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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by for Autohome’s First Quarter 2019 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.
Thank you, operator. Hello, everyone, and welcome to Autohome’s First Quarter 2019 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 Mr. Min Lu, Autohome’s Chairman and CEO; and Mr. Jun Zou, Autohome’s CFO. After the prepared remarks, Mr. Lu 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 include discussions of certain unaudited non-GAAP financial measures. The 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 webcast of this 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.
Thank you, Anita. Hello everyone. Thank you for joining us today to discuss our first quarter 2019 results. I am pleased to report a strong start to the year in which our revenue increased by 25% year-over-year to RMB1.61 billion. More importantly, adjusted net income during the quarter grew 35% year-over-year to RMB701 million representing an adjusted net margin of 43%.
During the quarter, we continued to face a challenging operating environment and the auto market is still trending down. However, we embraced these challenges by continuing to pursue innovation across our key products and as for new business opportunities. We saw encouraging progress in each of our major business lines. In March the number of average DAUs who accessed our mobile websites and the primary application increased by 14% year-over-year to 30.2 million.
We saw strong traction from both used car channels and Carso, which is a self developed intelligent search engine providing aggregated care related information. This continued traffic leadership and growth was driven by our capability of precisely identifying the true needs of our large and expanding user base while offering them customized content and the tools by our advanced the big data technology.
For Media business we continued to build up our competitor base with high quality content, improve the user experience by enhancing data driven intelligent recommendations. For the first quarter all of our PGC, UGC, OGC and AGC content category gained solid user traction. EV channels and Mini Short Video channels all saw rapid traffic ramp up. Used channel achieved peak DAUs of 2.7 million in April which was very essential as we are increasingly able to retain younger generation. All of our efforts in creating immersive content SMS and the tools that users love, want to share and interact with others have resulted in continued expansion of our traffic as I have mentioned in the beginning.
Our intelligent market solutions, which is based on UVN-B model leveraging big date and AI technology is getting wide acceptance from our OEMs. By the end of April we have signed 15 intelligent marketing solution projects with and will expand throughout 2019. On average such projects have successfully increased OEM's brand awareness by 60% to 170% while expanded the leads volume by 30% and more.
For our leads generation business, the number of paying dealers was over 24,000 as of the end of the first quarter with leads volume increased by 19% year-over-year.
Next, our Data business continues getting market momentum with positive reviews. For the first quarter 11 OEMs and over 14,000 dealers have purchased our data products. As for our used car C2B to C platform by the end of the first quarter we were able to grant very competitive merchant loans products to over 3,900 qualified dealers without any total cumulative credit line of RMB6.3 billion.
For the auto-financing business during the first quarter we facilitated over RMB5 billion in loans and insurance representing over 130% increase year-over-year. For the Beijing AR auto show last year and the recent Shanghai AR auto show we plan to host the first ever global [indiscernible] auto show on August 18 which with new vehicle debut plus TV [indiscernible] plus online shopping carnival.
To conclude, the solid progress across our business manifests the power of our ecosystem combining the best content and the big data technology. We are confident that our diverse revenue model and the pioneer suite will accelerate the network effect in fuelling our long term sustainable growth.
With that, I will now turn the call over to our CFO, Jun Zou for a closer look at our first quarter financial results and the business outlook for the second quarter.
Thank you Min. Hi everyone. As Min has already highlighted, we are very pleased to report an excellent first quarter into 2019. Please note that I will reference RMB only in my discussion today. Net revenue for the first quarter was RMB1.61 billion representing a 25% growth compared to previous year. This was 2% above the high end of our original guidance.
For a detailed breakdown, Media Service revenue increased 10% year-over-year to RMB643 million. Despite the challenging auto market, Autohome continues to be the automaker's partner of choice. Leads generation services revenues increased 20% year-over-year to RMB734 million, primarily driven by an increase in ARPU. Online marketplace and others revenues increased 152% year-over-year to RMB235 million primarily due to auto-financing data business growth.
Moving on to the costs, our cost of revenues increased by 26% year-over-year to RMB184 million. Gross margin remained stable at 89% in the first quarter.
Now operating expenses, sales and marketing expenses in the first quarter were RMB510 million compared to RMB398 million in Q1 2018 mainly because of increased cost in salaries and benefits as well as offline execution expenses. Product and development expense were RMB269 million compared to RMB229 million in Q1 of 2018. Again, this reflects our RMB headcount increase and it is proof of [indiscernible] to technology and hiring talent.
Following, G&A expenses were RMB68 million compared to RMB63 million one year ago. overall we delivered an operating profit of RMB657 million for the first quarter of 2019 representing an increase of 26% year-over-year, primarily due to consistent topline growth, streamlined operations efficiency and effective cost control.
Adjusted net income attributable to Autohome was up 35% year-over-year to RMB701 million for the first quarter of this year.
Non-GAAP basic and diluted earnings per share and per ADS for the first quarter were RMB5.93 and RMB5.87 respectively compared to RMB4.43 and RMB4.36, respectively, in the corresponding period last year.
As of March 31, our balance sheet remained very strong with cash and cash equivalents and short-term investments of RMB10.48 billion. We generated operating cash flow of RMB418 million in the first quarter.
Let me now address our second quarter 2019 outlook which reflects our current and preliminary view on the market and operating conditions that may be subject to change. At this point we are expecting to generate net revenue in the range of RMB2,275 million to RMB2,305 million representing a 21.7% to 23.3% year-over-year growth.
In summary, we are very pleased with our first quarter results. Together as a team we again achieved very strong year-over-year growth in the revenue and profitability. Given the solid confidence from the continuing momentum of our new business initiatives, we are confident in maximizing long term shareholder value.
With that, we are ready to take your questions. Operator, please open the line for Q&A. Thank you.
Thank you, sir. [Operator Instructions] Your first question is from Liping from CICC. Your line is now open, please go ahead.
Management, the first one is related to the outlook of auto industry because we see that the sales, the new car sales was acknowledged deal [ph] the result, so what's the outlook of the new car sales industry from the management's perspective and what is the implication Media revenue growth?
And my second question is related to our business model, as the company is testing new monetization model, so can you elaborate a little bit more on the progress of our CPO and CPS model?
The third question regards some of that business and what should we [indiscernible]?
This is Mr. Lu answering the first question about the outlook for the auto market as well as the advertising business. Concerning the auto market, the business in April is not exactly very good. There is no officially statistics yet, but it is not exactly very good. We expected better performance in April because of the 3 percentage point reduction of VAT, but now it seems that the effect is not that ideal.
And talking about the second half of this year it’s very difficult to estimate because the crucial factor is the macro economy of China. If China’s macro economy could perform better, then, I am positive that the auto business will follow.
About Autohome's OEM advertising business, we believe that a rather good growth will be maintained. And however we will continue to work on the core issue which I have already mentioned at several meetings previously, that is we will continue to make efforts to first of all increase the total amount of leads and second to help improve the conversion rate of the dealers. And if we could successfully do the previous two tasks that I have mentioned, I believe there will be no decrease in the OEM advertising business here.
Ever since the second half of last year there has been concern in the market, that is as the, there is a downward trend in China’s automobile market, will there also be a decrease in the revenue of Autohome? But a fact has proved that in the time of a downward trend the resources will be accumulated towards the top, the top and in the Internet business. Because in a downward trend in the automobile market there will be higher requirements of the effect. So in conclusion it is very difficult to give an estimation of the second half of this year, but we will continue to make our best effort to improve the effects and to help the dealers to increase their conversion rates.
And by the way, in Q1 the total volume of our leads has a year-on-year increase of 19% which is already mentioned in our report previously.
As for your second question, you mentioned the new business model, yes, we are making a lot of attempts including the CPL and CPS as you mentioned. About the CPL, well it is an effort that we take to try to help some dealers because some dealers they are in a lot of difficulties at the moment. So if we charge our fee according to the single lead then that might help some dealers to return to the business, but we are at a very early stage in this business model so the total amount is not very substantial.
Just a couple of punches. About CPS, this is something we are trying to expand this year. However, this is going to be a quite challenging project. And, for example, now we are using our e-commerce platform and to carry out the CPS projects at the level 2 dealers in the lower tier cities, for the level 2 dealers where there is no authorized dealers.
We are making accounts in these two areas because actually the procedure we have already gone through these procedures. And, now we are facing some difficulties, so one of them is the SKU is not sufficient enough. And so hence we need some change in the habit of automobile purchase from the customers. And as the volume of transactions of the deal is not very substantial yet, it’s like a couple of a hundred per month. And we hope that this business will be expanded this year and we will try to increase the volume here and so that the volume will have a considerable contribution to our performance next year.
Actually there are some other comments I would like to make concerning your second question that is, I would use the car open platform, it is already open, it is already initiated at the second, in later March, this March. So, this is going to increase the revenue of our department of used cars.
Comments in CAU [ph] for our use of vehicles is about 3 million and even more. We, certainly have the most traffic in used vehicle in China. And then next step is how to maximize the value out of the leads of the used vehicles.
About your third question concerning the online marketing revenue breakout, well, we will have an accurate break down at a later time and this year the growth looks quite good, especially our data business as well as auto-financing business. They are two major media drive for us and we hope that in a medium to long-term perspective our data business on financing as well as transactions surely will be as important as our current major business.
Also, you know, actually CPO [ph] model is actually a very new model that was just launched in April, so just one month into July and here we are watching this program closely.
And I would like to make some more comments about the Data business because it consists of two parts, first is on the OEM, and second is about the dealers because the contracts are annually signed. About the dealers we signed the contracts, with the…
Any contracts - yes - and we also receive that fee payment in the beginning of the year and they are amortizing that over every month so…
So, currently we already have the signed contract value of almost RMB500 million. And in the remaining months, in the months to come this year, we will try to sign more dealers into this. And we are also developing more data products targeting the dealers. And these programs are highly practical. They could really help the dealers to increase their ultimate, final conversion rate. So, we will continue to expand this business and currently there are over 4,000 dealers are sign into this product and we expect more growth by the end of this year.
About the data product for the OEM, it is also signed annually. Considering there was no such business at the same period last year and currently we already have 11 OEMs who have signed the contract, so we can expect more growth, because some of them signed at the second half of last year, some of them in the first half of this year, so we will expect more.
About auto-financing business we will continue to promote this sector and we are confident of good progress this year. So, thank you Liping for your questions and that is our brief answer.
Thank you. [Operator Instructions] Your next question is from Wendy Huang from Macquarie. Your line is now open, please go ahead.
My questions mainly are related to the dealer business. So can you give us an update on the number of the paying dealers as of March and also as of now? I recorded the number you previously mentioned it was 24,000 dealers as of March, and also, among the 24,000 dealers if that number is correct, have you included any dealers to a now paying model or a CPO model?
And also, what’s your current observation on the number of dealers in the marketing total, are you seeing the increasing number of the dealers that are shutting down, but getting tied your market share is actually increasing and the markets have leads. It also related to the dealer [indiscernible] there is an item on the balance sheet [indiscernible] which seems only growing at 4% year-on-year in this quarter and also it will translate that into the percentage of the dealer revenue quarter that seemed to just only 42% of dealer value which was 50% a year ago. Has this related to the dealer contract change or have you changed any, like payment policy towards the deal? Thank you.
Wendy, thanks for your question. Yes, firstly we do have more than 24,000 dealers by end of March and we are expecting probably signing another batch, renew another batch in probably in mid year. And approaching the rule of exciting CPO, the CPO model tying into that as well. And as Mr. Lu said you know we've launched the product just one month ago and have added a few hundred though we could see more.
And as for your overall market dealer comps, of course in the beginning of the year we saw that dealer comps reduced to just over 26,000 and now the number is a little over 27,000, it is still less than of course end of last year and maybe 2000 to 3000 less, but that number can change over the course of a year when some of those dealers actually shift from one brand to the other and we'll see, it happened last year too.
And in terms of deferred revenue, well you know, we still see actually the deferred revenue fall on our subscription business [indiscernible] subscription business alone still increased by 2 digits. However, some actually other business, for example our used car business and our new car commerce business, we are rolling out a new business model and we are changing from actually prepayment model to actually like a more CPO/CPA [ph] based a commerce based model. So actually there are reductions in deferred revenue on those business lines. So overall our retail business are still growing at a very strong pace than we were fully probably in - were still going to grow very strongly in the second quarter as well.
Thank you. Our next question is from Eddy Wang from Morgan Stanley. Your line is now open. Please go ahead.
I have two questions actually, the first one is about the incident actually in the last month between your Mercedes dealer and this customer and such dispute actually makes people turn more sensitive about the auto-finance and it is related so it will be charged to the customers. Have you seen any impact to the overall auto-finance spend, our overall auto finance spend is in the short term and through the overall industry?
And the second question is about effective tax rate, so in the first quarter this year actually our effective tax rate is around 3 percentage points lower than the same quarter last year. So what's the reason for this and should be expect similar tax rate in the second and third quarter this year? Thank you.
So Mr. Lu will answer the first question and Mr. Zou will answer the second question. That incident between Mercedes Benz and the dealer and his consumer is actually doesn’t have impact on our business of auto-financing. Because as I have previously mentioned the closed loop of deals and we are doing quite a few of them and not a lot especially concerning the youth cars.
So we have a very small business concerning the mortgage after the individual purchase of automobile. So that incident has very little impact on us. So of course we need to look in the long term perspective. If in the future there is tighter supervisionary requirements, if the transparency increases I think that will actually help us with our business.
Yes, as for effective tax rate, I think in Q1 this year we do have a 2.2% reduction compared to Q1 last year. And the main reason was actually the deduction for R&D was allowed to increase from 150% to 175% in September last year and that policy was also applied to the whole year 2018 retrospectively. So in Q1 when we made our estimate we were making estimates based on the old policy. But now this year of course you know we have actually a more amplified deduction for R&D expenses and we do not expect our ADR [ph] to be higher than Q1 this year's level. Hope this answered your question Eddy.
Thank you, Edddy.
Thank you. [Operator Instructions] Your next question is from Jamie Shen from Bank of China International. Your line is now open, please go ahead. Unfortunately, the line was disconnected. We will move on to the next question. Your next question is from Hillman Chan from Citigroup. Your line is now open. Please go ahead.
So I have two questions, the first one is about the youth car sales leads businesses that we started seeing late March. Could management share more on the progress with that particular business? And regarding the 3 million DAUs how should we think about the amount, the volume of these kind of sales leads and the utilization of them as of now? And regarding the major customer, sale also feedback from them?
And my second question is about the affordability of our auto loan and auto insurance business in the near term and also long term? Thank you.
And so Mr. Lu will answer your first question and Mr. Zou will answer the second one. So that will be used car business as I have mentioned in our previous road show event we will develop this business and previously I was so pleased, C1 is only for [indiscernible] the C2 is for the dealers and there are over 30,000 of them. And with the increase of DAU we are witnessing increase in both types of leads. And so, the leads are already too much for [indiscernible] as well as the used car dealers that cooperate with us, that's too much for them to digest. In order to improve the utility rate of these leads we try to open them up to others, for example e-commerce platforms or other entities to cooperate with us.
And now about the sales leads, we already have two more platforms cooperating with us. And that's just we will cooperate with some regional platform of automobile auctions. About the car purchase leads apart from the dealers there are also platforms that wish to cooperate with us. And since it is a little over a month since its launch the utilization rate is not optimized yet. So we will continue to make efforts to help the platforms and businesses to make the best use of the leads. And now Mr. Zou will answer the second question.
Yes, Hillman, as far as auto-financing business, of course you know this is the business of lower margin compared to our other business lines. But we have an internal policy to have a positive incremental margin for every line of businesses. And at this stage it is a marketplace, even though we spend actually many of the sort of commission revenue on our sales and marketing we do intend to of course bear no credit risk and no like heavy assets and in the long term we have confidence that this will be a high margin and high sort of business. And also know this, our business model is healthy as there are many other asset heavy credit risk to bear with models on the market. Thank you, Hillman, for your question.
Thank you. Your next question is from Miranda from Bank of America Merrill Lynch. Your line is now open. Please go ahead.
So I have three questions, this one is about the cost of leads product, so can management share with us what are the target dealers for this kind of product and what's the companies are for this positioning for this product over the mid to long term? Is involve the product that the company will use to improve monetization during the downturn of the auto market or is it like important strategic product that's in over mid to long term.
And then my second question is about the margin. So we have seen the margin improvement for past many or consecutive quarters, so can management share with us your outlook for the margin? We are seeming to see mixed factors here, on the one hand we are seeing the decline in the headcount in 1Q on a quarter-over-quarter basis and so will there be any leverage in the and your personnel related costs? And on the other hand we have the sales and marketing may go up driven by the expansion of the financing insurance business.
Then my last question is about this volume, and so we have seen that in FY 2018 the traffic growth is faster than the leads volume growth of 10% in FY 2018, but in this quarter the leads volume growth of 19% was faster than the traffic growth. So just trying to understand the reason behind it, is it mainly due to the company's intelligent marketing product? Thank you.
And Mr. Lu will answer the first and the third question. So now the first question the answer is very concise because CPO is not our current major model. CPO is targeted to as Mr. Lu has mentioned previously to dealers who are having difficulties in operations, perhaps difficulty in paying membership fee in a lump sum manner. So these dealers are concentrated in low tier cities. And they are consumers, they are our users and there is demand in the low tier cities. And for the dealers we could help them do more business in this way. And so, CPO is comparatively taking a simple approach. So, this is how CPO works in a simple way and there is not going to be a large amount or large size of this business.
And your – the question about the relationship between DAU and the amounts of lead, so currently we are moving from Q1 being 19% growth of the leads amount actually doesn’t have much to do with intelligent marketing, because within Q1 there is February, the Chinese New Year, so few OEMs would do promotions because they were all enjoying the holiday.
But the logic is like this, as I have explained previously, for users who visit Autohome it actually takes two and a half months before it actually converts into a lead. So yearly, the traffic increases and afterwards the leads increases as it follows suit. So, that is the pattern in general and besides it might also have something to do with our improved confidence, improvement of the approach of leads collection. And, we will continuously improve our user product. And, currently we are updating two versions every month and by June or July there will be also major updates and in the product.
So we constantly update and release new versions of our products in the hope of attracting new users and helping them to fulfill their dream of car purchasing. And, Mr. Zou will answer the second question.
Yes of course you know, think that fourth quarter of 2017 we started to implement car control programs in particular for citizen businesses and those programs have been prudent and very effective so far and you have seen now that we do have a continuous this improving margin track. But still as I enter into the market in the past quarters as you know we – our target this year is to at least even maintain the same margin level compared to last year, but this year it could be higher. But we will still continue to invest in new businesses.
And as for the headcount and sales marketing questions you asked, actually if you compare our headcount in Q1 this year to last year's Q1, on a year-over-year basis we do see an 8% headcount growth. So, we are definitely not you know sort of just trying to headcounts to save money. We have added our personnel needs on a very sort of prudent basis as well.
As for sales marketing, with the initial developments of course of our auto-financing business they are certainly you know sales marketing expenses. But you know when I mentioned that, when I was addressing the Hillman's question, in the long term with the leads our third party marketplace model is a healthy model. Thank you very much Miranda.
And, after comments from Mr. Lu. Cost control is something that Mr. Lu as the CEO started to work very hard on since three years ago. There are three parts that we work really hard on. The first is to control the headcount. Actually comparing the headcount now and that three years ago there is actually no increase. So there is a first part headcount because human resource cost is the biggest cost for Internet business companies.
The second major part of cost control is the exchanges of traffic and leads. And we have a ceiling here no matter how it develops there is a ceiling that cannot be exceeded. The third part is, like Mr. Zou mentioned about the budget management including the procurement management. These kind of internal cost control such as procedures and platforms these are some of the tools that we use to control that. So we are working very hard in these three aspects to trying to control this further increase of, any further increase of costs. So, that is all.
Thank you. There are no more further questions at this time. I will turn the conference back to the management for closing comments. Please go ahead.
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 further questions or comments. Thank you.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all now disconnect.