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Jiayuan.com International Ltd. (NASDAQ:DATE)

Q1 2013 Earnings Conference Call

June 05, 2013, 20:00 PM ET

Executives

Shirley Zhang - IR Manager

Linguang Wu - CEO

Shang-Hsiu Koo - CFO

Analysts

Andy Yeung - Oppenheimer

George Askew - Stifel Nicolaus

Gregory Chow - Citigroup

Operator

Hello and thank you for standing by for Jiayuan's First Quarter 2013 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objection, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference, Shirley Zhang, Investor Relations Manager of Jiayuan. Thank you. Please go ahead.

Shirley Zhang

Thank you, operator. Welcome to Jiayuan's first quarter 2013 earnings conference call. On today's call you will hear from Mr. Linguang Wu, CEO; and Mr. Shang Koo, CFO of Jiayuan.

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

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

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

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

I will now turn the call over to Mr. Linguang Wu, CEO of Jiayuan.

Linguang Wu

Hello, everyone, and thank you for joining us for our first quarter 2013 earnings conference call. We saw a solid performance for the quarter with 9.2% year-on-year growth in average monthly active users, along with 18.6% year-on-year increase in ARPU. This shows strong revenue at a net profit gross. But impacted by the better-than-expected results, (inaudible) seasonality associated to late arrival of the Chinese New Year holiday, which also overlaps with Valentine's Day, our traditional (inaudible) dating season.

We are very pleased to see users increasingly using our mobile products while trying to improve (inaudible) to offset seasonality. We record (inaudible) strong progress on our segmentation strategy to provide pay rate options for different (inaudible) markets. By the (inaudible) are further integrating juedui100.com and developing new features for izhenxin.com both of which are fairly popular with our active user gross. As you know, the rate of mobiles (inaudible) most exciting and challenging trend in our business and with the sharp rise in mobile users witnessed over the Chinese New Year holidays suggest that the shift is only accelerating.

We're seeing that our mobile (inaudible) or end users for our overall users better than (inaudible) into our traditional platform user base, and we are pleased to (inaudible) progress (inaudible) traffic. We are confident that today Jiayuan has the best industry offering on the mobile front and our (inaudible) has been building out an exciting top line offering. [Earlier] today expanding our (inaudible) program towards general users nationwide following our successful (inaudible). (Inaudible) world users for its [free date] ingredients when they compete (inaudible) and that enhanced (inaudible) which is an impact in current user experience on a success rate and which will increase the (inaudible) experience as a result.

We will continue to optimize this program and expand (inaudible) Jiayuan plan from going forward. (Inaudible) is building (inaudible) following initially structured and our recent (inaudible) system which will help us to scale our (inaudible). We're also pleased to see that the (inaudible) number of VIP customers this quarter jumped (inaudible) year, two year to 399 customers. Going forward, we plan to expand this significantly starting the second half of 2013 as we ramp up higher (inaudible) matchmakers. We expect our VIP business will be one of our major growth drivers in 2013. With the onset of our 10th anniversary (inaudible) our new (inaudible), our prime mascot.

We think China's (inaudible) this along with our new logo (inaudible) brand and (inaudible). They're also having some great market initiatives spread around our 10th year anniversary celebration. As part of our progress we have made our segmentation strategy and the mobile strategy this year (inaudible) competitions, Jiayuan continues to drive (inaudible) for organic growth while expanding market share. And we have covered under that our pipeline and innovative (inaudible) coming out of the second half of 2013 and until '14 we will have (inaudible).

Now let me ask our CFO, Shang Koo to walk through our financials.

Shang-Hsiu Koo

Thank you, Linguang. Hello, everybody. I'm pleased to report that our net revenue in the first quarter rose 27.6% year-over-year to RMB111.5 million. This performance was driven by a 9.2% growth in average monthly paying users and an 18.6% growth in ARPU. As Linguang has already mentioned, healthy growth in mobile usage helped to smooth out seasonality and muted outcome of the negative impact from a late Chinese New Year, as our users continued to use Jiayuan while they're home for the holidays. We're also encouraged that our VIP business showed healthy growth in the quarter.

Cost of revenue in Q1 was 22% year-on-year to RMB37.9 million. This was the result of customers shifting usage from their desktops to mobile devices when they went home for the holidays. Processing mobile payments had higher associated costs which pushed costs up overall for the quarter. We were pleased, however, that despite cost pressure from mobile payments, our gross margin remained stable at 66% in Q1 compared with 64.4% and 65.4% in Q1 and Q4 2012, respectively, due to economies of scale and better cost controls.

Sales and marketing were up 24.7% year-on-year, mostly due to higher advertising prices. R&D costs were up 29.8% year-on-year. This is largely due to the fact that we're still actively investing in our industry-leading technologies and in our segmentation strategy. We have many new products planned for the second half of 2013, including our wireless dating app [juedui100] which we started limited testing in there. We're also working on a complete rebuild of juedui100.com that will allow for greater scalability and a more robust mobile experience. We expect to increase investment in these areas in the coming quarters to spur growth.

Turning to our G&A expenses, we saw a 14.4 year-on-year increase in the quarter to RMB14.8 million. The rise was primarily due to increased headcount and the annual salary adjustment, which became effective in January. We completed our office relocation in May and expect to [decompensate] from the move as early as the third quarter. However, we expect to post additional G&A expenses in Q2 as we will record expenses for both the old and the new offices during April and May, the period covering our move. With the stability from owning our own offices will help to strengthen our competitive position as we embark on our next 10 years.

We're [slumping] our strong cash flow and our solid cash position, which stood at $87.4 million as of end of Q1. Last month we announced a special dividend covering the second half of 2011 and full year 2012, as well as the annual dividend policy. Generating stable shareholder returns and organic growth are key priorities for us, and looking forward as a profitable growing business we are confident that there is significant long-term upside for investors.

With that, let me give you our outlook for the second quarter of 2013. Looking to the second quarter of 2013, Jiayuan currently expects to generate net revenues in the range of RMB118 million to RMB120 million. This forecast reflects Jiayuan current and preliminary view which is subject to change.

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

Question-and-Answer Session

Operator

Thank you, sir. The question-and-answer session of this conference will start in a moment. (Operator Instructions). Your first question comes from Mr. Andy Yeung of Oppenheimer. Please ask your question.

Andy Yeung - Oppenheimer

Hi. Good morning. Thank you for taking my question. My question is about your mobile operations. Can you give us some more color in term of mobile user activity level, as well as mobile revenues that you generate from those accounts?

Linguang Wu

[Foreign Language]

Generally, the mobile users as a percentage of total users make up about 40%.

Andy Yeung - Oppenheimer

Okay.

Linguang Wu

[Foreign Language]

And revenues as part of our online revenues has exceeded 20% of total online revenues.

Andy Yeung - Oppenheimer

Great. And just a follow-up on that. You mentioned a little bit earlier about mobile payments being more expensive. When we compare the payment fees that you need to pay for revenue collections as mobile revenue continues to go up, should we expect there's some compression on the gross margin front?

Shang-Hsiu Koo

Going forward as we shift from one of our – as more users and revenue shift to mobile, there will be a little bit of gross margin compression. However, at the same time, the mobile payments are becoming more mature. So we're seeing more options for us for mobile payment. So we will be shifting to the cheaper, the higher conversion mobile payments over time and that will help to bring down our overall costs. But how that transition works out it's hard to say right now, but I think in the near term at least in the next year, we don't expect the new mobile payment solutions to really catch up with existing solutions.

Andy Yeung - Oppenheimer

Great, thanks. That's helpful. I will get back to the queue.

Shang-Hsiu Koo

Thank you.

Linguang Wu

Thank you.

Operator

The next question comes from George Askew of Stifel. Please ask your question.

George Askew - Stifel Nicolaus

Yes, good morning. Thank you. A very nice quarter. The conversion ratio is improving nicely paying users as a percent of active users. What is really driving that? Is it mobile specifically? Is it segmentation efforts or a focus on other demographics? What's happening there in the last quarter or two?

Linguang Wu

[Foreign Language]

Part of the reason is that the mobile usage is helping our overall active to paying conversion. What we're seeing is that mobile users or online users that also use mobile tend to have higher conversion rates, because one they have easier access to our services so they – and it's easier to update these users with the latest activities on the website. So, the mobile users are more active and they have more chances to pay for our services as well. At the same time we are also working on a lot of our backend technology that's helping to increase conversion rate as well. So through our different search options and through our recommendation technology and our search – improving search algorithms, we're actually allowing our users to find better matches. And in our results driven business model, the better matches that they find, the better results that they get, the more likely they are to pay for our services. So as we continue to improve on our backend technology, we expect the conversion rate increasing as well.

George Askew - Stifel Nicolaus

Got it. You mentioned that 40% of mobile – that mobile users are 40% of the total. You made the reference to users who are both online and mobile. What is that number? Is it 40% as well or is it something lower?

Linguang Wu

[Foreign Language]

Yeah. It's up 15%.

George Askew - Stifel Nicolaus

Okay, good. I'll get back in queue. Thank you.

Linguang Wu

Thank you.

Operator

Your next question comes from Gregory Chow of Citigroup. Please ask your question.

Gregory Chow - Citigroup

Hi. Congratulation on a strong quarter and thanks for taking my question. I have one question about sales and marketing. For the (inaudible) promotion for our products especially the mobile products, what's the major channel for that (inaudible) promotion? And what's our strategy here? Thank you.

Linguang Wu

[Foreign Language]

So for our wireless advertising, there are two main types of channels that we use. The first type is app location download source, so there are dozens of major application download source in China and we use all of them. At the same time for WAP usage, we advertise through the traditional online media and through this traditional online method, so we buy keywords by this WAP platform we do (inaudible) another WAP websites. And then we also – with the WAP advertising networks to purchase advertising space.

Gregory Chow - Citigroup

Okay, thanks.

Linguang Wu

You're welcome.

Operator

Your next question comes from (inaudible) of CICC. Please ask your question.

Unidentified Analyst

Hi, good morning. Thank you for taking my questions.

Linguang Wu

Good morning.

Unidentified Analyst

My question is regarding the monthly ARPU and we have noticed that over the past three quarters your monthly ARPU actually remains at a pretty high level. So is it driven by the mobile products, the increasing mobile traffic or the new products launch? And as Linguang just mentioned that you're going to have more products launched in the second half of this year, so how do you see this ARPU trend going forward? Thank you.

Linguang Wu

[Foreign Language]

For our ARPU, it really has – mobile actually has a negative impact on ARPU because mobile users tend to be more of – lean more towards the (inaudible) payment. So mobile ARPU's lower than our online ARPU, so actually drives it down. So our overall ARPU is rising. A lot of that is due to our own operations. So the technology that improved the search and recommendation technology that I mentioned before, that actually has quite a bit to do with improving ARPU as well. So if you can find more matches – if more people are sending messages to you, then you're more likely to pay more than before for our services. So that has a lot to do with increasing ARPU. At the same time, we're converting more of our RMB2 single payment users to subscription users, and that helps as well. For our new products, near term those new products what that will do is help to increase our app users and help to increase user activity on our current platform. But longer term, they will help increase ARPU as well.

Unidentified Analyst

Okay, thank you.

Linguang Wu

You're welcome.

Operator

The next question is a follow-up from George Askew of Stifel. Please ask your question.

George Askew - Stifel Nicolaus

Yes, two questions. You talked about the new product launches in the back half of the year. You've got (inaudible) and it sounds like a couple other things. Are we going to see like everything hit at once or are you going to phase new products in over the course of the back half of the year? And I guess what I'm really saying is, are we going to see some in third quarter, some in the fourth quarter?

Linguang Wu

[Foreign Language]

We'll be gradually rolling out these new products. Q3, we'll be focusing on launching (inaudible) and Q4 you'll see our main focus for new products will be in for the re-launch of Juedui100.

George Askew - Stifel Nicolaus

Okay, good. Is there anything about the later spring festival this year that would have pulled forward new users from the second quarter into the first quarter?

Linguang Wu

[Foreign Language]

So initially for Chinese consumers, they tend to go home a week or two weeks or even as early as a month before the start of Chinese holiday. So we actually are seeing declines in usage especially for the online usage, about – a significant decline starting about two weeks before the holiday season starts. And then the rebound from usage we see that about five days into the holiday period. So of the seven days during the holiday, the last two days we start seeing the rebound and this continues for about two weeks. And after that, we see a pretty strong usage until late March to April when there is a trough, when there's actually a small decline before the usage rebound again for the summer. So, what happened this year because of the later Chinese New Year, we actually saw that – the rebound happened much later in the first quarter and actually – then we actually continued to see the same drop off after the Chinese New Year that we traditionally saw. And then the summer rebound is occurring around the same time. So what it means is that the post Chinese New Year high that we normally see every year is actually a little bit shorter in 2013 than you would normally see. So the March and late March highs that we see in our user activities and payment is actually a little bit less than normal in 2013.

George Askew - Stifel Nicolaus

But it sounds like the drop offs perhaps last year would have started at the end of March and this year it was an April event. Is that the case?

Shang-Hsiu Koo

Well, this happened later but the time was about the same. So if you think the time periods between the end of Chinese New Year holiday and the May holidays, so that period is – about half of that is a very big rebound and another half of that is a somewhat weaker season. So because that entire time is compressed, we saw a little bit of less of a weak season but we also saw smaller period of time where there's rebound as well. So overall, the later Chinese New Year actually negatively impacted the whole rebound season that we normally see. And because about 30% of our payment is actually for subscription services, you're going to see the impact of that in the second quarter as well.

George Askew - Stifel Nicolaus

Got it, okay. And then just lastly, you've provided revenue guidance for the second quarter. You're obviously investing aggressively in R&D. You've mentioned the temporary bump in process costs, a little bit in G&A. Can you give us a little bit of insight into margins in the second quarter? It sounds like there's lots of downward pressure?

Shang-Hsiu Koo

I think from a year-over-year basis, we'll see some declines in margins. Advertising spending will be on an absolute basis in the second quarter and we'll see about the same as the first quarter this year. But it will be significantly higher than second quarter last year. And on a percentage basis, it will be significantly higher than second quarter last year as well. G&A I think will be steady because we also have a little bit economies of scale that will offset the increase in rent for April and May. And then R&D I think will be stable as a percentage of revenue. And so overall I expect margin to decline sharply from second quarter of 2012, but it will be an improvement from first quarter of 2013.

George Askew - Stifel Nicolaus

Got it, okay. Thank you very much.

Linguang Wu

Thank you.

Operator

Your next question comes from [Fred Fauconberg of Fauconberg Investment Management.] Please ask your question.

Unidentified Analyst

Hi. How are you? As far as the headquarters are concerned, you're new headquarters, I have two questions about that. First was who owns the new headquarters? Is it the company or the management of the company?

Shang-Hsiu Koo

The company owns the new headquarters.

Unidentified Analyst

Okay. So there's no separate entity that owns that?

Shang-Hsiu Koo

Correct. The company itself purchased it.

Unidentified Analyst

Okay. And the second question was how much do you anticipate saving on the new headquarters as opposed to the old one, as far as rent is concerned?

Shang-Hsiu Koo

Yeah, initially we expect it to achieve cost savings in 2014 because depreciation versus the rent we're paying, we expect it to be level starting 2014. But actually rent was increasing much faster than we expected. So, from what we've seen the rent for our old office, we would actually see about 5% to 10% improvement on savings in cost starting in the third quarter from moving to our new office. And this includes depreciation for the new office as well as depreciation for the renovation of the office versus rent and management fees that we're paying for the old office.

Unidentified Analyst

Okay, thank you.

Operator

(Operator Instructions). There are no further questions at this time. We're now approaching the end of the conference call. I would now turn the call over to Shirley Zhang of Jiayuan for closing remarks.

Shirley Zhang

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

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may all now disconnect. Good day to all.

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