Autohome Inc. (NYSE:ATHM) Q1 2020 Results Earnings Conference Call June 1, 2020 8:00 AM ET

Company Participants

Anita Chen - Head, IR
Min Lu - Chairman & CEO
Jun Zou - CFO
Haifeng Shao - Co-President
Jingyu Zhang - Co-President

Conference Call Participants

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

Operator

Ladies and gentlemen, thank you for standing by for Autohome's First Quarter 2020 Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference 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 first 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. Thank you for joining us today. We kicked off 2020 with a solid first quarter reporting total revenue of RMB 1.55 billion. Notably, revenue from new initiatives increased by 32% year-over-year and contributed to 20% of total revenues compared to a revenue contribution of 15% for the same period last year.

The exceptional revenue performance achieved by the new initiative was driven primarily by robust revenue from data products, which increased by over 80% year-over-year.

In the first quarter total new passenger vehicle sales fell by 45% year-over-year as a result of the COVID-19 outbreak and subsequent expansion - extension of the Chinese New Year holiday.

In many cases buyers postponed their vehicle purchase plans due to the extensive quarantine measures, while the continued spread of the pandemic around the globe. Further for around the period of domestic containment efforts. All these factors resulted in a further delays in the near term marketing demands of our customers.

Although consumers remained cautious during the first quarter as the containment regulations have been eased in China, coupled with the government's stimulus policy, the market began to show a gradual improvement from April.

During the quarter we witnessed an increased demand for online marketing services, as automakers and dealers shift their focus from offline to online channels. To capitalize on this trade we introduced a suite of data products and the tools.

For example, we upgraded our intelligent showroom and embedded live streaming functions both of which were designed to enhance the efficiency and effectiveness of online marketing programs.

Our live streaming channel has been popular among automakers as well. Since the outbreak of COVID-19 about 50 automakers have delivered a total of 124 live stream programs on our platform. We also launched a three week spring virtual auto show in collaboration with China Council for the promotion of international trade, Automotive Sub-Council in April. This signature event presents an attractive marketing opportunity that drove sales for our customers at the time when offline auto shows are either delayed or canceled in China and abroad.

About 60 auto brands and more than 1,300 dealers have signed up for the event. In addition, as we remain committed to supporting our customers and industry, we have been offering free trial of our smart instant messaging tool to more than 2,000 dealers.

Our strategic approach to delivering our business and strengthening our technologies allows us to generate additional value to our customers, which in turn will further enhance our market leadership in the long run.

During the quarter, leveraging our advantages in big data analysis and industry insights, we enhanced our data product metrics that facilitates OEM decision-making. In the first quarter, 17 automakers purchased our data product offerings compared with eight automakers in the same period of last year.

In the first quarter, we have engaged with automakers for 15 programs for intelligent new car launch and 29 projects for intelligent marketing solutions. In terms of our data products to dealers, in the first quarter, over 17,000 dealers purchased our data products. By the end of the first quarter, close to 3,000 dealers were using our smart call-out and smart assistant, which we launched last year.

Regarding our traffic in March, the number of average DAUs, who accessed our mobile websites, primary app, and the mini apps was 31.7 million, relatively stable compared with prior period despite an unfavorable operating environment in other verticals.

With 2020 well underway, I am confident in our ability to maintain our indisputable market leadership, given our well-defined long-term strategic plan and laser focus on delivering value to our customers and other industries.

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

Jun Zou

Thank you, Min. Hi, everyone. As Min has already highlighted, we are pleased for the solid first quarter to start 2020. Please note that as with prior calls, I will reference RMB only in my discussion today.

Net revenues for the first quarter were RMB1.55 billion compared to RMB1.61 billion in Q1 last year. For detailed breakdown, media services revenue were RMB566 million, leads generation services revenues were RMB670 million; online marketplace and others revenue increased by 32% year-over-year to RMB310 million, primarily attributable to the increased contribution from data products.

Now, moving on to the costs. Cost of revenue was RMB 178 million, compared to RMB 184 million in Q1 2019. Gross margin remained stable at 89% in the first quarter.

Now as for operating expenses, sales and marketing expenses in the first quarter were RMB 124 million compared to 110 million in Q1 2019. Product development expenses were RMB292 million compared to RMB269 million in Q1 2019.

Finally, G&A expenses were RMB89 million compared to RMB68 million in the same period of last year. Overall, we delivered an operating profit of RMB586 million for the first quarter of 2020 compared to RMB657 million in the corresponding period of last year.

Adjusted net income attributable to Autohome was RMB646 million for the first quarter compared to RMB701 million in the corresponding period of 2019. Non-GAAP basic and diluted earnings per share/per ADS for the first quarter were RMB5.43 and RMB5.4 respectively compared to RMB5.93 and RMB5.87 respectively in the corresponding period of 2019.

As of March 31, 2020, our balance sheet remained very strong with cash, cash equivalents and short term investments of RMB13.3 billion. We generated operating cash flow of RMB499 million in the first quarter of 2020.

Let me now address our second quarter outlook, which reflects our current and preliminary view on the market and opening conditions and may be subject to changes. At this point, we expect to generate net revenues in the range of RMB2.220 billion to RMB2.320 billion.

In summary, our solid financial performance once again demonstrated resilience of our core business as well as the strength of our new initiatives and disciplined approach to managing costs. As we fulfill our commitment to maximizing shareholder value, we are very pleased to pay our first regular annual dividend to our shareholders in April 2020 as scheduled.

Going forward, we'll continue to expand our footprint in auto-related sectors, while enhancing operating efficiency across each of our business lines, all with the ultimate goal of generating sustained long-term value for our shareholders.

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

Question-and-Answer Session

Operator

Thank you, management. [Operator Instructions] Thank you. Our first question is Miranda Zhuang from Bank of America.

Miranda Zhuang

Thank you, operator. [Foreign Language] Thank you for taking my questions. So, as you mentioned, there is salvation in offline to online in business activities. So my question is regarding Autohome strategy and initiatives in this process, in particular, on two areas.

The first one is on the online live broadcasting. So would like to get management's view on like what's the difference of live broadcasting in the auto industry, which has low transaction frequency and high transaction value versus live broadcasting like retail e-commerce platform?

When offline activities all come back to normal, do you expect live broadcasting for cars to be able to sustain a strong traction among users and dealers? And what's the Company's strategy to compete in this area?

And then my second area is about the private domain traffic management or customer relationship management. Recently, we are seeing an increasing amount of merchants using like tours such as mini program to attract and interact with users directly to transaction conversion. So, just wondering what's company's strategy and product offering in this area. Thank you so much.

Haifeng Shao

[Foreign Language] First of all, thank you for your questions. Now to answer your questions, I have to say through the COVID-19 epidemic, we do see a clear trend that a lot of activities have moved online. We do see that the new car purchase loop has been transferred into the search online. They get a lot of information online and it's non-contained related research, plus they make the purchase in the store. So this will become a close loop, and this will become a new model for the new car purchasing.

Haifeng Shao

[Foreign Language] For the three parts of this close loop, for Autohome, we already get prepared and we already researched a lot of our products and services based on the three parts of this loop.

Haifeng Shao

[Foreign Language] For example, the first part, the online communication, we do have a lot of tools, including the 3D tools, the virtual reality VR tools, and also the virtual new car auto show, et cetera, to cover the online broadcasting and communication.

Haifeng Shao

[Foreign Language] Now, the second part, the non-contract-based sales, we do have the live streaming and also the video-based sales.

Haifeng Shao

[Foreign Language] Now you asked a question, what's a major difference between the large amounts of transaction compared with the regular the small transactions. I still believe there are a lot of differences.

Haifeng Shao

[Foreign Language] For large transactions, for the users, they have to take a look of the car and they have to make comparison of the car. This two parts are inevitable.

Haifeng Shao

[Foreign Language] Now, on the broadcasting a live streaming, we do see that the anchorman or the hoster and the participation of the support of the OEM and the dealers are critical.

Haifeng Shao

[Foreign Language] As you know, the cars are quite expensive. So that's why for the live streaming, we do believe that our support with data products, with the product information, and also training and helping and the services for the live streaming was very important.

Haifeng Shao

[Foreign Language] In first quarter, our live streaming platform, we already worked very closely together with OEMs and the dealers. This is already in utilization.

Haifeng Shao

[Foreign Language] So my last conclusion is for the live streaming, during the COVID-19 epidemic outbreak, this is very important. And also in the car purchasing loop, it is one of the critical part, but it is not the most important part.

Min Lu

Okay. I’ll answer your question on private domain user traffic, this is Lu Min speaking. And speaking of the private domain user traffic, actually, we have already paid a lot of attention on this area and we have already started some of the projects internally, but everybody is talking about private domain user traffic. It's difficult for the dealer, a single dealer or even OEMs to make full use of the user traffics down there.

So we are doing projects hopefully in Q3 or Q4, I don't know. We're doing the projects hopefully in Q3 - late Q3 or early Q4. We can launch new tools or products, helping dealers, OEMs to apply more and more user traffic, the private domain user traffics and helping them to convert the user traffics to the sales leads. We'll see, we try our best.

A – Unidentified Company Representative

[Foreign Language] Thank you.

Operator

Next question is Eddy Wang from Morgan Stanley. As a reminder please ask one question at a time.

Eddy Wang

[Foreign Language] Thank you for taking my question. My question is regarding management's view on the auto market recovery in the second quarter and in the second half of this year. As you mentioned that you have witnessed some improvement in terms of the auto demand in - since April. What - do you think it's just shift up in auto sales from the first quarter into the second quarter? Or you have seen a structure improve the sentiment for auto sales in the full year 2020? And what will be the impact of your overall revenue in the second half of this year? Thank you.

Min Lu

Okay. The pandemic to me, I think, it has a huge impact on the auto industry. And right now, there are so many people have lost their jobs and plus the pandemic maybe still there and some saying that there could be a second wave, things like that. So it hit the economy heavily. So I think this pandemic has a huge impact in the future as well.

So, I may ask Shao Haifeng to address your specific question.

Haifeng Shao

[Foreign Language] Well, thank you for your question. I would like to share my view regarding the markets with you. If you look at this year, because of the epidemic of the COVID-19, we believe the new car sales for year-round will drop by 10% to 15% and that's also - that's not only our estimation, but also the estimation from the China car sales for the Promotion of International Trade, the Automotive Sub-Council.

Haifeng Shao

[Foreign Language] Now, if you look at the passenger car, if you look at the sales in April, it's still negative growth, but we have to wait until May and June to verify whether this negative growth would continue or not. Maybe that's due to some of the dealers pushed Q1 sales quota to April.

Haifeng Shao

[Foreign Language] Q1 sales quota to April. Also as you know, the sales drivers, the marketing budgets always grow along with the total sales volume. If the sales volumes go down, their marketing budget would also continue to go down.

Haifeng Shao

[Foreign Language] Actually this year, because of the COVID-19 epidemic, we do see a new trend, which is moving the offline budgets to spend online. So that's why we do see this trend will continue and this is investable.

Haifeng Shao

[Foreign Language] So this year, we do see a lot of opportunities with aligning our data products as well as the new tools business.

Jun Zou

Let me just add one point, actually I think for the first time, online budgets were 50% of the total OEM marketing budget this year. Yeah, definitely it's a great opportunity for us.

Haifeng Shao

Okay. Thank you.

Operator

Next question is Thomas Chong from Jefferies.

Thomas Chong

[Foreign Language] Thanks management for taking my questions. My first question is about our cost control initiatives. Can management share about our strategies in coming quarters?

And my second question is about our overseas expansion strategy. Given that in overseas market, we are seeing the impact for coronavirus is still quite severe, how should we think about our global Online Auto Show in August, as well as our strategies for this year? Thank you.

Jun Zou

Thomas, I will answer your first question and then Lu [ph] will answer the second one. Regarding the cost control, we'll continue at our prudent cost control programs in particular in traditional business as we have implemented in the last two and a half years and we believe, we'll be able to actually optimize our overall operation and deliver good return to our shareholders. And that's our belief and we are committed to do that in the future.

Min Lu

Okay. And regarding the development overseas, actually, we have already set up two subsidiary companies in the UK and Germany already and the teams are already there and actually we have already launched an application called YesAuto and you may download it from the Apple Store. And if you want to see the progress, maybe you should download that and take a look at it and the progress that we're making.

But you're right, because of the pandemic, the whole process being delayed, because our application, there are some dealers already, but the whole process was delayed because other dealers have shut down. So, it delayed our process, but we will continue our efforts. Hopefully the pandemic can be ended soon.

And August 18, we will launch the virtual auto show in China as we did last year. This year, we hope - hopefully we can launch the auto show the same time in U.K. and Germany. We will see. Thank you.

Operator

Our next question is Frank Chen from Macquarie. As a reminder please ask one question at a time.

Frank Chen

[Foreign Language] Thank you for taking my question. I understand that COVID-19 maybe a trigger for OEMs and dealers to shift their budget online. It's encouraging to see OEMs are now allocating over 50% of their budget online in the first quarter. Can management share with us what's the potential here looking ahead? Thank you.

Haifeng Shao

[Foreign Language] First of all, thank you for your questions. Well, actually for the first quarter, because of the COVID-19 epidemic, there is actually no offline activities. So that's why the OEMs moved their more budgets to online.

Haifeng Shao

[Foreign Language] In Q2, we will see the offline marketing activities gradually recover. However, compared with 2019, the percentage or outbreak in the total budget is still less than what happened in 2019.

Min Lu

[Foreign Language] Why this is a case, that is because in Q1, it provided a relative opportunity for the OEMs to work with us. We launched the Intelligent New Car Launch tool program and we also worked with them to do the live streaming as well as the video and other online activities. And then the OEMs were very happy to see that the effect was really good with a lower cost.

Min Lu

[Foreign Language] So my judgment is, for the offline activity, it will not vanish, it will still be there. However, the size of the online will be gradually growing. It won't decrease the offline budget.

Jun Zou

And Frank, let me also clarify one thing, what I meant is that the online spending for this year will exceed 50% for the entire year. Thank you, Frank.

Operator

Next question is Tina Long from Credit Suisse.

Tina Long

[Foreign Language] And so my question is regarding the data products. So, out of all the products that we have lunched in the past 12 months to 18 months, what are the products that actually have been received the best out of all - from all the distributors and what kind of data to back that up? And also, in the next six to 12 months, what are the new data product rollout plan and also what are the expected adoption rate by the dealers? Thank you.

Jingyu Zhang

[Foreign Language] Let me explain to you and clarify what is the data product. [Foreign Language] Our data product covers two major products. One is intelligent new car launch and the intelligent marketing solutions. This two are for OEMs.

Jingyu Zhang

[Foreign Language] We also have products for dealers. The smart call-out and the smart assistant.

Jingyu Zhang

[Foreign Language] For the OEMs, the intelligent new car launch and intelligent marketing solutions, there are already 17 OEMs procured this and they already used this product.

Jingyu Zhang

[Foreign Language] Actually, last Q1, I mean, Q1 in 2019, the number was only eight. This year, it was 17.

Jingyu Zhang

[Foreign Language] Now talking about smart call-out and the smart assistant offered for dealers, the Q1 of this year, the number was 17,000 dealers already use this. And if you compare with 2019 Q1, the number was only 14,000.

Jingyu Zhang

[Foreign Language] So the core value of such products not only offered to OEMs, but also offered to dealers, is to try to enhance the conversion rate. The enhancements of the conversion rates can be 20% to 35%.

Jingyu Zhang

[Foreign Language] For the latter part of this year, on the OEM side, we are trying to launch the intelligent activities. Actually, we want to connect the OEMs with the dealers through such intelligent activities.

Jingyu Zhang

[Foreign Language] For the dealer side, for the latter half of this year, we are going to launch the smart sales tools to help them enhance the conversion rate after customers visit the store.

Jingyu Zhang

[Foreign Language] And we are going to upgrade Intelligent New Car sales. In this way this product will be more perfect side.

Min Lu

[Foreign Language] On top of what Jingyu has said, maybe I can expand it a little more. Actually, there's a split of data products that we are developing and understanding. For example, there is a product called Smart R&D, which is for the use of the R&D phase of the OEM when they design the new car models, things like that, we have the big data to help them and support them to design the model that suit the needs of their customers and things like that, there are many.

And Jingyu mentioned smart call-out, for example. That's like an AI added tools to the dealers. Once they receive the sales leads for us and their call center guys will make phone call to the leads and when they talk to the customers, on the screen, there will be a set of messages or the parameters that customers are talking about.

For example, the acceleration of what kind of a model and the system will immediately recognize his questions and pop up with the answer on the screen, so that the telephone guy can give very precise answers and make the explanation and things like that. This is very welcomed by the dealers, and for example, last year, the dealers that used this tool, now, they improved their store visit rate by 20% roughly. Okay.

Operator

[Operator Instructions] Our next question is Brian Gong from Citigroup.

Brian Gong

[Foreign Language] I will translate myself. So, in the first quarter, the number of dealers was slightly impacted by the COVID-19. So, when does the number of dealers kind of recover to normal level in the management's point of view? Thank you.

Haifeng Shao

[Foreign Language] Thank you for the questions. Talking about the numbers of the dealers, it always goes with the new car sales. If you look at the sales transaction volume, if the total sales, the year round would go down by 15%, I would foresee the dealer numbers would also go down. Q1 would be the valley and it will gradually recover. But overall speaking, the total number of dealers will also go down accordingly while the sales volumes go down.

Haifeng Shao

[Foreign Language] We will also watch what will happen further and we have to watch and observe. However, I think one key element is very critical, which is the of profitability level of different brands.

Haifeng Shao

[Foreign Language] Now, this year, if you look at the Japanese brands, actually the Japanese brands, their margin level would continue to remain strong.

Haifeng Shao

[Foreign Language] The German brands would be stable.

Haifeng Shao

[Foreign Language] The U.S. brands will decline.

Haifeng Shao

[Foreign Language] For the South Korea and the French car, they would come - they would be quite the worst.

Haifeng Shao

[Foreign Language] So, for the Chinese brands, we have to wait and see to see how we evolve. I think all these brands, if you look at the mixture of all the different brands and if you look at the profitability level of different brands, you will have an idea.

Haifeng Shao

Thank you.

Operator

Our next question is from Ben Huang from T.H. Capital.

Ben Huang

[Foreign Language] So the question is related to the supply chain of the OEM. So overseas, pandemic has actually happened much later than China and they just started to go back to work, resume their business operation. So, for the auto productions, there are some major components that we actually need to import it from overseas vendors. So what do you see the supply situation in the second half? Will the overseas pandemic situation impact the potential manufacturing capacity? Thank you.

Jun Zou

Okay, thanks for the questions. For the supply chain, of course, we were also worried about that in the beginning. Most of the OEMs have usually about like two months inventory of, let's say, auto parts. And what we actually see most European actually manufacturers have resumed work and the U.S. a little bit lagging behind in mid-May but they will gradually resume to walk in late May to early June. So that is a good sign.

But that being said, as Mr. Lu mentioned, a lot of experts are warning about the second wave of the pandemic, we're going to see. If that happens, the supply chain will definitely be disrupted.

But in the long term, I think this will really, I guess, promote the localization of the auto supply chain in China. And as far as we understand, many auto OEMs in China are planning to do that. And even for test lines, they have planned to 100% localize their supply chain by next year - sometime next year. So, this is something, I guess, we are sure about. Thank you.

Operator

Our next question is Robin Zhu from Bernstein.

Robin Zhu

[Foreign Language]

Min Lu

Okay. Let me answer your question briefly. Autohome, as we talked many times before, that we always exploring the future opportunities while we're doing the current business. And we - today, we have already discussed the traditional business lines advertisement and the lead generation. But in the future, I think there are new areas that we are going to develop.

Now, for example, the data products we mentioned and the used car part I think there is a good opportunity for us to expand our business and we actually invested a lot. And two years ago, we start become profitable in terms of this business unit. And hopefully in the next few years, we can expand our business even bigger.

And then the aftermarket, we are looking to the aftermarket, and see if we can develop the new products and services, things like that. Of course, these are to-be business. Also, we are looking to the possibility of - to see. And for example, our car sales channel grows very smoothly, and actually, we hope it will be even bigger in the future.

And also, we have already launched the shared car platform where it [indiscernible] several shared car companies with us and we hope we can expand this well. So in the future, we will keep our traditional business growing. Of course, it will be affected by the industry, but on top of that, will develop the new business lines. Thank you.

Operator

And this is the end of question-and-answer session. Now, I hand back to management for closing comments. Thank you.

Min Lu

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

Operator

Thank you. This concludes our conference call. You may disconnect now. Bye.+