Good day, and welcome to the Tuniu Corporation Second Quarter 2017 Earnings Conference call. After today's presentation there'll be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Maria Xin, Vice President. Please go ahead.

Thank you, and welcome to our 2017 second quarter earnings conference call. Joining me on the call today are: Donald Yu, Co-Founder, Chairman and Chief Executive Officer; Alex Yan, Co-Founder, President and Chief Operating Officer; and Conor Yang, Chief Financial Officer. For today's agenda, management will discuss business updates, operational highlights and financial performance for the second quarter of 2017. Before we continue, I refer you to our safe harbor statements in the 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 the figures mentioned during this call are in RMB. I would now like to turn the call over to our Co-Founder, Chairman and Chief Executive Officer, Donald Yu.

Thank you, Maria. Good day, everyone. Welcome to our 2017 second quarter earnings conference call. We are pleased to report a strong quarter performance for the second quarter of 2017. Net revenues increased by 54% year-over-year while gross profit increased by over 84% year-over-year. Tuniu already holds the largest share of the market, yet we are able to continue strengthening our leading position relative to our peers. Our improved operational efficiency continued to be another highlight. Gross margins reached 52.3% during the quarter compared to 43.6% in the second quarter of 2016. This improvement is largely due to our increased presence in the travel supply chain. We are able to procure more high-quality products at competitive prices. During the quarter, we narrowed our loss as the operating expense decreased both on an absolute basis and as a percentage of revenue. As we realize the benefits of economies of scale in areas such as branding and technology, we will work on further improvements to our profitability. In order to further strengthen our long-term competitive advantage, we are focusing on a number of strategies to help us maintain and improve our market position. I would like to give an update on the strategies in greater detail. First, in 2014 we launched our direct procurement initiative. Over the years, we have refined our procedures, systems and products. We have accumulated years of experience in inventory management and procurement. This expertise will be valuable going forward as we create a greater emphasis on our direct procurement strategy. During the second quarter of 2017, direct procurement accounted for approximately 40% of our total GMV, up from 35% during the same period last year. Throughout the quarter, we have continued to implement new products created by Tuniu to great success. In these new products, Tuniu sold…

Thank you, Donald. Hello, everyone. Now I'll walk you through our second quarter 2017 financial results in greater detail. Please note that all the monetary amounts are in RMB, unless otherwise stated. You can find the U.S. dollar equivalents of the numbers in our earnings release. Net revenues were 460.1 million, representing 54% year-over-year growth on a non-GAAP basis. Revenues from package tours, substantially, all of which are recognized on a net basis, were up 58% year-over-year on a non-GAAP basis to 339.3 million and accounted for 74% of our total net revenues for the quarter. The increase was primarily due to the growth of organized tours and self-guided tours. Other revenues were up 38% year-over-year on a non-GAAP basis to 120.8 million and accounted for 26% of our total net revenue. The increase was due to a rise in revenue generated from financial services and commission fees received from other travel-related products, such as transportation ticketing and accommodation reservations. Gross profit was up 85% year-over-year on a non-GAAP basis to 240.6 million for the second quarter of 2017. The increase in gross profit and gross margin was primarily due to improved economies of scale, increase of operational efficiency and optimized supply chain management. Operating expenses for the second quarter of 2017 were 529.2 million, down 41% year-over-year, excluding share-based compensation and amortization of acquired intangible assets. Non-GAAP operating expenses were 471.2 million, representing a year-over-year decrease of 44%. Research and product development expenses for the second quarter of 2017 were 146.6 million, up 4% year-over-year. Research and product development expenses as a percentage of net revenues were 32% in the second quarter of 2017, decreased from 47% as a percentage of non-GAAP net revenues in the corresponding period in 2016. The decrease was primarily due to the increase in…

Thank you. We'll now begin the question-and-answer session. Our first question comes from Alvin Jiang with Deutsche Bank. Please go ahead.

I have two questions. First of all, could you give us more color on the profitability outlook? I noticed the recent margin trends. And what are the drivers -- the detailed drivers for the margin improvement? And do you think it's feasible to make progress in next year or even in Q3 of this year? I have a follow-up.

We expect that the outlook margin will continue to improve going forward. And that comes from mainly two parts. Firstly, that our dynamic packaging products continue to increase. Currently, now including -- we provide like air ticketing parts or transportation, including like a high-speed railway, air ticketing plus the local tour operator activities. And that kind of dynamic -- that client to pick the dynamic packaging product will improve the margin. We'll continue to -- we'll see the trend that is growing. And the other one is the -- we continue to have further integration of our supply chain, mostly right now, on the destination services that the local tour operator. We used to use a lot of tour operators in various popular destinations. Now more and more, we start our own local tour operating activities. We -- especially, mostly right now in domestic destinations in China. So by providing these differentiated products, including further integration on the supply chain, we expect that our take rate continue to improve next year to about 9% to 10%, overall. And yes, that's the first question, yes.

Right. Together with -- the gross margin improvement plus the continued increased -- improved the efficiency of the operations that we are doing our best to reach the non-GAAP profitability in the third quarter, single quarter, this year as well as that we are doing our best to achieve the whole year non-GAAP profitable for 2018.

Okay, got it. Before my second question, may I have a quick follow up on the first question? Do you have free cash flow guidance for next year?

Right. And as we indicated for something like that, third quarter, our cash flow cycle is negative 27 days. In our operation, we receive customer's prepayments first and -- for the most part, and then, we pay our supplier after customer comes back. So we have a good cash flow once we breakeven. So under that assumption that if we try to make the non-GAAP breakeven next year, then free cash flow should turn positive, doing our best to achieve that goal for next year.

Okay, got it. Got it. My second question is about the revenue growth. What's the target for next year's revenue growth? And how big is the contribution from your offline stores?

Right. Our goal is -- for the next year that we think our GAAP revenue will continue to grow at higher than industry average level, and the benefit for coming out from the offline stores should improve the overall growth rate to about -- contribution to about 10%.

Our next question is from Natalie Wu with CICC.

This is Cheryl on behalf of Natalie Wu. I have two questions. The first one is regarding your GMV growth. Can management please share us more color on the GMV growth in the second quarter of 2017? And the second one is regarding the recent incident that CAA forbid the bundled sales of air ticketing. Do you seeing any impact of your take rate or the sales of your financial products in the near future? And how should we expect the scale of these incidents?

Yes. For this stage that I'll -- since we -- our aim for cutting costs and then improve the operational efficiency. We aim for that improved gross margin take rate. We aim for achieving non-GAAP profitability. Therefore, our first priority is not really the GMV growth. Therefore, we do not disclose the GMV numbers. Regarding to the insurance bundle with the air ticketing that -- currently, the this portion is still small compared to our overall revenue. And since we started selling air ticketing alone, we always put that user experience as the top priority. So we let our customer to pick, to choose whether they want to bundle insurance or not. And overall, our insurance revenue mostly coming out from our packaged tour that these customers buying insurance. So the insurance revenue coming out from air ticketing compared to the overall insurance revenue still not very substantial. So that new regulation actually does not really impact our business.

May I have a follow-up question regarding your take rate? Can management please share your current take rate? And what -- how should we expect the trends going forward?

Right. Our current take rate is about 8% to 9%, and we're expecting continue improve that next year, that should achieve about 9% to 10% take rate.

That's very helpful, thank you very much.

Our next question comes from Tian Hou with T.H. Capital. Please go ahead.

I have a question related to your newly exercised strategy which is a direct procurement model. So what is this going to be as a percentage of revenue at the end of this year and end of next year? And from economic point of view, direct procurement, what does the gross margin and operating margin look like for this particular type of a business? I have a couple of follow-ups after this.

Right. Our direct procurement purchase in terms of our overall business currently has increased from earlier about 30something percent to about 40% right now. And our goal is to have a further more direct procurement by end of next year to about 50% of our overall business.

Right. Right. The take rate from direct procurement products is at higher gross margin overall than our other products. Currently, the direct procurement product, we have more than 10% take rate.

What's the operating margin level?

Because it's -- product-line-by-product-line, that's income through like operating margin that you have to calculate a specific percent dedicated to that and because we have lots of coming expenses that may be shared among different groups like back-end office, research, R&D, so we look at that from the overall company level. So as we said, our current take rate about 8% to 9%. We're trying to achieve 9% to 10% by increasing more of the direct procurement products that will help us on our overall take rate goal for next year. And hopefully, as we say, that we want to achieve non-GAAP profit for next year, for whole year, so operating will also be on a positive side.

Okay. So the second question is related to the marketing. So if I look at the financial statement last year, same quarter, you spent a huge amount of capital on the marketing. And this year, we do see the marketing dollar came down significantly. I wonder if you guys ever did any cohort analysis and to see the result of your past several quarters in brand advertising. So that is one. So if there's an analysis, what kind of repeat customer, repeat rate do we see? That is number one. And number two, going forward, particularly in the third quarter, what do we see about sales and marketing expense?

As you can see that our second quarter marketing expenses was down 64% year-over-year. So last year, same quarter, we -- before the second half of last year, we spent lots of effort on our brand promotion. And actually, it's quite helpful in terms of the increasing the mind share of customers. So it demonstrates that even though we have a huge cut in our marketing expenses this quarter, our revenue was still able to grow about 50-plus percent year-over-year. And repeated customers, the old customer contribution to our second quarter revenue account -- the old customer account for about 60% of our total business in the second quarter. That percentage continue to increase and we expect will continue to increase as well. And the marketing dollar spending for the second half of this year, we're expecting pretty similar to the first half of this year. So that means we'll continue to improve the efficiency of our marketing expenses.

So I have a last question. It's related to financing business. So last year, you guys started this financing business, and I realize a lot of Chinese Internet companies involved in this part of the business and most of them are money losing. And since this part is not really your core business, is there a plan to discontinue this within the IPO-ed entity?

Yes, you are correct that we have our Internet finance business, mainly on the supply-chain management, the customer financing as well as some of the enhancement product sold to customers. The team we have -- the revenue we generate actually, yes, you're right, in most cases, not really profitable. As we are aiming for the non-GAAP profitable year for next year, we actually have a -- we have plan to divest part of that team. So from -- so by -- this is actually in the process, and actually will save our overall expenses. And our plan is probably to divest about 200 people more or less by end of third quarter. So that will further decrease the overall spending. Yes, that will be helpful for our OpEx going forward.

[Operator Instructions] Our next question is a follow-up from Natalie Wu with CICC.

My question is regarding your market share. Can management please share more color on current market share in relation to your market? And how should we expect the trend in the future? And the second question is regarding your -- regarding the GMV contribution of your 12 -- top 5 destinations? And what are the growth rate during the second quarter?

Sorry, Natalie, what's your last question?

That last question is regarding the GMV contribution for the different -- for the top destinations, and what are the growth rates during the second quarter?

Right. Our overall market share on the online package tour currently at about 26%, so leading the market. We expect that going forward, we should -- we aim to continue to increase our market share overall. In terms of the top destinations, we see actually quite strong rebound from our European business as well as the cruise line business. So in the second quarter this year, our top destination is Europe. That contributed about 16% of our overall business, and followed by like Southeast Asia, about 10%; and then Japan, Korea, about 8% to 9%; cruise line, about 8%, yes. Even though that -- Japan, Korea, we put it together, but mostly, Japan because Korean business has a pretty big negative impact from the political situation. So Japan -- mostly Japan that contributed about 8%. Going forward, the Korean and China relationship can be like more relief -- getting better, then we should see that will be upside from that area. Right, that's the current situation.

Our next question is a follow-up from Alvin Jiang with Deutsche Bank.

I have two follow-up questions. First one is on the revenue split between high-tiered cities and the low-tiered cities. What's the current proportion, and how's the growth speed of different city types? And my second question is about new technology deployed in your inventory management system. Do you see any contribution, especially on measured -- measurable contribution of this new technology?

Right. The first-tier city currently contribute about 52% of our overall business, and then second-tier and then below, about 48%. The percentage increase on the first-tier city, part of the contribution actually coming out from that we have retail store open mostly on the first-tier cities, and we expect the near-term trend will continue to have -- like the first-tier city will be over 50% of our business. And the system we implemented, we're very focused on this data collection. Using this big data analysis that will help us in terms of the marketing, more precisely to target our customers, and will be also helpful to provide to our suppliers that they can see more data for their products. And more importantly, that will help us on the inventory management for the new system implement our level of inventory loss actually has decreased. That is also helpful on our gross margin overall. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Conor Yang for any closing remarks.