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Trip.com Group Ltd (NASDAQ: TCOM) 2021 Third Quarter Earnings Conference Call, December 16, 2021, 7:00 PM Eastern Time
Thank you for your support and welcome to the Trip.com third quarter 2021 earnings conference call. 【Instructions】
I now want to hand over the meeting to Michelle Qi, IR Director of Ctrip. please continue.
Michelle Qi - Director of Investor Relations
Thank you, Darcy. thank you all. Good morning, good evening. Welcome to Ctrip's 2021 third quarter earnings conference call. Joining me in the conference call today are Mr. James Liang, Executive Chairman of the Board; Ms. Sun Jie, Chief Executive Officer; and Ms. Cindy Wang, Chief Financial Officer.
In this conference call, we will discuss our future outlook and performance, which are forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. Therefore, our results may differ materially from the opinions expressed today. Many potential risks and uncertainties are outlined in the public documents submitted by Trip.com Group to the US Securities and Exchange Commission. Except as required by applicable law, Trip.com Group assumes no obligation to update any forward-looking statements.
James, Jane and Cindy will now share the strategy and business updates for the third quarter of 2021, operating highlights and financial results, and the outlook for the fourth quarter of 2021. After the prepared speeches, we will conduct a question-and-answer session.
With this, I will forward the call to James. James, please?
Liang Jianzhang-Co-founder, Executive Chairman of the Board of Directors
Thank you, Michelle. Thank you everyone for joining our conference call today. In the third quarter, we are very happy to see the world continue to transition to normalcy. Due to the rapid introduction of vaccines and the relief of travel cuts, people are more comfortable with travel and can do more at their destinations. As for the domestic tourism market that has recovered [illegible], Europe and the United States have reopened their borders to fully vaccinated travelers. The EU digital COVID certificate helps promote free movement and travel within the European continent. We are also very happy to see that many countries have adopted a tourism fresh [Phonetic] policy to pave the way for international travel and tourism.
In China, the spread of Delta variants that began at the end of July disrupted the peak summer season and curbed the travel momentum in the winter. The country’s vaccination rate continues to rise, and it is expected that more than 85% of the Chinese population will be fully vaccinated early next year. High vaccination rates and the promotion of enhanced injections throughout the country will help us build our capacity to respond to the challenges of the pandemic. The recently discovered variant of Omicron may have triggered a new round of global attention and has once again triggered various travel restrictions. If we believe that maintaining [unrecognizable] in the face of change is the key to resisting the effects of the pandemic, then the pandemic may continue to be a continuing problem for consumers and businesses alike next year.
We will continue to adopt a dual circulation strategy and focus on China's domestic and global tourism markets. The team saw-in the rapidly changing market conditions, external [Phonetic] saw any opportunity. In the Chinese domestic market, we continue to focus on strengthening the supply chain and enriching our products to cover more user scenarios, and using our content strategy to attract the younger generation. Our content channel is not only a source of inspiration for travelers, but also a platform for business partners to display products and interact with high-quality users of the Ctrip Group. This year, more than 200 million users viewed our content. Approximately 30% to 35% of independent app visitors have developed the habit of browsing our content channels. As a leading one-stop travel platform, our content-to-transaction conversion rate is also higher. Business partners can enjoy up to 30% conversion rate every month, encourage them to strengthen cooperation.
On the international front, Asia-Pacific and Europe will continue to be our focus. In the Asia-Pacific market, our global brand Ctrip continues to expand its market share in Hong Kong, Singapore, Japan and South Korea. With the increase in brand awareness and application usage, during the pandemic, Ctrip quickly adapted to different needs and focused on holidays by strengthening local hotel products.
In Europe, all our brands have been cooperating closely in the past few quarters, which has greatly enhanced Ctrip's product competitiveness in the region. In the long run, Trip.com will continue to enhance its product supply and leverage Skyscanner's strong traffic and strengthen its market share in Europe.
In short, focusing on local and global perspectives will continue to be our core strategy in the coming years. We will continue to focus on strengthening the competitiveness of the group and prepare for the recovery of the global tourism industry and the prosperity of the tourism industry. We hope to see these investments begin to bear fruit and be reflected in our business performance in the next three to five years.
With this, I will forward the call to Jane to get operational highlights.
Jane Jie Sun - Chief Executive Officer, Director
Thank you, James. Good morning everybody. I want to start with a brief overview of our performance in the last quarter and update our strategic focus. In the third quarter, our total net income remained stable year-on-year, down 9% from the previous quarter, mainly due to natural disasters and a new round of infections affecting many provinces in China. We are very happy to see the world making progress in the normalization of international tourism. However, the road to global recovery is not without its ups and downs. The performance of the tourism market in major economies has been uneven. The Chinese tourism market is often disrupted by the return of COVID cases. It witnessed a strong recovery in July until the emergence of natural disasters and Delta variants slowed it down.
From an industry perspective, compared with the level of market performance before the COVID-19 in 2019, hotel occupancy rates and air ticket bookings in the third quarter fell by approximately 30%. Nevertheless, our domestic hotel business was able to exceed market performance by 20% to 25%, and our domestic air ticket booking recovery was also much higher than the market level.
On the other hand, the global market has made great progress in returning to normal, especially in Europe and the United States. In the past few months, airfare bookings in these markets have taken some major steps toward pre-pandemic levels, while global flight volumes are still below 2019 levels. Trip.com's overall international air ticket bookings increased by about 40% month-on-month, and European air ticket bookings increased by 170%. Skyscanner also found that the number of air tickets bookings increased by about 100% year-on-year and by about 35% month-on-month.
Although the COVID-19 pandemic has had a negative impact on the tourism industry, there is no doubt that the industry will stand out from the trenches and become stronger. We hope to see the tourism industry take off in the middle of 2022, as vaccination levels in major markets rise, travelers have become accustomed to a certain degree of travel restrictions and once again feel more comfortable booking travel.
Looking forward to 2021, our long-term mission is to pursue a perfect journey to a better world. This mission has never changed. As James just mentioned, we will continue to adhere to our strategy of focusing on local and global perspectives, and focus on the following areas. First, build strong user stories and make travel a part of our daily lives. As a result of the pandemic-and the resulting health and travel measures, people avoid long-distance travel, and weekend, regional and holiday travel has become more popular and frequent. In the third quarter, we are very pleased to see our province’s hotel bookings have increased by approximately 35%, and our local hotel bookings have increased by more than 60% compared to the same period before COVID in 2019.
In order to build a strong user case to attract and motivate users, we have cooperated with more than 6,000 five-star hotels to provide value-added hotel packages, including catering and many other in-hotel services. This type of package contributes approximately 30% to the sales of our partner hotels. We strive to seize this opportunity to attract the younger generation and help users make travel a part of their daily lives. In order to meet the need for inspiration for short trips and local travel, we continue to make solid progress in our content strategy. The total amount of content published on our platform has increased by 100% year-on-year. Compared with the second quarter, our number of KOLs has continuously increased by 35%. The number of users interacting with our content increased by 20% in July, and the monthly content-to-transaction conversion rate reached 30%.
Second, strengthen relationships with business partners and empower them to optimize customer structure and increase efficiency. Our content channel is not only the user's inspiration center, but also the preferred platform through which suppliers can improve production efficiency and attract high-quality users of Trip.com Group. As an important part of our content strategy, StarHub aims to help increase the conversion rate and information flow of suppliers to increase their exposure. We have seen the amount of professionally generated content, content exposure, and content GMV increase by an average of 50% per month for the past seven consecutive months.
To help expand the customer base of our partners, we are also able to-promote multiple co-branded membership programs where users have the right to benefit from both parties. There are now more than 30 million co-branded members between Trip.com Group and our hotel partners. Since 2019, this number has increased approximately 6 times. We have also strengthened partnerships with airlines to help them improve operational efficiency and promote our growth in first class and business class bookings.
Third, strengthen the synergy between the brands under the Ctrip Group, and improve our market response to the global space. In terms of strengthening the synergy between global group companies, strengthening the synergy between global group companies has continued to achieve its goals in the past few quarters [Phonetic]. With strong brand awareness and global influence, we are able to establish closer relationships with local suppliers, and provide Skyscanner and Trip.com with higher competitiveness, enhanced product supply and service reliability, and seize the pandemic. Opportunity coming. We have launched a series of value-added services to meet the user-friendliness and flexibility of our global customers. We believe these will enable us to better respond to the changing needs of travelers after the pandemic and further gain market share. A strong local supply chain and strong product capabilities will enable Trip.com to make better use of Skyscanner's strong traffic in Europe.
Fourth, corporate responsibility. Following our rural revitalization plan, in addition to the rural resorts that Ctrip Group opened in the second quarter, two more were opened this quarter. Our facilities in any province have now developed into the foundation of the Rural Revitalization College that we co-founded with the local government. Through online and offline channels, we provide professional training and skill development for local talents, and contribute to the improvement of global service quality. In addition to developing rural tourism, rural vacations can also help promote the sales of local products in nearby areas to improve the local economy and livelihoods. Trip.com Group has a strong and diverse workforce, and also strives to create an inclusive and friendly working environment. We adopt a clear code of conduct to support working mothers and take care of pregnant employees.
In October, we were pleased to receive the Women's Empowerment Principle Award from UN Women's China in recognition of our efforts in promoting gender equality and women's empowerment. From 9/11 to SARS, the tourism industry has proven its resilience, and we have indeed weathered the storm of COVID-19. Crisis comes with opportunity. Being agile in the face of challenges will help us seize opportunities, return stronger, rebuild confidence in travelers, and pursue perfect travel in accordance with our mission.
With this, I will now forward the call to Cindy.
Cindy Xiaofan Wang - Chief Financial Officer, Executive Vice President
Thanks, Jane. Good morning everybody. In the third quarter of 2021, Ctrip Group achieved net income of RMB 5.3 million to RMB 0 billion, a year-on-year decrease of 2% and a month-on-month decrease of 9%, mainly due to natural factors. Disasters in many regions of China and a new round of escalation of the epidemic.
In the third quarter of 2021, accommodation booking revenue was RMB 2.2 billion, down 11% year-on-year and 11% month-on-month, returning to the level of 53% in 2019. This was the net result of steady growth in July, but it was offset by the devastation of natural disasters and the resurgence of COVID cases that began to spread to multiple provinces at the end of July.
Our domestic hotel bookings in China have maintained high single-digit growth year-on-year, while both ADR and mixed occupancy rates have been affected by sluggish demand. In the third quarter of 2021, transportation ticketing revenue was 1.8 billion yuan, down 5% year-on-year, 12% month-on-month, and returned to 49% of the 2019 level. The recovery momentum of the domestic transportation industry was affected by natural disasters and the resurgence of COVID cases in the summer. The number of international air tickets bookings increased by about 40% compared with the previous quarter, mainly due to the recovery in Europe.
In the third quarter of 2021, tourism group revenue was 392 million yuan, an increase of 20% year-on-year and 7% month-on-month, returning to 24% of the 2019 level. This is due to the increase in demand for leisure travel in July before the outbreak of the new pandemic.
In the third quarter of 2021, business travel revenue was RMB 338 million, an increase of 20% year-on-year and a decrease of 13% from the previous quarter, which was slightly higher than the level of 2019. This market segment continues to gain momentum due to an expanding user base and improved cross-selling from transportation to accommodation.
The gross profit margin in the third quarter of 2021 was 77%, which was lower than the 79% in the previous quarter, mainly due to the slowdown in revenue recovery interrupted by a new wave of infections. Excluding equity incentive expenses, our adjusted operating expenses dropped by 32% compared to the same period in 2019.
The adjusted third quarter product development expenses increased by 20% compared with the same period in 2020, and increased by 2% compared with the previous quarter, mainly reflecting the general increase in the salary of product developers. We continue to strive for excellence and maintain a stable number of people in the team. Compared with the same period in 2019, this represents a saving of 19%. Adjusted sales and marketing expenses in the third quarter were reduced by 10% compared to the previous quarter, because we quickly adapted to changing market conditions and followed more cautious spending agreements. Responding to the uncertainty brought about by the epidemic. This reflects a 49% savings compared to the same period in 2019. Adjusted G&A expenses in the third quarter fell by 5% from the previous quarter. The year-on-year increase of 83% was mainly due to the provision of bad debt provision by the company's travel suppliers in the third quarter of 2020, which reduced 20% compared to the same period in 2019.
Adjusted EBITDA in the third quarter was RMB 537 million, compared with RMB 916 million in the previous quarter. The adjusted EBITDA margin in the third quarter was 10%, compared with 16% in the previous quarter. The diluted loss per common share and American depositary receipt per share in the third quarter was RMB 1.32 or USD 0.20. Excluding share-based compensation expenses and equity securities investments and fair value changes in exchangeable senior notes, non-GAAP diluted earnings per common share and American depositary receipts per share in the third quarter were RMB 0.81 or USD 0.13 .
As of September 30, 2021, the balance of cash and cash equivalents, restricted cash, short-term investments, held-to-maturity time deposits and financial products was RMB 67.6 billion or US$10.5 billion. We redeemed $500 million in 2025 Booking and Hillhouse notes early in the third quarter, and redeemed another $500 million in the same convertible notes in December, thereby reducing the potential dilution of 14.6 million common shares .
Speaking of the fourth quarter of 2021, we would like to share some of the colors of our business. In China, during the National Day holiday, our domestic hotel bookings achieved double-digit growth at the beginning of the holiday, while the traffic bookings were close to the level before the epidemic. The multiple rounds of new coronary pneumonia cases that began in mid-October have spread to more than 20 provinces and have a major impact on the entire Chinese domestic tourism industry. In November, compared with the same period in 2019, industry-level hotel occupancy rates fell by 30% to 40%, and air ticket passengers fell by 50% to 60%.
Ctrip Group is also affected, but we continue to lead the market by at least 10% to 20%. Under the current circumstances, outbound travel is still quite calm, while outside China, the recovery momentum in Europe and the United States continued into October, benefiting from the relaxation of travel restrictions and the introduction of vaccines, and the number of flight segments increased. The path to global recovery has been determined, but it is not without its ups and downs. We will continue to adapt and respond to changing market conditions, and be flexible and agile to seize opportunities to create value for our users and partners.
With this, operator, please open the question line.
thank you. [Operator Instructions] Your first question comes from Thomas Chong from Jefferies. please continue.
Thomas Chong - Jefferies - Analyst
Hi, James. Jane, Cindy. Good morning. Thank you for answering my question. Can you share the company's expenditure on international business? With the lifting of restrictions, how do you see the pace of recovery in outbound tourism? thank you.
Liang Jianzhang-Co-founder, Executive Chairman of the Board of Directors
In recent months, many countries have adopted plans to reopen their borders to ease travel restrictions. More and more people are back on the road and go further. Although some countries have recently tightened restrictions due to the Omicron variant, the temporary turmoil will not change the ultimate trend of travel recovery. Under normal circumstances, we may see China gradually relax its entry-exit tourism policy in the second half of 2022. The process of reopening is expected to start with the reconnection of Mainland China and Hong Kong, and then conditionally open to other international markets. The speed actually depends to a large extent on the vaccination rate and the epidemic control ability of the relevant market. We will continue to enhance the competitiveness of our products and services in the domestic market and make full preparations for the recovery of the international market. In the past two years, Ctrip Group has demonstrated resilience, leading the industry's recovery despite the unfavorable situation of the epidemic, and making us a stronger company. We believe that our local focus and global vision strategy will promote our long-term sustainable growth.
thank you. Your next question comes from James Lee from Mizuho. please continue.
James Lee - Mizuho Securities - Analyst
great. Thank you for answering my question. Here are two quick ones. Hi Jane. How should we consider the tourism activities that may enter the Chinese New Year, this is the first. Secondly, I think it is an outbound trip to Hong Kong. Any early readings about consumer needs and behaviors that you see there? thank you.
Jane Jie Sun - Chief Executive Officer, Director
Of course. Thanks, James. The opening of Macau does provide a good indicator for further consideration of Hong Kong. So we just held our global partnership meeting in Macau. And the virus control over there is very good. This provides everyone in the tourism industry with some experience on what will happen if Hong Kong opens up. Therefore, we very much expect that the virus in Hong Kong will continue to be well controlled. In this case, the opening of Hong Kong may be a good consideration. This is also related to our Lunar New Year plan. Historically, these-Hong Kong is a very popular tourist destination during the Lunar New Year because people try to go shopping in Hong Kong in different cities. Therefore, I hope that the environment in Mainland China and Hong Kong will be well controlled, and there is sufficient evidence to support us in further considering opening up Hong Kong beyond Macau. thank you.
James Lee - Mizuho Securities - Analyst
thank you. Your next question comes from Brian Gong from Citigroup. please continue.
Brian Gong - Citi - Analyst
Thank you James, Jane, Cindy and Michelle for answering my questions. So my question is about the expectations of domestic travel. So how does the management view the tourism performance prospects in the fourth quarter of 21 and next year? In the first quarter of next year, some local governments are now encouraging people not to travel across regions. The Winter Olympics will be held in March. Do we still expect domestic performance to be dragged down by travel restrictions? ? And given the low base in the second half of this year, will the year-on-year growth of the domestic market in the second half of next year be more normalized? thank you.
Jane Jie Sun - Chief Executive Officer, Director
Yes. So what we saw when traveling domestically was four S. Speaking of the four S, we see that people are paying more and more attention to safety. Therefore, we encourage our suppliers to ensure that they take very good safety measures, such as providing hand sanitizer and masks to our passengers. The second S is that people prefer to travel with much smaller groups rather than large groups. So under normal circumstances, our custom tools sell very well. Our customers prefer to rent cars and touring bicycles with their families instead of taking them around. The third S is that the booking window is very short. Due to virus control, many times we will receive notifications from different destinations. So the booking window we saw was much shorter. The last four-one of the four S is short distance. So what we see is that people prefer to travel near their hometown. Any place within 300 kilometers becomes a radius, and people are more comfortable to travel.
Moreover, we have seen that the younger generation prefers to travel. So we see that young consumers born in the 90s and Z generations travel a lot. So these are the trends we have seen so far. Similarly, I think a lot depends on the control of the virus in the first and second quarters. However, these needs have not disappeared. From our search data, the pent-up demand of customers is accumulating and very strong. As we have seen during the May Day holiday this year, search demand is very strong. So we very much hope that the vaccination rate will continue to increase. Virus control measures will prove to be effective, and then the market will gradually increase. Therefore, your assessment of the second half of 2022 will be stronger than that of the first half, and we very much hope that. thank you.
thank you. Your next question comes from Ronald Keung from Goldman Sachs. please continue.
Ronald Keung - Goldman Sachs - Analyst
Thank you James, Jane, Cindy and Michelle. My question is more-if the recent travel patterns we have seen in recent months last longer and have Omicron and the government’s dynamic zero COVID strategy, how does the management view the trajectory of domestic and international travel in 2022, What if the recent trend lasts longer? How will we plan our costs accordingly and the impact on cash flow or profit margins in the next one to two years? thank you.
Jane Jie Sun - Chief Executive Officer, Director
thank you. Yes, thank you, Ron. Our profit is actually determined by revenue and cost control-our cost control. The most important thing is that in terms of revenue, of course, we belong to the tourism industry, so our performance will largely depend on industry growth. However, as always, we will do our best to continuously surpass industry growth. For example, in the third quarter of this year, compared with the industry growth of the tourism industry, we exceeded at least 10% to 20% in different market segments.
In terms of cost, we will continue-in order to resist the new crown virus and resist the storm, we must have a very strict cost policy and cost structure to withstand the storm. First, we have a very strong cash position. At the end of the third quarter, our cash balance was approximately US$10.5 billion, which may be the best among them — one of the best in the tourism industry. Secondly, in terms of costs, due to our very flexible cost and expense structure and efficient operation management, our adjusted total cost and operating expenses in the third quarter actually dropped by more than 35% compared to the level before COVID. In the past few quarters, in addition to certain adjustments related to COVID, we have also simplified the operations of different business lines. In addition, our improvements in content, cross-selling and technology have further improved our marketing efficiency.
As far as future cost trends are concerned, we expect that personnel costs in our international market will see a very modest increase. For the domestic market, we expect our total headcount will be very stable, especially for our core business, but we need to increase some investment to capture the already suppressed demand in the international market, especially in the European market. In terms of sales and marketing expenses, we will continue to adapt-adopting a ROI-driven strategy, we will formulate very strict policies on sales and marketing expenses, whether it is for the Chinese domestic market or the international market.
Michelle Qi - Director of Investor Relations
thank you. [Operator Instructions] Your next question comes from Alex Yao from JPMorgan Chase. please continue.
Alex Yao - JPMorgan Chase - Analyst
Hi, good morning, management, thank you for answering my question. I have a question about investment activities. Given the potential reopening of more regions and markets in China and other parts of the world, are you considering any additional new investment activities to seize these reopening opportunities? thank you.
Jane Jie Sun - Chief Executive Officer, Director
Yes. Thanks, Alex. In terms of investment strategy, historically, we are very self-disciplined. We adhere to three principles. First, it needs to be closely related to our core competitiveness. Second, we need to really look for companies that rank first or second in their verticals. Third, the valuation needs to be very reasonable. So historically, we are very, very selective and very cautious in investment. However, in terms of our organic investment in our core competitiveness of long-term investments in technology, services and products, we are using this off-season to ensure that we focus on projects that strengthen our competitiveness in the industry. long. Therefore, with limited resources, we also prioritize our internal projects to ensure that we prioritize those projects that will expand our capabilities in the long-term. thank you.
thank you. There are no other questions at this time. I am going back now to make the closing remarks.
Michelle Qi - Director of Investor Relations
thank you. Thank you all for joining us today. You can find the transcript and webcast of today's conference call on Investors.trip.com. We look forward to speaking with you on the fourth quarter 2021 earnings conference call. Thank you, have a nice day.
Jane Jie Sun - Chief Executive Officer, Director
Cindy Xiaofan Wang - Chief Financial Officer, Executive Vice President
Michelle Qi - Director of Investor Relations
Liang Jianzhang-Co-founder, Executive Chairman of the Board of Directors
Jane Jie Sun - Chief Executive Officer, Director
Cindy Xiaofan Wang - Chief Financial Officer, Executive Vice President
Thomas Chong - Jefferies - Analyst
James Lee - Mizuho Securities - Analyst
Brian Gong - Citi - Analyst
Ronald Keung - Goldman Sachs - Analyst
Alex Yao - JPMorgan Chase - Analyst
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