Trip.com Group Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
December 15, 2021

There are 9 speakers on the call.

Operator

Thank you for standing by, and welcome to the trip.com 2021 Q3 Earnings Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer I would now like to hand the conference over to Michelle Key, Trip .com, IR Director. Please go ahead.

Speaker 1

Thank you, Darcy. Thank you all. Good morning and good evening. Welcome to Tripdocom's 2021 Q3 earnings conference call. Joining me today on the call are Mr.

Speaker 1

James Liang, Executive Chairman of the Board Ms. Jane Sun, Chief Executive Officer and Ms. Cindy Wong, Chief Financial Officer. During this call, We will discuss our future outlook and performance, which are forward looking statements made under the Safe Harbor provisions of the U. S.

Speaker 1

Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in trip.comgroup's public filings with the Securities and Exchange Commission. Ship.comgroup does not undertake any obligation to update any forward looking statements, except as required under applicable law.

Speaker 1

Jim and Cindy will share for the Q3 of 2021 as well as outlook for the Q4 of 2021. After the prepared remarks, we will have a Q and A session. With that, I will turn

Speaker 2

the call over to James. Jim, please.

Speaker 3

Thank you, Michelle. Thank you everyone for joining us on the call today. In the Q3, we are glad to see the world's Thanks to rapid vaccine of the easing of travel curves, people are more comfortable with traveling And I hope to do more in-depth patients. The trends that Atlantic travel markets have seen recovery take shape And Europe and the United States reopened their orders to fully active travelers. The EU's digital COVID certificate It helps to facilitate free movement and travel within the continent.

Speaker 3

We're also happy to see many countries In China, the spread of Delta variant beginning at the end of July disrupted the summer vacation season and has suppressed the travel momentum in winter. The vaccination rates in the country continues to rise with expectation that over 85% of the Chinese population We'll be fully vaccinated early next year. The high vaccination rates and the national rollout of booster shots Will help us build resilience to pandemic challenges. The recent discovery of omni crime area may have sparked a new round of global concern And once again given rise to lots of supply restrictions, pandemic adjustment may continue to be an ongoing issue For consumers and the business lines in the next year, yes, we believe that the remaining AGL In the face of change, it's a key to hold off pandemic impacts. We continue to adopt the dual circulation strategy to support some of both Amidst fast changing market conditions, on China's domestic markets, we are focused on qualifying supply chains Group's high quality users.

Speaker 3

This year, more than 200,000,000 users have viewed our content. As a leading one stop travel platform, our content to transaction conversion rate is also higher. Business partners can enjoy a monthly conversion rate On the international front, Asia Pacific and Europe will continue to be our key focuses. In APAC market, our global brand trip.com Has been gaining share in markets such as Hong Kong, Singapore, Japan and South Korea. With increasing brand awareness and app usage, during the pandemic, ship.com swiftly adopted to meet different In Europe, all of our brands have been closely collaborating throughout the previous quarters, Giving a strong boost to Trip.com's private competitiveness in the region.

Speaker 3

In the long run, Trip.com will continue to add to the car upgrade In short, global focus, global vision will continue to be our core strategy in coming years. We'll remain focused on strengthening the fleet's competitiveness and we're prepared to embrace the global travel revival and tourism boom. We hope to see such inputs start to bear fruit and to be reflected in the performance of our business over the next 3 to 5 years. With that, I will turn the call over to Jane for operational highlights.

Speaker 2

Thank you, James. Good morning, everyone. I would like to start with a brief overview of our performance in the past quarter and updates on our strategic focuses. In the Q3, our total net revenue remained stable year over year and decreased by 9% quarter over quarter, Mainly due to natural disasters and the new rounds of infections, which affect multiple provinces in China, We are glad to see the world moving ahead in normalizing international tourism. Yet, the road to global recovery is not without ups and downs.

Speaker 2

The performance of travel markets In major economies has been divergent. The China travel market has been frequently interrupted by the resurgences of COVID cases. It has witnessed a strong recovery in July until natural disasters And the Delta variant emerged to slow it down. Industry wise, the hotel occupancy rate And air ticket bookings in Q3 were down by around 30% when compared to the pre COVID 2019 level for market performances. Nevertheless, our domestic hotel business Was able to outpace the market performance by 20% to 25%, and our domestic air ticket booking recovery was much higher And the market levels as well.

Speaker 2

The global market, on the other hand, has been making great progresses In returning to normalcy, especially in Europe and United States, air ticket bookings in these markets made some major strides towards pre pandemic levels in

Speaker 4

the past

Speaker 2

months. While the global flight volume We're still below 2019 level. Trip.com's overall international air ticket booking have increased by around 40% quarter over quarter, with air ticket bookings in Europe growing by 170%. Skyscanner also saw air ticket bookings increased by approximately 100% year over year and around 35% quarter over quarter. While COVID-nineteen pandemic has negatively Thank you, ladies and gentlemen.

Speaker 2

Thank you, ladies and gentlemen. We hope to see the travel industry take off in mid-twenty 22 as vaccination level rise in the key markets And travelers become used to some level of travel restrictions and feel more comfortable booking trips again. Looking beyond 2021, our long term mission is to pursue the perfect trip for a better world, It has never changed. As James just mentioned, we will continue to stick to our strategy of local focus, global vision and focus on the following areas: 1st, Building strong user cases and make traveling part of our daily lives. As the pandemic and resulting health and travel measures make people shy away from long distance trips, Weekend, regional and staycation travel have become more popular and frequent.

Speaker 2

In Q3, we were glad to see our intra province hotel booking grew by approximately 35%, And our local hotel bookings grew by more than 60% compared to the same period pre COVID in 2019. In order to build strong user cases to attract and motivate users, we collaborated with more than 6,000 Highstar Hotels to provide value added hotel packages, which included catering and many other in hotel services. Such packages contributed around 30% To our sales of these partner hotels, we strive to seize this opportunity to attract young generations And to help users embrace travel as part of their daily lives, in response to addressing the need For inspiration for short haul and the local trips, we continue to make solid progress in our content strategy. The total amount of content published on our platform increased by 100% year over year. Compared to Q2, our number of KOLs have sequentially increased by 35%.

Speaker 2

The amount of users who interacted with our content increased by 20% And the monthly content to transaction conversion rate reached 30% in July. 2nd, Tightening our relationship with business partners by empowering them to optimize customer structure and improve efficiency, Not only as an inspiration hub for users, our content channels also serve As the go to platform, where suppliers are empowered to improve making efficiencies And gain traction with trip.comgroup's high quality users. As an important part of our content strategy, Startup aims to help improve suppliers' conversion rate and the info feed to increase their exposure. We have seen the number of the professionally generated content, content exposure and content GMV increases by monthly average of 50% for past consecutive several months. In order to help expand our partners' customer base, we are also able to Pushing forward with multiple co brand membership programs, where users are entitled to benefit from both parties.

Speaker 2

There are now more than 30,000,000 co branded members between trip.comgroup and our hotel partners. And this number has grown by about 6 times since 2019. We also strengthened our partnership with airlines to help them with operating efficiencies and enhance our growth in the 1st and business class bookings. 3rd, Strengthening the synergy among all brands of our group of trip.comgroup to increase our market response To Global Spaces, in strengthening the synergies among our group companies globally The strengthening of the synergy among our group companies globally has continuously On the go for the past quarters, leveraging the strong combined brand awareness and the global presence, We're able to establish closer relationship with local suppliers and to fill the Skyscanner and trip.com with improved competitiveness, enhanced product offerings and service reliability, Grasping the opportunity present by the pandemic, we launched a serious value added services To address our global clientele for user friendliness and flexibility, we believe these will enable us To better respond to the post pandemic travelers' evolving demands and further gain market share, A strong local supply chain and bolstered product capabilities will enable trip.com To better utilize Skyscanner's strong traffic in Europe 4th, corporate responsibility.

Speaker 2

Following up our rural revitalization initiatives, on top of these trip.comgroupcountryretreats That were already opened in the business in Q2, 2 more were opened this quarter. Our facility in annual provinces has now grown into a foundation of our Rural Revitalization Academy, Co created with the local government through online and offline channels, we provide local talent With professionally training and developed skills and contribute to improved global services quality, On top of the developing rural tourism, the country retreats also Help facilitate the sales of local products beyond Vicinity as a means to improve local economy and livelihoods. With a strong diverse workforce, trip.comgroup also strive to create an inclusion Inclusive and friendly working environment. We adopt a clear code of conduct To support working mothers and care for pregnant employees, in October, we were happy to receive The Women's Empowerment Principles Award by UN Women China as a recognition of our efforts In promoting gender equality and female empowerment, the travel industry has proven It's resilience over the time from 9eleven to SARS, and it will definitely weather the storm of COVID-nineteen as well. With crisis comes opportunity.

Speaker 2

Remaining agile in the face of the challenge will help us to seize opportunities And come back stronger and reestablish confidence in travelers and to pursue the perfect trip for a better world as our mission stated. With that,

Speaker 4

I will now turn the call over to Cindy. Thanks, Jane. Good morning, everyone. For the Q3 of 2021, trip.comgroup Reported net revenue of RMB5.3 billion, representing a 2% decrease Year over year and 9% decrease quarter over quarter, primarily due to the influence of natural disasters and new launch of pandemic outbreak in multiple regions of China. Accommodation reservation revenue for the 3rd quarter of 2021 was RMB2.2 billion, representing an 11% decrease Year over year and a 11% decrease quarter over quarter, recovering to 53% Of the 2019 level, this is a net result of a steady growth in July, Offsetting by the disruption of natural disasters and resurgence of COVID cases spreading over multiple provinces Beginning at the end of July, our China domestic hotel bookings have been have seen High single digit growth year over year, while ADR and blended take rate are both affected by the depressed demand.

Speaker 4

Transportation ticketing revenue for the Q3 of 2021 was RMB1.8 billion, representing a 5% decrease year over year and a 12% decrease quarter over quarter, recovering to 49% of the 2019 level, among which domestic transportation's recovery momentum was disrupted by natural disasters and resurgence of COVID cases in summer, while international air ticket bookings increased by approximately 40% when compared to the previous quarter, mainly contributed by the recovery in Europe. Packaged tour revenue for the Q3 of 2021 was $392,000,000 representing a 20% increase year over year and a 7% increase Quarter over quarter, recovering to 24% of the 2019 level. This was contributed by an increase of leisure travel demand in July before the new round of pandemic outbreak. Corporate travel revenue for the Q3 of 2021 was RMB338 1,000,000, representing a 20% increase year over year and a 13% decrease quarter over quarter, Slightly higher than 2019 level, this segment continues to gain momentum as a result of the expanding user base and improving cross selling from transportation to accommodation. Gross margin was 77% for the Q3 of 2021, decreasing from 79% In the previous quarter, mainly due to reduce the top line recovery interrupted by new wave of infections.

Speaker 4

Excluding share based compensation charges, our adjusted operating expenses decreased by 32% Compared to the same period in 2019, adjusted product development expenses For the Q3 increased by 20% from the same period in 2020 and increased by 2% from the previous quarter, mainly reflecting the general increase in salary of product development personnel. We continued to run lean and maintain a stable headcount in the team. It is a saving of 19% when compared to the same period in 2019. Adjusted sales and marketing expenses for the 3rd quarter decreased by 10% from the previous quarter As we swiftly adapt to the changing market conditions and followed a more prudent spending protocol in response to the uncertainty brought about by the pandemic. This reflects a saving of 49% when compared to the same period in 2019.

Speaker 4

Adjusted G and A expenses for the 3rd quarter decreased by 5% from the previous quarter. It also increased by 83% year over year, primarily due to a reversal of bad debt position in the Q3 of 2020 for the company's travel suppliers and it is a saving of 20% when compared to the same period in 2019. Adjusted EBITDA for the 3rd quarter was RMB 5 RMB37 1,000,000 compared to RMB916 1,000,000 in previous quarter. Adjusted EBITDA margin was 10% for the 3rd quarter compared to 16% In the previous quarter, diluted loss per ordinary share and per ADS were $1.32 or US0.20 dollars for the 3rd quarter. Excluding share based compensation charges and fair value changes of equity securities investments and exchangeable senior notes, non GAAP Diluted earnings per ordinary share and per ADS were RMB 0.81 cents or US0.13 dollars for the 3rd quarter.

Speaker 4

As of September 30, 2021, The balance of cash and cash equivalents, restricted cash, short term investment, How to maturity time deposits and financial products was RMB67.6 billion or US10.5 billion dollars We redeemed early US500 million dollars Of the 2025 Booking and Hill House notes in the quarter and another US500 million dollars of the same convertible notes in December, reducing a potential dilution of 14.6 1,000,000 ordinary shares. Turning to the Q4 of 2021, We would like to share some color of our business. In China, during the National Day holiday, Our domestic hotel reservation reached a double digit growth during the beginning of the holiday, While transportation reservations close to the pre COVID level, multiple rounds of COVID cases that began In mid October, a spread to more than 20 provinces largely impact the entire China domestic travel industry. In November, the industry level hotel occupancy rate was down by 30% to 40% and air ticket passengers down 50% to 60%, both compared with the same period in 2019. Trip.comgroup was also affected, but we continue to lead market performance by at least 10% to 20%.

Speaker 4

Outbound travel remain rather muted in current conditions, While outside of China, the recovery momentum in Europe and the U. S. Continues to carry over To October, we increased the freight segment benefiting from the relaxation of travel restrictions and vaccine Rollout. The path to global recovery is set, but not without ups and downs. We will continue to be adaptive and responsive to changing market conditions and be flexible and agile to seize opportunities to create value for our users and partners.

Speaker 4

With that, operator,

Operator

Your first question comes from Thomas Chong from Jefferies. Please go ahead.

Speaker 3

Hi, James, Jane, Cindy, good morning. Thanks for taking my questions. Can you share some color about the company's plan for the international business? How do you think about the pace of recovery in outbound travel as the restrictions are lift? Thank you.

Speaker 3

In the recent months, many countries have adopted to border reopening plans So there is relaxed travel restrictions. More and more people are back on the road and travel further. Though some countries have tightened the restrictions recently due to the Omicron variant, The temporary turbulence will not change the ultimate trend of travel recovery. Under normal conditions, we may see China gradually relax We expect to begin with the mainland China with connecting with Hong Kong and then traditional openings with other international markets. The pace and range are largely dependent on our activation rate and the pandemic control capability in related markets.

Speaker 3

We will continue to enhance our product and service competitiveness in the domestic market and fully prepared for the recovery of international markets. In the past 2 years, trip.comgroup has demonstrated its resilience by leading the industry recovery despite COVID headwinds, Making us a stronger company, we believe that our local focused global vision strategy

Operator

Thank you. Your next question comes from James Lee from Mizuho. Please go ahead.

Speaker 5

Great. Thanks for taking my questions. Two quick ones here. Hi, Jane. How should we think about maybe the activity heading to Chinese New Year, that being first.

Speaker 5

And second for, I think, outbound travel to Hong Kong, Any early read that you're seeing on consumer demand and behavior there? Thank you.

Speaker 2

Sure. Thanks, James. The opening up of Macau really provide a very good leading indicator for For the consideration of Hong Kong, so we were just in Macau holding our global partnership committee And the control of the virus over there is being conducted very well. So that provides Everyone in the travel industry, some experience as to what will happen if Hong Kong opens up. So we are very much looking forward to a very good control of the virus in Hong Kong continuously.

Speaker 2

And with that condition, There might be a good consideration for opening up of Hong Kong. And that also connects to our Plan for the Chinese New Year. Historically, this Hong Kong is a very popular travel destination For Chinese New Year as people try to go visit different cities and doing some shoppings in Hong Kong. So hopefully, there will be enough supporting evidence as to the well controlled environment, both in Mainly in China and in Hong Kong, which give us the support to further consideration of opening up Hong Kong in addition to Macau. Thank you.

Speaker 5

Great. Thank you.

Speaker 2

Thanks.

Operator

Thank you. Your next question comes from Brian Gong from Citi. Please go ahead.

Speaker 6

Thanks, James, Cindy and Michelle for taking my question. So my question is about domestic travel expectation. So how does management see the travel performance outlook in Q1 'twenty one and next year? For Q1 next year, with some local government right now encouraging people not to travel across regions and Winter Olympic In March, should we still expect domestic performance to be dragged by travel restriction? And also with a low base in the second half of this year, should we see a more normalized year on year growth In the second half next year for domestic market?

Speaker 6

Thank you.

Speaker 2

Yes. So what we have seen for the Domestic travel is 4S. By saying 4S, we have seen people are paying more attention to safety. So we encourage our suppliers to make sure they have very good safety measures such as providing The hand sanitizers, masks to our travelers. The second S is People prefer to travel with much smaller groups rather than big groups.

Speaker 2

So normally our customized tour is selling very well. Our customers prefer to hire car and tour guide with family then to take their family around. The third is with the much short booking window. Because of the virus Control, a lot of time we will get notification from different destinations. So the booking window we have seen is much shorter.

Speaker 2

And the last one of the 4s is short distance. So what we have seen is people prefer To travel nearby their hometown anywhere within the 300 kilo Because the radiance people feel more comfortable to travel to. And also we have seen young generation Prefer to travel much more. So we have seen the young spenders who were born in 9 days and Generation Z travel quite a lot. So these are the trends that we have seen so far.

Speaker 2

Again, I think a lot of it will be Depending on how well the virus is being controlled during the Q1 and the second quarter, However, these demands are not disappearing from our data of the search. Customers pent up demand is accumulating and very strong. Just as what we saw in May holiday this year, the surge of the demand is very strong. So we are very hopeful that the vaccination rate will be continuously increasing, the measures of the virus control We're proved to be effective and then gradually the market will increase. So your assessment to

Operator

Thank you. Your next question comes from Ronald Keung from Goldman Sachs. Please go ahead.

Speaker 7

Thank you. Thank you, James, Jane, Cindy and Michelle. My question is more on if the recent travel patterns That we saw in recent months last for longer. And with Omicron and government's dynamic 0 COVID strategy, Then how does management see the trajectory for domestic and international travel in 2022 If the recent trends last longer and how will we plan our costs accordingly and implications to either cash flows or margins in the next 1 to 2 years? Thank you.

Speaker 4

Thank you, Ron. Our margin actually decided by Both the top line as well as the cost to control. On the top line, on the revenue side, Of course, we are in the travel industry, so our performance will be pretty much decided By the industry growth, however, as always, we will do our best to continuously outpace Industry growth, for example, in the Q3 this year, we outpaced 10% to 20% At least for different segments compared with the industry growth in the travel industry. On the cost side, We will continuously to weather the COVID, to weather the storm, we have to have a very disciplined Cost policies, cost structures to weather the storm. Firstly, we have very At the end of the Q3, we have about US10.5 billion dollars In the cash balance, which probably is the best among one of the best in the travel industry.

Speaker 4

Secondly, on the cost side, our total adjusted cost and operating expenses actually decreased By more than 35% in Q3 compared with the before COVID level. Thanks to our very largely flexible cost and expenses structure and as well as efficient operating management. During the past few quarters, we streamlined our operation across different business lines In addition to certain adjustments related to the COVID and in addition, our improvements On the content, cross selling and technology have further lifted our marketing efficiencies. In terms of the cost trend going forward, we will expect very modest Increase in the personnel expenses only on our international markets. And for the domestic market, we expect our total headcount will be pretty much stable, Especially for our core businesses, but we need to add some investment Just to capture the pent up demand that has already been seen in the international market, especially in the Europe market.

Speaker 4

On the sales and marketing expenses, we will continuously to adapt and ROI driven strategy. And we will have a very disciplined

Operator

Thank you. Your next question comes from Alex Yao from JPMorgan. Please go ahead.

Speaker 8

Hi, good morning, management. Thank you for taking my question. I have a question on the investments activities. So in light of the potential reopening in And also more regions and markets in the rest of the world. Are you guys contemplating any Additional and new investments activity to capture those reopening opportunities?

Speaker 8

Thank you.

Speaker 2

Yes. So thanks, Alex. In terms of investment strategy, Historically, we are very disciplined. There are 3 principles we adhere to. First of all, it needs to be very closely related to our core competence.

Speaker 2

And secondly, We need to really look for the companies that is number 1 or number 2 in their verticals. And thirdly, the valuation needs to be very reasonable. So historically, we are very, very And very careful in terms of our investment. However, in terms of our organic investments in our core competence For the long term investment such as technology and services and products, we are taking advantage of this Slow season to make sure we focus on the projects, which were strengthening our competitiveness in the long term. So with limited resources, we're also prioritizing our internal projects to make sure We give the priority for the projects, which will extend our competence in the long run.

Speaker 2

Thank you.

Operator

Thank you. There are no further questions at this time. I'll now hand back for closing remarks.

Speaker 2

Thank you. Thank you, everyone, for joining us today. You can find the transcript and webcast of Today's call on Investors. Trip.com. We look forward to speaking with you on our Q4 2021 earnings call.

Speaker 2

Thank you and have a good day. Thank you very much. Thank you.

Operator

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.

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