Earnings Call Transcript - TOUR Q4 2020

Operator, Operator

Hello. And thank you for standing by for Tuniu’s 2020 Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today’s conference call, Director of Investor Relations, Mary.

Mary Chen, Director of Investor Relations

Thank you, Andrew. And welcome to our 2020 fourth quarter and full year earnings conference call. Joining me on the call today are Donald Yu, Tuniu’s Founder, Chairman and Chief Executive Officer; and Anqiang Chen, Tuniu’s Financial Controller. For today’s agenda, management will discuss business updates, operation highlights, and financial performance for the fourth quarter and fiscal year 2020. Before we continue, I refer you to our Safe Harbor statement and earnings press release, which applies to this call, as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB. I would now like to turn the call over to our Founder, Chairman and Chief Executive Officer, Donald Yu.

Donald Yu, CEO

Thank you, Mary. Good day, everyone. Welcome to our 2020 fourth quarter and full year earnings conference call. First, I would like to provide a brief review of the China travel market in 2020. 2020 was a challenging year for the tourism industry both in China and globally due to the impact of the COVID-19 pandemic. While the travel industry has begun to gradually recover, and we are optimistic about the future, we did experience a period of stagnation last year. Fortunately, Tuniu’s years of experience in the industry have allowed us to accumulate a large number of high-quality business partners and loyal customers, along with a diverse product portfolio and a strong customer service team. All of which help us to get through the most challenging times. Also, our flexible operating model allows us to effectively respond to changes in customer demand during and after the COVID-19 outbreak by adjusting our business focus, product strategy, and staffing. Upon the outbreak of COVID-19 in January last year, our first priority was to guarantee the safety and interest of our customers. We quickly assisted traveling customers with their return logistics while responding to or adjusting previously purchased packages for customers who hadn't started their trips yet. During the pandemic, our direct loss related to customer refunds totaled more than RMB100 million. Thanks to our timely response, however, we’ll be rewarded with the long-term support and trust of many loyal customers who have greatly contributed to the recovery of Tuniu’s business. I'm pleased to see that our GMV contribution from repeat customers reached a new high last year. In response to the changing external environment, we've also made various adjustments to our business operations and the corporate structure, including optimizing our teams and repositioning our key staff. We've also adopted tighter cost control measures since the outbreak of the pandemic, resulting in a 20% year-over-year decrease in total operating expenses for 2020. Excluding the provision for receivables recorded in the fourth quarter, our yearly operating expenses declined over 50% year-over-year. When the provincial travel market reopened in April, we leveraged our flexible transportation plus destination-based tour model to launch a number of tour products for traveling to destinations or nearby cities. Since then, we've seen the progressive recovery of our business starting from local tours and self-driving tours. With the gradual recovery of business, we have found that customer demand for safer and more personalized products is increasing. In particular, our customized tour GMV in the third quarter increased by eight times compared with the second quarter. When inter-province tours were resumed in July, the risk of pent-up demand greatly accelerated the recovery of the domestic travel market. Under the strong recovery momentum of the industry, our business continued to improve. According to our data, packaged tour GMV was up over 200% in the second half of July compared to the first half of the month. In addition, our operating cash flow turned positive in the third quarter of 2020. With the resumption of nationwide travel, we have seen customer requirements for product quality also increase. In response, we upgraded the data Tuniu tool, our own branded product launched in 2009. With the goal of providing high-quality packaged tours that meet the ever-evolving standards of China's travelers. Our upgraded new tool products feature stricter resource selection and have higher standards for clean and safe travel conditions, such as enhanced safety protocols and individually served meal options. We also launched more small and medium-sized packaged tours, as well as private family tours, which have proven to be quite popular. Looking to 2021, we will continue to invest in our product innovation, quality improvement, and technology under our integrated business model. First, we continue to be guided by our customer-first principle and our commitment to developing domestic travel products. We will continue to increase our investment in product upgrades to ensure we always have compelling and differentiated product offerings for customers. To design more targeted products for different customer groups, we conducted in-depth content and analysis of our customer needs, which provided us with insight to create a more accurate product strategy. We found that even in the top groups, customers can be further narrowed down based on their needs into more distinct customer groups. Based on this insight, we will focus on developing tailored products for specific groups in order to capture more overall market share. Secondly, we will continue to improve the quality of both our products and services. Higher quality means higher customer satisfaction, which drives a higher repurchase rate and additional value into the company. We reached product launch standards again after the outbreak of the pandemic. In 2019, a product with a satisfaction rate of 80% we launched on our website and app. Last year, we reached the standard at 85%. We will apply a stricter product selection process and aim to further reach standards of 90% this year. In addition, Tuniu has established more than 30 self-operated local tour operators in China to provide high-quality destination service for our customers. Currently, over 97% of customers are satisfied with our self-operated local tour product, and we are striving to achieve zero complaints this year. In the fourth quarter, GMV of self-operated local tour products accounted for nearly a quarter of the GMV of our packaged tour products, with a higher degree than products purchased through third parties. In 2021, we will further expand our self-operated local tour products and develop the role our self-operated local tour operators play to support Tuniu’s organized tours, as well as customized tours, private family tours, and other travel destinations. In terms of customer services, we will work to provide more personalized customer service and targeted products to improve overall customer experience. We will increasingly look at the full customer lifecycle and use the most suitable marketing tools for specific customer groups. Thirdly, Tuniu has built a strong IT support system to improve our internal operational efficiency and reduce operational costs. Today we are looking to introduce more advanced technologies in various aspects of our business from supply chain management to product design to customer service. For example, we have leveraged new technologies to establish a more accurate customer portfolio and tour guide information database to support our product design, customer services, and marketing efforts. Also, by developing more intelligent product recommendations and customer response systems, we will offer our employees more opportunities to create value through their work. Tuniu has been making great efforts for over 10 years to develop a vertically integrated business model. We have focused on the integration of the supply chain, production, and sales channels and implemented a direct procurement strategy to directly acquire destination resources at favorable prices. We will also establish our own local tour operators to directly serve our customers at destinations. By moving to our direct procurement and local tour operators, we are able to produce our own products and help upgrade many of them to the mass premium level. On the sales side, we will develop our sales network, including both online and offline channels, loyalty programs, B2B distribution, as well as popular channels such as social marketing and live streaming shows. With the development of our own supply chain, production system, and sales network, we can penetrate every part of the supply chain and provide full services to both our customers and suppliers. By shortening the supply chain, we have better control over product and service quality, higher internal efficiency, and better profit margins. Moreover, we are flexible to collaborate with business partners in each part of the supply chain to provide better products and services to our customers. Overall, 2020 was full of instabilities and challenges. But we have always remained optimistic about the prospects of China's and the global travel industry. At present, the development and rollout of the COVID-19 vaccine has made significant progress, which brings us more confidence in the recovery of the industry. We look forward to developing more high-quality products to serve our customers better and have positioned Tuniu to take advantage of the emerging opportunities in China's vast tourism market. I will now turn the call over to Anqiang Chen, our Financial Controller for the financial highlights.

Anqiang Chen, Financial Controller

Thank you, Donald. Hello, everyone. Now I will walk you through our fourth quarter and fiscal year 2020 financial results in greater detail. Please note that all monetary amounts are in RMB unless otherwise stated. You can find the U.S. dollar equivalents of the numbers in our earnings release. Starting from the fourth quarter of 2020, net revenues were RMB118.7 million, representing a year-over-year decrease of 74% from the corresponding period in 2019. The decrease was primarily due to the negative impact brought by the outbreak and spread of COVID-19. Revenues from packaged tours were down 76% year-over-year to RMB83.1 million and accounted for 70% of our total net revenue for the quarter. The decrease was mainly due to the decline in travel to international destinations caused by the outbreak and spread of COVID-19. Other revenues were down 67% year-over-year to RMB35.6 million and accounted for 30% of our net revenues. The decrease was primarily due to the decline in service fees received from insurance companies and revenues generated from financial services. Gross margin was 40% in the fourth quarter of 2020, compared to a gross margin of 48% in the fourth quarter of 2019. Operating expenses for the fourth quarter of 2020 were RMB960.1 million, up 48% year-over-year. Excluding share-based compensation expenses, amortization of acquired intangible assets, and impairment of acquired intangible assets, non-GAAP operating expenses were RMB924.3 million, representing a year-over-year increase of 60%. Research and product development expenses for the fourth quarter of 2020 were RMB12.8 million, down 84% year-over-year. The decrease was primarily due to the decrease in research and product development personnel-related expenses. Sales and marketing expenses for the fourth quarter of 2020 were RMB113.2 million, down 53% year-over-year. The decrease was primarily due to the decrease in sales and marketing personnel-related expenses. General and administrative expenses for the fourth quarter of 2020 were RMB844.8 million, up 147% year-over-year. The increase was primarily due to the provision provided for receivables with an amount of RMB0.8 billion recorded due to COVID-19. Net loss attributable to ordinary shareholders was RMB901.9 million in the fourth quarter of 2020. Non-GAAP net loss attributable to ordinary shareholders, which excluded share-based compensation expenses, amortization of acquired intangible assets, and impairment of acquired intangible assets, was RMB865.6 million in the fourth quarter of 2020. As of December 31, 2020, the Company had cash and cash equivalents, restricted cash, and short-term investments of RMB1.6 billion. Capital expenditures for the fourth quarter of 2020 were RMB6.7 million. Now moving to full year 2020 results. In 2020, net revenues were RMB450.3 million, representing an 80% year-over-year decrease. The decrease was primarily due to the negative impact brought by the outbreak and spread of COVID-19. Revenues from packaged tours were down 84% year-over-year to RMB302.4 million and accounted for 67% of total net revenues in 2020. The decrease was primarily due to the suspension of sales of packaged tours impacted by the outbreak and spread of COVID-19. Other revenues were down 63% year-over-year to RMB147.9 million and accounted for 33% of our total net revenue in 2020. The decrease was primarily due to the decline in commissions received from other travel-related products and service fees received from insurance companies, which were impacted by the outbreak and spread of COVID-19, as well as revenues generated from financial services. Gross margin was 47% in 2020, which was in line with the gross margin in 2019. Operating expenses were RMB1.6 billion in 2020, down 20% year-over-year. Excluding share-based compensation expenses, amortization of acquired intangible assets, and impairment of acquired intangible assets, non-GAAP operating expenses were RMB1.5 billion, representing a year-over-year decrease of 16%. Research and product development expenses were RMB100.5 million in 2020, down 67% year-over-year. The decrease was primarily due to the decrease in research and product development personnel-related expenses. Sales and marketing expenses were RMB372 million in 2020, down 60% year-over-year. The decrease was primarily due to the decrease in sales and marketing personnel-related expenses and promotion expenses. General and administrative expenses were RMB1.1 billion in 2020, up 48% year-over-year. The increase was primarily due to the provision provided for receivables with an amount of RMB0.8 billion recorded due to COVID-19. Net loss attributable to ordinary shareholders was RMB1.3 billion in 2020. Non-GAAP net loss attributable to ordinary shareholders, which excluded share-based compensation expenses, amortization of acquired intangible assets, and impairment of acquired intangible assets, was RMB1.2 billion in 2020. Capital expenditures were RMB28.3 million in 2020. Tuniu's business has been significantly and negatively impacted by the outbreak and spread of COVID-19 since January 2020. As a result of the continued influence of COVID-19, for the first quarter of 2021, the Company expects to generate RMB60.9 million to RMB69.6 million in net revenues, which represents a 60% to 65% decrease year-over-year. Please note that this forecast reflects Tuniu's current and preliminary view on the industry and its operations, which is subject to change, particularly due to the uncertainties brought by the impact of COVID-19. Thank you for listening. We are now ready for your questions.

Operator, Operator

The question-and-answer session of this conference call will start in a moment. The first question comes from Amy Jo, a private investor. Please go ahead.

Amy Jo, Investor

Thank you, operator. Hi, management. I've got two questions. The first is regarding your 2020 financial results. What's the reason for the increased loss in the fourth quarter? How does it impact your cash flow? My second question is about your 2021 outlook. What is your view on the recovery of the industry in 2021? And how do you plan to expand your business in the post-epidemic era? Thank you.

Donald Yu, CEO

Thank you for the question. First, let me explain the increased losses. We reviewed our accounts throughout the year and at year-end, recorded approximately RMB800 million in impairment charges in the G&A expenses, including refunds to customers that we paid on behalf of our travel suppliers, and the increased credit risk as a result of COVID-19, as well as impairment on some financial products. Excluding these non-cash expenses, our G&A expenses for the fourth quarter and full year 2020 both declined significantly. Our net loss also narrowed on a year-over-year basis. As of December 31, our cash balance was RMB1.6 billion, which is in line with the last quarter and will be sufficient to support our future business operations. Secondly, although there were industry headwinds such as small outbreaks in the winter and tightened travel restrictions during the spring festival, we always see pent-up demand for travel and expect a strong momentum for recovery for domestic tours. In fact, the bookings after the spring festival have kept increasing according to our data. Also, it was recently announced that the Labor Day holiday for 2021 will be a five-day holiday, which may further stimulate the domestic travel market. For outbound travel, although it hasn't recovered yet, we are optimistic about its long-term growth. We won’t miss the opportunities for this recovery in the future. Currently, our focus is still on domestic tours. This year, we will continue to focus on product innovation, quality improvement, and technology under our integrated business model. We continue to increase our investment in product development and upgrades to ensure we always have compelling and differentiated offerings for customers. Recently, we conducted in-depth research on our customer needs to guide our production. Based on the insights we gained from research, apart from mass market products, we are able to develop more tailored products for more distinct customer groups. Moreover, we have been working in China's domestic travel market for over 10 years and have rich experience and a large customer base in many popular destinations such as Hainan and Yunnan. We will further expand our advantages in these destinations, featuring them as the basis for our star tour products. Secondly, we will further improve the quality of both our products and services. We continue to meet our product launch standards since 2019, and this year we aim for a satisfaction rate of 90% for product launches. So far, we have over three self-operated local tour operators in China and plan to open more this year. Our local tour operators not only help us better serve our customers but also assist with promotions and customer acquisition at destinations. Our local tour operators have always achieved high satisfaction rates among our customers. However, we are pursuing zero complaints regarding our local tour operator services. Currently, we have selected seven destinations in China as a trial where we aim to achieve zero complaints about our local tour operator services. In terms of customer service, we are focused on developing long-term relationships with our customers through our customer service teams. The contributions from repeat customers reached a new high last year. We will continue to provide high-quality service to our customers in order to capture the recovery momentum of domestic travel at present and outbound travel in the future. Thirdly, technology is the basis of our production, service, and internal management. This year, we will adopt digitalized management systems to increase internal efficiency and reduce operational costs. Lastly, I want to talk about our vertically integrated business model, which differentiates Tuniu from our peers. We always focus on integration with supply chain; we have established our own local tour operators, direct procurement, product design team, and customer service team. By shortening the supply chain, we can maintain better control over product and service quality, enhance internal efficiency, and achieve better profit margins. In addition, we are open to cooperating with our business partners, such as suppliers and destination B2B and B2C distributors. Together, we can provide differentiated products and compelling services to our customers. Thank you.

Amy Jo, Investor

Thanks.

Operator, Operator

We are now approaching the end of the conference call. I will turn the call over to Tuniu’s Director of Investor Relations, Mary, for closing remarks.

Mary Chen, Director of Investor Relations

Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support. We look forward to speaking with you in the coming months.

Operator, Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.