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Executives

Ryan Cheung - Corporate Finance Director

Cheung Koo Wing - Founder, Chairman, Chief Executive Officer and Member of Corporate Governance & Nominating Committee

Dele Liu - President and Director

Ge Xu - Chief Financial Officer and Senior Vice President

Wei Wang - Founder, Chairman and Chief Executive Officer

Analysts

Dick Wei - JP Morgan Chase & Co, Research Division

Muzhi Li - Citigroup Inc, Research Division

Jin Kyu Yoon - Nomura Securities Co. Ltd., Research Division

Alex Yao - Deutsche Bank AG, Research Division

Alicia Yap - Barclays Capital, Research Division

Jiong Shao - Macquarie Research

Philip Wan - Morgan Stanley, Research Division

Piyush Mubayi - Goldman Sachs Group Inc., Research Division

Tian X. Hou - T.H. Capital, LLC

Youku Tudou (YOKU) Q4 2012 Earnings Call February 28, 2013 8:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Youku Tudou's Q4 and Fiscal 2012 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, the 1st of March, 2013. I would now like to hand the conference over to your speaker today, Mr. Ryan Cheung, Corporate Finance Director of Youku Tudou. Thank you. Please go ahead.

Ryan Cheung

Thank you, operator, and welcome to our fourth quarter and full year 2012 earnings conference call. Let me introduce the management team on the call today. They are Chairman and CEO Victor Koo; our Board Director and President, Dele Liu; and Michael Xu, our Chief Financial Officer and Senior Vice President.

For today's agenda, Victor will kick off with an overview of the performance in Q4, key updates on our integration status, sales strategy heading into 2013 and our mobile traffic growth. Dele will discuss our content strategy and cost synergies and Michael will discuss the fourth quarter and full year 2012 unaudited financials, and then we'll open the floor for questions.

As a reminder, the financial results and a webcast of this conference call are all available at the Investor Relations sections of the Youku Tudou website. A replay of the call will be available on our website in a few hours. I refer you to our Safe Harbor Statement in our earnings press release, which apply to this call, as we will make forward-looking statements. In addition, please also refer to our Basis of Presentation sections on our press release. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi.

Let me now turn the call over to our Chairman and CEO, Victor Koo. Please proceed.

Cheung Koo Wing

Thank you, Ryan. Good morning and good evening, everyone. Thank you for joining us. I am pleased with our financial and operational performance in the fourth quarter, which was the first full quarter of the merged Youku-Tudou company.

Revenue from Tudou recovered back to its premerger level, and we see there are still a lot of revenue synergies to be realized from both platforms, on which I will give you more details later in this call. We are particularly pleased to note that net loss for the combined company has narrowed down materially despite sales disruption brought out by the reorganization of our sales team after the merger. Operationally, the significant growth in our mobile traffic continued, which we will start to monetize this year. We have begun to realize synergies from this merger through cost structure optimization. The initial results have already appeared in this quarter, and we expect to see further improvement in 2013. Overall, the integration has proceeded smoothly, and Youku Tudou continues to be one of the fastest-growing online media businesses in China and best positioned to grow our leading presence in the online video market.

The cornerstone of sales strategy for 2013 is to grow our advertiser base, as well as increase revenue per advertiser for existing clients. More specifically, our strategies are: one, to diversify our client base, especially domestic clients; two, to increase sell-through rate for both platforms in lower-tier cities; three, to further improve Tudou's sell-through rate; four, to optimize our rate cut policy in the Tier 1 cities and for contents that have high sell-through rates; five, to develop content marketing solutions through sponsorships of product placement opportunities in our regional production; six, to start monetizing our rapidly growing mobile platform.

While the back-end advertising systems for both platforms have already been integrated, on the front end, we continue to work on integrating and optimizing the combined sales team. We are largely satisfied with the overall progress as we are in our final stages of our sales team restructuring in Q1 2013. In the past few months, since the closing of the merger, we have taken some painful but necessary measures to strengthen our sales team. While the short-term revenue outlook might be adversely affected, as evidenced by our relatively soft revenue guidance provided for the first quarter, we believe our strong sales organization is the basis for healthy growth.

We held sales roadshow events in multiple cities in Q4 to introduce the integrated advertising platform, cross-platform and content marketing solutions to our key clients and agencies. We emphasized the combined media influence of the 2 platforms, which have the broadest reach in the online video industry in China and reduced advertising waste resulting from user base duplication. Our clients have reacted positively to the combined platforms advertising solutions. We believe that over time, the advantages of advertising on Youku Tudou will become more pronounced, and advertisers will experience increasing opportunity cost of placing ads on the other online video platforms.

As the clear leader in this space, we are also setting industry standards for online video advertising with key clients, agencies and third-party measurement companies. I would like to emphasize that the media value of Tudou's platform has been elevated after the closing of the merger. We have launched multiple initiatives to enhance their brand value and unique personality of Tudou. These efforts have started to pay off as we began to see organic growth in Tudou's reach and user time spent and initial success of Tudou's content marketing efforts. For us, as a technology-based media company, as long as the media value of the platform is there, the advertising dollars will flow in with the execution improvement of our combined sales team. Evidently, we have already seen Tudou's sell-through improved post the closing of the merger.

Another positive is that the cost structure of the combined platform, which Dele will provide more details on, has been significantly improved. Our operating expenses are under control primarily due to cost savings from bandwidth and personnel-related expense as we drive synergies from the merger. On the other hand, the temporary challenges we are facing in sales during the integration process will require us to improve on execution, and at the same time, explore other monetization opportunities in the online video space.

For example, in the past quarter, about 50% of our advertising revenues were derived from international FMCG. The spending growth from this sector may not be as robust as previous years because some of our major FMCG clients are conducting worldwide budget control based on the relatively soft macroeconomic condition in the second half of 2012. While overall sentiment has improved in 2013, there's a time lag on marketing spending allocation with global companies in China.

In addition, the majority of our revenue comes from hard advertising such as pre-roll, banner ad, et cetera. However, unlike our international brand advertisers that are more data driven and focused on the reach and frequency of our platforms, there's unexploited potential from brands that are more content or event driven and receptive to other forms of advertising such as program sponsorships and product placements. Unlike television stations, which derived a significant portion of their revenue from soft advertising, we are just starting to tap into this important source of advertising dollars. And as such, one of our key strategies is to develop content marketing solutions for our clients.

We believe the combined Youku Tudou entity is in a very unique position as we have the 2 most recognized online video brands, the most experienced and proven in-house content production teams in the Internet industry and the increasingly distinct brand differentiation. As you may recall, Youku's brand image and user base is considered more mainstream, while Tudou has a strong appeal with young and fashion-forward users.

So far, we have already achieved initial success in this area. Two popular Youku Original series, Morning Call and Legendary Me, are now in their second seasons, while Tudou recently launched 2 new original series, Tudou Groovin' and Yif Magic. The in-house produced Tudou Groovin' has already lined up brand sponsorships way above its production costs without consuming any higher advertising inventory.

While we are encouraged by the untapped monetization opportunities ahead of us, we are now in the transitional period as it takes time to build the right team capabilities and roll out these initiatives. With our proven track record of increasing budget allocation from international brand advertisers and developing the TVC monetization model in previous years, management is on top of these initiatives and will execute decisively in 2013.

For example, we are building an experienced team to build on Tudou's brand personality and content differentiation. Weidong Yang former CEO of Max Times [ph], a youth entertainment content and marketing company and Marketing Activation Director of Nokia to Greater China, has joined us as President of Tudou. While at Max Times and Nokia, Weidong has cooperated with Youku and Tudou to launch pioneering content in events that involve online video and interactive marketing.

Another key priority for us in 2013 is to extend our traffic lead in mobile. We believe we can achieve this as we have the 2 most recognized and distinguished online video brands in China, the most comprehensive content library, a well established technology network infrastructure, a dedicated mobile video team and a pure focus on online video.

Video is one of the most popular applications on smartphones and other mobile devices based on user demand. Smartphones and tablets allow users to watch videos anytime anywhere. Demand for mobile video continues to grow exponentially as mobile devices become more commoditized and reach into lower-tier cities and remote regions with limited or no desktop penetration. Youku's growth in mobile traffic was explosive throughout 2012, increasing at a rate of over 800%. We are very encouraged that our daily mobile video views exceeded 100 million by the end of 2012.

At Youku Tudou, we invested early in building our presence in the mobile ecosystem through our cooperation with Apple and multiple upgrades in Android and iOS applications. For video, we see the mobile ecosystem as a natural extension to PC. Access to the combined Youku Tudou video platforms from both PC and mobile give our users the choice and flexibility to access to our content library. The monetization of mobile traffic will naturally follow as the video monetization model is similar to that for PC.

In summary, as I mentioned in this call, last quarter was the first full quarter after the merger, and integration is still under way. We have significantly narrowed down the net loss of the combined company through realizing cost synergies, and expect this to be continued to be going forward. We continue to see strong growth in mobile traffic. The integration has been progressing smoothly with Tudou's media value continuing to grow. Despite relatively weak Q1 revenue outlook, we have seen a lot of revenue potentials in content marketing, verticals outside international FMCG and in mobile traffic as we are taking concrete measures to realize them. We didn't underestimate the challenges we face in such a large-scale merger, but with our proven track record and experienced management team, we are fully confident that we would further improve Youku Tudou's operational results to create long-term shareholder value.

I will now turn the call over to Dele.

Dele Liu

Thank you, Victor. Hello, everyone. Following the merger between Youku and Tudou, we now have the largest syndicated content budget in China. In order to deploy our resources smartly, we have adopted a balanced approach for investing in content.

Let me briefly go over the various content categories. As for professional licensed content, post merger, we consolidated the procurements of copyrighted content into one integrated media syndication team. This integrated strategy for both Youku and Tudou video platforms as well as for PC and mobile will lead to increased scale benefit. Already, we noticed that the rapid scaling of our cross-platforms and mobile traffic has significantly lowered our cost per 1,000 videos viewed, and this will continue going forward. Even as we take a balanced approach, we remain proactive to obtain a fair share of head [ph] content in the market in order to maintain our traffic and media leadership. We have secured a solid pipeline of TV serial dramas for 2013.

In addition, we have signed several important content partnerships such as a 2-year exclusive license rights agreement with TVB from Hong Kong for its new production and all library content and a 3-year exclusive license rights agreement with SBS from Korea. We also signed a partnership agreement with Benmountain Media Group, a well-known company owned by the top Chinese comedian, Mr. Zhao Benshan.

As Victor has already mentioned, our in-house production -- content production will be strengthened in support of our content marketing and sales efforts. We believe increased resource allocation to in-house production is a sound strategy for Youku Tudou for several reasons. We are a leader in the area with a proven track record and well-established popularity with Internet audiences. Three of our in-house produced variety shows, Morning Call, Legendary Me and Youku Entertainment Daily [ph], constantly ranked among our top 10 most viewed variety shows. To date, we have invested a considerable amount of time, effort and funds in building up our content production experiences and capabilities. These investments were expensed upfront and is currently under monetized.

Furthermore, through in-house production, we moved up the value chain of owning IP franchises and leveraging the scale of our distribution channels while reducing our dependence on head content bought from third parties. Finally, as Victor indicated, we believe there's untapped revenue from content marketing solutions to be gained from in-house production.

As for user generated content, the combination of Tudou and Youku UGC has resulted in a much more extensive UGC library than any of our peers in China. This further supplements the variety of our content offering and creates unrivaled social media value compared to any of our peers in China.

Overall, we expect that our balanced approach to investing in different content categories and continuing to build a comprehensive content library will pay off more as time goes by. By investing in in-house production, we gradually limits our reliance on head content from third parties in the long term. And with the ongoing growth in traffic, especially in mobile, we expect content economics to improve further and to make us less sensitive to head content pricing trends in the future.

Let me turn now to bandwidth and personnel. We're encouraged that even in the short time period since the merger was completed, we began to note cost benefits for the combined Youku Tudou entities. Our bandwidth costs have stayed more or less flat despite the exponential growth in mobile traffic. This is largely due to the integration of our CDNs and the flash P2P infrastructure that reduced per unit bandwidth cost and achieve bandwidth savings. In 2013, we'll continue to optimize our CDN infrastructure to create incremental bandwidth savings. In the area of personnel-related expenses, we also expect to see cost benefits from the merger this year. We have a leaner and more efficient team structure as we expect to stabilize our headcount growth in 2013.

With that, I would like to pass the floor to Michael, our CFO to go over the financial results with you.

Ge Xu

Thank you, Dele. Hello, everyone, and I thank you all for joining our conference call today. Before working through the financial highlights, I'd like to remind you that Youku and Tudou completed the merger on August 23, 2012, with Tudou's financial results consolidated into the company from the date of the completion of the merger. Comparison of Tudou's financial results with previous periods cannot be provided because the cut-off dates of previous periods will not reflect the consistent basis of comparison. For more information, please refer to our earnings press release for consolidated full year 2012 financial results.

Let me now take you through our financial highlights for the quarter. The amounts mentioned here are in RMB unless otherwise noted. For the fourth quarter, our consolidated net revenues were RMB 635.8 million, a 30% increase year-on-year and beat the high end of our guidance. Consolidated advertising net revenue were RMB 574.9 million, meeting the guidance previously announced by the company. The growth was primarily attributable to the increased use by brand advertisers for advertising services, as evidenced by an increase in number of advertisers and an increase in average spend per advertising.

Consolidated bandwidth costs were RMB 163 million, representing 26% of consolidated net revenue compared to 37% in the same period in 2011. Consolidated non-GAAP content costs were RMB 258.2 million, representing 41% of consolidated net revenue. During the fourth quarter of 2012, there was a onetime reclassification from consolidated sales and marketing expenses into content costs. If excluding this onetime reclassification, our consolidated non-GAAP content costs would have been 36% of our consolidated net revenue compared to 35% in the same period 2011. The slight increase was primarily due to content price increase during 2011, which we amortized using accelerated method, broadening our content portfolio, and an increase in salary and benefit for our content team. In-house content production costs and the investment in TV serial dramas was RMB 17.1 million as compared to RMB 6.6 million in the same period in 2011. We have already secured a solid pipeline of content offering in -- for 2013 in advance, and a financial commitment for the end of 2012 for this content was RMB 399.5 million.

Non-GAAP gross profit was RMB 129.1 million, a 74% increase year-on-year due to strong operating leverage. If excluding the onetime reclassification of advertising production costs from sales and marketing expenses into content costs, consolidated non-GAAP gross profit would have been RMB 160.6 million, representing 25% of consolidated net revenue and grew by 116% year-on-year as compared to 15% in the same period in 2011.

Non-GAAP operating expenses, were RMB 206.4 million, an 18% decrease year-on-year. The decrease was primarily due to the reduction of bad debt expenses, reduction of traffic acquisition costs incurred by Tudou and a onetime reclassification of advertising production costs from sales and marketing expenses to content costs.

Non-GAAP net loss was RMB 62.3 million, a decrease of 64% compared to RMB 174.6 million in the same period in 2011.

Turning to the cash flow item as of December 31, 2012. Cash, cash equivalent, restricted cash and short-term investments totaled RMB 3.8 billion. Our cash flow from operating activity recorded RMB 158.7 million as compared to RMB 81.6 million in the same period in 2011. Acquisition of intangible assets was RMB 111.1 million as compared to RMB 115 million for the same period in 2011.

Looking out to the first quarter of 2013, we expect consolidated net revenue will be between RMB 480 million to RMB 520 million, with consolidated advertising net revenue contributing roughly between RMB 420 million and RMB 450 million.

We will now open the call to the questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today comes from the line of Dick Wei from JPMorgan.

Dick Wei - JP Morgan Chase & Co, Research Division

First question is I wonder if management is able to separate out for Q1 guidance how much revenue is from Youku versus Tudou and what are the respective growth rate? And secondly, I understand that in the second half, there will be momentum coming out of content management solutions, some vertical expansion and maybe on mobile as well. But what gives the management the confidence that maybe the growth rate is going to accelerate and given that we may have lost some of the early framework contract for the full year at this point?

Cheung Koo Wing

Okay. Let me answer the first question. I think on an ongoing basis, it actually started from Q1, we will not provide separate revenue guidance for Tudou and Youku. The reason is very simple. Starting from Q1, there will be no single team dedicated to Tudou inventory. As a result, there's no way we can tell how much revenue is attributable to Tudou and how much is attributable to Youku. As for the percentage of the increase, I think we have already given the guidance.

Wei Wang

Now to add to Michael's point, Dick, starting from the closing of merger, the advertising back-end system was integrated. And basically, especially on the TVC advertising, clients can basically buy on a combined basis with all the duplicated users sorted out. And so from a revenue standpoint, it's actually linked. I also would elaborate on your other part of your question in terms of revenue. As we expected, actually, when we first started the merger integration, that the cost synergies will come earlier than the revenue synergies. And as you see that on the cost side, whether on the bandwidth side or on the team side, the synergies are coming earlier. And on the revenue side, we're quite confident that as we work through the sales team reorganization, and I think we can work through these issues pretty -- relatively expediently.

Dick Wei - JP Morgan Chase & Co, Research Division

Great. I wonder if you can also add about the customer number as well as ARPU for the quarter as well.

Ge Xu

Okay. The cost we -- for the Q4 2012, we have roughly 480 advertisers, and the ARPU is roughly RMB 1.5 million for the quarter. We cannot -- by the way, this time, we won't be able to provide pro forma number of advertisers as well as ARPU because in Q4 2011, 2 companies are still separate and there's overlap in terms of the customer base. But starting from next quarter, I think the number will be -- we will provide more comparable numbers.

Operator

Your next question today comes from the line of Muzhi Li from Citigroup.

Muzhi Li - Citigroup Inc, Research Division

Would you please shed some color about the mobile monetization and the timeline when the program will start to launch and when we can see some revenue impact and also share some light about what the cost will be affected because of mobile monetization?

Ge Xu

Similar to PC, we decided to kind of defer our mobile monetization until we reach scale, which we did at the end of 2012 when the daily video views exceeded 100 million. And as you recall from advertising standpoint, the 2 biggest solutions we have really is basically TVC advertising where advertisers are looking for reach and frequency. If you look at online video for Youku Tudou on the PC basis, we have around 300 million and 400 million visitors. And as such, with the mobile opportunity, what we're seeing is the growing unique visitor base. And this is something that's very attractive to our advertisers that are looking for broader reach. And as such, we think that this is a -- TVC is a model that will translate very well to the mobile space. On the content marketing solutions side, this is also something that will fare very well because the same content of product placements as well as the sponsorships will also carry across streams whether it's tablets or mobile device. The third feature here is really that especially for tablet computers, we see more high-end users, and that also forms a very, very important point of targeting. And on the mobile phone side, given the fact that we know a lot more about geographical as well as the characteristics of each user, that also helps in terms of overall CPM as well. On the cost side -- actually on the content side, basically the content is shared across PC and mobile. So here, you'll see operating leverage. And we have a dedicated mobile product and technology development team, although the mobile product and technology were also leveraged based on what we've built on the technology back end for PC as well.

Ge Xu

So in summary, the incremental costs for mobile won't be very significant. Basically, to be more specific, the incremental costs for mobile were mostly from bandwidth costs as well as team costs. But bandwidth costs have already reflected in Q4 results. And we are confident that even with additional very strong growth from the mobile traffic, we can sell maintain -- we can still keep the momentum of well-controlled bandwidth cost for the whole company. As for the personnel-related cost, I think we have already built up the mobile team to a decent size. And I think that, that's the increase -- incremental hire count will be relatively moderate.

Muzhi Li - Citigroup Inc, Research Division

I see. Would you please share also when we can see the monetization started for the year?

Cheung Koo Wing

Well, we've started in Q1 in 2013, and as you've observed also with PC, it does take some time. But this is -- as I mentioned, the solutions are well received by the clients and we've already seen demand from advertisers back in 2004. And as I mentioned, we decided to actually hold off for -- taking mobile advertising in 2012 and start this year.

Operator

Your next question today comes from the line of Jin Yoon from Nomura.

Jin Kyu Yoon - Nomura Securities Co. Ltd., Research Division

The question is on the content side for both Youku and Tudou. What percentage of the content that you're showing on Youku is actually showing on Tudou as well? And what are the pricing differences on a CPM basis, if any? Second question is related to mobile, just kind of a follow-up question from the question before, and that is if you're monetizing on a pre-roll basis anyways, what -- was there any significant CPM basis, whether it's in mobile or PC? Just to give the foreign factors, it shouldn't be that big of difference because it's showing pre-rolls anyways. Can you just kind of elaborate them both?

Ge Xu

Jin, in terms of contents, we have 3 major components: professional syndicated content, in-house production and UGC. So the UGC part and in-house production are totally segregated and operated under a different brand, platform, product and team. So they are separate. In terms of professional syndicated content, most -- super majority of them are shared between 2 platforms. However, the editors and content operating team will feature a different product mix, content mix to strengthen -- to reflect the brand of differentiation. And they may package the content in a different way, and they may recommend a different methodology, but they are totally used between the 2 platforms.

Cheung Koo Wing

Let me address the mobile advertising issue. I think you're right to say that basically on the TVC mobile side, if you roll over to mobile, especially for mobile phones, this is a dedicated device. We see that the CPM will be similar. I think on the tablet side, we do see upside as a lot of premium brands view this as a premium audience and we are charging a higher CPM rate on that.

Jin Kyu Yoon - Nomura Securities Co. Ltd., Research Division

So just to follow up, the CPM is actually higher on the tablet than on the PC or traditional mobile?

Cheung Koo Wing

That's right, that's correct, that's correct, that's correct. So the tablet is higher than the other

Operator

Your next question today comes from the line of Alex Yao from Deutsche Bank.

Alex Yao - Deutsche Bank AG, Research Division

I have 2 questions. Number one is on Tudou's media value. So Victor, you mentioned that post the merger, Tudou's media value increased. I'm wondering, what are the quantitative metrics you look at to say whether the media value is increasing or decreasing? Can you share the metrics with us? And number two, is can you elaborate a little more on the first quarter revenue guidance? The weak -- presumably, you guys have already integrated a back-end system, so sales team has more inventory to sell. So the relatively weak 1Q guidance, is it because on the technology side, you cannot really figure out the duplicated traffic? Or is it because the macro is still an issue? Or is it because the sales team is not able to efficiently sell the cross-platform inventory?

Cheung Koo Wing

Okay. Let me answer the second one first. It's not related to technology. The technology was actually the advertising back-end system was integrated in the fourth quarter of 2012. And what we're going through is really the front-end integration of both teams, which normally takes 2 quarters to go through, and we're in the final stages of the front-end integration. And as you can imagine, restructuring sales teams into different industries and then having accounts transition across the board as well as communication to clients and agencies and third party, it does take time. And I think in online video industry, we've seen other companies go through also sales force restructuring as well as Internet companies. And it does take 1 or 2 quarters.

In terms of the Tudou value, as I mentioned in the script, it's really measured upon organic users coming to the platform on a daily basis. Really, the issue is when Youku and Tudou is competing head to head, as we don't always discuss, is that it's hard to really focus on different brand differentiation because both platforms were going after kind of a mass position. I think the analogy I would like to use in the U.S., if you look at TV stations like CBS and Fox, for example, CBS has a much more mainstream position and Fox has -- goes after younger users. And that is something that we can do a lot more effectively now with original programming as well as UGC competitions and so forth to enable our users to have a more affiliation with these 2 platforms, and also the increased brand positioning is also very, very helpful for advertisers in terms of targeting as well as for content marketing solutions to be more differentiated. So whether it's from a user base standpoint or clearly the user profile standpoint and the stronger content differentiation standpoint, those are all strong things we can do as a combined company with 2 differentiated platforms.

Operator

Your next question today comes from the line of Alicia Yap from Barclays.

Alicia Yap - Barclays Capital, Research Division

Victor, Dele, Michael and Ryan, my first question is a follow-up on the first quarter guidance. And on your prepared remarks, you mentioned that you're more optimistic for the second half 2013. And just wondering, what about the second quarter? So why should we be expecting for second quarter? Should we expect a seasonal strong rebound after the weak 1Q? Or are you suggesting that maybe second quarter might still see some impact? And then also, I wanted to know, what is the company expectation for the overall industry growth rate for the online video market this year?

Cheung Koo Wing

Okay. Thank you, Alicia. As I mentioned in the script, basically, especially with the international clients, we did see a macroeconomic sentiment change last year in the second half of 2012, which actually rolled over to the first half of 2013. But we've seen that overall sentiment has improved in 2013, and there will be a little bit of a time lag. In terms of timing, generally, because we just came back from Chinese New Year, we will see a lot more visibility, I think, in the second half of March, especially in April. So I think it's a little bit too early to give you specific guidance on Q2 of this quarter, and that's why we indicated what we've indicated. Overall, we've seen third-party measures for the full year to be 50% industry growth overall.

Alicia Yap - Barclays Capital, Research Division

I see. Can I also follow up on some of these regarding this outlook? Is that -- I just wonder if advertisers are seeing the combined business as one customer at all given that now that they can do with the same kind of like allocations on the one back end, hence, they'll probably maybe allocate the budget to some other competitors. Are you seeing that? And I may have one follow-up.

Cheung Koo Wing

Well, in fact, what we're seeing is that as a combined platform, since it covers over 80% of the online video reach, our advertisers, if they chose Youku as the primary platform and use other platforms as supplementary to Youku, now it's even clearer that as the leadership position strengthened, that more important share of their ad spend will be to Youku Tudou. Plus, because we can deduplicate our users, this is a much more stronger ROI comparing to our peers because that's something that other peers cannot do. So then to basically supplement Youku Tudou, the incremental 20% reach of Youku Tudou, then you're getting quite a bit of wastage. And that's something that we've been communicating with the clients and agencies, and we're seeing very positive feedback, as I mentioned, for the key advertisers and agencies.

Alicia Yap - Barclays Capital, Research Division

I see, okay. And then I just wonder if you can just broadly speak about what are some of the criteria that advertisers are looking for when they decide to allocate their budget to different site? I mean, one that you just mentioned. And then I just wonder whether, let's say, the content or maybe the traffic would automatically win out, as that's what the users are going after?

Cheung Koo Wing

On the TVC side clearly, what's important are reach, frequency and overlap. And those are issues that people look at. And then also, whether you can offer targeted solutions based on -- across device or content specific. On the content marketing, it really matters because I think that's always been the concern to a lot of advertisers that most online video websites' brand positioning are not distinct enough. And this is also one of the primary pieces of the Youku Tudou merger, and we are starting to see more and more benefits as brands are saying, okay, this makes sense even with -- especially companies with multiple brands. They are saying that this make sense to cooperate with Youku, and that brand makes sense to Youku Tudou, and we are actually working together across the board to work with more of their brands within their brand portfolio.

Operator

Your next question today comes from the line of Jiong Shao from Macquarie.

Jiong Shao - Macquarie Research

Could you first talk about the pricing trends for content over the last few months? And what's your outlook for the price going forward for the next couple of years?

Dele Liu

Shao Jiong, good question. If we compare with last year, today, we have only 4 buyers -- or 4 major buyers relative to like 8 or 6 in the last couple of years. And no, they are Youku Tudou, Tencent, Soku and Baidu. So everybody knows each other, and now we're getting to a stage where the competition is not purely about price. It's about many fronts. So we've seen for the last 3 quarters the content price has been stabilized. And in the next -- and these content price is already relatively high at historical level, and this comes as the profit to the content producers. So we expect the content price on an apple-to-apple basis should be relatively stable in the near term -- in the non-distant future or a couple of years even.

Cheung Koo Wing

And as you've seen internationally, leading online video platforms have also been really focused on original content production side, and to cite the example of Netflix's House of Cards, for example, to see that really as a balancing force of the overall content price. What Dele was talking about is really the head content in terms of, for example, TV series as well variety shows. And what we are now -- beneficial trend is what we cited, for example, in the variety show side, when the 3 of the top 10 show are actually produced yourself and increasing moreso for the other content categories, that also gives you a lot better positioning from the overall content pricing standpoint.

Jiong Shao - Macquarie Research

Just following up on your comment on the original content, could you talk about the contributions to video viewers and also to your revenue from UGC and from your in-house production?

Cheung Koo Wing

I would say overall from a traffic standpoint, we're about 1/3 to going maybe 40%. From a revenue standpoint, it's actually relatively very small because it actually -- especially on the content marketing solution side, it takes time to build the brands of regional shows, and we've actually had a lot of success on Youku as well as starting on the Tudou side. And we're seeing increased amount of interest from sponsors. And this is an area where we see significant growth in 2013.

Dele Liu

Between UGC and in-house production, the traffic is around 1/3 to 40%.

Cheung Koo Wing

Also on UGC side, since they tend to be a little bit more shortfall and we're also seeing sell-through rate on this area improving, as internationally, you've also seen YouTube's sell-through rate as well as advertising formats being enriched as well.

Ge Xu

To add a little bit more color about our content costs as well as the relation to traffic, just like Victor and Dele said, there's roughly -- UGC and in-house production roughly accounts for 30% to 40% of total traffic. However, its revenue contribution is almost negligible. So that's one thing. And then the other thing is we began -- however, the costs incurred in the past 6 to 12 months, we have been trying to build up our in-house production team. And we have made quite success -- made quite a lot of success in terms of in-house produced contents traffic. Just like we mentioned, Youku's top 10 -- Youku's several variety show has been constantly on the top 10 list of variety show in terms of traffic. In the past 12 months, we -- our focus is to build up the traffic, but on the other hand, the monetization has been lagging behind. And what we have seen in this year is the monetization began to take off. For example, in the earning call, we mentioned about Tudou Groovin', which generates the sponsorship dollar way beyond its costs. So with this initial success, I think we can repeat the successful story of Tudou Groovin', and we are very confident that in 2013, we're going to see more example like Tudou Groovin'.

Jiong Shao - Macquarie Research

Okay. My last question, if I may, is could you talk about your inventory utilization of your rates for the slots in Tier 1 cities as well as in the Tier 2 to 4 cities?

Ge Xu

We don't -- actually, we don't want to disclose those very detailed operational numbers. But what I can tell you is the sell-through rate, just like everybody knows, in a top tier city is pretty high industry-wide. And -- but we still have a lot of unused inventory in second-tier cities. So from supply side, I don't think we have -- I think from -- we have sufficient supply to fill up any incremental demand from advertisers.

Dele Liu

And the sell-through rate is based on the current ad load, which can always be added. And once we add, everybody will follow suit. Right now, the maximum length of commercials we have is 45 seconds.

Cheung Koo Wing

It's also important to tie your customer mix with your inventory mix. As international clients are moving or developing their business in second-tier cities as well as local clients being focused more on second, third-tier cities, part of our key sales strategy this year is to broaden our advertising base, especially on the domestic side, which addresses the sell-through rate on the second and third-tier cities, which Michael just cited. And so we see that the overall strategy is aligned, and certainly from a supply demand side, we see that as a very important area as well a very good potential.

Operator

Your next question today comes from the line of Philip Wan from Morgan Stanley.

Philip Wan - Morgan Stanley, Research Division

I have a few quick questions. Number one is that could you talk about your advertising rate in 2013? Are you expecting a price increase throughout the year? And then second is related to the content costs. Could you share with us your kind of budget content cost for this year and also versus -- the growth versus last year?

Cheung Koo Wing

Let me first address the CPM issue. In terms of pricing, really the strategy here is really based on the sell-through rate itself. Now on first-tier cities, part of second-tier cities, plus certain content base advertising solutions, we have tremendous amount of demand and there's a lot of pricing power. On the second and third-tier cities, I think the strategy is really to broaden and increase the sell-through rate in these areas. I think you may recall in previous years, I've said that -- in previous years that our primary sales strategy was to increase ARPU on a very -- the top tier clients. What we've been able to establish now is that a lot of the benchmarks of each industry really advertising on Youku and increasingly on Tudou. And the ripple effects as we broaden our advertising sales development is that we can have very strong sales benchmarks for all kinds of different industry in both FMCG, IT, auto as well as other categories as well. And that's really the focus for 2013 and beyond.

Ge Xu

The other point you should be aware of is historically, Youku the Tudou's rate cards have always been -- you always see like a 2% to 30% difference in rate card between Youku and Tudou. In 2013, what we are doing there is to unify the rate card between Youku and Tudou, and the result is Tudou's inventory price actually has been jacked up by 20% to 30%. So -- and for this reason, also for some other -- for the reason to generate more demand, we won't raise the rate card for Youku for another -- on top of what we have already done for Tudou, for another 20% to 30% in the second-tier or third-tier cities. So I think that's -- you should also be aware of this fact.

Dele Liu

Philip, on your question regarding content budget, normally and as usual, we don't disclose our content budget.

Philip Wan - Morgan Stanley, Research Division

All right. And then lastly, could you also provide the revenue contribution among your top categories for the fourth quarter?

Cheung Koo Wing

I think overall, international FMCG constitutes close to 50%. And then you've got what we call industry -- internet-related industry like IT, auto, those kinds of categories about 20% or so. And then also, you've got Internet services, which is another 10% plus, and with the balance being local clients.

Ge Xu

Yes. That's the point we're trying to illustrate. And so in domestic, FMCG customer only contribute, roughly 13% of the total advertising dollar. If you compare the revenue mix of traditional TV, you're going to find that the ratio is completely reversed. For example, there's no assorted number but on the other hand, we know that in [indiscernible] and satellite TV and all those kinds of satellite TV, domestic roughly contribute 70% of their total revenue. But for our site, domestic only accounts for 13% to 15% of total revenue. So there's a huge room for improvement on the domestic side. And at the other side, the other story -- the other factor you should be aware the revenue contribution from soft dollar versus revenue contribution from hard dollar -- hard advertising dollar. So last -- in 2013, our total ad revenue in gross term is roughly RMB 2.5 billion. Almost 90% are coming from pre-roll, banner, et cetera, that are what we call hard advertising dollars. But the contribution from soft, from sponsorship is almost negligible. But if you look at Voice of China or the other major entertainment program in satellite TV, you're going to find out that the soft dollar accounts for a very significant portion of the revenue.

Cheung Koo Wing

Majority of those.

Ge Xu

Yes. So for this reason, that's why we are spending a significant amount of budget on in-house production, on the investment in variety shows and TV dramas. And we think those -- we've begun to see pay off, but there is still a way to go. But we already begun to see initial success, as evidenced by Tudou Groovin'.

Cheung Koo Wing

To add talk to Michael's point, international, global clients tend to be early adopters of new media formats, and they tend to be industry standards and examples, and that's why the industry has really focused on this part of the business first. But as I mentioned, after you've been able to accumulate the last portion of the budget allocation and set industry examples, leading -- local clients are also really coming into the mix, and we're seeing that trend increasing.

Operator

Your next question today comes from the line of Piyush Mubayi from Goldman Sachs.

Piyush Mubayi - Goldman Sachs Group Inc., Research Division

I just have one question. What are your thoughts now on the back of 20% or so growth at the midpoint of your guidance for the first quarter of profitability?

Ge Xu

Well, we generally don't make prediction about our profitability timeline. But on the other hand, 20% is really a soft guidance. It's -- I mean, the profitability is simply using revenue minus cost. And I think our cost is well under control. So we are confident that we will be profitable sometime in the not distant future. But on the other hand, I think we who are on the conference call is not responsible to make very specific timeline -- to make a very specific timeline for profitability. And if we execute well, the profitability will flow in naturally.

Cheung Koo Wing

Well, I think the data point to cite is really looking on the narrowing net loss of this quarter. And basically, what you're seeing on the cost side, I think the online video industry in general, year-over-year over the last few years, has been really -- increasing cost is generally the norm. But what you're seeing is with the Youku Tudou merger, we're starting to see the overall industry rationalizing and the synergy coming from the merger increasingly clear. And so we are now in an environment where the cost environment, I think, for the overall business and the synergy potential here is a very, very new story here, I would say, for the industry. I think it's very good for the long-term whole of the industry as it evolves.

Operator

The next question comes from the line of Tian Hou from TH Capital.

Tian X. Hou - T.H. Capital, LLC

Richard, Victor and Michael, so the 2 items on the income statement, one is bandwidth costs and also the sales and marketing. So the bandwidth cost has been quite stable over the last couple of quarters. So I wonder, what the trend could be into 2013. That's number one item. Number two is the sales and marketing. Q4 as combined basis dropped over Q3, and so how should you look at this item going forward into 2013? So that's on our income statement. And then there's another question on accounting costs. So I realized you guys are increasing the budget in the in-house production. So if you couldn't give the number of how much you're going to invest in the in-house content, would you please give a percentage allocation out of your total content cost? That's all my questions.

Ge Xu

Okay. The first question about the reduction of the sales and marketing expenses, 2 reasons caused the reduction. One is -- one reason is in Q4 2011, Tudou incurred very significant amount of acquisition cost. And we think that strategy is not really working. It's not really working, and we're focused on organic. So after we took over, we cut down those kind of unproductive spending on acquisition. So that's one reason. And the other reason is reclassification. At the very beginning of the earning release, we said -- we told people that we reclassed roughly RMB 30 million expenses, which related to ad production from sales and marketing to cost of sales. That's another reason. I think on an ongoing basis, the content -- the sales marketing percentage, we're going to see -- you're going to see quite some leverage if the revenue grow in a healthy manner because you know that in a sales marketing expenses, actually, there's 2 parts. One is roughly fixed like salary, et cetera, and it decreased. And then the other is very much in line with the revenue growth, which is the sales commission. So the point is the trend is going to continue. In terms of percent of revenue, as well as revenue growing in a healthy manner, you're going to see the percent of sales and marketing drop. And in terms of bandwidth cost, in the past few quarters, the bandwidth cost had been very stable and is slightly down. And I think this trend will continue into 2013 with very high confidence. And I think even with very robust growth in both mobile and PC, we can still make sure -- we can still maintain this momentum. So in summary, the cost structure of the combined company has very significantly improved, and I think more synergies in the cost side will be realized in 2013. So remind me, what's your last question?

Cheung Koo Wing

So let me add one point in the bandwidth side. What's happening is from the unit cost standpoint, the combination of the 2 companies over Q4 and Q1, the media database, for example, and the back-end CDN infrastructure, as we combine -- we've been able to get different unit cost improvement, plus combined P2P strategy from the overall OpEx and the operating leverage. And that's why as Michael highlighted, despite the mobile traffic or overall traffic growing significantly, we've been able to have our bandwidth cost under control.

Dele Liu

In in-house production, the percentage of total content budget is still a small portion because we have such a large platform that basically can accommodate unlimited amount of content. So in-house production is a small portion of the total budget. However, the strategic value is to -- for us to create a high-quality content so that we have a strategic position in our content syndication dynamics because we understand the business and we have a flagship, well-known, high-quality content, and the negotiation dynamics will change in our favor. So that's the strategy. And then also, deepening relationship with our clients is also the purpose of beefing up the in-house production.

Ge Xu

I'd also like to talk more about the [indiscernible] cost. Yes, if you compare P&L with the cash flow, right, amortization of the content cost is roughly RMB 130 million. But on the P&L side, we recognized, on a non-GAAP basis, roughly RMB 260 million of content cost. So you see that we have -- there's a gap roughly -- there's roughly 50% gap. I think the point I'm trying to make is content cost is not only -- our content cost is not only coming from syndication, which is for outside procurement. So we still -- we invest in in-house production, and as far as investing, in the early stage of the TV drama making. And also, we have people cost in the content costs. All those kinds of items are very -- either undermonetized or has strong operating leverage, for example, people cost. So people always worry about content cost escalation, but what I'm trying to tell people is we have strong operating leverage in the content costs.

Operator

Ladies and gentlemen, that concludes the question-and-answer session for today. I would now like to hand our conference back to your presenters. Please continue.

Ryan Cheung

Thank you all for joining us on this call. Please feel free to contact us if you have any questions. Goodbye.

Cheung Koo Wing

Thank you.

Operator

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

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