Ctrip.com International, Ltd. (ADR) Calms Investors' Nerves

Image source: Getty Images.

Heading into 2016, you would have been hard-pressed to find a Chinese stock with more momentum and positive sentiment than Ctrip.com . The country's largest online travel agency (OTA) had finally won out over rivals, benefiting from partnership agreements with its chief rivals, eLongand Qunar .

Not only that, but the company continued to gain market share and prove that it truly was top dog. That helps explain why the stock advanced 170% between December 2014 and late 2015. But when the company gave its initial outlook of revenue growth of 75% to 80% for the first quarter of 2016, it raised eyebrows on Wall Street.

Of course, any company showing that level of growth would consider itself lucky. But Ctrip said it was including the revenue it believed it would gain from its tie-up with Qunar. Analysts estimated that this meant organic growth would be between 30% and 40% -- a far cry from where it had been.

But with the company's earnings release late Wednesday evening, Wall Street can breathe a qualified sigh of relief.

How did revenue growth stack up?

For the quarter ending March 31, Ctrip saw net revenue of $648 million, well above the midpoint of the guidance that it provided of $620 million. Management broke down all four of the major contributing categories.

Data source: Ctrip.com investor relations. Does not include "other" sources of revenue.

Importantly, while the company's release made it clear that the (essential) acquisition of Qunar helped results, there was also organic growth in all four major categories. That was very important for investors to hear.

During the conference call, management said that two nascent growth drivers performed very well: Train ticketing volume grew more than 300%, while bus ticketing had breakeven profitability for the quarter -- the first time that has happened.

I stated in my preview of earnings that watching gross margins would be key. For a long time, there was a brutal race to the bottom among Chinese OTAs looking to grab market share. Now that consolidation has set in, Ctrip -- the theory goes -- should be able to enjoy better gross margins.

Indeed, that was the case, as gross margins expanded 330 basis points year over year, to 72.8%, from 69.5%. That's also very good news for investors. Management said pricing has become more rational, and the amount of couponing that Ctrip has participated in has lessened significantly.

Where does that leave Ctrip moving forward?

Heading into the second quarter, management now expects Ctrip to show revenue growth of between 70% and 75%. Again, it's very difficult to tell how much of this is organic versus the acquisition of Qunar -- as both companies share inventory.

James Liang, co-founder, CEO, and chairman of the board, said, "Going forward, we plan to devote more resources to innovation and outbound travel to build a solid foundation for our sustainable long-term growth."

Overall, that means the profitability will take a hit. But over the long run, this is definitely the right move. Ctrip is the undisputed leader among Chinese OTAs. While gross margins continue expanding because of a maturation of the industry, Ctrip needs to leverage both its market position and its $3.2 billion in cash, equivalents, restricted cash, and short-term investments. That will help build a moat around the company that will be very difficult for competitors to match.

The article Ctrip.com International, Ltd. (ADR) Calms Investors' Nerves originally appeared on Fool.com.

Brian Stoffel owns shares of Ctrip.com International. The Motley Fool recommends Ctrip.com International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.