Hello, and thank you for standing by for Tuniu's 2020 Second Quarter Earnings Conference Call. My name is Andrew. [Operator Instructions] After management's prepared remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the meeting over to your host for today's conference call, Director of Investor Relations, Mary.

Mary Chen - Director of Investor Relations

Thank you, Andrew. And welcome to our 2020 second quarter earnings conference call. Joining me on the call today are Donald Yu, Tuniu's Founder, Chairman and Chief Executive Officer; and Anqiang Chen, Tuniu's Financial Controller. For today's agenda, management will discuss business updates, operation highlights and financial performance for the second quarter of 2020.

Before we continue, I refer you to our safe harbor statement in earnings press release, which applies to this call as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB.

I would now like to turn the call over to our Founder, Chairman and Chief Executive Officer, Donald Yu.

Donald Dunde Yu - Founder, Chairman and Chief Executive Officer

Thank you, Mary. Good day, everyone, welcome to our 2020 second quarter earnings conference call. After nearly six months of downturn caused by the COVID-19 outbreak, we are encouraged to see that China's domestic travel market is finally showing signs of recovery.

On July 14, China's Ministry of Culture and Tourism announced the resumption of inter province tours and began allowing travel agencies and OTAs to resume sales of packaged tour. We have also seen local travel authorities across China launch promotions for discounted or free tickets to local attractions in order to support the recovery of the travel industry.

The release of pent-up demand has increased the flow of travelers during summer holiday season. According to our data, packaged tour GMV was up over 200% in the second half of July compared to the first half of the month. Although the control over the pandemic is getting better within China, the outbound travel market still faces challenges due to the continuous threat of the COVID-19 abroad.

Also, China still experience small scale outbreak from time-to-time and the travel industry continues to adjust in line with the anti-corona virus precautions implemented throughout the country. From improving safety measures during travel, anti-corona virus precautions limiting the number of tourists at popular attractions. And customer focuses - focus on safety and hygiene. The bar for all travel products and services has been raised in many ways. In this new environment our focus on continues innovation is one of Tuniu's main advantages in ensuring the satisfaction of our customers.

As part of this, we have adjusted our product positioning to better meet current customer demands. We upgrade our mass-market products to mass premium products to create higher quality travel experiences through stricter product selection, higher service standards and more precede - products - production process.

As a leading company in China's travel industry, we view innovation is the key to success. Tuniu's destination based packaged tour product, which we launched in 2012 pioneered the transportation, plus local tour service model, giving customers much more choice and flexibility compared to traditional product - packaged tour products where travelers are required to assemble at departure cities.

From the company's perspective, this model enables us to acquire customers national wide and release the efficiency for - of forming organized tours. Today, our destination based product model is widely recognized and used in almost all packaged tour products domestically. Before the inter province travel market reopened, we separated out the transportation element from our destination based products. Creating high quality inter province products to give a boost to our business.

While inter province travel has recently resumed, the number of tourists have - has still not recovered from pre-COVID-19 levels, and the difficulty of assembling travelers at a single departure city is even higher than before. We expect that our destination based product model, which allows us to gather travelers across the country will help us decrease inventory risk and rapidly expand our business in China.

Throughout the year we have continued to upgrade existing products and launch new ones. Following the July resumption of inter province travel, we upgrade Niu Tour, our self owned product launched in 2009, with the goal of designing high quality packaged tours that meet the demand of China's travelers. Since its launch, Niu Tour has served over 5 million travelers and received a 97% satisfaction rate on average.

While organized tour has changed significantly compared to 10 years ago, in areas such as destinations, depth of experience and service and price expectations we continue to position Niu Tour as the benchmark for organized tour services by continuously improving and adapting our products for the market. For example, through our dynamic packaging system, we allow customers to book and depart from anywhere in the country and can offer more affordable packages, which is a major differentiator compared to other standard packaged tour products on the market.

In addition, we have 31 self operated local tour operators in China, which can directly provide local tour services for Niu Tour products, creating a sustainable service network.

Turning now to our product design strategy. In order to complement the shift in our product positioning we have setup a product committee to focus on premium and innovative products. In the past, product development was based on sales volume with multiple roles for a number of popular destinations. Nowadays, we start from understanding customers demand and flag one or more products from our existing or innovative products, leveraging our advantages in procurement, R&D and marketing - and the marketing to quickly roll out popular products to satisfy immediate market demand and to create high quality products for the long term.

Starting at the end of July we began releasing our premium products to customers through our weekly product-based live stream show. The first release was our Yunnan based product, as well as parent-child travel and family products, which are specifically designed for our key user groups. In August, our first product-based live stream show recorded a nearly 200% viewer increase compared to our historical average. We have also seen that customer preferences have shifted to more customized and private tours following the COVID-19 outbreak.

Compared to before, customized tours, smaller size packaged tours and the private family tours are all now preferred by customers. With our Niu Tour platform and product-based promotions addressing the new market dynamic, we saw customized tours increased over 100% in June, compared to May. And almost 300% in July, compared to June.

I would now like to give you an update on our sales network. As our revenues began to increase, we hope to offer more help to our upstream and downstream supply chain partners to help accelerate the industry's recovery. We opened the Niu Tour distribution to our peers through our Difeng Cloud platform for the first time, allowing the sharing of high quality products and a lowering overall customer acquisition cost. We hope to support our passengers through high-quality products to attract more customers and to provide better products to our customers through our network of over 40,000 distributors.

Our self-operated local operators network has gained a good reputation within the industry for providing highly - high quality services. And it is now offering services to other travel agency. Also, we launched Taikoo [Phonetic], our social marketing tool in early 2019 in order to reach more customers and their social circles. During the pandemic period Taikoo plays an important role in our sales channels, it provides a safer way for our customer service representatives to reach and engage with both new and existing customers. The new user of customer - the new user of Taikoo increased over 100% in July on a month-over-month basis. And the GMV generated from Taikoo in July increased over 500% compared to June.

In conclusion, China's reopening of the inter province travel market is an important sign that the travel industry has restarted, but full recovery will still take time. This presence both challenges and opportunities for travel agencies. As customer demand is released, travelers have not lowered there expectations for quality travel products. On the contrary, demand on travel agencies are greater than ever, and only those who provide the best services and travel experiences could sustain.

As a leading company in the industry, Tuniu has paid close attention to challenges in customer demands and by continually optimizing our product portfolio with the launch of popular high quality products we are confident that more than - more and more customers will chose to spend their vacations with us.

I will now turn the call to Anqiang Chen, our Financial Controller, for the financial highlights.

Anqiang Chen - Financial Controller

Thank you, Donald. Hello, everyone. Now, I will walk you through our second quarter 2020 financial results in greater detail. Please note that all the monetary amounts are in RMB unless otherwise stated. You can find the US dollar equivalent of the numbers in our earnings release.

For the second quarter of 2020, net revenues were RMB34 million, representing a year-over-year decrease of 93% from the corresponding period in 2019. The decrease was primarily due to the negative impact brought by the outbreak and spread of COVID-19.

Revenues from packaged tours were down 97% year-over-year to RMB12.6 million and accounted for 37% of our total net revenues for the quarter. The decrease was primarily due to the suspension of sales of packaged tours impacted by the outbreak and spread of COVID-19.

Other revenues were down 76% year-over-year to RMB21.5 million and accounted for 63% of our total net revenues. The decrease was primarily due to the declines in service fees received from insurance companies and the commissions received from other travel related products impacted by the outbreak and spread of COVID-19.

Gross margin was 23% in the second quarter of 2020, compared to a gross margin of 45% in the second quarter of 2019. The decrease was primarily due to the decline in net revenues impacted by the outbreak and spread of COVID-19.

Operating expenses for the second quarter of 2020 were RMB158.1 million, down 63% year-over-year. Excluding share-based compensation expenses and amortization of acquired intangible assets, non-GAAP operating expenses were RMB128.9 million, representing a year-over-year decrease of 64%.

Research and product development expenses for the second quarter of 2020 were RMB20.6 million, down 74% year-over-year. The decrease was primarily due to the decrease in research and product development personnel related expenses.

Sales and marketing expenses for the second quarter of 2020 were RMB84.3 million, down 62% year-over-year. The decrease was primarily due to the decrease in promotional expenses and sales and marketing personnel related expenses.

General and administrative expenses for the second quarter of 2020 were 61% - were RMB61 million, down 55% year-over-year. The decrease was primarily due to the decrease in general and administrative personnel related expenses.

Net loss attributable to ordinary shareholders was RMB147.6 million in the second quarter of 2020. Non-GAAP net loss attributable to ordinary shareholders, which exclude share-based compensation expenses and amortization of acquired intangible assets was RMB128.3 million in the second quarter of 2020.

As of June 30, 2020 the company had cash and cash equivalents, restricted cash and shot term investments of RMB1.6 billion. The COVID-19 pandemic has negatively impacted our business operation and the cash flows during the second quarter of 2020, which will continue to impact on subsequent periods.

Based on our liquidity assessments and management actions, we believe that our available cash, cash equivalents and the maturity of investments will be sufficient to meet our working capital requirements and capital expenditures in ordinary course of business for the next 12 months.

Capital expenditures for the second quarter of 2020 were RMB3.7 million. Tuniu's business has been significantly and negatively impacted by the outbreak and spread of COVID-19 since January 2020. As a result of the continued influence by COVID-19, for the third quarter of 2020 the company expects to generate RMB85.3 million to RMB170.5 million of net revenues, which represent 80% to 90% decrease year-over-year and 151% to 401% increase quarter-over-quarter.

Please note that this forecast reflects Tuniu's current and preliminary view on the industry and its operations, which is subject to change. Particularly as to the uncertainty brought about by the impact of COVID-19.

Thank you for listening. We are now ready for your questions. Operator?

Question & Answers

Operator

The question-and-answer session of this conference call will start in a moment. [Operator Instructions] The first question comes from Tracy Wong [Phonetic], Private Investor. Please go ahead.

Tracy Wong - Private Investor - Analyst

Thank you for taking my questions. Hi, management. Can you just talk about how you begin to recover as we see the industry has shown the sign of recovery? Thanks.

Donald Dunde Yu - Founder, Chairman and Chief Executive Officer

Thank you for your question. After the outbreak of COVID-19 in late January, we have experienced really hard times for nearly three months. We restarted the local tour travel in late April when the number of bookings trended up, but the increase of revenues was limited because the ASP of local tour is comparatively low.

After the inter province travel reopened in July, we finally see the recovery in both revenues and in number of trips. The release of pent-up demand has greatly increase the flow of traveler, especially during summer holiday season. Currently, our domestic packaged tour products are resumed. Based on our transportation plus local tour service model, we quickly launched a number of packaged tour products in popular destinations, such as Hainan, Yunnan and Western China.

We also launched products that are designed for summer holidays, such as theme parks, seaside and prairie. To capture the recovery, we upgraded our product positioning from mass market to mass premium products to create higher quality travel experience to our customers.

We also upgraded Niu Tour, our self-owned product targeting medium to high end customers to customers more exact [Technical Issues] post COVID-19 era. Our Niu Tours are popular, especially among repeated customers. Recently we have invited our loyal customers to travel with Niu Tour itineraries for free, appreciating them - appreciating them for their continuous support as well as taking their advises on how to improve their travel experiences. This activity was welcomed by our customers and the sponsoring helped us promote Niu Tour products among their friends and relatives.

Starting at the end of July we began releasing our premium products to customers though our weekly product-based livestream show. So far we have had five shows, each of which had a specific theme. Products selected for product base are specifically designed for our key user group, such as parent-child, family travel and senior citizens. We start from understanding customer needs, leveraging our advantages in all segments to roll out top selling products.

Lastly, on the financial side, we see net revenues are increased on a month-over-month basis in the third quarter. Also we have been implementing more strict cost-control measures since the outbreak of COVID-19. We see our operating expenses were reduced for two consecutive quarters. We believe with the recovering of revenues, our financial conditions will be gradually improved. Thank you.

Tracy Wong - Private Investor - Analyst

Thank you. I have no further question.

Operator

[Operator Instructions] We are now approaching the end of the conference call. I will now turn the conference over to Tuniu's Director of Investor Relations, Mary, for closing remarks.

Mary Chen - Director of Investor Relations

Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support, and we look forward to speaking with you in the coming months.

Operator

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TUNIU CORP

Q2 2020

Earnings Transcript

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