Earnings Call Transcript - MMYT Q1 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to the MakeMyTrip Limited Fiscal 2020 Q1 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call may be recorded. I would now like to introduce your host for today’s conference, Mr. Jonathan Huang. You may begin.

Jonathan Huang, Host

Thank you. Greetings and welcome to MakeMyTrip Limited fiscal 2020 first quarter earnings call. I would like to remind everyone that certain statements made on today's call are considered forward-looking statements within the meaning of the Safe Harbor provision of the US Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to inherent uncertainties, and actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date, and the company undertakes no obligation to update information to reflect changed circumstances. Additional information concerning these statements is contained in the risk factors and forward-looking statements section of the company's annual report on Form 20-F filed with the SEC on July 23, 2019. Copies of these filings are available from the SEC or from the company's Investor Relations department. Today, we are joined by Deep Kalra, MakeMyTrip's Founder, Chairman, and Group CEO; Rajesh Magow, Co-Founder and CEO of India; and Mohit Kabra, MakeMyTrip's Group CFO. Now, let me turn the call over to Deep to begin today’s discussions.

Deep Kalra, CEO

Thank you, Jon, and welcome everyone to our fiscal 2020 first quarter earnings call. As we complete the first fiscal quarter of 2020, I'd like to share that we continue to believe in the long-term growth opportunities available to us in India’s large and attractive travel market. India’s rising Internet penetration, fast-improving digital and payments ecosystem, coupled with a very young population, is continuing to change consumers’ buying behavior towards convenient online platforms, a trend that is expected to continue. Our optimism for this growth opportunity is further underscored by a recent Goldman Sachs analyst report, which has forecasted that total online travel booking, excluding rail, will reach $33 billion by fiscal 2025. During the first fiscal quarter of 2020, we did witness temporary softness in the domestic travel market, driven by a supply crunch caused by the shutdown of Jet Airways, a general slowdown in consumer spending leading up to the May general election, and a tightening of consumer credit. However, during this tough operating environment, we have been able to deliver results in line with our plan while using this opportunity to further strengthen our competitive moats and accelerate online growth in under-penetrated outbound travel segments, which includes international air ticketing and international hotels. We've also been successful in further narrowing our operating losses year-over-year, driven by a continued scaling up of business and improving marketing and promotional efficiencies. As I shared last quarter, owing to the shutdown of Jet Airways, we expected domestic travel growth to be impacted in the first half of fiscal 2020, but anticipate a rebound in demand in the second half of the year when the lost seat capacity is expected to be largely restored by other carriers in the domestic air market. During the quarter, we were encouraged to see other airlines quickly replacing some of the lost capacity and avoid a contraction in quarterly year-on-year growth for the industry. Historically, the Indian domestic aviation industry has taken a couple of years to regain its higher growth rate from the shutdown of a large carrier like Kingfisher Airlines. However, with most airlines being in expansion mode, we believe the domestic aviation industry should begin to normalize for the second half of this fiscal year. In the meantime, as demonstrated in Q1, we will continue to make investments in our technology, product supply, and brand to achieve continued robust long-term growth with a focus on outbound travel. We will also continue to make investments in new growth opportunities within our domestic hotels and accommodations market to increase our share of consumers that prefer alternative accommodations and expand our client base within the corporate travel market. Now, I'd like to share some of our achievements during the first quarter of fiscal 2020. In Q1, our team continued to promote and nurture our brand in order to target and drive awareness to new and existing online users. As a result of our comprehensive marketing strategy, we've been able to grow our transacting user base to 42 million live-to-date customers by the end of Q1, an increase of over 26% year-on-year. In Q1, we engaged with several international tourism boards, including Indonesia, Singapore, Australia, and Dubai, to drive greater awareness of outbound travel for consumers. Additionally, during India's highly popular cricket season, we partnered with two IPL teams, the Kolkata Knight Riders and Royal Challengers Bangalore, along with Bollywood stars to help generate excitement and attraction for online bookings among young Indians. We also leveraged social media to connect with the younger net users in the country to drive greater awareness of our alternative accommodations offerings. During Q1, our team also leveraged our multiple loyalty programs to drive greater stickiness to our platform. We now have nearly 11 million MMTBLACK enrollees and 106,000 Double Black members who are providing us with greater repeat rates and a higher number of transactions than general users of our platform. In Q1, we extended our MMTBLACK programs to corporate consumers who are enrolled under the myBiz program, further incentivizing SME users to enroll in the self-service corporate program and increasing our cross-sell opportunities. Similarly, for the brand Goibibo, our go rewards program has crossed over 2 million registered users, having rewarded by actively making our platform better. This program has been very popular with our Goibibo fan base, as more than one-third of daily active users complete reviews and context. During the last year, we have launched activities and experiences for the domestic market in order to increase the frequency of our app usage. I’m pleased to announce that we have also expanded our offerings to activities and international destinations to cater to our growing base of outbound travelers. As we progress through this fiscal year, we plan on enhancing the shopping experience within this vertical to help users find and book an activity experience, which will drive even greater stickiness and more frequent engagement with our brands. Lastly, I'd like to give you a quick update on our corporate travel strategy where we are leveraging online self-serve technology to empower and address the needs for business travelers from small organizations to large corporates. Our myBiz program, which is seamlessly integrated with our B2C mobile app, is already addressing the underserved needs of over 7,500 small and medium enterprises. Furthermore, our recent acquisition of Quest2Travel is aimed at meeting the demands of large corporates with an online end-to-end enterprise-grade corporate travel solution. During Q1, as part of the pilot launch of this platform, our team has successfully signed up several large and well-recognized corporates within India. With that, I'd like to turn the call over to Rajesh.

Rajesh Magow, CEO of India

Thanks, Deep, and hello everyone. I would like to begin by highlighting our various initiatives coming into fiscal year 2020, as we continue on our efforts to become the travel super app for Indian travelers. We now have comprehensive travel offerings prominently offered on our platforms like rail, intercity cab, airport transfers, activities and experiences, ancillary products like visa and travel insurance, besides our main product offerings of hotels and accommodations, air, and bus. We've also added additional useful travel information, like flight and train status, to our redesigned app home screen, and we expect to introduce more relevant and useful features going forward this year. This should help us increase the stickiness of our platform. In the past few months, we've also been making investments to grow under-penetrated travel segments, like outbound flights and hotels. These segments, along with domestic accommodation, are likely to be future growth drivers for us, as they are largely booked offline today. Our focused investment and efforts have been helping us continue to expand our already strong market leadership position even as the overall domestic travel industry is experiencing a temporary slowdown in growth. Now, I would like to share some quick highlights from our Q1 financial results, and Mohit can share additional color on our results later. For Q1 of fiscal year 2020, the MakeMyTrip group achieved gross bookings of nearly $1.7 billion, representing a constant currency growth of over 24%. Our Q1 adjusted revenue grew by 21% on a constant currency basis to $198.5 million. From a supply standpoint, we further expanded the choice and selection for customers to over 63,000 properties bookable within India, which now includes 16,500 alternative accommodations. During Q1, our ramped-up efforts on alternative accommodation resulted in strong new user growth for customers who prefer gated passes, parking, and villas, which widen our customer reach. As for our outbound hotel growth strategy, we now have directly contracted over 8,000 international properties, which account for the majority of our international hotels booked in key destinations by our customers. Furthermore, growth from this segment has also been fairly robust. Now, I would like to share a highlight from our ongoing product enhancement effort, inspired by customer insights and driven by tech innovation to deliver a best-in-class customer experience. As an example, our hotels and alternative accommodation content to date has been vastly improved on all platforms, powered by user-generated and curated content, including videos and more accurate representation of location and amenities. As shared on our last earnings call, we have been very encouraged by the growing amount of user-generated content on our platform. During the quarter, we upgraded the MakeMyTrip UGC collection point to be more customer friendly and provided incentives to further drive collection. I'm also pleased to share that more than one-third of Goibibo users are providing us with content, including ratings, reviews, and pictures, which is quite an achievement since most domestic travelers are not known to share feedback post-travel. These ongoing efforts only serve to drive greater attention to our platform and make the shopping experience even better for future users. Additionally, we have made the experience for suppliers even better by streamlining and simplifying the onboarding process for new partners. Our mobile supplier-facing app has been upgraded to help partners set up properties, establish rates, allocate inventory, and manage bookings more easily. Lastly, we have rolled out a heat map to empower suppliers to make informed pricing decisions based on real-time demand cues. As for our flights order, we have an improved and friendlier user flow for the purchase of ancillary products like advanced seat selection. We have also improved on customer messaging regarding visa requirements, mandatory web checking requirements, and included other add-on ancillary products like meals and extra baggage, all helping to improve customer conversions. Our work on automation in phases, leveraging machine learning and AI, also continues to gain traction. During Q1, our in-house ARN system was launched across all our call centers, and today, 95% of our agents are using the system to resolve customer requests with much greater satisfaction. Our postpaid chatbot, Myra, has also greatly improved its natural language processing skills and is able to understand user inquiries with 89% accuracy. It can also provide intent options with a mechanism in place to reconfirm if the system is not very confident in its own predictions. Similarly, for Gia, we have been working to leverage the latest advancements in AI and natural language processing to provide a better postpaid experience. A great example of Gia in action is in the way name change requests are handled for flight customers. Prior to Gia, users had to spend a significant amount of time to get this seemingly simple task done. Now, through Gia, the request can be completed in a matter of seconds. I'm pleased to share that the number of users coming directly to Gia has increased from nearly 0 to 25% of all customers who have a post-booking support need. Furthermore, as travel continues to expand across India, we also wanted to leverage the nationwide digital payment push enabled by the government’s UPI framework and gain greater access to a wider audience. We continue to expand upon our already comprehensive payment options, which now include equal monthly installment plans, enabled by third-party financial institutions. We’ve also rolled out multiple options, including paying closer to the travel date, where we automatically debit customers' payment cards. Lastly, I would like to share some details on our bus business, led by the redBus giant. During Q1, redBus continued to achieve robust growth, despite the general slowdown during the peak travel months of April and May, driven by the ongoing shift from offline to online bus booking. During the quarter, bus operators also launched 900 more new destinations than the same period a year ago, which helped to widen our potential addressable audience. In Q1, our team continued to leverage the ongoing digitization efforts by various local governments and successfully integrated the Telangana State Road Transport Corporation onto our platform to distribute their inventory. On the product side, we’ve also introduced the redBus open ticket, which allows passengers to travel in any class of service for a given day, which helps to accelerate the shift towards online on short-duration routes. Today, Indian metropolitan cities are facing the burden of increasing urbanization migration and paralyzing vehicular traffic, especially in cities like Bangalore. In order to help ease congestion and drive greater carpooling, I’m pleased to announce that redBus has piloted a carpooling app called rPool. This new application is aimed at addressing the daily commuting needs of working professionals by encouraging the pooling of rides to help decrease traffic congestion and air pollution over time. Now, let me hand it over to Mohit, who will share more details about the quarter.

Mohit Kabra, CFO

Thanks, Rajesh. Hello, everyone. We’re glad to report a 21% year-on-year constant currency growth in adjusted revenue, along with the reduction of losses from $32.8 million in Q1 of last fiscal year to $29.2 million in Q1 of this fiscal year, despite the short-term operating challenges already highlighted by Deep and Rajesh. The 21% growth in adjusted revenue was largely led by volume growth, as blended net revenue margins have moderated slightly from 12% in Q1 of last year to 11.7% in this quarter. With that, let me share financial highlights by business segment, beginning with the air ticketing business. Our year-on-year segment growth of 15.7% was largely driven by the international air ticketing segment’s growth of over 41%, which also helped us register a 24.2% year-on-year constant currency growth and aided in achieving adjusted revenues. In the hotels and packages business, the 12.1% adjusted revenue growth was driven by about 12% growth in total segment room nights stayed and reflects the current slowdown in the domestic travel market. Excluding our holiday packages products, the standalone hotel bookings grew by about 14% year-on-year. As mentioned by Rajesh earlier, our international hotels business grew quite robustly during the quarter. However, given the very early stages of this business segment, its contribution will take some time to become a meaningful driver of overall HSB unit growth. Our bus ticketing business had continued to grow strongly during the quarter as well. The ticket business grew by roughly 41% to nearly 21 million bus tickets sold during the previous quarter. The business also generated over $21.3 million in adjusted revenue during the quarter, a growth of 37% year-on-year in constant currency terms. Adjusted revenue from other revenue stood at about $10.7 million, the majority of which was driven by facilitation fees for travel insurance, and ancillary revenue from our travel alliances and affiliate partnerships. I would now like to share some details on our operating leverage, which was driven by the improving scale of our business and this even more efficient marketing and promotional expense. In the quarter, our total marketing and promotional expenses were $160.8 million, which stood at about 9.5% of our gross bookings compared to 10.5% in the previous year’s similar quarter. As a result, our adjusted operating losses stood at a negative 1.7% of gross bookings compared to a negative 2.3% of gross bookings in the same quarter last year. With this, I'd like to thank you for joining this call and open up the call for Q&A. Operator, please?

Operator, Operator

And our first question comes from Sachin Salgaonkar with Bank of America.

Sachin Salgaonkar, Analyst

I have three questions. The first question is on air ticketing margin. Mohit, on a QoQ basis, it has come down. How should we look at it? I know directionally you guys have indicated that the margin could go down. So is this a new normal, and going forward, should we expect a steady level or slight decline from these levels?

Mohit Kabra, CFO

I think Q1 was expected to be challenging. I think there is a little bit of seasonality in terms of good versus travel, etc., and also the fact that, post Jet going down, some amount of segment fees that used to come in from full-service carriers like Jet also kind of goes away. So there is expected to be a release of compression in the overall margins as we continue, and probably this trend could largely be a characteristic focus of the year.

Sachin Salgaonkar, Analyst

My second question is on the marketing and sales promotion. So is there any one-off in this quarter? I understand the seasonality factor again in Q1, but how should we look at spending this quarter and the overall outlook going forward?

Mohit Kabra, CFO

In terms of overall marketing spend, really the one-off is just that you typically find that pretty much every year, in Q1, the brand marketing spend is a little high. For the last few years, we've been leveraging the IPL franchise significantly, which has become extremely popular, and the brand tends to be extremely high. Therefore, there are brand spends specifically incurred in quarter one, which also has a lasting effect throughout the year. You could see, on a year-on-year basis, I think the trending would largely continue to be on similar lines for the quarter, as it has been in the past couple of years.

Sachin Salgaonkar, Analyst

And so directionally, it should continue to be more like 10% of GMV or sort of go down, right?

Mohit Kabra, CFO

Actually, the target is to take it down further. It moved down to about 9.5% of gross bookings in the fourth quarter. We would definitely want to bring it below the 9% level in the coming quarters. Longer term, probably closer to 8% or 8.5%.

Sachin Salgaonkar, Analyst

Lastly, I understand Jet's impact, and you guys have said first-half is slow and things should improve. On the ground, generally, if we’re seeing in some of the other consumer sectors, like autos, we are seeing a bit of an impact on overall consumption slowdown. So big picture, any thoughts on how we should look at it? Do you still expect a recovery going into the second half as the Jet impact more or less goes away? Or does this consumer sentiment risk a disappointment?

Deep Kalra, CEO

It's a fair question. Sachin, this is Deep. I think we have seen that in travel, the market has been fairly resilient, because the outbound market is quite indicative of the fact that people continue to travel. I think what's happening is a lot of people are switching large, durable expenditures, whether it’s automobiles or others now. Maybe the renting, but preferring to spend a lot more on themselves. Especially the youth, we’re seeing eating out, going out, and traveling being something that's still growing. So we do believe that from a secular basis, these trends should remain strong. We have some headwinds right now, which are short-term in nature. We think the second half of the year should bounce back. If we just look at some of the other travel markets, particularly on the international side, we feel quite encouraged that there's a lot right now that is yet to come in this segment.

Operator, Operator

And our next question comes from an unidentified analyst.

Unidentified Analyst, Analyst

Hi, good evening. Thank you for taking my questions. My first question, again on the hotel growth, which saw a slowdown in this particular quarter. From a growth standpoint, definitely, the consumer sentiment in general has been weak. But if you were to try to bifurcate this growth slowdown between the Jet impact plus, in general, consumer slowdown, how would you classify this slowdown in those two buckets? What has led to how much? And again, in terms of recovery, you called out second half of this fiscal year to start improving. In the past, you've grown at north of 20% annually, is that the kind of growth that you expect to return in this segment by the second half of this fiscal year, or is that still some time away?

Rajesh Magow, CEO of India

Let's discuss the recovery aspect first. Currently, one of the reasons for the slowdown was the decline of Jet Airways, which led to a supply shortage. When this shortage occurred, flight fares increased, causing this primary issue. Growth should rebound as supply returns, especially since we've been pleasantly surprised by the rapid increase in capacity from other airlines, particularly IndiGo and SpiceJet, which is evident from their recent results. As supply improves, we can expect to see a correction in prior growth trends. Consequently, as this growth returns, we anticipate that hotel and accommodation sectors will also experience growth. However, there's still some uncertainty regarding overall consumer spending sentiment. As mentioned earlier, while discretionary spending may slow down, we are noticing a shift in consumer behavior toward spending more on personal experiences than before. Therefore, I'm optimistic that the combination of these improving factors in the second half of the fiscal year will lead to growth compared to the first half.

Unidentified Analyst, Analyst

A couple of quick questions for Mohit. One, just in terms of the cash balance or the net cash balance in the quarter, I noticed that it saw a sharp sequential decline; am I looking at it correctly? Is there anything there? And the second question in terms of the breakeven target, I mean, could you just let us know when you think, from an EBITDA or adjusted EBIT standpoint, we should get to breakeven? Should it still be some time in the middle or the end of fiscal ’20, early fiscal ‘21? How are you thinking about that?

Mohit Kabra, CFO

On the cash calculation, apart from the operating cash flow in Q1, we had also reported an investment at the corporate level in Quest2Travel. So, there’s been some deployment on the investing side as well. Therefore, the overall cash position now factors in the investment made in the corporate travel business and some other investments as well. Longer term, I think I was just like we have been saying, targeting more like a year-on-year improvement, trying to do that every quarter. If you see the trending for the last probably five or six or seven quarters, you would see that year-on-year, the operating losses have narrowed every quarter. Now, whether it takes us to reach an operating breakeven in the next year or sometime later this year, it’s difficult to call out since it depends on many market factors like the recent slowdown that wasn’t budgeted earlier, which came into play in the first half of this year. So, by the second half of the year, we expect growth to bounce back a little, allowing us to share more clarity then.

Operator, Operator

Our next question comes from Parag Gupta with Morgan Stanley.

Parag Gupta, Analyst

Hi. I just wanted to check on two things. Firstly, other operating expenses seem to have gone up quite a bit this quarter relative to the previous quarter. What accounts for this? I know that this probably includes payment gateway charges and other operating expenses, so if you could provide some insight on that. And secondly, you've been making investments in outbound, both air, hotels, and local experiences; could you provide some insight into the kind of investments you're making? Are those increasing similarly to previous years, or are they accelerating?

Deep Kalra, CEO

Sure, Parag. I can take the first one. On the other operating expenses, the increase is largely due to incremental expenses coming in from one, I would say, the annual merit increase or the annual inflationary increase across people costs and some part of it due to call center-related content in SG&A costs as well. So some portion of it comes as part of that in SG&A, but otherwise, largely, the payment is because we have increased with the increase in gross bookings as well. You see almost like a 24% increase in gross bookings, and that gets reflected in the payments, as a percentage of gross bookings largely remaining the same, with more absolute dollars going up.

Rajesh Magow, CEO of India

As for the investments in outbound and local events and activities, the investments have been consistent. The investments involved building technology platforms and enhancing our offerings. Therefore, I would say largely in line with our ongoing strategies. We have been steadily building momentum with new segments and gaining traction over the past quarters.

Operator, Operator

Ladies and gentlemen, that now ends our Q&A portion of today’s conference. I would now turn the call back over to Jonathan Huang for any closing remarks.

Jonathan Huang, Host

I would like to thank everybody for joining our call this morning. We certainly look forward to speaking with each and every one of you shortly. Thank you.

Operator, Operator

Ladies and gentlemen, thank you for attending today’s conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.