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Jiayuan.com International Ltd. (NASDAQ:DATE)

Q3 2012 Earnings Call

November 20, 2012 8:00 p.m. EST

Executives

Yan Peng – IR Specialist

Rose Gong – Founder and Co-CEO

Linguang Wu – Co-CEO

Shang Koo – CFO

Analysts

William Huang – Barclays Capital

[Yang Zhang] – [PGC]

[Laura Li] – Oppenheimer

George Askew – Stifel Nicolaus

[Greg Retol] – Citigroup

Operator

Hello and thank you for standing by for Jiayuan's third quarter 2012 earnings conference call.

[Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference, Yan Peng, Investor Relations Specialist of Jiayuan.

Yan Peng

Thank you. Welcome to Jiayuan's third quarter 2012 earnings conference call. On today's call you'll hear from Ms. Rose Gong, Founder and Co-CEO; Mr. Linguang Wu, Co-CEO; and Mr. Shang Koo, CFO of Jiayuan.

Ms. Gong will begin today's call with an overview of Jiayuan's business highlights, Mr. Wu will discuss our product initiatives, and then Mr. Koo will talk you through this quarter's key financial indicators. After the prepared remarks, Ms. Gong, Mr. Wu and Mr. Koo will be available to answer your questions.

Before we proceed, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public filings with the SEC. Jiayuan does not undertake any obligations to update any forward-looking statement except as required under applicable law.

Our discussion on this call includes certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited directly comparable GAAP measures and is available on our IR website at ir.jiayuan.com.

As a reminder, this conference is being recorded. In addition, a live and archived webcast of the conference will be available on our website.

I will now turn the call over to Ms. Rose Gong, Founder and Co-CEO of Jiayuan.

Rose Gong

Hello, everyone. I thank you for joining us for our third quarter earnings conference call. I'm pleased to report that Jiayuan experienced solid top-line growth during the third quarter 2012, driven by the growth of our products [inaudible]. In order to ensure we continue to provide outstanding user experience and [general] usage, we remain focused on [developing] quality, convenience and [greater] results.

Looking forward, we ensure that Jiayuan is able to build on our industry leadership. We are focused on two key strategic growth initiatives. One, providing the best results and the user experience on Jiayuan, and in particular, taking advantage of the explosive growth in mobile internet usage. And two, meeting the specific needs of different vertical markets through our segmentation strategy [inaudible] through the quarter and the exciting initiatives we have already underway, including the launch of our new vertical website izhenxin.com.

I will now turn this call over to our co-CEO, Linguang Wu. Thank you.

Linguang Wu

Thanks, Rose, and hello everyone. With our Jiayuan's results [inaudible] business model, better dating results [inaudible] and as a result of our efforts, we continued to generate a steady growth with more than 1.27 million average paying users in the third quarter 2012, up from about 1.25 million in Q3 2011 and from about 1.22 million in Q2 this year. ARPU for online services in the third quarter 2012 was RMB26.5, compared to RMB20.2 for the third quarter of 2011 and RMB23.4 for the previous quarter.

As Rose mentioned, the overall shift to mobile internet use is a huge opportunity for us, so we are very focused on rolling out initiatives to better meet the needs of this growing market. In addition to the [inaudible] function we mentioned in the second quarter, we have also introduced a new search function based on key [inaudible] help users make better use of their time to search [products] online. I'm pleased to report that Jiayuan smartphone apps have already been downloaded [inaudible] over 10 million times as of the end of the third quarter. Although it is still early days for the mobile internet, our strong volume penetration brings us a valuable platform to supplement our desktop services.

And as Rose mentioned, we are very confident in the segmentation strategy that we introduced the launch of our members-only website izhenxin.com. This new website was developed to provide [busy] singles a more focused and a streamlined environment to search for marriage-minded partners. This is a first online dating platform in China to [inaudible] information verification system, which provides the initial bridges for the [inaudible] assigned to each member. In addition, izhenxin uses a [inaudible] on a real-time basis. [inaudible] as our core platform, we will remain focused on developing [inaudible] products and investing in the best possible mobile and desktop experience for our users.

In spring 2013 we will also plan to launch a new product with more social networking features targeting younger users.

I'd now like to turn the call over to Shang Koo to talk through our financials. Thank you.

Shang Koo

Thank you, Linguang. Hello everybody.

I'm pleased to report strong top-line growth in the third quarter. Our net revenue was RMB113.5 million for the third quarter 2012, representing a year-over-year increase of 24.8%. This was primarily due to steady growth of the company's online services business which contributed RMB101.1 million or 89.1% of net revenues. This growth achieved our expectation as we accelerated the launch of some applications and features earlier than planned in the third quarter in order to concentrate resources on the launch of izhenxin.com in the fourth quarter.

As Linguang explained, the online services growth was primarily due to the increase in paying user accounts and ARPU. We are encouraged by the expansion of both registered user accounts and paying user ratio. As of September 30, 2012, the number of registered user accounts was 73 million, with approximately 5.5 million users acquired during the quarter. With regard to average monthly paying user accounts, we achieved growth of 4% from the previous quarter, reaching almost 1.3 million during the period.

The success of our mobile offering, which encourages users to spend extra time on our platform and increase the money that they spend, was a significant contributor to this growth. Jiayuan's mobile apps were downloaded and activated over 10 million times by the end of September this year. Monetization of our wireless business, however, remains slower than that of our traditional online services. That said, we're seeing more and more incremental revenue as mobile is increasingly driving traffic and user stickiness.

Jiayuan holds the leading position for mobile penetration within this market and we are confident that our mobile strategy will strengthen our position as an overall market leader. Going forward we will continue to prioritize retaining high-quality users and increasing the monetization of mobile usage.

In the third quarter, R&D expenses totaled RMB4.4 million, an increase of 41.6% year over year and 6.2% quarter over quarter. The increase in R&D expenses was driven by new product development and our investment in wireless services. Superior technology and innovation are among Jiayuan's greatest strengths. In August we launched an improved version of our recommendation system and our proprietary user behavior analysis technology which we developed for izhenxin.com is a clear differentiator. In the quarters ahead, we expect to continue increasing our investment in the development of new technologies and products as well as enhancements of existing products.

Now let's talk about offline's performance. Our events and VIP revenue was RMB12.1 million for the third quarter of 2012 compared with RMB13.7 million for the corresponding period in 2011 and RMB12.8 million for the previous quarter. The slight decrease was primarily due to lower event attendance during the London Olympics period. As you know, our VIP business unit is still undergoing restructuring. In the near term, the new VIP business management team will be introducing new sales and customer engagement processes to lay a solid foundation for the sustainable growth of this business unit.

Looking to the coming quarter, as the weather turns colder and the days become shorter, people tend to spend more time at home rather than going out on dates. So as pretty usual, we do expect the fourth quarter to be impacted by seasonality.

With that, let me give you the outlook for the fourth quarter 2012. Jiayuan currently expects to generate net revenues in the range of RMB106 million to RMB108 million for the fourth quarter of 2012. Selling and marketing expenses for the fourth quarter 2012 are expected to be in the range of RMB44 million to RMB46 million. This forecast reflects Jiayuan's current and preliminary view which is subject to change.

Thank you for listening. We are now ready for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

Your first question comes from William Huang from Barclays. Please ask your question.

William Huang – Barclays Capital

Hi. Thank you for taking my call. Just a question, first question is about mobile internet. Given that you just commented that mobile is a big opportunity for Jiayuan, but it seems like the monetization on mobile has been challenging for most of the internet companies. Can you share with us your view in terms of the mobile monetization for Jiayuan? This is my first question. Thank you.

Shang Koo

Let me translate that real quick.

[Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

The problem with a lot of other companies in charging for mobile products is that there's a lack of business model for mobile. However, Jiayuan's [standard] system, which is RMB2 per message, is actually very suitable for the mobile system. So, by transferring the [standard] system to the mobile ecosystem is actually very accepted by our online and mobile users as well.

Operator

Thank you. Your next question comes from [Yang Zhang] from [PGC]. Please ask your question.

[Yang Zhang] – [PGC]

Hi, good afternoon everyone. [Zhang Yang], [Pembroke Global Capital]. A question about the cost.

[Chinese language spoken]

Shang Koo

So the question is, the cost is increasing faster than revenues, so -- and I'll let Linguang explain that a little bit.

Linguang Wu

[Chinese language spoken]

Shang Koo

Sorry. Are you asking about Q4 or Q3?

Shang Koo

Q3.

Linguang Wu

[Chinese language spoken]

Okay. Yeah. Part of it is marketing, marketing expenses that -- but a lot of that is due to our mobile services. But I think a lot of the digital cost increase that you see increasing faster than revenue actually comes from G&A. And G&A both on a year-on-year basis and on a sequential basis will actually -- a lot of that cost is due to cost of being a listed company. So, even in third quarter last year, after we listed all of the listing -- not all the costs related to the enlisted company was factored in, and over the last few quarters we had to expand our internal teams for SOX 404 compliance for additional legal fees. There's different costs related to the enlisted company that impacted our G&A and hurt our operating margin.

Sorry, but going forward into 2013, I don’t think you'll see G&A increasing faster than revenues.

Operator

Thank you. Your next question comes from Andy Yeung from Oppenheimer. Please ask your question.

[Laura Li] – Oppenheimer

Hi, this is [Laura Li], asking a question on behalf of Andy Yeung. So my first question is regarding the competitive landscape. So, can you comment on any -- do you see any changes in competitive landscape of China's online dating market in this quarter versus the previous quarter? Thank you.

Shang Koo

[Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

There is no major change in the overall competitive landscape, but we are finding that our -- the number two and number three players, especially the number three player, they are concentrating more and more of their resources on offline business rather than online business.

Operator

Thank you. Your next question comes from George Askew from Stifel Nicolaus. Please ask your question.

George Askew – Stifel Nicolaus

Yes, thanks. I would like to -- and congratulations on a good quarter, very good quarter. I'd like to kind of address costs going forward. You kind of touched on the G&A topic, but you stressed investments being made going forward. Obviously there's a lot of sales and marketing spend in the fourth quarter. Can you address sales and marketing and R&D, particularly as you go into 2013?

And then secondly, relatedly, how far do you intend to take the segmentation strategy? I mean, are we going to, you know, three years from now, will we see five brands inside of Jiayuan? Thank you.

Shang Koo

[Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

Yeah. So, for your second question about your segmentation strategy, so we're segmenting the entire industry in terms of user preference. So, not only will we have different brands but we will have different products within each brand. For example, we will have special apps both for social networks and for the smartphones. That targets a specific user base with -- even within a particular brand. But yes, going forward, you will see more brands coming from Jiayuan.

For your first question, about our sales and marketing expenses for the fourth quarter, the increase versus the third quarter comes in two parts. One is the additional marketing that's spent on izhenxin. But a bigger part is actually -- is that we're testing with different new marketing channels in the fourth quarter. So, a lot of our marketing spend is signed on an annual basis. So even in the fourth quarter we cannot discontinue it when we find that the ROIs for those marketing channels is pretty low. But at the same time, we need to start finding new marketing channels for 2013. So you're actually seeing some overlaps in marketing spend in the fourth quarter with us testing new marketing channels and with us not able to shut down some of our less efficient marketing channels from earlier in the year.

Operator

Thank you. Your next question comes from [Greg Retol] from Citigroup. Please ask your question.

[Greg Retol] – Citigroup

Hello, Gong; hello, Wu and Shang. Thanks for taking my question. Congratulations to the strong quarter. My first question is about [inaudible]. Now, is it possible to disclose some operation data [inaudible] like registered users, active users and ARPU?

And my second question is about the advertising and -- also about advertising and marketing. Now, what's your platform to now use for advertising and marketing? And what's the most effective channel to think for our marketing? Thanks.

Shang Koo

[Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

For izhenxin, right now it's still too early to talk about numbers. We've launched it for less than a month, but so far izhenxin's performance has been above our expectation. For marketing, what we find mostly effective, one, PR efforts. We think this traditional PR with news articles about Jiayuan and about our new products, that is one of the most effective ways of promoting Jiayuan. But if you think -- if you're looking at in terms of online ad spending, we do find search and navigation as very ROI channels for us.

Operator

Thank you. Your next question comes from [inaudible] from CICC. Please ask your question.

Unidentified Participant

Hi, good morning. Thank you for taking my questions. I have two questions. The first question is in regard of the monetization about your business. As I noticed that this izhenxin, the company devoted lots of resources on it, and also our mobile services. So, when do the management expect the monetization of those two services will come up?

And my second question is about mobile traffic, so, how -- so, what is the weight about the proportion of the mobile traffic compared with your total traffic amount? Thanks.

Shang Koo

[Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

I do think right now we're still very focused on users rather than monetization. And within the next six months, our focus is on users rather than monetization, so, a lot of -- even though it is a members-only service, we will be giving a lot of free accounts, a lot of free trials, to get users to use and staying on our platform.

For mobile traffic right now, mobile traffic is growing much faster than online traffic. And in terms of proportion, right now it's over 20% of overall traffic.

For monetization for mobile, we are already monetizing from our mobile products, and revenue from mobile is growing very fast, although it is still a very small portion of our overall revenue.

Operator

Thank you. [Operator Instructions].

Your next question comes from William Huang from Barclays. Please ask your question.

William Huang – Barclays Capital

Hi. I just have one more question. How should we expect any improvement changes after your restructuring of VIP business? Thank you.

Shang Koo

[Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

So the VIP business is stable in third quarter and it is growing slightly. So what we're doing with our VIP business is introducing -- is improving the products so that it better suits the needs of the users. At the same time, for our VIP management system, we're introducing a lot of new policies to make sure that there's more tracking of the sales process and customer engagement process, so that over time the customers are -- our users and customers are better serviced by Jiayuan and are serviced by multiple people including [inaudible] and as well as their matchmaker.

Operator

Thank you. Your next question comes from George Askew from Stifel Nicolaus. Please ask your question.

George Askew – Stifel Nicolaus

Yes, thank you. You were very helpful on kind of the sales and marketing cost profile looking ahead. Can you give us sort of a similar overview on R&D both fourth quarter and next year? Again, obviously you're in investing mode, lots of innovation happening on multiple fronts. It seems to me we got to see R&D as a percentage of sales creep higher. What should we expect?

Shang Koo

Our revenue -- our R&D is growing a little bit faster than revenue, but it's still under 5% of overall revenue. And our target actually for this year is 5% of revenue -- R&D as 5% of revenue. So we're actually under -- our spending for R&D is actually under budget this year. Next year going forward for 2013, our budget is still 5% of revenues for R&D. So it's a matter of -- we want to spend more on our R&D, it's just finding the right people and hiring.

Operator

Thank you. Your next question comes from [Yang Zhang] from [PGC]. Please ask your question.

[Yang Zhang] – [PGC]

Hi. I have another question -- actually two questions on the pricing front. The first question is on the drivers for the ARPU increase this quarter. Could you please get into a little bit more detail just to see how much -- what's driving the 30% increase year over year?

And the second question on the pricing front, it's basically actually for Gong and Wu.

[Chinese language spoken]

Shang Koo

[Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

So for your first question about ARPU growth in third quarter, our ARPU growth in the third quarter is from just better results for our users. Our recommendation system -- our recommendation helps to make sure that the more active users have better results. And it recommends the users that are more recently active. So, overall, our users have been getting better results, and as a result, are paying more. So that's one part.

Also, mobile actually helps to increase monetization of our online users as well. So, for users that are -- online users that also use the mobile platform, that's actually additional incremental monetization from what we have before.

Now, for your second question about market share, we actually don't see that much difference in market share between us and our competitors. We don’t think that the margin of our advantage over our competitors is shrinking. In fact, with our -- I think it might be looking at some market share metrics that are more focused on online. And the difference with -- the problem with using those numbers is that right now, like Wu said, like Linguang said, over 20% of our user traffic is coming from mobile, so that's not being tracked by those third-party data. And our competitors right now have very little mobile presence in China.

At the same time, we introduced a desktop client in the first -- at the end of the first quarter this year. The desktop client is responsible for a lot of user traffic as well. So if you add the desktop client and the mobile clients back in, our market share -- our time spent for online dating in China is just as strong as it was in 2011 and 2010.

For our pricing strategy and for our user acquisition strategy, this year we're focusing on monetization. That does not mean that we're not going to grow users for 2013 or in the future. This year we are trying to find different ways to improve services for our users and find ways to better monetize our existing users. But going forward, once we find the best methods and also once we find better ways to market to new users, we can open up our marketing spend to get them the most attractive, the highest ROI users in the future.

Operator

Thank you. [Operator Instructions].

Your next question comes from [Yang Zhang] from PGC. Please ask your question.

[Yang Zhang] – [PGC]

Hi. Another question for Gong and Wu. Basically on the new product izhenxin.

[Chinese language spoken]

Shang Koo

Sorry. Actually before, we actually said it's 10,000 active users, that's one of the methods we use for Jiayuan. But actually that does not apply as much to izhenxin because izhenxin is a more focused product. It's for those users that are very focused on dating -- on marriage, whereas Jiayuan has a slightly younger user base that is not -- that does not want to get married -- that some of them may not want to get married immediately. So the greater focus of izhenxin actually means that we can actually have a much smaller scale in individual cities to have the critical network that's needed for success.

Linguang Wu

[Chinese language spoken]

Shang Koo

Okay. Yeah. And to add to that, for phase two of izhenxin, we are trying to introduce some new products and features that's not Jiayuan that will help with user engagement for -- specifically for izhenxin.

So the user engagement and the critical scale needed for izhenxin is very different from Jiayuan because of the different user base and as well as the different features that we offer on both -- on the two different platforms.

Operator

Thank you. If there are no further questions at this time, I'd now like to hand the conference back to your host, Yan Peng. Please go ahead.

Yan Peng

Once again, thank you for joining us today. Please don’t hesitate to contact us if you have any further questions. Thank you for your continued support. And we look forward to talking with you in the coming months.

Operator

Thank you. Ladies and gentlemen, that does complete our conference for today. Thank you for participating. You may all disconnect.

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