Phoenix New Media Ltd (FENG) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Phoenix New Media second quarter 2012 earnings call. At this time, all participants are in a listen-only mode. (Operator Instructions). I must advise you that this conference is being recorded today, 14th of August, 2012.

I would now like to hand the conference over to your first speaker today, Matthew Zhao. Sir, you may begin.

Thank you, operator. And a thank you and a welcome to Phoenix New Media second quarter 2012 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, Ms. Lily Liu. For today's agenda, management will provide us with a review on the quarter and also include a Q&A session after the management's prepared remarks.

The second quarter 2012 financial results and the webcast of this conference call are available at the Investor Relations sections of www.ifeng.com. A reply 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 RMB. With that, I would like to turn the call over to Mr. Liu Shuang, our CEO.

Thank you, Matthew. Good morning and good evening everyone. In the second quarter, our advertising revenue grew by 30% to approximately RMB147.6 million. However, as many of you are already aware, China's continuing macro-economic uncertainty resulted in the past quarter being more challenging than previously anticipated for many in the internet advertising sector, including us. In particular, several of our advertising clients were delaying [ad spending] more than we initially forecast.

But at the same time, we also witnessed our average revenue per advertiser increasing by 53% year-over-year to over RMB650,000. Overall, we believe that this truly reflects our recognized leadership as the prominent media platform with highly desirable demographics advertisers are looking for. With that, I would like to discuss three key areas with you today -- (1) our user base extension; (2) updating you on premium content offerings and product development; and (3) recent initiatives which will help drive growth in the second half of the year.

First, our [recent] user growth dynamics. Even though our industry is facing challenges in this current economic environment, at ifeng we continue to significantly outpace our peers' user growth and user retention. According to our research, in June our average daily unique visitors grew 62% year-over-year, and 15% sequentially to 26.4 million, which grew significantly faster than the top four portals. In addition to this strong user growth, we further improved our user stickiness, as measured by average daily page views, which grew by 42% year-over-year to over 331 million in June.

Our video platform, ifeng video, has now become one of the largest short-form video platforms in China, focusing on professional news videos and documentaries. According to iResearch, by the end of June ifeng video ranked number nine among all Chinese online video companies in terms of data-unique visitors with over 10 million unique viewers and over 100 million on a monthly basis.

Now I would like to turn to discussing broadening our content offering and the product development. In the second quarter, we continued to enrich our content offerings to fulfill the demands of our viewers. During our continued coverage of major news events taking place around the world, some notable featured topics taking place in the quarter, including the controversial South China Sea territorial disputes as well as the widely popular 15th annual Shanghai Film Festival, which attracted over 85 million average daily page views in this lively one-week event.

In June, we also announced a three-year strategic cooperation agreement with the National Film Board of Canada to exclusively launch the first ever online channel in mainland China, devoted to Canadian entertainment content. In addition to continually extending our content offering, we firmly believe we need to move to where our viewers are by offering them access to multiple platforms. In this effort, we continuously strive to improve the customization and seamlessness of accessing our content from any device for our viewers. As an example of this, in May we launched a new free-to-download mobile audio application called Phoenix Radio. With over 600,000 downloads so far, Phoenix Radio has become one of the most downloaded non-music audio apps in China, due to its ease of use in accessing our content.

Certainly, moving our focus to the second half of 2012, we are anticipating continued macro-economic challenges and uncertainties in our industry, but at the same time we remain committed in carrying out our growth initiatives, which will continue to help drive growth going forward. As one of the largest internet video platforms in China, especially for professional news, as society evolves and people become used to watching video content on phones, PCs or internet-connected TVs, we will continue to benefit.

In last quarter's conference call, our COO Li Ya discussed the adjustment to our [field] strategy for video apps, the key goal of which is to boost our video advertising sales by going after TV advertising dollars in addition to internet advertising budget. This general realignment is nearing completion, and will allow us to better target the pool of TV news advertising dollars, which was estimated at over RMB30 billion in last year.

Another key area of focus for ifeng is on the mobile advertising brand that continues to explore innovative and effective mobile internet advertising solutions to help our advertisers target users who are consuming significantly more content on their portable devices. Due to the diversity of our mobile product offerings, like smartphones with WAP portal access, individual media apps, mobile videos, digital reading, and mobile games or MMS, or feature phones, we are able to offer advertisers a wider range of ad-targeting options than any of our competitors.

During the second quarter, the percentage of advertising revenue derived from mobile platform products increased significantly to 4.5%, up from 2.6% in the first quarter. We believe this proportion will gradually increase going forward as advertisers continue to find value in ROI associated with mobile internet advertising.

Lastly, our internet media business continues to generate healthy cash flow, enabling us to advance in our business and return capital to our shareholders. Today, we also announced a $20 million share purchase program for periods not to exceed 12 months. We believe our current valuation does not properly reflect our inherent value, and because of that, we believe the share purchase authorization is in the best interest of our shareholders.

Although currently we see temporary weaker growth of our advertising business due to the uncertainty of Chinese macro-economics, we still remain confident in our current business strategy and our near and long-term growth prospects.

Looking forward, the second half of the year is going to be an extremely busy news season, as we all know. Many events are going to influence and shape not only China but the entire world. Beginning with the London Olympics and building up to the Chinese political changes expected later this year, and the US Presidential elections in November, as well as several general elections taking place in other countries.

We're expecting a packed schedule and are confident that our in-depth and proprietary news reporting, which differentiates us from other portals, will continue to capture more viewers as well as more advertising dollars from our clients. As Chinese readers who value unbiased reporting turn to us for unfiltered access to global news, we will leverage our converged platform across portal, mobile, and video, linking users involving demands for content customized consumption anywhere, any time, and on any devices.

With that, I would like to pass the floor to Lily to go over our second quarter 2012 financial results.

Thank you Shuang.

As Shuang has just highlighted, our second quarter 2012 financial results were mixed due to the weaker than expected online advertising demands. For the second quarter of 2012, our total revenues grew by 24.5% year-over-year to RMB283 million, and non-GAAP diluted EPS was RMB0.47. Let me now take you through the details of our second quarter 2012 financial results. The amounts mentioned here are all in RMB unless otherwise noted.

In the second quarter, net advertising revenues grew year-over-year by 29.5%, and sequentially by 14.5%, reaching to approximately RMB148 million. Paid service revenues grew by 19.5% year over year to RMB136 million year-over-year, or up 23.2% sequentially. Our net advertising revenues were primarily driven by growth in the average revenue per advertiser, or ARPA. Year over year ARPA grew by 52.9% to RMB650,000 in the second quarter, as compared to RMB425,000 in the second quarter of last year. This reflects our ability to garner a greater percentage of our advertisers' marketing dollars.

Our top five industry contributors for this quarter are auto, e-commerce, food and beverages, financial services, and medical services. For paid service revenues, mobile internet value added services, or MIVAS, mainly comprised of digital reading, mobile games, and WVAS businesses, represented approximately 43.4% of total revenues in the second quarter as compared to 45.2% in the prior year. Video value added services, or video VAS, represented approximately 4.5% of total revenues in this quarter, versus 4.7% in the second quarter of last year. We believe both of these components will continue to decline as percentage of total revenues, and will in turn be more than offset by the momentum for advertising revenue growth.

Our adjusted gross margin, which affects (sic - see press release "excludes") share-based compensation expenses of RMB0.7 million, was 44.7% as compared to 46.4% in the second quarter of last year. The four components of cost of revenues are revenue sharing fees related to paid services, content and operational costs, bandwidth costs, and business tax. On a GAAP basis, revenue sharing fees as presented total revenues declined to 25.7% as compared to 28.8% in the second quarter of 2011.

Our content-related costs as a percentage of total revenues increased to 17.8% from 15.7% in the second quarter of 2011, primarily due to the increases in headcounts and acquisition for the new content. Bandwidth costs as percentage of revenues increased to 5.9% from 3.5% in the second quarter of last year, reflecting our strong traffic growth. And lastly, business tax as a percent of revenue decreased to 6.1% from 6.4% in the second quarter of 2011.

Next, our adjusted operating income decreased by 21% to RMB38 million from RMB48 million in the second quarter of last year, primarily due to a bad debt impairment and increased headcounts. Adjusted operating income has excluded share-based compensation expenses of RMB2.9 million. Adjusted operating income margin was 13.4% in the second quarter, as compared to 21.1% in the prior year.

Adjusted sales and marketing as a percentage of revenues decreased to 12.8% in the second quarter, as compared to 14.4% in the second quarter of last year, due to a decrease in staff-related costs. Adjusted G&A expenses as a percentage of revenues increased to 10.7% from 5.2% last year, due to a bad debt impairment of RMB11 million related to advertising sales and increased staff-related costs.

And lastly, adjusted R&D expenses as a percentage of revenues increased from 5.7% last year to 7.8% this year, reflecting increased investment in our infrastructure and technology. Our GAAP net income was RMB35 million in the second quarter, as compared to RMB36 million in the second quarter of last year, adding back total share-based compensation expenses of RMB2.9 million.

Adjusted net income attributable to Phoenix New Media was RMB37.9 million, as compared to RMB44.8 million in the second quarter of last year. This resulted in adjusted net margin decreasing to 13.4% from 19.7% in the second quarter of 2011, primarily due to bad debt impairment and increased headcounts. Adjusted net income attributable to Phoenix New Media per diluted ADS was RMB0.47, or about $0.07 per ADS, as compared to RMB0.61 in the second quarter of 2011.

Lastly, I'd like to reiterate our business outlook for the third quarter 2012. We're expecting our net advertising revenues to be between the RMB132 million to RMB135 million. Paid service revenues are expected to be between RMB134 million to RMB144 million. As a result, for the third quarter of 2012 our total revenues are expected to be between RMB266 million to RMB279 million in total.

With that, I'd like to open the call for questions. Operator, please go ahead.

Ladies and gentlemen, we will now begin the question and answer session. (Operator instructions).

Our first question comes from the line of Alex Yao of Deutsche Bank.

Hi, good morning everyone and thank you very much for taking my question. I have two questions. (1) is that given the slower than expected macro-environment, what is your defensive strategy over the next four quarters? Secondly, how do you think about the competitive landscape in China's grand advertising market over the next two to four quarters? Thank you.

Thanks, Alex, thanks for the question. This is Ya. Your first question regarding the defensive strategy for the next four quarters?

Yes please.

Is that right? Is that right --

Yes, that's correct.

-- for the next four quarters, right?

Yes, that's correct.

Okay, yes. Thank you, yes. So what we have been doing is we are -- we have two different strategies. One is aiming at the internet advertising budget, another one is aiming at the TV advertising budget, or more particularly the TV news ad budget. For the first part, we are working on improving the advertising results, which will eventually determine the ad budget allocated to us. We want to deliver them better measurable, in terms of quantitatively and also qualitatively, the advertising results.

The quantitatively such as the CPC, [CPA], [CPS], these factors can be internally measured by advertisers and by the also third-party advertising technology companies. We can deliver to improve these quantitatively measurable results. At the same time, we are working with some third-party research companies such as Nielsen, such as CTR, to improve the qualitatively measurable advertising results, in terms of brand perception, our [purchasing intention], and so by delivering the better, improved results, we think we can deliver the better ROI to the advertisers.

All of this is based on, of course, our continuously increasing user traffic, and also our leadership in some of the very important verticals. For example, in the second quarter our fashion and entertainment vertical continued to remain the second daily UV among all the top five portals, only after the QQ. Also, our cover page of ifeng.com has been the number one page view among all the top five portals.

All this traffic growth provided a foundation for our monetization growth, and with this ROI base and also approach to improve the internet advertising results, we are comfortable that we can continue to take the market share, like we did in the first half of this year, to improve our market share of all portal advertising.

Secondly, we are also taking very important approach towards the TV news ad budget. As Shuang mentioned in his speech, that China's TV news ads is a RMB30 billion market, and the ifeng's video is a recognized number one news video in China, with the exclusive news program from Phoenix TV. Also, our news coverage leadership in terms of our news channel, and we have unparalleled advantage compared to both the [PureView] video play companies who are focusing on the TV drama or movie contents, or the other portals like SINA, due to the fact that we do have the exclusive Phoenix TV news program.

Recently, we have been strengthening our work on this front. We are working with the third-party TV news agencies, and also we are analyzing the TV news program advertiser base and their industries, and as we re-align our video ad sales team, we have already seen meaningful improvement in the second quarter so far compared to the second quarter -- the temporary decrease in our video ad sales contribution.

So combining this online ad budget and with the TV news ad budget, we are rather confident in our mid to long-term growth in our advertising revenue, which can drive our bottom line growth.

The second question is regarding the outlook for the brand advertising or portal advertising in the next two to three quarters in China. We do see there are -- there's a big trend, I think -- I call it the insight, consumer insight, which is a basic of advertising and marketing. But the insight actually has two meanings. One is the insight through data, through data analysis and we are working on that. We have been improving our advertising technology team and product team by providing more positive ads, both online and also on the mobile platform and by doing the constant targeting, user behavior targeting, especially utilizing the third party databases, by providing improved results. This is one effort we are taking.

Second, I think the insight also includes the improved content marketing, improved understanding of our consumer. That's actually from our improved strategy between our reporting and also our ad sales. Our content quality -- premium content resulted in fast traffic growth. That's all based on the insight or understanding of our consumer -- of our target user in this rapidly changing Chinese society and that also our advertisers want. We want their -- more than just the heart or the pure ad placement. We want their ad message, the brand message, to be embedded in the content, in the -- in this reporting we cover for them. That insight, actually, is what we uniquely, I think, outperform other portals. So I think with the trend of the changing advertising industry, coming back to emphasize our insight, we are working on both the insight into our consumer, into the relationships between our content and our advertisers, as well as the data analysis.

So, we are rather confident that the brand advertising, the (inaudible) advertising as a whole, maybe see the challenges from the data driven, the results driven or search driven advertising. However, our combined platform from online and mobile can deliver the data that the advertisers want, as well as the insight, the brand and also the consumers want. So as a whole, we are seeing that the market remain -- I think we are ready for the changing market condition. But for ourselves, we remain confident.

A few more points I want to add Alex, this is Shuang -- yes. Despite the weaker than expected second quarter results, the fundamental, core portal business remains unchanged. Basically we are still one of the very few companies in China that delivers both low [budget] traffic growth and advertising sales growth. You will find that there is a very interesting race between our -- very interesting -- very encouraging race between our traffic growth and monetization process. The interesting thing is every time our advertising achieves a new record high, our traffic growth will quickly catch up to create another new record high and it constantly overshadows the momentum of our advertising sales growth.

So the challenge is obviously [shifting] to work our monetization process. I can say -- honestly speaking, I can say we are happy with our second quarter results. We also have conducted a very rigorous, internal review. I think there is definitely some room for improvement, like a better coordination between our agency team and our customer team. Better communication and cooperation with our accounting department and [skills] department and speed up the process of internal realignment of the video sales team. I think we could do better. We should do better. So that is a key area which we'll work on. Speaking of the mid to long-term, (inaudible).

Thank you very much.

Our next question comes from the line of Steve Zheng with -- excuse me -- our next question comes from the line of Gillian Chung with Morgan Stanley.

Hi. Thanks for taking my question. Given the challenging macro outlook, are you going to raise your advertising price again in the second half and if yes, how much do you think it will be? My second question is on the video advertising. Given all the efforts that you've put to try to monetize your new video content, should we expect the video advertising sales as a percentage of your total advertising revenue, to go up a lot in the second half? Thanks for your time. Thank you.

Okay. Thank you Gillian. This is Ya again and okay. So the first question is regarding the price hike for the second half and because of our continuous improving traffic, growing traffic, we have this internal analysis. Despite of the difficult macro-economic condition, we still plan to increase our price slightly. Probably at the low teens for the -- on October 1st. (Inaudible) we will still review this and we haven't made the decision yet, because we do understand the market share at this condition is probably more important than the price itself we sell to the advertisers. But we do enjoy the [pricing] power and because of continuous growing traffic.

The second question about the video ad sales. As I mentioned, it is a huge market and within the video ad sales, we are also taking two different approaches. One is against the internet video advertising [budget], especially for the FMCG sector. We have successfully won some major clients such as Unilever and also working on a lot of the FMCG clients for the internet video advertising. At the same time, working with the typical TV news advertising clients, especially in the sectors like alcohol, like regional gardens, like travel, like many things and this taken approach allows us to open a new area in terms of growing clients from totally different sectors or totally different base, other than our existing internet advertising base.

So in the third quarter, we are seeing some meaningful improvement compared to the second quarter. We believe in the fourth quarter and going to the next year, the contributions from video ads will increase faster, even faster than the third quarter. So to answer your question, yes we are ready to see that improvement.

Thank you very much.

Thank you Gillian.

Our next question comes from the line of Steve Zheng with Macquarie.

Good morning. Thanks for taking my questions. I have a question in regards to your major verticals. Which ones are you seeing the most strength, going into the second half of the year and which ones are you seeing the most weakness?

Okay. I think when -- we noticed in this difficult economic condition, we are trying to broaden our sectors that we are working with. So that's why in the second quarter the top 10 sectors contributed 4% less than the top 10 sectors in the first quarter and -- which we see as a healthy indicator. However, among the top sectors, I think because of the sector, because of our video ad sales strategy, we do think that the FMCGs, the food and beverage and also the (inaudible) and the travel sectors, probably will see better improvement. And also, because of our growth in -- traffic growth, in our fashion and entertainment sectors, we are seeing some strong momentum in luxury brands, despite of the difficult economic conditions. And the e-commerce probably will not see much growth, as we are strengthening our internal review in terms of order management of what kind of clients and the payment terms we need to sign with these e-commerce companies, as we see some of them are facing challenging environments, both from capital market and also from their internal competitions.

Okay, great, thank you. Just as a follow up, as you mentioned, that you are seeing good growth from your mobile advertising sites. Can you talk a little more about your strategy for that segment? Whether or not you are just using traditional banner advertising on mobile? Or are you swaying more (technical difficulty) ?

Yes. I think the mobile advertising is slightly different and we -- our mobile platform consists of the right range of products, from the smartphone, the 3G services like the mobile ifeng.com, the mobile website and also some flagship mobile apps like Phoenix News the mobile Phoenix station et cetera, as well as the MMS and some other targeted solutions. So we have a whole range of different mobile products to offer, with a large [right now] under-monetized traffic and the more targeted aps can deliver better ROIs to encourage advertisers to experiment within the mobile advertising. That's why I think the mobile advertising is a little different. It's -- if you don't have the brand effect, but in addition, is more ROI based, it's more results based, at this early stage of mobile advertising. And we are seeing gradual increase in this mobile advertising contribution to our overall revenue. Shuang, do you have anything --?

Yes. I think we are ideally positioned in capturing the [big] opportunity in the wireless advertising, as Li Ya mentioned. We have -- our current media oriented wireless apps have achieved more than 20 million downloads and subscribe fee based MMS has commanded more than -- almost 10 million customers and also our WAP is one of the top ranking WAP portals in China. So that provides a very perfect base for us to capture the wireless advertising opportunities and also the good thing -- the good news is -- another good news is, we don't see that much [cannibalization] across our different platforms. You will see across platform traffic growth. So that means our users get access to our different platforms for different purpose. Some want to get in depth coverage of the major current affair. Some want to have an easy and quick access of some very fragmented news and that enables us to capture.

So our [convergence] model, our devices across the platforms, enable us to capture our end users in their different timeslots in their 24, daily [technical]. So that will further strengthen our convergence model supported advertising model.

Okay, great, thank you.

Our next question comes from the line of Martin Bao with CICC.

Thank you for taking my question. Actually, I have two questions and the first one is regarding to the sales team for the online advertising service. Do you have a unified sales team or a -- two separate --?

Sorry, We can't hear you. Can you speak louder?

Can you hear me now? Yes. I'm wondering whether you have two sales teams or just one unified sales team. I mean the two sales teams are a separate sales team for the random advertising and the video advertising?

Okay. Yes, we actually have a central sales for the brand and the video advertising team. However, we do have a dedicated video and sales strategy team, which does the ground work, which provides the sales strategy and sales solutions and then use that to train our internal sales force across different regimes and across different sectors and the difference sales -- industry sectors, of course, some of the sales sectors are more targeted at the TV news advertisers. For example, those serving the alcohol industry or serving the regional travel sectors. So to answer your question, so it's a centralized team, but with a dedicated strategy team.

Thank you and I have another question regarding the paid services. We know that the traditional pay services for the feature phones are not growing and the whole market is not growing. So, do we have any plans to introduce any new services or innovative services for the smartphones or other kind of mobile [devices]? Thank you.

Martin, I'll take that question. Let me try to repeat your question. Your question is given the fact that WVAS growth is slower, what do we have any strategies for smartphones and other new services?

Yes and typically, the kind of (inaudible) service that will take revenue direct from users, not from the advertisers.

Oh I see. Okay. On the WVAS or generally speaking, on the pay services front, aside from mobile advertising, which both Shuang and Ya highlighted, in terms of subscription base revenues, the strategy going forward is really to continue to work with the telecom operators on additional 3G services. So in the past couple of years, we launched a digital reading. We launched a mobile video. We added more content channels for our mobile video. We also added more mobile games. So we will continue down this path offering additional 3G services through the telecom operators going forward, for paid services. That's -- aside from mobile advertising, that's our core strategy.

In addition to China Mobile, we are also working more and more with China Telecom and China Unicom, offering additional services and products. So overall, I do believe that pay services revenues -- growth rate will continue to be slower than advertising.

Thank you very much.

I think -- this is Shuang. One more sentence I want to add. I think the growth of the traditional [SP] business will be very stable, will be -- it's going to be difficult to see driven growth in this regard. But the pay driven -- the wireless business itself is evolving. With the deployment of the 4G networks by telecom operators, we see huge opportunity in wireless medium area. I think thank (inaudible) fit into our convergence model, because [current affair] centric type of video is very friendly on a smaller screen and it is very -- it matched people, a professional company online. So that is a big opportunity for us. We need to get ready for that and we need to invest in the related infrastructure.

Our next question comes from the line of [Eric Ghee] with (inaudible).

Hello. Can you hear me? Hello?

Yes.

Okay. I noticed for Q3 you reported only single digit year-over-year growth and also because the [up] value will be higher than last third quarter. So that means the number of advertisers will continue [job]. Is that right? So it is a very week forecast for you.

Yes. The first about the (inaudible) forecast. I think, given the macro uncertainties, I think we are taking a lot of conservative approach in giving our revenue guidance and however, internally, we do have a higher target and also, based on the sales order of completion rate at this time, we are rather confident in terms of -- for the guidance where we gave and so internally, we are trying, of course, to deliver or beat our guidance. We are seeing, also, in addition to the sales targets, we are seeing gradual improvement in terms of the number of advertisers, especially because of the approach we are taking to towards the video advertising, aiming at the TV advertisers.

So, I think part of the reason that we are seeing the numbers have decreased, was because we proactively took some actions to stop orders or to reduce the sales with some smaller, riskier clients in this difficult economic condition. I think that's for the protection of our finance. I think that approach is important for us and is meaningful. The higher quality client base continues to expand and that's also going to be true for the third quarter. So in terms of third quarter forecast, I have to say that as -- if we compared -- right now we are at the half of the quarter and if we compared the sales completion rate with that of the second quarter at the same time and similar time, we are much ahead. So that's why I think we are seeing better internal confidence in terms of delivering or internally trying to beat the guidance.

Okay and may I ask, what's the [UV] and also the price, compared with other major portals, from ifeng?

Okay. The price thing, there is just so many -- I mean, to just give you an example, if we calculated the front page -- the cover page [CPM] rate, right now (inaudible) has about one-third premium over us. However, we do believe the quality of application levels and consumption levels of our user base and also the brand influence of ifeng. So that's one area we see continuous improvement.

In addition to CPM you are asking about the UV. As we mentioned, if we look at some of the verticals, like fashion, our daily unique visitor is about twice of that of fashion of females channel of SINA. And if we -- the amount of portal -- the topside portal and our UV is number two for the fashion and entertainment verticals.

Of course if you look at the front page, our UV is number two on the (inaudible), the PV for front page is number one, and that's according to the monthly iUser tracker data. So we do see the improvement potential because of our continuous growing traffic and also the comparative compared to the other portals.

Okay, thank you.

Thank you.

(Operator instructions). Our next question comes from the line of Joyce Zhou with Barclays.

Hi. Thank you for taking my question. So my first question is regarding your auto advertising restructuring. So previously I think you mentioned that you are doing a restructuring on the auto advertising department, so I just want to get an update on the process. Also for the second quarter, do you see the auto segment growth is better than expected and how does that look for the third quarter?

My second question is regarding the third quarter guidance. So based on your guidance, I think we see a quarter-over-quarter decline. This already I think you have factored in the London Olympic Games. So for the London Olympic Games, how is the result comparing to your previous expectations? Thank you very much.

Okay, thank you for your questions. This is Ya. Yes, we did -- during the first half of this year we did restructure our auto channel to be under the command of the advertising department, because we recognized that the auto channel actually serves both the consumers as well as our advertising clients. But they, ergo, should be more aligned to have better monetization and we did also recruit a top industry expert to head our auto department and based on the results we have seen so far -- I mean, our auto channel has taken a differentiated approach and also an innovative approach to develop contents both online and also on the mobile platform and both emphasizing the influence in the sector in the industry as well -- or more so -- as serving our consumers.

Fundamentally, that will drive better advertising dollars both from brand advertising and also promotional budget. So I think that partly resulted in the 28% contribution from the auto sector in the first half not just in the second quarter. I think this actually is better than we expected, however, as we expect other sectors to contribute more, to grow faster, and to improve, so the auto contribution probably will decrease slightly. However, compared to our competitors our market share among the auto budget will continue to improve we believe.

Your third question is regarding for the third quarter outlook especially the Olympics. The Olympic Games actually did not receive the same attention compared to the 2008 Beijing Olympics. The advertising revenue received is also less than we had expected. But we believe what's more important is the sport advertising, or the sport reporting is important for our top portal in China.

Through this we (inaudible) media reporting for these Olympics. We worked closely with our TV parent companies, where we created three original video contents, produced all of London, and we also used our mobile platforms to provide timely coverage of the events. Also, beyond the sporting event itself, more on Chinese audience perceptions, understanding, and their value change through these events.

So the advertising revenue itself seems to be less than expected but the Olympics coverage itself I think is a huge success. I think in the last week or so we also provided the conclusive reports on our Olympic coverage. So I think the rather soft sales from the Olympics probably also contributed to less than expected third quarter revenue increase.

But as I mentioned earlier, that our third quarter revenue guidance I think is very disciplined and rather conservative guidance, given the uncertain macroeconomic conditions and based on our sales order completion rate we are confident in delivering that result, or beyond.

(Operator instructions). We do have a question from the line of Alex Leung with SAC.

Thanks. Hi, guys. Thanks for taking my questions. I've just got a couple. Could you actually just quickly repeat how much video is as a [percentage] of your ad business right now? That's the first question, and the second question is can you add more color around the bad debt? You probably can't say which customer it was but maybe which vertical and what happened and how you see bad debts going forward, how you're going to limit, et cetera?

The third question is what is your at inventory utilization rate right now? My thinking is if utilization rate is low then how can you raise prices in October? It could make your utilization rate even lower. I'm sure it's more complicated than that. So if you could explain that, that would help. Thanks, bye.

Okay, the first question is regarding the video contribution. As we mentioned earlier, because of the realignment of our video ad sales force in the second quarter we saw some temporary setback in terms of video ad sales. So for the second quarter, video ads only contributed to about 12%, less than 12%, of overall ad sales.

Right now we already see the third quarter, that presentation already has received meaningful improvement and going forward we are confident that that contribution will continue to improve.

The second question regarding bad debt, I mean in the second quarter we did take a proactive approach to recognize the bad debt impairment. Some of the typical advertisers for this for this includes one e-commerce company, one tax link advertiser. However, I think during the follow up communication with these advertisers, we may be able to recover some of this. But we did seek a disciplined approach to recognize these bad debts first.

Right now I think going forwards we are taking two different approaches. First, in terms of order [contract assignment] we already take some actions to help protect our finance being some stricter rules about what kind of clients we want to work with, what kind of credit we process if we want to go through.

Second of course, we probably will have better analysis on the accounts receivable and to provide earlier internal alert so that our cell phones, our agency can communicate with advertisers earlier before some of the situations became worse or difficult to control.

I think Lily probably will have more to add on this but let me just answer your third question first, about the ad utilization rate. Our ad utilization rate actually is not one number because we have four different types of ad inventory resource; A-plus, A, B and C. For the A-plus or A categories, for example, the banner, [front banner ends] on our cover page, the sales rate is about one-third and for the B category or C category inventories utilization rate, the sales rate is lower.

I think the reason we want to slightly increase the pricing is because we want our value to be fully recognized. The price, there is a comparison between us and the other portals. We're not trying to catch up with the other portals' price, CPM price, overnight. But we do want them to recognize that there is grand premium, there is better ROIs because of our user quality. That's why we are taking a well-considered approach by planning to increase the price slightly at the low-teens during the next price hike.

But Lily, maybe you can -- have better elaboration on that --?

Can I clarify that for a second? So if your sales rate on A-plus is one-third, what are you doing with the other two-thirds? Is part of the other two-thirds given away as a bundle, as just free incentive? So is there is a difference between your sales rate and the actual effective usage rate of your inventory, because perhaps part of your inventory is given away for free?

No, the utilization rate is the utilization to the other time -- either it's going to mostly be used for internal promotions. For example, our internal official reporting of certain events or our original content of creatives by different verticals. So most will be used for the internal promotion and also some of the exchange. We do not recognize these exchanged mutual [expulsions] with other media.

Sometimes we promote other medias through these exchanges. But these are not recognized revenue so it's not part of the ad utilization. I don't know if that answers the question.

It does, thanks.

There seem to be no further questions. I'll now hand the call back over to the presenters for closing remarks.

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

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation, you may now disconnect.