SouFun Holdings' Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 8.13 | About: SouFun Holdings (SFUN)

SouFun Holdings Limited (NYSE:SFUN)

Q2 2013 Earnings Conference Call

August 08, 2013 08:00 a.m. ET

Executives

Hong Zhao – VP of Finance

Tianquan Vincent Mo – Executive Chairman of the Board of Directors

Lanying Guan – CFO

Analysts

Fei Fang - Goldman Sachs (Asia) LLC

Ravi Sarathy – Citigroup

Chao Wang – Merrill Lynch

Anthony Thong – 86 Research

Gregory Zhao – Citigroup

Alan Hellawell – Deutsche Bank AG

Tian Hou - TH Capital

Wendy Huang – Standard Chartered

Operator

Ladies and gentlemen, thank you for standing by and welcome to the SouFun Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday 8 August 2013.

I would now like to hand the conference over to your speaker today, Mr. Hong Zhao. Thank you, sir, please go ahead.

Hong Zhao

Thanks, operator. Good morning everybody, we just want to welcome to SouFun's second quarter 2013 earnings call. As introduced, I am Hong Zhao; I'm the Vice President of Finance. Joining me today are SouFun's Executive Chairman, Mr. Vincent Mo and our CFO Ms. Guan Lan. This conference call is being broadcasted on internet and is available through our IR website at ir.soufun.com together with our earnings release.

Before we carry on, I would like to remind you that during that during the course of this conference call we may make forward-looking statements, these are the statements that are not historical facts, including statements about our beliefs and expectations. Forward-looking statements involving inherent risks and uncertainty.

A number of important factors could cause the actual results to differ materially from those contained in our forward-looking statements. SouFun assumes no obligation to update the forward-looking statements in this conference call or elsewhere.

Potential risks and uncertainties included but not limited to those outlined in our public filings with the SEC including our Form 20-F. Our earnings press release and this call includes discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable to GAAP measures and is also available in our IR website.

We will have a brief Q&A session after the prepared remarks. So that was the disclaimer. Before we start the call, we’re very happy to report another very strong quarter and a solid first half. Our effort in expanding our products and services and investments in new technology including mobile we continue to drive growth in the future and increase the shareholder value.

Now let's run down some of the numbers. First let's look at the financial highlights of the second quarter of 2013. Revenue totaled $144.1 million for second quarter of 2013 representing an increase of 48.6% from a year ago. Primarily driven by the growth in listing services and SouFun membership services compared to 2012, revenue from marketing services grew about 6% to $58.9 million in the second of 2013.

Revenue from E-commerce services from second quarter grew 84.2% to $45 million. It was group of revenues from marketing services and E-commerce services together, we will see that it aggregate, they grew about 30% to $103.9 million as compared to $84.1 million a year ago.

Our effort in expanding of services secondary home market is paying off. Revenue from listing services for the quarter grew 147.3% to $38.4 million, primarily driven by the substantial increase in number of paying subscribers compared to a year ago.

On the cost side, cost of revenue increased $26.1 million or 43.5% from a year ago. The increase in cost was primarily due to the increase in staff cost and business taxes. Our gross margin, as cost continues to grow slower than revenues, our gross margin improved slightly by almost 1% point from a year ago to approximately 82% for the quarter.

Operating expenses and income, turning to the operating expenses, our selling expenses in second quarter were $23 million, an increase of 34% from a year ago. G&A expenses were $19.4 million an increase of $37.4 million compared to last year. The increase in operating expenses are primarily due to increase in staff cost. Total headcount as of June 30, 2013 was about 8,250 as compared to about 7,250 in the same period last year.

Operating income grew 59.6% to $75.8 million in second quarter of 2013, the strong pipeline growth and effective cost control resulted in a 2.6% improvement in operating margin in the second quarter. Income tax expense was $24.7 million for the second quarter of 2013 representing a 40.2% increase compared to a year ago driven by higher quarterly profit.

Our effective tax rate decreased by approximately 4 percentage point from a year ago as a result of smaller impact of the dividend withholding tax accruals and slightly lower current income tax accruals compared to last year. Net income increased by 71.3% to $55.4 million from a year ago. Fully diluted EPS were $0.67 per share increased about 68 percentage points from five years, $0.40 a share.

Our adjusted EBITDA which we introduced in the first quarter of this year increased by 58.7% to $80.7 million for the quarter as compared to $50.8 million last year.

We continue to enjoy very strong cash generation capability of our business, operating cash flow increased about 80% to approximate $80 million in the second quarter of 2013 representing an 80.4% increase from last year.

At January 30th, 2013 our cash, cash equivalence and short-term investments totals $273.4 million up more than 90% compared to the beginning of the year.

Next, let’s move on to the financial highlights of the first half of 2013. During the first half of 2013, so far we have total revenue of $235.2 million as increase of 51.3% compared $155.5 million in the same period last year.

Marketing services claims approximately 40% of total revenue, e-commerce service is about 30%, listing service is 28% and value-added service is about 2%.

In the first half of last year, the revenues for like among these four categories were 58%, 24%, 17% and 2% respectively. Our total revenue guidance has been updated, our last quarter to $538 million. In terms of quarterly revenue, 17% of total revenue has been achieved in Q1 and 27% in Q2.

Tier one cities mainly Beijing or Shanghai contributed 44% of total revenues in the first half of 2013, tier two cities contributed 31% and tier three cities contributed 25%. Although revenue grew faster in the tier two and tier three cities, geographic distribution of the total revenue is still similar to that of the same period last year.

Gross margin in the first half of 2013 was 80.4% compared to 77.7% in first half of 2012. Operating margin in the first half of 2013 was 48.1% compared to 39.7% of first half of 2012. The effective tax rate for the first half of 2013 was 30.3% similar to that at last year.

Operating cash flow was about $140 million for the first half of 2013 compared to $70.7 million of same period last year, almost a 100% increase. Looking into the future for the full year of 2013, we expected annual revenue to reach between $538 million to $548 million representing between a 25% and 27.5% annual growth rate. The forecast reflects SouFan’s current and preliminary view, which is subject to change. And, thank you for taking the time to join us for this call today. And now, we will open for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Sure. Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Fei Fang from Goldman Sachs, please ask the question.

Fei Fang - Goldman Sachs (Asia) LLC

Hi, thanks for taking my question and congratulations on the good results. My question is on the property market, which seemed other property industry is probably going through a consolidation phase where it’s smacking small developers seemed to be dropping out or having problems, a large developers controlling their sales and marketing expenses. So, have you seen any change in how developers have set their budgets through your marketing services and if so, how would you respond to the changes on your customer’s side? Thank you.

Tianquan Vincent Mo

Hello, this is Vincent Mo. You’re right. The market situation of the industry players had some changes, but the changes to me, to my understanding of the industry it’s a slow and continues change, which means the concentration of the industries become my – it’s becoming, you know, kind of to award with the biggest developers or companies. But, the process is really slow.

In the process, our business we have not fear, you know, substantial or create change frequently in our clients’ spending with us. My judgment of the industry going forward, I think the concentrating ratio would be higher going forward, but it would be a slow process. In the past five years, the biggest development China Wonka its market share from 2% to 3%. That’s how the market changed in about five years.

So, I believe the market environment so far will remain mostly the same and although the market will be more and more toward the buyers or towards the big players.

Fei Fang - Goldman Sachs (Asia) LLC

Yeah, it’s okay, great. Thank you Vincent, that’s been helpful. Second question, can you elaborate other drivers behind the leasing services, what drives the robust growth and how should we model the gross rates in the next few quarters? Thanks.

Hong Zhao

Well actually Fei, we just actually raised our guidance to 27.5% I think, which basically implies in the next two quarters we’ll be growing at very conservatively, at least 50% per quarter. Going out next year we expect our growth rate to be at least 20% given what we can see now. So I think that would be a very reasonable expectation.

Tianquan Vincent Mo

Okay, a feedback to your question, as you asking for the listing services?

Fei Fang - Goldman Sachs (Asia) LLC

Yes Vincent, and what would be the drivers behind the listing services robust growth rate this quarter?

Tianquan Vincent Mo

Yeah, Hong just mentioned is overgrowth guidance and back to the listing, you have seen a rapid growth for our listing services in the past two quarters. Two reasons behind, or two drivers, if you are going to say that way, one is that our resale market, specifically our listing services, has been adopted broadly by the industry, by the resale markets, by all the agencies and brokers in China’s major cities.

We started about seven or eight years ago with our kind of China’s multiple listing services. It’s kind of national multiple listing service in China and buying by the industry, specifically the agent and brokers, they have no choice and this is one of the definitely the factor, in our multiple listing services for them in time. So that's the major factor behind the recent rapid growth. Another factor which is in March this year, because one of the policies at that time with the transactions were in the March a lot, because of that rapid growth of transaction volume in March, which also cost a huge demand for our listing services during that period of time and after that, the agent brokers, they are more to use our listing services. So that's another factor which enhanced the adoption of our listing services product.

Fei Fang - Goldman Sachs (Asia) LLC

Understood, it's very helpful. Thank you very much.

Operator

Thank you. Your next question comes from the line of Ravi Sarathy from Citi. Please ask your question.

Ravi Sarathy – Citi

Congratulations on a fabulous set of results, Vincent, Hong and US team and CFO colleague. I have a couple of questions if I may, the first one is around margins. I mean clearly we are seeing a very powerful operational network and I wanted to get a little bit more color around the drivers of that. I was kind of assuming a lot of SouFun card kicking in with a structurally higher margin, but I was wondering if you can give a little bit more color on that around the drivers of that and if we should look at your margin structure slightly differently going forward, I know that you have tended to manage the business with consistent growth to kind of meet the high 30 income margin, should be looking to evolve that upward somewhat or do you think that still a robust underlying expectation.

Hong Zhao

Hi Ravi! Thanks for the question. I think – that a good question actually we are monitoring our margins very closely as well. We definitely see slight improvements in terms of our gross margin just because we are seeing a little bit of sort of economic scale when we keep expanding and keep a very robust pipeline growth and our cost are generally very well controlled as you can see. So, there is definitely certain level of expansion going forward and as far as, I guess in terms of product mix, and what we enhance, what will bring higher margin is, E-commerce and marketing services as we talk to you before and then all the others before that these margins are very similar. They are these two products, the markets are right around, you know high 70s and to 80s and our listing services enjoy a little bit higher margin because the eagle box rolled.

So, we are looking at right around 80% I think that’s, that will be a pretty reasonable view for the near future.

Ravi Sarathy – Citi

And then, if you translate that down to overhead to net margin, I think you’re seeing some clear operational gearing with, you know, sales and marketing, G&A declining it’s percents of revenue. Do you expect that continue potentially to structurally somewhat higher net margin?

Hong Zhao

Yeah, we believe so, I mean, despite a past few quarters, yes, we all see the net margin keeps expanding. However, I mean, we’ve also, you know, as Vincent and auto engineering had communicated before. We believe that 30% net margin is actually very healthy margin if it’s too much above that we potentially run a risk in investing in certain thing. So, going forward we’ll be, you know, we’ll look at that and we will see, you know which area we might have to invest a little bit more including technologies and some of the R&D cost that we have to bring into to really gear us up for the mobile world. So, again I think the general guidance is trying to get to the 30%, 35% margin; net margin and not running the risk of under investing in the business.

Ravi Sarathy – Citi

Absolutely, understood. And, my final and follow up question for change too some of those exciting new developments particularly around mobile, I know you mentioned last quarter that mobile started to inflect as a percent of traffic, I wonder if you can give us an update on that, I also know you’ve been doing a lot of R&D work around the mobile apps academic and some other areas, so I was wondering if you can give us an updates on those two areas, share of traffic and now that’s growing and how you’re getting ahead of that with some of the exciting mobile developments you’ve got going on?

Tianquan Vincent Mo

Thank you Ravi, this is Vincent. You’re right. So, we have been focused in very much on mobile application since at last year and the beginning of this year. Currently our mobile, you know, business, unique visitors daily we have over 700,000 unique visitors to our mobile application and WAP application as well.

So, we are going to see the topic we’ll grow continuously in the second half of the year. We believe the mobile application in our, in the company and you know our products will be very useful to the home buyers and also will be very useful to our listing services.

So, I’m personally walking again with my, with our vice president of technology and this mobile application is going forward.

Ravi Sarathy – Citi

Thank you very much, Vincent. That’s very helpful.

Operator

Thank you. Your next question comes from the line of Chao Wang from Merrill Lynch. Please ask your question.

Chao Wang – Merrill Lynch

Thank you for taking my questions. My first question is regarding the listing, the follow up on the listing services, how much it actually attribute to the new business it’s so called online agencies and how much of that would go to the ( inaudible) business and also do you think there is any structural changes in fiscal markets that will help your listing services in the long-term? Thank you.

Hong Zhao

Wang, could you clarify a little bit of your question.

Chao Wang – Merrill Lynch

I remember that you have a new service, new business is so called online agency?

Hong Zhao

Online shops.

Chao Wang – Merrill Lynch

Online shops, right.

Hong Zhao

Yeah, we do have the, in Chinese it’s called SouFan one and it’s our online shop for brokers and agents.

Chao Wang – Merrill Lynch

Yeah I just want to – how does that business help your service, listing services in the quarter?

Hong Zhao

It has been supporting our listing services all the time, since we launched about one and half years ago. Currently we have paid online shop around 10,000 across about 20 cities in China. Our online shops for brokers and agent it’s something we think we will play much bigger in the future. Currently for every online shop, we just charge about, you know, RMB1000 a month, so which is very minimum, you know, which is very small amount of money.

So, we would expect that this monthly charge, you know, will grow and hopefully it grow rapidly in the coming two, three years, so that’s our expectation. And, the fundamental act is very, very simple and straightforward, you know, we have seen, everybody has seen, you know, the straight shops in Hong Kong, in Beijing, Shanghai and all the major cities in China, we just one, two, we stop this our online shop system to replace, you know, some of the traditional, you know, straight in shops. So, that’s the fundamental thinking.

Chao Wang – Merrill Lynch

All right and second question is on the guidance, maybe could you share with us your guidance on the different business lines?

Tianquan Vincent Mo

We don’t have divided guidance for new home, repair or home furnishing to our investments or to our shareholders or the investments so far but we do have a aggregate gross guidance to all of our top line revenue. As Hong mentioned and once again, we raised our gross guidance another 2.5% annually for this year.

Chao Wang – Merrill Lynch

Thank you.

Operator

Thank you. Your next question comes from the line of Anthony Thong from 86 Research. Please ask your question.

Anthony Thong – 86 Research

Thank you very much for taking my questions. I just have one question to you, I see that the marketing revenues are exploring and I was just wondering what measures you have taken to help this to get in line against risk and actually model this going forward. Thank you.

Tianquan Vincent Mo

Hi Anthony. Thanks for the question. I thought marketing services, I mean we are actually pretty encouraged to see that the markets are coming back to a growth pattern from a very flat fourth quarter of last year. So, in terms of the growth, again, we are all using, we mentioned last year in a call that we were actually reviving some of the policies to incentivize our people to really pursue the marketing services offering so that we’re not, you know, to minimize the offset effect from the E-commerce impact and also our membership services impact.

The second thing is I think for every, for the CDs, for the new prices, for the newer CDs will enter into new market, we will be emphasizing our marketing services so that we can keep the marketing services line back to a growing pattern. I think internally, and we are looking at this to be roughly 10% to 15% is our total goal at least to get back to that level of growing. Bear in mind that our marketing services is still 40% of our business and it’s very significant to us and we believe that we haven’t reached the potential yet, far from it actually. So, we’ll keep emphasizing on marketing services growth. That will be our goal.

Anthony Thong – 86 Research

Okay, thank you very much. One more question from me. Could you share the percentage of your E-commerce given it’s revenues in tier-1, tier-2 and versus pretty mix quarter and what do you think the breakdown should be in the long term and also what do you think is a challenge you are facing to penetrate this service into grow this? Thank you.

Tianquan Vincent Mo

Our e-commerce line yet, shall we start from the quarter first, in the second quarter, e-commerce business accounted for about ( inaudible) accounted for about 58% of our total e-commerce revenue from our membership services, down from 70% in the second quarter of last year, which was actually, …and then in the second tier CDs, that ratio was 33% compared to 25% last year, and in the tier-3 CDs account over 9% of the total revenue as compared to 5% of last year.

Actually, this is pretty causing trend and we’re seeing that the tier-2 and tier-3 CDs have taken a bigger share and they are growing by far relatively faster compared to the Beijing and Shanghai markets. So that on a quarterly that’s the picture for the quarterly, and then if you look at the first half that revenue, it showed a very similar trend actually.

The first half, Beijing or Shanghai accounted for about 57% of the total revenue as compared to 70% last year, and the second tier CDs 33% compared to 26% last year, and tier-3 CDs about 10% compared to 4% last year. So overall, I mean it really is moving into cassette and small CDs that we expand our programs offering in across the nation, but that’s very encouraging trend.

And we expect the CDs continue in the foreseeable future because there’s certainly great potential there in the smaller CDs or tier-2 or tier-3 CDs, but we will not take our eyeballs off of course of tier-1 because we think we can continue to peak when the penetration in Beijing and Shanghai and this last quarter, I mean we were only at 10% and in those places, and there’s still room there for us to grow, you know to

potentially say, that will be our, emphasis is to expand our services in other cities but also deep in our penetration in the existing cities that we are in.

Anthony Thong – 86 Research

Okay, great, thank you.

Operator

Thank you. Your next question comes from the line of Gregory Zhao from Citigroup. Please ask the question.

Gregory Zhao – Citigroup

Hi, I’m Gregory Zhao. Thank you for taking my question and congratulation on the strong quarter. I have several questions. The first of is about the E-commerce business what we are looking to the underlying volume in Beijing and Shanghai. We see the number of new house in Beijing and Shanghai almost flattish, but revenue from this two cities almost doubled this quarter. So that means the penetration in this quarter also doubled compared to last year?

Hong Zhao

Greg, thanks for the question. I think yes I mean in terms of the new home sales, they are relatively flat compared to last year however, in Beijing and Shanghai as we just described they are actually, Beijing and Shanghai for the quarter the value increased was about 53%. As we mentioned earlier in the tier 2 and tier 3 CDs they grow much faster on an average of above 100, 150%. For Beijing and Shanghai, the reason the revenue continued to grow in those areas is because our penetration is deepen. We just have a more projects and adding more houses in each project for our program. So deepen the penetration allow us to continue to grow in this big market, Beijing and Shanghai even though we already had a loin share, we still continue to do, monitor to do the more but the growth engine of future we believe will be actually to and smaller series where you are just full of potential. And we are very low in terms of penetrating those slightly.

Gregory Zhao – Citigroup

My second question is on the pricing of SouFun card, I think, your competitors also aggressively promoting their E-commerce business and provide similar products like our SouFun card and do you think you might be in the future some potential price will may differ?

Tianquan Vincent Mo

Hi Gregory, this is Vincent. I don't think so. Well, it’s always traditional behave, you know, SouFun’s behave, you know, we never do a price wall, we just improve our service and improve our product efficiency and cost improve of the performance of our services and products and to compete in the field.

So, we believe with the strong SouFun website and SouFun’s mobile applications, we have, you know, advantageous of any other potential in a competitor which they do not have. So, we believe we can still play according to the rule. So, we set for the market and we do want to continue and to maintain our price and power in the market.

Gregory Zhao – Citigroup

Thank you. My next question without the dividend, if the special dividend takes time in the same structure as the early dividend announced before, I mean, the R&D in China and U.S. border and go with it, right?

Tianquan Vincent Mo

Yes Gregory, it will be similar to what we had done in the past, yes.

Hong Zhao

And, sometime we’re also in the profits of dividends out from our R&D profit inside China to our trace operating. So, we expect it’s going to be done in about a month, ( inaudible) yeah, we are going to have about, you know, RMB500 million dividend out from China to our headquarters overseas in about a month.

Gregory Zhao – Citigroup

Thank you. My fourth question and the last question is about our new product CDs, I think SouFun’s just launch to the new product with the management gave us brief introduction about the products and ( inaudible) base? Thanks.

Tianquan Vincent Mo

You’re right, Greg. We are doing a lot of things about our e-commerce business, including the new platform we call it, in SouFun Ton in Chinese. So, that is upgrade of our existing e-commerce business. We would like to setup the tax one for the new home market, so that more on a more new projects, new developments, they can use our SouFun platform to do, you know, transactions to enhance transactions between the sellers and buyers.

So, it’s still in the early stage, but we have seen momentum, you know, from developers and from the buyers and also from our, you know, our agents, brokers, not to use the new platform to enhance the transaction between the property developers and property buyers.

So, it’s our expectation that this new platform there will be another solid fundamental product or platform for our existing e-commerce business, we would, we expect that will again penetrate into the new home, e-commerce or transaction business in a broad way into the future, which means, we hope that we expect that will mark this year in the new home transaction will be higher into the future.

Gregory Zhao – Citigroup

Thanks very much.

Operator

Thank you. Your next question comes from the line of Alan Hellawell from Deutsche Bank. Please ask question.

Alan Hellawell – Deutsche Bank AG

Hi guys, congratulations on another expense quarter. Just a basic question, can you comment on what you believe to be ROI trends and cluster and product?

Hong Zhao

Alan, I’m sorry, to be ROI return investment, is that what you mentioned?

Alan Hellawell – Deutsche Bank AG

Yeah, exactly as an ad format, what do you think the trends are for advertise on SouFun?

Hong Zhao

Well, I mean, we think our marketing services are still providing a very good ROI for the advertisers who is doing business with our advertisement on our platform, and as advertisers buy, you know, we still have very relatively stable custom base and they actually, a lot of these customers have been with us for a long time and then now we’re moving into a more comprehensive type of solution for them, which will include advertisement as well as, you know, the actual membership services, they’re actually help to promote their properties a bit more effectively and a bit more fast, faster.

Now, on the listing services is actually very interesting as Vincent has mentioned earlier, because we have such a dominant in flat one in China and really we are defacto MOS in China. So for any of the agencies who want to secure their market share, that will be actually, will be very natural choice of that and lot of times the only choice because our far reaching and sort of these position that gave us the absolute sort of, one is pricing power, the other one is really the best reach I guess for these advertises or for the agencies to post their property information.

So, from these posts prospective, I think they are, we are still at very platform for the long time, the best platform for the new home developer as well for the agency.

Alan Hellawell – Deutsche Bank AG

Got it, thank you very much.

Operator

Thank you. Your next question comes from the line of Tian Hou from TH Capital, please ask the question.

Tian Hou - TH Capital

Hi Vincent and Zhao. Congratulations on a good quarter. I have several questions. So, the first one is regarding your E-commerce business, so as of from last year, end of last Q4, you mentioned that E-commerce business was in about 10 cities. So, I wonder how many cities you’re doing offer E-commerce services today and what's your plan for the future of the expansion that’s my first question. And the second question is also E-commerce related which is, E-commerce grow so rapidly in Q to Q wise. So, I wonder where the growth comes from, it could come from same city expansion and also could come from newer city expansion. So, I wonder which factor play a major role or another word it's how much growth contributed from same city growth and how much the growth contributing from city expansion. I will stop here. I have more questions following this one.

Hong Zhao

Yes, thanks Tian. This is Hong. Actually if you look at the quarter over quarter in terms of growth the growth engine actually come more from the secondary and third tier cities than it is from Beijing and Shanghai. Even though Beijing and Shanghai are still growing very strong. As I had mentioned earlier to Anthony, we actually a $9 million increase in the quarter, just from Beijing and Shanghai, which represent about 53% of an increase year-over-year. In the second and third tier cities, in aggregate, we grew about 12 million out of a 7 million total from last year. So, that was a phenomenal growth, over 150%.

At this point, it seems to be, the contribution will be the actual expansion into other cities. In Beijing and Shanghai though, we do see deeper penetration as we mentioned earlier and these are strategy. As you can see, we will deepen our penetration, increase that so we can continue to monetize on the program and in the new cities we’ll be expanding to get new business.

Right now to your comment – I mean to the first question we had about 25 cities at the end of Q2.

Tian Hou - TH Capital

Q2, so what’s the plan, what’s the expansion plan?

Hong Zhao

As we start, I mean the expansion plan, we already established, I mean when we say 25 cities, but when we look at the actual penetration the second and third tier cities are still very relatively light as we put it. Beijing and Shanghai we’re now into a bit above 10% penetration, but in the smaller cities we’re at probably half of that. So, there’s still a lot of room for us to just deepen that and I think also, we’ll be adding cities as we go along. Whenever the city has potential for us to run the business or we’re mature enough, then we will go into those cities and expand.

Tian Hou - TH Capital

Okay, thank you; very helpful. My other question is related to mobile business and I would like to get some color on how exactly the mobile platform is a necessary platform for SouFun that is number one. The number two is, how major might be mobile practice, what is the matrix you’re going to use or we should use?

Hong Zhao

Yes, I mean – to your question, I think mobile is definitely – the reason why we have the mobile – I think, Mobile provides a lot of features and advantages for our website, which is very natural especially in our listing services. When the thing about the user behavior, when they walk around with a smart phone and, of course, I mean Smartphone penetration has been increasing quite a bit in China and then the user are really, kind of, adapting to that kind of world, where a lot of location-based – I mean LBS type of technologies or helping them shape and every aspect of their lives, including – for instance finding restaurants, finding places to stay, finding restaurants to eat, or any entertainment venues. It is the same thing as finding a place to rent a house or finding a place to actually buy a home.

I mean, we can see that definitely is very well received by the community and we actually has – I mean, as I mentioned earlier, we already have about 2 million active users, and of that it generates about 700,000 daily unique visits. That shows you, I guess, how powerful it is to give our consumers the best experience and allow them to really adapt to their, kind of, mobilized life.

Now, secondarily, when you mention the matrix, I think, for now, we are looking at a lot of matrix concentrated on traffic model. I mean, at this point, it is still – I guess, mobile is still in its early stage for most of the companies and for companies like us. We will continue to grow that looking at really, how many of these active users that we were tracking and also daily traffic and we’re actually benchmarking and with some of the – with the companies like the Villas and the Chulias’ to make sure that we’re competitive in their marketplace. We are actually sometimes it could give us a better edge in Chinese space because we’re so dominating. So, that will be the current matrix for now. The monetization of it, right now it’s – bringing revenue is not extremely significant, but going forward, we expect a lot more products to be moving onto the mobile platform mobile platform and will be able to monetize it a little bit further.

Tian Hou - TH Capital

Okay. That’s very helpful. The next question is related to the marketing services and it seems like among the four different, different lines of your revenues and marketing service and your growth in the last year-on-year basis. So, what do you see, given the future, you know the future growth of the – for this part of the business? So, that is the number 3 question, the third question?

Hong Zhao

Okay. Our marketing services – as we mentioned earlier, I mean marketing service we just believe that marketing services is nowhere near its full potential. Compensates one, the advertising – the total ad market and then nationwide, about probably less than 20% of the money of all time dollars, if we spend on that platform, I mean, that is relatively low compared to U.S. standard. So, when we look at that, we think that, you know, there is still room now for us to monetize more when the trend moving from the print media to the online platform.

Certainly I think, you know, we have seen very encouraging trend of increasing penetration, penetration in China especially in the smaller cities, you know, rapid growth, some data we saw, you know, 36% last year, but now it’s 42%. So, it’s very rapid growth in that regard. So, we believe that with the increase of penetration, also with the secular trend of moving from a less effective trend and more expensive media on to a online platform, my gosh, we believe, you know, that will give us a lot more opportunity and not to mention that in at market, we are absolutely dominating position as well, you know, occupying more than 62% of the marketplace and also more than about 70% of total advertises, so that give us definitely give us a good competitive advantage.

Tian Hou - TH Capital

Okay. The last question it’s related to, you know, the reason, you know, government saying about the prudential policy is no towards housing market, you mentioned like a ( inaudible) expect this some kind of the long-term, you know, adjustment mechanism, whatever. So, I wonder what your guy’s interpretation for that?

Hong Zhao

The long-term, I mean, regardless, we actually, you know, the company, we as a company we always, you know, in the law offense we welcome the new policies, I mean, we believe that a policy was really there to secure a long-term and sustainable growing market of real estate, healthy real estate market in China, which is actually to our best interest because a very spiky, very unstable or hype of globe market doesn’t really help us. And, SouFun’s business, you know, it’s not really, it’s not thrown to the policy fluctuations.

However, a long-term and sustainable growing market is very beneficial to us, beneficial to us. Now looking at this policy, I mean, you know, we passed how many rounds, probably more than 10 rounds of the government control policies and so far, I mean, every time SouFun has demonstrated that, you know, our business continue to grow through those policy control cycles.

So, from that perspective I think SouFun will not really worried about this new policy or this sort of view point from government, we actually welcome and I think in terms of, you know, in terms of looking at longer firm rather than short-term price hike or short-term transaction volumes, looking at longer term stability and also you know, longer term I guess, effectiveness measurements, I think it help the regulated market and really some of the over enthusiasm in the marketplace, you know, due to artificially pass demand, which could build up a lot pressure on the price. So, we think that’s a good move and then really SouFun will actually benefit from it as well.

Tian Hou - TH Capital

Okay, thank you for your insights. And again congratulation on a good quarter, that’s all my questions.

Hong Zhao

Thank you.

Operator

Thank you. Your next question comes from the line of Wendy Huang from Standard Chartered. Please ask the question.

Wendy Huang – Standard Chartered

Good evening. And thank you for taking my questions. I have several questions. My first question is regarding your SouFun card, I wonder if you can give some color on the competition out there for your fast growing SouFun card also called e-commerce business also how has that competition changed in first half this year? Thank you.

Hong Zhao

You mean competition, correct?

Wendy Huang – Standard Chartered

Yes, for SouFun card because I notice some of your competitors are still issues similar services.

Hong Zhao

That would be correct as Vincent had mentioned earlier, you know, this SouFun card is, you know, we actually, we are probably among the first ones, we are probably the first one, it’s also kind of services and grew very rapidly just because, you know, our platform and a reputation in the – SouFun’s reputation at industry place in a marketplace, so that allow us growing effect, it becomes, you know, a little bit competitive us for as, you know, some of the local or geographic areas, yeah, we do have some complication.

However, when we look at the market share and when we look at the number of developers that are pondering without, we steal, you know, way ahead of our competitor. I think nationwide; I think we are still among the most competitive e-commerce solution provider in offense for the developer.

However, I mean, not been said, I mean, we are monitoring our competition really closely and part of our initiative is to push out, you know, as a result of that we’re actually pushing out some of these new products and upgraded platform to really help our users to fine if that’s how they have and also help the developer to market their properties more effectively.

And so, because it’s a relatively new platform, I believe it’s got great potential, we are just having, you know, we’ve had enough time, I guess, to really track the executive at this point, but we will continue to monitor that and then update you on the program.

Wendy Huang – Standard Chartered

Okay. My second question is fill up on your new services can you help me to understand how exactly you’re going to ( inaudible) from this new product, are you going to charge a commission fee based on each section or are you going to charge a fixed fee, what kind of revenue motto on that particular new product? Thank you.

Hong Zhao

Vincent, do you want to give – share a little color on this.

Tianquan Vincent Mo

It actually relates to the course of the question. And, SouFun Tan is the free platform it’s like SauFun.com like the website, you know, users can use it for free, they can chatting for making for free. So, SouFun Tan it’s the platform for the e-commerce business for the new home sector. So, you know, developers they can use this platform for free, as a software, as a system or a platform to support their transactions, so that’s SouFun Tan mean to do into the future.

We are adding more applications and value-added services to the platform those value-added services like one we have been doing with the advertising, currently e-commerce business and membership services so on so, only charge as due here, but SouFun Tan product is going to be adopted by a broader developers going forward that something we expect.

Wendy Huang – Standard Chartered

Okay. Thank you. And, my last question is regarding the fast growing mobile part. So, if any following peers that you can learn from about to grow this new business and also what kind of business motto up there, are there more developed market?

Hong Zhao

I think yes, after the mobile applications it’s a new to the whole world including us, but that said, you know, we are learning a lot from other industry players and also we have said in the spirit, prayers like zero in the U.S., tutor in the U.S. and realestate.com.au, and in Australia right move in the U.K. so, they will come to party in U.S. and Australia and U.K. So, we are learning from them. And at sometimes, I guess, they’re also learning from us, so it’s a mutual learning process, together I think, you know, China, U.S., U.K., Australia and other countries I think we can make this home industry, you know, much earlier to hinder, so that’s the current situation as I mentioned before mobile application and mobile services that our focus and we are going to spend more efforts and resources on that. So, make sure that SouFun will continue its leadership in this new technology and applications.

Wendy Huang – Standard Chartered

Okay. Thank you very much.

Operator

Thank you. (Operator Instructions)

Hong Zhao

And, operator, if we don’t have any more questions, we can potentially conclude the call.

Operator

There are no further questions at this time, Mr. Zhao.

Hong Zhao

Okay, great. Well, thank you everybody for joining us today. And, thank you operator for the help, for the assistance through the call. And, we look forward to hear from you in the near future and we look forward to another successful quarter to report it back to you. Thank you.

Tianquan Vincent Mo

Thank you.

Operator

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

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SouFun Holdings (SFUN): Q2 EPS of $0.75 beats by $0.21. Revenue of $144.14M (+48.6% Y/Y) beats by $26.7M. (PR)