Jiayuan.com International's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jiayuan.com International Ltd (NASDAQ:DATE)

Q2 2013 Earnings Conference Call

August 21, 2013, 20:00 PM ET

Executives

Shirley Zhang - IR Manager

Linguang Wu - Chief Executive Officer

Shang-Hsiu Koo - Chief Financial Officer

Analysts

Andy Yeung - Oppenheimer

George Askew – Stifel Nicolaus

Gregory Chow – Citigroup

Operator

Hello and thank you for standing by for Jiayuan's Second 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 objections 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.

Shirley Zhang

Thank you. Welcome to Jiayuan's second 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 second quarter 2013 earnings conference call. I am pleased to report we achieved top line growth for the quarter, along with a strong year-on-year increase in number of average monthly paying user count and ARPU.

Our on-going success as China's leading online dating platform has always been based on our providing the best possible user experience. And in the past quarter we made a big step forward here with our advanced system for cracking down on unhealthy user behavior. While this [initiative will provide] short term growth in the number of average month active user count year-on-year, we expect this new system will encourage more effective and trusted inductions on to our platform.

Turning to mobile, a huge and a growing demand for mobile dating, especially among younger users continues to be very exciting and we are pleased that Jiayuan's existing mobile offerings has already proven popular, adding significantly to our overall traffic. At the end of the second quarter the number of active user instalments of our smartphone apps has reached 18.5 million, representing a strong growth of 176.1% year-over-year. But we are just getting started.

In the first quarter of 2013 we’re excited to realize our new model product design [inaudible] appeals to the young segment also as part of our segmentation strategy where we will be launching greater than [$100 as mobile optimized smartphone]. The new plan provided significant [inaudible] mobile strategic business model including online payment method which we will try reduce the relatively higher fees presently paid to the carriers.

While these are still in the early stage testing we are confident that we have the right [inaudible] and the broad roll-out of mobile transition. Looking towards first of all on our match-making business. The investments we have made here really began to pay off this quarter as average monthly customers are up 50% year-on-year. Traditional match making remains an area of strong potential growth for us. The traditional match making market is expected to reach RMB4.22 billion by 2013 and RMB 5.1 billion by 2015 according to our research.

And with our [inaudible] our online platform including China’s largest database of marriage minded singles and our in-house developed CRM system, we have exciting and a sellable business that has well positioned us to disrupt, consolidate and lead this market.

This quarter we’re expanding our personalized match making business in both Beijing and Guangzhou and have two new [inaudible] cities. For the full year 2013 we expect to add a total of 15 new locations to our personalized match making network and we are excited to [inaudible] our expansion in 2014.

In closing we had a great number of Chinese singles from different age groups, income level and regions look for love online we are confident that focusing on user experience while developing new product that give value with the latest in technology and innovative business models Jiayuan will continue to grow our user base while improving monetization over time.

Now I’ll turn to our CFO, Shang Koo who will take you through our financials.

Shang-Hsiu Koo

Thank you, Linguang. Hello everyone. I am pleased to report that net revenue in the second quarter was up 20% year-over-year to RMB119.3 million. This performance was driven by an 8.5% increase in average monthly paying user accounts and a 13.7% increase in our books. Cost of revenues in the second quarter rose 27.8% year-over-year to RMB44.1 million.

As Linguang mentioned this is partially due to the cost associated with processing mobile payments as mobile usage continued to rise. Gross margin was down slightly to 63%. We expect more efficient mobile payment methods to help improve those margins over the medium to long-term. The on-going investment in our personalized match making business will likely lead to gross margin expansion in the short-term.

While we continue to optimize our marketing on higher ROI channels we did experience across the board increases in advertising rates this year. This along with the brand advertising campaign contributed to higher sales and marketing cost for the quarter. We expect sales and marketing costs to be slightly lower for the third quarter. We’re [sharpening] our focus on developing new mobile offerings. R&D costs were up 31.2% year-on-year. As mentioned we currently expect to launch several new products in the fourth quarter and look forward to sharing more details with you on this next quarter.

Looking to our G&A expenses we saw about 1.4 year-on-year, a 1.4% year-on-year increase in the quarter to RMB12.4 million as we recorded expenses for both the old and new offices during April and May, the period covering our office relocation. However G&A expenses were down by 15.8% quarter-on-quarter due to better cost controls.

Also in the second quarter of 2013 Jiayuan paid a special cash dividend in amount of 0.6 cents per ADS. The aggregate amount of this special dividend is US$7.8 million which is 46.5% of Jiayuan’s non-GAAP net income generated in the third and fourth quarter of 2011 and full year 2012.

With that let me give you our outlook for the quarter ahead. In the third quarter of 2013 Jiayuan currently expect to generated net revenues in a range of RMB125 million to RMB127 million. This forecast reflects Jiayuan’s 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

(Operator Instructions). Please ask the question. The first question comes from Andy Yeung from Oppenheimer. Please ask your question. The line of Andy Yeung is now open, please ask your question.

Andy Yeung - Oppenheimer

Hi, good morning. Thank you for taking my questions. My first question is actually about your mobile effort. Can you actually give us a little bit more color in terms of total user metrics for your mobile right now, such as active user traffic, daily, monthly and also the ARPU for that?

Linguang Wu

Our current mobile usage is about 10 million active users per month. And of-course there is some overlap in this number, the 10 million number with our online users. So you need -- it’s not exact sure mobile user numbers. And about 20% of our revenue, of our online revenue are from mobile visits, which is about the same as the quarter before. This quarter is about 23% our online revenues.

ARPU is, our ARPU continue to grow for our mobile users. But it’s right now it’s still lower than online ARPU. So we still believe that ARPU for mobile users has a long way to go.

Andy Yeung - Oppenheimer

Okay great. The second question is about the marketing expenditure. Besides of the [ad rate] increase and also some of your existing advertising campaigns, in terms of your mobile applications and mobile marketing what do you see the trend there and then how do you actually distribute your mobile app. Do you do it through the app store or on other channel?

Linguang Wu

And so for actually last couple of quarters, our mobile, the cost of mobile apps I think per unit of advertising has not increased for us. It’s been really flat. And part of the reason is that the mobile advertising market is actually very fragmented. So we actually have a lot of purchase power with advertisers.

We advertise mainly on the good app stores and there are hundreds of app stores in China, especially as the Android app store is extremely [inaudible]. And in addition to that we also advertise our a little bit on the web portal as well.

Andy Yeung - Oppenheimer

Great, thank you so much.

Operator

(Operator Instructions). Your next question comes from Jin Yin from Stifel. Please ask the question.

Undefined Analyst

Hey good morning Linguang, Shang and Shirley. [Foreign Language] Could you give us an update on the matches of your newly launched app through [inaudible] like for some users, monetization session, et cetera?

Linguang Wu

Currently we are still in second round of internal testing. So we haven’t opened it for open public testing yet. So the numbers are very limited.

Undefined Analyst

Got it, thanks. Another question is could you provide some color on your also newly launched voice search app, called Jaiyuan voice search. Just talk about the new app and what’s your expectation and who provides the technologies, or techniques behind it? Thanks.

Linguang Wu

So we work with -- the technology for the voice search is provided by [inaudible]. So when the user uses the voice search, their voice gets translated into text through that technology. And that those text keywords are used in our own internal self-developed voice recognition technology which is then used to filter and then find the best matches for candidates.

Undefined Analyst

Thank you. So a final question, when is the iOS app available for the voice search?

Linguang Wu

Yeah we are currently waiting for approval problem from Apple, the iPhone app store. So that could -- how long that takes is unknown.

Undefined Analyst

Thank you so much. I will go back to the queue.

Operator

Thank you. Your next from the line comes from George Askew from Stifel.

George Askew – Stifel Nicolaus

Thank you, George Askew in for Zim Yun. Just a couple of questions. I could not hear well the commentary regarding the personalized match making service. And clearly that’s an area of optimism right now. It sounds like there is new activity down in Guangzhou, I heard the term on Guangzhou and similar stuff. So can you just repeat a bit what the metrics are there and how quickly that materializes, it sounds like it’s the third-fourth quarter event here.

Shang-Hsiu Koo

I will let Linguang explain a little bit and I will add as well. But the VIP visits actually have been growing very fast in second quarter. However because VIP revenue is recognized over about eight months, so even though the sales, the cash sales for us ramps up very quickly in the second quarter in Guangzhou and Beijing we are unable to recognize revenue for that until third quarter and fourth quarter. And I will let Linguang explain a little bit about the VIP business in detail as well.

Linguang Wu

So the VIP business is actually more of the traditional match making business than [ADT]. Right now it’s one on one. So we have match makers to provide one-on-one service for our users. Our match makers actually interview in person every candidate that our paying users meet through our traditional match making business. What we’ve done and touched in Guangzhou and Beijing is that we expanded the products that are traditional one-on-one match making service offers. So we started lowering the minimum price that we charge for the service.

So opening that up or opening that up to a larger number of potential customers. And we also standardized more of our service offerings for the lower priced services so that we can deliver a better service. The reason we haven’t open up our traditional match making business before was that we were waiting on our CRM system to be more mature. So we’ve been spending the last year developing our CRM system so that we can better manage our match making sales team as well as our match makers.

And in addition to that to better manage the available candidates that our match making users can view and can meet up, meet with. So now that this CRM system is mature and we’ve been able to test in Guangzhou and Beijing we'll try to open that up to more regions. And we believe with this CRM system we can quickly ramp up businesses and new locations as well. So we definitely see our VIP business as a major growth area in the future.

George Askew – Stifel Nicolaus

Got it, great. Thank you for that. Did you provide in the script a metric of how many VIP customers you have or growth there, there were something and again I apologize I just missed, couldn’t understand that?

Shang-Hsiu Koo

The number of average monthly customers for our VIP personalized match making service increased 50% year-over-year.

George Askew – Stifel Nicolaus

Okay, perfect. And then a quick question on the brand advertising, higher brand advertising, how much of that was related to the new logo design?

Shang-Hsiu Koo

It's at the store now. The new local design, the cost for that is low. But we designed our brand advertising campaign around our 10th anniversary as well as the logo design, the new logo design but I wouldn’t say that it's specifically for the new logo or for the 10th anniversary it’s just brand advertising campaign that took advantage of the new initiatives that we had.

George Askew – Stifel Nicolaus

Okay, thank you.

Operator

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

Gregory Chow – Citigroup

Thanks for taking my question. My first question about the Q3 guidance I think the guidance indicates about 11 to 12 year-on-year growth. Compared to the last two quarters I think there is a slowdown. So was management [aside from this year], were they due to the slowdown of online service revenue or the VIP services? Thank you.

Shang-Hsiu Koo

Yeah, sure. A big part of the reason for the VIP slowdown, for the guidance in the third quarter slowdown is that we shifted some of our online resources to the products that we plan to launch in fourth quarter to accelerate the launch. And as a result we couldn’t -- we concentrated less on new monetization and new kind of features, adding new features to our online service. So that helped -- that contributed a little bit to the lower revenue growth in the third quarter.

At the same time we’ve been focusing more on user strength and are cracking down on unhealthy user behavior. So that limited our user growth in the third quarter and that limited monetization third quarter as well. VIP, we still believe that to be a major growth area in the third quarter. However as I mentioned before revenue is recognized on accrual basis. So we won’t be even though the business is growing very fast in terms of cash yield we won’t be able to recognize the revenue as quickly.

Gregory Chow – Citigroup

Thank you and my second question is about our security fees. And I think recently Jiayuan applied more strictly the security session for the ID and [streamlined] online dating security. So your short-term utilization really is the cost that has actually put pressure on our margins. And in longer term so what impact for our user growth, thanks.

Shang-Hsiu Koo

The security measures really don’t put much pressure on our margins. There is a minimal cost on an incremental basis to verify user ID. But and I think that cost is more than justified given the additional benefits that it provides to our users end in fact it provides for having a verified user on our platform. So we are more than happy to help verify the users.

In terms of other security measures that we're enacting a lot of that is just through our R&D efforts. We’ve been improving our filtering methodology we’ve been increasing and enhancing our online monitoring systems and other security measures. So most of that is through technology means which is part of our normal R&D cost.

Gregory Chow – Citigroup

Thank you, very helpful.

Operator

(Operator Instructions). There are no further questions at this time. We are now approaching the end of the conference call. I will 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 to you in coming months, operator?

Operator

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

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