Phoenix New Media Ltd (FENG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Phoenix New Media's second quarter 2011 earnings conference call. My name is Melanie, and I'll be your coordinator today. At this time, all participants are in a listen-only mode. We will accept your questions at the end of this conference. (Operator Instructions). As a note, today's call is being recorded.

I would now like to turn the call over to Mr. Matthew Zhao, IR Manager. Please proceed.

Thank you, operator. Welcome to Phoenix New Media's second quarter 2011 earnings conference call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu, our Chief Operating Officer, Mr. Ya Li; and our Chief Financial Officer, Miss Lily Liu.

For today's agenda, management will provide us with a review on the quarter, after which we will conduct Q&A. The second quarter financial results and webcast of this conference call are available at the Investor Relations section 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 statement 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. Shuang Liu, our CEO.

Thank you, Matthew. Good morning and good evening, everyone. Welcome to our second quarter 2011 conference call.

Phoenix New Media has continued to deliver impressive growth across the board this quarter. Our focus on providing premium content on an integrated platform across Internet, TV, and mobile has continued to solidify our leading position in China's new media industry, as witnessed by strong traffic growth.

As you have seen from our earnings release, we have once again delivered top notch revenue growth in the second quarter, with net advertising revenue growing 150% year over year, and total revenue growing 83% year over year; both exceeding the high end of our guidance.

There have also been many exciting developments, as we look forward to discussing with you on this call.

As one of China's leading portals in both Internet and mobile space, our traffic growth has continued to surpass those of our competitors. According to iUserTracker, a product of iResearch, a third party independent research firm, our monthly unique visitors in June increased by 20.9% from March 2011. This growth rate is significantly faster when compared to China's other four major portals, where the second faster growth rate was only 11.6% during the same period.

On the mobile front, our average daily page views for our mobile site grew by over 50% quarter over quarter to over 130 million in June, from 88million in March.

In particular, our video business has growth tremendously in the quarter. Our monthly unique visitors to our video channel increased by 25.6% on the last quarter according to iUserTracker. This is second highest growth rate among all online video websites, just behind only Tencent.

Since the launch of project Fengming in mid-May, where we established an online viewing aggregation and distribution platform for news and information videos, our video operation has expanded rapidly. We strengthened our efforts on original web-based media production, to further differentiate ourselves from other online video operators and to provide more lighthearted content to our audience.

Going forward, we'll continue to make smart investments in video content production and Company acquisitions, striving for target user traffic increase and advertising potential for these investments.

Focusing on our main portal business, on June 30th, we launched an enhanced ifeng homepage, which improves navigation and aesthetic appeal, creating a more engaging and user-friendly experience. End user data from July has already shown an immediate viewer increase from the redesign. For example, we saw our traffic -- we saw our parenting channel increased by over 36%, and our sports page recorded an increase of almost 29%.

In the coming quarters, we'll continue to launch upwards to our key vertical channels. We'll continue this process more closely aligning our advertising technology and enhancements with content production from new channels. The initial four channels we are focusing on are auto, finance, fashion, and technology. And our aim is to provide better services and experience for end users, in addition to enhancing our premium content offers.

We'll also continue to explore more innovative and interactive Internet advertising solutions with our clients. We believe these efforts will not only enrich our content offering and enhance online and offline interaction among users, but it will also strengthen our pricing power with advertisers.

By fully utilizing our users' interactivity and our innovative convergence platform, we believe these ongoing initiatives will keep Phoenix New Media at the forefront of China's new media industry.

Now, turning to our new business initiatives, on June 30, we announced the launch of our social networking platform, called Kuaibo, or quick blog. After rigorous internal testing, last week, we began our soft invitation-only launch for Kuaibo. This open testing period will last throughout August, after which we expect the official launch to take place in the third quarter.

Kuaibo is a light blogging platform that allows users to share short text, quotes, images, and video content, as well as allows users to easily discover connected friends who share similar interests or hobbies.

Strategically, we see Kuaibo fitting right into the gap in between weibo and Twitter-like products and blog-like products. The former is convenient for sharing short information, but falls short in multi-media features; while the later is more robust, but lacks flexibility.

Combining the trends of both of these products, Kuaibo will offer a distinctly new experience, focused on capturing user of both weibo-like products and social networking platforms. We estimate that Kuaibo can reach up to 2 million registered users by the end of 2011.

China's social networking and social media services are still in the early stage of development and the landscape remains very diverse and segmented. Online users often have different and specific needs, as experienced by major micro blogging services, serving different users and generating different content.

Kuaibo is one of the few earlier adopters of light blogging services in China. We believe Kuaibo easily combines the expressiveness, convenience, and the brevity of regular micro blogging services, with the professional and the sophisticated nature of our blogging platform.

Empowered by our large user base, as well as our branded and premium content offerings, Kuaibo will clearly be differentiated from our competition and is best positioned to serve China's Internet users.

As you can tell, we're excited about Phoenix New Media's strong growth performance and opportunities in front of us. We will continue to invest in the future, and our initial results are showing that we are on the right track.

Not only have our strong execution capabilities enabled us to deliver continued growth, but also our innovativeness and creativity have helped us to invest intelligently for our future, building future revenue streams for the long-term growth of Phoenix New Media.

We will remain China's premium content channel for high-end Chinese Internet users, where users can share high quality, user-generated content, enjoy professionally produced content, and network freely with each other any time, anywhere, or anywhere interactively.

Now let me pass the call over to Lily to go over our financial results.

Thank you, Shuang, and hello, everyone. Let me now take you through our second quarter financial results.

As Shuang headlined just now, I'm pleased to report to you that are net advertizing revenues grew by 150.5% reaching RMB114 million, compared to the second quarter of last year. Our paid service revenues grew by nearly 45% to RMB113.6 million, compared to the second quarter of last year. As a result, our total revenues grew nearly 84% to RMB227.6 million year on year, or 32.5% sequentially.

This quarter also represented a significant milestone, where our net advertizing revenues exceeded 50% of total revenues; and, of course, we will expect net advertizing revenue contribution continue to increase.

Our net advertizing revenues were supported by growth in both number of advertisers, as well as average revenue per advertiser, or ARPA. Our number of advertisers in the second quarter was 268, which represents a 38% increase from 194 advertisers in the second quarter of last year. ARPA was RMB425,000 in the second quarter, as compared to RMB234,000 in the second quarter of last year, which represents an increase of 81.6%. This reflects our ability to increase our wallet share from our high quality advertisers.

In the second quarter, we saw an increase in advertizing dollars from e-commerce providers, which is in line with the general e-commerce industry growth, which also represents a testament to the effectiveness of our convergence platform to these value-conscious advertisers. Auto, e-commerce, IT, finance, and, lastly, food and beverages were our top five advertiser categories.

For paid service revenues, we have three sub-segments; mobile Internet value-added services, or MIVAS, video value-added services, or video VAS, and Internet VAS.

MIVAS represented 44.6% of total revenues in the second quarter, as compared to 54.3% in the second quarter of last year. MIVAS mainly comprises of digital reading, mobile games, and WVAS businesses. In particular, WVAS business represented approximately 32% of total revenues in the second quarter.

Video VAS represented approximately 5% of total revenues in this quarter; and Internet VAS represented only 0.6% of total revenues in the second quarter. Going forward, revenues from Internet VAS will be combined into revenues from MIVAS, as it's expected to remain a very minor revenue sub-segment.

In the second quarter, our GAAP gross margin was 45.7%, compared to 44.3% last year, and 33.1% last quarter. Excluding the impact of share-based compensation expenses, adjusted gross margin for the second quarter was 46.4%, which also improved sequentially compared to the 42.2% last quarter.

The four components of cost of revenues are revenue-sharing fees relating to paid services, content costs, bandwidth costs, and business tax. Revenue sharing fees as a percent of total revenues declined to 28.8%, compared to 29.5%, as a result of increasing contribution from advertizing revenue.

Revenue-sharing fees as a percent of paid service revenues increased from 46.5% last year to 57.6% this quarter, primarily due to increasing contribution of paid service revenues that incur revenue-sharing fees to total paid services.

Net profit margin for subscription-based mobile newspaper, traditional WVAS, and mobile video business, the three businesses that incur revenue-sharing fees, the net profit margin for these three businesses remain in the single-digit range. There has been no impact on our overall net profit from increasing revenue-sharing fees.

Our content and operational costs were 15.7% of total revenues, as compared to 17.9% last year, primarily due to revenue growth outpacing our content production and acquisition costs.

Bandwidth costs as a percent of revenues increased from 3.3% last year to 3.5% this quarter, reflecting the strong traffic growth.

And lastly, business tax as percent of revenues increased to 6.4%, also reflecting higher contribution from advertizing, which has a higher business tax rate.

Our non-GAAP operating margin was 21.1% in the second quarter, as compared to 22.5% in the second quarter of last year. The decline was primarily due to continued build up of our sales force.

Our non-GAAP sales and marketing as percent of revenues increased to 14.4% this quarter, as compared to 11% in the second quarter of last year, due to additional expansion of our sales team.

Our non-GAAP G&A expenses as percent of revenues decreased from 5.5% last year to 5.2% this quarter, reflecting increased expenses associated with being a public company, but offset by operating leverage.

Non-GAAP R&D as a percent of revenues increased from 5.4% to 5.7%, reflecting increased investments in R&D. In the second half of the year, we expect to make further investments in Kuaibo, additional new product development for our convergence platform, and further expansion of our advertizing sales force.

Total share-based compensation expenses related to operating expense lines were RMB6.9 million, as compared to RMB2 million in the second quarter of last year. We expect total share-based compensation charges for the second half of the year to be approximately RMB11.1 million, which remains stable compared to the second half of the year in 2010.

GAAP net income attributable to Phoenix New Media was RMB36.2 million.

And the loss attributable to ordinary shareholders was RMB350.6 million. The GAAP loss attributable to ordinary shareholders was primarily due to accretion to redeemable convertible preferred shares redemption value of RMB380.7 million. The charges related to preferred shares were non-recurring charges as these preferred shares were automatically converted to ordinary shares upon completion of our initial public offering on May 17, 2011.

Non-GAAP adjusted net income attributable to Phoenix New Media with share-based compensation expenses added back was a positive RMB44.8 million in the second quarter, which represents a 76% growth from the second quarter of 2010, and which also represents a 105.7% growth sequentially.

Adjusted net income per ADS was RMB0.74, or about $0.11 per ADS, which grew by over 17.4% from the second quarter 2010.

Please bear in mind that weighted average number of ordinary shares outstanding may seem significantly lower than current shares outstanding due to preferred shares and our IPO offering shares being counted as part of total ordinary shares outstanding only upon their conversion and offering on May 17.

Lastly, I'd like to reiterate our business outlook for the third quarter. We're expecting our net advertizing revenues to be between RMB121 million and RMB125 million, approximately 145% to 153% growth year on year; paid service revenues to be between RMB115 million and RMB120 million, or approximately 15% to 20% growth year on year; and, as a result, our total revenues are expected to be between RMB236 million to RMB245 million, or approximately 58% to 64% growth year on year.

With that, I'll open the call for questions. Operator, please go ahead.

Thank you. (Operator Instructions). Chenyi Lu, Cowen.

I have two questions. First question, regarding the guidance, I know the advertizing revenue growth continue to be strong, but the paid services revenue come really a bit soft compared to the previous two quarters year-over-year growth rate, so can you give us the reason why you guide a little bit lower on the paid services revenue? Thank you.

As you can see, we've guided 15% to 20% growth for paid service revenues. Overall, for the second half of the year we think that paid service revenues' growth rate is going to remain in this range due to telecom operators' policies. Generally speaking, because of the telecom operators' internal policies, their marketing -- generally, we are seeing that their marketing efforts have been weaker for the second half of the year; and some of the pilot projects launched last year have also been moving a bit slower.

So, all in all, I think that overall the paid service industry has been impacted and every player in this industry has been impacted. So our growth rate, in fact, is higher than most of our competitors, but it's in line with the industry trend.

And to conquer the slower growth in paid service revenues, we're in fact actually exploring innovative mobile services, which we believe will drive our future growth in the coming years.

So, basically, what you're saying that for second half, especially for December quarter, you guide for 17.5% growth rate? Does that also imply that the December quarter you are thinking about 17.5% average growth rate for the year -- for the December quarter?

For the December -- for the fourth quarter, we're expecting growth rate to be generally in line with this range, but probably towards the top end of the range.

Okay, so top end of 15%/20% range year-over-year growth rate. Okay. Now that -- then -- but, again, we can see the net advertising revenue continue to be strong, and then I think in the third quarter -- second quarter the growth rate was about 151% and then third quarter is about 150%, so what do you think about the December quarter for your net advertising revenue growth rate?

The net advertising revenue growth for the December quarter is going to remain very strong. Right now, it's in line with the -- it's going to be in line with the -- it's actually in line with the consensus.

Okay, great, thank you. And then the next question, regarding your gross margin, again, the gross margin this quarter has been very strong, I think mainly because of lower percentage of cost coming from the content and operational cost, so my question to you is, going forward, do we still see this kind of gross margin level going forward? Or you think it's going to be decreased slightly? Thank you.

For the third quarter and the fourth quarter, basically, for the second half of year we are expecting our gross margin to be on par, or in the same range, as our second quarter. And going forward, for next year we're expecting the gross margin to be in line with this year.

Okay, great, thank you. That's all my questions.

(Operator Instructions). Ming Zhao, SIG.

First time I've been on the call; congrats on the good quarter. I have a question about the two verticals. I think you talked about e-commerce as the second largest vertical, and you also mentioned the automobile vertical, just wonder what are you seeing happening with these two verticals going forward?

I think there's a little bit of concern about e-commerce companies' burning cash activity, whether that's sustainable in the second half or into 2012, I want to see what your comments there for this segment.

And also, auto, the Japan earthquake impact, was there any impact in the second quarter? And how do you see that in the second half, also? Thank you.

First, about the numbers, we did see the auto sector's contribution to advertising decrease 1% in the second quarter, compared to the first quarter, to be about 22%, while the e-commerce contribution increased 1% to reach about 17%.

Going forward, since we work with high quality brand name e-commerce companies with strong cash position, and also some of the leading retailers, like the new e-commerce initiatives, and we work with almost -- or none of the group-buying companies, and so -- and also, we are very careful dealing with the payment terms of e-commerce companies, and so right now, for ourselves, we see the trend going still very strong for the remaining two quarters.

And for the auto sector, as I mentioned, we did see impact from the Japanese earthquake, and also the new policy. However, the auto sector still contributes to the largest sector of our advertising category; and also, for the individual advertisers we're still among the top 10 advertisers, we see a couple of them in the top 10 advertisers for our business.

So the earthquake, some people say that the impact is in second quarter and the third quarter, and maybe in the fourth quarter will be some pick up in the volume of production, and enhance the advertising spending, do you see that's possible?

Yes, from some of the large advertising contracts we have signed, to be executed in the third and fourth quarter, we do see the increase of ad spending from the leading auto makers.

Okay, great, thank you.

(Operator Instructions). Ming Zhao, SIG.

I'm not very familiar with the story so I wonder if you could explain a little bit about your parent company, the satellite TV station. How does that help the business of this new media company? And the video revenue you talked about, is that relating to the video produced by your parent company, or elsewhere?

I think the beauty of our business model, [licensing] convergence model, we're backed by a TV powerhouse in Greater China area, which is Phoenix TV. Phoenix TV is based in Hong Kong, beaming techno through satellite to global Chinese. It has very strong presence in China, but it has only limited landing right. And its content stands for serious journalism, editorial integrity, and the Greater China prospectus, so it has best-in-class content, especially in news and documentary related area.

And we've been able to secure a five-year long-term contract with Phoenix TV, which enable us to have full exclusive access to Phoenix TV's content library. That gives us huge competitive advantage because Phoenix TV content is very rich; it has five channels, movie, news, documentary, and entertainment; covers a lot of topics. So we have more flexibility in content acquisition.

Also, Phoenix TV is a perfect platform for us to do cross-channel production and promotion. We can do co-sponsorship events. We can co-produce program. We can co-purchase some hot programs. So that creates a lot of cost synergy, and also revenue synergy.

Phoenix TV is still currently the single largest shareholder of Phoenix New Media. And under our long-term contract with Phoenix TV, even if our current contract expire in five years, we will have the right of first offer to have it renewed at reasonable terms.

So that's the most competitive advantage we have against other online video players.

Maybe Ya could elaborate on the online video revenue?

Yes, I think in terms video revenue contribution of our online video content source, of different sources, first of all, in terms of video VAS, the largest contribution right now is about -- comes from the effort of the third party, non-Phoenix TV video content; this contributes about 50%. And then the Phoenix TV-related content contributes about 40%. The remaining 10% comes from our ifeng.com self-made content, and that's from the video VAS contributions. In terms of the our contribution, it's similar.

Okay.

And in terms of the revenues we draw from these video contents, we -- first of all, largest revenue is from advertising. Video advertising accounts for about 18% of our advertising revenue for the second quarter, which is a significant increase from the same period last year, which is about 10% only.

Also, the second revenue source is from paid mobile, video, and paid online subscription, and pay-per-view videos. All these various video revenues are fast growing; right now, represent a very small portion of our overall revenue.

Okay, that's good. Just a follow up to that video strategy here. We see the Tier 1 players, Youku and Tudou, they are already popular and they go after those professional content, and in a rising content environment are you going to do the same strategy, or you have some differentiation in your video strategy going forward?

I think because video is our strategic focus, I'd like to answer your question in the context of competitive landscape, our overall strategy, and our competitive advantage.

As you may hear from my opening remarks, our video traffic growth has been very rapid. I think that demonstrates that our Fengming project and differentiated approach is paying off. We are very proud of our differentiated approach because in this competitive market many other video players are paying a lot of money in acquiring long-form video, especially TV drama and films. We have revelation about this kind of long-form video download-driven traffic growth support.

I think whether this kind of model could sustain is a big question because there are four risks behind this kind of approach. First, content acquisition costs for long-form video is very costly, especially in the environment where many State-run producer and privately-held TV drama production house are considering IPO. They will be much more sensitive to the price of their [current] (inaudible) content library. This will further inflate the long-form video costs.

Secondly, the bandwidth costs for long-form video is also very high. Also, the long-form video is very hard to cut into short clips; not very friendly on smaller screens, especially iPad or mobile handset, so not very easy to monetize on wireless platform.

But, more importantly, I think customer user loyalty associated with long-form video side is kind of fragile because whenever someone else pay more price for long-form video the user will then just go for these kind of sites.

So, because of this, we adopted a differentiated approach, focusing on news and documentary-driven short-form video. I think we are very lucky that, as I mentioned, we are backed by TV powerhouse, Phoenix TV. Its content, especially in the documentary and news area, is best-in-class in Greater China area, so that enables us to charge a premium price on online media advertising.

Also, this kind of video consumes less bandwidth; it's more friendly on smaller screen, like an iPad, like a mobile handset; and can be easily cut into short episodes to be monetized.

So I think comparing against our competitors, we have obvious competitive advantage. We have a flexibility in acquiring different kind of content. But we will be focusing on our short-form video, with an eye for long-form video. When the price of long-form video return to equilibrium, we will start considering investing in this area, but we'll definitely invest smartly. Yes, that's basically all.

That's very helpful, thank you very much.

Steve Zhang, Macquarie.

Thanks for taking my questions. Just to follow up on e-commerce segment, you mentioned that it's 17%, and you guys are with high quality advertisers, but recently some of these e-commerce guys have had trouble raising capital in private markets. Do you see any trend in fourth quarter, or in terms of orders, that's visible right now? Or what are your expectations for next year for this segment? Thanks.

I think for the previous couple of quarters some of the e-commerce, and especially group-buying companies, they probably roughly spend more freely, and try to create momentum, or maybe just for the purpose of raising next round. But from now on they will be more cautious; they will manage the results more carefully.

We do have advantage in delivering the results, both from the branding, in fact, because for e-commerce companies the credibility is very important, and in terms of fraudulent products, and also the trust, any trust; secondly, in terms of the purchasing power of our valuable user base, also deliver the best measurable loyalty customer total purchase instead of simple measurement of clicks, or exposures.

So based on the trend that the e-commerce companies will put more emphasis on the actual results, the effects of the advertising campaign we should be benefit, based on our strong branding and user base.

Do you plan on limiting the percentage of revenue exposure to e-commerce?

Internally, we have a policy that, especially for group-buying companies, we only deal with the high end group-buying companies; also, we demand stricter payment terms compared to the other sectors. In other words, actually, we encourage them to put up -- to have better payment terms for better advertising terms/deals.

Okay, sure. Can you talk a little more about the wireless value added service segment? SINA this morning came out, basically just said their paid service is going to flat year over year, and I know you mentioned that you're going above your competitor's rates, but can you give a little more color? Are you growing in single-digits? Or are you growing faster than that? Thanks.

I'll take that question. As I mentioned, I think overall the industry has been impacted. All the players in the industry are impacted by the telecom operators' policies and some of the internal changes. We are growing above the industry. We are expecting 15% to 20% growth to be for the second half of the year, as well as actually for the next year.

Internally, paid service revenues, especially WVAS business, is not our strategic focus. The net margin for this business, as I mentioned on the call, is only in the single-digit. And this margin has remained very stable; we don't expect the margin to change. So we expect the impact on the bottom line is minimal from -- even though the growth rate for the top line is only at around 15% to 20%.

Okay, great, thank you. Just to go off of that, can you discuss a little more about the progress of your non-GoTone digital reading services.

Sure. Our digital reading services has essentially three components; the GoTone mobile newspaper, the mobile newspaper by subscription, and then lastly the digital reading services, where users can pay for books and short stories on their mobile services.

This is one of the new services that was launched by the digital reading center of China Mobile last year. Again, this is one of the new services that we are seeing a bit slower marketing efforts from the telco. So the growth rates, we are decreasing the growth rate because we are seeing a bit slower marketing efforts, so I think that impacts the growth rate for this new service. But then again, compared to the other businesses, we're still expecting higher growth from digital reading services in the future.

Okay, great. I guess going off that track, is your mobile video segment going to be impacted by smaller marketing efforts also? Or is that still on track?

Mobile video, again, mobile video, because this is the policy changes at the telco, these are industry wide. And particularly for mobile video, I believe China Mobile is in fact spinning off the mobile video center and establishing a joint venture with CCTV that has been announced in the industry.

This will not change how we work with China Mobile. We are still one of the premier constant providers to their mobile video channel. But in terms of new product launches, for example, new channels within mobile video, we are seeing a bit slower effort in that regard as well. So that's impacted the second half of year growth projection for paid service revenues as well.

But in the future, again, we are still expecting faster growth from this area as this is one of the areas that all of the telecom operators are very much focused on.

Great, thank you.

Alex Yao, Deutsche Bank.

I have two questions; one is for the upward growth in this quarter, which is very strong, 82% year over year. Can you talk about to what extent is the growth attributable to the pricing hike, and to what extent is attributable to the real demand growth on the advertisers?

And my second question is regarding the expense in second half. So for the operating expense, as well as the content investment for second half budget, any change to the plan you made in the first half this year?

And also, can you give us headcount update and the headcount targeted by the end of this year? Also, can you talk about the wage inflation compared to last year? Thank you very much.

Thanks for your question. I will take the first question, and Lily probably will take the second.

Income for the second quarter, we see that a number of advertisers grew sequentially 16%, and the ARPA grew sequentially 31%. Also, for year over year, that was 38% in terms of number of advertiser, and 82% in terms of ARPA. So we are seeing the trend there in terms of the larger portion of the growth comes from the ARPA, because we are taking market share from some of major clients at the expense of the other online media companies.

At the same time, of course, we are expanding into, for example, the food and beverage, FMCG, and especially luxury goods, these sectors, to fully realize our valuable user base, advertising value.

Going forward, for the second half, we are planning the second rate hike, which probably will be announced some time next week. Right now, we are seeing, for example, for the cover page, the rate hike will be probably about 20% from the April rate card. So the rate card increase -- our ability to increase our rate at a higher percentage compared to the peer companies indicates that both reflect our strong track growth momentum, and also the advertising effect based on our branding fact and valuable user base.

Just a quick follow-up question. What's your view on the next year's rate card increase?

I think as we are still seeing our traffic growth among the highest, I think, compared to all the portal, video, and the SNS companies in China, we are confident that we should maintain a relatively stronger rate hike increase compared to the peers.

And as we can see, actually, if you look at the second quarter, the leading two portals advertising revenue grew by 26% and 27% respectively over the last year, when we grew by 150%. And we are seeing that the next two quarters sequential adverting growth will remain as double-digit, sequential growth.

Alex, I'll answer the second part of the question. In terms of our operating expenses for the second half of the year, the major areas that we are going to be investing in are, as we discussed on the call, first two main areas; one is a technology and product development team, we're increasing headcount there for R&D staff for our Kuaibo, as well as for our advertizing; and, generally speaking, our sales force, again in the second half of the year, will continue to expand as well.

So those are the two major areas where we're going to be increasing the headcount.

In terms of headcount update, for our estimate for full year, or at the end of this year compared to the end of last year, it's also in line with what I just said. The two major areas -- actually three major areas where we are seeing the biggest headcount increase is in technology, technology and product development, advertizing, and lastly, in video.

Video, as we mentioned in the previous quarters, we brought in a Vice President in charge of our video business at the end of the last year. And as you can see from the traffic and operating metrics, our video operation has expanded rapidly in the first half of the year.

So those are the three areas where we're going to see significant headcount increase.

And in terms of wage increase, we have done a mid-year salary adjustment and I would say the biggest increase, again, comes from technology, R&D, and tech people. So that's where we're seeing the biggest wage increase. For all the other areas, the wage increase is in line with the CPI growth.

Okay, got it. What's your content investment plan for second half?

The content, in terms of content, there's not --

Maybe I can take this question. Our content investment strategy is, as I mentioned, in the video section we're going to make smart investment in company acquisition.

We're going to focus on news and short video-driven video content, and for the [text], so that will save us a lot of money because we are already backed by a TV station, so we have full access to Phoenix TV's content library. And we still believe the long form video-driven traffic growth strategy is very fashionable, especially in this very competitive environment, whether the other competitor can sustain this kind of traffic growth momentum.

So, for us, we're going to focus on the short-form video, and this will give us obvious competitive advantage and a better operating leverage against other competitors. Phoenix TV's content is very unique and best-in-class in this arena.

Also, we're going to invest smartly in regional programming, like what we did in second quarter. We have produced some famous talk show, which carry -- create very good advertisement sponsorship. So we're going to continue to stick with this approach, but keep an eye on long-form video. When the price returns to equilibrium, we will start thinking about more investment in long-form video area.

And for the [text] and [other] related content, as you all know, the price has been very reasonable and insignificant in our total content acquisition costs.

Got it. Thank you very much.

Wendy Huang, RBS.

Congratulations on the strong growth in the quarter. My first question is about the comparison between the Phoenix New Media and SINA. I think both companies are known for the premium new media companies in China. I also understood that Phoenix New Media has some, I think, advantages from the parent company's content. But in terms of the Internet-originated media content, how are you differentiate that from SINA's content?

And also, I think both companies are targeting the high end Internet users in China, so, going forward, with the increasing user base of your Internet audience, how will you differentiate your audience targeting as well?

And lastly, I think you earlier mentioned that you had strength in the news and documentary content, and the sports content as well, I think that has been the traditional strength for SINA as well so I just want to get some color on the differentiating point on that front as well. Thank you.

I will, because you asked very important question, try to answer question from a competitive point of view. I think Phoenix New Media in fact is quite different from SINA. We are a convergence story.

Our strength lies in TV, telecom, and Internet convergence; that creates huge cost synergy and revenue synergy. Because, as I mentioned, for our video business, we have secured five-year contract to have full exclusive access to a very rich Phoenix TV content library. This content is produced in Hong Kong, which stand for serious journalism, editorial integrity, and Greater China prospectus , so it has only limited landing right in China so it has been very popular, hotly sought after by white collar living in metropolitan area.

So that is a huge competitive advantage in terms of our cost structure. We have better leveraging; we have better operational leverage against other players, including SINA, and some other video sites in terms of content acquisition.

And secondly, we can do a lot of cross-channel promotion, we can co-produce content, we can do co-sponsorship events, so that also creates a lot of confidence.

And secondly, we do advertize our media DNA. We place high emphasis on our content editing, our media value, our media churn, so that enables us to charge premium price our premium content, especially video content. So that's the second advantage we have.

And certainly, we also place high emphasis on our user-generated content. Like what we did in second quarter and third quarter, we're going to launch our Kuaibo product. We're very proud of this product.

In the last two quarters, as you may notice, we have enjoyed very rapid traffic growth. I think we have substantially leveraged SMS sites to reach broader audience. But we also discovered that the users' demand is evolving and the demographics becoming very diversified. Their need is very long-tailed. So in order to stay ahead of the innovation and trends, we need to invest more heavily in this SNS area, so that's the kind of thinking for us to develop Kuaibo product.

And I think we have very obvious competitive advantage in SMS area, like you mentioned, Internet-generated content area, because Kuaibo has very strong media feature, which creates the entry barrier for other players in this arena with their own media experience.

We can easily leverage Phoenix TV's celebrity commentator and opinion leaders. We can also leverage our vertical's accumulated content and understanding of some very good interests to develop this kind of Internet user-generated content. So that grants us superior content metrics, which means we could spend less money in developing this kind of product.

And also, our type of product is different from so-called mini blog of weibo, especially the Twitter-like products and blog-like product. This is a combination of media feature and SNS feature.

So in China there is only three to four players in this area. We think we are one of the pioneers, and we are very optimistic about this product. I think it will significantly develop our Internet user-generated content and enable us to capture evolving demand of the users and to better serve Internet users who like participating in online activities.

I think your fourth -- maybe I missed some of your

Yes. Just to follow up on your comments on Kuaibo. If I'm right, earlier you mentioned that you expect Kuaibo's registered user to reach 2 million by the end of 2011, right?

Yes, I think that's a modest estimate.

Okay.

I think the Kuaibo battle is a long battle. We are very ready. We're going to be very committed, and we're confident we're going to win in this area because our confidence is based on our past record.

When we started ifeng.com five years ago we basically started this site from scratch. Its domestic rating is number 15 something. Within just five years, without significant investment, we significantly boosted ranking of our ifeng.com site. Now we are one of the five major portals in China. So I think we can confidently repeat the success what our ifeng.com has experienced; deepenly leverage our brand, the Internet users brand perception, and our resources to quickly catch up.

So I don't know if you can give us a time plan when do you expect Kuaibo's registered user to reach 100 million. As you probably know, SINA this morning announced their weibo registered user already hit 200 million level so I just wonder how quickly you can narrow this gap and catch up.

I want to emphasize that Kuaibo is not -- I think I am hesitant to comment on individual companies, but we are very confident about our Kuaibo product. I think Kuaibo fits into the gap between Twitter and Tumblr, so it's not competing directly with mini-blog kind of product. Actually, we're in a different arena.

Our product is more broad based interest-focused, more focused on metropolitan life, and has different kind of demographic. So we are not competing with -- we do not have a competitive head-to-head composition.

I think we're going to focus our demographic, focus on our broad-based interest approach, and committed to it. I think we'll have a great potential to win.

Also, I wanted to get some color on the digital reading services. What's the revenue share with China Mobile regarding the digital reading services right now?

For all of our key service revenues, we share revenue not only with China Mobile but also with third party channel providers, for example, manufacturers, when we stream our application (multiple speakers). So the revenue-sharing fees that you see in our cost of revenues, that's a combination of revenue-sharing fees paid to China Mobile, as well to third party channel providers.

For digital reading services to China Mobile, I believe we're paying out around 20% to China Mobile. Most of the revenue-sharing fees actually are paid out to third party channel providers.

So what kind of net share can Phoenix New Media get in this relationship?

For our paid service revenue product, it ranges anywhere from -- essentially, we retain around 30% to 40%; and digital reading services is on the higher end.

Okay. And lastly, can you give some comment on the operating margin outlook? And when should we expect you guys to break-even at bottom line as well?

For the bottom line, let me actually just clarify. For now, the lost that you see, the net income attributable to ordinary shareholders, that's primarily due to the preferred shareholder charge prior to IPO. So since IPO the preferred shareholders have been fully, automatically converted to ordinary shareholders, so on a Company basis we have been profitable since 2009. So we've been profitable, and going forward we're going to continue to be profitable.

Okay great, thank you.

(Operator Instructions). Philip Wan, Morgan Stanley.

I had a follow-up on advertizing business. First of all, I wondered how many new advertizing customers did you acquire during the quarter, and their revenue contributions.

And also, a second is regarding your visibility going into -- towards the end of this year. Any comment that you can share about the secured contract or recognized advertizing backlog for the rest of this year?

And lastly, about your pricing, how do you compare the pricing versus SINA? Thank you.

Thanks for the question. Actually, it's a little -- I have a little difficulty in hearing all your words, but so I think your first question's regarding in terms of the number of advertiser increase, is that correct?

Yes, how many new advertizing customers did you acquire during the quarter, and their revenue contributions for Q2?

Direct contribution?

For the second quarter, our total number of advertisers was 258, and this is a 38% increase compared to 194 in the second quarter of 2010.

Is that what --?

Right, let me speak slower. Actually, the question was how many new advertizing clients which has not been advertized on Phoenix New Media for this quarter?

For this quarter, yes, we do not -- basically, we tracked -- number of new advertisers in second quarter increased from the first quarter was 16%. But in terms of how many are new, because we do understand the churn rate, our churn rate right now is relatively, actually, I think, about average comparing to the peers. So I cannot give you the exact number. I can give you probably in a follow up after the call in terms of absolute new numbers advertizing on ifeng.

And we are building up our advertizing sales team, which has reached 200, and covering all the major sectors, so we do expect our number of advertisers to work with to quickly reach the majority of our target client base.

And in terms of our rate card increase, your second question, we do mentioned that going forwards visibility for advertizing remains strong, which will represent triple-digit growth year over year, and double-digit growth quarter over quarter. And in terms of rate card increase, we are seeing that higher than 20% rate cards increase for the most important ad inventories, such as the front page of ifeng.com.

Right, for example, how does your pricing for your front page compare to SINA's?

Okay, yes, right now, in terms of the CPM ratio, that's the best we could manage that. We have still about 40%; slightly above that, 40% of SINA CPM rate. And I think we are seeing our CPM gap gradually decrease despite of our strong rate card increase because of our equally strong traffic growth, much higher traffic growth, comparing to SINA's portal traffic growth.

Right, thank you.

[Martin Brough], CICC.

I have one question regarding the mobile Internet. We would like to know whether you have, or are planning, any new initiative or (technical difficulty)?

Sorry, there was some difficulty; can you repeat your question, can speak a little bit louder?

Yes, of course. I would like to know whether you have, or are planning, any new initiative, or investment, particularly on mobile Internet segment.

I think mobile, we are very bullish about the mobile Internet. As you see from our opening remarks, we have experienced some sort of softness in wireless value-added service, so we're going to beef up our investment in our wireless Internet area. We are also exploring different options, especially in some core areas, but we are still at the stage of finalizing game plan.

So as soon as our game plan is finalized, I think we'll keep you guys updated about our new initiative. At the current stage, we probably couldn't disclose too much detail.

So my follow-up question is when do you expect to see the material impact from these new initiatives? So, based on your answers, you cannot give any answer, right?

Yes. I think we have a new addition to wireless Internet; we also have Kuaibo product. Kuaibo, for next one or two years we're going to focus on investments, build up the traffic, and improve the market share. And I think when the traffic's built up, this model itself (inaudible). So next few years of Kuaibo is going to be investment stage.

But for our wireless Internet initiatives, I think it's not very -- and also for Kuaibo, I think because of the strong media feature of our Kuaibo product, we have superior competitive -- superior cost advantage against other players because we can leverage Phoenix TV and ifeng.com's resources to develop it. So it won't be very costly. The money we're going to spend on this product will be significantly lower than some other competitors.

And back to the wireless Internet initiative, it's not going to be a very labor intensive or capital intensive project, but will deliver good numbers. So I really don't think it will compromise our operating leverage in the short to mid-terms.

That's wonderful, thank you very much.

Ling Wang, Brean Murray.

My first question is a follow up on your online video sector. So you are focusing on short-form videos, can you talk a little bit about how does your advertising on short-form videos differ from long-form video in terms of revenue and effectiveness?

First, we believe we enjoy the highest actual selling rates comparing to the long-form competitors. Our published rate is 120 yuan, which is not much -- not too much higher than the peer. But the actual discount rate the peering companies are giving now are very big because they provide the same product on the same kind of content; however, ours are exclusive content.

Based on recent [DCCI] research report on online video user behavior, which indicated that news video tend to be consumed during the day and by people with better education and with stronger influence and who tend to share their interests, versus the movie and TV drama watchers tend to be similar, like the old TV watchers; probably they are less likely to have open attitude to share.

And this kind of data, and also, very importantly, the news video is among the top demanded content category, indicates that the strong demand, and also the value, of the news video watchers to the advertising clients.

And, in fact, in the second quarter we did see our video traffic significantly increase from search, which tells us that users actively search for news video, not just the TV drama. And when they search for news video and more likely they will come to our site because we are the only -- or the leading differentiated news video leader in China.

And as we are taking steps to make it a better recognized branded product, news video product, and also the commercialization will materialize as we have built a dedicated national video advertising sales team actually in the third quarter; the beginning of the third quarter. And so we are confident that the differentiated approach will result in increased video advertising contribution, as we have seen from the second quarter already.

There are a couple of points I want to add. First, our news and documentary driven short video is a hot commodity in China because in a very tightly controlled media environment our unique (inaudible) highly [perspective] news and documentary video really stand out. So that's why we could achieve very rapid video-related traffic growth.

Second, we're going to still keep an eye on long-form video. When the price returns to equilibrium, we're going to start invest smartly, but definitely not right now.

And certainly, the users' loyalty to long-form driven video sites is relatively fragile because they're largely associated with the film star and film director rather than the site. So I think it's not wise for us to, at this stage, at this crazy inflated accounting price stage, to spend too much on long-form video.

Okay, thank you very much. And so my follow up is what percentage of your advertising revenue comes from video-related advertising?

For the second quarter, it's about 18%, which is a significant increase from just 10% to the same period last year.

Okay, thank you. Do you see an increase in revenue from video, like what percentage do you expect in the following quarters?

I think because overall advertising revenue is growing at triple-digit year over year, and so I think for the next 18 months our video advertising revenues will grow at a higher rate, net overall our ad revenue growth rate. It won't reach more than 20% next year.

Okay, thank you. My second question is regarding your weibo. Since you are going to focus on development of Kuaibo, what's your plan, or direction, on the weibo product? Are you still going to keep expending on your weibo product?

I think we're going to be very wholeheartedly focused on Kuaibo. This is going to be our main strategic focus. We believe Kuaibo is the next generation weibo product because it has perfect combination of both media feature and social networking feature and could enable us to leverage our brand perception, counter resources, and celebrity opinion leader resources. We will have much superior cost advantage in developing this, and could leverage our high popularity among metropolitan white collar.

So Kuaibo will be our strategic focus. We hope there will be a migration of users from weibo to our Kuaibo.

Okay. How do you position in your Kuaibo product? Also, do you have any monetization plan on the counter?

Kuaibo will be positioned at connecting point of our users across our Internet, TV, and wireless platforms eventually.

Right now, I think we are still at the stage of investment. So for the next two years we're going to focus on building up the traffic, improving the user's experience, and consolidate market resources. But as I mentioned, because of our obvious advantage, competitive advantage, the investments we're going to put in this project will be significantly lower than some other players, especially for the players with zero media experience, with zero portal backing.

Okay, thank you. My last question is on your wireless video. How many users actually paid for the subscription service? And how many paid for the -- what they call pay-per-view?

I'll take that question. For our wireless mobile video business, most of the paying users actually come from pay-per-view services. We also have our significant subscription basis. For the subscription basis, it's less than 300,000 monthly subscriptions. But on a pay-per-view basis, for the average of the second quarter, it ranged around 120 million -- sorry, 120 million on an average monthly basis.

Okay, thank you very much. That's all my questions.

Ladies and gentlemen, we show no further questions at this time. I'd like to turn the call back over to the Company's management for closing remarks. Please proceed.

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

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.