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Autohome Inc. (ATHM) Q2 2019 Earnings Call Transcript

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Autohome Inc. (NYSE: ATHM)
Q2 2019 Earnings Call
Aug 7, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by for Autohome's Second Quarter 2019 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Anita Chen, Autohome's IR Director. Ms. Chen, you may begin.

Anita Chen -- Director of Investor Relations

Thank you, operator. Hello, everyone, and welcome to Autohome's second quarter 2019 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 Mr. Min Lu, Autohome's Chairman and CEO; Mr. Haifeng Shao, Autohome's President; and Mr. Jun Zou, Autohome's CFO. After the prepared remarks, Mr. Lu, Mr. Shao and Mr. Zou will be available to answer your questions.

Before we begin, please note that discussions today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those are outlined in our public filings with the Securities and Exchange Commission. Autohome does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

The earnings press release in this call also includes discussions of current unaudited non-GAAP financial measures. The 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 webcast of this 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 & Chief Executive Officer

Thank you, Anita. Hello, everyone. And thank you for joining us today to discuss our second quarter 2019 results. I'm pleased with our quarterly results amid a soft macro economy and considerable auto market decline. Chinese new passenger vehicle sales fell for four consecutive quarters and extended into a double-digit decline in July. Despite these headwinds, we still managed to deliver solid results with a total revenue increasing by 24% year-over-year to RMB2.31 billion.

During the quarter, we strove to offer high-quality content to our users, while endeavoring our partners by leveraging our AI electric data capacity in order to gain more wallet share. Some highlights in the quarter and most of the reasons include in June. The number of average DAUs who accessed our mobile websites, primary application and mini-apps increased by 48% year-over-year to 37.8 million. In July, we made a major upgrade on our main App by improving user interface and the reclassifying our products by functions. These upgrades and the enhancements improve the overall user experience, attracting more younger demographic users. App performance experienced an encouraging trend after the headwinds.

For the second quarter, all of our content categories expanded rapidly. DAUs for each new channel, including travelers [Phonetic], EV, used and the mini short video, all reached to 325 million. We are also rolling out more car use related content such as a road trip aiming to attract users in addition to car buyers. As a leading online out of ecosystem, Autohome always explores new opportunities and constantly contributes to the auto industry.

On August 18, we will hold the 818 Global Super Auto Show. This show aims to initiate a Double 11 shopping festival in the auto space. At this global event, we are [Indecipherable] to deploy the integration of our distinguished online auto show and offline celebration activities.

For the online segment, we will leverage our intelligence technology to present panoramic multidimensional shopping scenario. For the offline sales, I'd like to highlight our partnership with a Hunan TV, one of China's most watched TV channels. The 818 Global Super Auto Show will be planned by Hunan Tv's top production studio and make its debut in prime time on August 18 as the first-ever auto-themed gala. We also launched various offline activities for industry experts, car owners, auto fans in addition to a number of auto show events across China for both the new and the used cars. With all of the aforementioned, we are endeavoring to help automakers and the dealers achieve success in branding and sales performance.

By the end of July, more than 80 auto brands and over 2,400 dealers have signed up for participating in events.

Regarding the data product offerings to the automakers, we proactively upgrade [Indecipherable] from analytical tools to smart marketing solutions, helping automakers not only identify the issues, but also providing professional suggestions to solve problems. By the end of June, 21 OEMs have purchased our data products. In addition, we plan to further expand our intelligent solutions portfolio with [Indecipherable], a brand new based products designed to serve OEMs' R&D department and it will help them well position to capture future trends. [Indecipherable] demonstrates our strategic move to go beyond the marketing solutions and tap into the R&D value chain.

In terms of data product for dealers, by the end of second quarter, approximately 15,000 dealers have purchased our data products. In early July, we launched two new AI-based data products, which are designed to improve dealers' efficiency at the lower level costs. With the more innovative products in our pipeline, we are building data product metrics that serves as a comprehensive CRM systems to dealers. We also see potential in overseas markets and are currently at the preliminary exploration stage.

Now, please let me provide some highlights on our business operations. For our lead generation business, in the second quarter, total leads volumes increased by 30% year-over-year. As for our used cars, C2B2C platform, by the end of second quarter, we were able to grand very competitive merchant loan products to over 4,800 qualified dealers, resulting in a total cumulative credit line of RMB6.8 billion. Finally, for the auto financing business, during the second quarter, we facilitated close to RMB6.2 billion in loans and insurance representing a 108% increase year-over-year.

To summarize, Autohome has already evolved a media vertical to an auto ecosystem platform, leveraging our in-depth insights in the industry compared with our advanced technology. We are confident to further unlock our value and deliver long-term growth to our shareholders.

With that, I will now turn the call over to our CFO, Jun Zou for a closer look at our second quarter financial results and the business outlook for the third quarter.

Jun Zou -- Chief Financial Officer

Thank you, Min. Hi, everyone. As Min has highlighted, we are pleased to report another solid quarter. Please note that as with prior calls, I will reference RMB only in my discussion today.

Now, net revenue for the second quarter was RMB2.31 billion, slightly above the high end of our original guidance and which is 24% growth on a year-over-year basis. For detailed breakdown, media services revenue increased 11% year-over-year to RMB1.028 billion. Despite a challenging critical auto market, Autohome continues to be automakers' partner of choice. Lead generation services revenue increased 20% year-over-year to RMB889 million, primarily driven by an increase in ARPU. Online marketplace and others revenue increased 97% year-over-year to RMB392 million, primarily due to the increased contribution from data products and auto financing business.

Now moving on to costs. The cost of revenue increased by 26% year-over-year to RMB264 million. Gross margin remained stable at 89% in the second quarter. For operating expenses, sales and marketing expenses in the second quarter were RMB893 million compared to RMB588 million in Q2 2018, mainly because of increased offline execution expenses to help automakers and dealers generate more leads and sales, while P&D expenses were RMB361 million compared to RMB313 million in Q2 last year. Again, this reflects our R&D headcount increase, and it is a proof of our commitment to technology and talent.

Finally, G&A expenses were RMB82 million compared to RMB86 million in Q2 last year. As a result, we delivered an operating profit of RMB835 million for the second quarter compared to RMB748 million in the corresponding period of 2018. Adjusted net income attributable to Autohome was RMB855 million for the second quarter compared to RMB744 million in the corresponding period last year. Non-GAAP basic and diluted earnings per share and per ADS for the second quarter were RMB7.22 and RMB7.15, respectively compared to RMB6.33 and RMB6.23, respectively, in the corresponding period of 2018.

As of June 30, 2019, our balance sheet remained very strong with cash, cash equivalents and short-term investments of RMB10.83 billion. We've generated operating cash flow of RMB372 million in the second quarter.

Let me now address our third quarter 2019 outlook, which reflects our current and a preliminary view on the market operating conditions that may be subject to changes. At this point, we expect to generate net revenue in the range of RMB2.160 billion to RMB2.190 billion, representing a 14.4% to 16% year-over-year growth rate.

In summary, we are happy with our second quarter 2019 results. Each of our business lines achieved decent growth, coupled with our strong balance sheet. We're well positioned to capture the future growth opportunities, drive long-term sustainable growth and maximize value for shareholders.

With that, we're ready to take your questions. Operator, please open the line for Q&A.

Questions and Answers:

Operator

Thank you. We will now begin our question-and-answer session. [Operator Instructions] The first question is from Eddy Wang at Morgan Stanley. Please go ahead.

Eddy Wang -- Morgan Stanley -- Analyst

(foreign language) My question is that we will start the Global Super Auto Show next week, and I believe such events could help to maintain and further improve our long-term relationship and partnership with OEMs and dealers. So my question is that how management expects such events could help our media business in the short term, say like in the second half of this year? Thank you.

Min Lu -- Chairman & Chief Executive Officer

(foreign language) Okay. I'd like to address this question, Eddy. Actually, 818 Auto Show has been initiated since last year. And for the first half of this year, we have been preparing for this event. (foreign language) Actually, on this auto show, we will include nine different categories of activities. The largest activities are co-organized together with the China trade promotion agency, which is the Auto Association and there's the China trade promotion agency.

(foreign language) The second biggest activity is the cooperation with Hunan TV, which will be a gala night performance hosted on August 18, which will have a lot of superstars who join us. (foreign language) The third activity was co-organized with China Auto Industrial Association on August 19, which will be participated by 1,000 people, which is a workshop. (foreign language) The fourth activity is that we are going to organize offline car exhibition in almost 130 cities in China, so that we can help the dealers to sell cars. (foreign language) And there will be other activities, which I won't go into details; for example, the Fan Festival or the car model competition, et cetera. (foreign language) Actually, this is a big portfolio of different activities. The major purpose is to rejuvenate this industry. (foreign language) The second purpose is to expand the influence of Autohome among the consumers.

(foreign language) And in terms of the financial revenue generated by this activity, I'd like to say that we are not going to actually make money from this kind of auto show. The major purpose are what I mentioned before. (foreign language) Generally speaking, we are not going to suffer losses by organizing this auto show, but our major objective is to contribute to the entire auto industry in China and also pave the way for the future development of Autohome. (foreign language) This is a very first time we organize such a large scale virtual auto show. (foreign language) And through this first time experience, we also want to expand this auto show to the global level for the second time next year. (foreign language) That is why we also have the English website for this auto show this time, so that people can watch their online auto show. (foreign language) That's all from me, Eddy.

Eddy Wang -- Morgan Stanley -- Analyst

(foreign language).

Operator

And our next question is from Miranda Zhuang at Merrill Lynch. Please go ahead.

Miranda Zhuang -- Bank of America Merrill Lynch -- Analyst

(foreign language) So we have seen that in the past, Autohome has invested in TTP Car, which is a C2B used car company. And recently, the company has been cooperating with [Indecipherable], which is B2C used car company and also [Indecipherable], which is C2C used car company. And also we know that a campaign this year is expanding the CPA model for the used car industry. So just, I would like to understand the Company's latest thinking about your strategy in the used car industry. Thank you.

Min Lu -- Chairman & Chief Executive Officer

(foreign language) Okay. I'd like to take this question. Firstly, we are quite bullish about the future of used car business in China. (foreign language) That is why we have been exploring this business over the past few years. And now strategically, it becomes more clearer. (foreign language) So since the second half of last year, we have opened the entrance for the used car business. We hope that we can expand the traffic for the used car. (foreign language) So far, our daily DAU for the used car is about 3 million. (foreign language) So actually, I instructed my team to hit the target of 4 million by the end of the year. (foreign language) So this is first part of our strategy, which is to take a very strong hold of the traffic entrants of the used car business.

(foreign language) The second part of the strategy is that due to the increase of the traffic, the volume of the leads will also increase. (foreign language) Actually, the merchants we are cooperating with are having very high quality, but the number of the total merchants are not very big. Let's say almost 30,000. (foreign language) However, with the increasing of the volume of the leads, actually, we think that the number of the merchants are not enough. (foreign language) That is why I said that in the second half of the year and also on the Hong Kong roadshow, we want to make used car a open platform, which includes a B2C and -- a C2B and a C2C. (foreign language) For example, we have been cooperating with [Indecipherable] to expand our platform cooperation, and we are also expanding to some regional platforms in our cooperation strategies. (foreign language) In that case, we can fully digest order leads we generated. (foreign language) And at same time, we can also better satisfy the amount of the consumers. (foreign language) For example, our cooperation with [Indecipherable], we have a program called [Indecipherable], which is the procurement of the used car all over China because regionally the used cars are mainly traded locally. So this is a new type of service delivered to the consumers by cooperating with [Indecipherable] we can actually promote more trades of the used cars nationwide.

(foreign language) So I just mentioned about the increase of traffic and leads that certainly -- it certainly is that we are also developing the integrity alliance, which is the closed-loop transaction. (foreign language) So actually, this year, we have revised the rules of the game. We're going to expand this kind of cooperation, because during the pilot period of last year, we encountered some problems. (foreign language) And now actually, Tiantian Paiche, TTP Car has been cooperating with us in this.

(foreign language) You also mentioned TTP Cars, so I'd like to mention our strategic cooperation with them. (foreign language) We do have a close cooperation with TTP. (foreign language) Every two weeks, we will organize a PMO conference, which I personally attend. (foreign language) There are three aspects in this kind of cooperation. Firstly, C2B business, mainly the auction of the cars and the testing of the cars. (foreign language) And the same time, it will also generate leads of the new cars. (foreign language) And these are very accurate leads. (foreign language) And secondly, B2B corporations. (foreign language) And together with TTP and some of 4S stores and the dealers, we're doing the trading business of the used cars and help the dealers to auction their used cars.

(foreign language) And the third corporation is the B2C corporation, including the integrity alliance I mentioned just now, and also we will put the TTP authorized cars on our apps, so that to make the consumers assured about quality. (foreign language) So actually, these are some simple philosophies for our used car business. And I think the essence is to intensify the development of our user products and recently, we are also iterating our user products, and after that, we're going to strengthen our traffic development for the used cars. (foreign language) And actually last year, our used car department for the very first time turning losses into profit. (foreign language) And this year, we hope that end of the guidance so far our used car development business, we can accelerate the used car business next year. (foreign language) Thank you. That's my answer for the used car business.

Miranda Zhuang -- Bank of America Merrill Lynch -- Analyst

Thank you very much. Very clear.

Operator

[Operator Instructions] The next question is from Frank Chen at Macquarie. Please go ahead.

Frank Chen -- Macquarie Group -- Analyst

(foreign language) I will translate myself. I have a quick question on the cash. On the balance sheet, you got RMB10 billion cash and short-term investment, and I wonder what's your plan with your cash? Any plan for the potential dividend or M&A in the future? Thank you.

Jun Zou -- Chief Financial Officer

(foreign language) Okay. I will address the questions simply. Yes, indeed, we have abundant cash on our balance sheet. (foreign language) Firstly, we are going to intensify our investment. (foreign language) There are two parts, internally and externally. (foreign language) Externally, I also mentioned before, we are looking at the possibility on the offshore market, including United States, Europe and Southeast Asian countries. (foreign language) And the final decision are yet to be made.

(foreign language) Internally, we have several new projects going on. The 818 Auto Show is one of them. Altogether, there are six or seven new projects going on. (foreign language) When this project develops to a certain extent, actually Chinese market, there will be opportunities for investment. (foreign language) Yes, of course and the -- this project themselves also need R&D input. (foreign language) And secondly, you also mentioned about dividends. Actually, we are still steady about the plan of dividend. If there are any news, we will disclose to the market. (foreign language) That's all from me. Thank you.

Frank Chen -- Macquarie Group -- Analyst

Great. Thank you, Jun Zou. Very clear. (foreign language).

Operator

The next question is from Hillman Chan at Citigroup. Please go ahead.

Hillman Chan -- Citigroup -- Analyst

(foreign language) So my first question is about the second half outlook for the auto retail industry as well as the online OEM advertisement. And my second question is about the margin impact from our offline event, including August 18 and also the event for the 130 cities? Thank you very much.

Min Lu -- Chairman & Chief Executive Officer

(foreign language) Okay, the first question, the OEM advertising investment in the second half of the year. (foreign language) You may notice that we have lowered our guidance in Q3. (foreign language) This is a pre-cautious move. (foreign language) Because the market in July is not that good. (foreign language) Situation also differs among OEMs. Some still have the positive growth, but quite a few suffer from losses.

(foreign language) So actually, we heard that the budget of the OEMs, our goal in parallel with their sales volume. (foreign language) If these suffer from negative growth, we will be very pre-cautious about releasing budget. (foreign language) And this is general circumstances and today, I also see a moody forecast, which set that at the end of this year, the auto industry in China will suffer from negative 6.5% of growth. (foreign language) If this forecast come true, actually the auto market in the second half of the year is quite good. (foreign language) Since the first half is negative 14%. so if the whole year forecast is negative 6.5%, it means that the auto market will go up in the second half.

(foreign language) So according to the statistics from Autohome, actually, the advertising investment from the Top 15 OEMs still remains positive. (foreign language) Among the Top 15, only three have the negative growth. All the rest have the positive growth. (foreign language) But things are not very clear, because the auto market is still not very good August, we have to look to September. (foreign language) That is why we make so much effort in 811 Auto show. (foreign language) We hope that actually, 811 will become a turning point for the entire auto industry.

(foreign language) Your second question is about the margin for 818. (foreign language) I already mentioned is that we will not organize this event into loss. (foreign language) And secondly, we also have our budget management system. So this is also raising our budget. (foreign language) And I also mentioned before, actually, most important thing is that this auto show will impose big influence on auto market and then in future, it will generate big value. (foreign language) That's my answer. Thank you.

Hillman Chan -- Citigroup -- Analyst

(foreign language).

Operator

Next question will be Tian Hou at TH Capital. Please go ahead.

Tian Hou -- TH Capital -- Analyst

(foreign language) So Mr. Lu just mentioned, you hope through orders activities and can actually become a turning point for China auto industry from current quite bearish to probably -- possibly better situation, what is the logic behind that -- behind that hope? And actually, the question really behind that is what is the major reason for the current market weakness? Is that because people do not know those automakers or because consumer doesn't have enough willingness to buy auto cars, so what is the main reason, what is exactly the current situation is in your mind? Thank you.

Min Lu -- Chairman & Chief Executive Officer

(foreign language) Actually, the auto market is far from being saturated. (foreign language) Actually, the auto ownership per 1,000 person in China is still very low. (foreign language) And recently, actually I heard from the Deputy Director General [Indecipherable] from the National Information Center. He mentioned that actually in the future, the selling of new car sales in China is 14 million [Phonetic] per year. (foreign language) And we see that's the negative growth we're suffering this year. It is also the first time ever over the past seven to eight years. (foreign language) Because the previous years are too good. And this is the very first time we have such a big drop, the things are quite special.

(foreign language) Someone compared China to Japan in 1970s. Actually, Japanese automotive industry also experienced a lot of twists and turns. (foreign language) So if we look at the situation in the long run, we may reach the same consensus, which is the negative growth we're suffering now is only a setback in the longer history. So in the future, we're still bullish about the auto market. (foreign language) As I also mentioned in the previous conference call, this year we are suffering from worse negative growth compared comparing with last year, I think this is related to the macro economic situation. (foreign language) Including the trade war initiated by President Trump.

(foreign language) And in order to promote environmental protection in China actually, the jump from National 5 to National 6 standards is too fast. (foreign language) So we see that actually in June of this year, the National 5 standards of vehicles are all sold out. (foreign language) Actually, now the National 6 standards are already put into place. That is why actually the sales in July has dropped. (foreign language) And we also see the phasing out of the subsidy policy for new energy vehicles. (foreign language) As a result, the consumers will actually wait and see. (foreign language) So we hope that through the 818 Auto Show, the voice of this industry can be maximized, it can be spread out, so as to rejuvenate this industry and to consolidate the confidence of the consumers. (foreign language) Generally speaking, I think the Chinese auto market is still very huge and enjoys a great potential. Despite the current difficulties, we can actually join hands to tide over these difficulties. (foreign language) That's all for my answer. Thank you.

Operator

Next question is Jamie Shen from Bank of China. Please go ahead.

Jamie Shen -- Bank of China -- Analyst

(foreign language) I will quickly translate my question. I just wonder if we continue to witness soft auto sales figures where Autohome continue to increase the sales and marketing expenses related to offline promotional campaigns to support OEM and dealers. Thank you.

Min Lu -- Chairman & Chief Executive Officer

(foreign language) Autohome has been developing a very fast over the past few years. (foreign language) And our margin always remain high. (foreign language) When there is a negative growth in the Chinese auto market, we can -- we cannot just purely pursue margin. (foreign language) So what we have to pursue is the biggest profit rather than the biggest profitability. (foreign language) In that way, we can actually contribute the long-term return for the investors and shareholders.

(foreign language) And at the same time, we also got a mission to contribute to the entire industry. (foreign language) In particular in difficult times. (foreign language) That's why we will engage in some lower margin businesses. (foreign language) Generally speaking, we hope that the mark -- auto market can be rejuvenated again and renew this positive growth pathway. (foreign language) So that's all for my answers. Thank you.

Operator

Next question is from Tina Long at Credit Suisse. Please go ahead.

Tina Long -- Credit Suisse -- Analyst

(foreign language) So my question is actually regarding the ARPU increase, which actually is the main driver for the lead generation for this. So I want to know whether it comes from the price hikes year-on-year -- from a year-on-year base where actually is because of dealers chosen more value-add service, and how much of the chance that the price can continue to be high for next year given the current situation? And second, a small question is about the other income and also where it comes from in second quarter?

Min Lu -- Chairman & Chief Executive Officer

(foreign language) So I will answer the first two questions. Talking about the leads, actually, since last year and the beginning of this year, we already have agreement on the price of the leads as a package. (foreign language) And about the price increase in the end of last year and the beginning of this year, our costs increased by 20 times -- 20%. (foreign language) And same time, we also added our science and technology department income into that, but this is data products and not the leads. (foreign language) I also mentioned that actually our price increased by 20 times [Phonetic]. However, at the same time, our leads increased by 30%. (foreign language) You also note that at the very beginning of this year, some -- actually dealers challenged about our price increase. (foreign language) So we are now steady about the price plan for the leads of next year.

(foreign language) Our team also discussed with some OEMs (foreign language) And also with some dealers. (foreign language) And actually, the dealers and the OEMs, they also cannot agree on this topic. (foreign language) And now, we developed a new plan, and we will communicate with them, and we already learned the lessons from last time, which means we will communicate first and then do it. (foreign language) And actually -- we will actually maintain the volume and also enjoy some floating. (foreign language) We will also disclose this information after the communication. (foreign language) Now it's yet to be finalized because we are still communicating with them. (foreign language).

Jun Zou -- Chief Financial Officer

Hi, Tina. Yeah, in this quarter, other income do increase by 65% compared that of last year. And the main reason is that after careful planning, we are able to enjoy more government tax refund and rebate. And so basically, yes, that's the reason. Thank you.

Operator

Thank you. There are no further questions at this time. I would turn the conference back to management for closing comments. Please go ahead.

Min Lu -- Chairman & Chief Executive Officer

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

Duration: 63 minutes

Call participants:

Anita Chen -- Director of Investor Relations

Min Lu -- Chairman & Chief Executive Officer

Jun Zou -- Chief Financial Officer

Eddy Wang -- Morgan Stanley -- Analyst

Miranda Zhuang -- Bank of America Merrill Lynch -- Analyst

Frank Chen -- Macquarie Group -- Analyst

Hillman Chan -- Citigroup -- Analyst

Tian Hou -- TH Capital -- Analyst

Jamie Shen -- Bank of China -- Analyst

Tina Long -- Credit Suisse -- Analyst

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