Q3 2013 Earnings Call Transcript

Published: 14 Nov 2013

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Phoenix New Media Third Quarter and 2013 Earnings Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, the 14 of November 2013. And I would now like to hand the conference over to Phoenix New Media’s IR Director, Mr. Matthew Zhao. Thank you, sir. Please go ahead.

[Matthew Zhao:]

Thank you, operator. And thank you and welcome to Phoenix New Media third quarter 2013 earnings conference call. I am joined here by our Chief Executive Officer, Mr. Shuang Liu; our Chief Operating Officer, Mr. Ya Li; and our Chief Financial Officer, Ms. Betty Ho. For today’s agenda, management will provide us with a review on the quarter and also include a Q&A session after the management’s prepared remarks. The third quarter 2013 financial results and the webcast of this conference call are available at the Investor Relations sections of www.ifeng.com. A replay of the call will be available on the website in a few hours. Before we continue, I refer you to our Safe Harbor statements in our earnings press release, which applies to this call, as we will make forward-looking statements. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in Renminbi. With that, I would like to turn the call over to Mr. Liu Shuang, our CEO.

[Shuang Liu:]

Thank you, Matthew. Good morning and good evening everyone. We are very excited to report a strong third quarter which revenue growing by 35% year-over-year and the GAAP EPS reaching a historical high of RMB1.04, with the bottom-line significantly exceeding the three consensus. In particular the outperformance was driven by a 160% year-over-year increase in mobile advertising and a 60% increase in overall net advertising revenues. Moreover, the cost synergy from our converted model, further helped to facilitate marketing session which led to the company achieving greater GAAP net income. Looking beyond our financial performance, we are proud to see our company continue to evolve from News focused portal leader into a diversified News and lifestyle media company. Going forward, it is our goal to deepen our exposure to lifestyle topics such as real estate, auto and health, while also developing our mobile offering and expanding into other mediums such as mobile radio and platforms. Before elaborating our recent initiatives to support these goals, let me first share with you a snapshot of our unique content offering in the third quarter to show how our iFeng Media brand is continuously impacting Chinese society. In one case iFeng video led exclusive interview with the mother of the high profile criminal Li Tianyi, interest in this case led to over 1 million viewers turning into our video website along with many mainstream TV news networks, including both Phoenix TV and CCTV using our interview footage in the point plan news. Another turning example of our influence came during a recent online poll conducted by the government enquiring about public dissatisfaction of existing holiday schedules. The poll was conducted through the top six Chinese news portals including us. In the end, iFeng users altogether contributed to more than 60% of the 2 million portal votes was submitted. This greatly – this greater portability by iFeng users to participate in public affairs demonstrate that our users are more socially and politically aware. Because of such (inaudible) and premium content, we again significantly outpace our peers in PC portal traffic growth as well as achieved phenomenal growth in business through our mobile platform. In September 2013, the daily unique visitor of iFeng.com increased by 20.3 year-over-year which most other portals has declining PC user traffic. On the mobile fronts, we realized the fastest growth rate in daily active user of our iFeng news application which increased by over 400% according to iResearch. We believe this set the stage for more monetization opportunities on mobile devices in the future. With these recent achievements in mind, we have recently embarked on several initiatives to support our growth and diversify to other opportunities. First, we are expanding into the real estate information verticals by establishing a joint venture with several key partners where we will host major majority ownership, we believe that with our large audience of high-end users, along with the trends of urbanization and the middle-class expansion. This real estate vertical will allow us to increase user reach and user retention and further expand revenues with this growth of high income users. We are also striving to broaden our user reach to expanding into new information mediums. Recently, we signed an agreement with IDG, one of the China’s premier internet and media investors, to more aggressively develop our Phoenix FM app business, which offers listeners non-music audio content such as news, radio programs, audio books, educational courses, and so on. This partnership allow us to both leverage IDG’s unparalleled media experience and resources and expand our user reach to include the growing number of radio listeners, commuters and auto owners in China. Additionally, we have continued to modestly expand iFeng’s in-house video production capabilities with several successful internally developed sources and short documentaries during 2013. As an example of our initial success, in October, we entered CCTV’s Inaugural China’s Short Film Festival. Of the 2100 short film submissions, our production Letters from the South was awarded the festival’s overall top award. This recognition clearly validates the strength of our in-house production capabilities. In conjunction with these new initiatives, we are focusing heavily on the development of our mobile offering through promoting greater mobile growth and adoption, our mobile platform has already began to return significant dividends as it has acted as a gateway to attract additional users and create further thickness in viewership across different platforms. Additionally, in the third quarter, we saw mobile and film increased an impressive 160% year-over-year, now accounting for 10% of our portal advertisement sales. The next episode, further expanding our mobile offerings, diversifying into additional verticals, as well as increasing the monetization of the platform itself. Last month, we announced the formation of the strategic partnership with China Unicom to offer a co-branded world-class iFeng mobile video data package to China Unicom’s 3G subscribers through iFeng’s mobile video application. This partnership will capitalize on the mobile trend and further enhance user experience on iFeng’s mobile platform through facilitating easy access to our video content, through mobile device anytime from anywhere in the China Unicom’s 3G network. Next year, carriers will start to launch their 4G networks nationwide leading to a much faster and more stable mobile internet environment and accelerating the mobility trends. Having this new opportunity in mind, we are well prepared to stay ahead of the curve in pushing forward our model on streamlining our content determination across all devices. These initiatives will strengthen the comprehensiveness of our content offering increase the number of mediums by which we can reach existing and new users set the stage for robust financial growth and the brand development as well as improved customer loyalty and satisfaction. We believe there is tremendous market potential in this arena because of several trends, larger user appetite for lifestyle news and information, transition to mobile devices for consuming information and growing middle-class in China. In order to provide better ROI to our advertising clients through our media platform, we recently have begun to explore more innovative advertisement solutions such as native advertisements which better combine brand with content. For example, we recently re-united with Lenovo to renew our Chinese doers program for second year. The purpose of the initiative is to find and highlight inspiring stories by young Chinese being persistent in pursuing their dreams, a theme that is in line with Lenovo’s lower phone brand image. The web page we established to disseminate these inspiring stories has already attracted over 40 million page views. Furthermore, reflecting our achievements and evolution into a major media company, we have begun to focus more on corporate social responsibility and charitable initiatives. In the third quarter, we hosted our seventh forever happiness Winner a record $1.5 million U.S. for improving children Medicare in Euro China. And in all, in this competitive Chinese media sector, there is no reward for (inaudible) In order to see continued growth and expansion, we must relentlessly pursue catalyzing on emerging trends and changing market dynamics. We have succeeded thus far in adapting our business model and refining our media platform and service offering to strive in this changing market. In the coming year, we have plans to achieve greater synergy in cooperation with our parent company Phoenix Satellite TV in terms of program production, advertising sales and course marketing promotional initiatives. Going forward, we will continue to involve on staying front of the wave of information provision through building a comprehensive content offering, diversifying into new mediums and focusing our monetization. With this, I would like to turn the call over to our CFO, Betty Ho.

[Betty Ho:]

Thank you, Shuang and thank you all for joining our conference call today. This is the first time I present to you as Phoenix New Media’s CFO. I’m very honored to join a great company like iFeng to offer my financial expertise and experiences to have the company’s growth going forward. Let me take you through our financial highlights for the third quarter 2013 results. The amounts mentioned here are all in RMB unless otherwise noted. IFeng total revenues for the third quarter came in at RMB378.7 million. Non-GAAP net income for the third quarter was RMB82 million, or RMB1.06 non-GAAP net income per diluted ADS which exceeded Bloomberg’s street consensus by over 39%. Let me now run through the other key financial highlights starting with net advertising revenues. Net advertising revenues for the third quarter came in at RMB223.8 million, which beat the high end of our guidance and represents a respectable year-over-year growth of 59.3%. Average revenue per advertiser or ARPA increased by 13.8% to RMB0.7 million and total advertisers number increased by 40% to 336. Our top five industry contributors for this quarter are auto, food and beverages and wine, e-commerce, medical services and financial services. With respect to paid service revenues, for the third quarter of 2013, iFeng generated RMB154.9 million paid service revenues, which are lower than our previous of our guidance due to the weak user demand for 2G text message based pay-per-view services for the third quarter of 2013. Mobile Value-Added Services or MVAS revenue decreased by 4.3% to RMB132.4 million. Games and other revenues increased by 202.6% to RMB22.5 million primarily due to increase in revenue generated from the web-based games on our own game platform. As the consumers’ interest shift toward mobile internet, we expect legacy 2G pay service revenue will continue to decline as a percentage of total revenues, but that will in turn be offset by the growth of 3G paid service revenues such as mobile video and digital reading, as well as web page games going forward. In terms of gross margin, our gross margin for the third quarter was 48.7%, up significantly from 39.3% for the same period in 2012. With respect to cost of revenues the four components of cost of revenues are revenue-sharing fees relating to paid services, content and operational cost, bandwidth cost, and sales taxes and surcharges. On a GAAP basis, revenue-sharing fee as a percent of total revenues declined to 20.1% from 27.8% in the third quarter of 2012. Content and operational cost as a percentage of total revenue decreased to 19.9% from 21% in the third quarter 2012. Bandwidth cost as a percentage of total revenue decreased to 4.8% from 7% in the third quarter of 2012. And lastly, sales taxes and surcharges as a percent of total revenues increased to 6.4% from 5% in the third quarter 2012. Regarding to operating expenses on a GAAP basis, operating expenses for the third quarter were RMB109.7 million compared to RMB108.8 million from the same period last year. The increase in operating expenses was primarily due to increase in staff-related cost, and expenses associated with marketing and promotions and offset by the decrease in bad debt provision. iFeng’s operating margin for the third quarter of 2013 increased to 19.7% from 1.3% in the third quarter of 2012, mainly due to the increased revenue contribution from advertising and web-based games. Non-GAAP income from operations for the third quarter of 2013 increased significantly to RMB76.6 million from RMB6.3 million for the same period last year. Non-GAAP operating margin for the third quarter of 2013 increased to 20.2% from 2.2% in the third quarter of 2012. Finally on net income, net income attributable to iFeng for the third quarter increased by 593.5% to RMB80 million from RM11.5 million for the same period last year. Non-GAAP net income attributable to iFeng for the third quarter increased by 481.5% to RMB82 million from RMB14.1 million for the same period last year. Non-GAAP net income per diluted ADS for the third quarter was RMB1.06 or $0.17 compared to RMB0.17 last year. With respect to balance sheet items as of September 30, 2013 iFeng’s cash and cash equivalents and term deposits totaled RMB1.25 billion or approximately USD205 million. Our business outlook for the fourth quarter of 2013. In terms of total revenues we are targeting to be between RMB368 million to RMB378 million. For net advertising revenues, we’re targeting between RMB244 million and RMB249 million. For paid services revenues, we are targeting between RMB124 million and RMB129 million. This concludes the written portion of our call. We are now ready for questions. Please go ahead, operator.

[Operator:]

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question today comes from the line of Alex Yao of Deutsche Bank. Please ask your question.

[Alex Yao:]

Thanks so much for taking my question and congratulations on a fantastic or strong quarter. Two somewhat interconnected questions. The company has been very good at flagging the declining 2G paid service and I was curious now that we are on the cost of launching 4G in China. How do you plan to seize on that? Can you describe what the model for paid services might be? And then somewhat related to that, I would love to get any more data points around your mobile advertising business and how we are seeing it crowded and model it more generally?

[Shuang Liu:]

Hi, Alex, this is Shuang, let me answer your first question. We are very excited about the coming era of 4G. I think this is definitely good news for users, telecom operators and us. For users, 3G the coming of 3G definitely means better access speed, better viewing experience and better packages. And for telecom operators, this would definitely intensify the competition among them. This will force them to come out with more competitive video data related package to users. So, because of these two factors, media, a very strong new media player like us which has very strong brand on the primary premium content could leverage and if you look at our cooperation with China Unicom, it’s just a cooperation in 3G area and it has been – the agreement just been signed for one month. But the progress we made has been very impressive. More than 15 provinces have entered into cooperation with us and – at the current stage, I cannot disclose too much details, but we are very optimistic about the further layout of this campaign. So, speak of the 4G services, I think, 4G means, even better viewing experience, better access speeds and the telecom operator will definitely shift their marketing resources to push for that kind of services. So, we will definitely benefit from this, especially, our strength like in news and documentary related – is very friendly on the non-Wi-Fi environment. So, we are looking forward to the fully launch of the 4G related service, but it’s not – we won't have them in the next one or two quarters. I think the full layout of these services will happen probably in the mid-summer of next year. But to that extent, it will offset the softness in the traditional 2G related business. In 2G related business, we definitely will see some softness and weakness in this area. But as I mentioned before, the revenue contribution of 2G related services is declining, the percentage is right now is, below 40% and the profit contribution is even less. So, and the rise of the 4G related services to a quite extent will offset the drop of the 2G related services. So we are very excited about the 4G era and I think we will be well positioned to benefit from this.

[Ya Li:]

Well, Alex, this is Ya and I think, for the paid service on the wireless platforms, right now we have three different monetizations, first of course is the mobile video, which is growing relatively, I think a modestly high rate of 50% expansion this year. We expect its double-digit growth continue into next year. And secondly, digital reading, which has a huge potential and still has a very small base. And the third is a mobile game and especially for exclusively licensed or co-developed or self-developed mobile games. But we are very careful in the mobile game area and so we are only starting to tap into this important monetization area. The WVAS revenues in the second quarter decreased 4% and we do expect that the trend to continue into fourth quarter, as you can see probably from the fourth quarter revenue guidance in which the advertisement revenue will experience about 10% quarterly growth – sequential growth while the paid service revenue overall will be negatively affected by the decrease in the WVAS revenues. However this change in the revenue mix will help actually further margin expansion we think a slight expansion into next year. And in terms of mobile advertising and in the third quarter, the contribution increased to 10% of overall advertising revenue from 6% in 2012 and the growth rate was 160% and it’s almost overall for this year we will experience higher than 100% growth from mobile advertising revenue. But we are still at the very early stage of mobile advertising monetization and we are not in a hurry to be too aggressive in monetizing the mobile traffic. We are still focusing on enhancing user experience and providing premium differential content. The user expansion and user experience improvement will drive on long-term future mobile advertising. I think we are one of the very few companies continuously disclosed our mobile advertising trend from the 2% contribution of the first quarter 2012 to the 10% for the first time, in the recent quarter. And we do expect our mobile advertising revenue to grow to lead the industry. We are also expanding the mobile advertising formats and product offerings including both the native advertisement concept, as well as integrated advertising solution leveraging our convergence platform. I think that’s the answer to your question.

[Operator:]

Our next question comes from the line of Julia Chung from Morgan Stanley. Please ask your question.

[Julia Chung:]

Hi, thank you for taking my question. I saw that the number of advertiser (inaudible) in third quarter, so I just wonder if it is a trend for the fourth quarter as well? And do you expect fourth quarter advertising sales minutes’ drive by the advertiser growth or from both of advertiser growth and average spending? Thank you.

[Ya Li:]

Hi Julia, this is Ya. Yes, I think for this year as a whole we do experiment higher growth in number of advertising clients. However, the future revenue growth will be driven by both factors. The number of advertisers as well as the ARPA. The number of advertisers mostly contributed new advertisers – mostly contributed from the new verticals. For example, the beverage and alcohol, food beverage and alcohol sector reach is further driven by our news video strategy and also certain verticals like real estate, that’s based on our vertical expansion strategy into lifestyle and consumption verticals. And also the convergence model also helped us to gain some incremental ARPA increase from even existing advertisers.

[Shuang Liu:]

And also let me add that Julia, we just successfully recruit (inaudible) a top talent in China’s agency – advertising agency market. She has a lot of extensive strategic contacts in China’s FMCG, telecom, and financial institution are. So he is joining us it will definitely add value to deepen our client contacts and ARPA.

[Julia Chung:]

Thank you and I have a second question about – you mentioned that you expand into the real estate, so I just wonder what’s your, for example target coverage and your strategy on differentiate yourself from your peers? Thank you.

[Ya Li:]

Yes, I think the real estate vertical actually targets the high-end user in general which matches very well with our user demographic which has greater spending power than our peers. But in the past, the revenues from real estate vertical were very limited or almost negligible while our competitors or some verticals have already gained enormous revenues. That’s why we formed a very experienced strategic partner with strategic investment formed a joint venture in which we have a majority ownership and our targeting and positioning is both at the high end real estate including the commercial real estate, travel related real estate, culture related and the retirement related real estate. And also these investments go in mind and also we target the global consumer’s interest in Chinese real estate as well as Chinese consumer’s interest in overseas real estate market. These are some unique positioning which also fits well with our high-end user demographic. We do expect the effect of this to be incremental to our bottom line and but the revenues contribution will be single-digit as a percentage of our advertising revenues.

[Julia Chung:]

Thank you. That’s very helpful.

[Ya Li:]

Thank you.

[Operator:]

Our next question comes from the line of Jiong Shao of Macquarie. Please ask your question.

[Jiong Shao:]

Thank you for taking my questions. Good morning and Betty, welcome to the iFeng team.

[Betty Ho:]

Thank you.

[Jiong Shao:]

I just – couple questions as well, first on your advertising business which was up almost 60% year-over-year. You talked about in your prepared remarks about I think mid-teen ARPA growth and nearly 40% number of advertiser growth. I was hoping you can slice and dice in another way, could you talk about in terms of the inventory growth, sales survey growth and CTM growth, where you look at your advertising business growing today and then looking forward, could you talk about what your expectation for the industry growth for 2014 may look like? What kind of growth you are planning for your own advertising business? That’s my first question.

[Ya Li:]

Okay, thanks, John, this is Ya. Yes, let me first provide a perspective to look at the growth, if you look at our top-10 sectors, advertising sectors the most recent change is in the increase of food, beverage and alcohol. And that – as I mentioned, that fits well with our news video strategy and also regional travel and also financial service and also communications, communications I think is related to the rising 4G opportunities and the mobile internet as a whole and when we look at in the overall usage or sell-through rate. It’s actually we have slight increase in terms of sell-through rates and inventory usage mainly because our traffic growth continue to lead the peers even in the area of mobile internet. Our PC traffic is 20% unique visitor growth in the third quarter that’s why our own advertising for example CPM rates increased and we will have to compete with our own traffic growth. In 2013 we have had two rate card increase in January and July and in each case, our A plus category, the premium ad inventory reach increased by around 15% each time. And with our mobile rate card, we also had increased it like three quarters in a row since the October of 2012. But, right now, because of our track increase our inventory, existing inventory actually can satisfy our sales demand. And so going forward, we will continue the strategy of slow rate card increase, However, I think in 2014, people well noticed that our cover page of iFeng CPM rate will probably accelerate the rate increase to reflect the brand influence of iFeng. Because right now, iFeng’s current page has the number two unique visitor among all the Chinese internet sites. Only after by do – according to iResearch. And that just demonstrates the overall influence and that’s very welcomed by the brand advertisers of ours. And the question about the 2014 industry outlook, I can only think, especially in the last two months development and also from the recently concluded convention of the – third convention of 18th Congress of Communist Party I think economic reform and development was the focus, was again in the communicate was said to be the focus of the further reform and the market is the decisive force in allocating resources. This new, I think reference – this new term of decisive is significantly different from the previous one of basic force. I think which shows that economic growth market reform will continue to help, I think the overall market advertising and marketing at China continues its market economic development

[Jiong Shao:]

Okay, thanks Ya for the comment. A second question is on mobile, I missed what you said about your MAU for your mobile app, could you repeat that? And I think you started your web game platform business about a year ago this business has brought incremental revenues, at what point you may be opening up your mobile app to be sort of a mobile game platform as well?

[Shuang Liu:]

Well let me answer the first question. Our total daily DAU for our mobile platform is 22 million. We feel quite comfortable with our market expansion on the mobile front. There is three apps iFeng FM, iFeng News and iFeng Video and our total ranking of our – overall ranking of our mobile apps is comfortable to our PC portal’s overall ranking. I think right now, our top target is to better improve our user experience and enhance customer loyalty. So we adopt a different approach in terms of market expansion. So we basically believe in organic growth. So top focus is build the product up with better user experience, better product experience. So we haven’t launched kind of a marketing campaign like what has been conducted by other competitors like apps placement which will cost a lot of money. I think this kind of approach wills seriously – a few hesitant to adopt this kind of approach because it could be easy. I wouldn’t comment on other companies’ practice on this, bit for us, I think, the sustainability of product placement spending a lot of money and do the product placement different menu mobile handsets is questionable. So, right now we are focusing on the user experience to improve the product experience on major apps. So right now we are very comfortable with our user numbers. Ya, probably can get on this.

[Ya Li:]

Yes, the mobile game – can you rephrase the question just again?

[Jiong Shao:]

Yes, because year-and-a-half ago you successfully started your web game business you basically monetized your portal traffic, right?

[Ya Li:]

Right.

[Jiong Shao:]

So, at what point you started to monetize your mobile traffic through gaming portal as well for mobile games?

[Ya Li:]

Yes, that’s definitely, we think one of the focus for our game team. And as we notice for the industry as a whole, I think other than the MMO key games, the massive online games, I think, the industry has shifted its focus from the casual online to the mobile games. And we are working on in terms of licensing and the ways to developing mobile platform games. And so, we do expect next year to start to see the revenues for the mobile games. Right now, we have not been able to monetize our mobile web page or mobile app traffic by the mobile games, but next year I think we will see the revenues in that.

[Shuang Liu:]

Yes let me add that, even given the fact that working on less amount of money in doing apps placement to help that. Our year-on-year and quarter-to-quarter growth rate is quite impressive. IPV is ahead of the industry peers.

[Jiong Shao:]

Sounds great. Thanks again guys.

[Operator:]

Our next question comes from the line of Alex Yao from JP Morgan. Please ask your question.

[Alex Yao:]

Hi, good morning everyone. Thank you very much for taking my question. The first question is a follow-up question on mobile advertising monetization. I understand you guys have a relatively more WAP traffic compared to app traffic. Are you seeing any preference from advertisers over these two type of different traffics? Which type of the traffic is an easier monetizable? Second question is, the press release mentioned there is a decrease in bad debt provision in the quarter, can you elaborate a little more why is there a decrease and what is the amount in the quarter? Thank you.

[Ya Li:]

Okay, the first question regarding the mobile – the mobile advertising I was confused by your second question. What’s the first question again? I’m sorry

[Alex Yao:]

The first question is

[Ya Li:]

Yes, yes, okay, I’m sorry, yes, so in general, we have been able to monetize our mobile WAP traffic and I think not only us, I think a couple other sites including two leading portals also has a very large mobile WAP traffic. And we have been able to monetize them relatively I think well. But the trend of course, we see stronger demand from advertisers for the – for advertisement on mobile apps. However, we think that we are still maintaining and also developing and growing our mobile WAP traffic and other forms of mobile apps such as the light apps, initiated by the big search engine Baidu. Because the mobile relative app product is a rather self-closed environment and difficult to be discovered from search engines and that’s why I think we also realized the HMM-5 technology will help increase the user experience for the mobile WAP site and also for the light app products and services. That’s why for the user growth, we do expect to grow users across all these different products and services, but for the advertising demand, it seems the stronger demand comes from the native apps. And for the second question, Betty will handle it.

[Betty Ho:]

Hi, Alex. This is Betty. In terms of the bad debt provision, it’s all our company policy. There are two types of provisions, one is general provision and the other one is specific provision. In terms of general provision, this is based on the aging of the accounts receivable. The decrease of the bad debt provision is because of the improving of the aging on our accounts receivable. We are seeing this year that collating period is improving that’s why we have a lower bad debt provision. Does that answer your question?

[Alex Yao:]

Yes, it does. So can you talk about what is the magnitude of the decrease in the quarter?

[Betty Ho:]

You can see from our balance sheet on page nine, on the press release, you can see there is a – the bad debt expenses is included in the general and administrative expenses. You can see that as of September 30 there is s significantly decrease in general and administrative expenses partly it’s because of the decrease in bad debt expenses.

[Alex Yao:]

Got it, just one quick follow-up. Does this decrease in accounts receivable collection days indicate a generally better advertiser sentiment towards next year or maybe the fourth quarter advertising outlook?

[Ya Li:]

No, I think it’s only compared to a quarter ago or to a year ago, comparing to those two time starts I think, we do foresee the improvement in terms of advertiser sentiment.

[Alex Yao:]

Got it. Thank you very much.

[Ya Li:]

Thank you.

[Operator:]

Our next question comes from the line of Muzhi Li from Citigroup. Please ask your question.

[Muzhi Li:]

Hi, thanks for taking my question. I have a question about the margin trend, how does the company look at the fourth quarter on a going forward, especially the transition of the paid services from 2G to 4G might have – how this transition and the product offering might affected the margins in the short-term. Thanks very much.

[Ya Li:]

Thank you Muzhi for the question. First, if you look at the revenue mix, of course the continuous increase in the percentage of advertising revenue and also the higher margin 3G or 4G in the future service revenues will definitely help the margin. But from another perspective, as we also try to seize the big opportunity of mobile internet and also expand into new lifestyle and the consumer verticals, and also maintain balanced pace in monetizing our mobile traffic. The margin improvement will be steady but very slow and I think for the third quarter and second quarter our operating margin I think already reached 19% and which I think is very – I think it’s a significant improvement from a year ago, but going into the next year the pace of expansion will definitely I think, slow and as mentioned for the reasons earlier. Does that answer your question?

[Muzhi Li:]

Thank you.

[Operator:]

Our next question comes from the line of Joyce Zhao from Barclays. Please ask your question.

[Joyce Zhao:]

Hi, good morning. So, my first question is regarding your two segments of the revenues can you give us the detailed number of the contribution from each segment please?

[Ya Li:]

Okay, yes, thanks for the question. The auto sector contributed 29% and the e-commerce for 9% and then the food, beverage and wine is 13% that’s the second segment, 13%, e-commerce 9%, health and medical service 7%, financial service 6%.

[Joyce Zhao:]

Okay, thank you very much. Well, my second question is the advertising growth outlook for this third quarter. So I think your competitors are very positive on the fourth quarter because of the – some part because of the single-day promotion. So also want to know that your insight and whether you will benefit from this as well?

[Ya Li:]

Particular to the single-day promotion, I think, we feel the impact is overall and long-lasting impact of the e-commerce rather than that single-day. For example, in our top 10 advertiser, one of our top-10 advertiser is a e-commerce lender and also – e-commerce contributed 9% of our overall advertising revenues. However it’s not concentrated on just that single day and because our users actually have greater spending power and also are less sensitive to price movements. So we are actually, our users are actually better e-commerce customers, clients, because we will keep using the e-commerce sites. Beyond the single-day, low price discount promotion and which could help the e-commerce lenders the overall revenue and indeed that our users generated probably fewer clicks but definitely contributed better results, better ROIs. That’s why I think the e-commerce is a very important component in our advertising sector. And, the first part of the question is regarding the 2014? Is that so or?

[Joyce Zhao:]

Fourth quarter 2014 please?

[Ya Li:]

Yes, for the fourth quarter, we didn’t notice that, I think for those two companies, or three companies already announced their fourth quarter guidance. As I mentioned, from quarter-to-quarter growth rate, I think our guidance for the fourth quarter is at least double their guidance despite the fact that those two companies have some unique new advertising resources one in video, one in social media. I think, but overall, definitely, I think, we all feel that the advertising environment is improved from a quarter ago or from a year ago and despite – still the uncertainty is within the structure of Chinese – for example financial system and the Chinese economy. So we are cautiously optimistic about the next year as well.

[Joyce Zhao:]

Thank you. My last question is regarding the mobile cooperation with China Unicom. So, I noticed that users will be included in your VIP video users. So I just want to see if you have any comments on the growth of the VIP user number?

[Shuang Liu:]

The service just being launched for one month, so it’s very premature to disclose that exact data. But the progress we have made in cooperation with China Unicom has been very impressive. And, right now, just one month past, already 15 provinces have launched the campaign to push this kind of services and especially under the intensified market condition, I think both sides will put more resources to boost the subscription of those kind of services. So we are very optimistic and I think with the advancement of the 4G network by a tenant mobile we can repeat this with other telecom leaders

[Joyce Zhao:]

Okay, thank you very much. Operator We have no further questions in queue. (Operator Instructions)

[Operator:]

Our next question comes from the line of George Wu from Legends Asset Management. Please ask your question.

[George Wu:]

Hi management thank you the great quarter. I’ve got two questions. My first question is on video contribution. Can you share a little bit about the video DAU as a percentage of revenue contribution? Thank you.

[Ya Li:]

Okay, thank you George for the question. According to iResearch the DAU of our video business is about 12 million in the third quarter and it remains very strong within the sites and despite the fact that we concentrate on providing this news and documentary short form content instead of the entertainment TV, drama and movie content. And in terms of revenue contribution it increased 110% year-over-year in the third quarter and the contribution within the PC advertising is 18% for the third quarter. We think the entire advertising revenue is 16% that’s an increase from 12% a year ago over 14% a quarter ago. And we do expect that the contribution of video advertising to increase in the fourth quarter as we mentioned that our differentiated video advertising strategy is a more sustainable model not based on the same content or high bandwidth cost and it plays on our unique media positioning for the brand and the unique content and also it fits well with the coming 4G era for the mobile internet. And so the video strategy and the video monetization will become a key focus on our 2014 of our overall work.

[George Wu:]

Thank you for the great remarks on the video also I’ve got another question on the operating expenses. It seems that the operating expense is quite fluctuating between different quarters and the operating expense in this quarter is relatively low and could you please share about your outlook for the operating expenses in Q4 as well for example, some outlook in 2014?

[Betty Ho:]

Hi, George, this is Betty.

[George Wu:]

Yes, hi Betty.

[Betty Ho:]

As discussed on page nine on our press release, it shows our balance sheet under the general administrative expenses, your question is, why this quarter’s general and administrative expenses is lower than the other quarters. The major reason was being that the decrease of bad debt expenses.

[George Wu:]

Yes, I understand the bad debt expenses definitely have on the expenses, but if instead the sales and promotional expenses is vertically lower as well. So, could you give us some outlook on the operating expenses in Q4?

[Ya Li:]

Yes, George, there is an internal seasonality at the company. Lots of the major offline campaigns, actually marketing events take place, or happen in the fourth quarter. So, in the coming quarter expenses in this regard it will be a little bit higher than the other quarter. This is every single year, we basically, like a fashion show or an economic summit or auto show will be held by the year or the beginning of the first quarter. So, for the fourth quarter that expenses in this regard will be higher than the rest of the quarter. So this is we have internal seasonality in this regard.

[George Wu:]

So, we can expect some normal seasonality in Q4?

[Ya Li:]

Yes, normal seasonality, but overall, we do not aggressively rely on marketing and promotion to increase traffic.

[George Wu:]

Okay. Thank you. Thanks for the great remarks.

[Operator:]

(Operator Instructions) If there are no further questions, I will now hand the call back to Mr. Matthew Zhao for any closing remarks.

[Matthew Zhao:]

Thank you, operator. We have come to the end of our Q&A session and our conference call. Please feel free to contact us if you have any questions. Thank you for joining us on this call. Have a good day.

[Operator:]

Thank you very much.

[Betty Ho:]

Thank you, bye.

[Shuang Liu:]

Thank you.

[Ya Li:]

Thank you.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.