Yahoo Finance Tuniu Shs -A- Sponsored American Deposit Share Repr 3 Shs -A- (TOUR) Q4 2018 Earnings Conference Call Transcript
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Tuniu Shs -A- Sponsored American Deposit Share Repr 3 Shs -A- (NASDAQ: TOUR)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 8:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Hello, and thank you for standing by for Tuniu's 2018 Fourth Quarter and Full Year Earnings Conference Call.
At this time, all participants are in a 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, please go ahead.
Mary Chen -- Director of Investor Relations
Thank you, Anita, and welcome to our 2018 fourth quarter and full year earnings conference call. Joining me today on the call are Donald Yu, Tuniu's Founder, Chairman and CEO; and Maria Xin, CFO. For today's agenda, management will discuss business updates, operational highlights and financial performance for the fourth quarter and fiscal year 2018.
Before we continue, I'll refer you to our Safe Harbor statements in 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 CEO, Donald Yu.
Donald Yu -- Chief Executive Officer
Thank you, Mary. Good day, everyone. Welcome to our 2018 fourth quarter and full year earnings conference call. 2018 has been a year filled with achievements and milestones. We launched a number of initiatives across the company in order to profitable played (ph) scale. As a result, we are pleased to announce two new achieved non-GAAP profitability and positive operating cash flow for full-year 2018, the first time since our listing.
2018 was not a great year for the travel industry as number of external events contributed to declines in Chinese visitors to key destinations such as Thailand, Maldives and Bali. These events all had an native impact on our revenue and margins during the year. Even taking into consideration of these events, we were able to find growth in all the other destinations such as Europe, Australia and New Zealand.
Looking back to 2018, we made strong progress in executing our core strategies. During the year, we profited our service network, sales network and smart network. Our service network is a co-element in our product design and procurement. It improved our trade presence in China's power supply chain and has allowed us to directly service our customers at various destinations. Our sales network allowed us to efficiently diversify our user acquisition channels, which in turn lowered our blended user acquisition cost and the required marketing expenses.
Lastly, our smart network links our service and sales network through technology and big data. Operating only, we also made strong progress during 2018 by refining our internal workflows in order to achieve higher levels of efficiency. In 2019, we will continue to refine our networks through innovation. Now I would like to give an update on our 2019 strategies in greater detail.
First, I would like to talk about our leisure (ph) travel business. We currently divide our distribution into various sales channels, the channels are complete inventory to each other and cover their respective customer growth. We continue to optimize each channel, so that we are able to lower our effective user acquisition cost. China's travel market has evolved from an offline industry into an industry consisting of both online and offline features. With the development and diversification of our sales channels, our leisure (ph) travel business has taken the form of a new retail model that seamlessly combines the online and offline experience.
As of December 31, 2018, we have 509 offline retail stores across 69 cities throughout China. In terms of contribution, offline retail stores contributed approximately 17% of our package toward GMV during the fourth quarter of 2018. This is significant increase from the 9% of package toward GMV in the fourth quarter of 2017. Given the scale of our offline retail stores and positive historic data. We believe our offline retail store model has been tested and proven.
In order to combine the offline and online experience, we will continue to divide our customer service into two different types, dedicated customer service we are focused on attracting the customers' basic questions and maintaining a long-term relationship with the customer, so that the next time a customer has any travel demand, our dedicated customer service will be the first point of contact. The other type of customer service is professional customer service, dedicated to addressing more detailed destination-related questions. These customer service representatives have specialized expertise in the product and the definitions and are able to answer all travel-related questions.
Combining the two types of customer service, we are able to ensure all customers have a satisfactory booking experience whether they decide to book online or offline. Another of our key channels in our social marketing distribution channel by leveraging the relationships of our stakeholders, we are able to provide products and service directly to their closest social networks.
During the quarter, we continued to refine our social marketing tools so that the distributors are able to more easily sign up and have access to more products variety. For users we are optimizing these tools so that we can have a better booking experience. Going forward in 2019 we will continue distributing our social marketing tools to more growth, including tour guides, travel agencies and the distributors, so that Tuniu can leverage their social relationships to further increase coverage and improved conversion rate.
For our existing customers, we offer a number of events and promotions, both online and offline to better engage with them. During the fourth quarter of 2018, existing customers contributed to 64% of our GMV reaching a historic high. In November of 2018, we launched two new membership rewards card available to all customers. So far, sales had been strong, as we sold over 20,000 membership reward cards since its launch. Both new and existing customers have purchased the card to experience its various perks (ph). These reward cards have been able to increase user thickness and encourage customers to book with Tuniu for their next trip.
Next, I would like to talk about our travel-related supply chain. Tuniu's supply chain is the bridge connecting supply and demand. Over the years, we have consolidated and shortened the travel supply chain by steadily moving up our position in the supply chain. We will continue increasing our presence in the travel supply chain by strengthening our direct procurement and increasing the number of local tour operators.
Direct procurement continues to grow positively as we are able to service-based products using our own local tour operators and distribute our packaged tour products using our fast-growing B2B distribution. These two factors have allowed our direct procurement to continue scaling up and deeper its influence within the industry.
As a result, direct procurement as a percentage of packaged tour product GMV reached 60% in the fourth quarter. Our local tour operators are another crucial part of Tuniu's supply chain. As they allow us to directly provide services to our customers. For full-year 2018, we serviced more than eight centered and 70,000 trips domestically and internationally.
During the fourth quarter, packaged tour GMV using our local tour operators reached 11%. User reviews and repurchase rates continue to be strong, reflecting customer demand for high-quality services. We will continue to expand our local tour operators and optimize their efficiencies. As we continue to refine the services of our local tour operators, we will start opening up their availability to other travel agencies for B2B distribution, so that more travelers are able to experience our services.
Tuniu's Difeng Cloud, B2B distribution is another key component of our supply chain due to its ability to distribute product to travel-related companies and distributors across China. As the only B2B provider to offer the complete variety of travel products, Difeng has been able to quickly scale and help Tuniu reach more customers. During the fourth quarter of 2018, GMV of Difeng Cloud increased more than 40% year-on-year. In the future, Difeng will focus on developing distribution in lower-tier cities where products variety and coverage are lacking.
Lastly, I will talk about our strategy in technology and data. As Tuniu continues to sell more customers and increase its product offering, it is crucial for us to use technology to better connect the two. We continue to optimize our (inaudible) our user fees and demographics so that we can have a better understanding of our customers. By leveraging technology to better match customers with their wide product, we are able to decrease manual labor during the booking process while increasing conversion rates and their user experience.
Tuniu's dynamic packaging system is industry leading. This tool allows users to tailor specific trades based on their needs, combining transportation, accommodation and destination-based products and services into one bundle product. We plan to continue refining the bundle tour in 2019, so that more customers can tailor their trips and enjoy package price.
We also continue to make strides in optimizing the booking experience so the simplification of our existing booking process and optimizing the UI. This way, users are able to more smoothly navigate our app and have more simplified experience even when booking complicated products. We continue to see great potential in the Chinese travel market and Tuniu is in prime position to capture the market growth.
In terms of demand, consumption power in lower-tier cities across China continues to rapidly grow. Despite these refining consumption power the availability and selection of travel products is lacking in these cities. We believe there is huge potential in unlocking demand in low-tier cities. Currently, approximately 50% of our GMV are from lower-tier cities, significantly higher than 40% when we first listed. In 2019, we will continue expanding into lower-tier cities and increasing coverage of future travel demand in China.
Overall, Tuniu puts its customer experience as the highest priority during the implementation of our strategies. In 2019, we will push for the utilization of the new retail model in our core travel business to feature online and offline synergy and Big Data utilization. We will leverage mobile payments, social networking and big data to create a better Tuniu that combines both online and offline experiences.
The focus here will be on the user experience and Big Data. We want to ultimately provide users with the best experience by offering the most suitable travel products at the right time. The continuous execution of our cost strategies will allow Tuniu to capture the future of China's online leader travel market at Tuniu (inaudible) the new retail model into our existing model.
I'll now turn the call over to Maria Xin, our CFO for the financial highlights.
Maria Xin -- Chief Financial Officer
Thank you, Donald. Hello, everyone. Now, I will walk you through the fourth quarter and full year 2018 financial result in greater detail. Please note that all the monetary amounts are in RMB unless otherwise stated. You can find the US dollar equivalent of the numbers in our earnings release.
Starting from the fourth quarter of 2018, net revenues were RMB471.2 million, which remained consistent with the corresponding period last year. Revenues from packaged tours were up 23% year-over-year to RMB357.6 million and accounted for 76% of our total net revenues for the quarter. The increase was primarily due to the growth of open network. Our revenue was down 37% year-on-year to RMB113.6 million and accounted for the 24% of our total net revenues.
The decrease was primarily due to the decline in revenues generated from financial services and service fee received from the insurance companies. Gross profit was up 15% year-over-year to RMB270.2 million for the fourth quarter of 2018. The increase was primarily due to the increase in efficiency resulting from the economics of scale. Operating expenses for the fourth quarter of 2018 were RMB373.3 million down 18% year-over-year, excluding share-based compensation and amortization of acquired intangible assets. Non-GAAP operating expenses were RMB326.4 million, representing a year-over-year decrease of 19%.
Research and product development expenses for the fourth quarter of 2018 were RMB75.9 million, down 32% year-over-year. Research and product development expense as a percentage of net revenues were 16% in the fourth quarter of 2018 decreasing from the 24% in the corresponding period in 2017. The decrease was primarily due to the increase in efficiency, resulting from the economics of scale and the refined management and optimization of research and product development personnel.
Sales and marketing expenses for the fourth quarter of 2018 were RMB209.1 million, up 8% year-over-year. Sales and marketing expenses as a percentage of net revenues were 44% in the fourth quarter of 2018, increasing from 41% in the corresponding period in 2017. The increase was primarily due to the optimization of customer's loyalty program team and increased promotional campaigns in certain channels.
General and administrative expenses were for the fourth quarter of 2018 were RMB120.5 million down 22% year-on-year. General and administrative expenses, as a percentage of net revenues were 22% in the fourth quarter of 2018, decreasing from the 33% in the corresponding period in 2017. The decrease was primarily due to the increase in operating efficiencies resulting from the economics of scale and refined management.
Net loss attributable to ordinary shareholders was RMB64.7 million in the fourth quarter of 2018. Non-GAAP net loss attributable to ordinary shareholders, which excludes share-based compensation expenses and amortization of acquired intangible assets was RMB17.3 million in the fourth quarter of 2018. As of December 31, 2018, the company had cash and cash equivalents, restricted cash and short-term investment of RMB1.7 billion . Capital expenditure for the fourth quarter of this year was RMB34.7 million.
Now moving to full year 2018 results, in 2018, net revenue was RMB2.2 billion , representing 2% year-over-year increase. Revenues from the package tour were up 15% year-over-year to RMB1.8 billion and accounted for 82% of our total net revenue in 2018. The increase was primarily due to the growth of organized tours. Other revenues were down 32% year-over-year to RMB409.5 million and accounted for 18% of our total net revenues in 2018. The decrease was primarily due to the decline in revenues generated from the financial services and the service fee received from the insurance companies.
Gross profit was up 1% year-over-year to RMB1.2 billion in 2018. The increase was primarily due to the increase in efficiency, resulting from the economics of scale, which was partially set up by this decrease in other revenue. Operating expenses were RMB1.5 billion in 2018, down 26% year-over-year, excluding share-based compensation and amortization of acquired intangible assets.
Non-GAAP operating expenses were RMB1.3 billion , representing a year-over-year decrease of 27%. Research and product development expenses were RMB315.2 million in 2018, down 42% year-over-year. Research and product development expenses as a percentage of net revenues were 14% in 2018, decreasing from 25% in 2017. The decrease was primarily due to the increase in efficiency resulting from the economics of scale and the refined management and optimization of research and product development personnel. Sales and marketing expenses were RMB778.1 million in 2018, down 13% year-over-year. Sales and marketing expenses as a percentage of net revenues was 35% in 2018, decreasing from this 41% in 2017.
The decrease was primarily due to the optimization of promotional expense structures and preference for marketing channels with higher ROI. General and administrative expenses were RMB487.4 million in 2018, down 24% year-over-year. General and administrative expenses as a percentage of net revenues was 22% in 2018, decreasing from 29% in 2017. The decrease was primarily due to the increase in operating efficiency resulting from the economics of scale and the refined management.
Net loss attributable to ordinary shareholders was RMB187.9 million in 2018. Non-GAAP net income attributable to ordinary shareholders, which excludes share-based compensation expense and amortization of acquired intangible assets was RMB22.4 million in 2018.
In 2018 excluding the impact of the prepayment to Hainan Airline Tourism, cash conversion cycle was negative 27 days compared to negative 20 days in corresponding period last year. Cash flow generated from the operations was RMB268.1 million in 2018 compared to negative cash flow from operations of RMB418.7 million last year. This was primarily due to the increase in net income and improved management of our working capital.
Capital expenditures were RMB117.9 million in 2018. Tuniu currently expect to generated RMB432.5 million to RMB456.5 million of net revenue for the fourth quarter of 2019, which represents 5% to 10% year-over-year decrease. Please note that this forecast reflect Tuniu's current and preliminary view on the industry and its operations, which is subject to change.
Thank you for listening. We are now ready for your questions. Operator?
Questions and Answers:
Operator
The question-and-answer session of this conference call will start in a moment. (Operator Instructions) The first question today comes from Elaine Hee (ph) a Private Investor. Please go ahead.
Unidentified Participant -- -- Analyst
Hi management. Thanks for taking my question. Can you share with us what is the key driver -- key growth drivers in 2019?
Donald Yu -- Chief Executive Officer
(Foreign Language) As mentioned in the opening remarks, for 2019, our overall strategy is a continuation of our 2018 strategy. So notably two parts; for the sales network, we want to increase our sales channel and distribution, so that we're able to diversify our channels and for the service however, we want to increase and improve our direct procurement as well as our ability to service customers.
(Foreign Language) In 2019 additionally, one of our more primary strategy revolves around improving and optimizing the user experience. We will dedicate more resource into increasing direct procurement, especially within the travel industry, mainly focusing on accommodation, transportation and destination-based products. So we will also make -- increase our resources dedicated to R&D and overall -- the overall development of our systems. Although we have a very stable system that is able to service most of our need, there continues to be room for improvement.
Now, one of the core focus for us will be improving our dynamic packaging system. This tool allows customers to tailor their ownership and bundle transportation, accommodation and various services and products into a bundled product, but in 2019, we will also focus on improving this tool so that -- and putting in more direct procurement products, so that customers are able to enjoy better bundle price.
(Foreign Language) just for example, currently over 95% of our long-haul domestic organized tours is already using this dynamic packaging system. 50% of our self-guided tour is using this system as well. So we are seeing overarching of this ratio being increasing.
So being able to dynamically package this product, allows us to differentiate ourselves from other more static products that are being offered by other travel agencies. There are -- another benefit is that, we are able to quickly scale the product and connect multiple departure cities into this package. This allows us to rapidly provide products to larger cities where generally these kind of SKUM (ph) product variety is lacking. Thank you.
Unidentified Participant -- -- Analyst
Thank you.
Operator
(Operator Instructions) The next question comes from Ted (inaudible) ICBC International. Please go ahead.
Unidentified Participant -- -- Analyst
Hi, (inaudible) from ICBC International. Just one quick question here, can the management share with us on your projections for the 2019 revenue and profit? Thank you.
Maria Xin -- Chief Financial Officer
Thank you for your question. We believe our ability to generate a non-GAAP breakeven year is a positive step in our ability to be profitable. In 2019, we plan to continue improve our user experience as just mentioned by Donald, because our customer is our greatest and the most important asset. We plan to make investments in order to achieve this such as R&D investments. We will implicate more resource into improving our presence in supply chain, addressing (ph) the direct procurement capabilities, and upgrade our dynamic packaging tours. By improving this user experience, we will refine our competitive advantage and further improve our position, as the leading online leisure travel company in China. As your questions regarding the status (ph), we continue to see the headwinds driven by the external factors in field our core destinations.
But after Chinese New Year, we are seeing the recovery on customer's needs, which help us to impact our March and April. Also, we moved out majority of the insurance products to give our customers a better experience, but it continue to be impact our other revenues. This factors -- negative factors, we are seeing new growth drivers in the lower tier cities and improve our procurement capabilities.
For the yearly number, unfortunately we don't give the yearly status, but we are for the longer term, we have very confident for the travel industry.
Unidentified Participant -- -- Analyst
Okay. Thank you.
Mary Chen -- Director of Investor Relations
Thank you.
Operator
(Operator Instructions) The next question comes from William Yoon (ph) with Blue Sky Capital. Please go ahead. Please go ahead, Mr. Yoon, your line is open for question.
William yen -- Blue Sky Capital -- Analyst
Yes, hi, management. Congratulations on the solid results. I have two questions, the first one is, can you share the GMV breakdown by a destination, and what are the chairs in this designations?
Mary Chen -- Director of Investor Relations
Thank you for your question. Domestic Destinations contributed around 30% of our GMV; Europe, around 15%; Japan, around 10%, Southeast Asia around 10%; Maldives and other airlines together around 9% to 10%; Australia and New Zealand around 5%; Americans around 5%. In terms of Destination, we are seeing strong recovery from the European destinations; Australia and New Zealand. Japan are also very solid in the last quarter. Thank you.
William yen -- Blue Sky Capital -- Analyst
Thanks. Second question is, what are your source on this slowing economy. How we are -- affect the company and the industry's outlook?
Unidentified Speaker --
(Foreign Language) So last year, a number of external events have impacted us and a number of our relatively key destination. This includes places such as Thailand and Maldives. So this year, as noted by our internal data, Chinese New Year was not too great of a year, but we are seeing a very strong recovery following the Chinese New Year outbreak.
So in terms of external events, we believe that these events are temporary in nature and we believe that this year, there will be a relatively strong rebound from these events and on a mid to long-term basis, we believe the Chinese -- the economy is fine and the travel industry, we are optimistic of the travel industry, but on a very short-term basis, we do see some temporary headwinds. Thank you.
Operator
We are now approaching the end of the conference call. I would like to turn the call back over to Tuniu's CFO, Maria Xin for any closing remarks.
Maria Xin -- Chief Financial Officer
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 and we look forward to speaking with you in the coming months. Thank you.
Operator
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.
Duration: 45 minutes
Call participants:
Mary Chen -- Director of Investor Relations
Donald Yu -- Chief Executive Officer
Maria Xin -- Chief Financial Officer
Unidentified Participant -- -- Analyst
William yen -- Blue Sky Capital -- Analyst
Unidentified Speaker --
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