Phoenix New Media Ltd (FENG) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Phoenix New Media third quarter 2013 earnings call.

At this time all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. (Operator instructions). I must advise you that this conference is being recorded today, Thursday November 14, 2013.

I would now like to hand the conference over to Phoenix New Media's IR Director, Mr. Matthew Zhao. Thank you sir. Please go ahead.

Thank you operator, and thank you and welcome to Phoenix New Media third quarter 2013 earnings conference call.

I am joined here by our Chief Executive Officer, Mr. Shuang Liu, our Chief Operating Officer, Mr. Ya Li and the Chief Financial Officer, Ms. Betty Ho. For today's agenda management will provide us with a review on the quarter. It will also include a Q & A session after the management's prepared remarks.

The third quarter 2013 financial results and webcast of this conference call are available at the Investor Relations sections of www. ifeng.com. A replay of the call will be available on the website in a few hours.

Before we continue, I refer you to our safe harbor 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. Liu Shuang, our CEO.

Thank you Matthew. Good morning and good evening everyone.

We're very excited to report a strong third quarter with revenues growing by 33% (sic - see press release '32.3%') year over year and the GAAP EPS reaching a historical high of RMB1.04 with the bottom line significantly exceeding the street consensus. In particular, this outperformance was driven by a 160% year over year increase in mobile advertising and a 60% increase in overall net advertising covenants.

Moreover, the cost synergies from our converted model further helped facilitate margin extension which led to the Company achieving record GAAP net income. Looking beyond our financial performance we are proud to see our Company continue to evolve from a news-focused portal leader into a diversified news and lifestyle media company.

Going forward it is our goal to deepen our exposure to lifestyle topics such as real estate, auto and health while also developing our mobile offering and extending into other mediums such as mobile radio and short films.

Before elaborating on our recent initiatives to support these goals, let me first share with you a snapshot of our unique content offering in the third quarter to show how our ifeng media brand is continuously impacting Chinese society. In one case ifeng video had an exclusive interview with the mother of the high profile criminal [Vi Chen Li]. Interest in this case led to over 1 million viewers tuning into our video website along with many mainstream TV news networks, including both (inaudible) TV and CCTV using our interview footage in the prime time news segments.

Another telling example of our influence came during a recent online poll conducted by the Government enquiring about public dissatisfaction of existing holiday schedules. The poll was conducted through the top six Chinese news portals, including us. In the end, ifeng users altogether contributed to more than 60% of the 2 million total votes that were submitted. This greater proclivity by ifeng users to participate in public affairs demonstrates that our users are more socially and politically aware.

Because of such (inaudible) and premium content, we again significantly outpace our peers in PC portal traffic growth as well as achieved phenomenal growth in visitors to our mobile platform.

In September 2013 the daily unique visitor of ifeng.com increased by [20.3%] year over year, which most other portals have declining PC user traffic. On the mobile branch we realized the fastest growth rate in daily active users are our ifeng news application which increased by over 400% according to iResearch. We believe this sets the stage for more monetization opportunities on mobile devices in the future.

With these recent achievements in mind we have recently earmarked several initiatives to support our growth and diversify into other opportunities.

First, we're expanding into the real estate information verticals by establishing a joint venture with several key partners where we will hold majority ownership. We believe that with our large audience of high end users, along with the trend of urbanization and the middle class extension, those real estate verticals will allow us to increase user reach and user retention and further extend revenues with this growth of high income users.

We're also striving to broaden our user reach -- so extending into new information mediums. Recently we struck an agreement with IDG, one of China's premier internet and media investors, to more aggressively develop our Phoenix FM app business which offers listeners non-music audio content such as news, radio programs, audio books, educational courses and so on. This partnership allows us to both leverage IDG's unparalleled media experience and resources and extend our user reach to include a growing number of radio listeners, commuters and auto owners in China.

Additionally we have continued to modestly expand ifeng's in-house video production capabilities with several successful internally developed short films and short documentaries during 2013. As an example of our initial success, in October we entered CCTV's inaugural China Short-Form Film Festival in Hangzhou. Out of 2100 short film submissions, our production, Letters from the South, was awarded the festival's overall top award. This recognition clearly validates the strength of our in-house production capabilities.

In conjunction with these new initiatives, we are focusing heavily on the development of our mobile offering. Through promoting greater mobile growth and adoption our mobile platform has already begun to return significant dividends as it has acted as a gateway to attract additional users and create further [thickness] in viewership across different platforms.

Additionally, in the third quarter we saw mobile and sales increase an impressive 160% year over year, now accounting for 10% of our total advertisement sales. The next steps include further extending our mobile offerings, diversifying into additional verticals as well as increasing the monetization of the platform itself.

Last month we announced the formation of a strategic partnership with China Unicom to offer a co-branded Wo+ifeng mobile video data package to China Unicom's 3G subscribers through ifeng's mobile video application. This partnership will capitalize on the mobile trend and will further enhance user experience on ifeng's mobile platform through facilitating easy access to our video content through mobile devices anytime, from anywhere, in China Unicom's 3G network.

Next year carriers will start to launch their 4G networks nationwide leading to a much faster and more stable mobile internet environment and accelerating the mobility trend. Having this new opportunity in mind we are well prepared to stay ahead of the curve in pushing forward our convergence model on streamlining our content dissemination across those devices.

These initiatives will strengthen the comprehensiveness of our current offering, increase the number of medium by which we can reach existing and new users, set the stage for robust financial growth and brand development, as well as improve customer loyalty and satisfaction.

We believe there is tremendous market potential in this arena because of several trends; larger user appetite for lifestyle news and information, transition to mobile devices for consuming information and the growing middle class in China. In order to provide better ROI to our advertising clients through our media platform, we recently have begun to explore more innovative advertising solutions such as native advertisements, which better combine brands with content.

For example, we recently reunited with Lenovo to renew our Chinese Doers Program for second year. The purpose of the initiative is to find and highlight and find stories from young Chinese being persistent in pursuing their dreams, a theme that is in line with Lenovo's [learn from] brand image. The webpage we established to disseminate these inspiring stories has already attracted over 40 million page views.

Furthermore, reflecting our achievements and evolution into a major media company, we have begun to focus more on corporate social responsibility and charitable initiatives. In the third quarter we hosted our seventh Forever Happiness Charity Dinner and raised a record $1.5 million for improving children's medical care in rural China.

We know in this competitive Chinese media sector there is no reward for complacency. In order to see continued growth and expansion we must relentlessly pursue catalyzing our emerging trends of changing market dynamics.

We have succeeded thus far in adapting our business model and refining our media platform and service offering to thrive in this changing market. In the coming year we plan to achieve greater synergy through cooperation with our parent company Phoenix Satellite TV in terms of program production, advertising sales and of course marketing promotion initiatives.

Going forward we will continue to evolve and stay in front of the wave of information provision through building a comprehensive content offering, diversifying into new mediums and focusing on monetization.

With this, I'd like to turn the call over to our CFO, Betty Yip Ho.

Thank you Shuang and thank you all for joining our conference call today.

This is the first time I present to you as Phoenix New Media's CFO. I'm very honored to join a great company like ifeng to offer my financial expertise and experiences to help the Company's growth going forward.

Let me take you through our financial highlights for the third quarter 2013 results. The amounts mentioned here are all in RMB unless otherwise noted.

ifeng total revenues for the third quarter came in at RMB378.7 million. Non-GAAP net income for the third quarter was RMB82 million or RMB1.06 non-GAAP net income per diluted ADS, which exceeded Bloomberg's street consensus by over 39%.

Let me now run through the other key financial highlights starting with net advertising revenues. Net advertising revenues for the third quarter came in at RMB223.8 million which beat the high end of our guidance and represents a reputable year over year growth of 59.3%.

Average revenue per advertiser, or ARPA, increased by 13.8% to RMB0.7 million and total advertiser numbers increased by 40% to 336. Our top five industry contributors for this quarter are auto, food and beverage and wine, e-commerce, medical services and financial services.

With respect to paid service revenues, for the third quarter of 2013 ifeng generated RMB154.9 million paid service revenue which is lower than our previous guidance due to the weak user demand for 2G text message pay per view services. For the third quarter of 2013 mobile value added services, or MVAS, revenue decreased by 4.3% to RMB132.4 million. Games and other revenues increased by 202.6% to RMB22.5 million, primarily due to increase in revenue generated from the web based games on our own games platform.

As the consumer interest shifts toward mobile internet we expect legacy 2G paid service revenue will continue to decline as a percentage of total revenue. But that will in turn be offset by the growth of 3G paid service revenue such as mobile video and digital reading, as well as webpage games going forward.

In terms of gross margin, our gross margin for the third quarter was 48.7% up significantly from 39.3% for the same period in 2012. With respect to cost of revenue, the four components of cost of revenues are revenue sharing fees relating to paid services, content and operational costs, bandwidth costs and sales taxes and surcharges. On a GAAP basis, revenue sharing fees as a percentage of total revenue declined to 20.1% from 27.7% in the third quarter of 2012.

Content and operational costs as a percentage of total revenue decrease to 19.9% from 21% in the third quarter of 2012. Bandwidth costs as a percentage of total revenue decreased to 4.8% from 7% in the third quarter of 2012. Lastly, sales tax and surcharges as a percentage of total revenue increased to 6.4% from 5% in the third quarter 2012.

Regarding to operating expenses on a GAAP basis, operating expenses for the third quarter were RMB109.7 million compared to RMB108.8 million from the same period last year. The increase in operating expenses was primarily due to the increasing staff related costs and expenses associated with marketing and promotions, and offset by the decrease in bad debt provision.

ifeng's operating margin for the third quarter of 2013 increased to 19.7% from 1.3% in the third quarter of 2012 mainly due to the increased revenue contribution from advertising and web based games.

Non-GAAP income from operations for the third quarter of 2013 increased significantly to RMB76.6 million from RMB6.3 million for the same period last year. Non-GAAP operating margin for the third quarter of 2013 increased to 20.2% from 2.2% in the third quarter of 2012.

Finally our net income, net income attributable to ifeng for the third quarter increased by 593.5% to RMB80 million from RMB11.5 million for the same period last year. Non-GAAP net income attributable to ifeng for the third quarter increased by 481.5% to RMB82 million from RMB14.1 million for the same period last year. Non-GAAP net income per diluted ADS for the third quarter was RMB1.06 or $0.17 compared to RMB0.17 last year.

With respect to balance sheet items, as of September 30, 2013 ifeng's cash, cash equivalents and term deposits totaled RMB1.25 billion or approximately $205 million. Our business outlook for the fourth quarter 2013, in terms of total revenue we are targeting between RMB368 million to RMB378 million. For net advertising revenues we are targeting between RMB244 million and RMB249 million. For paid services revenue we are targeting between RMB124 million and RMB129 million.

This concludes the written portion of our call. We are now ready for questions. Please go ahead operator.

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

Thanks so much for taking my question and congratulations on a fantastically strong quarter. Two somewhat interconnected questions; the Company has been very good at flagging the declining 2G paid service and I was curious, now that we're on the cusp of launching 4% in China, how do you plan to seize on that? Can you describe what the model for paid services might be?

Then somewhat related to that, would love to get any more data points around your mobile advertising business and how we should think about it and model it more generally.

Hi Alan, this is Shuang. Let me answer your first question. We're very excited about the coming era of 4G. I think this is definitely good news for both users, telecom operators and us. For users 3G -- the coming of 3G definitely means better access feeds, better viewing experience and better packages. For telecom operators this will definitely intensify the competition among them. This will force them to come out with more competitive video data related packages to users.

So because of these two factors, media -- a very strong new media player like us, which has a very strong brand on the premium content, could leverage. If you look at our cooperation with China Unicom, it's just cooperation in the 3G area and the agreement has just been signed for one month, but the progress we've made has been very impressive. More than 15 provinces have entered into cooperation with us. At this current stage I cannot disclose too much details, but we are very optimistic about the further layout of this campaign.

So speak of the 4G services, I think 4G means even better viewing experiences, better access speed. The telecom operators will definitely shift their marketing resources to push for these kind of services. So we will definitely benefit from this. Especially our strength lies in news and documentary related short films. It's very friendly on the non-Wi-Fi environment. So we are looking forward to the full launch of the 4G rated service. But it won't happen in the next one or two quarters. I think the full layout of these services will happen probably in the mid-summer of next year.

But to a certain extent it will offset the softness in the traditional 2G related business. In the 2G related business, we definitely will see some softness and weakness in this area. But as I mentioned before, the (inaudible) contribution of 2G related services is declining. The percentage right now is below 40% and the product contribution is even less. The rise of the 4G related services to quite an extent will offset the drop of the 2G related services. So we are very excited about the 4G era and I think we will be well-positioned to benefit from it.

Ya probably will answer the second question.

Hi Alan, this is Ya. I think for the paid service on the wireless platform and right now we have three different monetizations. First of course is a mobile video which is growing relatively -- I think a modestly high reach -- a 50% expansion this year. We expect double digit growth to continue into next year.

Secondly, digital radio which has huge potential and still has a very small base. The third is mobile games, especially for exclusively licensed or co-developed or self-developed mobile games. But we are very careful in the mobile game area as we are only starting to tap into this important monetization area.

The WVAS revenues in the second quarter did decrease 4% and we do expect the trend to continue into the fourth quarter as you can see probably from the fourth quarter revenue guidance in which the advertising revenue will experience about 10% quarterly growth, sequential growth, while the paid service revenue overall will be negatively affected by the decrease in the WVAS revenue.

However this change in the revenue mix will help actually further margin expansion we think -- slight expansion into next year.

In terms of mobile advertising and in the third quarter the contribution increased to 10% of overall advertising revenue from 6% in 2012 and the growth rate was 160% and -- so overall for this year we will experience higher than 100% growth for mobile advertising revenue but we are still at the very early stage of mobile advertising monetization and we are not in a hurry to be too aggressive in monetizing the mobile traffic.

We are still focusing on enhancing user experience and providing premium differentiated content. The user expansion and user experience improvement will drive our long term future mobile advertising.

I think we are the -- you know, one of the very few, I think, companies that continuously disclosed our mobile advertising trend from the 2% contribution of the first quarter of 2012 to the 10% for the first time in the recent quarter. And we do expect our mobile advertising revenue growth to lead the industry.

We are also expanding the mobile advertising formats and product offerings including both the native advertisement concept as well as integrated advertising solution, leveraging our convergence platform. I think that's the answer to your question.

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

Thank you for taking my question. I saw that the number of advertisers experienced (inaudible) growth since the first quarter so just wonder if it is a trend for the fourth quarter as well? And do you expect the fourth quarter advertising sales are mainly driven by advertisers' growth or from both advertisers' growth and average spending? Thank you.

Hi Gillian, this is Ya. Yes, I think for this year as a whole we do experiment in higher growth in number of advertising clients. However, the future revenue growth will be driven by both factors, the number of advertisers as well as the ARPA. The number of advertisers mostly contributed new advertisers mostly contributed from the new verticals.

For example, the beverage and alcohol -- food, beverage and alcohol sector, which is further driven by our news video strategy and also certain verticals like real estate, that's based on our vertical expansion strategy into lifestyle and consumption verticals. And also, you know, the convergence model also helped us to gain some incremental ARPA increase from even existing advertisers.

Also let me add that, Gillian, we just successfully recruited [Zhoujin Andi Zhou], a top talent in China's agency -- advertising agency market. She has a large -- extensive strategic contacts in China's FMCG telecom and financial institutional area. So his [sic] joining us will doubly add value to deepen our client contacts and ARPA.

Thank you, and I have a second question about your -- you mentioned that you're expanding into the real estate, so just wonder what your, for example, target city coverage or your strategy on -- you know, differentiating yourself from your peers. Thank you.

Yes, I think the real estate vertical actually targets the high end user in general, which matches very well with our user demographic, which has greater spending power than our peers. But in the past the revenues from real estate vertical was very limited or almost negligible while our competitors or some verticals have already gained enormous revenues. That's why we found a very experienced strategic partner, real strategic investment, formed a joint venture in which we have a majority ownership.

And our targeting and positioning is both at the high end real estate, including the commercial real estate, travel-related real estate, culture-related and the retirement [village] real estate and also, with investment goal in mind. And also we target the global consumer interest in Chinese real estate as well as Chinese consumers' interest in overseas real estate market.

These are some of the unique positioning which also fits well with our high end user demographic. We do expect the effect of these to be incremental to our bottom line and -- but the revenue contribution will be single digit as a percentage of our advertising revenue.

Thank you, that's very helpful.

Thank you.

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

Thank you for taking my questions, good morning and Betty, welcome to the ifeng team.

Thank you.

I have a couple of questions as well, firstly on your advertising business which was up almost 60% year over year. You talked about in your prepared remarks about I think investing ARPA growth and nearly 40% number of advertisers growth. I was hoping you can slice and dice in another way.

Could you talk about in terms of inventory growth, sales survey growth and CPM growth when you look at your advertising business currently? And then looking forward, could you talk about what are your expectations for the industry growth for 2014 may look like, what kind of a growth you are planning for your own advertising business? That's my first question.

Okay, thanks Jiong. This is Ya. Yes, let me first provide a perspective to look at the growth. If you look at our top 10 sectors, advertising sectors, the most recent change is in the increase of food, beverage and alcohol and that, as I mentioned that's -- fits well with our news video strategy and also regional travel and also financial service and also communications. Communications I think is related to the arising 4G opportunity and to the mobile internet as a whole.

And when we look at in the overall usage or sell-through rate it's actually -- we have slight increase in terms of sell-through rate and inventory usage, mainly because our traffic growth continued to lead the peers, even in the area of mobile internet our PC traffic experienced 20% unique visitor growth in the third quarter. That's why our own advertising, for example CPM rate increase will have to compete with our own traffic growth.

In 2013 we have had two rate card increases, in January and July, and in each case our A-plus category, the premium ad inventory rate increased by around 15% each time and for our mobile rate card we also had increased it like three quarters in a row, since October of 2012. But right now, because of our traffic increase our inventory, existing inventory actually can satisfy our sales demand. And so going forward we will continue the strategy of slow rate card increase.

However, I think in 2014 people will notice that our cover page of ifeng CPM rate will probably accelerate the rate increase to reflect the brand influence of ifeng. Because right now ifeng's cover page has number two unique visitors among all the Chinese internet sites, only after Baidu according to iResearch and that just demonstrates the overall influence and that's very welcomed by the brand advertisers of ours.

And the question about 2014 industry outlook, I can only say I think, especially the last two months' development and also from the recently concluded -- the convention of the -- third convention of the 18th Congress of Communist party, I think economic reform and development was the focus, was again -- in the communique was said to be the focus of the further reform. And the market is the decisive force in allocating resources.

This new, I think, reference, this new term of decisive is significantly different from the previous one of basic force, I think which shows that economic growth, market reform will continue to help, I think, the overall advertising and marketing as China continues its market economic development.

Okay. Thanks, Ya, for the comment. Second question is on mobile. I missed what you said about your MAU for your mobile app. Could you repeat that? And you -- since you've started your web game platform business about a year ago, this business has brought incremental revenues. At what point you may be opening up your mobile app to be a mobile game platform as well?

Well, let me answer the first question. Our total monthly -- daily DAU for our mobile platform is 22 million and we've been quite comfortable with our market expansion on the mobile front. There are three apps, ifeng FM, ifeng news and ifeng video and our total ranking of our -- overall ranking of our mobile apps is comparable to our PC portal's overall ranking. I think right now our top target is to better improve our user experience and enhance customer loyalty, so we adopt a different approach in terms of market expansion.

So we basically believe in organic growth, so our top focus is still the product upgrade, better user experience, better product experience. So we haven't launched a full-blown marketing campaign like what has been conducted by other competitors like apps placement, which will cost a lot of money.

I think this kind of approach -- we seriously feel hesitant to adopt this kind of approach because it could be easy -- I wouldn't comment on other companies' practice on this but for us I think the sustainability of product placement, spending a lot money and do the product placement on different --many mobile handsets is questionable. So right now we are focusing on user experience to improve the product experience on our major apps.

So right now we're very comfortable with our user numbers. Ya probably can get on the--

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

Yes, because a year and a half ago you successfully started your web game business basically monetize your portal traffic, right. So at what point do you start to monetize your mobile traffic through gaming portal as well for mobile games?

Yes, that's definitely -- we think one of the focus for our game team and as we notice, for the industry as a whole, I think other than the MMOG games, the massive online games, I think the industry has shifted focus from the casual online to the mobile games and we are working on, in terms of licensing and the ways to developing mobile platform games.

So we do expect next year to start to see the revenues for the mobile games. Right now we have not, you know, been able to monetize our mobile web page or mobile app traffic by the mobile games but next year I think we will see the revenues in that.

Jiong, let me add that-- (multiple speakers). Yes. Let me add that even given the fact that we'll spend less amount of money in doing apps placement on the handset, our year on year and quarter to quarter growth rate is quite impressive. I believe it's ahead of the industry peers.

Sounds great. Thanks again, guys.

Thanks.

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

Hi, good morning everyone and thank you very much for taking my question. The first question is a follow-up question on mobile advertising monetization. I understand you guys have relatively more WAP traffic compared to app traffic. Are you seeing any preference from advertisers over these two types of different traffics? Which type of the traffic is easier monetizable?

Second question is the press release mentioned there is a decrease in bad debt provision in the quarter. Can you elaborate a little more? Why is there a decrease and what is the amount in the quarter? Thank you.

Okay. The first question regarding the mobile -- the mobile advertising -- I'm just confused by your second question. What's the first question again? Sorry.

The first question is--

Oh yes, yes. Okay, I'm sorry. Yes. Yes, so in general we have been able to monetize our mobile WAP traffic and I think not only us, I think a couple of other sites including two leading portals, also has a very large mobile WAP traffic and as -- and we have been able to monetize them relatively, I think, well.

But the trend of course we see stronger demand from advertisers for the -- for advertisement on mobile apps. However, we are -- it seems that we are still maintaining and also developing and growing our mobile WAP traffic as well as other forms of mobile apps such as the Light apps initiated by the big search engine Baidu.

Because the mobile -- the native app product is a rather self-closed environment and difficult to be discovered from search engine, and that's why I think we also realize that HMO5 technology will help increase the user experience for the mobile website and also for the Light app products and services.

That's why for the user growth we do hope -- expect to grow users across all these different products and services, but for the advertising demand it seems the stronger demand comes from the native apps. And for the second question, Betty will handle it.

Hi, Alex, this is Betty. In terms of the bad debt provision, based on our Company policy there are two types of provisions. One is general provisions and the other one is specific provisions. In terms of our general provisions, this is based on the ageing of the accounts receivable.

The decrease of the bad debt provision is because of the improving of the ageing on our accounts receivable. We are seeing this year that the collecting period is improving, that's why we have a lower bad debt provision. Does that answer your question?

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

You can see from our balance sheet on page 9 on the press release, you can see there is a -- the bad debt expenses is included in the general and administrative expenses.

Got it.

You can see the -- as of September 30 there is a significant decrease in general and administrative expenses; partly it's because of the decrease in bad debt expenses.

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

No, I think it's only compared to a quarter ago or to a year ago. Comparing to those two time spots, I think yes, we do perceive the improvement in terms of advertiser sentiment.

Got it. Thank you very much.

Thank you.

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

Hi. Thanks for taking my questions. I have a question about the margin trends. How does the Company look at the fourth quarter and going forward, especially the transition of the paid services from 2G to 4G might have -- how this transition and the product offering might affect the margins in the short term? Thanks very much.

Thank you, Muzhi, for the question. First, if you look at the revenue mix, of course the continuous increase in the percentage of advertising revenue and also the higher margin of 3G or 4G in the future service revenues will definitely help the margin.

But from another perspective, as we also try to seize the big opportunity of mobile internet and also expand into new lifestyle and consumer verticals, and also maintain a balanced pace in monetizing our mobile traffic, then the margin improvement will be steady but very slow.

And I think for the third quarter and the second quarter our operating margin already reached 19%, which I think is very -- I think it's a significant improvement from a year ago, but going to the next year, the pace of expansion will definitely, I think, slow, as mentioned for the reasons earlier.

Does that answer your question? Okay.

Thank you.

Our next question comes from the line of Joy Zhou from Barclays. Please ask your question.

Hi, good morning. So my first question is regarding your key segments of the revenue. Can you give us a detailed number of the contribution from each segment please?

Okay, yes. Thanks for the question. The auto sector contributed 29% and the e-commerce for 9%. Then the food, beverage and wine is 13%, that's the second segment, 13%. E-commerce 9%, health and medical services 7%, financial services 6%. That's the top line.

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

Particular to the single day promotion, I think we feel that the impact is overall and long-lasting impact of the e-commerce, rather than that single day. For example, in our top ten advertisers, one of our top ten advertisers is an e-commerce vendor.

And also now e-commerce contributed 9% of our overall advertising revenue. However, it's not concentrated on just that single day, because our users actually have greater spending power and also are less sensitive to price movement. So we are actually -- our users are actually better e-commerce customers, clients, because they will keep using the e-commerce sites beyond the single day low-price discount promotion, which could help the e-commerce vendors' overall revenue.

And indeed as our users generated probably fewer clicks, but definitely contributed better results, better ROIs. That's why I think the e-commerce is a very important component in our advertising sector.

The first part of the question regarding 2014, is that so or--

Fourth quarter and 2014, please.

Oh, yes. Yes, for the fourth quarter we did notice that -- I think for those two companies or three companies that already announced their fourth quarter guidance, as I mentioned, I think for the quarter to quarter growth rate, I think our guidance for the fourth quarter is at least double their guidance, despite the fact that those two companies have some unique new advertising resources, one in video, one in social media.

I think -- but overall, I think that definitely I think we all feel that the advertising environment is improved from a quarter ago or from a year ago, despite the field -- the alternatives within the structure of the Chinese, for example, financial system and the Chinese economy. So we are cautiously optimistic about the next year as well.

Thank you. My last question is regarding the mobile co-operation with China Unicom. So I noticed that the users will be included in your VIP retail users, so I just wanted to see if you have any comments on the growth of the VIP user number. Thank you.

The service just enlarged for one month, so it's too premature to disclose the exact nature. But the progress we've made in cooperation with China Unicom has been very impressive. And right now, just one month passed, already 15 provinces have launched the campaign to push the kind of services, and especially under the intensified market conditions, I think both sides will put more resources to boost the creation of those kinds of services.

So we're very optimistic. I think with the advancement of the 4G network by China Mobile, we can repeat the success with other telecom operators.

Okay, thank you very much.

We have no further questions in queue. (Operator instructions). Our next question comes from the line of George Wu, from Legend Asset Management. Please ask your question.

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

Thank you, George, for the question. According to iResearch, the DAU for our video business is about 12 million in the third quarter, and it's remained very strong within the overall video sites, despite the fact that we concentrate on providing the news and documentary short-form content, instead of the entertainment, TV, drama and movie content.

In terms of revenue contribution, it increased 110% year over year in the third quarter, and the contribution within the PC advertising is 18% for the third quarter. Within the entire advertising revenue, it's 16%. That's an increase from 12% a year ago or 14% a quarter ago.

We do expect the contribution of video advertising to increase in the fourth quarter. As we mentioned, our differentiated video advertising strategy is a more sustainable model, not based on the same content or high bandwidth costs. It's based on our unique media positioning and also the brand and the unique content. It also fits well with the coming 4G era for mobile internet. So the video strategy and video monetization will continue to be a key focus for our 2014 overall work.

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

Hi George, this is Betty.

Yes, hi Betty.

I think the (inaudible - technical difficulty) line on our press release, it shows our balance sheet under the general administrative expenses. Your question is why this quarter's general and administrative expenses is lower than the other quarters. The major reason was being that the decrease of bad debt expenses.

Yes, I understand that the bad debt expenses definitely helped on the general and admin expenses, but it seems that the promotion expenses is relatively lower as well, so could you give us some outlook on the operating expenses in Q4?

George, there's an internal seasonality at the Company. Lots of the major offline campaigns, especially marketing events, take place -- happen in the fourth quarter. So in the coming quarter the expenses in this regard will be a little bit higher than the other quarters of business.

Every single year, we basically -- like our fashion show, our economic summit, our auto show will be held at the year-end or the beginning of the first quarter. So for the fourth quarter, the expenses in this regard will be higher than the rest of the quarters, so this is -- we have internal seasonality in this regard.

So we can expect some normal seasonality in Q4?

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

Okay thank you, thanks for the great remark.

(Operator instructions). If there are no further questions, I will now hand the call back to Mr. Matthew Zhao for any 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 you for joining us on this call. Have a good day.

Thank you very much--

Thank you, bye.

Thank you.

Thank you.

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