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Youku Tudou (NYSE:YOKU)

Q1 2013 Earnings Call

May 15, 2013 9:00 pm ET

Executives

Ryan Cheung - Corporate Finance Director

Cheung Koo Wing - Founder, Chairman and Chief Executive Officer

Dele Liu - President and Director

Ge Xu - Chief Financial Officer and Senior Vice President

Bin Yu - Chief Financial Officer

Analysts

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

Catherine Y. Leung - Arete Research Services LLP

Muzhi Li - Citigroup Inc, Research Division

Alicia Yap - Barclays Capital, Research Division

Chao Wang - BofA Merrill Lynch, Research Division

Philip Wan - Morgan Stanley, Research Division

Jiong Shao - Macquarie Research

Piyush Mubayi - Goldman Sachs Group Inc., Research Division

Mark A. Marostica - Piper Jaffray Companies, Research Division

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

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2013 Youku Tudou's Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 16th of May 2013. I would now like to hand the conference over to your first 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 first quarter 2013 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 our performance in Q1, sales strategy and mobile traffic growth in 2013. Dele will discuss our company reorganization and content strategy, and Michael will discuss the first quarter 2013 unaudited financials. And then we'll open the floor for questions.

As a reminder, the financial results and the webcast of this conference call are all available at the Investor Relations section of the Youku Tudou website. A replay of the call will be available on our website in a few hours. I'll refer you to our Safe Harbor Statement in our earnings press release, which applies to this call, as we will make forward-looking statements. In addition, please refer to our Basis of Presentation section 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 integration process as we've entered into the final phase now and we have completed our sales team reorganization. Our Q1 revenue met our previously provided guidance, and our Q2 revenue guidance shows the accelerating growth. In combination with the continued cost structure optimization, our loss continues to narrow year-on-year. Operationally, exciting growth in our mobile traffic continued with daily video views growing more than 50% quarter-over-quarter.

Additionally, we announced a change in the organizational structure designed to encourage unity, flexibility and innovation to cement our existing leadership in the evolving Internet space. Under our new company group structure, our 2 platforms, Youku and Tudou, operate as differentiated brands, which is designed to elevate the combined media value.

Overall, our sales is recovering on improved execution, growing demand and scale benefits. Our sell-through rate improved, especially for Tudou. Our strong combined sales team structure has been put in place, and we added 109 new advertisers in Q1 despite a mixed macroeconomic environment.

We are the leading destination for the international FMCG brands because of scale benefits derived from the merger as our combined platform reaches over 80% of the online video audience in China. We expect growth to reaccelerate in the second quarter. The scale benefits of our dual platform advertising solutions have increased our ability to absorb the growing demand of online video advertising.

Looking further ahead, I want to tap into the enormous growth opportunities in online video advertising to improve our advertising revenue mix such as increased budget contribution from domestic brand advertisers, content marketing solutions and multiscreen advertising. Now in this context, I would like to briefly talk about our competitive advantages with regards to these areas of potential.

First of all, the increasingly differentiated brand positioning and media influence of our 2 platforms help us to win recognition from domestic brand advertisers and over time, increase our CPM bargaining power. Our new domestic brand advertisers in Q1 include, [Chinese], et cetera.

Second, the scale of our 2 platforms, especially with the exciting traffic growth from mobile devices, further increases our reach and user time spent. Our multiscreen video advertising solutions, of which we will provide more details later in the call, have appealing value for brand advertisers and would well serve the increasing demand for brand building in China.

Third, our experience in brand advertising and content enables us to customize our regional content to develop various advertising formats other than TVC, such as brand sponsorship and product placement. Notable progress has already been made, and Dele will provide more details later in this call. We are encouraged by our progress so far in developing new revenue sources. We're convinced that our 2 platforms are well positioned to develop these unexploited advertising dollars.

Before Dele talks about our content offering, I'm going to present our mobile Internet positioning as part of our strategic plan. Let me share a few insights based on market data and observations from our own operations. First of all, mobile Internet population will surpass PCs in China. Smartphones and tablets are commoditizing and penetrating across China, including areas where PC presence has historically been low.

Secondly, consumption behavior of online video is transforming now that users can use mobile devices to watch videos for a much extended period than before. According to Sinomonitor, 60% of online video users watch more than one video screen on a daily basis, and 75% on a monthly basis. This tells us that the exposure of our 2 platforms extends to multiple screens, and users extend their time spent on multiple screens.

Thirdly, the landscape of mobile Internet is fragmented and lacks gate keepers that can divert traffic to their preferred platforms. According to our internal data, more than 80% of our mobile traffic is from that. Pure brand focus, content comprehensiveness and product user experience are keys on this rapid growth phase.

We see mobile Internet has provided Youku Tudou significant growth opportunities in user base, video views and user time spent that jointly are emerging as a multiscreen online video platform. We are leveraging our PC-based online video leadership to strengthen our presence in mobile. Drivers of our mobile traffic growth of the scale of our 2 platforms core users, most comprehensive content library, well-established technology infrastructure, and the #1 and #2 online video brand. Our mobile traffic growth in turn helps us build our multiscreen online video platform and marketing solutions.

For online video, we believe that active user base, video views and huge [ph] user time spent, are the key industry measures rather than installed downloads. In the first quarter, Youku had solid growth in mobile traffic with over 50% increase quarter-over-quarter in daily video views. We have now over 170 million daily video views, more than 100 million active monthly users and 70 minutes average daily user time spent. We are a solid #1 in mobile video according to our internal tracking data.

I would also like to point out that currently, there's no authoritative third-party measurement in mobile video traffic that's growing demand from the advertising industry for more accurate and consistent measures of mobile traffic. Therefore, as the market leader, we are setting industry standards for online video with key clients, agencies and third-party measurement companies, as there are other online video companies that continue to provide foreign land [ph] traffic data and deliver pirated content. We believe this will improve the credibility of online video industry, and hence, monetization opportunities over the long term.

As we observed that users are extending their time across different video screens, our product innovation would also need to be multiscreen in nature, coupled with more personalized functions, to ensure users' viewing experience is synchronized across different video screens. Both Youku and Tudou platforms now feature products that are connected to our cloud, which store users' viewing history and their video collection, readings, playlists, comments and subscriptions that would seamlessly continue users' viewing progress across screens.

Updates were launched in April and May on our Android and iOS apps. For example, we have added a new recommendation function for our users on the latest Android app. Our cloud can automatically analyze users' viewing preferences and recommend the most relevant type of videos that users would like to watch. This user-friendly function lets them find the videos faster and precise -- more precisely than before. In addition, personal center was added, where users can personalize the settings, such as definition of video files, Internet connection settings and video files downloaded onto mobile devices.

As I have mentioned, multiscreen video viewing by users offers a better opportunity for brand advertisers to reach out to a wider and more targeted audience. We believe video advertising through various screens can make a brand more visible and recognizable and closer to the point of sales. Our growing mobile traffic has further strengthened the scalability of Youku and Tudou, and we are in an enviable position to deliver clear and distinct value for multiscreen video advertising solutions to our clients.

Recently, we've begun monetization on mobile traffic as part of our multiscreen video advertising package. In the latest stage, our sales team will be able to tailor and customize our advertising offerings for brand advertisers and create additional monetization opportunities. Educating our clients and enhancing their demand require time. Therefore, we don't expect significant advertising dollars to be generated for mobile in 2013. In summary, we continue to realize the cost synergies of our merger, and we have started to realize the revenue synergies after completing the final phase of our sales reorganization.

Improved execution, growing demand and scale benefits are driving our sales recovery and acceleration. Despite the challenges of the large-scale merger, our experienced management team has taken concrete actions to build a solid foundation for future growth.

I will now turn the call over to Dele.

Dele Liu

Thank you, Victor. Hello, everyone. I would first like to talk about our company's reorganization announced in April. The design of our new group structure is to further differentiate our 2 platforms, brands, content and products, while at the same time, strengthen the synergy at a group level.

Under the new structure, Youku and Tudou will operate as separate business units, with Wei Ming as President of Youku and Yang Weidong as President of Tudou. As you may know, Youku's brand image and user base is more mainstream, while Tudou has a strong appeal with young and fashion-forward users. The group supports these 2 business units with shared infrastructure and services. We promoted Xiangyang Zhu to be Chief Content Officer, who will be in charge of our content strategy and media corporation. Yawei Dong has been promoted as group's Chief Marketing Officer and heads up our sales front and back-end operations.

Several committees of executive officers are formed at the group level to oversee content, sales, technology and design long-term strategic direction for the group and business units. Overall, the online video industry is consolidated, a trend to which our merger greatly contributed. And we believe this will further rationalize content price and reduce piracy.

Another positive note is the recent Chinese government law enforcement, our anti-piracy and the closure of companies delivering pirated content, which improves the overall online video ecosystem. On content, our active strategy is to decrease our dependence on head licensed contents while strengthening our position in in-house production and user-generated content. Besides obtaining a fair share of professional licensed content, user-generated and in-house produced content are critical pieces of our unique content offering. Our goal is to take a balanced approach and to -- and continue to deliver high impact sales produced content that strengthens brand identity for Youku and Tudou, enhance its social media value and support our content marketing solutions.

Regarding professional licensed content, as you may know, we have already secured a solid professional licensed content pipeline for 2013. In addition to our exclusive deals with domestic content suppliers with TVB, SBS, in April, Youku and Tudou started a new British TV serial drama and variety show channel with popular shows like Top Gear, Sherlock, Downton Abbey on an exclusive basis to continue to enrich our content variety and genres.

In regards to the monetization of our professional licensed content, as Victor has mentioned, cross-screen video viewing behavior is increasingly evident as audiences watch head content on TV screen, tablets and smartphones. As a result, advertising budget allocation from brand advertisers is also increasing because Youku and Tudou platforms are complementary to TV stations. For example, Tuhan [ph], one of the popular exclusive content broadcast during last quarter, was simultaneously broadcast on 4 major satellite TV stations in China. Over 50% of Youku Tudou's brand advertisers who targeted advertising on this show chose to place commercial on TV stations simultaneously. With cross-screen viewing behavior continuing, we expect brand advertisers' budget allocation to increasingly shift to online video in the long run.

As for the user generated-content, Youku and Tudou are continuing to build a strong ecosystem starting from 2006. For instance, Tudou is the organizer of the largest independent original video festival in China, Tudou Video Festival. The festival enters into its sixth year, and its final competition will be held in June. This year's festival attracted over 18,000 video submissions from filmmakers, actors and actresses and animators and amateur videographers to win the grand prizes at the festival. Over 230 million videos viewed have been already generated from this year's festival. We believe that the Tudou Video Festival as well as Tudou's other artist-centric initiatives will continue to boost Tudou's influence and appeal among Chinese video enthusiasts, further expanding our unique and creative video content while also growing our user base and interaction.

Our in-house produced content continues to gain popularity among Internet audiences. Five of Youku's in-house produced variety shows and movies ranked among Youku's top 10 most viewed variety shows and movies recently. In addition, 2 of Tudou's in-house produced variety shows ranked among Tudou's top 10 most viewed variety shows. Friend [ph], Youku's self-produced celebrity interview show has entered into its second season, and it was recently broadcast on major satellite TV stations, which extended the media attention already gained on Internet. Youku's self-produced web movie series, Hip-Hop Trail [ph], generated more subscription revenue than the Oscar-winning movie Life Of Pi on Youku, which were both shown on our paid services channel.

And as Victor indicated, we believe there's untapped revenue from content marketing solutions to be gained from in-house production. We are making notable progress on this front to explore potential from brand sponsorship and product placement revenue. For example, Tudou Video Festival received sponsorship from Ford, Gearway and DHL, while Youku self-produced variety shows have already received ad sponsorship from Monglio [ph], Jeep and various embassies. These investments are all expensed upfront and currently undermonetized. We believe dedicated investment in this area should deliver us higher margin, higher return over the long term.

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 thank you all for joining our conference call today. Let me now take you through our financial highlights for the quarter. The amounts mentioned here are in RMB, unless otherwise noted. Before we go down to each line item, you should be aware that when you add up some of non-GAAP financial figures such as content costs, tax, cost of revenues, gross profit, net operating loss, et cetera, disclosed by Youku and Tudou in their respective earnings release in Q1 2012, the results are significantly different from the pro forma non-GAAP numbers for Q1 2012 disclosed in the earning release. The reason is the pro forma financials for Q1 2012 is calculated on the assumption that a merger was completed on January 1, 2012. Therefore, to get pro forma financials, the combined historical financials have to be adjusted to reflect the P&L impact of assets write-off and assets write-down due to the merger.

So for the first quarter, our consolidated net revenue were RMB 516 million, a 21% increase year-on-year, meeting the consolidated net revenue guidance previously announced by the company. Consolidated advertising net revenue were RMB 429 million, also in line with our guidance. Consolidated bandwidth costs were RMB 161 million, representing 31% of consolidated net revenue, as compared to RMB 185 million, representing 43% in the same period in 2012. RMB 25 million out of this RMB 161 million bandwidth spending is associated with mobile traffic.

Consolidated non-GAAP content costs were RMB 255 million, representing 49% of consolidated net revenue as compared to RMB 195 million, representing 46% of the net revenue in the same period in 2012. On the other hand, the combined historical non-GAAP content costs for Q1 2012 before any pro forma adjustment was RMB 238 million, which is 56% of the combined historical net revenue of Youku and Tudou.

In-house content cost -- in-house content production cost and the investment in TV series dramas production was RMB 46.6 million as compared to RMB 40.9 million in the same period in 2012. At the end of Q1, our commitment for content to be broadcasted in the rest of 2013 and '14 was roughly RMB 600 million.

Consolidated non-GAAP gross profit was RMB 28.2 million, representing 5% of gross margin compared to non-GAAP gross loss of RMB 16.6 million in the same period last year, representing negative gross -- 4% gross margin. The combined historical non-GAAP gross loss for Q1 2012 before any pro forma adjustment was RMB 59 million, representing a negative 14% gross margin last year.

Consolidated non-GAAP operating expenses were RMB 231 million, a 22% increase year-on-year. Detailed discussion of each component of operating expenses is as follows: consolidated non-GAAP sales and the marketing expenses were RMB 115.5 million, an increase of 10% year-on-year. This increase was primarily due to higher commission expenses paid to our sales force, in line with our revenue growth. Consolidated non-GAAP product development expenses were RMB 48 million, an increase of 11% year-on-year. This increase was primarily due to higher personnel-related expenses for our product development in mobile, search, social and in paid services.

Non-GAAP general and administrative expenses were RMB 67.5 million, an increase of 65% year-on-year. This increase was primarily due to additional rental and depreciation expenses incurred for consolidation of the offices post the merger, more litigation expenses and a business tax accrued for intercompany transactions.

Consolidated non-GAAP net loss was RMB 182 million, and it has narrowed down 8% from RMB 197 million in the corresponding period in 2012. On the other hand, the combined historical non-GAAP net loss for Q1 2012 before any pro forma adjustment was RMB 240 million.

Turning to cash flow items as of March 31, 2013. Consolidated cash, cash equivalents, restricted cash and short-term investments totaled RMB 3.5 billion. Our cash flow from operating activity recorded RMB 4.2 million, a positive cash flow, and acquisition of intangible assets was RMB 238.9 million.

Looking out to the second quarter of 2013, we expect net revenue will be between RMB 720 million and RMB 770 million, with consolidated advertising net revenue contributing between RMB 700 million and RMB 740 million.

Now we will open the call to questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today comes from the line of Jin Yoon from Nomura.

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

Just a couple of questions on Yuoku Original and just kind of the monetization scheme. I think you mentioned on the prepared remarks about sponsorships and product placement. Can you just give us about -- or give us a little detail about how sponsorship is different from just pure advertising on the pre-rolls [ph] side, what kind of revenue -- or what kind of incremental revenue stream can that sponsorship actually materialize to be? At the same time, what kind of revenues could we expect from product placement? It seems like pretty differentiated from -- the revenue stream seems to be a little bit differentiated from what we've seen before. So kind of curious on the cash flow impact of that. Second of all, on the whole, I guess, ROI aspect at Youku Original, can you just talk about how we should be looking at on the cost aspect in terms of the cost of production for Youku Original? Should we be expecting the cost of production the same way we're depreciating the license content that you would normally buy?

Cheung Koo Wing

Thanks, Jin. Let me take it from a marketing and advertising perspective first. From a regional content, what marketers are really looking for is someone different from the kind of complementary to TV, kind of TVC solution. They're looking for more engagement. They are looking for more brand compatibility, looking for original content that ties with what they're trying to deliver, as well as what kind of target advertisers. Now when you were talking about sponsorships and product placements, this is a model that's been highly successful for satellite television, as well as CCTV. So as TVC becomes more and more dense on television, for example, sometimes they go for about 12 minutes, more and more advertisers are looking for sponsorships and also product placements because people can see their brand exposure in a program that's compatible to their brand during the program. And so it's not in a very crowded kind of advertising environment. And it's also placed in an environment where it's compatible to their target audience, as well as their brand, so which means that the size, the kind of hard TVC advertising on online video platforms, within the content itself, you're seeing more and more inventory, shall we say, and that's an area where, where you have original content, that's something you can do because if you're only broadcasting TV serial dramas, as well as variety shows, that you acquire from professional content companies, as well as television stations, those embeds are already in the program itself. So in other words, these marketing solutions are additive to the TVC solution that you've seen before.

Dele Liu

If you look at the TV stations, for example, the variety shows, most of their revenue comes from the sponsorship and placement rather than hard commercials. So the second question you asked is about cost of in-house production. We viewed our in-house production based on the roots of our total user-generated platform or user communities and our data users. And we are disrupting, if you will, the content production in the traditional value chain, and our cost is materially more -- better than the current shows that are produced for TV. So we anticipate the investment we are making in in-house production will significantly reduce our reliance on high-priced professional content, bought from outside, and at the same time, reduce our total content cost.

Operator

Your next question today comes from the line of Catherine Leung from Arete Research.

Catherine Y. Leung - Arete Research Services LLP

I have 2 questions. My first question is can you comment on the sequential increase in the sales and marketing costs? Given, I assume, that commissions were lower off of the lower advertising revenues, were there any one-off restructuring costs or marketing expense that we should be aware of? And secondly, in terms of the flattish sales and marketing [ph] cost in the quarter, are there any seasonal factors? Or should we assume that this is a continuation of the back-end integration that you've been doing with Tudou? And maybe if you could give us an update on where you are in negotiating some of the overlapping bandwidth contracts of the 2 companies?

Cheung Koo Wing

Okay. Actually, I think the sales and the marketing cost in terms of percentage is very normal. So it looks -- the top line grew by roughly 21%, but the sales and marketing expenses only grew by 11%, which mostly reflected the higher commission we need to pay in line with the revenue growth.

So there's not many -- there's not much onetime charge, and the trend is very normal. As for the bandwidth cost, I think the bandwidth cost -- we are continuously do -- we will continuously try to improve our band -- the cost structure of bandwidth. I think that we already reached the level where we feel comfortable, but on the other hand, there are still quite -- still significant room for further improvement. But you should be aware, in absolute dollar terms, the bandwidth cost will be moderately increased in the future. The reason is the mobile traffic has been growing in a very, very fast pace, and as you have already seen, the mobile traffic already accounts for roughly 30% -- already surpassed 150 million VV [video view] per day. So in the ongoing -- for ongoing purpose, you should see the bandwidth cost as a percentage of revenue keep on dropping. But on the other hand, in terms of absolute dollar terms, the bandwidth cost may see moderate growth. On the sales force reorganization, Catherine, as you recall, the merger was completed at the end of August. And so we started the integration in Q4 and was ongoing also in Q1 because it requires both internal restructuring, as well as external communications with key clients as well as agencies. But we're happy to report that the sales force reorganization was completed in Q1. And so for Q4 and Q1, certainly, the sales force reorganization has tempered the revenue performance, but as we finalize the sales force reorganization, you're starting to see in Q2 reaccelerating revenue growth.

Operator

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

Muzhi Li - Citigroup Inc, Research Division

I have some question about the general ad inventory. Would you please give some introduction about the future plan of adding more advertising inventory and as well as the utilization rate and the pricing trend between the top tier and the secondary tier cities?

Cheung Koo Wing

In terms of inventory, from a TVC solutions standpoint, that's sold on a CPM basis across different cities. And for the first and second tier cities, those are the high price and the high utilization. And as we have mentioned this in previous calls, that we're -- one of our main strategic plans this year is to optimize our second and third tier city sell-through rates through going after both growth of international advertisers as they're going to the second, third tier cities, as well as domestic clients. So from that standpoint, the sell-through rate in first and second tier cities is higher than third or fourth tier cities, for example, and the price is also higher. The other area of growth, clearly, is in terms of what we talked about in terms of content marketing solution. So in terms of hard advertising inventory, we're doing 1 minute maximum for long form content for pre-rolls, and for exclusive and hot content, we do some mid-rolls, but very, very little. But for soft advertising, there's still a lot of room for growth as we are looking at more and more original programming. So those are areas that we see a lot of content macro solutions of sponsorships and so forth. Now of course, as our mobile traffic is growing very, very rapidly, that's across first, second and third tier cities, and we are quite positive about the multiscreen solutions that we're proposing because as you may recall, we have over 300 million unique visitors on a weekly basis on PC and over 400 million on monthly basis. And we're already seeing over 100 million on the mobile side, which we will see ongoing growth. And as I mentioned, we also forecast that mobile Internet will exceed PC Internet over time. And that -- although video is a heavy application, we're also -- even -- with that background, we're seeing quite explosive traffic growth starting from last year and especially this year. And so we see that reach of the mobile traffic also increasing substantially, also in areas where there are no PC penetration. So as the multiscreen solution for our clients from first to third, fourth tier cities, we're going to see more inventory across the board, which will be heavily attractive as a solutions complementary to television.

Muzhi Li - Citigroup Inc, Research Division

A follow-up question is do you -- well, you mentioned that the mobile traffic will continue to increase as a percent of the load [ph] traffic. Would you expect someday the PC traffic will start to peak off and decline?

Cheung Koo Wing

Well, PC traffic is still growing but at a lower pace, clearly, comparing to mobile. But we're also seeing that as the growth is really coming from a lot of the Android devices that are spreading around the country, in hundreds of millions of devices, and a lot of those users actually do not have PCs.

Muzhi Li - Citigroup Inc, Research Division

I see. One last question, would you please give us some brief introduction about the major advertising category and rough revenue split?

Cheung Koo Wing

Okay. So let me answer this question. International -- sorry, FMCG customers accounts for roughly 58% of total revenue; auto and finance, roughly 14%; and IT, telecom each accounts for roughly 8%. I think that's pretty much the ballpark of our major verticals.

Operator

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

Alicia Yap - Barclays Capital, Research Division

I apologize if I missed it earlier, but I wondered, have you actually disclosed what is the percentage of any mobile revenues contributions in the first quarter? And then for your second quarter guidance, were there any mobile revenue actually baked into the guidance? And then related to that, I wanted to ask, what has been the cash insofar from the advertiser? And could we get a sense of the adoption rate?

Cheung Koo Wing

Thanks, Alicia. As I mentioned, actually, the mobile monetization this year is relatively modest and certainly not a clear area in terms of significant enough for us to break out as a separate segment. We're really in a phase where we're actually having a lot of communications with our clients. It's important for mobile traffic to get to the critical mass before it is worthwhile to really deliver to our clients. And at the end of last year, when we booked 100 million video views, that's when mobile traffic reach critical scale, and this is really the year very similar, I think, to 2008 for the PC, when we're educating the clients back in 2008. As you may recall, the first year, we didn't have a lot of revenue, but it very quickly picked up in future years.

Alicia Yap - Barclays Capital, Research Division

I see, I see, understood, okay. And then the second question is that in light of some changes on the competitive landscape, will that affect our tractions and bargaining powers against the advertiser? And also related to that, do you think we need to strengthen our tractions on the clients' in-store software -- client base install software? Or it doesn't matter as we move into the mobile apps environment?

Cheung Koo Wing

Well, actually, I think there's a great advantage of the mobile app environment for leading brands like Youku and Tudou because what we are seeing is that our active users are very high, as well as the activity, level of activities is very high. This is why we really believe that unique visitors, active users, video views and user time spent is critical, but not just downloads, because we've seen a lot of peers going up the downloads through different channels that generate very, very little traffic. Whereas most -- because most of the users, our current users, as well as -- are very familiar with the Youku and Tudou brand. And when they think about mobile video, I think we have a big advantage, whether through our organic growth, as well as the distribution through different channels. And again, because majority, over 80%, of our mobile traffic comes from apps, this is a channel where people are looking for videos, directly in the app and not going through search or social channels. But we also have a lot of features on our apps that actually have broadened our corporation with [indiscernible] WeChat, Renren and different social platforms as well. So that's where we feel that in the mobile world, leading brand as well as content competitiveness and product user experience is far more important, even more advantageous for category leaders versus PC.

Alicia Yap - Barclays Capital, Research Division

Sure, sure. And then last question, if I may. Is there any meaningful difference of the tractions to different group of the advertiser for the professional content versus the UGC content and versus the in-house produced content?

Cheung Koo Wing

Well actually, these advertisers are attracted to both, but they are really leveraging it for different marketing purposes. For TVCs across the board, they are looking for targeted region frequency. As we mentioned, Youku and Tudou on a combined basis cover over 80% of the online video audience, and because we have combined the platform, we can also deduplicate, which means there's no way wastage. That's why we have a one-stop shop solution for these leading advertisers and agencies. And that's why we continue to have a very solid leadership in this category. But in terms of the more engagement, as well as the more brand affinity that they want to be able to broadcast to targeted consumers, that's where user-generated interactive solutions as well as content marketing solutions become very attractive. Again, I think mobile and multiscreen will help significantly in this as both interactive as well as the content marketing solutions will be multiscreen. And so beyond the traditional TVC solutions being able to go multiscreen, interactive and content marketing solutions will have a much broader reach, as well as have a much closer to the point of sale, which I also mentioned in the call. Because of the targeting nature of mobile devices when they are on the road, I guess, because the PC screen is usually stationary, both the tablet as well as the mobile phones give marketers actually very, very attractive solutions when it comes to geographical and LBS targeting.

Dele Liu

I just want to add that all of our UGC content are classified into 14 to 15 channels because our editors or part-time editors, when they are screening all the UGC content, the retagging and reclassification job. So the way we are selling ads is based on different contextual content channels, which the advertisers choose to target. So the UGC content are being sold in a same way as the professional contents, except that to certain cases, that advertisers choose to target specific content. In which case, the CPM price is much higher.

Cheung Koo Wing

Dele has a very good point because when -- in the general international, U.S. audience, when people think of user-generated content, they think of YouTube. And what people need to realize is user-generated content in China, because of regulatory, as well as marketing purposes, they are created. And in other words, the specificity as well as the attractiveness of this content, most of inappropriate content are generally screened out. And as Dele pointed out, they are also created, which means they are very advertiser friendly.

Operator

[Operator Instructions] Your next question comes from Chao Wang of Merrill Lynch.

Chao Wang - BofA Merrill Lynch, Research Division

Question is that, actually, could you update us, the sell-through rate for Youku and Tudou platform, respectively, and how does that compare to the first quarter last year?

Cheung Koo Wing

Well, we actually, we don't specifically talking about sell-through rate in different regions. But in general, generally speaking, since the revenue is going up, the sell-through rate also improved.

Bin Yu

And an important thing to note with sell-through rate, it's also directly related to ad load. And as sell-through rate goes up, there's also ad load that we can change, which will change sell-through rate.

Operator

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

Philip Wan - Morgan Stanley, Research Division

My question is for your second quarter guidance, which implies a recovery in advertising spending. Could you share with us a little bit more about where is the improvement coming from? For example, which sectors have been doing better? And what has been the trend for international clients specifically?

Cheung Koo Wing

Thanks for the question. I think across the board, I think FMCG categories are quite healthy, and this is our area of strength. I think during Q4 and Q1, we have a lot of internal reorganization issues, but as we are working through those issues, with the combined platform and with the combined sales team now, we can capture the growing demand in this area. The other area that we're really going after is -- there's a tremendous amount of potential for -- in terms of domestic clients that we're just starting to tap, and this is really the core focus, actually, for satellite television stations as well. And they've also moved from international to domestic clients over time. And this is an area where still contribute a relatively small percentage of our revenue but we see tremendous area of growth. So it's not -- from that standpoint, this is really in terms of our own execution.

Operator

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

Jiong Shao - Macquarie Research

If I have to pick one question, I guess, I'm going to ask a question on your strategy and the business model. Victor, you mentioned about multiscreen strategy. As you know, some of your competitors in China recently have gone into set-top box business, even went to as far as making TVs. Any thoughts you guys have on that would be great. And also, in China, both Netflix and Hulu are having great success with the subscription-based business model. I'd also love to hear your thoughts on whether or not subscription base will ever succeed in China.

Cheung Koo Wing

Very good question. I think our focus is in software content and services, and for any Internet-enabled device, you'll see Youku Tudou to be a part of, whether it's a small screen, a mobile screen or a big screen. And we already have apps for large screen as well, and this is an area that we're working on. And we will work with multiple, I guess, hardware providers as most hardware providers would prefer to have Youku Tudou as a partner when they are selling the devices.

Dele Liu

I just want to add that all -- most of our content licensing rights contains Internet television. So as Victor said, we're building the software parts, so that all the hardwares can get access to our content.

Cheung Koo Wing

On the subscription side or the paid services side, we are seeing very rapid growth, but from a low base. And I think the key bottlenecks in the past were piracy and payment. Now we see a lot of improvement on the payment side, and piracy continues to be an issue, but we have also addressed in the call that we are seeing the market consolidation, as well as cooperation with -- within the industry, as well as governmental actions, we are seeing improvement in that environment as well. They are also fused, a part of this paid services growth.

Dele Liu

And we envisage the paid services are -- will be significant, truly significant businesses, huge businesses, and we have teams working very hard on that, and we will be able to make more information available when we have something more tangible.

Cheung Koo Wing

Also, as we move more to exclusive original content strategy, we're also actively on the legal side, going after pirated content as well.

Operator

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

Piyush Mubayi - Goldman Sachs Group Inc., Research Division

Could I just look at your -- when I look at the revenue guidance and the costs that you've been booking in the first quarter, could you give us a feel for your thoughts on turning profitable again, please?

Cheung Koo Wing

Piyush, again, we don't normally -- well actually, it's our policy. We don't specify the profitability timeline because as you know, the profitability is only revenue minus costs and expenses, right? If we do our job, if we do a good job, so revenue keep on growing, and as also you have already seen, we have good control over the cost. The profitability will follow its natural course. So again, sorry, we don't talk about specific timeline for profitability.

Ge Xu

But from a strategic standpoint, I think if you look at our major cost items, whether it's bandwidth, people, as well as especially content, we are seeing a lot more discipline within the industry, and growth is -- actually, all these cost areas are much lower than in the past.

Dele Liu

Yes, as you can see from our first quarter results, we turned gross margin positive from gross loss same period last year. And content as a percentage of revenue decreased on a pro forma consolidated basis despite a truly low quarter and also despite the strong growth in bandwidth consumption and related -- mobile-related cost of goods sold. So we are on -- I think we are on the right direction.

Operator

Your next question comes from the line of Mark Marostica from Piper Jaffray.

Mark A. Marostica - Piper Jaffray Companies, Research Division

I was wondering if you could comment on the traffic that you're seeing for your in-house produced content for the Youku and Tudou platforms and comment on the monetization you're seeing, each in-house production platform. And well, I was going to ask about profitability expectations for each, but to the degree that you can comment on that, it will be helpful.

Cheung Koo Wing

We are certainly seeing increasing traction on both platforms. Youku has a longer history in terms of the original content, but Tudou has a longer history in terms of our user-generated content. And what we're starting to really see in the last half year is that the investments we have put in those areas have garnered very positive results from clients, both international and domestic. We cited some examples for both Youku and Tudou, original shows being on the top 10 list from the viewership standpoint, as well as attracted both international and domestic clients. And I think as Michael has pointed in the past, some of these original programs are basically profitable just on a sponsorship and product placement basis without even the kind of TVC advertising. So we are really seeing good traction here.

Operator

Your next question comes from the line of Tian Hou from the T. H. Capital.

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

Yes, I have a couple of questions. One is regarding your strategy, moving less focused on licensed content but rather puts more focus on your in-house produced content. So one issue is in terms of the sales, so for the licensed content, advertisers buy advertising into it because they know who produced it, so there is some kind of a name recognition, some kind of minimum guarantee for the exposure. However, in-house content, there could be some kind of a hit or miss [ph] issue. And how do you sell to advertisers to convince them that so the in-house content can also generate the exposure that's, in a way, similar to licensed content? So that's #1 question.

Cheung Koo Wing

Can we answer this one first, and then we'll go the other questions. First of all, let me clarify that professional content, we're still the leader in professional content. And what we're saying is we are getting away from the head content where we believe there is low ROI. Professional content is a very, very broad perspective here, and we're still the leader in the space. And what we're telling the market is that there are -- we've seen certain head content where the industry have bidded very high cost for and ROI as well as cost per 1,000 video views are very, very poor.

Dele Liu

Uneconomical.

Cheung Koo Wing

Uneconomical. And because of our large content comprehensiveness, we are in a unique position versus our competitors to be able to have a very large traffic base without completely relying on this content. And we believe that we will still get our fair share of the head content but not have to rely on that head content. And so we still have a very broad-based comprehensive professional licensed content working from many years with television stations, as well as film and TV companies. Now the second part is on the original content, we are going into multiple seasons of our original content that are already proven in terms of brand positioning, as well as traffic. So if you reflect on HBO, for example, or you reflect on Netflix, for example, you see both online and offline examples where original content are not unknown content and as well as have very unique attributes that are different from traditional broadcasters. So this is an area where we are actually seeing a lot of actually interest from our clients because of the uniqueness, as well as the flexibility of the original content, as well as proven traffic, as well as brand positioning in the past.

Dele Liu

Just for more information for you, some of the domestic advertising clients, if their budget is not like over RMB 100 million or something for the top satellite TV variety shows, they actually are not able to participate in those shows, such as Hunan, such as The Voice. And alternatively, there is a much better opportunity for them to work with us, and for their brand to be associated with the most creative and pioneer online brand such as Youku and Tudou to help their brand. So we have witnessed significant success with Tudou Music, which is sponsored by Jeanswest, a garment company, and we make decent profit even before consuming any of our commercial -- TV commercial inventories. And the clients are very happy about the corporation.

Cheung Koo Wing

I think Dele brings up a very good point. And this highlights the importance of the brand differentiation between Youku and Tudou, whether it's in terms of our professional content, original content or user-generated content, where -- because products have different age demographic, different brand attributes. The fact that Youku represents a more mainstream, as well -- very similar to, I guess, CBS or ABC in the U.S., and if you look at Tudou, which is more like Fox and CW in the U.S., which goes out to much more young and fashion-forward audience, different brands, as well as different products within each company, select Youku and Tudou as different platforms that are more compatible with their brands. Even major advertisers, broad-based advertisers like L'Oréal or P&G or Munglio [ph], they have a variety of products, which are actually working on our 2 [ph] brands with different programming.

Operator

Ladies and gentlemen, due to time constraints, that does conclude the question-and-answer session for today. I would now like to hand the call back to your presenters for closing remarks.

Cheung Koo Wing

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

Dele Liu

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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