Phoenix New Media Ltd (FENG) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Phoenix New Media first quarter 2014 earnings call. (Operator Instructions). I must advise you that this conference is being recorded today, Tuesday, May 13, 2014. I would now like to hand the conference over to Mr. Matthew Zhao. Thank you. Please go ahead sir.

Thank you operator and thank you and welcome to the Phoenix New Media first quarter 2014 earnings conference call. I'm joined here by our Chief Executive Officer, Mr. Shuang Liu, our Chief Operating Officer, Mr. Ya Li, and Chief Financial Officer, Ms. Betty Ho. For today's agenda management will provide us with the review on the quarter and also include a Q&A session after the management's prepared remarks. The first quarter 2014 financial results and webcast of this conference call are available at the Investor Relations sections of www.ir.feng.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 are very pleased to begin 2014 with a robust quarter characterized by strong financial and operational performance. 2014 also marks the expansion of our online verticals, mobile platform and video offering.

On the top line we comfortably beat consensus and our prior guidance propelled by the promising 41% growth in net ad revenues. This strong advertising growth reflects the success we have had in building our brand and expanding our user base. Operationally we were able to increase online daily unique visitors by 33% year over year to 42.8m. Our operational growth was fueled by the strong performance of several of our verticals, including fashion, which is now ranked number one in terms of daily unique visitors.

The first quarter was a very eventful period in China from a media perspective. We experienced the Malaysia airplane mystery, terrorist attack in the Kunming train station, Michelle Obama's China visit and several other impactful news stories.

It is during these eventful and transformative times in China that ifeng's [strikes]. In this tightly regulated media market, breaking the daily news, the public encounters in this (inaudible) world, we believe that we truly stand apart from peers due to our serious journalism and media brand influence. We have become China's indispensable multi-screen media platform for our high quality media content, enabling us to continue to grow our audience on both the PC and mobile fronts.

As an example, our distinguished news reporting around these big news events helped us attract many first-time users to our mobile platform. In the first quarter we began to use China Mobile's 4G technology to bring our users live broadcasting of these large media events. During this time we also released a 4G ifeng news app, a new version of our ifeng app. We see positive long-term benefits from the influence of mobile traffic as these new users enjoy the fast speed of 4G and they further explore our differentiated and broad content.

By both attracting new users to our media platform and mobile platforms, and providing existing users improved viewing options, we are able to further accelerate the growth and monetization of our mobile audience, which now reach over 26m on a daily basis.

With China's on-the-go culture becoming even so pervasive, mobile strategies will remain on center stage with users and Internet companies alike. For ifeng we continue to focus and grow our mobile platform, as recently demonstrated through our agreement with Samsung to pre-install ifeng news on their top-selling Galaxy S5 smartphone throughout China. This cooperation will further help us vie to become the go-to source for differentiated news content on mobile devices in China.

This continued focus on mobile should not be taken to mean we will de-emphasize our PC platform. In fact our goal is to leverage our media platform in this multi-screen world. In doing so we continue to work to attract additional users on the PC front and more importantly we are working to enter our audiences' living rooms through Internet TVs. In an effort to broaden the viewership possibilities of our video content we have struck unique partnerships with Internet TV manufacturers in China such as Xiaomi, Hisense and Konka. Similar to our partnerships with China's mobile carriers, this expansion provides us new collaboration and advertising opportunities.

Moving the focus to our content strategy, we believe that our deepening engagement with users across all verticals necessitates a greater focus on original content generation. On the video production side, Super Mummy, which is now in its third season, continues to be a hit and has attracted a significant number of sponsors.

Our effort with in-house original programming as well as professionally produced short-form news videos continues to contribute heavily to the expansion of our ifeng video offering. The ifeng video offering now ranks number four among integrated portals and number seven among all video-focused websites.

In addition to maintaining our leading position in news and current affairs coverage, we are focusing more on strengthening our urban lifestyle related information and online services among others. Facing the growth in urbanization and emerging trends associated with China's media channels, we can witness the demand related to the new metropolitan lifestyles. This provides us insight into the related content and services associated with that trend, which are massive and present huge market potential.

These trends have helped propel our fashion and entertainment verticals to now rank number one and two in China respectively in terms of daily unique visitors according to iResearch. For our fashion vertical our feature reports about the four major fashion weeks attracted over 20m readers with over 160m page views this past quarter. Meanwhile our growing cosmetics section attracts a large number of high-end female consumers who are searching for the most updated and cutting-edge cosmetic information available such as news release, major functions and comparable pricing.

In addition our other verticals have demonstrated similar growth patterns. Our auto vertical is now ranked number four in China with over 3m daily unique visitors and our real estate vertical is now ranked number three with 2.5m daily users in China. We aim to be more aggressive and focused on tapping into this market dynamic by expanding either via partnerships and acquisitions or through organic growth by better leveraging existing resources and quickly adapting to market changes, enabling us to more quickly capture market opportunities.

Meanwhile, by leveraging our proprietary news content and focusing on providing unbiased and comprehensive reporting, our unique model continues to support our evolution into a truly diversified new media company.

As an example, in the aftermath of Flight 370's disappearance we provided exclusive live coverage across our platforms and published a series of in-depth feature reports. In addition we complemented this content with in-depth analysis, thought-provoking commentary, live video coverage and mechanism for users to contribute and discuss during this time of mourning. We believe that such powerful contributions to Chinese society during these times will help to significantly differentiate ifeng from traditional news aggregating portals.

Going forward, an important contributor of content and driver of growth will come from convergence with our parent Phoenix TV. As the CEO of Phoenix New Media and the COO of Phoenix TV, implementing the convergence of the Phoenix Group's TV and Internet properties is an ongoing core focus of mine. We have already achieved modest results in terms of initial restructuring and in the first quarter we even began to co-produce other shows. We're happy with progress we've made in these early stages and expect that tangible results in terms of content, advertising and user growth synergies will be realized going forward.

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

Thank you Shuang and thank you for all joining our conference call today. Let me take you through our financial highlights for the first quarter of 2014 results. The amounts mentioned here are all in RMB unless otherwise noted and all numbers that are mentioned here are non-GAAP adjusted numbers. The difference between GAAP and non-GAAP is the adjustment of the share-based compensation, gain on disposition of a subsidiary and acquisition of equity investment, and loss from equity investments.

ifeng's total revenue for the first quarter came in at RMB357.1m, which exceeded the high end of our guidance. Adjusted net income attributable to Phoenix New Media in the first quarter was RMB56.9m or RMB0.73 non-GAAP net income per diluted ADS.

Let me now run through the other key financial highlights, starting with revenue. Net advertising revenues for the first quarter came in at RMB234.9m, which represents a solid year-over-year growth of 41.1%. Average revenue per advertiser or ARPA increased by 34.4% to RMB900,000 and advertisers number increased by 5% to 253. Paid service revenues for the first quarter was RMB122.2m, which represents a year-over-year growth of 6.3%. Mobile value-added services revenues increased by 2.4% to RMB98.2m. Games and others' revenues increased 26.4% to RMB24m.

Secondly, gross profit and margin. Adjusted gross profit for the first quarter of 2014 increased by 34.8% to RMB186.2m. Our adjusted gross margin for the first quarter was 52.1%, up from 49.1% for the same period last year.

In terms of cost of revenues, there are four components. Revenue-sharing fees relating to paid services, content and operational costs, bandwidth costs and sales tax and surcharges. Revenue-sharing fees as a percentage of total revenues decreased to 15% from 17.6% due to the increase of net advertising revenues. Content-related costs and operational cost as a percentage of total revenue decreased to 19.9% from 20.1%. Bandwidth cost as a percentage of revenues decreased to 5.8% from 6.6%. And lastly, sales tax and surcharges as a percentage of total revenue increased to 7.1% from 6.7% due to the increase of net advertising revenues.

Thirdly, adjusted operating expenses for the first quarter increased by 24% to RMB132.3m. The increase in operating expenses was primarily attributable to the increase in staff-related costs and expenses associated with the Company's marketing and promotional initiatives. Adjusted operating income for the first quarter increased by 71.7% to RMB54m. Adjusted operating margin for the first quarter improved to 51% from 11.2% for the same period last year.

Fourthly, adjusted net income attributable to ifeng for the first quarter increased by 47.2% to RMB56.9m. Adjusted net income per diluted ADS for the first quarter increased by 49.1% to RMB0.73.

In terms of balance sheet items, as of March 31, 2014, ifeng's cash and cash equivalents and bank term deposits totaled RMB1.4b or approximately $224m.

Lastly, I would like to provide our business outlook for the second quarter 2014. We are forecasting total revenues to be between RMB405m to RMB418m, representing an increase of 11% to 15% year over year. For net advertising revenues we are forecasting between RMB290m and RMB298m, representing a growth of 38% to 42% year over year. For paid services we are forecasting between RMB115m and RMB120m.

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

(Operator Instructions). Alan Hellawell, Deutsche Bank.

Yes, hi team. Congratulations on a very strong bottom line. If you don't mind I have three questions. Firstly, just looking at our assumptions it looks as though you came in comfortably below our assumptions on the sales and marketing and R&D front. Can you explain what might have happened here and whether we can expect more of the same for the rest of the year?

Secondly, what percent of revenues now come from mobile and what are the challenges and opportunities you see as you cross the chasm in the mobile world?

And finally, Shuang mentioned that we have succeeded in harmonizing our business gradually with Phoenix Satellite TV. How will this process impact margins and other parts of the P&L as we think about additional costs on one side and synergies on the other? Thank you.

Hi Alan. Good morning. Let me answer your first question about sales and marketing expenses. For sales and marketing expenses our first quarter number was about RMB74m. As compared to first quarter last year we have increased about RMB20m. But, however, in terms of percentage as of total revenue, our sales and marketing margin was about 20.9%, which is similar to last quarter, which was at 19.5%. So it will remain at about 20% moving forward. And in terms of absolute number the increase was mainly due to the increase of the promotion costs for our news apps, for our video apps and our games. They totaled about RMB10m.

So moving forward, as I said, we expect to be around 20% to the total revenue.

Hi Alan. This is Ya. Thanks for the question. Yes, about the mobile, first the mobile advertising revenue contributed 10% to our overall advertising revenue. As we continue to increase our overall advertising revenue, the overall mobile advertising contribution will help a lot on the mobile monetization as well as the margin.

As for the mobile strategy overall, we're focused on both content and the channel as well as digital partnership. I think these three vehicles are three basically wheels to help us to move forward.

First on content, we emphasize that we provide original content and we have a strong media influence. That's the basis for our second and seventh ranks. The channel cooperation is very important especially in the area of 4G as our exclusive content is very sought after by both the handsets manufacturers as well as the operators.

And also especially on the mobile video front is our short-form news video fits very well with these 4G operators as well as the handset manufacturers. We are forming a lot of strategic partnerships. As Shuang mentioned in his prepared speech that not only with Samsung, we are also negotiating and also signing and implementing a lot of pre-installment agreements with the handset manufacturers. And also this 4G opportunity brings to us this data-traffic-centered strategic focus for the operators.

And then also on the strategic partnership side, we have been also discussing with a lot of product and technology driven mobile start-ups, try to leverage these start-ups' technology competence to improve our product offering on the top of our editor-oriented approach towards content.

So the content and brand, and plus the channel cooperation and plus the strategic partnership is helping us to develop and grow our mobile traffic. We have experienced a 10% quarter-over-quarter overall daily active user growth. We are focusing both on the mobile apps as well as the mobile website, the HTML5-based, browser-based traffic. The overall mobile traffic now represents slightly below 40% of our overall daily active users.

And for future monetization, in addition to the current mobile advertising we are also exploring native advertising drive or stream-based, content-stream-based advertising format to help increase, improve our mobile ad monetization. We're also looking at the great opportunity of mobile gaming and other paid mobile services in the 4G area. And we expect these paid service revenue will grow in the second half of this year and also partly offset our proactive retreat from the traditional value-added service from the 2G feature phones. I think that's it overall. I don't know if Shuang has something to add.

Yes, that's it. Alan, this is Shuang. I'd like to get back to your question three. Actually you're quite right; my mandate as C0O of Phoenix TV is to fully implement the convergence in TV's groups, TV and Internet property, and that's my main focus. I have been on the position for two months so it's still at the very early stage.

At this stage it's hard to quantify the concrete impact on (technical difficulty), but I think the convergence will definitely make a contribution to our margin improvement because the benefit is there, obvious there. We can co-produce hit programs, we can co-host a marketing-driven campaigns like industry standard and political forum, and we can even co-purchase some program. So that will enable us to spend less to achieve greater influence, achieve greater audience impact. Because it's still at a very early stage so we're still at the stage of doing internal structuring and brain-storming. But we'll keep you updated about the new developments on the convergence on both sides. Okay?

Great. Thanks a lot guys.

Philip Wan, Morgan Stanley.

Hi. Good morning. Congrats on a good quarter and thanks for taking my question. My question is about your advertising business. This quarter we saw a jump in spending per advertiser. Could you give us more color on this? How much was driven by the organic price increase?

And the second is going forward how should we look at your customer acquisition for your advertising business? Thank you.

Okay. Thanks Philip. This is Ya. Thanks for the question. First, in the beginning of this year we did increase our advertising price for the premium A-plus category by 20%. Also for the video ad rate increase was 30%. And we plan to continue to have a slight rate increase for our PC advertisement. We will have low double-digit rate hike for our mobile advertising price in the second half of this year. So going forward I think the rate hike will continue to be a factor as well as the number of advertisers to our overall advertising revenue growth.

And as for the customer acquisition I think our approach right now is what we call it native marketing plus native advertising. Native marketing refers to evolution of brand advertising. It's an upgrade from the old banner display ads. It leverages our special capacity of content marketing and with integrated brand message we think the content will deliver.

And that's something all of -- overall global movement in the past two years started from the United States. Actually all the media companies as well as the new, even social-media companies are embracing this idea of native advertising and native marketing. So that kind of approach will not directly reflect in the banner rate card increase, but rather in the new approach while to take a bigger market share of clients because we can deliver real value, real interest to the clients, especially in this age when audience becomes ever increasingly blind to hardcore advertisement, be it a pre-roll before an online video or a pure banner, a traditional banner on the portal.

And I also mentioned the term native advertising, which refer to our innovation of the advertising format or advertising product especially on the mobile Internet side. Currently, including apps, we are very good at monetize the front page or the starting page of mobile apps. However, we believe there are great potential in innovative advertising format. And we are studying international progress on the native advertising movement and we do believe that this native advertising format innovation both on PC and mobile will help us to better monetize our existing large traffic and high quality user base.

Thank you. That's very helpful. May I have a follow up question? So this quarter how much of your revenues coming from video?

And also, as we compare PC versus mobile, what is the average spending on mobile as compared -- like the gap between advertising spending on PC or mobile? Thank you.

Okay. Thanks for the question. This year the video advertising for the first quarter contributed 18% of the overall ad revenue while mobile contributed 10% compared to 16% and 8% respectively a year ago. So each of, the mobile and video each has a 2% increase in their contribution to overall ad revenue.

And if we look at the growth rate the video advertising grew by 53% in the first quarter over a year ago compared to the industry average 41% based on iResearch study. And also our mobile grew by 84% compared to the industry average of 76%. And so also our second quarter guidance is also, the midpoint is also 40%. The first quarter was 41%. I think this is well above the industry average for portals or even the industry average for the overall online revenue growth of 35% based on iResearch study. Then this is the growth rate.

And you also, the other question was --

Yes, I just wondered --

Did you have another question?

Yes, I just wonder if you can add some color in terms of advertising spending behavior between PC and mobile? For example, what's the average spending on mobile versus PC?

Yes, we are seeing, yes, I definitely see a stronger demand mobile advertising from our clients. And we do see similar sector distribution for our top contributors for PC and mobile advertising.

And in terms of pricing model right now it's still, as I mentioned, mostly CPT based. So, for example, for the mobile apps advertising is also the starting page certain price per day. And in terms of CPM it's I think the PC front page still enjoys a greater CPM compared to the mobile CPM. And, as I mentioned earlier, we are focusing on innovative approach to new advertising formats. And we do expect that to help us in the next 18 months. Yes, that's the pricing comparison between PC and mobile. Thanks.

I want to add a few more words about our business. Actually, as I emphasized in my opening remarks that revenue amount has been growing. If you look at the performance of our portal I think it's performing still very robust, very strong. That actually sets us aside from other portals in China.

In the last quarter we experienced a series of major events that contributed a lot to our traffic growth. So the portal side traffic still growing so we have a kind of a three-break internally between multiple platform between -- among PC, pads and smartphones. And PCs' traffic growth is not losing steam; it's still growing so that provides a solid foundation for our fundamental business growth, which is good to see. Of course the wireless platform and wireless advertising will be our new driver. That's going to be our main focus going forward.

Right. Thank you for the color.

Alex Yao, JPMorgan.

Hi. Congratulations on a very strong quarter. This is Bin calling on behalf of Alex. Thank you for taking my question. My question is actually on the advertising. I'm just wondering can management share the key verticals or the vertical mix to advertising revenue? Is there any verticals which performed extremely strong due to the weakness of some underlying industries such as real estate?

And what is your general outlook on the advertising revenue for 2014? I think you mentioned the overall growth should be in the mid 30s. So given the first quarter performance, is there any potential to deliver a stronger performance than our previous outlook? Thanks.

Hi Alex. Thanks for the question. This is Ya. First of all, the top contributors, the sectors, we have the top five sectors remain almost the same as a year ago, with auto contributing the most with 27%, and beverage and food/wine contributing 17%, a 1% drop from a year ago. And also the ecommerce 12%, with 3% increase from year ago. And then is health and medical service, 9%, remain the same as year ago. And also the financial service, 5%, was a 1% increase from a year ago. That's the top five sectors.

For the top 10 sectors it's total adds of 83% of our overall contribution. Among these sectors we see auto remain the same as previous quarters. The beverage, especially the Chinese wine sector, is relatively weak because of the policy I think of the government. However, we were able to keep the Chinese wine contribution about the same with our dedicated news video fit very well with this sector. And also we did hold a Chinese wine industry summit in the first quarter, which also helped us to grow our market share in this sector. The other sector we see relative weak demand is luxury brand and also certain IT services.

And then if we look at the overall year outlook currently we do see lower visibility actually compared to a couple of quarters ago. We keep a close eye on the macro economy as well as the government's any significant policy. And right now we are still forecasting a mid-30% growth rate for our advertising revenue despite the fact that the first quarter and second quarter guidance is about 40%. Due to this lower visibility I mentioned we want to be I think cautious going forward.

Thank you. And my second question is on your general video content strategy for 2014. So there's actually some government censorship over video content in first quarter so just wondering is there any -- does this have any impact on your overall video content strategy? So are you continue to focus on your video UGC or are you actually try to offset or shift some focus to some other content? Thanks.

Yes, I think actually these recent changes actually helped us reaffirm our content strategy and direction. And when we look at it there are two structural changes, if I can call it structure. One is of course I think the cleaner content environment will help our content to compete for bigger share of audience time and eyeballs, and I think that's just I think as we did not have especially user generated or the software generated or the professionally made, but I would say very doubtful content from certain video platforms. And so first change about the government's policy to clean the video content will certainly help us to compete for bigger time share from the same audience.

And secondly, we noticed that Hunan TV and CCTV did some new policy regarding it's not licensing -- withholding the content from licensing to the online platforms. It basically I think will --- it basically disclose that the value of content is very important in the video platform contribution. Again we see the user loyalty actually follows the top content.

That's why if we look at our own content mix we have 40% of our content from Phoenix TV, this very exclusive, high-value, high-quality news driven and some documentaries. And also we have single-digit contribution from in-house made -- or actually about 10% in-house made video content. And thirdly is from the aggregation of other professional made content. But overall we focus on the news and documentary and other talk shows, debate shows, or interviews.

This content is very different from entertainment-focused content. Our user demand may not be as big overall as entertainment video category. However, we are the only differentiated and also the undisputed leader in this vertical. It helps us to gain -- to develop partnerships with the handset manufacturers as well as the telecom operators based on these kind of contents.

Another thing I want to emphasize on our content strategy is in the first quarter we increased our original content production. For example, we did produce three seasons of a parenting program, video program, called Super Mummy, which has clear vertical interest towards young parents and also strong advertising demand with certain sectors. Second, we also produced cooking competition reality show called Match of the Taste, which just started to be available online and this show will also available on Phoenix TV as part of our convergence strategy.

And so the food sector, the parenting sector, these are clear sectors will help us with our vertical strategy. We are also planning to produce video shows within, for example, fashion and entertainment sector. And it's part of our vertical strategy, also part of our video content strategy. And so I think that's our take on the overall industry change and also our determination for continue our strategy.

That's helpful. Thank you.

Okay. Thanks.

George Meng, Macquarie.

Hi. Good morning everyone. Thank you very much for taking my question. Congratulations on a solid quarter. I actually have three questions if I may.

The first question is related to your second quarter guidance, especially the paid service revenue guidance. I wonder if you can give us a little more granularity in terms of the breakdown of the paid services. Probably cannot give like exact numbers, but just wonder like -- because I think the guidance is a little bit lower and I understand there is some impact from the transition from business tax to a value-added tax, but just wonder, for example, which part of the paid service is actually weaker than your expectation, i.e. is it the traditional 2G, ringtone/SMS or it's the digital reading or the video, or if it's the game and others revenues? That's my first question. Thanks.

Hi George. This is Betty. Let me answer your first question. With respect to the paid services, we have guided about 24% decrease. It was due to two reasons. First reason was mainly due to the change of the revenue-sharing ratio between telcos and our channel partners. It has been increased by 12% so as a result it will impact our gross margin. And the second reason is being the recent introduction of the VAT to replace the sales tax of the telecom industry. It will be effective from June 1 this year.

So these two areas will affect mostly our mobile video and the wireless value-added services. As a result we decided to trim down the revenue contribution for the second quarter. However, for the full year we are still formulating a long-term strategy. We will update you and share with you in time.

Okay. Cool. But just to follow up on that, so you are not really seeing any accelerated decline in the paid service, especially the traditional legacy 2G kind of service? Because we know that eventually this part of the revenue will probably slow down, actually decrease, but you are not really seeing an acceleration in decrease in the near term, right?

For the paid services, especially for 2G-related services, we are actually always forecasting a decreasing at about 10% to 15%. So actually it's in line with our expectation.

Okay. Cool. That's very helpful. My second question is related to your real estate channel because you mentioned that's already the number three real estate portal or channel in China, but I believe it's not really generating a lot of revenue for you guys. And you mentioned the JV last time. I just wonder if you can give us any update in terms of the JV and also your plan in terms of monetization for the real estate channel. Thanks.

Yes, hi. This is Shuang. Actually, as I mentioned in my opening remarks, in addition to maintaining our lead in covering news and current affairs we are focusing more on improving life, metropolitan-lifestyle-related information and online service. This includes real estate, [art], fashion and entertainment. Real estate of course is a major, major focus. As we mentioned, we have a relatively high ranking in terms of traffic, but the monetization is still at its early stage. We have to bear in mind that this one I mentioned has just been set up.

Three quarters.

Like three quarters. Actually, yes, just three quarters so it's still at its early stage, but we definitely realize that the potential for quality of real-estate-related online services is huge. But the market supply has not been satisfied so the market is big enough to accommodate lots of players. Given our strong brand and relatively a high traffic and a strong partner, I think we'll have a chance.

Right now we're focusing on just being more aggressively recruiting top talents in this area and to come up with better innovative products to address the specific needs of the real-estate-related users, and to improve our infrastructure. We also have a specific focus on senior-visitors'-related pension property and overseas property. Yes, that's going to be our main focus. But it takes time. We are patient. I think going forward, once with the further advancement of our products and infrastructure, the monetization pace will be accelerated.

Okay. Cool. And my third and also last question is on -- is probably for you, Ya, so it's about native advertising because I think you've talked about native advertising for quite a while now, like you started talking about it a year ago. And I just wonder to what extent has the benefit of native advertising has already been factored in and also what are the upside going forward from here. Especially again can you talk separately on PC and also on mobile, is there any kind of quantitative benefit that you can actually think of? Thanks.

Okay. Sure. First, thanks for paying attention, noticing our application for the native advertising. Currently we did not -- we have not factored in quantitatively the increased contribution from native advertising.

And actually I want to share more. Just a week ago we, ifeng, Phoenix New Media, launched the first native marketing institute in China. We have 50 industry experts from the major clients, like certain CMOs of major international and domestic clients, and also the executives of advertising agencies as well as researchers from academics and third-party management companies, all joining us launching this institute of native marketing, (spoken in foreign language).

And it received broad industry attention. And our advertising executives, both Ling and Andy, who are VPs of our advertising, have received strong demand from many clients, including some of the top telecom operators to talk about the concept and the practice of native marketing within the organization.

And, as I mentioned earlier, the native advertising will help us, first, to innovate the advertising format and product beyond the old way of banner display ads, which are often ignored by audience, and also can help us with monetization on the small screen for mobile internet. And in addition the idea of native marketing can also help us to leverage our content capacity to provide sponsored stories, for example, for certain major clients to help their brand message and product message better received by audience. So it's not considerably factored in yet but we do see great potential and it has received warm receptions from the industry.

Okay. Cool. That's very helpful. Thank you very much.

Natalie Wu, CICC.

Good morning everyone. Congratulations on a solid quarter. Thank you for taking my question. I have three questions. Firstly, I noticed that there has been some change in Phoenix FM and you started to record this business as equity investment since last quarter. I'm wondering how was the revenue used to be recorded, in advertising or in paid service, and can you give us some colors on the rough revenue scale of Phoenix FM? Thanks.

The second question is, given that many internet companies spending a lot of money to promote their mobile apps in 2014 as well as making aggressive investment, I'm wondering what is your investment and spending plan this year. Can you give us some color on the margin trend this year and next year?

And lastly, what is the percentage of the organic traffic of your mobile apps? What are the major promotion methods of your mobile apps?

And can you share us, can you share with us the monetization outlook? When will your mobile apps reach the breakeven point in the future? Thanks.

Hi Natalie. This is Betty. With respect to the FM transaction, actually FM is not consolidated to our balance sheet or to our P&L because of we have given substantive participation right to the investor, which was IDG. For this particular transaction we have a one-off gain on disposition of a subsidiary on our P&L and it would not happen for the following quarter. It's a one-off item and it's an unrealized gain. For this transaction we also will book the gain and loss as investment gain or loss so it will not be consolidated to our financial statement.

And as for the FM project now, we are just -- we have just completed the whole transaction about two months ago so they are still actually structuring the whole team and as for now we are still actually at the set-up stage. So as of today there's no revenue.

And for your second question regarding the margin trend, as for operating margin this quarter we have recorded about 15.1%, which is an increase from 11.2%. Despite of the fact that we have trimmed down the paid services revenue we are still trying very hard to keep and maintain our operating margin at about level at 15%.

Yes, hi. This is Shuang. I will try to answer your question about mobile. I think your question covers many key words, like breakeven point, and like marketing, traffic, acquisition and all these things. I'll try to answer in a nutshell, in short form. I think mobile has been our key strategy and we are pretty comfortable with our mobile assets' ranking. It's basically in line with our portal's ranking. And our advertising growth rate is highly above the -- is above the industry average so that demonstrates the power and warm reception of the market.

Right now we feel reluctant to spend too much money on pre-installment, those kinds of marketing tricks. We still strongly believe in word-of-mouth. I think the final stage of the products will be dictated by the brand, by the user experience, by the proprietary content you provide. That will set us aside from other players so we would rather spend more expense on recruiting talents and product innovation.

So we are actually actively seeking opportunities in the market, which can improve our product, extend our channels and bring our technology infrastructure to the next level. So we wouldn't rule out the possibility of, by either joint venture or acquisition or investment into other marketplace, which can complement our existing business and extend our user reach or bring our infrastructure, technology infrastructure to the next level. Yes. Did I answer your questions?

Can I clarify one thing?

What?

Yes, I want to add one thing, that the pre-installment partnerships we mentioned earlier, I think for us we do not spend -- it's not paid. It's all based on the merits and the value of our content and brand. That's why we really compete on the base of our content.

Right. I forgot one word. Breakeven point. I think we are still at the early stage, yes. Our main focus will be on expanding our user reach, to improve our user experience. I think it's still too early to have that as a big -- to try to emphasize our breaking even.

That's very helpful. Thanks Betty, Ya[-dong] and Shuang[-dong].

Thank you. Thank you very much.

Alicia Yap, Barclays.

Hi. Good morning everyone. Thanks for taking my questions. My first question is regarding your achievement on the fashion and cosmetic channels. So can you elaborate a little bit with that achievement and success on that, does that lead you to any change of the mix of your advertising consumer base?

And how are the tractions in the eyeballs on these fast-growing channels compare on the PC versus the mobile? And I have another question. Thanks.

Hi Alicia. Thanks for the question. Indeed that fashion is area we see great potential not only because of it's a mostly female audience and also because of the rather great advertising, also ecommerce potential, all of it.

Shuang did mention in his prepared script about the fashion weeks, our coverage and influence nationwide. In addition we have also developed certain products. For example, our cosmetic database and its trial center, it actually ranks, based on our own knowledge, according to our own base, ranks number one. And that paves the way for us to evolve from this information provider to a service provider. It also helps us to integrate ecommerce strategy with these cosmetics and clothing and luxury brands and these very strong demand sectors. So that's the answer for the fashion and female channel.

In terms of actual sector contribution, we do expect, for example the general FMCG sector contribution and also home appliance as well as ecommerce, a lot of e-commerce contribution, to represent the contribution from the traffic and the rankings of our fashion and female channel.

I see. Can I have a follow-up on that? So I understand a lot of our advertising customers are still on the timed-based model, but then with these tractions from these cosmetic and profession channels, and I think with the ecommerce, like you were saying, you're transferring from information to the service provider, will we eventually maybe testing or introducing on the cost-per-click basis of the advertising model?

Yes, we do not rule out any possibility in terms of, as I mentioned, evolving from information provider to a service provider and also to have very tight strategy -- very tight integration with ecommerce providers through partnerships or investments. Especially on the mobile front, certain cosmetics, we are planning for some fashion mobile apps, which has great ecommerce potential. It may not have the same great DAUs as the information service, but the direct sales, promotion sales advertising revenue actually can help us in addition to the brand advertising revenue we already grabbed from our existing information service.

That's right. That's right. And then my second question is that if we have any more colors, details, given some of the recent crackdowns by the government on the video side, are we seeing more benefit from there, especially on the traffic side and also from the advertiser?

And then related to that is I think you guys mentioned in terms of the top line growth rate for this year and a little bit lower visibility into the next couple of quarters, so just wanted to get more color is that related to a weaker economic outlook or is it more on the sentiment impact from the recent regulatory effect? Thank you.

Firth, yes, definitely I think we are benefiting from this still ongoing change. I think it's only starting. Especially the content owners, such as Hunan and CCTV, are taking new stance on licensing their contents. We're definitely going to benefit from it. Secondly, our capacity of producing in-house video content will help us to gain audience, to take time share from the competitors. And also I see this, our short-form news video strategy, also are very welcomed by the 4G industry sectors from the operators to the handset manufacturers.

So overall our video business is benefiting from the content change and also the 4G opportunity and we are leveraging on our content capacity to grow our audience. For example, on our PC platform, we now have daily active users of 15m on our PC for our video service, which ranks number two and seven within the video categories, as mentioned by Shuang earlier.

Yes. The second question is about the overall economic impact outlook on the overall advertising market. Is that the question?

Yes, that's right. I think you mentioned you have lower visibility versus a few quarters ago so I just wanted to get some color. Is that more as Chinese economy weakening or is it more the sentiment impact from the advertiser due to the recent regulatory impact?

Yes, I have to say that overall we do not see a clear change from our advertising client in terms of pushing back or cutting their annual budget. We do see certain particular sectors affected by some particular policies. As I mentioned, the luxury brand sector, the Chinese wine sector are relatively weak. But for some of the other top sectors, for example, the auto sector and ecommerce sector, they remain very strong for us. But overall the economic environment do make us feel that there is increased uncertainty in certain areas. That's why we are taking a more careful approach in terms of giving the outlook.

I see. Great. Thank you. Very helpful.

Thank you.

As there are no further questions in queue I'll now hand the call back to your speaker, 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 nice day.

Thank you very much ladies and gentlemen. That does conclude our conference for today. Thank you so much for your attendance. You may all disconnect.