Chinese Internet travel company eLong.com's (LONG) business has hit a wall as its unaudited financial results for the fourth quarter and fiscal year ended December 31, 2006 show the company's revenues decreased 7% sequentially.

"While we faced a challenging fourth quarter, we are pleased with the improvements we have made to our infrastructure during the period. With the December launch of our new air search system complementing our innovative 360-degree virtual hotel tours, we believe we lead the industry in leveraging technology to provide Chinese travelers with enhanced selection and features. We made significant operational and financial progress in 2006, achieving 39% growth in total revenues with only a 10% increase in total operating expenses. Service development increased only 15% while we made demonstrable web improvements to homepage, hotel and community content, and to the domestic and international air booking platform. We are confident that eLong is fundamentally stronger than ever and well-positioned to capture the growth potential in the online travel market," said Tom SooHoo, Chief Executive Officer of eLong.

Separately eLong also announced the election of Henrik Kjellberg as chairman of the board of directors and the appointment of Chris Chan as chief financial officer. Chan will replace Tony Shen, who has acted as interim CFO since July 27, 2006 when Derek Palaschuk abruptly left the company, and will continue in his current consulting capacity to the company during the transition period.

Total revenues for the fourth quarter of 2006 were CNY69.7 million, an increase of 20% from CNY57.9 million reported in the same period in 2005, and a decrease of 7% from CNY74.6 million reported in the third quarter of 2006. Total revenues for fiscal 2006 were CNY264.5 million, an increase of 39% from CNY190.3 million in fiscal 2005.

Revenue from hotel commissions for the fourth quarter of 2006 totaled CNY56.0 million, an increase of 23% from CNY45.6 million year-over-year, and a decrease of 2% from CNY57.4 million sequentially.

The year-over-year increase in revenue from hotel commissions was primarily due to higher room volumes accompanied by higher hotel commissions per room night. Hotel room nights booked through eLong increased 19% to 860,000 in the fourth quarter from 724,000 room nights in the corresponding period a year ago and were down 4% sequentially from 893,000 in the third quarter of 2006. The sequential decrease in revenue from hotel commissions was due to lower room volumes. Hotel commissions per room night were CNY65 in the fourth quarter of 2006, up 3% from CNY63 in the corresponding period a year ago, and up 2% from CNY64 in the third quarter. eLong says hotel commissions increased due to better override as a result of higher room volume.

Revenue from hotel commissions for fiscal 2006 totaled CNY209.3 million, an increase of 38% from CNY152.0 million in fiscal 2005. The total number of hotel room nights booked through eLong in fiscal 2006 was 3.25 million compared to 2.54 million in fiscal 2005, an increase of 28%. Hotel commissions per room night were CNY64 in 2006, up 7% from CNY60 in fiscal 2005 mainly due to higher commissions associated with increased volume.

As of December 31, 2006, eLong offered discounted rates at a choice of 3,505 hotels in 294 cities across China as compared to slightly fewer than 3,100 hotels in 278 cities a year ago.

Revenue from air ticketing commissions during the fourth quarter of 2006 totaled CNY9.6 million, an increase of 27% from CNY7.6 million year-over-year, and a decrease of 13% from CNY11.0 million sequentially. Volume in air segment sales totaled 269,000 in the fourth quarter of 2006, an increase of 25% from 215,000 in the corresponding period a year ago and a decrease of 1% from 273,000 in the third quarter. Revenue per air ticket was CNY36 in the fourth quarter of 2006 as compared to CNY35 in the corresponding period a year ago and CNY41 in the third quarter. The sequential decrease of revenue per air ticket was primarily due to a decrease in the average air ticket price.

Revenues from air ticketing commissions for fiscal 2006 totaled CNY38.3 million, an increase of 61% from CNY23.8 million in fiscal 2005. Air segment sales were 1.01 million in fiscal 2006, an increase of 55% from 651,000 air segments sold in fiscal 2005. Year- over-year growth in air ticketing revenues was primarily driven by the acquisition of new air customers, increased sales of air tickets to eLong's existing hotel customer base and better product offerings.

Other travel revenue in the fourth quarter of 2006 was CNY1.5 million, an increase of 79% from CNY813,000 year-over-year, and a decrease of 62% from CNY3.9 million sequentially. The sequential decrease was attributable to CNY2.6 million in revenue recorded when the related contract was finalized in the third quarter of 2006 for inventory procurement services provided to Expedia by eLong for the period from January 2005 through September 2006.

Other travel revenue for fiscal 2006 was CNY8.4 million as compared to CNY2.7 million in fiscal 2005. The year-over-year increase was mainly due to the increased revenues of vacation packages and as well as services provided to Expedia as explained above.

Gross margin in the fourth quarter of 2006 was 76%, as compared to 80% in the corresponding period a year ago and 77% in the third quarter. The year- over-year reduction in gross margin was a result of reduction in higher-margin non-travel revenue, additional compensation and benefits for call center employees and a slightly increased proportion of revenue contributed by the air ticketing business.

Gross margin in fiscal 2006 was 76% as compared to 79% in fiscal 2005. The year-over-year reduction in gross margin was due to reasons similar to those explained above.

Service development, sales and marketing and general and administrative expenses for the fourth quarter of 2006 totaled CNY49.7 million, a decrease of 17% from CNY59.7 million year-over-year, and a decrease of 3% from CNY51.4 million sequentially. These expenses for fiscal 2006 were CNY202.4 million, an increase of 8% from CNY186.7 million in fiscal 2005.

Service development expenses were CNY10.6 million in the fourth quarter of 2006, a decrease of 14% from CNY12.4 million year-over-year, and a decrease of 1% from CNY10.7 million sequentially. The year-over-year decrease reflected improvements in operational efficiencies. Service development expenses in the fourth quarter of 2006 were 15% of revenues as compared to 21% in the corresponding period a year ago and 14% in the third quarter.

Service development expenses for fiscal 2006 were CNY41.9 million, an increase of 15% from CNY36.3 million in fiscal 2005 due to ramped-up investments to support the eLong.com website and the company's air, hotel and vacation package businesses. Service development expenses for fiscal 2006 were 16% of revenues as compared to 19% in fiscal 2005.

Operating loss in the fourth quarter of 2006 was CNY1.3 million, as compared to an operating loss of CNY16.8 million in the corresponding period of 2005 and an operating income of CNY1.7 million in the third quarter. Operating loss for fiscal 2006 was CNY16.2 million, as compared to an operating loss of CNY47.9 million in fiscal 2005.

The company recorded a net loss of CNY1.8 million for the fourth quarter of 2006, as compared to a net loss of CNY8.7 million in the corresponding period a year ago, and a net income of CNY2.7 million in the third quarter. eLong recorded a net loss of CNY1.1 million for fiscal 2006, as compared to a net loss of CNY62.2 million in fiscal 2005.

As of December 31, 2006, the company's cash and cash equivalents balance was CNY1.19 billion.

eLong expects total revenues for the first quarter of 2007 within the range of CNY62.0 million to CNY66.0 million, an increase of 16% to 23% from the first quarter of 2006.

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