative growth, but we need to wait until May and June to determine if this trend will persist. This could be influenced by dealers pushing their Q1 sales quotas into April. As you know, sales drivers and marketing budgets typically increase alongside total sales volume. Therefore, if sales volume decreases, marketing budgets are likely to decrease as well. This year, due to the pandemic, we are observing a shift towards reallocating offline budgets to online spending. We expect this trend to continue, making it a viable investment opportunity. Consequently, we see numerous opportunities to align our data products with the new tools business.

Jun Zou, CFO

Let me just add one point; actually, I think for the first time, online budgets were 50% of the total OEM marketing budget this year. Yeah, definitely it's a great opportunity for us.

Haifeng Shao, Co-President

Okay. Thank you.

Operator, Operator

Next question is Thomas Chong from Jefferies.

Thomas Chong, Analyst

Thank you management for addressing my questions. My first question pertains to our cost control initiatives. Could management provide insights on our strategies for the upcoming quarters? My second question concerns our overseas expansion strategy. Considering the ongoing and significant impact of the coronavirus in international markets, how should we approach our global online auto show in August, along with our strategies for this year? Thank you.

Jun Zou, CFO

I will answer your first question and then Lu will address the second one. Concerning cost control, we will maintain our careful cost control programs, especially in the traditional business, as we have implemented over the last two and a half years. We believe we can optimize our overall operation and provide good returns to our shareholders. That is our belief, and we are dedicated to achieving that in the future.

Min Lu, Chairman and CEO

Okay. And regarding the development overseas, we have already set up two subsidiary companies in the UK and Germany, and the teams are already there. We have already launched an application called YesAuto, and you may download it from the Apple Store. If you want to see the progress, maybe you should download that and take a look at the progress that we're making. But you're right, because of the pandemic, the whole process has been delayed, as some dealers have shut down. So, it has delayed our process, but we will continue our efforts. Hopefully, the pandemic will end soon. On August 18, we will launch the virtual auto show in China, as we did last year. This year, we hope to launch the auto show at the same time in the UK and Germany. We will see. Thank you.

Operator, Operator

Our next question is Frank Chen from Macquarie. As a reminder, please ask one question at a time.

Frank Chen, Analyst

Thank you for taking my question. I understand that COVID-19 may encourage OEMs and dealers to move their budgets online. It's encouraging to see OEMs allocating over 50% of their budget online in the first quarter. Can management share with us the potential here looking ahead? Thank you.

Haifeng Shao, Co-President

Thank you for your question. In the first quarter, due to the COVID-19 pandemic, there were no offline activities, leading to OEMs reallocating their budgets predominantly online. We expect offline marketing efforts to gradually resume in Q2. However, when compared to 2019, the proportion of the budget allocated to offline activities remains lower than it was in that year.

Min Lu, Chairman and CEO

In the first quarter, we had a unique chance to collaborate with the OEMs. We introduced the Intelligent New Car Launch tool program and supported them with live streaming and other online initiatives. The OEMs were pleased with the positive outcomes achieved at a lower cost.

Jun Zou, CFO

And Frank, let me also clarify one thing: what I meant is that the online spending for this year will exceed 50% for the entire year. Thank you, Frank.

Operator, Operator

Next question is Tina Long from Credit Suisse.

Tina Long, Analyst

My question is about the data products. Among all the products we've launched in the past 12 to 18 months, which ones have had the best reception from distributors, and what data supports that? Additionally, what are the plans for new data product rollouts in the next six to 12 months, and what are the anticipated adoption rates by the dealers? Thank you.

Jingyu Zhang, Co-President

Let me explain and clarify what the data product is. Our data product includes two major offerings: the intelligent new car launch and intelligent marketing solutions, which are aimed at OEMs. We also have products for dealers, such as the smart call-out and the smart assistant. For OEMs, 17 have procured and are currently using the intelligent new car launch and intelligent marketing solutions. In Q1 of 2019, the number was only eight, but this year it has increased to 17. On the dealer side, 17,000 dealers were using smart call-out and the smart assistant in Q1 of this year, compared to 14,000 in Q1 2019. The core value of these products, offered to both OEMs and dealers, is to enhance the conversion rate, which can improve by 20% to 35%. For the latter part of this year, we are aiming to launch intelligent activities on the OEM side to connect them with dealers. On the dealer side, we plan to introduce smart sales tools later this year to help boost conversion rates after customers visit the store. We are also going to upgrade Intelligent New Car Sales to make it even better.

Min Lu, Chairman and CEO

On top of what Jingyu has said, I can expand on that a little more. We are developing and understanding a range of data products. For instance, we have a product called Smart R&D, designed for the R&D phase of OEMs as they create new car models. We leverage big data to assist them in designing models that meet customer needs. There are various products like this; Jingyu referred to the smart call-out, for example. It's an AI-enabled tool for dealers. When they receive sales leads from us, their call center staff reach out to those leads, and during the call, a set of messages or parameters related to the customer’s inquiries will appear on their screen. If a customer inquires about the acceleration of a specific model, the system quickly recognizes the question and displays the answer, enabling the sales representative to provide accurate information and explanations. Dealers have appreciated this tool, and last year, those who used it saw their store visit rates improve by around 20%.

Operator, Operator

Our next question is from Brian Gong at Citigroup.

Brian Gong, Analyst

In the first quarter, the number of dealers was slightly affected by COVID-19. From management's perspective, when can we expect the number of dealers to return to normal levels? Thank you.

Haifeng Shao, Co-President

Thank you for the questions. Regarding the number of dealers, it is closely tied to new car sales. If we observe a 15% drop in total sales year-round, I anticipate that the number of dealers will also decrease. The first quarter will likely represent the lowest point, with a gradual recovery expected afterward. Overall, as sales volumes decline, the total number of dealers will similarly decrease. We will monitor future developments. One critical factor to consider is the profitability of different brands. Looking at Japanese brands, their margins should remain strong. German brands are expected to be stable. However, US brands are likely to see a decline, while South Korean and French brands may face the most significant challenges. For Chinese brands, we will need to see how they develop over time. I believe examining the mix of various brands along with their profitability will provide a clearer picture.

Operator, Operator

Our next question is from Ben Huang from T.H. Capital.

Ben Huang, Analyst

The question is related to the supply chain of the OEM. Overseas, the pandemic has occurred later than in China, and they have just started to resume their business operations. For auto production, there are major components that we need to import from overseas vendors. What is the supply situation looking like for the second half? Will the overseas pandemic situation affect manufacturing capacity? Thank you.

Jun Zou, CFO

Okay, thanks for the questions. For the supply chain, of course, we were also worried about that in the beginning. Most OEMs usually have about two months' inventory of, say, auto parts. Most European manufacturers have resumed work, and the U.S. is a little behind, but will gradually resume by late May to early June. So that is a good sign. But that being said, as Mr. Lu mentioned, a lot of experts are warning about a second wave of the pandemic, and if that happens, the supply chain will definitely be disrupted. Long-term, I think this will promote the localization of the auto supply chain in China. As far as we understand, many auto OEMs in China are planning to localize their supply chain and are planning to achieve 100% localization by sometime next year. So, this is something we are sure about. Thank you.

Operator, Operator

Our next question is Robin Zhu from Bernstein.

Min Lu, Chairman and CEO

Okay. Let me answer your question briefly. Autohome, as we have discussed many times, is always exploring future opportunities while we're managing our current business. Today, we discussed traditional business lines such as advertising and lead generation. However, in the future, I believe there are new areas for us to develop. For example, our data products and the used car segment present good opportunities for us to expand our business, and we have invested a lot in them. Two years ago, we started to become profitable in this business unit, and hopefully in the next few years, we can expand this business even further. We are also looking into the aftermarket and exploring new products and services in that area. Of course, these are long-term goals. Additionally, we are looking into the possibility of expanding our car sales channel, which is growing smoothly, and we hope it will be even bigger in the future. We have already launched a shared car platform, where we collaborate with several shared car companies, and we hope to expand this well. In the future, we will continue to grow our traditional business, which may be affected by the industry, but we will also develop new business lines. Thank you.

Operator, Operator

And this concludes our question-and-answer session. Now, I hand back to management for closing comments. Thank you.

Min Lu, Chairman and CEO

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

Operator, Operator

Thank you. This concludes our conference call. You may disconnect now. Bye.