JOYY Inc (YY) 2014 Q1 法說會逐字稿

Good day everyone and welcome to YY's first quarter 2014 earnings conference call. At this time, all participants are in a listen only mode. We will be facilitating our question and answer session towards the end of this conference call. At this point I would like to turn the call over to Charles Eveslage from ICR.

Thank you operator. Welcome to YY's first quarter 2014 earnings conference call. With us today are Mr. David Xueling Li, CEO of YY, and Mr. Eric He, CFO. Following management's prepared remarks, we will conduct the Q&A session.

Before we begin, I refer you to the safe harbor statement in our earnings release, which also applies to our conference call today as we will make forward looking statement. At this time, I would now like to turn the conference call over to Mr. David Li, CEO.

Thank you. Good morning and good evening everyone. We have reason to announce a strong first quarter to start 2014. We enjoyed robust growth during this seasonal low first quarter, and aim to carry this momentum throughout 2014. In particular, online music and entertainment again outperformed our expectations this quarter, with revenues growth by 228% and paying user increased by 103% year-over-year. This robust growth was supported by our well-developed ecosystem and diverse live content, which helped retain performance while encouraging our spending.

As such, we continue to see increasingly dynamic and interactive online activities among our expanding base of 95.1 million (sic - see presentation, "95.5 million") average monthly active users. Moreover, users continued to find new ways to socialize and interact with one another on our platform which provides us new business opportunities and additional ways to monetize. An exciting moment on this front was our launch of our dedicated education platform, 100 Education in later February. Leveraging our powerful audio and video communication technologies as well as our massive real-time hosting abilities, our education facilities provide a real-time interactive setting of students and teachers.

By expanding our footprint in a wide range of real-time online interactive services in China, we aim to further expand our diverse online communities and user base. In addition, we made a great stride on the mobile front, delivering solid growth in user traffic and spending on mobile (inaudible). In particular, I'd like to point out that since we introduced virtual item sales into our mobile online entertainment services last October. Revenues generated from our mobile platform surged 180% to $29 million from a quarter ago.

Among all the paying user of our online entertainment services, 8% of users made a payment exclusively through mobile devices, representing an impressive 88% increase in members from last quarter. These results demonstrate our initial success in calculating users' playing habits on mobile by allowing users to remain active with us and access our highly demanded services through the mobile devices.

Building upon the momentum in our online music and entertainment business, we have officially kick off a star making champion in an attempt to form our own pop idol brand, idol band, 1931. Unlike other companies that only host the contents in their own thread with very limited handshake interaction between sales and band, our 1931 band performing regularly at segment 31 PM. We will leverage YY's real-time interactive platform to enable live and innovative interactions between singers and users.

Through this effort, we will also be able to expand our fast growing music and entertainment business to offline savings, potentially creating a new growth opportunity with the concept of idols you can not only meet, but also interact with. With the strong foundation and a strong marketing position we have established, we will continue to attract user and optimize our monetization efforts through online entertainment, live broadcasting, education and other verticals. We believe we are well-positioned to sustain robust growth and performance in the future.

With that, I will now hand over the report to our CFO Eric.

Thank you David. Good morning everyone. I would like to further elaborate on our increasing focus on our education and mobile endeavors. First, with the launch of the 100 Education in February, followed by the introduction of branded client last month, we now have established a dedicated and branded platform for both PC and mobile access within China's fast growing online education markets.

By enabling a revolutionary and real-time interactive education experience, we differentiate our education service offerings from traditional educational service that are usually passive, asynchronous, one way endeavors, with minimal participation from students with the offering of a variety of highly popular live exam preparation classes and programs online, free of charge to users. Our near term focus remains on the optimization of our product and services offerings.

Through these efforts, we aim to improve user experience while attracting more teachers and students onto our platform with disciplined marketing spending. This strategy has already begun to bear fruit as we saw the number of active monthly teachers, paid courses and free courses all increase by more than 70% in March from its launch only a month before. With an expansion of our platform, we also want to empower teachers to benefit professionally and financially in tandem with us. We believe this win-win arrangement will create additional monetization avenues on our technology platform in the future.

We continue to see encouraging results with the growth of our mobile platform, as highlighted by the increased adoption and monetization of our mobile applications. Monthly average users of our mobile application increased by 18% to approximately 20 million quarter-over-quarter. Furthermore, as David highlighted earlier, our monetization ability on our mobile platform continues to improve, with revenue generated from mobile online entertainment increasing 180% to $29 million quarter-over-quarter. This represents 8% of all revenues from online entertainment.

In addition, 24% of all online entertainment paying users use mobiles to pay for virtual items. Of these paying users, one in three use mobile exclusively to pay for music and entertainment. As consumers' option of mobile payment solutions remains low in China, we are very delighted that our users have quickly established a habit of spending in our new mobile ecosystem, and have built trust in our Company to pay via our mobile payment channels.

As China's wireless network infrastructure improves and 4G usage becomes more widespread, we believe that mobile adoption of YY will continue to increase and will provide ample opportunity for monetizations.

One last item I want to point out was that our Board of Directors approved a share repurchase program. This authorized amount will be up to $100 million for a period of one year, effective immediately.

Now moving onto our quarterly financial details. Before I get started presenting our financial numbers, I would like to clarify that all financial numbers we are presenting today are in renminbi, RMB amounts, and percentage changes are year-over-year comparisons unless otherwise noted.

First of all I would like to highlight that in the first quarter we were once again able to achieve results that exceeded our expectation on the top line. Moreover, we also saw net income attributable to YY almost triple year-over-year, due to the expanding scale and leverage of YY business operations. Net revenues for the first quarter 2014 increased by 112% to RMB666 million. This increase was primarily driven by an increase in IVAS revenue. IVAS revenue was increased by 127% to RMB642 million. This overall increase primarily reflected an increase in the number of paying users and increase in ARPU.

Let's look at each of our IVAS business lines more specifically. Revenue from online music and entertainment increased by 228% to RMB383 million. This increase primarily reflected a 103% increase in the number of paying users to just over one million, and a 61% increase in ARPU to RMB381 during the first quarter 2014.

Revenue from online games increased by 36% to RMB180 million. This increase primarily reflected an increase in ARPU of 24% to RMB391, and a 10% increase in the number of paying users to 461,000. Also, the number of online games increased to 139 as of March 31 2014 from 92 online games last year.

Revenue from others increased by 134% to RMB79 million. Revenue from membership programs increased by 54% to RMB43 million. This increase primarily reflected a 56% increase in the members to 151,000 (sic - see presentation, "851,000") as of March 31 2014. Revenues from live broadcasting of online games increased significantly to RMB24 million from RMB3 million in the prior year period.

Online advertising revenue were RMB24 million in the first quarter 2014, compared to RMB32 million in the corresponding period of 2013.

Cost of revenues increased to RMB317 million. This was primarily attributable to an increase in revenue-sharing fees and content costs, which increased to RMB179 million this quarter from RMB56 million last year. This increase included revenue-sharing fees and content costs to performers, channel owners and content providers, and that was primarily due to higher level of user engagement and spending. In addition, bandwidth costs increased to RMB63 million, representing a 10% of revenue, down from 14% of revenue in the same period last year, as we continue to manage our bandwidth costs through better allocation of bandwidth resources and infrastructure improvements.

Gross profit increased by 106% to RMB346 million (sic - see presentation, "RMB349.3 million"). Gross margin was 52% compared to 54% in the corresponding period of 2013. The decrease in gross margin was mainly attributable to the higher portion of revenue resulting from online music and entertainment, and the corresponding higher costs of revenues from revenue-sharing fees and content costs.

Our non-GAAP operating income increased 177% to RMB229 million. Non-GAAP operating margin increased to 34% from 26% in the same quarter last year. The increase in operating margin was primarily due to increased operating leverage associated with our expansion. GAAP net income attributable to YY increased 187% to RMB184 million from RMB64 million in the same quarter last year. GAAP net margin increased to 28% from 20% in the same quarter last year.

Non-GAAP net income attributable to YY increased by 153% to RMB208 million, while non-GAAP net margin expanded to 31% from 26% in the same quarter last year.

Diluted net income per ADS increased to RMB3.06 or $0.49 from RMB1.11 in the same quarter last year. Non-GAAP diluted net income per ADS increased to RMB3.46 or $0.56 from RMB1.42 in the corresponding period 2013.

For the second quarter of 2014, we currently expect our net revenue to be between RMB745 million and RMB755 million, representing a year-over-year growth of approximately 82% to 85%.

This conclude our prepared remarks for today. Operator, we are now ready to take questions.

(Operator instructions) Your first question today comes from the line of Timothy Chan from Morgan Stanley. Timothy, please go ahead.

Good morning. Thank you very much for taking my questions; I have two questions. The first one is actually a follow-up on your education business which shows really a promising start. Could you maybe talk about your next step and target this year? For example, the student volume that you are going to sign up or whether you have plans to expand your offer to other categories? And I have another question. Thank you.

Sorry. Let me just translate your question a little bit to our CEO. I think this question will be answered by CEO David.

(interpreted) Yes. We are very pleased to announce our endeavor into education business. We use a new brand name, 100 Education. We use very different ways to enter into this market which is different from previous traditional ways. I think at this moment of time our focus is not on the number of students or number of courses; we want to focus on delivering the best courses or best service to our students and to our teachers.

We are very glad to see that the first course that we conducted a couple of weeks ago we got a very good -- satisfactory or good ratings of 97, which is -- I think which is very rare. We intend to maintain that kind of ratings, so we want to emphasize at this point of time number of students or number of courses is not the most important metrics. In fact, we want to actually deliver the best user experience and satisfactory service to our students and teachers.

Thank you. My second question is related to the change in government policy on i-content recently. I wanted to ask is there any impacts on YY and if there is any, what are you going to do to minimize the impact? Thank you.

We will direct this question to the CEO David to answer.

(interpreted) Yes. I think first of all we would like to say very clearly we are in supportive of government's regulations and government's crackdowns on inappropriate and pornography content on the internet. We believe the government's control and monitoring will bring a lot of the good side-effects to the industries, especially which will actually make competition, make long term development of the industry very good -- in very good directions. So we actually support government's monitoring and regulations.

Number two, I think we want to emphasize that YY as a company actually has been a long time try to crack down on pornography and inappropriate content, so these government regulations or new monitoring policy actually is in consistence with our policy and strategy. So at this point of time we will continue to our strategy to monitor and control inappropriate and pornography content, as before.

Number three, I think because our policy has been very much to try to eliminate all this pornography content, so you may actually have seen that in our first quarter and in our second quarter forecasts you don't see that much of the impact on our business levels. So we don't think that this government's crackdown will affect or impact our business line or operations too much.

Number four, we want to emphasize that we have been in constant communications with government's relevant agencies and we actually would like to report and interact with the government and try to tell them that what's going right, what's going wrong on our platform. If we find out any inappropriate caches, we usually will report to government voluntarily. So the dialogue and the communication between us and the government has been very good. So far we have never been enquired or asked for any inappropriate content at this moment.

That's very helpful. Thank you, David and Eric.

Thank you.

Your next question comes from the line of Alex Yao from JP Morgan. Alex, please go ahead.

Hi. Good morning, David and Eric. Congrats on the solid quarter. I have two questions. Number one is the webgame outlook for this year. It seems to me the overall web gaming market is slowing down. How do you guys drive this part of the business growth in this year? Are the recent [cheap] games such as (inaudible) et cetera helping to further drive the business? I stop here, and I have a second question. Thank you.

Okay, sure. Thank you, Alex. Let me answer your first questions regarding this webgame business outlook. As you can see that in 2013 our webgame business has grown at a clip of 80%, which is roughly twice as fast as the industry average. The industry was estimated to grow at about 40%. As you can see, the first quarter, our webgame business has slowed on a year-over-year basis to roughly 40%. To be exact it's about 36%. This is actually very much in line with what I have been expecting.

We have communicated with the investment community, telling people that a webgame business is growing but it's slowing down. The webgame business as a whole perhaps is not growing at 40% now, perhaps it's 15% to 20% as I told or communicated with the communities. So if we can continue to grow two times as the industry we should get somewhere around 30% to 40%. That's exactly what we are delivering in the first quarter.

Your question is; moving forward what's the outlook for this business? In fact, I think the outlook for the whole industry is not changing too much. I think it will continue to grow but at a slower pace, and we continue to believe that we should outperform the industry average. On top of that, we are somewhat optimistic or cautiously optimistic about our webgame business because in this business we not only actually have webgame business behind us, we also are exploring some of the new markets we believe it will bring in additional growth for us. So for all of this year's we still believe that we should be achieving quite a decent growth rate on a year-over-year basis.

That's very helpful. And secondly, your online ads business declined by 25% on a year-over-year basis this quarter. Can you help us understand why is the business underperforming in the quarter and what's the outlook going forward? Thank you.

Your question is about the advertising?

Yes.

Okay. Yes. I think this online advertising business did actually decline from the fourth quarter's level. First of all I think it's seasonal because as you know, the first quarter is the slowest season of the year. But on year-over-year basis we did actually slow down. The reason was because we have changed our sale strategies.

Last year, 2013, we had a strategy to concentrate, to have a package deal with ad agency. Now we are trying to diversify our usage of ad agencies. So the first quarter of 2014, just last quarter, is right in the midst of it, so we are adjusting our strategy. So when we adjust our strategies we try to break down this very large so-called contracted numbers from last year to this year, so we will lose some momentum, we will lose some revenue. From what we can see now is that this online advertising revenue should come back.

On a whole year basis 2014, the whole year basis, our estimation for our online advertising business will be flat with the number of 2014(sic). I believe in 2014 (sic) we delivered somewhere around RMB116 million in revenue for the whole year. I think this year we're going to deliver very similar numbers, despite the fact that the first quarter was a little below, at normal or average, I think the second quarter, third quarter, fourth quarter, this business will pick up, will come back. So the whole year bit, on an annual basis in 2014 we should look -- online advertising business should be very much in line, the total dollar amount or contributions will be very much in line with what we had in 2013.

That's very helpful. Thank you very much.

Your next question today comes from the line of Vivian Hao from Deutsche Bank. Vivian, please go ahead.

Hi, Eric. Thank you for taking my question. I have one question. Recently we noticed that some of the monetization functions for particularly the high rollers in the chat rooms have been required to be -- I don't know if it's required or just to be removed. Just trying to understand what's the expected impact from such changes.

Thank you, Vivian. I will ask our CEO David to respond to the question. (Spoken in foreign language).

(interpreted) Yes. I think recently you mentioned that some game like [kicking] people game or [dancing channel] has been closed. I think that is in the normal course of business operations, because in fact in February and March of this year we voluntarily banned a game called Slave Trading because we think that there is some problems in that game, so we actually stopped it.

So I think we want to emphasize again this time we voluntarily again banned some of the features and the games in our channels. I think what we are trying to do is we try to actually stipulate a better management regulations or methodology so that once we have it -- once we have that installed or in place, we would again to reinitiate the features or games or channels. I think what you just mentioned is exactly what happened to us.

Understood. May I just have one quick follow-up? Could you please remind us what is roughly the contribution from high-spenders in the music community, in terms of revenue? Thank you.

Yes. As I mentioned before that in our music entertainment business, for example this year -- sorry, this quarter we have over one million paying users, right. Usually in the [item] based monetization, a small about of paying users will account for a large percentage of the revenue. For us, it's more in that general direction as well. Roughly 5% of our paying users account for roughly 70% of the total music revenue. That has been pretty consistent in recent quarters.

Thank you.

Your next question today comes from the line of Jialong Shi from Credit Suisse. Jialong, please go ahead.

Hi, David. Good morning, David and Eric. Thanks for taking my question. I have a follow-up question on the education business. I understand that you guys may not be in a hurry to monetize this business just wondering if the management can share with us any potential monetization models for this business in the future. I have one follow-up. Thank you.

Okay, let me translate this question a little bit. (Spoken in foreign language).

(interpreted) We want to emphasize that in the education market or business or industry, there are many aspects. Learning is one aspect, interaction is one aspect. So we want to emphasize that we are not going to let everybody get a free lunch on everything, meaning that it's not free-of-charge for everything. In fact we -- at this moment we want to use a free-of-charge strategy on certain part of the business. This certain part of the business is the part that student care the most. What does a student care the most at this moment is what we believe is crash courses. Those crash courses is student care the most and where the focus is.

However, students do have other needs; do have other areas that they care. So when students are being attracted to our platform we deliver very good services. Then we will let teachers to design very individualized courses or the point-of-sales for them to make money. So our business model is to use this free-of-charge crash courses and attract large volumes of traffic onto our platforms, we will let teachers to design their individualized courses and services so that they can charge people, for money and for their services. So that's our business model.

Thank you for the color. My second question is about 1931. I just wonder what is your long term goal for this business. Is it [intended] to grow into a talent agency business like Huayi Brothers so that YY might make money from the paid performers, both offline and online? Thank you.

(Spoken in foreign language). I am translating the questions to our CEO David. David is going to answer the question. Thank you.

(interpreted) Okay. We think that 1931 is very important for our online music and entertainment business, because it's very strategical, very important. The purpose we have this group is to cover from upstream to downstream of the music business. We already have very strong followings on so-called grass roots people, grass roots singers. Now, 1931 is to help us to go up to the value chain. So we also want to be able to create a chain or channels to create superstars.

So on YY platform there are so many grass roots singers, but once upon a time, or sometimes we will have very talented, very reputable performers. We want to make 1931 become the [exit] of those elite performers so that they will one day become a household name in the entertainment business in China.

I remember that before we mentioned AKB-40A's business model in Japan, I want to emphasize that as far as I understand, AKB-40A actually is making tons of money. If I'm not mistaken this should be somewhere around $300 million on an annual basis. So this business will be a very good supplement to our current business and also help us to broaden our user base and to make YY Entertainment become a mainstream entertainment in the long term basis. That's our purpose and goal.

Thank you.

Your next question today comes from the line of [Jao Chao] from Macquarie. Jao, please go ahead.

Thank you for taking my questions. My first follow up is on the government regulation on the online UGC video content. I was just wondering what licenses a company like yours typically would need to broadcast UGC content online and how many licenses does YY have right now to do this music business? That's my first follow up. I have a second follow up. Thank you.

(interpreted) YY has been in business for so many years, actually since 2005, close to 10 years. We have so many permits and licenses which allow us to do all sorts of internet broadcasting. I think specifically we have two licenses which are very relevant. One is called Audio and Video Permits. I believe that is from GAPP or it's from Soft, actually. Video and Audio permit is from Soft.

Also we have internet performance permits which is promulgated from the Ministry of Culture. So those are the most critical ones, and those two licenses enable us to do all this content broadcasting on the internet. Of course, I want to emphasize it's not just those two. We actually have many other licenses in the company. So I think in terms of licenses, we are equipped with all the necessary, if not more than necessary, licenses to do the business in China.

Okay, great. Thanks David and Eric for the answer. My second follow up is on the mobile business. You have already shared some of the metrics for your mobile in terms of the MAUs and the revenue contribution. I was wondering could you talk about in terms of the user behavior, in terms of time spent on mobile, the monetization, the differences, what items mobile users buy or not buy? Any additional color you can share would be great, thank you.

Sure. I think yes, we are very pleased to see our mobile initiative actually bear some fruit. I want to emphasize that we started the mobile monetization in the fourth quarter of 2013. As we just reported, the mobile monetization is doing much better than we expected in terms of number of users, in terms of dollar amounts. I think in terms of the behavior, this is what we looked at. If you look at the numbers, you can see clearly at this point in time the output from mobile users or mobile spendings is smaller, as I want to go back to the numbers again to you.

Our mobile monetization dollars is only 8% of our total entertainment revenues. However, in terms of people who use mobile devices to pay for their virtual items is 24%. If you interpret that, you can clearly see the output for the mobile purchase is smaller than the normal one from PC. So that's one clear evidence.

Number two is that from what I can see, on the very consistent basis that our users usually will enact long hours with our services on PC. As you know most of the mobile users, they use the service in a much shorter time span. So those are the two very clear differences in terms of user behavior between mobile users and the PC users.

Thanks again, Eric. Thank you.

Your next question today comes from the line of Chao Wang from Nomura. Chao, please go ahead. Hello Chao, your line is now open. Please go ahead.

My question is regarding [deferred] revenue. Could you roughly break it up between games and music? Also I noted that it's up 5% quarter-over-quarter again after a 22% sequential increase in last quarter, so how should we think about the seasonality of deferred revenue versus revenue? Thank you.

I'm sorry, can you repeat the question? You said to break down the revenue between the games and music?

I mean deferred revenue.

Oh, deferred revenue.

Yes, and also want to understand the seasonality of deferred revenue versus revenue.

Okay, good. Okay, for deferred revenue, as we all know, that is a balance sheet item. Deferred revenue is derived because according to US GAAP, some of the services is not being rendered completely as of the quarter end, so we have to defer to next quarter. We actually do not disclose the details of deferred revenue, but I can give you some kind of guidance.

The largest part among our deferred revenue is on the music side. That actually is a little more than one third of the total amounts. The second largest one is the games deferred revenue. That is also in the 30-some %. The third one is membership. It's in the high 20%s, close to 30%s. So those three items actually account for the 95% or 96% of the deferred revenue, so they are pretty much evenly spread over from 30% to 38% or 39%.

So in terms of the seasonality, I don't think there is too much seasonality other than that deferred revenue usually goes in tandem with the revenue of a particular line of business. Say if the music business goes up revenue increase, if everything goes normal, deferred revenue will go up with it as well. So usually that is the case.

Thank you very much, very helpful.

Your next question today comes from the line of Tian Hou from TH Capital. Tian, please go ahead.

Morning David and Eric. Thanks for taking my question. A couple of questions. One is regarding your music business. I saw that in this quarter it went up a lot, and that's actually followed a high growth in 2013. So I wonder, what is the outlook for this part of business in 2014 and how do you (inaudible) this business continue to grow at high speed? So that's on the musical side. On the education side, I know you're investing heavily in this quarter business and aiming at recruiting users and recruiting sticky users. I wonder what's the total investment are you planning to put in place and how should we think about your growth margin going forward? That's the two questions.

Well, first of all, for the music business, as you have seen, our music business has grown very rapidly, very strongly. I think the way that we grow our music business are in many folds. We have a very strong music team. They don't actually just grow revenue. They also try to grow user base. So for the short term, on a quarter-over-quarter basis, our music team has sponsored or has done a lot of marketing campaigns surrounding all these holidays.

I think this strategy has been proven very effectively. They will continue to use that. For example, in the first quarter we had Valentine's Day, we had Chinese New Year, we had February, there is a day called Once In A Life or something. Those kind of holidays, those kind of days will be the special day for them to do their promotion. That's on a short term basis.

On the long term basis, we try to build a very solid user base, not only that we are looking at monetizing in the short term manners. We also want to broaden our user base. I think 1931 is one of the long term efforts or endeavors so we don't expect 1931s to create huge amounts of traffic or user base in the short term, but in three quarters, a year or two, it actually can broaden our user base on a long term basis. So that's going to help us to allow our platforms to have a better or stronger capability, to help our performers to monetize in the long term basis. So that's our music strategy.

On the education side, yes, this year is a year of investment for our education business because we already said that this year we don't pay attention to monetizations. We don't even pay attention to the number of students. We want to make sure that the quality of service or the quality of the content is up to the satisfaction of our students and the teachers. That means yes, we need to actually have a very strong team. I think our education team at this moment is doing very well. We will continue to support them, so we will add head counts in that team.

Secondly, we did actually mention we want to invest RMB1 billion into the education business, so a lot of people or investor will start to worry that $1 billion (sic) is a lot of money. But if you look at the history or the tradition of YY, we don't usually will conduct a massive marketing campaigns. I think most of that money will be used to invest or acquire meaningful education outfits or business model, meaning that all those money will be spent onto so-called balance sheet items, become investments. So I think in the short run, I don't see that our spending in education business is going to impact our P&L or income statement that much.

That's very helpful, Eric. I have a follow up question. You mentioned about the sponsorship in the music performance. So I wonder how important those sponsors are to the performer and to the music business.

Can you say that again? I don't understand that, because I thought you already asked two, so I didn't expect that you ask another question. Can you repeat your question again?

Yes. It's about the sponsor. So you mentioned about the sponsorship for the musical performers. So I wonder how important those sponsors are to those performers? Also how important those sponsorship to your revenue growth?

Can you say sponsor in Chinese? Because I don't really understand what sponsor means.

(spoken in foreign language)

Okay now I understand. I think you misunderstand our business. Our business, we don't have what you call sponsor. Our term is called channel owner. We have channel owner who is running the channel and the channel owner will have contract with hundreds of singers. So they would have relationship with a lot of singers, so they don't actually sponsor it.

The business model you are talking about could be related to some other companies. It's not -- it doesn't have anything to do with us. So we have channel owners who will actually share the revenue, the music revenue, with the performers. So the more performers they have, the more money they're going to make. The better the performers they can contract with and then the better business will be in that specific contract. So I don't think we call them sponsors.

That's helpful. How important they are to your business?

Can we go to next question please? Next question please.

Your next question comes from the line of Yu-Heng Fan from China Renaissance. Yu-Heng, please go ahead.

Hi good morning. Thanks for taking my question. My first question is regarding the student acquisition. You mentioned that you are stayed disciplined in marketing for your education. I just wonder so far since the launch of 100.com, how much of your -- how many of your students were acquired organically, what's your plan in the future, and I have a follow up for the next question.

Yu-Heng, can you repeat the question very, very quickly again because I was a little preoccupied, sorry about this.

Sorry about that. You mentioned that you stayed disciplined on your marketing spending for your education business. I just wonder since the launch of 100.com, how many of your students (inaudible) so far were acquired organically, what's your plan in the future? I then have a follow up, thank you.

Yes, I can tell you as of now, it's all -- they all come to 100 Education organically. We do not actually purchase any traffic or anything. Because that is just out of one press conference, so I would say that the 20,000 students who signed up is just because of that press conference. That press conference is what I mentioned as disciplined marketing strategy. Because obviously that press conference will cost us money, right? So we haven't actually tried to use other means to attract other students.

Thank you. For those paid teacher you hired, I just wonder what's your--the compensation structure for those teachers? Are those based on the fixed annual salary or is there any incentives tied to their compensation? Thank you.

You know it's very interesting. Right now we do have six teachers conducting courses at 100 Education. But you know what? All of them are volunteers. When we actually announced that we are trying to recruit some teachers to teach on that particular courses, there are hundreds of teachers trying to apply for that position. We just take one of them to become the teacher who is teaching the course. So at this point of time, we have not spent money to hire teachers to conduct the courses yet.

Okay thank you, that's helpful. Congrats on strong progress. Thank you.

Ladies and gentlemen, this concludes the question and answer session for today. I would now like to hand the conference back to management for closing remarks.

Thank you very much for everyone. Now we conclude the conference call. Thank you.

Thank you, (spoken in a foreign language).

Ladies and gentlemen, this concludes the call for today. Thank you all for participating. You may all now disconnect.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. This interpreter was provided by the Company sponsoring this Event.