Autohome Inc (ATHM) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by for Autohome's second quarter 2014 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded; if you have any objections, you may disconnect at this time.

It is now my pleasure to introduce your host, Cara O'Brien, from FIT Consulting (sic -- "FTI Consulting"). Ms. O'Brien, you may begin.

Thank you, Operator. Hello, everyone, and welcome to Autohome's second quarter 2014 earnings conference call. Earlier today, Autohome distributed its earnings press release, and you can find a copy on the Company's website at www.autohome.com.cn.

On today's call we have Mr. James Qin, Autohome's Chief Executive Officer, and Mr. Nicholas Chong, Autohome's Chief Financial Officer. After their prepared remarks, James and Nicholas will be available to answer your questions.

Before we begin, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited, to those outlined in the public filings with the Securities and Exchange Commission. Autohome does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

The earnings press release in this call also includes discussions of certain unaudited non-GAAP financial measures. The press release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures and is available on Autohome's IR website.

As a reminder, this conference call is being recorded. And in addition, a webcast of this conference call will also be available on Autohome's IR website.

I will now turn the call over to Autohome's Chief Executive Officer, Mr. James Qin. James?

Yes, thank you Cara and hello everyone. I am very excited that we are reporting another strong set of results for the second quarter of 2014. We again exceeded our expectations for the top line and recorded very healthy profits and cash flow. Also, we have made additional important progress across all of our four key strategic initiatives and made significant steps forward in exciting new areas such as online transactions.

And importantly, we continue to demonstrate to our customers and users that Autohome is the clear leader in China's auto online sector in terms of the value of our media assets and the value of our transaction platform. Nicholas will go through our second quarter financial results in detail in a moment but let me first highlight some of our most important achievements for the second quarter.

Looking first at our key financial metrics, our net revenue increased 72% year-over-year to RMB506.8 million. Net income increased 69% year-over-year to RMB206.3 million. Net cash provided by operating activities increased 189% year-over-year to RMB163 million.

Similarly, in terms of our key operational metrics, I am very encouraged to note that Autohome remains the clear leader in the industry. In terms of PC traffic, according to iResearch, Autohome continues to lead China's automotive websites and other automotive channels on Internet portals across all of the most important metrics: average daily unique visitors, average daily page views and average daily time spent.

Our PC-based unique visitors and average daily page views in the second quarter were 6.8 million and 127.3 million, respectively. Average daily time spent per user increased from 15.4 minutes in the second quarter of 2013 to 16.3 minutes in the second quarter of 2014.

On the mobile front, in the month of June, the number of average daily unique visitors who accessed our websites via mobile devices and the number of average daily unique visitors to our mobile applications amounted to approximately 2.9 million and 2.3 million, respectively. This represents growth of more than [25%] (corrected by company after the call) in the total number of average daily unique visitors on mobile platforms compared to March of 2014.

We are continuing to invest strategically in mobile technologies and our expanded R&D team is working hard to create new products particularly in terms of mobile app development and enhancement in order to capture more of this promising market. These are very encouraging results and reflect how continued successful execution of our clear strategy for growth is driving strong performance.

Now, let me update you on some of the other important progress we have made in the last quarter across certain key initiatives that are part of our growth strategy. First, as you know, we are very focused on increasing our "share of wallet" from automakers. I am pleased to report that our advertising revenue growth from automakers continues to exceed the overall growth rate of auto online advertising and of our peers.

In the second quarter of 2014, Autohome's advertising revenue from automakers grew by 46% versus the same period of last year. This clearly demonstrates that automakers in China increasingly recognize the media value that Autohome offers. They see that we have unrivaled reach among potential car buyers and car enthusiasts and they understand that advertising spend on our websites will generate an ROI that no other auto vertical or media outlet can match.

Another pillar of our strategy is to increase and further monetize our dealer network. And again, we are making great progress here. Our revenue from dealer subscription service has increased 109.6% year-over-year in the second quarter of 2014. This growth was driven by a rapid increase in the number of paying dealers on our network, which grew by a hugely impressive 86.3% year-over-year to 13,693. This improvement is a clear result of our efforts to build out our dealer network beyond only Tier-1 cities.

With the majority of these newly-joined dealer subscribers coming from fast-growth markets in Tier-3 and Tier-4 cities. This also demonstrates how dealers are increasingly recognizing the value of our platform in terms of generating meaningful sales leads for our subscribers.

While we talk about dealers, I do want to flag that in addition to subscriber growth, we have recorded a very impressive growth rate of 131.2% in advertising revenue from dealers year-over-year. Again, this illustrates the value of the ROI that our media entities offer to our advertisers, both automakers and auto dealers. All in all, our dealer yellow page business, which includes both dealer advertising services and dealer subscription services, grew significantly with a year-over-year increase of 117.6% in the second quarter and contributed 45.6% to our total net revenues.

This market-leading position reinforces our ability to monetize our dealer network and deepen our cooperation with them and further validates the media and platform value that Autohome can offer.

Our third area of strategic focus is to build out our offering in the used car sector. Although this is still an early stage sector in China, we are continuing to cultivate this market and during the second quarter we made further progress here. With respect to our used-car platform, we are very focused on enhancing user experience and we have introduced several new enhancements to our platform. We have also continued to work on expanding the used-car listings to strengthen user engagement. As part of this, the number of used-car listings on the Company's platform has almost tripled compared to the same period a year ago.

Looking to the long-term, I am confident that we are well positioned to grow our position in this market and establish a strong foothold in this business.

Before I conclude, I want to highlight two important strategic initiatives that are worth calling out in detail. First, we became Baidu's exclusive partner to provide information such as model descriptions and pricing to enhance auto-related searches on PCs using "Aladdin", Baidu's open platform. This significant new partnership covers a 12-month period that officially began on July 1st and is generating results in line with our expectations.

We are also encouraged that since beginning our cooperation with Baidu's "Aladdin" platform, there was a quick positive impact. In the first four weeks of July, the number of average daily unique visitors on PCs was 7.4 million. This said, the partnership has been immediately beneficial to our operations and results and we expect it to have great long-term contribution to the business.

Second, let me turn to what we are calling transaction platform services, something we see as an important growth area for Autohome, considering our unrivaled reach among dealers, automakers and highly motivated car buyers and an ability to generate meaningful sales leads. This is an area we have been working on for some time and in the second quarter we introduced some exciting new initiatives. First in April, we conducted our second major online sales promotion event, following our hugely successful November 11 online campaign, in November of last year.

This April promotion targeted select provinces where the November 11 promotion performed well and was well received by dealers and automakers. This was a 4-day campaign that encouraged users to purchase vouchers that could be used to obtain discounts from participating dealers. More than 1,700 people purchased vouchers during the 4-day campaign. And by the end of the month approximately 550 were used for car purchases with a total value of more than RMB80 million.

Second, in May we launched another promotional campaign in partnership with China-based automaker Chery. The promotion involved a pre-sale campaign to promote Chery's latest model, the Tiggo 3. By July 15 the promotion resulted in over 2,200 pre-orders, which brought over more than 1,000 transactions valuing more than RMB80 million. This was our first trial on car pre-sales and we are very pleased with the overwhelming results which highlight our ability to generate highly relevant sales leads and deliver tangible sales results for automakers and dealers.

It also demonstrated how our flexible O2O platform could be leveraged for focused promotional programs targeting specific automaker customers, car brands or geographies based on customers' need.

After these successful trials in June we formally launched our own transaction platform, Autohome Mall; the url is "mall.autohome.com.cn". This is an online platform that will allow us to be a long-term transaction facilitator. It was an important milestone to mark our transaction business, which has switched from trial basis into a permanent sustainable platform.

In the first month following the formal launch Autohome Mall has already facilitated over 3,000 transactions, involving 137 car models from 36 car brands. We are encouraged about our achievements so far, and we believe this highlights the value of this platform for marketing partnerships, and promotions.

Having established Autohome Mall, we see a lot of opportunities in our transaction business in the future, in both existing car sales as well as car pre-sales. We will continue to explore ways to boost our transaction business and we are confident in Autohome's ability to generate meaningful sales leads with high conversion rates.

Before I turn the call to Nicholas I would like to summarize a few last things. First, we have delivered very strong results in the second quarter and it is clear that our multi-faceted growth strategies are working, both operationally and financially. As such I am very confident that we are firmly on the right track to achieve our near- and long-term strategic goals.

Second, we are transitioning our Company from being an only PC-oriented Company to being both a mobile- and a PC-oriented Company. We are investing heavily in this transition. This has already delivered very solid results in its early stage in the form of strong traffic growth and we anticipate continued positive momentum going forward.

Finally, we are also excited about the results of our transaction initiatives and the launch of our new transaction platform Autohome Mall, which we believe provide another potential long-term growth driver.

With that, I turn the call over to Nicholas.

Thank you, James. Hello everyone. As James noted, we have posted very strong results for the second quarter coming in ahead of our initial expectations.

Let me spend a few minutes to drill down into those numbers and talk you through some specific details for the second quarter. Note that I will reference RMB only in this discussion, but you can find equivalent US dollar numbers in our press release issued earlier today.

Net revenues for the second quarter increased 71.8% to RMB506.8 million from RMB295 million in the corresponding period in 2013. This increase was due to increases in revenues from both advertising services and dealer subscription services.

Breaking this down further, advertising services revenues increased 60.7% to RMB366.2 million from RMB227.9 million in the corresponding period in 2013, as we increased revenues from both automaker advertisers and dealer advertisers.

The increase in automaker advertising services revenues was primarily attributable to an increase in average revenues per automaker advertiser as automakers continued to allocate more of their advertising budgets to Autohome's online advertising channels. The increase in dealer advertising services revenues was mainly due to an increase in the volume of advertising, purchased by dealer advertisers as a result of our expansion into new geographical markets and deeper penetration into existing markets. We also increased the rates for our dealer advertising services.

Turning to dealer subscription services revenues here increased 109.6% to RMB140.6 million from RMB67.1 million in the corresponding period in 2013. This was mainly due to an increase in the number of paying subscribers as we expanded into new geographic markets and gained deeper penetration into existing markets, as well as an increase in the "share of wallet" from the dealer customers during the second quarter.

As James has noted we sold dealer subscription services to 13,693 dealers in the second quarter of 2014 compared with 7,351 dealers in the corresponding period in 2013, which is very encouraging. Cost of revenues for the second quarter increased 61.7% to RMB93.5 million from RMB57.8 million in the corresponding period in 2013, due to increases in value-added taxes and surcharges, content related costs, bandwidth and IDC costs and depreciation.

The cost of revenues included share-based compensation expense of RMB2.3 million and RMB1.6 million for the second quarter of 2014 and 2013, respectively.

Operating expenses for the second quarter increased 75.3% to RMB160 million from RMB91.3 million in the corresponding period in 2013. As a percentage of net revenues, operating expenses for the second quarter increased to 31.6% from 30.9% in the corresponding period in 2013, as we have been continuously reinvesting in key strategic areas such as sales and marketing and product development to fuel our business growth.

Breaking this down further, we increased headcount in both sales and marketing and product development as we hired more experienced sales people to provide better service and support to our important customers and added product development and other administrative staff to support our growing business.

We also increased marketing expenses in connection with the promotion of our brands through navigation sites and mobile platforms. In addition to these increases in compensation and marketing spend we incurred increased professional fees as a result of becoming a public company. Lastly, we invested in growth initiatives on the product development side such as the mobile initiatives that James outlined earlier.

Operating profit for the second quarter increased 73.6% to RMB253.3 million from RMB145.9 million in the corresponding period in 2013. All-in-all net income for the second quarter increased 68.8% to RMB206.3 million from RMB122.2 million in the corresponding period in 2013.

Basic and diluted earnings per share and per ADS a record "EPS" for the second quarter were RMB1.96 and RMB1.83 respectively, compared to basic and diluted EPS in the corresponding period in 2013 of RMB1.22 and RMB1.21, respectively.

Adjusted net income, which is defined as net income excluding share-based compensation expenses and amortization expenses of intangible assets related to acquisitions increased 68.4% for the second quarter to RMB219.6 million from RMB130.4 million in the corresponding period in 2013.

Non-GAAP basic and diluted EPS for the second quarter were RMB2.08 and RMB1.95 respectively compared to Non-GAAP basic and diluted EPS in the corresponding period in 2013 of RMB1.30 and RMB1.29 respectively.

Turning to balance sheet and cash flow information as of June 30, 2014, Autohome had cash and cash equivalents and term deposits of RMB1,571.2 million. Net cash provided by operating activities in the second quarter of 2014 was RMB163 million, compared to RMB56.4 million in the corresponding period in 2013.

Let me now address our outlook for the quarter ahead. For the third quarter of 2014, we currently expect to generate net revenues in the range of RMB507 million to RMB528 million, representing a 53.1% to 59.4% year-over-year increase.

Again, I must mention that these comments on our outlook reflect our current and preliminary view on the market and operating conditions, which is subject to change.

Finally, let me conclude by noting that very recently Autohome received prestigious accolades for investor communications around our IPO in December 2013. PRWeek Asia, a leading trade media outlet, and the International PR Association, a global public relations industry organization named Autohome's IPO the Financial Communication and Investor Relation Campaign of the Year for 2013 respectively. We are pleased to receive these awards, which highlight our strong commitment to best practices in communications with you, our investors.

This concludes our prepared remarks and now we would like to take any questions you may have. Operator, please open the line for Q&A.

We will now begin the question-and-answer session. (Operator Instructions). Evan Zhou, Credit Suisse.

Congrats on a very strong quarter. My first question is regarding our transaction platform. So, these 3,000 transactions we have done in the past month. It's a very impressive number I have to say so. So, I would like to pick your brain on some of the (inaudible) -- what do you expect that run rate to continue going forward, and within that 3K transactions, actually how many coupons are actually sold and what's the kind of conversion that we see from this transaction platform to help dealers to make the deals? Thanks.

Okay. So, the number we gave out is about 3,000 transactions, and among that I think majority of the transactions are done on a cash coupon basis. So basically, we have done about four different types of so far online transactions. Cash coupon is a very -- majority of the transactions would be done in the cash coupon format. And another relatively big portion will come from the presale version. And the other two versions, which is the fixed price and customized cars only for Autohome. Those are kind of very small portion. And I think it's very early or probably it's too early to tell going forward what the split or the trend will look like, because at this point is pretty much depending on the capability for Autohome to source product from either the dealers or carmakers.

So, I'm not sure if I answered your question. So, I think 3,000 per month -- no, this is per month, right? -- for the first month is only a beginning and we haven't really put our full gear in terms of sourcing product from dealers and carmakers. But I think we have done the full sales cycle, which is very encouraging.

Understood. Thanks, James. That's very helpful. My second question is regarding the mobile exposures. You have around like 2.9 million on mobile web and 2.3 million MAU, on mobile apps. I'm wondering, how do you see that breakdown then going forward? Do you see that in all the verticals that users tend to use more mobile wap or tend to -- probably parse) information within the app, and how do you see the user behavior differences between the web and the app within all verticals?

Okay. This is a great question. I think currently you can say that we have a little bit more user access our services through mobile web than mobile app. I don't have the industry data, I think it depends. My guess is the content [oriented] company tend to have more users to visit the -- through mobile web, while the pure transaction platform will tend to have more users who use the application services rather than through the mobile web. But I think in our line of services, I think the mobile web at this point has more user base is very natural. Through time I think that might change. It really depends on the bandwidth, it really depends on the product capabilities. So, that's the first thing about the split between mobile web and mobile app.

Secondly, I think your question is about the whether or not there is a major difference between the usage pattern between the mobile web and the mobile app. Currently, we didn't see -- we haven't seen a very clear difference. So, from our point of view, they almost seem to be -- they are very similar.

Got it. Thanks James for the color.

Vivian Hao, Deutsche Bank.

I have two questions. One is regarding our operating margin outlook, especially on the sales and marketing side. For the second quarter, we still have a very strong margin of 43% on bottom-line, and what is the outlook for the rest of the year, especially factoring the PC Aladdin cost? This is my first question.

My second question is on the -- as for the second quarter traffic seems to be slightly weaker than first quarter. Is it because of seasonality or other reasons? Thank you.

So Vivian, let me handle the questions on margin. I think for 2014 year-to-date, we have posted very strong performance overall in terms of both the revenue and margins. We have also been able to gain operating leverage as evidenced by the increase in the gross profit percentage.

As communicated before, and since the IPO roadshow, we will continue to reinvest in future growth opportunities in area like mobile, sales and marketing, product development and in new businesses like used cars, transaction business, et cetera. So, for 2014, we expect the non-GAAP net margin will be similar to what we have average in this area for the last three calendar years. Now, you can take it higher than mid-30s but keep in mind though that we do not presently provide formal guidance on our margins and bottom-line.

I will take the second part of the -- the second question. I think I just want to clarify, you are asking about the PC traffic or you are asking about the mobile traffic or both?

Yes, the PC side.

On PC traffic.

Yes.

Okay. So there is one number I actually don't have, which is the industry average growth because we can always deliver higher than industry growth but we cannot

grow above the industry. I am not sure when you say, I think probably from the absolute -- absolute number, our Q2 DAUs growth is slower than the Q1 growth. While I don't have the -- currently, I do not have the industry average growth from Q2 compared with Q1. So I don't really know whether or not that absolutely growth rate slowdown means anything.

Okay. So this is not a trend for now, we need to compare with the industry growth.

Yes, I think first you need to compare with the industry growth and secondly because everyone knows that PC DAU growth for the whole sector is topping off, is slowing down. So when we grow our PC DAU shares, we're basically taking shares from our peers.

I am pretty sure in July, our DAU growth by certain percentage and [hours] can attribute to the PC Aladdin fact. By doing that we're taking share from our peers.

I think just to add on to that, I think as you can see from the earnings release we say that in June we have 6.8 million for PC DAUs and in the month of July it has increased to 7.4 million DAUs.

Okay, great. Thank you.

Piyush Mubayi, Goldman Sachs.

Just two questions from me. The first is when I look at the ARPU, it went up nicely in the quarter, and I think you mentioned that rates also went up during the quarter. Could you just run me through what are the rate increases you were able to push through and should we think of these as being an annual event potentially in the second quarter?

And the second question I have is relating to when you talked about the 550 cars purchased for RMB80 million, were you referring to the Guangzhou Auto Toyota Show? On the e-commerce Mall or was it a different car, could you just remind me of that? Thank you.

Okay. The first question.

Yes, I think on the first question --

Can I clarify it, when you say ARPU, you're meaning on the dealer subscription services or the blended of dealer subscription services plus dealer advertising services.

The dealer subscription.

The dealer subscription services.

Yes.

Yes, I think the --

Or either blended. When you mentioned rate increase which were you referring to?

Yes, I think it is dh because we -- dealer subscription service went up by about 109% on the revenue side and then the -- of which of about 86.3% of that is coming from volume increase because our dealers numbers has -- number of paying dealers has gone up by 86%. So the ARPU actually gone up by about 12.5% because we are able to take some price increase in the dealer packages and some of it is also because the dealers move up from a base package to the premium package because we offer the -- both the basic and premium package in our dealer subscription services.

And what is that premium amounting to for the quarter, from basic to the premium package?

I think we don't have the --

We don't have the number on top of my head.

Yes.

The number should be good.

Yes. We can get back to you on that. But in the point we highlighted is that -- what we are saying is that because we are able to not just only grow in terms of the numbers of paying dealers but we are also able to increase ARPU.

The second question is about, there was a car sales event which we sold about 500 cars and the result is for RMB80 million, right?

Yes.

That is the April promotion event that we have done over four days period.

That was the three provinces, right?

Yes in three provinces, the Guangdong --

No, the RMB80 million is for (inaudible) your Tiggo now is pre-sales.

Pre-sales, okay. There was a more recent one that we read about which was Guangzhou Auto Toyota that was much broader in, its reach I think it was 30 provinces?

But is that Q2 or is already --

That is, it may be after Q1.

Yes that's Q3 right.

Okay. Is there any color you could shed on how that's progressed?

We can always talk about that in the next earnings call. I think for the transaction services, before June mainly we're trying to by running more trial runs in order to get a -- a better feeling of how to source a product, how to talk with the car makers, how to talk to the regional sales offices of car makers and dealers. And on the -- when we launch the Autohome model, that was the time we start to launch the product sourcing effort and I think throughout the second half of this year, we're going to do more of that. And through all the PR effort you should be able to see most of those effort.

I think just to -- Piyush, just to build on what James has said, I think if you look at the motorhome.com, in the first month we have 36 brands involved, we have 137 models and right now by end of July we have increased 136 brands to 47 brands. And then the number of car models involved has increased from 137 models to 195 models. So that's what James is saying that we are trying to source more brands and more models to incorporate into the --

Yes, I got the lines Piyush is referring to. Basically, before we launched the model we did two meaningful event we would like to share with you. The first one is the, we call them April 15s, it's around April 15 for the event happened in three provinces, in the number of selected brands and that was the 550 vehicle per purchased. And the next one is the Tiggo 3 is a pre-sale promotion. We get a sales lead and most people paid out for us and then they can buy a latest model of Tiggo 3 from Chery. That was the second meaningful trial event we have run. And that one actually is still ongoing.

Thank you.

Ella Ji, Oppenheimer.

I have a few detailed follow-up questions. First off, relating to your transaction services line. I saw that you recently started to work with JD.com and just wonder what are you seeing the trend there, how much sales lead is JD providing you versus your organic traffic. And also within that 3,000 transactions you did in June how many of that are coming from the mobile side? And then I also wonder if management can talk about your revenue model for this business line. So it seems that for such transaction services for now you are collecting money from the buyers, from the customers. Any thoughts of also maybe getting revenues from the dealers or are you going to just focus on revenue source from the customers for now.

Okay. So I'll answer the second question first and then I'll refer to, I'll talk about Jingdong. The second question is whether or not -- how we're going to treat the revenue lines from those transactional services. Yes, we do collect some deposit money from the users and once the consumer bought a car we are not going to return the money back. However we also provide some discounted backup by ourselves as a marketing expense. So from my point of view is we don't really -- our intention is now to generate a meaningful revenue from those kind of events. However, I think as an Internet company, you always focus on creating value for the whole industry.

I think right now is our investment in doing that business. Basically, help facilitating China's auto consumer to buy cars over the Internet rather than go through the dealers. So we try to be part of that transactions loop. So in order to do that right now our intention is [stepping out] to generate a lot of revenue from that kind of business. So if I were you I would not have a huge expectation from Autohome on generate -- with that revenue line, especially in 2014.

Second part of the -- the first part of your question is about Jingdong; we do have a -- we did have a very successful co-branded sales event with Jingdong. However, we -- because we signed a confidentiality agreement with Jingdong probably we are not in the position to share with you the traffic split and the sales split.

All I can say to it; that was a very successful trial event and going forward we are going to -- you are going to see a lot more of that. It may now be Autohome work with the Jingdong alone we are in the process of working with majority of China's large e-commerce providers because as I mentioned to you in the first part of my answers we are in a process of invest our resources and energy to cultivate this market. We want to change consumer's behavior.

Got it.

Okay you also asked about the sales lead from mobile in June about the transaction services.

Yes.

Unfortunately, the -- because we -- the Autohome Mall -- the mall.autohome.com.cn is easier to visit through the PC services at this point. So I would assume majority of the sales lead probably if not all is from the PC at this moment.

Okay. Thank you for the color. Just relating to that -- I think you know your competitors are increasingly focusing on mobile. And our understanding is that they also get Baidu alerting on mobile. So can you talk about your thoughts of, for example, facilitating transactions on a mobile and in what does Autohome plan to do on the mobile end in order to create more value for the users?

I can tell you what we have done. I think every single Internet company is at this point focused on building their mobile userface. That's for sure and Autohome is definitely one of those companies. If you look at the mobile user coverage there are two types of mobile services.

One is the mobile wap, the other one is the mobile app, mobile a-p-p. And I think your question towards me is about the mobile wap. And for mobile wap basically, any mobile wap company, like Autohome is a mobile wap where some of our dh our peers' mobile wap, we'll have mainly three sources of traffic.

The first one is from a -- the sort of the overflow from your PC client. They --those people who visit your PC services very often and then when they use their mobile browser they tend to directly go to your mobile sites. So that's one.

And secondly, is the through browser because majority of China's mobile browser company provide similar services such as the navigation. So that's one.

I think the third one you mentioned is the search. Currently in China's mobile search area there is only one, and that might change in the near future because [UC web] is going to introduce (inaudible), so I think in this month.

But having said that before there was only Baidu's mobile search and on Baidu's mobile search currently we only provide the net -- we only show up as the net natural search read out. So I think if you think about the mobile wap traffic acquisition, you have to think about three things.

If you have a better PC traffic your -- naturally we will have your higher mobile web traffic. If you have better navigation services where you have more exposure over there you have better traffic acquisition. If you have more exposure on the Baidu's mobile search, yes you are going to be better. So there's multiple ways to increase the mobile wap.

So having said that there's another mobile app currently I would assume half of the -- because for the auto users, majority of the auto users tend to be affluent. So I would assume the IOS penetration among China's auto users will be higher than in general population. And everyone knows IOS platform there is no way you can buy traffic. You have to create the faster product in order to get more user download and user engagement.

And then the other part is the Android platform. In China, there are several android application stores. So you either provide best of the services and they rank you higher in terms of natural ranking, and also you can also spend marketing dollars to do that.

So I think we all know the road map and how to navigate among China's various app stores. It's just a natural process. I think every company like the -- such as Autohome, we focus to do better in terms of increased visibility of our mobile services.

For example, among some of our shared services such as technology and product (inaudible). In the past, in 2013, we always created features PC first and then ported to mobile. And ever -- since the beginning of this year, we already changed that. We -- most of the features we create on mobile first and then we put it back to the PC platform.

So that's our take on the mobile strategy.

Yes, thank you very much. That's very helpful. Then my second question is relating to your guidance for next quarter. Just looking at the number, it seems the year-over-year growth is little lower than the prior two quarters guidance. Just wondered if just management being conservative about it or is there anything that you want to bring to our attention?

Yes, on the -- you're right that the third quarter year-on-year growth is lower. I think that's basically the -- we also look at the last two years. If you look at it, the Q3 year-on-year growth rate has always been the lowest quarter in the last two years. So I think we -- yes, you could say that we err on the prudent side.

Yes, to sum up way there's no -- nothing special we want to bring your attention.

Okay. Thank you very much.

Gene Munster, Piper Jaffray.

Congratulations. And special congratulations on the transaction business. And I know you've talked a lot about that this evening, but if we think about that business longer term and you've touched on this; but if we think about that longer term, can you walk us through or that -- how that should impact the growth rate maybe in 2015? And when we should start to feel that we can model more of that into our estimates? Thank you.

That's a good question. We actually haven't really planned the revenue generation on the transactional -- that business. I think in general that will have some uplift to our revenue because think about in other ways it basically make the sales lead conversion more apparent to anyone within the industry because now we can not only say we have a certain percentage of conversion -- we can basically say -- if you have a need, for example, some car makers have a need in the second quarter to boost up their sales. Now is the only time we can provide our services.

In the past, there was no way we can provide our services. So I think this definitely will have some positive impact. However, we actually haven't really planned out our revenue generation model on this type of a business because it is still evolving, because currently we actually haven't really done -- collect all the payment upfront and then delivered the cars through the dealers help, we haven't done that. We really want to see that but so far it is just not happening yet. So I think probably only after that then I can revert to your question.

Let me ask you think, do you think there will be a point in the next two years where this starts to be incremental to the model or is it something that is just kind of driving a broader platform?

Well, if you ask me, two to three years. If we really pull this off, it is going to be a disruptive force in the whole industry and a lot of people's business model is going to be changed.

Okay. I kind of think of this two to three years out versus one year out.

Sorry --

I was saying we should think about this two to three years out versus one year.

Yes.

Excellent. Thank you.

[Gina Chen, Morgan Stanley].

My question is regarding the growth of subscribers. Your subscriber number increased by 86% year-on-year, which is quite impressive. So I guess most of the incremental subscribers are from non tier 1 cities. So could you please give us some color on your subscriber penetration in non tier 1 cities, including the historical numbers and the car number? Also, how does it look like compared with the penetration in tier 1 cities. Thank you.

Okay. So the growth rate of tier-2 or tier-3 cities in Q2, right?

Yes, second quarter.

Hold on, let me get a number to you. So except tier-1 cities, currently our growth rate for 2000 Q4 (phonetic) was Q4 was 86%. In our category that is called the class. BCD but you know what, basically it is tier-3, tier-4 in your definition because our categories are a little bit different from the general definition of tier-1, tier-2, tier-3 and tier-4. So majority, the 86% is except the tier-1.

Okay, right. And how about the penetration rate?

The penetration rate, I can give you that, majority of the tier-1 cities at this point is over 80% and in tier-2 cities it is close to 80%. And tier-3 and tier-4, only tier-3 is about 60%, tier-4 is even lower.

I think -- one thing to highlight the percentage that was shared just now is really, the number of paying dealers divide by the those registered dealers rather than divide by the total number of available dealers in the market.

Okay, you mean the total dealer doesn't include some second level dealers or --?

Yes, I think the percentage that was shared just now was for example we have 13,693 paying dealers. The percentage that was quoted just now by James was over the total number of registered dealers that we have is about 32,000 - 33,000, okay? And not versus the 30,000 authorized dealers that we have in total China.

Got it. Also, I have a follow-up question on the mobile, (inaudible) elimination before. Yes, James, you said there will be three major traffic sources for the web -- mobile websites. So could you please share how much revenue is from using browser right now?

Oh, so from mobile browser?

Yes, right.

Okay. Unfortunately we don't disclose that number for now, but I can tell you the rationale. There are two type of revenues we currently generate from the mobile platform, majority is the dealer subscription. But dealer subscription is a fixed subscription that covers all of our three platforms, PC platform, mobile wap and mobile apps. Internally, we track the number of sales -- hr sales lead -- the sales lead split among the three platforms but because of the revenue is a blended fixed subscription cover all three platform so it is difficult for us to really say our mobile web platform generated how much revenue because that was not done in that way. Our present model does not support that, so that is why.

And secondly, as our advertising services currently, yes, some car makers are doing advertising business with us so there a small percentage of the revenue generated from the mobile app and mobile web. But at this point, let me give you a conservative guess, it's less than 5% of the OEM advertising dollars, spend on mobile wap and mobile app all together.

Got it. Very helpful. Thank you James and Nicholas. That's all my questions.

Gregory Joe, Barclays.

Congratulation on the strong quarter. I have three very quick questions. First, I think we made some very good progress on the used car side. So I want to ask for the used car, what do you think is the best monetization way and do you think the transaction based business model can also be used on used car? This is my first question.

Okay, I will take a crack on your first question. Currently, we do not generate any revenue from the (inaudible). We do not generate any meaningful revenue from the used car business, mainly for, because we believe that industry is just still too early to generate any meaningful revenue. However, having said that, we watched some of our peers, if they generate a lot of revenue from the used car business, trust me, we will change our sales model overnight. But we don't believe, right now, used car market is sizable enough or mature enough for us to generate revenue. Because majority of China's used car transaction are done through C2C rather than B2C because of China's regulation as well as the tax.

Okay. My second question is, currently while our sales guy only want to approach a new auto dealer client, so what do you think -- do you think that the dealer -- they care most about the traffic on PC, only on PC or from mobile or other kind of dealer services?

Dealer only care about making money, because majority of if you look at those dealers, some of them list in Hong Kong stock exchange. So I think from their -- they are very practical, all right, they worry about going forward with their profit generation capability. So I think that was partially the reason we have a very good first and second quarter because they felt the pressure of where we can help them sell more cars and in turn generate aftermarket services for them, will tend to get their wallets. So that is good for us.

Okay. Thank you. My last question to you is about Baidu PC Aladdin.

So our estimate currently, will the traffic and the -- you need really the contribution increased by the Baidu Aladdin and compared to the traditional Baidu search so -- for the quality of that conversion rate of the Baidu Aladdin. Thanks.

Okay. So yes, we do have some DAU increase through the Baidu Aladdin project but that was two factors together because definitely Baidu Aladdin will give us some number of new visitors who traditionally will not visit our home [web] because they are at the top of the funnel so they are not the -- they don't know Autohome first.

But having said that, there will be some number of visitors which tend to use Autohome as a natural search result, not because of Autohome's being the number one search result on PC Aladdin platform, they click on PC Aladdin. So basically in some of the traffic supposed [to be mine].

So this is the two factors together. So it's really difficult for us to split whether or not the -- between the new, new and the mine but still from Aladdin.

But I think in general our estimate is PC Aladdin met our expectation in terms of absolutely new DAU generation. And also in terms of the behavior of those users in terms of the -- related to monetization.

Okay, and how about the conversion rates -- I mean convert to transaction and convert to lease?

It's still in line with our expectations.

Okay. Thank you. Thanks.

Tian Hou, T.H. Capital.

-- related to Baidu [Jesing] program, and I think it's great to really win this bidding and to generate more traffic. And I wonder you know since we all know Baidu [Jesing] program is quite expensive, I wonder how should we look at your operating margin going on forward? That is number one question.

And then number two, maybe today used car business is not so ready yet but I really want to know what kind of preparation for you guys are doing to prepare you for upcoming maturity of this part of market? Thank you.

Yes, hi let me answer your first question on margin. Actually I have talked about it in the earlier discussions.

Sorry.

I think for 2014, and as you can see then so far year to date we have strong performance in both the revenue and margin because on one hand we are able to be -- able to gain operating leverage as you can see that our -- there's a continuous increase in the gross profit percentage.

But we always want to reinvest into the business -- reinvest back into the business by mobile or the traffic acquisition that you talk about. So for 2014, we expect that the non-GAAP net margin will be similar to what we have averaged in this area for the last three calendar years. So higher than the mid-30s. but because we do not provide formal guidance on our margin and bottom line.

I think for the out years like 2015 actually is too early to provide or give any estimates for the next year. What we can say is that we will work to balance achieving operating leverage and reinvesting in business initiatives to help us take advantage of the market opportunities and gain market share.

I'll try to take the answer -- used car operation. I think currently there are two major challenges or obstacles if I may say, with regard to the used car business development. The first one is the government regulation on the -- in Mandarin, it's called [chianchian]. So they controlled the used car which registered in other cities to be registered in current city. For example, in Beijing, for example in a city close to Beijing which is Baoding. Unfortunately, it has to meet the emission standard, a very high emission standard, and also it will be bought within three years and then Baoding can only allow those used cars to be registered in the city of Baoding.

So currently in China there are about 13 cities only allow the emission standard above China's national fire service to be registered in that city. And those other 250 cities only allow national standard number 4, to be registered in that city.

And that basically makes sure a majority of the old cars cannot be sold or transacted outside of its original city. So that's one.

And the second one is about the tax. In China there was a used car transactional tax is called value added tax, it's about 2% of the whole car, the transaction value.

And unfortunately it cannot be -- I only know the Chinese term (foreign language spoken).

Cannot be deducted.

Cannot be deducted, and that prevent the transaction between a customer and a company. So that's why majority of China's used car transactions, even if done locally, will be looked at as done from a consumer to a consumer.

I think if those two obstacles are not looked at, China's used car business or used car market is typical for the used car market to fly. And from our point of view, at this point even the used car market is at very limited development. All we can do is make sure we can provide the past user experience. And by having to -- by doing that, we think we can put a very strong foothold in case the used car market really fly, we can capture that.

And we are -- [probably] trust me, we are more anxious than most of you guys to wait for the used car market to explode. And then we can take the benefit of that.

Chao Wang, Nomura.

Just one, what do you think is the impact from the new regulation on auto dealer industry announced recently, if any? Thank you.

Yes. To be honest, we watched closely our data. I think in the near term it won't a meaningful impact because this is only the levy from -- it is called foreign language spoken).

It's called the [ISAI] (foreign language spoken).

It's the same term with the (foreign language spoken).It's only one thing from ISAI see that basically means in the future the -- those car dealers, they do not have to register whereas (inaudible) with the [ISAI] however currently the limitation of those dealers are put by the car makers rather than [ISAI]. I think without that change the whole industry landscape won't change.

That only basically shows the government want to be open minded and promote the market economy, which in general tends to be a good sign for Internet business.

All right thank you very much for joining us today. And we appreciate your support and we look forward to updating you on our third quarter 2014 conference call in a few months time. In the meantime please feel free to get in touch with us if you have further questions, concerns, or comments. And thank you, everyone.

Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.