Autohome Inc. (ATHM) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by for Autohome Second Quarter and Interim 2023 Earnings Conference Call. [Operator Instructions] 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, Sterling Song, Autohome's IR Director. Mr. Song, please go ahead.

Thank you, operator. Good morning everyone, and welcome to Autohome second quarter and the interim 2023 earnings conference call. Earlier today, Autohome distributed this earnings press release, and the you may find a copy on the company's website at www.autohome.com.cn. On today's call, we have Chairman and Chief Executive Officer, Mr. Quan Long; and Chief Financial Officer, Mr. Craig Yan Zeng. After the prepared remarks, our management team will be available to answer your question. Before we continue, please know 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 expectation. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the U.S. Securities and Exchange Commission and the stock exchange of Hong Kong Limited. Autohome doesn't undertake any obligation to update any forward-looking statement except as required under applicable law. Please also note that Autohome's earnings press release and this conference call includes discussions of certain unaudited non-GAAP financial matters. Please refer to our press release which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures and is available also on our website. As a reminder, this conference call 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 Chairman, CEO, Mr. Long for opening remarks. Please go ahead, Mr. Long.

[Foreign Language]

[Interpreted] Thank you, sir and hello, everyone. This is Quan Long. I'm Chairman and CEO of Autohome. Thank you for attending our earnings conference call. In the second quarter, our financial and operational results continue to recover steadily with a 5.8% year-over-year increase in total revenue, marking fourth consecutive quarters of positive growth. Online marketplace and others revenue experienced strong growth of 20.4% compared to the same period last year, becoming the primary driver of our top line growth, notably TTP and data products, both delivered double-digit year-over-year revenue growth and the revenue from EV brand maintained its robust growth momentum as revenue continue to expand in scale. Not only has our revenue risen, but our profitability has also significantly improved. Adjusted net income attributable to Autohome for the second quarter was up by 20.6% year-over-year, and our adjusted net margin remained at a comparatively high level of 31.1%, an increase of 3.8 percentage points year-over-year. During the second quarter, we actively advanced our C-end strategy, making steady progress across content optimization and business diversification while expanding our traffic through multiple channels. Our goal is to provide users with high-quality content, practical tools and exceptional services, thus enhancing Autohome's brand recognition among users. In May, we unveiled our first Autohome Energy Space franchise store in Haikou, marking this the beginning of this new retail franchise model across the country. We also accelerated the application of AI technology in all scenarios and promoted the digital upgrade and the reconfiguration of customer business processes, enabling our partners to reduce cost and increase efficiency. In addition, our collaboration with Baidu large language model has yielded remarkable results in both user and the customer end, product application, providing both cohort with more efficient services. Looking ahead, as technology continues to develop, new technologies will eventually penetrate all aspects of the existing industrial chain. Autohome has taken advantage of this chance to transform technology into productivity, introduce innovative business models and use technology and innovation to drive the digital transformation of the automotive industry. We are confident that with long-term accumulation of cutting-edge technology and our growing brand advantages as well as our comprehensive innovation incubation system, Autohome is well positioned to seize rising opportunities, create new grounds and ultimately achieve diversified business growth. With that, I will now turn the call over to our CFO, Mr. Craig Yan Zeng, for a closer look at our second quarter operating and financial results.

[Foreign Language]

[Interpreted] Thank you, Mr. Song. I'm Craig Zeng, CFO of Autohome. In the second quarter, we continued to develop our content ecosystem and business innovation to capitalize on the 2 major industry trends of NEV and artificial intelligence. We further enriched our NEV-themed content and activities to enhance our content offering while also introducing new business models and technologies to meet the ever-evolving needs of users and customers. On the content front, in mid-June, we hosted the Future City NEV Technology Festival, a major industry IP following the August 18 Super Auto Show. We combined 3D [ videos ], on-site [ test drive ] and a star studded music festival to create an exciting experience for NEV owners and young users. At the event, we debuted China's first mobile exhibition truck featuring a large-scale holographic display, providing consumers in low-tier cities with more comprehensive information on NEVs and every NEV brand to expand their reach into this market in line with the government's policy to support NEV consumption in rural areas. The event received positive feedback with a total exposure of over 2 billion across the entire network. Furthermore, early this month, we launched the NEV content creator acceleration plan to help our content better align with the development of the NEV market and the users' actual needs. This plan is designed to provide creators with more exposure and monetization opportunities, encouraging them to join Autohome and contribute to the production of NEV content, thereby diversifying our content portfolio. As we strengthen and build our own platforms premium content, we are also expediting the development of a new media ecosystem by creating content to participate to the unique characteristics of various platforms, helping to promote Autohome's brand and holistically drive traffic. According to QuestMobile, in June, our mobile DAUs increased by 31.7% year-over-year to reach 62.71 million, demonstrating our continued leadership in the automotive media vertical. On business front, in the second quarter, new business continues to lead Autohome's overall business development. First, our NEV business. In the second quarter, revenues generated from NEV brands grew by 60% year-over-year. The successful launch of our Autohome Energy Space franchise stores in Haikou, Hainan Province marks the industry's recognition of this disruptive new retail model. Energy Space provides a comprehensive one-stop service for car selection and purchase, making it easier than ever for consumers to find their ideal car. Automakers also benefit from this innovative approach to NEV sales as it offers a cost-effective solution to the issue of single brand sales volume not being able to support the cost of store building and operation. Energy Space has been gaining traction with an increasing number of cooperative brands and 3D holographic modeling now covers more than 40 mainstream vehicle models. Furthermore, we are seeing more and more automakers and the franchisees actively reaching out to Autohome to express interest in this model as additional Energy Space franchise stores are established in various cities in the second half of the year, the scale of Autohome's new retail services will continue to expand. In terms of digitalization, we've leveraged the GPT model to develop 2 decision-making assistant products, our car selection assistant aggregates and extract information from Autohome's platform, helping users finding their ideal car based on their preferences, needs and budget. Operation Butler is a digital assistant for dealer management that can automatically integrate store operational data, generate analysis and make suggestions on command to guide dealers in their operation and the management of dealers. In addition, our existing data products have seen a steady increase in adoption with more than 21,000 dealers using our data products in the second quarter. Moreover, in the first 6 months of the year, key metrics such as the average number of data products adopted by each dealer store and the average revenue of data products for dealer store both grew by double digits compared to the prior year period. Going forward, we will continue to apply 2 fundamental capabilities, large language models and knowledge graphs across actual business scenarios to improve our data products quality and the [ usefulness ]. In terms of the used car business, Autohome used car business units, including TTP, experienced accelerated revenue growth in the second quarter. TTP's revenue saw a significant increase in the second quarter and the first half of the year, while also maintaining its profitability. Through Autohome's matching and auction services, our platform accounted for about 24.7% of all used car transactions in China, representing year-over-year growth of 2.1 percentage points. We have integrated our used car business with new car retail stores, providing car owners who purchase new cars with an easy way to dispose of their old cars. Furthermore, we extended used car testing and other services to the stores, cultivating more direct connection with consumers while creating and exploring new opportunities for business collaborations. Overall, Autohome's core business remained stable with strong growth across our new businesses. We've made significant progress in the development of new products and models, further strengthening our leading position in key areas. As we move forward, we will continue to focus on the industry's 2 major trends, namely NEV and artificial intelligence, constantly innovating to bring superior products and services to our users and customers while ultimately delivering long-term value to our shareholders. Now let me walk you through the key financials for the second quarter of 2023. Please note that, as with prior calls, I will reference RMB only in my discussion today, unless otherwise stated. Net revenues for the second quarter were RMB 1.83 billion, up 5.8% year-over-year. For a detailed breakdown, media services revenue came in at RMB 532 million, leads generation services revenues were RMB 760 million and online [ marketplace ] and other revenues were RMB 541 million, up 20.4% year-over-year, primarily attributable to greater contributions from TTP and data products. Moving on to cost. Cost of revenues in the second quarter was RMB 330 million compared to RMB 279 million in Q2 2022. The increase was primarily attributable to a rise in the operational costs. Gross margin in the second quarter was 82% compared to 83.9% in Q2 2022. Turning to operating expenses. Sales and marketing expenses in the second quarter were RMB 824 million compared to RMB 739 million in Q2 2022. The increase was primarily attributable to the escalation in marketing and promotional spending. Product and development expenses were RMB 313 million compared to RMB 362 million in Q2 2022. The decrease was primarily attributable to a decline in personnel-related expenses. Finally, general and administrative expenses were RMB 91 million compared to RMB 127 million in Q2 last year. The decrease was primarily attributable to the reduction of expected credit losses. Overall, we delivered operating profit of RMB 342 million in the second quarter compared to RMB 301 million in the corresponding period of 2022. Adjusted net income attributable to Autohome Inc. was RMB 569 million in the second quarter compared to RMB 472 million in the corresponding period of 2022, representing an increase of 20.6% year-over-year. Non-GAAP basic and diluted earnings per share in the second quarter were RMB 1.16 and RMB 1.15, respectively compared to both RMB 0.94 in the corresponding period of 2022. Non-GAAP basic and diluted earnings per ADS in the second quarter were RMB 4.62 and RMB 4.61, respectively, compared to RMB 3.77 for both in the corresponding period of 2022. As of June 30, 2023, our balance sheet remains very strong with cash, cash equivalents and short-term investments of RMB 23.34 billion. We generated net operating cash flow of RMB 522 million in the second quarter of 2023. On November 18, 2021, our Board of Directors authorized a share repurchase program under which we are permitted to repurchase up to USD 200 million of Autohome's ADR for a period not to exceed 12 months thereafter. On November 3, 2022, our Board of Directors authorized an extension of the share repurchase program for another 12 months, expiring on November 17, 2023. As of July 21, 2023, we have repurchased approximately 4.7 million ADS for a total cost of approximately USD 141 million. With that, we are ready to answer your questions. Operator, please help to open the line for the Q&A session.

[Operator Instructions] Our first question comes from the line of Xiaodan Zhang from CICC.

[Interpreted] Thanks management for taking my questions and congrats on the solid result. So first of all, what is your outlook for the domestic auto market in the second half of 2023? And could you please update us on the new retail model for NEV and what is the expansion plan going onwards?

[Interpreted] My name is Quan Long. I would like to take your questions. So firstly, let me give a summary of what's happening in the market. As you can see, starting from the second quarter, the auto market started to recover as people had expected. And for the second half of the year, we do believe that the outlook is quite promising. To further elaborate on that, firstly, because last year due to the impact of the COVID-19, the base was quite low. Secondly, in Q1, we all knew that there were price wars. And starting from Q2, with the easing of the price war, consumers also gradually stopped watching while hoarding cash and started to get into this market. So that's why we believe that for the second half of the year, the outlook of the auto market would be quite promising. And also, with the National 6B transitional policy was introduced and the pricing would gradually going stable. And especially recently, the central government launched a lot of stimulus policies and favorable policies to better stimulate this market. All this would help the market to gradually push forward. Well, we believe that there are structural opportunities in this market, especially in these 2 areas. The first would be NEV, second would be the used car. Now let's talk about the first one. The NEV would still be the focus of the market. According to the China Passenger Car Association's latest data, till the end of June, the penetration rate of the passenger car for the NEV reached 32.4%. Based on a lot of campaigns, for example, boosting the consumption policy of the central and the local government and the marketing activities of a lot of NEVs in multi-sites and also a lot of new car models get launched to the market, we believe the sales transaction volume of the NEV will continue to improve. And therefore, this year, the penetration rate would continue to go high. And also on June 12, MIIT, together with other 5 ministries and the department, they launched a policy on notice on 2023 Auto to the Countryside campaign. And actually, on June 21, the Ministry of Finance, the Tax Bureau and MIIT co-launched the fourth extension of the NEV purchase tax cost. So, we believe this would be very helpful to boost the consumption of the NEV. Now the second would be the used car. We believe this would become a very important part for the intrinsic driver for the Chinese auto market. According to the data in May, June for 2 consecutive months, the used car transaction volume reached year-on-year and month-on-month growth. And also, with the independent registration system be launching for the used car, we believe a lot of car dealers group, they would have a lot of potential to further grow business. And with NEV's development and with more and more car purchasing and low-cost NEV choices for the consumers, this will also boost the development of the NEV used car. And also this week, the meeting of the political bureau of the Chinese Communist Party showed that the central government would try to stimulus the domestic consumption, especially to push forward the fundamental function of the consumption to boost economy growth and also to enlarge the general public revenue and also household income to expand the consumption and to boost the end consumption demand. And also, they would leverage on boosting the domestic consumption strategy together with [ defend ] the supply side of reform. In this way, especially they were to stimulate the auto consumption, the electronic consumption and also consumption for the large furniture, et cetera, home appliances. So, in this way, we are very confident that the Chinese auto market would enrich the long-term and stable growth. We believe that consumers, the potential demand would gradually be released. And also, [ raise ]people's awareness would always improve and the technology breakthrough and innovation would bring a lot of new opportunities for the NEV and the used car business. So, in summary, I would see a long-term long cycle and a huge potential for the growth of the NEV market.

[Interpreted] My name is Zeng Yan. I would like to take the second question. Actually, starting from September of 2022, the Autohome Energy Space offline store was launched in Shanghai. This was the first and great effort in our retail channel and NEV innovation. And the store operating was quite good, and the business has been successfully promoted, and a lot of consumers and the customers and the dealers, they all think highly of this business model. And in June of this year, in Haikou City, we started the first franchise store of such Autohome Energy Space franchise store. Actually, in terms of the retail new business model, we have a lot of pilot projects, including the holographic modelling, the test drive reports, the lead services, the purchasing order and also the offline activities. For example, the holographic modeling, we already started to work with more than 40 main street OEMs. So based on the different characteristics of different cities and different market potential and market volume, we will very soon start to roll out the franchise stores nationwide. And we are trying to build a one-stop solution for the NEV consumers. And for the OEMs, we are going to help them to get reach out to the consumers and to upgrade their channels. So currently, we are still practically contacting with a lot of franchisees and partners. We are going to seek for more opportunities. Before the end of 2023, we are going to newly establish 10 to 20 offline stores, especially in those middle and lower tier cities. I think in the future, I would keep you updated on what are the latest progress.

Our next question comes from the line of Ritchie Sun from HSBC.

[Foreign Language] I will translate it myself. So, I noticed that we have a very strong DAU growth. Can you please explain the drivers behind that? And how should we interpret the consumption power of these users and the monetization potential?