Autohome Inc (NYSE:ATHM) Q3 2020 Earnings Conference Call November 30, 2020 7:00 AM ET

Company Participants

Anita Chen - Investor Relations
Min Lu - Chairman and Chief Executive Officer
Haifeng Shao - Co-President
Jingyu Zhang - Co-President
Jun Zou - Chief Financial Officer

Conference Call Participants

Eddy Wang - Morgan Stanley
Miranda Zhuang - Bank of America
Brian Gong - Citi
Ritchie Sun - HSBC
Thomas Chong - Jefferies
Liping Zhao - CICC

Operator

Ladies and gentlemen, thank you for standing by for Autohome’s Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to introduce your host, Anita Chen, Autohome’s IR Director. Ms. Chen, you may begin.

Anita Chen

Thank you, operator. Hello, everyone and welcome to Autohome’s third quarter 2020 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 Chairman and CEO, Mr. Min Lu; Co-President, Mr. Haifeng Shao; Co-President, Mr. Jingyu Zhang; and CFO, Mr. Jun Zou. After the prepared remarks, Mr. Lu, Mr. Shao, Mr. Zhang and Mr. Zou will be available to answer your questions.

Before we begin, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. 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 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 discussion of current unaudited non-GAAP financial measures. Our 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 live and archived webcast of this earnings 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

Thank you, Anita. Hello, everyone and thank you for joining us today. I am pleased to report a great quarter with revenues exceeding the high end of our original guidance by RMB35.6 million. Revenues for our new initiatives increased by 31% year-over-year and contributed to 24% of the total revenues. Data products delivered robust growth with 51% year-over-year increase and adjusted net margin increased by 6.6 percentage points year-over-year to 38.9%.

In this third quarter, to meet the increasing digital demand from customers and as we continue building upon our shares we are offering more differentiated higher value online services to support and complement customers’ offline operations with a high efficiency. In September this year, the number of average DAUs who accessed our mobile websites, primary app and the mini apps, further increased to 39 million, an improvement compared with the prior year period ended June 2020.

Regarding content, in the third quarter, we made a series of moves to optimize our product and content in order to enhance user experience. For example, we launched a light version of Autohome application to attract younger audience. We also rolled out MicroPulse channel, allowing users to post their photos and to make very brief comments and encouraging them to synchronize theirs posts to specific car models for instance, which provides OEMs, new channels to stimulate more content resources and their followers. Aside from these rollouts, our 818 Global Super Auto Show continued to be very popular with online video views from the [indiscernible] exceeding 260 million, further demonstrating its influence in the industry.

Our road trip channel allows automakers to extent their audience outreach to an even broader level through participating in various themed activities, users could improve their knowledge of auto brands and then be motivated to generate their own other related content. This content in turn becomes the results of automakers, which helps them further increase their brand’s recognition. In our efforts to explore new marketing approaches, we are encouraged to see that our flagship IT continued to scale up. In the past 4 months, we have worked with 9 automakers to promote their brands through road trip. In the first 9 months, the cumulative GMV for our road trip in this totaled RMB340 million, more than doubled, compared with the number for the full year 2019.

During the quarter, we further enriched our end-to-end SaaS platform reflect how unique capability in providing comprehensive digital services to our customers. For example, we are pleased to see that our data products continued to benefit from the digital transformation across the OEMs, as we offer our customers a full scope solution for each different space, providing them with better recommendations, helping them making better decisions and supporting them in more efficient project implementation. In the first 9 months, a total of 38 automakers were engaged in our data products, and notably our Intelligent New Car Launch and Intelligent Marketing Solutions collectively delivered over a 100 programs, far more than the total number of programs for the full year 2019.

In terms of data products to dealers, we ended to provide a comprehensive SaaS platform to dealer customers firmly to install visits, sales and ultimately could up sales, covering the full spectrum cycle of auto ownership and increasing the version rate each step of the way. In addition, the number of paying dealers for Smart Store 2.0, a product generating incremental lead for dealer customers has reached approximately 2,700 dealers.

In the third quarter, revenues from our used car business unit achieved double-digit year-over-year growth as we deepen our B2B cooperation with TTP Car Inc. In October, we made a further investment in TTP of $168 million to help accelerate our growth in the used car sector. Integrating Autohome’s online capabilities with TTP’s offline presence, we believe that we are well positioned to unleash more value to the industry. For auto financing business, in the third quarter, total GMV for consumer loans increased by 80% year-over-year.

Moving to the overseas business, in the third quarter, we continued to focus on expanding our content offerings while actively exploring ways to build out brand awareness. Our library now covers almost all the major models in the market with the VR technology to enhance the user experience.

In November, the total monthly unique visitors for Yes Auto exceeded 2 million and set a solid foundation for our cooperation with customers. As of last, we’ve connected with over 3,700 dealers, and the total SKUs on our overseas platform have exceeded 700,000. Our first dedicated overseas Online Auto Show also received the positive feedback. Many customers showed their interest in the format and are willing to participate in further trials with us. To conclude, as we move ahead, Autohome remains committed to developing innovative solutions and investing in strategic areas in order to strengthen our leadership position in the industry.

With that, I will now turn the call over to our CFO, Jun Zou for a closer look at our third quarter financial results, as well as the business outlook for the fourth quarter of 2020.

Jun Zou

Thank you, Min. Hi, everyone. As Min has already highlighted, we are pleased to report a great third quarter. Please note that as with prior calls, I will reference RMB only in my discussion today. Net revenues for the third quarter were RMB2.32 billion, a little under 7% higher than the same period last year and exceeding the higher end of our original guidance approximately RMB36 million. For a detailed breakdown, media services revenue were RMB927 million; lead generation service revenue were RMB840 million; and online marketplace and others revenue increased by 31% year-over-year to RMB548 million, primarily driven by growth of data products.

Moving on to costs, cost of revenue was RMB250 million compared to RMB247 million in Q3 last year. Gross margin remained stable at 89%.Turning to the operating expenses, sales and marketing expenses in the first quarter were RMB979 million, compared to RMB956 million in Q3 last year. Product and development expenses were RMB349 million, compared to RMB361 million in the third quarter of last year. Now finally, G&A expenses were RMB140 million, compared to RMB109 million in Q3 2019.

Overall, we delivered an operating profit of some RMB744 million for the third quarter, compared to RMB641 million in the corresponding period of 2019. Adjusted net income attributed to Autohome Inc. was RMB902 million for the third quarter, compared to RMB702 million in the corresponding period of 2019. Non-GAAP basic and diluted earnings per share and per ADS for the third quarter were RMB7.55 and RMB7.52, respectively, compared to RMB5.92 and RMB5.88, respectively, in the corresponding period of last year. As of September 30, 2020, our balance sheet remained very strong with cash, cash equivalents and short-term investments of RMB13.47 billion. We generated operating cash flow of RMB504 million in third quarter of 2020.

Let me now address our fourth quarter 2020 outlook, which reflects our current and the preliminary view on market and operating condition and maybe subject to changes. At this point, we expect to generate net revenues in the range of RMB2.475 billion to RMB2.484 billion.

In conclusion, we delivered a better than expected top line results as the new initiatives can continue to drive overall growth. Non-GAAP net income increased significantly by about RMB200 million year-over-year reflecting the effectiveness of our spending and cost control. In addition, our follow-on investment in TTP will accelerate the development of our used car platform and further solidify our leading position in this area, bolstered by an expanded array of growth drivers, a more balanced revenue mix and further enhanced operating efficiencies. We are well positioned to achieve our long-term goals and create even greater shareholder value.

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

Question-and-Answer Session

Operator

Thank you, management. [Operator Instructions] Thank you. Our first question is from Eddy Wang at Morgan Stanley. Please go ahead.

Eddy Wang

Thank you management for taking my question. So, my question is on the lead generation package side. So basically, we can see that this year, the auto market has been recovering quite well in the second half and if you look at our lead gen package in this year have not been any price hike. So, just wonder if we are approaching the year end and I think we are just starting our new process very soon. So, can you give us some color on how you see the lead gen package, the price hike chance in next year? Thank you.

Min Lu

Okay. Let me take the question first then I will invite Mr. Haifeng to follow on the answers. It’s the right time at every year to ask the question whether we are going to raise the price or not?

As you know last year, we experienced the negative growth of the auto market. So we said that we are not going to raise up the price and this year, we also experienced the negative growth of the market and also added on that we have the COVID-19 epidemic. So, that’s why we decided to follow the tide of the time. So, that’s why we are not going to raise the price, but our pricing mechanism – the pricing system may change.

Eddy Wang

That’s helpful.

Min Lu

Yes, to help forecast, let’s invite Mr. Haifeng.

Haifeng Shao

As our Chairman, Mr. Lu have said that we are going to follow the tide and also we offered two ways for the pricing with OEM and the dealers.

Well, they actually have two choices. Choice number one, which is at the flat price as 2020, which means there is no price hike. The second choice, they can choose a floating pricing model based on the new scenario.

Well, for the floating pricing mechanism actually we have targeted at those good performed dealers. If they want to get more leads from Autohome, they can choose this second way, which is the floating pricing model. As you know, we generated the better quality leads in the whole market.

We already communicated with a lot of OEMs and actually 30% of them already showed their initial interest in the floating pricing model. With further communicating and also the contract negotiation with those dealers, I believe – with the OEMs, I believe that there will be more and more OEMs may choose this floating pricing model.

Another thing I want to add on is that when we are talking about the floating pricing model, we already put a cap and a floor on the pricing. So, there would be a price range with the cap and floor. So in this way, the dealers and the OEMs can feel assured and eased that the pricing is quite reasonable.

As long as they get more leads, actually, they can take the floating pricing model. If we do not generate enough leads, the price would also go down.

Actually, another thing is we already have talked with four OEMs, which they were doing the comprehensive CPL model with us, talking about the comprehensive CPL model, which we bundled the advertising and the leads generating business together which is very similar to the overseas dealers’ business model, which is aggregated and bundled.

Jun Zou

Well, let me add on to that as well. The Smart Shop 2.0 is also actually incremental lead for this. So, we have already 2,700 plus coming on that and [indiscernible] more next year. With that, I guess, Eddy, we have answered for you for the first question. Next one, operator?

Operator

Thank you. Our next question is from Miranda Zhuang from Bank of America. Please go ahead.

Miranda Zhuang

Thank you, operator. Thank you, management for taking my questions. Mike, I have a follow-up question on the pricing for lead generation product. Can management give us more color on the details of the product, for example like, is the floating price model an add-on to these membership product or is a standalone product and where the dealers are – can choose either of them? And also any detail colors on the – how the pricing works for the leads, would it be set by the company or like some sort of a bidding basis? And also how are the leads sold – that are sold, for example like a package or like one-by-one basis? Any detailed colors on the product that could be helpful? And my question is on the management’s plan and strategy for the sales of the big data products in next year. For example, will you bundle some of the products with the membership products for sale or bundle all of the leads gen intelligent products for the dealers altogether to end-to-end SaaS products to sell to the dealers as a whole? And then – and for example, like will you then talk with – negotiate with the OEMs to set annual framework contracts for the intelligent marketing, intelligent new car launch products? Just please share with us any color on your size you are planning for your big data product sales strategy next year? Thank you.

Min Lu

Now, talking about your first question about the floating pricing model, it is not complicated. Actually, it’s very simple.

So basically, it’s very simple, because as we said, the auto market experienced negative growth and we have the COVID-19 epidemic. So, based on this big picture, we are not going to raise up the price, but we want to have plus and minus 10% range on the floating pricing based on how many leads they have, the more leads, they have more pricing, the less leads, they have less pricing.

And we don’t calculate each of the lead price because the price varies a lot. It depends on is it a big brand or small brand, it depends on the different models. So, we don’t calculate the unit price for each of the model or each of the branding. Usually for the big brands, they will generate a lot of leads. For small brands, their leads generation would be smaller and the pricing maybe more expensive. So, we would have to compare the same leads on the same brand. So actually, we don’t calculate the detailed unit price.

Actually, during our communication with the OEM and the dealers, actually the floating pricing model has been well accepted by them and it’s quite easy to understand and the model is very simple. As Mr. Haifeng said, a lot of OEMs and the dealers welcome such model.

I mentioned about the comprehensive CPL model, which we already started to work with four OEMs. So based on each of the leads, we would calculate how many of the numbers of the leads. The more leads, the high the price; the less leads, the less the price. It’s an end-to-end pricing model. We already started this comprehensive CPL model with four OEMs.

I think the key part is, we have the underlying technology, for example, the intelligent marketing technology and the big data technology, so we can generate high-quality leads, the more leads we generate, actually the more pricing we can get and actually, the OEMs welcome such high-quality leads. It’s a win-win situation.

Now, your second question is about our big data business. We have worked really hard on this period and we actually have very good revenue. If you look at the first three quarters, our revenue grow by 65% and the third quarter alone, we grow by 51%.

I believe that in the future there will be more opportunities lying ahead of us, no matter as working with OEM or dealer side, I believe there will be tons of new business opportunities, but we need to give our team more time.

Now, talking about the future opportunities on the dealer side, we will have a lot of sales management system to launch…

Haifeng Shao

CRM.

Min Lu

CRM, yes, okay, to launch for the dealers. And on the OEM side, we can create a lot of value – we can actually fit into a lot of value chain from the RMB. We have lot of big data products. We have a comprehensive SaaS service to offer to them. So that is one of our future strategy which is industrial internet solution.

The day after tomorrow we will be hosting the Investors Open Day. We would like to welcome you to participate in this wonderful event. Okay, thank you.

Haifeng Shao

Next one operator.

Operator

[Operator Instructions] Our next question is from Brian Gong at Citi. Please go ahead.

Brian Gong

Okay. I will translate myself. I still have a question, a follow-up question regarding the floating pricing model. So, management just mentioned some customer already spend for such pricing model. So, my question is based on the sales leads plus the track record for those customers, what’s the initial view of management regarding the impact on our revenue for next year? Thank you.

Min Lu

I will try to answer your question. I think floating pricing model actually is a testing of our ability to generate high quality leads. You know in the past consecutive 7 to 8 years, every year the pricing will go up by 20%. In 2019, there are some dealers who have some complaints and different opinions over this. We are a platform company. So that’s why I said, we have to follow the tide.

You know the past model is we just raise up the price. After price hike, we don’t care whether the lead numbers are growing, going up or going down. Now some of the OEMs and dealers started to accept our floating pricing model, that is to say we have to generate excessive high quality leads to them to be able to generate more income.

So actually on one side, if we want to raise up the price on the other side, we have to bear the risk whether we can generate enough leads or not. If we cannot generate enough high quality leads as previous year, then there will be 10% deduction from the previous price, so which is the floor 90%. However, if we can generate very good leads with excessive number, then we can go up by 10%, which would be 110% on the cap.

I have to say I’m very confident about our teams capabilities in generating high quality leads because we have intelligent marketing tools and the big data applications to support such generation leads business. So for those OEMs who signed the floating pricing contracts with us, we want to make sure that they would have excessive leads. Okay, thank you.

Operator

Our next question is from Ritchie Sun at HSBC. Please go ahead.

Ritchie Sun

I will translate the questions myself. Thank you for taking my questions. I have a question about the method or how to generate more high quality leads for the future. So other than the methods, like for example the big data and also the technology behind the platform. So, what about the new sort of user growth driver for the future or what’s the strategy behind it? For example, like the younger users, they can be also potential car owners in the future, but Autohome’s user profiles tend to be like 30 years or above for the age and so could management share what are other user acquisition strategy ahead so as to drive more high quality growth of the leads? Thank you.

Min Lu

Yes. To answer your question, we have already tried quite hard to go granule into the third tier, fourth tier, even fifth tier cities, by launching the light version of Autohome HP, which is very different from our major APP.

We will start more marketing and promotions of this light version HP to attract the young users from the lower tier cities. Now the second way is we have been launching and trying to generate young and fresh content and product on our major HP. We will do this step by step to better attract the lead generation users. Actually I already stated very clearly to the content generation team of our company, on one side we have to keep the most professional positioning of content consideration to the HP. On the other hand, we have to keep it fun, it should not be boring. To be funny and very professional, in this way we can attract the young users. For example, we have launched the young channel and we also host a lot of activities to go into the college. So in this way we would attract a lot of young users. And also on the 818 Super Auto Show, we hosted a Gala evening, we invited the superstar Mr. [indiscernible] who have a lot of young followers and young fans. And next year we are going to launch more collaboration with some young viewers website. Those website have a lot of young fellows. So in this way we can attract a lot of young users. Actually this is very good question. I firmly believe that if we can win the hearts of the young user we can win the market.

Jun Zou

Just to add a context here, like on the legacy [indiscernible] we have more than 216 million users, most of them are young users. And also as for traffic in the last quarter around 90% of our traffic already are coming from Tier 2 and the lower cities. So we are actually penetrating into younger and the lower tier cities.

Min Lu

Okay, thank you.

Operator

Thank you. Our next question is from Thomas at Jefferies. Please go ahead.

Thomas Chong

Hi, good evening. Thanks management for taking my question. Can you comment about the outlook about the industry, the [indiscernible] momentum in 2021? Thank you.

Min Lu

Now talking about the outlook of the market of 2021, we communicated with OEM and we also have our own observations. We believe that 2021 would be a growing market over 2020. And we believe the growth can be around 6%. However, if we compare next year with 2019, actually it still will be down. We also see another trend for next year, which would be more and more concentration of the brands in the market. For the EV OEMs, we believe that they will keep growing on the faster momentum. Okay, thank you.

Jun Zou

Yes, just to add on to that. Of course, now there are already 23 EV makers working with us this year, in different forms, entailment, leads or CPM. That will be a chance for us in the future.

Operator, next one please.

Operator

Thank you. Our next question is from Liping Zhao of CICC. Please go ahead.

Liping Zhao

Good evening management. Thanks for taking my questions. I have two questions here. First one is a follow-up question on your data product. Could management help us to break down the data products revenue by OEM and dealers? And second question is about the used car market, as we noticed Autohome increased the investment in TTP this quarter, could management share with us used car business updates and future strategy? Thank you.

Min Lu

Thank you. To answer your first question, actually for the matured product we have a different product targeting at OEMs and these pillars. They do know, which is the intelligent-based solution for OEMs and the two of which, which is smart-based solution is for the dealers. The ratio is between 50-50 maybe OEMs a slightly bigger, but still roughly 50-50. In the future, we are going to offer the total solution approach, the total solution approach would be more convergence. For example, the SaaS product would be a more convergence than the total solution based products. Now talking about the used car business, we attach great importance to this business, because this is a high growth business. If you look at previous years the used to car business growth would be higher than the new car sales growth. This year it’s also the same momentum, but the total volume is down. Now if you look at our investment in TTP, actually for the used to car business we have the online information flow. We also have the TTP which is a transaction platform offline, in this way we can combine online with offline. Now talking about our future strategy, we are designing the future strategy under the leadership of Chairman Lu. Our direction is very clear, we would go with the light access model, we would be a platform and we would offer the dealer cloud to help the OEMs to digitize their operating and we want to achieve the C2B2C model, which would be close loop model. We want to build the nationwide service network, our target is to become the global number one used car transactions and service platform.

Haifeng Shao

Just one thing to add, we are also going into, of course, integrate financing, insurance, and a number of other very adding services into the entire transaction at [indiscernible]. Thank you.

Operator

Thank you. There are no further questions at this time. I’ll turn the conference back to management for closing comments.

Min Lu

Okay. Thank you very much for joining us today. We appreciate your response and we look forward to the trading you 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 any further questions or comments. Operator?

Operator

Thank you. This concludes today’s conference call. You may disconnect.