Youku Tudou Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 9.13 | About: Youku Tudou (YOKU)

Youku Tudou (NYSE:YOKU)

Q2 2013 Earnings Call

August 08, 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

Analysts

Philip Wan - Morgan Stanley, Research Division

Muzhi Li - Citigroup Inc, Research Division

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

Alicia Yap - Barclays Capital, Research Division

Jiong Shao - Macquarie Research

Chao Wang - BofA Merrill Lynch, Research Division

Piyush Mubayi - Goldman Sachs Group Inc., Research Division

Mark A. Marostica - Piper Jaffray Companies, Research Division

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

Yu Heng Fan

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2013 Youku Tudou Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, the 9th of August 2013.

I will now like to hand the conference to your first speaker for today, Mr. Ryan Cheung, Corporate Finance Director of Youku Tudou. Thank you, sir. Please go ahead.

Ryan Cheung

Thank you, operator, and welcome to our second 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 a strategic overview of our multi-screen online video services and sales performance in Q2. Dele will discuss our company's operations and content strategy, and Michael will discuss the second 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 sections of the Youku Tudou website. A replay of the call will be available on the website in a few hours. I refer to 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 also refer to our Basis of Presentation sections on our press release. Finally, please note that, unless otherwise stated, all figures mentioned during this 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. We delivered a solid financial performance with Q2 revenue reaccelerating in line with our guidance, further cost structure optimization as we finalize our merger integration. We also achieved significant margins improvement and lowering loss in Q2.

First of all, I would like to share our strategic views on the online video industry, progress made to solidify our multi-screen leadership and monetization opportunities. Multi-screen video consumption is a game changer for Internet television. Internet users are now able to watch videos anytime, anywhere on any device and switch seamlessly between devices. This has always been our vision when we started the company, and this trend will continue as more Internet-enabled devices have video capabilities. With multi-screen Internet video content consumption becoming the standard and Internet television increasingly mainstream in China, we are at the center of exciting growth opportunities over time. We are the clear leader in multi-screen video. Youku and Tudou are becoming more and more differentiated in terms of brand leadership, content breadth, especially broadly, original and user-generated content and cross-screen product experience. This allows us to grow our user base and further widen our reach throughout China.

In particular, we see terrific growth in our mobile traffic under 3 key industry measures for online video: video views, active user and time spent. Mobile video views grew more than 100% within 6 months to over 200 million according to our internal tracking data. The latest iResearch data released in June shows that Youku app reaches, on a daily basis, close to twice that of our closest competitor. In addition, 180 million hours were spent on Youku's mobile platform in June, more than twice the user engagement of our closest competitor. In combination with the scale of our PC traffic, we are the clear leading multi-screen online video company in China.

In this multi-screen era, we see online video user behavior change. We observe that user time spent on our platform has extended from traditional evening prime time slots to now more video consumption throughout the entire day. Smartphones and tablets are now used in multiple locations instead of just offices or homes to access our content library. Users are watching a larger variety of content genres as it has become easily available on different screens. Seeing this multi-screen behavior change, we have made investments in cross-screen product innovation.

For example, in Q2, we rolled out new versions of Youku Tudou and Paike apps and also upgraded our web user interface and underlying architecture to achieve more consistent and interactive user experience for multi-screen purposes. With our multi-screen user base and product offerings, we have a solid foundation to deliver clear and distinct value on multi-screen video advertising solutions to our clients and paid services to our users.

Our sales team held a roadshow to introduce our multi-screen video advertising solutions to brand advertisers and agencies surrounding 3 major advertising formats: TV commercial, content marketing and interactive solutions. We believe through multi-screen on Youku Tudou, advertisers can reach out to the widest available viewer base, making their brand more visible and recognizable in their target market. Initial responses from our clients were promising, but it will take time to make multi-screen advertising mainstream. We are now educating our clients and grow demand for multi-screen advertising. We do not expect meaningful revenue contribution for mobile until 2014.

Turning now to our Q2 revenue, I'm pleased to see growth reaccelerated on improved execution following the merger integration completion. We are the leading destination for international FMCG brands, as our combined platform reaches over 80% of the online video audience in China. We remain committed -- we're committed to our sales goals, which are to add new brand advertisers, penetrate into lower-tiered cities, promote multi-screen and content marketing solutions.

During the quarter, we added 116 brand advertisers, including Novartis, Centauri, Vertu and Chinese brands such as [indiscernible]. Advertising budget from sectors such as IT and electronics and e-commerce have seen notable growth in Q2. In addition, our sell-through, especially in lower-tiered cities, improved as we are further penetrating into these regions.

On top of that, one of our key sale strategies is to develop content marketing solutions for our clients. I'm pleased with the progress that we made on this front. We continue to win new brand sponsorships and product placement in the last quarter. Besides the sponsorships from Deerway, DHL and Ford on Tudou Video Festival as mentioned in the previous call, both Youku and Tudou's original shows in the last quarter have signed sponsorships from P&G, Unilever, Grand Cherokee, Nestlé, Mong Yow [ph], et cetera.

With that, I will now turn the call over to Dele to go over our integration and content strategy.

Dele Liu

Thank you, Victor. Hello, everyone. I'm pleased to announce that all key areas of operation have been successfully integrated as of the second quarter 2013. We optimized our cost structure, reaccelerated our revenue growth and our industry leadership position has been further cemented. In addition, our 2 platforms and brands, Youku and Tudou, are increasingly differentiated to attract and retain its respective users.

Youku is a mainstream brand, while Tudou represents a young and edgy culture. We are pleased to report that we have significantly improved our cost structure. Bandwidth costs grew only 2% quarter-over-quarter despite exponential growth in traffic driven by mobile. We expect bandwidth unit cost to decrease due to technological innovations in data compression and network architecture and bandwidth cost as a percentage of revenue will continue to drop. We started to work with Qualcomm H.265 technology, which transmits quality videos using less bandwidth.

Personnel-related expenses were flat quarter-over-quarter, as we have kept our headcounts largely unchanged close to merger, and we expect moderate growth in personnel-related expenses in the next 2 quarters. We continue to improve our content economics in the second quarter. We take a balanced approach for investing in content. We are relying less than before on hot content to generate traffic. The hot domestic TV dramas, which most of our peers are pursuing, generates only 6% to 8% of our videos viewed in the second quarter. In fact, our users, mostly come and stay on our platform to watch our library content, user-generated content and original content.

We made further progress in building our UGC ecosystem to differentiate Youku and Tudou from our peers. During the second quarter, both Youku and Tudou successfully held their entry events of the year, Youku talent show and Tudou Video Festival. The Tudou Video Festival, which ran its 6th annual session this year, attracted 18,000 entries, and together, they generated more than 200 million views on Tudou since their release.

Both Youku and Tudou launched the content partner program to share advertising revenue with content partners with the content they upload. Content creators are -- who are accepted to the program will receive financial, technical and marketing support. This includes having their videos for prioritized in search results on both platforms. They can also leverage the unrivaled reach of our distribution platform to over 400 million viewers in China.

On top of this, Tudou has unveiled a content incubation fund that finances its UGC talents by connecting them with sponsors to launch their careers onto a larger platform. Sponsored by corporations like Ford, Deerway and DHL, this fund helped finance Tudou's content partners to create high-engaging-content channels. Youku

Original and Tudou Original are clearly gaining traction and accumulating millions of devoted fans who come to enjoy the shows day by day. Youku's original shows, such as Morning Call, Friend [ph], Youku Entertainment News, [Chinese], Miss Puff, [Chinese], et cetera, constantly -- consistently ranked as the top 10 most viewed programs of the site. Tudou Groovin' is also a top 10 most viewed show on Tudou.

We are now adding feature documentaries and comedy specials to our original content capabilities. In Q2, Youku Original launched a new documentary series, On the Road [ph], which has attracted over 30 million videos viewed with 8 episodes. Tudou also recently rolled out a real-life show called Tudou Show Box [ph], which becomes one of the most popular shows on Tudou. We'll continue to build on our initial success with original production and ramp up the quality as we gain more and more experience.

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 walk you through our financial highlights for the quarter. The amounts mentioned here are in RMB, unless otherwise noted. Before we drill down to each line item, you should be aware that if you add up some non-GAAP financial figures such as content costs, tax, cost of revenues, gross profits, net operating loss, et cetera, disclosed by Youku and Tudou in their respective earnings release in Q2 2012, the results may be significantly different from the pro forma non-GAAP numbers for Q2 2012 disclosed in this earning release. The reason is the pro forma financials for Q2 2012 is calculated based on the assumption that a merger was completed on January 1, 2012. Therefore, to get pro forma financials, the combined historical financials has to be adjusted to reflect P&L impact of assets write-up and assets write-down due to the merger.

For the second quarter, our consolidated net revenue were RMB 754 million, a 30% increase year-on-year, meeting the consolidated net revenue guidance previously announced by the company. Consolidated advertising net revenue were RMB 727 million, also in line with our guidance. Consolidated bandwidth costs were RMB 164.1 million, representing 22% of consolidated net revenue, as compared to RMB 177 million, representing 31% in the same period in 2012. Consolidated non-GAAP content costs were RMB 289 million, representing 38% of consolidated net revenues as compared to RMB 194 million, representing 34% of the same period in 2012. On the other hand, the combined historical non-GAAP content costs for Q2 2012 before any pro forma adjustments were RMB 248 million, 43% of combined historical net revenue for Youku and Tudou.

Consolidated non-GAAP gross profits were RMB 204 million, representing 27% of the gross margin and a growth by 77% compared to non-GAAP gross profits of RMB 116 million, representing 20% of gross margins for the same period in 2012. Consolidated non-GAAP operating expenses were RMB 261 million, a 2% increase year-on-year. Detailed discussion of each component of operating expenses is as follows: consolidated non-GAAP sales and marketing expenses were RMB 150 million, an increase of 12% 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 55 million, an increase of 14% year-on-year. This increase was primarily due to higher personnel-related expenses for our product development in mobile, search, social and paid services. Consolidated non-GAAP general and expenses -- general and administrative expenses were RMB 55 million, a decrease of 22% year-on-year. Consolidated non-GAAP net loss were RMB 45 million and has narrowed down to 63 -- and has narrowed 63 down -- 63% down in the corresponding period in 2012.

Turning to the cash flow items as of June 30, 2013. Consolidated cash, cash equivalent and the restricted cash and short-term investment totaled RMB 3.3 billion. Our acquisition of the intangible assets was RMB 102.5 million in Q2 2013. So looking out to the third quarter of 2013, we expect consolidated net revenue will be between RMB 830 million and RMB 870 million, with consolidated advertising net revenue contributing between RMB 740 million to RMB 770 million.

So we will now open to questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Philip Wan from Morgan Stanley.

Philip Wan - Morgan Stanley, Research Division

My first question is about your third quarter advertising sales guidance, which implies only single-digit sequential growth. Could you give us some color about the advertising outlook, as well as the progress of the customer acquisition for Youku?

Cheung Koo Wing

Can you please clarify the second part of the question? We couldn't hear very clearly.

Philip Wan - Morgan Stanley, Research Division

Okay. I would like to get an idea of the progress of the customer acquisition going forward.

Cheung Koo Wing

Okay, first of all, let's comment on your first part of the question, which is macroeconomic outlook, as well as the advertising performance. As most analysts have seen, there are multiple reports in the media about a slowing economic environment. And we've seen that in certain cyclical sectors like auto and finance, there will be some impact. The main categories, such as FMCG, I think that's going to be relatively stable and so our guidance are based on what we've seen on the overall economic environment. And in terms of the overall customer acquisition, well, actually, that's pretty positive both on the mobile monetization front, as well as from the second- and third-tier cities/local FMCG advertisers [indiscernible].

Philip Wan - Morgan Stanley, Research Division

Okay, just a quick follow-up. Would you share the total advertising customer for this quarter?

Ge Xu

This is Michael. I'm going to take the question. So in Q2 2013, we have 430 advertisers, and compared with Q1 2013, at that time, we have 390.

Philip Wan - Morgan Stanley, Research Division

4-3-0 for this quarter?

Ge Xu

Yes, 3-9-0.

Philip Wan - Morgan Stanley, Research Division

And then my second question is about the content. Just wonder if you could give us some color about the current competitive landscape in content acquisition and also Youku's strategy in terms of content swapping with other online video players.

Cheung Koo Wing

Yes. Philip, that's a great question. We take a balanced approach for investing in content. We continue to have a reasonable share of hot content, whereas our low-cost original content, library content and user-generated content are generating higher and higher portion of traffic over the last few quarters. In other words, we're relying less and less on hot content to generate traffic revenue and this translates into improved content economics. And in terms of differentiation, we are also working very progressively on original content, and we are now producing web-only shows that are creating high engaging, edgy, but much cheaper compared to television content. And a number of our original shows are generating over 5 million videos viewed per episode on average, which is already close to hot content. And last, but not at least, we are building an ecosystem to generate the next-generation artists and producers, who will produce content for the web. And also, there's a content swapping going on with -- again, with the peers right now. So overall, I think, content as a percentage of revenue will continue to decline.

Operator

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

Muzhi Li - Citigroup Inc, Research Division

I would like to ask the management to give some profitability guidance, given the company made a significant improvement [ph] of the cost structure in the second quarter. How are they going to effect the profitability in the second half and maybe give some broad pictures of profitability into 2014? And I have a follow-up.

Cheung Koo Wing

And as you can see from the results, our margin improved significantly as well as loss decreased materially year-on-year and quarter-over-quarter. We take out our active investments in growth opportunities such as mobile video traffic and original content investment. We should be already profitable on a non-GAAP basis. Despite these investments, if you look at our non-GAAP losses narrowed materially and breakeven point is already pretty close, I think the numbers indicate that non-GAAP loss is about 6% of our net revenue. We do not comment on specific timetable as we need to adapt the market environment changes, but we're confident with our business model and long-term growth potential. But as a policy, we do not want to forsake future growth opportunities for short-term profitability.

Muzhi Li - Citigroup Inc, Research Division

And also a follow-up question about the content, the company said only 6% to 8% of the video view come from the hot content and most of them come from -- and the rest of them come from the library and the user generate. So will you please give some revenue split at -- how much revenue come from the hot content and the -- and then from the other categories as well?

Cheung Koo Wing

Yes, we said that hot TV dramas, which are hotly pursued among peers, contributed 6% to 8% of traffic in the second quarter. Revenue-wise, that category is about 10%. So overall, we are relying less and less on the hot TV domestic dramas because we have a huge library and also user-generated content and in-house productive -- produced content.

Operator

Your next question comes from Jin Yoon from Nomura.

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

So a couple of question on your mobile monetization side. First of all, compared to where we were about 3 months ago at your last earnings call, how much have things progressed on the mobile monetization side, where we can actually see meaningful revenues coming from the 50% plus page views that you're seeing? And then the follow-up question to that is I think Dele mentioned on his prepared remarks that due to technology gains, that bandwidth cost should stabilize, given the fact that more traffic is coming from the mobile side, if I heard that correctly. If so, should we assume that the incremental margins on the mobile side should be better than on the PC? So as mobile ramp and monetization ramp, we should also see further scalability?

Cheung Koo Wing

Let me take the first part about mobile monetization. Overall, initial signs are positive. Especially in Q2, we have seen specific prime examples where cross-screen and mobile video marketing solutions are being adopted. To give you some examples, our leading advertisers are starting to adopt. On the cross-screen side, which means they are placing advertisements across PC, mobile as well as tablet. Examples include like IT companies, like Qualcomm, Samsung are doing that, FMCG companies, including [Chinese] on cross-screen. And then also advertisers are looking for solutions targeted towards just mobile as well. On the FMCG side, Dior, Chanel, Volkswagen on the auto side, as well as Intel on the IT side. So we've seen some very good initial examples. Also if you look at content, mobile content inventory itself, it's quite interesting. There's some industry hypothesis saying that people are watching mostly short form video on mobile, which the data indicate otherwise. If you look at on a daily basis, people watch over 50% -- 50 minutes on the PC screen are actually watching over 70 minutes on the mobile screen. And the mix between long-form and short-form contents are actually pretty similar across the screen. So whether it's mobile screen, the tablet screen or the PC screen, people are watching a combination of long-form as well as short-form content. And so we're seeing some leading -- our leading shows getting hybrid on all these screens. So as such, when advertisers and marketers are looking for cross-screen solution for specific demographic groups and specific content, they need to really go cross-screen. As we mentioned in the script, we have done roadshows with leading advertisers and we are hearing good initial feedback. So we're working towards making more improvement in the future.

Dele Liu

This is Dele here. On the bandwidth cost, the -- now we are adopting new technologies such as Flash B2B into the mobile area, and there is also scale economics going on as the size of the 2 companies -- of the 2 platforms increase. And therefore, the bandwidth cost, the increase is slower than the total revenue or total traffic increase. So there's clear improved cost structure there.

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

So is -- just to follow up, is the incremental margin on the mobile side better than PC? Or is that still undetermined at this point?

Dele Liu

If we are to segregate the mobile business, yes, it is a higher margin because the content cost is already [indiscernible] with the PC side. Because we -- when we license the content from the owners, we cover all the Internet-enabled devices. There's no additional cost need to be paid for the traffic generated from mobile.

Operator

Your next question comes from Alicia Yap from Barclays.

Alicia Yap - Barclays Capital, Research Division

I have 2 quick questions. My first question is actually regarding your guidance. Actually, looking at your advertising revenue guidance versus your total consolidated patterns, it seems to imply that this quarter, the non-ad revenues will have a range of RMB 90 million to RMB 100 million this quarter versus I think, previously in your second quarter, I think it only delivered around RMB 20 million plus in the second quarter. Is the sequential -- strong sequential growth come from the stronger subscription revenues? Any color you could provide will be appreciated.

Ge Xu

Yes. This is Michael. So the -- in the third quarter, we got -- yes, there's some -- there is strong growth in our mobile value-added service. So that's the main driver behind the non-advertising revenues growth. It is -- yes.

Alicia Yap - Barclays Capital, Research Division

And so is that because of the higher revenue coming from -- is it from subscription, right, not from the mobile advertising revenue?

Ge Xu

No, it's not from the -- it's not from mobile advertising. It's from mobile value-added service. Basically, it's kind of a subscription business.

Alicia Yap - Barclays Capital, Research Division

I see, I see. And then the second questions I have is on the balance sheet. So what is the reason causing a large increase in the intangible asset this quarter? Is that related to your in-house production content? And similarly, what are the main reasons for the larger increase in account receivable this quarter?

Ge Xu

Okay. The significant increase in the intangible assets is simply up because in the Q3 -- sorry, starting from Q2, we began to have a lot of dramas being broadcasted. So the accounting do -- the accounting looks like this. Before broadcasting, it's -- the payment or the cash outlay is categorized as prepayments. And when the broadcasting began, the balance, they will be moved from prepayment accounts to intangible assets accounts. So the up and down of the intangible assets account is mostly related to -- is mostly decided by the broadcasting time. Your second question is related to increase in AR. Yes, in the -- in Q2, the account receivables balance increased roughly by RMB 250 million. It's mostly seasonality reason. In Q2, generally speaking, Q4 is the payment high season and Q2, Q3 is the seasons where you can see a lot of revenue increase -- a lot of revenue and AR balance as a result increased significantly.

Operator

Your next question comes from Jiong Shao from Macquarie.

Jiong Shao - Macquarie Research

I have a few quick questions. First on your content strategy, you talked about the strength in your original content. Could you share with us as a percentage of video views or time spent, what is your original content is contributing? And any kind of revenue contribution, percentage of your revenue contribution from them? And then related to the -- my content question, some of your Internet peers recently partner with Hunan Satellite is doing a bit more interactive content on the -- sort of the Internet platform. Could you talk about any of the thoughts you may have in producing a bit more interactive content on your platform? That's my first question.

Ge Xu

Sure. So Jiong, I will take the first one. Yes, in-house production content has been generating more traffic on a percentage-wise as well as revenue. We have multiple shows going on, which get premiered on a weekly basis. I don't have the exact numbers of percentage of traffic and revenue handy. We will provide to you later. Ryan may follow up on this. The second question, I guess, Victor...

Cheung Koo Wing

I'll answer this. On the original content, the monetization are both through content marketing solutions and interactive entertainment. We've seen very solid examples on both the Youku platform and the Tudou platform. When we design our original content on both platforms, they are highly affiliated with each platform's brand positioning. I think as I mentioned in the past, Youku's positioning of views, the U.S. example is more like CBS and ABC; and Tudou's positioning is more similar to Fox and CW are more young and edgy. And so those programs are also designed in parallel with the different kinds of product placements and different sponsorships brands that are compatible with these brand positioning, and we've been very successful I think in the last few quarters to execute on this content marketing solutions strategy, whether it's local brands like Jeanswest and Deerway as well as international brands like Ford and DHL [ph] for Tudou as well as Mong Yow [ph] and a whole bunch of different brands like Jeep for the Youku side, which tends to do more talk shows and tends to do more variety shows. On the interactive entertainment side, that's quite interesting, where we've seen some companies in our business working with TV stations. Our initiative is really more focused towards working with our original content, and we're increasingly adding more interactive features onto our programming. And this is something we started doing about 2 years ago to get more user engagement into our original content. And this is something you'll see more and more of in the upcoming quarters.

Jiong Shao - Macquarie Research

Okay, great. That's very helpful. My second question is on your sales strategy. I think you talked about in your prepared remarks that you are gaining a lot of traction you said into the tier-2 cities. And as you know, in the entire online video or online TV, industries there's a dilemma. In the tier-1 cities, you have a lot of demand but often times, you don't have much inventory. But in the tier-2 cities, you have a lot of inventory. Sales really is not that high. So could you talk about what are the things that you have done to sort of increase your penetration in the 2 tier -- or tier-2 cities? And what are the things you would do more so that would -- to try to ramp up the sell-through rate for those inventories in the lower-tier cities?

Cheung Koo Wing

So from a sell strategy standpoint, clearly, the coastal cities tend to be higher sell-through rate, as well as higher CPM. And then this is an area where we're seeing increasing demand for both domestic as well as international advertisers, and we really want to create a marketplace where these inventories is leveraged to the full. And this is something that we're working towards, and we'll have new policies for 2014. Now obviously, a clear strategy this year is to work with local FMCG companies, especially those that have the majority of their brand presence as well as retail presence in second-, third-tier cities, as well as some of the content marketing solutions that I mentioned, the brands that I have cited also have most of their retailers as well as a consumer presence in the second-, third-tier cities. So a combination of availability of inventory as we penetrate wider, whether it's -- especially I think on the mobile screen; and two, offering more and more content and interactive solutions that's appropriate for these clients. Now from a sales force standpoint, we'll also have more and more of our sales team mix focusing on these clients and agencies as well as to broaden our reach, not just on the user front, but also from a advertising and marketing front.

Jiong Shao - Macquarie Research

Okay, great. And my third and final question is a quick follow-up on your mobile. I think, Victor, you mentioned earlier than the mobile revenue is going to be mostly for 2014. But the value proposition for mobile and multi-screen seems to be pretty strong. There got to be a lot of demand for your mobile ad inventory. And what are some of the concerns or reasons you don't want to sort of ramp that up very fast in the next couple of quarters?

Cheung Koo Wing

Well, I think what we are seeing is -- recall that we started monetizing our PC traffic in 2008. And what we're seeing also in 2013 that it does take time for clients to understand the mobile solutions, the cross-screens solutions to be comfortable with third party statistics and research. This is really a process of time. What I've indicated is we're seeing a lot of interest as well as positive demand. We really think it's just a process. As you mentioned, the value proposition is clear in terms of a wider reach, in terms of content being able to be matched with the demand, solutions that are matched with the demand, as well as much more proximity to purchase location. So the value proposition is clear and the clients do understand and appreciate that is really a process of getting them signed on and there are more case examples. I think versus last quarter where we couldn't really cite a lot of good examples, in Q2 we already have been able to produce solid examples on TVC [ph] solution, content marketing solution, as well as interactive marketing solution, which we have also well over the last couple of years on the PC side. And the leading clients on both FMCG and IC [ph] auto are signing up on the mobile as well as cross-screen side. So the initial examples of Q2 is an indication that we're on the right track.

Jiong Shao - Macquarie Research

Right. Sorry, just one quick follow-up on the mobile. Since the mobile traffic now is almost like half of your total traffic, is that -- longer term, is that reasonable to assume that revenues from mobile will be higher than from the -- from PC side, particularly CPC for mobile is higher -- sorry, CPM for mobile is higher in many cases than PC?

Cheung Koo Wing

Well, I think those trends will emerge over time. It's very hard to say when this is going to happen. But since from a device standpoint, there are many more mobile devices versus PC, the potential is clear.

Operator

Your next question comes from Chao Wang from Merrill Lynch.

Chao Wang - BofA Merrill Lynch, Research Division

Actually, could you share with us your thoughts on Internet TV or smart TV and its impact on the online video industry and also your strategy on it?

Cheung Koo Wing

From an overall strategy, we are a multi-screen video software services and content provider. And so we will provide these software services and content across all screens, including OTT and large screens. We already have a large screen app that we work with OTT partners on. And as this market grow, you will see more presence here. Very similar to when we work on the mobile side back in 2009, 2010, we didn't really talk too much about it because the market is still at the nascent phase. So I think the OTT side is still relatively early, I think, in China and will clearly be attuned to the market environment changes and make the appropriate investments as these opportunities surfaces.

Chao Wang - BofA Merrill Lynch, Research Division

I actually have a follow-up question on mobile. So wondering what's your expectation of mobile traffic and the monetization, let's say, in next year? And do you think mobile traffic will soon surpass PC traffic?

Cheung Koo Wing

What we've seen, actually, and that also ties onto your earlier question, is how our capabilities on the content software services can be leveraged across screen, and our rapid mobile growth and leadership over our peers give us very good confidence that we'd able to leverage our branding leadership on both Youku and Tudou, as well as our content leadership, having the deepest more comprehensive content library, original user-generated content. The other thing we've seen, very interestingly enough, that because the video is a long-form content that requires a fair amount of time, that is application where users want to use the same service across screens. We see users, for example, watching a TV show on the way to work for 20 minutes and then want to be able to keep watching it on a different screen. So the likelihood of jumping from service to service across the different screens for other services is actually relatively low. And video is actually going to be even lower. And we've also developed a lot of cross-screen product features that are cloud-based that will remember where users are and what they've watched, how far in the show that they've watched, that we can track them and provide recommendations to them based on our library content as well to feed in their user behavior. And that's why we think that our capability to leverage these core competence we have on Internet TV will continue to grow. We think that mobile traffic will certainly surpass PC in 2004 (sic) [2014] because just the user base will be much broader on the video views and probably also from the time spent basis as well. [indiscernible] for unique visitors.

Operator

Your next question comes from Piyush Mubayi from Goldman Sachs.

Piyush Mubayi - Goldman Sachs Group Inc., Research Division

Could you just split your traffic growth between mobiles and PC and tell us how PC trends have been in the last couple of months? That's my first question. And the second question is, if you -- could you tell us what your domestic revenue component is and how that has been trending?

Cheung Koo Wing

From the mobile and PC traffic growth, clearly, it's a very different situation, where the PC growth is growing at a very relatively slow pace, probably single digits, versus we've seen 100% growth on the mobile within 6 months. That's the combination of reasons based on adoption of smartphones, as well as different operating systems and services being more and more sophisticated. And we increasingly have more software and services tied towards the mobile phones.

Ge Xu

Okay, this is Michael. I'm going to take the second question. Your question is related to mix from domestic versus international. Is that right?

Piyush Mubayi - Goldman Sachs Group Inc., Research Division

Correct.

Ge Xu

So in terms of revenue contribution from domestic advertiser, the mix hasn't changed much compared to Q1 and -- 2013 and Q4 2012. We're working on to explore the underserved market in domestic FMCG. It's basically in the past quarter, where we have seen their revenue growth is very much in line with overall revenue growth. So there's still a lot of room for us to improve their -- to increase the contribution from this sector.

Operator

Your next question comes from Mark Marostica from Piper Jaffray.

Mark A. Marostica - Piper Jaffray Companies, Research Division

My first question relates to revenue concentration with respect to your foreign advertisers. I was hoping you could update us on anything we should be watchful of there?

Cheung Koo Wing

Compared with the past quarter, the revenue contribution is very much still the same. Basically, FMCG accounts for roughly 55%, 56% and finance and auto accounts for 13%. The one sector which really pop up in terms of revenue growth is e-commerce. So in Q2, e-commerce accounts for 6% of the total net -- total revenue compared with 3% to 4% in 2012 and first quarter of 2013. Telecom and consumer electronics accounts for 10% -- sorry, IT and consumer electronic accounts for 10%. Telecom accounts for 7%. Basically, that's the major verticals we have.

Mark A. Marostica - Piper Jaffray Companies, Research Division

Okay, great. And then on to mobile, is there any reason we should expect the sell-through rate on mobile, and I understand it's early days here, should be any different than the PC from a structural perspective?

Cheung Koo Wing

[indiscernible] to the clients is a cross-screen marketing solution. So as such, we would assume that the solution we're providing are quite similar across the board, so I will expect that those will be consistent over time.

Mark A. Marostica - Piper Jaffray Companies, Research Division

Fair enough. And then my last question relates to your content budget. I was just curious, as you look into fiscal '14, how should we think about your content budget that go to in-house production versus what we saw in fiscal '13? Just trying to get a sense of your direction there.

Dele Liu

Directionally, the percentage of budget allocated to in-house production will be certainly higher than 2013. But we haven't made up of our budget yet. We still don't have the concrete number yet. But the trend is pretty clear, and we're getting more and more tractions on in-house production and more and more expertise.

Operator

Your next question comes from Tian Hou from T.H. Capital.

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

I have 2 questions. The first question is related to your total unique visitors. So as you are pushing forward this cross-platform strategy, so I guess as some users are moving from PC to mobile, and I would also imagine some users may never actually use PC just newly adopted on mobile. So I wonder what's the total unique visitor looks like or what you experience? Is it increased than before or what's the situation there? That's number one question. The number two is related to the content cost allocation between license contents and in-house. I know you haven't really made up your budget for the next year yet, but all these allocation this year, how much you dedicate to in-house this year? That's 2 questions.

Cheung Koo Wing

Let me take the first part. In terms of our user base, what we're seeing is that from a PC and mobile standpoint, they are really used in different time of day and different user's location. So we've seen users basically that are traditional PC users to have more time spent across the 2 platforms. Especially with the growth of, I think, Android devices in the broader-based cities as we rightfully pointed out, that's going to increase our overall reach as there are many users with mobile screens that do not even have PCs. And that's an area where we think that the ability of Internet television, being more and more mainstream over time, will actually accelerate with the mobile screen. That [indiscernible] why we think that mobile is actually a game changer for our business.

Dele Liu

Yes. As for the composition of content cost allocation, in-house production accounts for about approximately 10% to 12% this year in terms of content budget allocation. And we expect it to grow next year. In addition to this, please bear in mind we also have a user-generated content parts, which contribute to, in the past, about 30% of traffic and actually growing. And we are also actively cultivating an ecosystem for them to contribute higher and higher engaging content to us, and we offer the revenue-sharing program with them so that this ecosystem can further finance our differentiated strategy. And this is going to be, as Victor said, totally across platform. And the leveraging effect is also more and more clear.

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

Okay, that's very helpful. And then the last question will be in terms of user-generated content, how much traffic are actually coming from user-generated traffic -- user-generated content?

Dele Liu

It used to be like 30% for a lengthy period of time. And now, since we are actively cultivating the sector, and we also offer the revenue-share program with the good-quality contributors, we expected that the percentage of traffic contribution as well as the revenue contribution will continue to increase.

Cheung Koo Wing

A quick addition to Dele's point...

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

So what is the revenue contribution now?

Cheung Koo Wing

Can I quickly add to Dele's point. I think, if you recall, for -- Tudou is the pioneer of [Chinese] the vloggers phenomenon in China, as well as Youku is the pioneer for Paike and Niuren phenomenon in China, and this is the basis of our leadership of user-generated content. So I think it's important to note that in China, the nature as well as the monetization of user-generated content is actually well established.

Operator

Your next question comes from Yu Heng Fan from China Renaissance.

Yu Heng Fan

I've a bigger question -- bigger-picture questions. From management point of view, is there any chance we can see a further industry consolidation going forward? And how will that affect the overall market landscape and Youku's positioning?

Cheung Koo Wing

I think from an overall standpoint, as we forecasted a few years ago, this industry is one with high entry barriers and will likely continue to consolidate whether through M&A or through attrition. What you're seeing is that now Youku Tudou has finalized its integration completion and we're certainly also looking at a couple of opportunities going forward.

Operator

Ladies and gentlemen, we have come to the end of our question-and-answer session. I will now turn the time back to our management for closing remarks.

Cheung Koo Wing

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

Operator

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

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