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China's largest online travel agency (OTA) reported second-quarter earnings this week, and it was just about what the market expected. Ctrip.com's (NASDAQ: CTRP) popularity continues to grow as it captures more and more market share in this fast-growing industry. At the same time, the company isn't resting on its laurels as it continues to aggressively reinvest in its business.
The headline numbers were what most investors were expecting. The midpoint of management's expectations called for $655 million in revenue. The top line actually grew to $664 million, representing 75% year-over-year growth. Earnings came in at a loss of $0.17 per share, but the loss is largely due to the fact that the company acquired a controlling stake in rival Qunar (NASDAQ: QUNR).
Digging into the results
Here's how the company's various divisions performed relative to expectations set out by management.
Data source: Ctrip.com investor relations.
As you can see, management actually over-estimated growth from all three divisions -- the first time this has happened in quite some time. In fact, Ctrip founder and CEO James Liang had developed a reputation for low-balling estimates to effectively manage investor expectations.
That being said, neither management nor any of the analysts on the conference call were too worried about this, so it's tough to tell what may have been behind the over-estimation.
Priorities moving forward
Liang spent the first part of the conference call diving into three specific areas he thinks investors should be aware of.
- A one-stop shop for travel: Long-term, this is the most important part of Ctrip's business model. The more users it can attract to its site -- primarily through its app -- the more the network effect takes hold. More users attract more hotel listings and airlines, which attracts more users, and so on. It's good to see management focusing here, as it has been almost a year since it discussed the importance of the company's app.
- Increasing travel inventory: On the last conference call, Liang said that a major initiative is to start focusing on outbound travel outside of China. That focus will continue: "We need to focus our efforts on creating a more comprehensive international travel product offering," said Liang.
- Improving operational efficiency: For those solely focused on the company's bottom line, this was the most welcome news. We've already seen the company's gross margins improve as the OTA industry has consolidated. With Ctrip working through the Qunar acquisition, and solidifying its dominance, profitability should receive a noticeable bump. Said Liang: "In the next two or three years, we expect non-GAAP operating margins to expand meaningfully from the current level of 4%."
Expectations for the third quarter
For the third quarter of 2016, management once again expects revenue growth to clock in at 70% to 75%. Broken down by segment, here's what is expected:
Data source: Ctrip conference call.
Overall, this was a solid quarter for the company. Investors should keep a close eye on two things in the quarter ahead. First, check and see if the miss on revenue growth by division was an anomaly or the start of a pattern of overestimation. Second, while operating margin expansion from the current 4% might take time, keep an eye out to make sure it's at least moving in the right direction by the end of the third quarter.
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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.