Q2 2016 Leju Holdings Ltd Earnings Call

Aug 25, 2016 AM EDT
LEJU - Leju Holdings Ltd
Q2 2016 Leju Holdings Ltd Earnings Call
Aug 25, 2016 / 11:00AM GMT 

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Corporate Participants
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   *  Annie Huang
      Leju Holdings Ltd - IR Manager
   *  Geoffrey He
      Leju Holdings Ltd - CEO
   *  Min Chen
      Leju Holdings Ltd - CFO

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Conference Call Participants
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   *  Hillman Chan
      Macquarie Research - Analyst
   *  Ming Xu
      UBS Investment Bank - Analyst
   *  Nora Zhang
      BofA Merrill Lynch - Analyst
   *  Robert Cowell
      86Research Limited - Analyst
   *  Tian Hou
      T.H. Capital, LLC - Analyst

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Presentation
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Operator   [1]
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 Hello, and thank you for standing by for Leju's Second Quarter 2016 Earnings Conference Call. (Operator Instructions) Please note that today's conference call 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, Ms. Annie Huang, Leju's Investor Relations Manager. Please go ahead.

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 Annie Huang,  Leju Holdings Ltd - IR Manager   [2]
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 Hello, everyone, and welcome to Leju's Second Quarter 2016 Earnings Conference Call. Today, we will update you regarding our financial results for the second quarter ended June 30, 2016. If you would like a copy of the earnings press release or would like to sign up for our e-mail distribution list, please go to our IR website at ir.leju.com.

 Leading the call today is Mr. Geoffrey He, our CEO, who will review operational highlights for the second quarter 2016. Ms. Min Chen, our CFO, will then discuss the financial results in more detail. We will then open the call to questions at which time our Executive Chairman, Mr. Xin Zhou, will be available.

 Before we continue, please allow me to review Leju's Safe Harbor statement. Some of the statements during this conference call are forward-looking statements made under the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that may cause actual returns to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. You are encouraged to review the forward-looking statements section of our annual report filed with the SEC for additional information concerning factors that could cause those differences. Leju does not undertake any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.

 Our earnings press release and this call include discussions of unaudited GAAP financial information as well as some unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

 Please note that, unless otherwise stated, all figures mentioned during this conference call are in U.S. dollars.

 I will now turn the call over to Leju's CEO, Geoffrey He. He-zong, please go ahead.

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 Geoffrey He,  Leju Holdings Ltd - CEO   [3]
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 Hello, everyone, good night. Thank you for joining us. We consistently focused on providing comprehensive and effective marketing solutions to developers and consumers over the last few years amidst various market conditions. We have been able to gain a leading position in the media marketing and e-commerce platforms through continued product innovation, strong execution and expanded partnerships and investing to new lines of business to ensure our long-term growth.

 During the second quarter of this year, we maintained healthy revenue presence and profitability. In the primary market services, we widened our leadership in the industry as a marketing platform through our continued efforts in product innovation. Many of our products we first launched in the industry are now becoming standard for the developers, including one-on-one private car service, virtual variety showroom experience and the aerial viewing tours recorded by drones, all aimed to serve homebuyers through various stages of home-hunting process and achieve better marketing results for our developer clients.

 Meanwhile, we increased our media influence and the brand awareness on the mobile sites through expanded partnerships with leading mobile browsers, including UC and Cheetah, which enable us to disseminate our content to a broader user base.

 In the secondary market, our listing services continued steady growth this quarter. We continue to see progress in attracting subscribing agents as we expanded our listing services to 60 cities. We will remain focused as an online information platform, which we believe will help us achieve scalability and the sustainable profitability in the years ahead.

 In home furnishing business, our home furnishing advertising business widened its leadership in the industry as we were the first in the industry to launch mobile live video to connect brands of all categories in home furnishing with homeowners. Meanwhile, our contractor platform continued its rapid development through strong efforts in marketing and raising awareness of the platform among the consumers. By mid-August, we achieved a GMV of over RMB500 million on our platform with close to 50,000 qualified contractors providing customized services directly to homeowners in 63 cities. We will continue to expand this business in more cities and launch new products and services around the process chain.

 Looking to the quarters ahead, we expect market competition to remain intense and the overall real estate market environment to face some uncertainties across different tiers of cities. But we believe that our clear strategy across all business lines will help us to sustain our business fundamentals, strengthen our industry leadership and lay a solid foundation for our future growth. In the meantime, we will also continue to invest in the home furnishing contractor business to maintain our first mover advantage.

 Now I'll turn the call to our CFO, Ms. Min Chen, who will review our financial highlights for the quarter.

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 Min Chen,  Leju Holdings Ltd - CFO   [4]
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 Thank you, He-zong. Good morning, and good evening, everyone. For the second quarter of 2016, we recorded total revenues of $158.3 million, relatively flat compared to the same quarter of 2015. Our e-commerce services revenues was $118.2 million compared to $117.4 million for the same period last year, representing approximately [74.7%] of our total revenues this quarter (company corrected after the call).

 Our e-commerce business continue to see increases in average price per coupon redeemed. But during this quarter, the price increases were partially offset by the decrease in number of coupons redeemed as a result of developers changing their launch schedules. During the quarter, we generated e-commerce revenues from 57 cities.

 Our online advertising services revenues for this quarter declined by 2% to $34.4 million as a result of changes in property developers online advertising demand. It contributed approximately [21.7%] of our total revenue this quarter (company corrected after the call). Our listing services revenues for the second quarter of 2016 increased by 9% to $5.7 million for the -- from the same period last year. The higher revenue was driven primarily by growth in secondary home sales.

 Our selling, general and administrative expenses increased by 5% to $134.3 million from the same quarter last year. The increase in overall SG&A was primarily due to increased marketing expenses spent on the promotion of our listing business and home furnishing business, which we have discussed before as well as the marketing expenses related to our e-commerce business.

 The second quarter non-GAAP income from operations was approximately $16.5 million for this quarter, while non-GAAP net income attributable to Leju shareholders was approximately $15.2 million.

 For the first half of 2015, we recorded revenues of $271.3 million, representing 8% increase from the same period last year.

 Our e-commerce revenue grew 11% from the same period of last year to $204.3 million, contributing [75.3%] of total revenues (company corrected after the call).

 Our online advertising revenues decreased 3% from the same period of last year to $56.2 million, contributing [20.7%] of total revenues (company corrected after the call), while our listing revenues -- listing services revenues increased 19% to $10.8 million, driven by the growth in secondary home sales for the first half of 2016.

 Non-GAAP income from operations was $9.2 million, representing a 56% year-over-year decrease from the same period last year. Non-GAAP net income attributable to Leju shareholders was $9.9 million, representing a 45% year-over-year decrease from the same period last year.

 As of June 30, 2016, our cash and cash equivalents balance was $272.2 million. Our net cash flows from the operations for the second quarter of 2016 was $23.5 million.

 At this moment, we're maintaining our previous guidance of total revenues of $660 million to $690 million for the full year of 2016, which represents an increase from full year 2015 of 15% to 20%. Please note this forecast reflects our current and preliminary view, which is subject to change.

 This concludes our prepared remarks. We're now ready to take your questions. Operator, please go ahead.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) We will now take our first question from Hillman Chan from Macquarie. Please go ahead.

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 Hillman Chan,  Macquarie Research - Analyst   [2]
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 My first question is about the home furnishing business. So just now you mentioned about GMV of RMB500 million in the quarter. Could we also have a sense on the revenue? And how should we think about the expense investment as well going to second half and also the revenue outlook going forward? That's my first question.

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 Geoffrey He,  Leju Holdings Ltd - CEO   [3]
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 Okay, thank you for your question. The top priority for our home furnishing business, I think, now is how to attract as many as possible consumers and contractors to make their deals on our platform. So that's our top priority. The second one is that [the live] -- the platform has many deals on that, so we [can] have enough advertising and business. We have already started, tried to sell the ad on that platform and gained some revenue, which is not so significant compared to our total advertising revenue. But it is a start, we have already started that trial.

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 Hillman Chan,  Macquarie Research - Analyst   [4]
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 Okay. And my second question is, I want to have a sense of your assessment of the property market and also the competition for our e-commerce business going into second half. Thank you.

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 Geoffrey He,  Leju Holdings Ltd - CEO   [5]
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 Okay. I think for the competition, I think, frankly speaking, I think this year, because many developers recognize the value of we call it a former e-commerce provider, the value of the former e-commerce provider, so actually the market is more concentrated to those big e-commerce platform rather than small e-commerce platform.

 So the competition actually is coming from our sized -- similar-sized competitors or some folks [on] their offline resources, the e-commerce providers. So the competition I think is not -- like last year, it's such a chaos. But this year, it should be better, I think, the environment.

 And the second one is that actually, the e-commerce business is highly related to the market -- the total trading volume of the primary sector. We actually face some problems when the market is going too hot. When the market is going too hot, the developers will not have discount to -- provided to consumers. Without the discount, so our coupon business will be negatively impacted.

 So the competition actually is coming from two ways. One way is the total -- or the whole competition landscape is better than last year. And the second one is we -- is high related to the market condition of the trading volume of the houses. I'm not sure if I answered your question, yes.

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Operator   [6]
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 We will now take our next question from Ming Xu from UBS. Your line is open. Please go ahead.

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 Ming Xu,  UBS Investment Bank - Analyst   [7]
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 So my first question is regarding the impact -- the regulation. So we noticed that recently the government released a new regulation, tried to regulate the property agents, so including some tighter requirements on them to update the posts. So I just want to know from your perspective, He-zong, so what's the impact on the agent's industry and also the impact on your business as a listing platform. And also, we hear that there are some downsizing layoff in the property agent teams in some of the larger Chinese cities. I just want to know whether this is in line with your observation and also the impact on your business. This is my first question.

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 Geoffrey He,  Leju Holdings Ltd - CEO   [8]
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 Okay. Actually, our listing business, it is true that the government released some restrictive policies on the agencies when they list some information. And actually, we see some influence to our business because they have to -- actually, they have to reduce the advertising -- reduce the listing numbers on our platform. But I think the influence is very -- quite limited because, as we know, that our business is verified listing. So most listings on our platforms actually are verified. So the influence is quite limited.

 As to your second question, I think we see some signals that they are trying to do that, but we have not yet to see the actual influence to our business. And the total market, I think this year is still quite positive. It's not so negative, so I'm not sure if it's a long-term trend. Even if some agencies, they laid off their people, maybe it's individual case, I think, from current point of view. Is that okay?

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Operator   [9]
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 We will now take our next question from Tian Hou from T.H. Capital. Please go ahead.

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 Tian Hou,  T.H. Capital, LLC - Analyst   [10]
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 One question is, so the first half of the China property market actually show some tremendous growth. So I wonder why Leju's growth is not in line with the industry growth. And also, how do you see the second half of the China property market as well as Leju's development in a different line of business?

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 Geoffrey He,  Leju Holdings Ltd - CEO   [11]
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 Okay. Yes, Leju's new primary set of business is highly related to the trading volume of the market. It is true, but it's not saying that when the market goes extremely hot there, we are the benefiter. Actually, as I said that in the second quarter, we faced some projects because the hot market cannot provide enough discounts to the developers. So they have to give up the e-commerce model, which is negative to us. So that's the first one.

 The second one is some projects actually postponed their deal confirmation process or prolonged that process in order to get a higher price, selling price to the consumers, which is also give us some negative influence.

 So as I said, our business is when the market goes too hot, it's not good. It's too cold, it's not good. When the market is fluctuating, I think it will be better for us. Looking forward in the second half of this year, I think the market will a little bit cool down because most big name developers, actually, they achieved their annual goal by -- already by 60% or 70%.

 So we are also watching if they will still continue selling their houses to set up a higher goal. If they set up higher goal, that means that we can still have quite good e-commerce business. But if they slow down their selling process, which is not good to us. And as to the market, I think it will be a little cool down because it will be not so crazy like the first half.

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Operator   [12]
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 We will now take our next question from Nora Zhang from Bank of America Merrill Lynch. Please go ahead.

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 Nora Zhang,  BofA Merrill Lynch - Analyst   [13]
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 I have two questions.

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 Geoffrey He,  Leju Holdings Ltd - CEO   [14]
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 Excuse me.

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 Min Chen,  Leju Holdings Ltd - CFO   [15]
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 Nora, we cannot hear you.

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 Nora Zhang,  BofA Merrill Lynch - Analyst   [16]
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 I wonder if there's a specific delay of projects that you made. Or is it that (technical difficulty) this year --

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 Geoffrey He,  Leju Holdings Ltd - CEO   [17]
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 Nora, could you please speak louder? We cannot get you.

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 Nora Zhang,  BofA Merrill Lynch - Analyst   [18]
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 (technical difficulty) launch and view of the, so far, the home business (technical difficulty).

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 Geoffrey He,  Leju Holdings Ltd - CEO   [19]
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 Sorry.

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 Min Chen,  Leju Holdings Ltd - CFO   [20]
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 Sorry, Nora, still cannot hear you.

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Operator   [21]
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 We will take our next question from Ming Xu from UBS. Please go ahead.

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 Ming Xu,  UBS Investment Bank - Analyst   [22]
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 So I just want to follow up on my previous question. You mentioned that the impact of the policy could be that the agents have to decrease their number of posts or number of advertisings. But I think one of the requirements is that after the house has been sold, the post have to be updated within two days or five days, if I remember correctly. So I mean, doesn't that actually increase the frequency of posts, in my opinion?

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 Geoffrey He,  Leju Holdings Ltd - CEO   [23]
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 I think because our verified listing model is sold by months, so they get that space and they can update the information. So it's not so -- it will not actually give us some influence on that on the updated frequency.

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 Ming Xu,  UBS Investment Bank - Analyst   [24]
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 Okay, got it. So I just have a very quick question on your financials. So we noticed that the accrued expenses increased another around $5 million in Q2 after a $5 million increase in Q1. So I'm just wondering what kind or what's that? Could you maybe share some color on the -- on that expenses and when that will actually be reflected in your P&L? Thanks.

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 Min Chen,  Leju Holdings Ltd - CFO   [25]
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 The accrued expenses, Ming, is a lot of the payroll and welfare expenses, so that we will digest over the course of the year.

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Operator   [26]
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 (Operator Instructions) We will now take our next question from Robert Cowell from 86Research. Please go ahead.

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 Robert Cowell,  86Research Limited - Analyst   [27]
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 When I'm looking at your guidance, I'm noticing a re-acceleration in the second half of the year. I wanted to ask about this home promotion on mobile event that you all held in July and maybe is that in any way related to the guidance, maybe just color or metrics on that promotion. Thank you.

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 Geoffrey He,  Leju Holdings Ltd - CEO   [28]
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 Yes, it's a promotional campaign that -- to attract developers to get some more -- [obtain that dollars]. So it's a very effective way to support our e-commerce projects. So it's a consumer-oriented campaign -- promotional campaign, but it's business. It's based on our clients.

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 Min Chen,  Leju Holdings Ltd - CFO   [29]
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 Robert, it's also one of our ways of showing developers our influence to the consumers, how much impact, how much reach we have to the homebuyer community. So that's one of the reasons why we launched this annual campaign every year. But more to your point about the second half re-acceleration, I think one indicator that we are maintaining our guidance is also looking at how much coupons we've sold, how many coupons we've sold that have not yet been converted to revenue. As you know, we recognize revenue only when the coupons are redeemed, when a homebuyer buys an apartment. But we have a relatively strong pipeline in terms of coupons sold that have not been converted.

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 Robert Cowell,  86Research Limited - Analyst   [30]
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 If I can get one follow-up. I'm wondering if there are any costs associated -- incremental costs associated with this mobile promotional event and if that has any impact on the cost structure in second half.

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 Geoffrey He,  Leju Holdings Ltd - CEO   [31]
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 What do you mean, the mobile?

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 Min Chen,  Leju Holdings Ltd - CFO   [32]
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 The costs related to that that we actually incur on our books is actually very minimal. A lot of the -- the gifts and the prices, etc., that we give out during the promotion are primarily shouldered by the developers who participate in a campaign. So the expenses cost to us is basically the initial development cost of launching that promotion on our channels and on our mobile apps. Other than that, there isn't much more than the -- sort of maintaining the app.

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 Geoffrey He,  Leju Holdings Ltd - CEO   [33]
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 Actually [during] -- one more to add to that. During that mobile campaign, actually we launched a lot of innovative products, like I said, that our 3D products, our virtual reality products and also our live broadcast products. So we actually displayed a lot of our innovative products to the consumers. On the other way, actually, it is a very effective way for us to encourage our developers to invest in our mobile advertising business.

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Operator   [34]
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 (Operator Instructions) We will now take our next question from Nora Zhang from Bank of America Merrill Lynch. Please go ahead.

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 Nora Zhang,  BofA Merrill Lynch - Analyst   [35]
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 I have a question regarding margins. Just now, He-zong mentioned that our competition landscape for the coupon business has been better than last year, but our margins, our operating margin is about 3 percentage points lower than second quarter last year. So my question is, can we -- is it right to say that our margins for the old business, including the coupon advertising, is actually improving and the lower margin is purely due to the drag from our investment in the home furnishing business? And how much do we expect -- as a percentage of revenue, how much do we expect to invest in the home furnishing business for the full year? And I also have a housekeeping question regarding the advertising business. I wonder what percentage is our revenue on mobile of the advertising business and also our number of accounts of the listing business. Thank you.

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 Geoffrey He,  Leju Holdings Ltd - CEO   [36]
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 First, I should explain that when I said that the competition landscape is better than last year, I mean that the players on the market is less than last year. It doesn't mean that the margin is related to the margin. When the developers actually choose a partner, actually they now -- actually, they want more services, both online and offline. So what I mean is that there are less players on this market. But most players actually, they're big-sized and the developer still will ask you for more services.

 Of course, because given our scalability, I think we have the strategy how to balance the profitability of each projects. So I think it's not related, actually. The second one is that in the first half of year, we did [that] invest in our Qiang Gong Zhang platform, which we already see a very clear business model, and we will further expand our national coverage of this platform and also we will increase our investment in this new platform, which is very exciting business for us.

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 Min Chen,  Leju Holdings Ltd - CFO   [37]
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 Yes, the mobile -- Nora, to your question about the mobile traffic, I think for the second half -- I'm sorry, yes, for the second quarter of this year, mobile traffic has already exceeded well over half. I think it's about 50% of our overall traffic to our website.

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 Geoffrey He,  Leju Holdings Ltd - CEO   [38]
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 For the total, I think it's approximately maybe 70%, like that. And our advertising business, actually, for the primary sector of our mobile advertising revenue already exceeds the PC advertising revenue in the second quarter.

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Operator   [39]
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 We are now approaching the end of the conference call. I will now turn the call back over to Leju's Investor Relations Manager, Ms. Annie Huang for any closing remarks.

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 Annie Huang,  Leju Holdings Ltd - IR Manager   [40]
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 This concludes today's call. If you have any follow-up questions, please contact us at the numbers or e-mails provided on our earnings release and on our website. Thank you.

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Operator   [41]
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 That concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.




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