Autohome Inc. (NYSE:ATHM) Q2 2020 Earnings Conference Call August 25, 2020 8:00 AM ET

Company Participants

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

Conference Call Participants

Thomas Chong - Jefferies
Miranda Zhuang - Bank of America
Eddy Wang - Morgan Stanley
Brian Gong - Citigroup
Liping Zhao - CICC
Ben Huang - T.H. Capital
Frank Chen - Macquarie
Robin Zhu - Bernstein

Operator

Ladies and gentlemen, thank you for standing by for Autohome’s Second 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 second 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 may 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. Thank you for joining us today. I am pleased to report a solid quarter with total revenue of RMB2.31 billion. Revenue from new initiatives increased by 38% year-over-year and contributed to 22% of total revenue driven by strong growth from beta products as well as the auto financing and the transaction business. Adjusted net margin increased year-over-year to 38.1%.

In the second quarter, we made steady strides in building an open and diversified automotive ecosystem with our unique product metrics and ongoing innovation. June traffic saw the number of DAUs who accessed our mobile websites, primary app and mini apps increased to RMB38 million, a slight improvement compared with the same period of last year and up to 20% compared to the March 2020. Regarding live stream, in the second quarter, over 40 brands delivered 93 live-streamed programs on our platform with average viewership reaching 420,000 for each program, we also integrated live stream into large activities such as the 818 Global Super Auto Show and provide the training courses to dealers.

Our road trip business also achieved a rapid ramp up with a cumulative GMV in the first 7 months of the year totaled RMB230 million more than doubled compared with the number for the full year of 2019 despite the unfavorable market conditions. In addition, we have accumulated about 1 million pieces of trip reviews and the short media post further diversifying our content library and establishing solid foundation for our 2C business. Our products continue to host strong growth in both revenue and the number of paying customers.

In the second quarter, revenue from data products increased by nearly 70% year-over-year, and for the first half of 2020, a total of 25 automakers were engaged with us. Our intelligent new car launch at intelligent marketing solutions collectively brought us about the 70 programs in the first half of the 2020, equivalent to the total number of the programs for the full year 2019 demonstrating the value of our intelligent products series. Our continuous efforts in product innovation have been translated into improve the monetization as we saw considerable increase in average revenue per automaker. In terms our data products to dealers in the second quarter over 17,000 dealers used our data products. We will continue to strengthen our service quality and enhance our competitiveness by optimizing in existing products and rolling out new ones in the meanwhile. For example, our further upgrade our online showroom and a launch the same – launch the smartest store 2.0 as the next step, we plan to release smart sales and smart after-sales products. The former one helps dealers manage the users in-store visit process and assist in the conversions and later aims to generate service leads for dealers through content and interactive tools. With the expanded smart series product portfolio, we are able to provide end-to-end a closed loop services from pre-sale to after sales. The further smart OEMs digital transformation, we expanded our offerings beyond the project based services.

With the annual performance-based comprehensive marketing solutions now available, helping our automaker partners plan and carry out their marketing campaigns more effective, more efficiently. We have already engaged with some of our strategic automaker partners regarding this solution by now. As the flagship event for the year, the 818 Global Super Auto Show attracted a broad attention different OEMs and dealers in addition to massive auto consumers and the infusers. As a result, a total of more than 70 brands and over 2,400 dealers have joined the event. In terms of our used car platform, in the second quarter our used car business unit as a whole achieved the record revenue ramped up with nearly 30% year-over-year growth. As for auto financing business in the second quarter, total GMV for consumer loans increased by 45% year-over-year.

Finally, for the overseas business, we continue to refine our U.S. auto product, our VR and 3D products are unique in overseas regions that attracted a broad user base. In August, the total amount of unique visitors for U.S. auto exceeded 1 million mark and it continues to grow. Alongside the ramp up in traffic, dealer customer expansion showed strong traction as of last count, we have connected with over 2,200 dealers and total SKU of our overseas platform reaching 450,000. Following our recent 818 Auto Show, we plan to organize our first dedicated overseas online Auto Show next month to support our customers and further promote our brand in overseas markets.

In conclusion, Autohome will continue to leverage its competitive advantages in content, technology and big data to provide customers with results driven marketing solutions. We believe that in facing new market dynamics we remain focused on expanding the breadth and depth of our offerings, while providing customers with highly efficient intelligent services that generates even more value for the automotive industry.

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

Jun Zou

Thank you, Min. Hi everyone. As Min has already highlighted, we are pleased to report a solid second quarter. Please note that as to it prior calls I will reference RMB only in my discussion today. Net revenues for the second quarter were RMB2.31 billion, a slight increase compared to Q2 last year. For additional breakdown, media services revenue were RMB132 million. Lead generation services revenues were RMB841 million. Online marketplace and others revenues increased by 38% year-over-year to RMB540 million primarily driven by growth of data products as well as auto financing transactions businesses.

Moving on to costs, cost of revenue was RMB265 million compared to RMB264 million in Q2 of last year. Gross margin remains stable at 89% in the second quarter. Turning to operating expenses, sales and marketing expenses in the second quarter were RMB872 million compared to RMB893 million in Q2 of 2019. P&D expenses were RMB326 million compared to RMB361 million in Q2 2019. Finally, G&A expenses were RMB82 million roughly stable compared to that of 2019. Overall, we delivered an operating profit of RMB871 million for the second quarter, compared to RMB835 million in the corresponding period of last year. Adjusted net income attributed to Autohome was RMB881 million for the second quarter compared to RMB855 million in the corresponding period of 2019. Non-GAAP basic and diluted earnings per share and per ADS for the second quarter were RMB7.39 and RMB7.36 respectively compared to RMB7.22 and RMB7.15 respectively in the corresponding period of last year. As of June 30, 2020, our balance sheet remained very strong with cash, cash equivalents and short-term investments of RMB13.43 billion. We generated operating cash flow of RMB466 million in the second quarter of 2020.

Let me address our third quarter 2020 outlook, which reflects our current and preliminary view on the market and operating conditions and maybe subject to changes. At this point, we expect to generate net revenues in the range of RMB2.240 billion to RMB2.280 billion. In summary, our second quarter results reflect solid progress in exceeding our key growth strategy. Data products together with auto financing and transactions business achieve double-digit revenue growth contributing to strong year-over-year growth of 38% in the online marketplace and other revenues. Core businesses also registered sequential improvement, which indicate the gradual recovery of auto market. Meanwhile, net margin for the quarter improved on a year-over-year basis as we remain committed to enhancing operating efficiency across the platform. We will continue to explore new growth opportunities, while keeping a disciplined cost structure in order to deliver positive returns for our shareholders in the long run.

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

Question-and-Answer Session

Operator

Thank you. Now, we will begin our Q&A session. [Operator Instructions] Our first question is from Thomas Chong from Jefferies. You may begin the question, sir.

Thomas Chong

Hi, good evening. Thanks management for taking my questions and congratulations on a solid set of results. My question is about the auto industry outlook in the second half as well as how we think about the competitive landscape in coming quarters? And a quick another follow-up is more about the data products that we have just talked about, how should we think about the data products that are going to be launched in the second half and how many products do we expect in 2021? Thank you.

Min Lu

Yes. So, the first question I would like to invite Mr. Shao to take the first one, the outlook of the auto industry for the second half of the year.

Haifeng Shao

Now, if you ask my comment about the whole overall market outlook and related to competition, I would say if you look the year round, the second half of the year would be better than the first half of the year. My reasoning behind this is because if you look at the first half of the auto business in China, the overall industry dropped by 20% and the year round, the outlook would be flat or single-digit growth. So if this is the case we can draw a conclusion that the second half would be better than the first half. Now, talking about the competition, this is in accordance with what we have expected at the beginning of the year that is a lot of automakers, they are moving their budgets from offline to online. So, there will be a lot of digitalized and online based activities in the marketing. We also see the second trend, which is more budgeting would be allocated to the top players in the industry. And the third feature is that people pay more attention to the quality and the effectiveness of the activities. Okay, that’s all for my answer. Thank you.

Min Lu

Thank you for the questions. And related to the answer for your question about our data products for the first half of the year, actually we already signed a contract with 25 automakers and actually we launched about 70 projects, which is comparable to what happened in 2019. For the later half of the year, we do have a plan to further upgrade the intelligent go-to-market – intelligent auto launch – intelligent new car launch into the version 2.0 upgrading. As for the data products for the dealers, actually we already signed with the contract with 17,000 dealers. They are all 4S store dealers. And for the later half of this year, we are going to further consolidate our business in the smart sales, smart store and smart after-sales for the dealers. And for the data products blueprint for next year, actually, we already did some basic research and as well as R&D for next year’s data products, we are going to transform from the single scenario into a more integrated, more macro picture scenario, which was echo with the industrial internet business. So this would be our new strategy and for the data products next year. That’s all for my answers. Thank you very much.

Operator

Thank you. Now moving on to the next question, we have Miranda Zhuang from Bank of America. You may begin the question.

Miranda Zhuang

Hey, thank you operator. Thank you for taking my question. So my question is about the profit margin and cost control. So we have seen that companies are achieved a year-over-year improvement in margins in second quarter and the non-GAAP sales and marketing, R&D expenses in second quarter both declined year-over-year. So my question is wondering that what is the outlook for the profit margin in second half this year. And also I would like to understand more details about how we are doing the cost control. So we understand the direction is to control sales and marketing costs, especially those related to offline expenses, and also control the headcount. But my question is wondering if the company can share with us your approach to manage the cost, and how do you decide which costs need to be reduced and which costs need to be returned? And how do you balance the need to reduce the cost of doing cost control, versus the need to expand your business, invest your new businesses and attract the best talent in the industry? Thank you.

Jun Zou

Thank you, Miranda for your question. Well, you actually asked a question, that probably need few hours to address but in a nutshell, in the last few years, we have gradually streamline the – our cost control process, our budgeting process and we have set up few new cost expense standards for each type of expenses. And we have been able to stick to our, flexible budgeting process and always keeping actually ROI in mind, and we always actually evaluate ROI, but still we actually look our different businesses into three different sort of types. One is traditional businesses. These are the type of business that we want to maximize return, optimize the operating efficiency. And the second category is growing businesses. And in those kind of business, there’s a different standard that we will actually strengthen on growth rather than, let’s say just profit itself. And then the third type is incubations. And we do have a pipeline of new products, new business, new initiatives that each year we invest into quite extensively. And to, sort of, we can prepare for future growth. And so we see if those three type of business are initiative differently. And so all our sort of effort is always to try to save, more in traditional business and then to reinvest in new initiatives so that we can continue to grow. Yes, that’s what we have been doing and we have delivered actually on that approach. That’s my answer. Thank you, Miranda.

Operator

[Operator Instructions] Next question we have Eddy Wang from Morgan Stanley. You may begin the question.

Eddy Wang

Thank you, management for taking my question. My first question is just want to clarify that Shao just mentioned that in the first half auto sales in China have been like 20% year-over-year, but given the recovery in China auto market, you expect that for the full year basis, auto Sales will be flattish or may record a single-digit growth on a year-over-year basis? And on top of that, have you witnessed the strong recovery of OEM to do more advertising and this will bolster overall our overall media service revenue growth in the second half, especially if you look at the basic factor, second half of this year actually we have a quite easy comp? Yes, thank you.

Haifeng Shao

Eddy thanks for the question. Let me add to what Mr. Shao has just said. I think Mr. Shao was referring to that, the industry view for second half, new car sales will see a slight increase like single-digit increase. And for full year, the current industry estimate is still there will be maybe a minus 5% to minus 10% growth. What we might see different sort of developments later in the year, which is something we hope to see of course. And as for automakers budget, of course, if their sales start to recover, I think their spending will recover. And as the leader in the online marketing sort of space, we will get more wallet share with our overwhelmingly sort of number of users and inferences overall the industry and also with our performance-based sort of approach to help OEMs get more leads in the sales. Yes, that’s our view. Thank you, Eddy.

Operator

Thank you. [Operator Instructions] Next, we have Brian Gong from Citigroup. You may begin the question.

Brian Gong

My question is regarding how is the opening progress of dealers so far given some auto sales has improved a lot. And do you have the client for the plan for the price hike for dealer substitution for next year after the market is stabilized? Thanks.

Min Lu

Thank you for your wonderful question. In terms of the number of dealers, actually the dealers, they would actually grow or shrink according to the sales revenue. If the sales go up, there maybe more entry of the dealers, if the sales go down, there will be exit of the dealers. So they are always being up and down and it’s quite normal in this market. Regarding to your second question, whether we are going to raise the price for next year, actually, we have not decided yet. We were going to do some assessment in September and October this year. So, we would be able to know until that time. Thank you.

Operator

Thank you. Next we have Liping Zhao from CICC. You may begin your question.

Liping Zhao

Good evening, management. I have two questions here. My first question is related to the 818 Auto Show could management share the investments in the auto show and it’s expected contribution to the top line And my second question is about the U.S. as China is gradually recovering from COVID-19 has so what’s the DAU level of our PC and mobile users thank you.

Min Lu

Now thank you for the question the first one is related to the 818 Super Auto Show. Let’s look at the participant ratio. Actually, almost all the active OEMs participated proactively in this 818 Super Auto Show. There are more than 10,000 actually merchants as well as 2400 dealers also participated in this 818 Super Auto Show. And we also see that there are more than 100 dealers. They also launched a similar online version of this one Auto Show on their mini city level. And also during this 818 Super Auto Show together with the Chinese association of the auto industry, we launched the Auto Consumers Forum. In this Auto Consumers Forum, we helped to come up with 17 billboards for different rankings a lot of automakers were selected in this billboard and this also reflected the Chinese consumers’ preference of the auto consumption. We also helped to launch the traditional online Auto Show actually improved this and upgraded into the auto festival. This has become the biggest event for the Chinese auto industry.

Jun Zou

And we also throw a very grand gala evening for the other show. Actually, we invited 47 superstars who participated and performed during this gala evening. And in terms of the viewing censorship, censoring, we are number one in terms of the viewers among that time. And also this helped to soon become even more successful e-commerce giants during this, what it is…

I guess, what Jun Zou mentioned is that we have actually attracted a much more bigger audience during the same night as the e-commerce giants gala on the same night. And so that’s definitely demonstrated our success, yes. And if you look at the social media, the most popular one like the Weibo and the TikTok and [indiscernible], this has become a very important hot searches and the buzzwords. We are around – we are among the top second buzzwords for the hot searches. And as you know, this year is the second time we saw such a very big super auto show. And this year we get more matured and accumulated more experience this year is even more successful than last year.

Min Lu

Let me address the second question about traffic. We actually have seen that our mobile traffic slightly increased on a year-over-year basis and increased by 20% on a sequential basis and number of, let’s say, visits per user per day on our app and the time spent on our app also increased on a year-over-year basis. This is sort of result of our more enriched portfolio of content, which include like road trip reviews, short videos, live video streaming and all different sort of content now you know contributed to our growth in terms of traffic. Thanks, Zhao.

Operator

Thank you. Next, we have Ben Huang from T.H. Capital. You may begin the question.

Ben Huang

Good evening, management. Management just mentioned that auto market in the second half is likely to be better than the first half. So, I wonder what’s the driver, is that organic growth or some kind of a government stimulization plan? And in terms of a government stimulization plan, previous years, whenever the auto market was weak, we could see a lot of stimulization policy from the government. But this year, it seems like didn’t see much effective ones. So, what’s the management insight in that front? Thank you.

Min Lu

Thank you for the question. First of all, let me define why the second half of this year would be better than the first half of the year? Well, we would compare this year over the same period of last year. If you look at the OEMs, actually, especially May, June and July, their sales – car sales has improved and also we they even achieved positive growth – achieved positive car sales then their budgeting would be increasing and there will be more promotions. And we also see that for second half this year, the impact from the COVID-19 epidemic would be less severe as the first half of the year? So that’s – those are the reasons why we say the second half would be better.

Haifeng Shao

Okay. Let me add to what Mr. Shao has just said, of course, I mean, part of the sort of recovery from May to July was because of delayed demand during COVID-19, the first 4 months. Then of course we believe current auto penetration in China is only 170 cars per 1,000 people, which is much lower than Thailand, Malaysia or South Korea, which range from 240 to 400. And the overall industry estimate is that Chinese auto penetration should be able to reach 400,000 people in the mid-term. And so we believe it’s about time for us to see some growth. And you are right, we do see lot of different stimulus packages from local government, from central governments, ranging from like recovered subsidy to NEVs or like a reduction of, let’s say, sales taxes for used cars or actually the removal of sales tax for NEVs and from different cities and provinces, you also have subsidy to buy cars or swap used cars. And all those that the efforts helped a little bit as well of course to promote new car sales. But overall, as mentioned that we do have confidence in the sort of in the Chinese auto market in the long-term and that’s our view. Thank you.

Operator

Thank you. Next, we have Frank Chen from Macquarie. You may begin your questions.

Frank Chen

I will translate myself quickly. Just want to get a sense on your view on the increasing geopolitical tension and how would that impact on your internationalization strategy? What’s our investment budget on that? And could you quickly and given we have launched our U.S. auto platform in UK and Germany for several months, could you quickly share some of the KPI on it? Thank you

Min Lu

Let me take this question. Actually, the overseas strategy is one of our long term strategy and ever since last year, we had made a lot of researches and analysis and we decided to make investment in Europe. And currently we see that our progress in Europe is even better than what we had expected. Actually due to the COVID-19 epidemic this year we thought that the overseas market may not be as promising as what we expected. However, ever since we launched the YesAuto Go Live in May, after 3 months, we accumulated MAU of 1 million after we break the 1 million mark at end of August, we already achieved 1.3 million MAU we expect to be a year end MAU can reach to 2 million and the type of our products are very popular and widely welcomed by the overseas OEMs as well as dealers. For example, we launched the VR showroom, which are very innovative and which was very warmly welcomed by them. Well, we can say that till today we don’t see the geopolitical complexity had made an impact on our business. Because what we basically do is are trying to establish a very good platform and serve the customers well. And some of the local governments even offered a lot of support to us. Thank you for your questions.

Operator

Thank you. Next question, we have Robin Zhu from Bernstein. You may begin your question.

Robin Zhu

So I have two questions, one, just on the online share of advertising has, it presumably went up in the first half will that now dip in the second half given offline activities resumes? What’s a long-term plateauing kind of level for online advertising penetration? And then secondly, on data products, does the management have any medium-term financial targets for this business?

Jun Zou

Let me address your question. Thank you. And now [indiscernible], we – according to our survey with most of the OEMs in the first half, they are spending about 50% or more in online actually this year. And that’s definitely an increase compared to the past. And for now, what we have learned from them is that they have been able to experience how efficient online digital solutions are and they are happy with our actually overall solution, whether it’s a new car launch or it’s intelligent marketing or it’s they are on data services that we provided to helping the dealers to convert more customer needs. So, the online digital solution has proven to be delivered better ROIs than those offline solutions. And we believe I mean they will certainly still reserve a certain portion of offline spending, but then the trend is to shift to online is definitely going to happen and – sorry, your second question was about the data products, right?

Robin Zhu

Medium to mid-term?

Jun Zou

In the medium to mid-term, yes, data products will easily replicate our traditional businesses and this is our goal. Thank you.

Operator

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

Min Lu

Okay. 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 any further questions or comments. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participation. You may now disconnect.