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SouFun Holdings (NYSE:SFUN)

Q3 2013 Earnings Conference Call

November 7, 2013 08:00 ET

Executives

Hong Zhao - VP, Finance

Vincent Mo - Executive Chairman

Analysts

Alex Yao - JPMorgan

Eddie Leung - Bank of America Merrill Lynch

Ravi Sarathy - Citigroup

Vivian Hao - Deutsche Bank

Anthony Thong - 86 Research

Lil Fang - Goldman Sachs

Wendy Huang - Standard Chartered

Alicia Yap - Barclays

Gregory Zhao - Citigroup

Lei Huang - Goldman Sachs

Tian Hou - TH Capital

Alexander Vitkalov - HNC Capital

Operator

Welcome to the Q3 2013 SouFun Earnings Conference Call. (Operator Instructions). I must advise you that this conference is being recorded today, 7th of November, 2013. I would now like to hand the conference over to your first speaker today, Mr. Hong Zhao. Thank you. Please go ahead, sir. Hong Zhao.

Hong Zhao

Thank you Grace and good morning everybody and welcome to SouFun’s third quarter 2013 earnings conference call. I’m Hong Zhao I’m the Vice President of Finance of the Company. Joining me today are SouFun’s Executive Chairman Mr. Vincent Mo and our CFO, Ms. Guan Lanying. This conference is being broadcasted on the web and it's also available through our IR website at ir.soufun.com together with our earnings release. Before we carry on we will like to remind you that during the course of this conference call we may make forward-looking statements, 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 actual results to differ materially from those contained in any forward-looking statements. SouFun assumes no obligation to update the forward-looking statements in this conference call and elsewhere.

Potential risks and uncertainties include but are 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 be unaudited most directly comparable to GAAP measures and is also available on our IR website.

We will have a brief Q&A session after the following remarks. So that was the couple of house-keeping items now is the actual remarks. We’re very excited to report another strong quarter. These marks the 13th consecutive quarter since our IPO in which we deliver results that are above the guidance and street estimates. We continue to strengthen our market leadership position in advertising services, e-commerce membership services and listing services drawing growth in every front. Despite impressive growth in the first half our e-commerce membership services and listing services continue the momentum and prove 94.2% and 128% respectively during the quarter. Our investments in technology and product innovation is also paying off, our mobile platform including WAP and APP experienced strong year-on-year traffic growth and are now bringing in additional revenue for mobile based services and products. Going forward we will continue to explore new lines of business and work with strategic partners to support SouFun long term growth and create value for our shareholders. Now let round out some numbers, revenue totaled a 185 million in the third quarter of 2013, an increase of 45.4% 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 8.5% to 86.5 million in the third quarter of 2013. We are encouraged by the improvement in growth rate and expect further improvements as we’re strengthening our dominance in the home-related advertising market with mobile-based marketing products. As mentioned earlier revenue from our membership services grew 94.2% to 49.7 million in the third quarter further enhances our leadership in the e-commerce market. We also wrote out an enhanced version of our e-commerce platform that encompasses developers, members as well as secondary real estate agents to further improve effectiveness of our platform in facilitating properly transactions. Grouping marketing services and e-commerce revenues together we will see that in aggregate our revenue from new homes market grew about 30.5% to a 136.2 million as compared to 105.3 million a year ago.

Revenue from listing services in the quarter grew a 128% to 46.3 million primarily driven by the increase in number of paying agent subscribers. In this quarter subscriber count reached 215,000 as compared to approximately 115,000 a year ago. The increase in number of posting per subscriber also contributed to the growth in our listing revenue. Cost of revenue increased by 37% to 28.5 million. The increase in cost was primarily due to increased staff cost and taxes. Growth margin improved by 1% to a point from a year ago to 84.6%. Operating expenses within the operating expenses our selling expenses in the third quarter were 25.4 million an increase of 23.1% from a year ago. G&A expenses were 20.7 million an increase of nearly 9.5% demonstrating our ability to effectively control costs while maintaining a high rate of growth. The increases in operating expenses primarily due to increased staff cost, total head count as of September 30, 2013 was about 9083 as compared to about 7650 in the same period last year.

Operating income grew 65.5% to a 110.6 million in the third quarter strong top line growth plus effective cost control resulted in a 7.3% point improvement in operating margin from the same period last year. Income tax expense was 14.2 million in the third quarter a 29.2% decrease compared to a year ago. The decrease was primarily due to a 15.1 million reversible of divined related withholding tax accrual in the current quarter resulting from certain subsidiary of SouFun being approved to be subject to a 5% dividend related withholding tax rate instead of a 10% rate that was used for calculating the original accrual. Net income increased by 109% to 102.7 million from a year ago. Fully diluted EPS were a $1.22 doubling from the prior year’s $0.61 a share.

But adjusted EBITDA increased by 67.4% to a 117.6 million in the quarter as compared to 70.2 million last year. We continue to enjoy very strong cash generation capability of our business. Operating cash flow was a 126.3 million in the current quarter, a 123.7% increase from last year. As of September 2013 our cash, cash equivalents and short term investments totaled 320.7 million up more than a 120% compared to the beginning of the year. Looking into the future for the full year 2013 SouFun expected annual total revenue to reach between 605 million to 615 million representing a 40.6% to 42.9% annual growth. The forecast reflects our current preliminary review and maybe subject to change. Thank you for taking the time to join us for this call today and I will now open the call for your questions. Operator please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Alex Yao of JPMorgan. Please ask your question.

Alex Yao - JPMorgan

I have a few questions. First off, for the revenue growth, obviously e-commerce is a very strong growth engine this year. From a high level, how do you guys think about next year's overall growth outlook across these three business segments, how do you think about the growth momentum next year? And I'm also wondering if you guys are working on the new project that could potentially become meaningful revenue driver next year. Secondly, I noticed you guys have a tax reversal in this quarter. What will be the tax rates in the next few quarters? And lastly, can you update us on your headcount in this quarter? Kind of what's your headcount expansion plan for next year? Thank you very much.

Vincent Mo

About the e-commerce business yes we have had a strong quarter in just a part, we started in the business about two years ago and since then e-commerce business has been growing accordingly at a comparatively high growth rate. I think we’re still in the middle or in the early stage of the e-commerce business of SouFun. And it's also in the early stage of China’s property market as well. So in our operations and based on the marketing responses and we’re confident that going forward you’re going to be either substantial contributor to our revenue. Going into the next year I think it will be beyond next year. But in the process the product itself or the services itself where you were also in the early stages of purely you know derivative of the advertising services and products and going forward more and more value added services will be added to the e-commerce business. So I’m confident that the e-commerce business will remain strong and into the next year and beyond next year and I think Hong is going to answer your second and third questions.

Hong Zhao

So Vincent also covered about next year’s revenue driver, I think the e-commerce will continue to be one of the things that will drive the business as well as our listing services. Now to next question about tax reversal, yes we had a tax reversal this year you know we treat that as a onetime benefit. Going forward I think our effective tax rate would be between 20% and 25% as we normally experience on the non-GAAP basis it will probably be about 20 because we were excluding the dividend withholding taxes accrual at part of the non-GAAP tax rate calculation. In terms of head count I mean we’re absolutely looking at about reaching 10,000 employees by the end of the year. So next year given the revenue growth I mean we’re looking at another probably 10% or 15% increase in our head count. So SouFun will be growing very rapidly next year as well.

Operator

Your next question comes from the line of Eddie Leung of Bank of America Merrill Lynch. Please ask your question.

Eddie Leung - Bank of America Merrill Lynch

Just I have one major question. Could you update us on competitive landscape, both on e-commerce business? It seems like some of your familiar competitors are also focusing on this business. And if you could also comment on the competitive landscape on your secondary listing business, with, again, some of the local directories. Thanks.

Vincent Mo

Your questions about the listing service only or?

Eddie Leung - Bank of America Merrill Lynch

Both on e-commerce and listing. E-commerce, I think some of your old competitors are also trying to push into this market. And then, on the listing services, could you comment on the competitive landscape with some of the local directories?

Vincent Mo

Eddie as you know we’re being competing with our competitors and many competitors for the past 10 years but the good thing is that we have always been winning the game up to today. So across the product and services we offer including you know the home sector and resale and rental sector and home furnishing sectors as well. You know we have competitions, that said you know whether it's in the new home sector or in the retail sector and we have been dominating in the market so I assume the new home sector mainly we offer two sets of products and services you know marketing services and e-commerce business or services. Our competitors you know including old and new they are also you know mimicking whatever we do in the market including our new home new driver products that e-commerce. Frankly there is no I mean the barrier of entry is low and anybody can do it but to make it successful and to make it into a big scale you need to have fundamentals. For us for the fundamental is the platform and our registered users, our members and of course our long term relationship with our developer clients. So we believe in those three lines, fundamentals we’re quite strong there and we’re going to remain strong in those really three lines. With those three fundamentals in hand and we’re sure we’re going to be continue to need our market behavior or marketing product and services into the next stage. For the resale market we had a very rapid growth this year, while at least in services, our growth is over 100% since Q1, Q2 and to Q3. I think we’re gaining market this year in the resale market and rental market but we do see competitions from lower and rental business. Frankly we ignored in some way the lower and rental market for because the lower end rental market it's really it's very diversified and you know it's mainly for the young people, I mean in their 20s around 20s and you’re not going to make a lot of money out of the rental market but we also recognize that is although it's not making money, we’re not going to make big money out of that, I think it's still important for future visitors for future you know members because those young people they are going to grow up, they are going to become more mature. So we are also paying special pension to you know the low end rental market, that said we’re quite good in the middle to high end rental market so that’s what the listing part or the resale market Eddie.

Operator

Your next question comes from the line of Ravi Sarathy of Citigroup. Please ask your question.

Ravi Sarathy - Citigroup

I have two questions, if I may. The first one I'd like to ask is a very direct question, which I know a lot of people have asked me, but have maybe been reluctant to ask yourselves directly. Understanding that, my first question is I was wondering if you could give us a little bit of color on the Company's plans to potentially invest, particularly in real estate assets that may be considered outside of the core (indiscernible) of the SouFun business. And I have a follow-up question, if I may.

Vincent Mo

Yes we do have enquiries sometimes from the investors asking our property strategy or whatever because we did you know have a property in Shanghai for our Shanghai headquarter and we did have one in in Wall Street (indiscernible). But the company is very clear to the company; this company is an internet company. It's not an investment in a company or not a property company at all. So you know whatever we do it's really for the properties it's really trying to support our operations and for human resource training in properties so that’s really the purpose. We don’t care whether our property is going to be appreciate or make money or not, of course we don’t want to overpay, when we acquire you know when we acquire their properties. So going forward we’re going to be now with this strategy and because in Beijing, in China we’re closed to 10,000 people and Beijing alone we have round 2000 people, in Shanghai we have around you know 1000 people. So they do need office space to support their you know operations. It is really a big hassle to move every other three to five years with 1000 people.

But that said you know we’re not going to invest in properties or asset properties but if we are going to acquire whatever you know office asset it's really trying to support the core business of this company. So Ravi is that clear?

Ravi Sarathy - Citigroup

Thank you. Thank you very much. That's very clear and very helpful, indeed. Thank you. Thank you. Thank you, Vincent. A follow-up question. You mentioned a couple of fascinating things about mobile, which have really which, I think the street's appetite, which is very focused on mobile right now. You mentioned that mobile continues to inflect that a lot of the R&D you've been doing over the last couple of years is starting to pay off. Would love to get any color that you might have around, number one, share of traffic on mobile, if it's not too early to talk about that, and some of the early-stage plans that you have potentially to monetize. You also talked about mobile possibly being of use in other areas of e-comm and advertising. You mentioned home mobile. I would love to have any color you might have around your mobile strategy and traction.

Vincent Mo

Yes we believe in mobile and you know we deeply believe and mobile is going to play a major role in the near future and of course longer future. At some time I also believe the web is still not mature yet, it still has the potential to grow into the next three to five years. So mobile wise internally we made our last year (indiscernible) for SouFun and this mobile year continued into this year. Since quarter-to-quarter last year our mobile part including our WAP, including our APPs and has been growing very rapidly in traffic. This year alone the traffic has been up 10 times and last month we passed over unique daily visitors over 1 million so that’s a milestone for SouFun. It's still growing and we do have an internal target and trying to reach the higher traffic number and throughout across the different mobile devices. Based on the rapid growth of the traffic and our visitors we’re also thinking about how to monetize you know mobile side, frankly the mobile, the effect to our clients is very good, very efficiency and you know it's very targeted to our consumers. Since last quarter we have been starting monetizing from both our new home sector and our resale sector. So new home sector it's mainly for two things, supporting two things and the one is really our marketing, our display advertising on to our mobile and so we’ve been you know collecting money from that although the total amount is still low but the growth in a month by month growth is very significant. So that’s one thing and for the resale market we thought you know signing-up paid clients or members since last quarter and after today we have over 6000 users who have 6000 paid users from our listing clients. I think that number is probably higher.

And unpaid together users of our listing services mobile I think, okay, so actually our subscribers to our mobile listing over 100,000 only about 10% of them has been paying although at a very low testing rate but we see the potential mobile and the monetization of mobile in operations is going to come next year. I would not expect it is going to contribute substantially in Q4, but I think it will be substantially in the coming year and going on.

Ravi Sarathy - Citigroup

And a very quick, final question, that was great color there. A very quick, final question, your marketing services has gained momentum for the last three quarters, and I was wondering if you could give us a little bit of color on the key driver of that, probably what you're seeing within the underlying property market and also your relationship with the key advertisers there.

Vincent Mo

You’re right Ravi and you know you probably remember it's always by belief the traditional internet advertising business is not mature yet; the therapy is I think it's still in early stage in China’s property market. You know we’re seeing more and more advertising fees, expenses is transferring from traditional media like newspaper, billboards and event all of those spending to online including web based advertising spending. So the penetration rate of the internet into China’s traditional real estate market is still you know I think around 15 or not more than 20% yet that penetration rate is going to go up. So based on that you know we’re confident that SouFun’s marketing traditional internet and marketing business is still going to grow. Although because of the rapid growth of the e-commerce business there will be some compensation you know or compromise to the marketing but we believe that our marketing services is going to grow at around low double digit rate I’m confident seeing that going forward.

Operator

Your next question comes from the line of Vivian Hao of Deutsche Bank. Please ask your question.

Vivian Hao - Deutsche Bank

I think most of my questions have been covered, but just one more on the competitive landscape side. Based on the data point that we have, based on Analysis International, it seems like our market share in the past eight quarters has been improving, except, however, SINA Real Estate seems to be another very strong marketing platform online for realtors, and especially, I think, right now, SINA they have this (indiscernible) platform becoming more and more mature in terms of monetization, how do you consider the competition coming from SINA in general?

Vincent Mo

What is the platform?

Vivian Hao - Deutsche Bank

The current second quarter market share of SINA Real Estate is posted as 37%, versus ours at 36%. I believe this is just for listing segments.

Vincent Mo

So where did you get the data?

Vivian Hao - Deutsche Bank

It's from Analysis International.

Vincent Mo

Yeah well Vivian it's very easy to answer this question, actually since we had a IPO three years ago and Analysis international has been saying with their analysis reports that SINA is the biggest real estate portal in China and the SINA is the biggest marketer in China, they are the number one you know real estate internet player in China. So there is no doubt that turned out now is closer right? So frankly I have no confidence with the number from Analysis International. So if you’re we have other number of peer from DCCI for Q3, 2013 and SouFun marketer in moneywise, moneywise marketer is 72% and all others adding together whether it's SINA’s real estate channel or its sole focused and other advantage it's about 13%. So you know back to you Vivian if you look at the numbers I think our financial numbers are open public numbers from all the companies. So you’re now who is the leader and who is number one or number two whatever. So I think the number you’re using is something I believe not correct.

Vivian Hao - Deutsche Bank

Okay. I just have one follow-up question on sales and marketing costs. So, can we have a breakdown of our current marketing spending for online versus offline? And how much goes to the online directory [ph] website, including Baidu and other third parties?

Vincent Mo

Our marketing and promotion expenses is comparatively very low frankly and we spend about $5 million to work with our internet partners including Baidu and Tencent and more than 100 other local international internet assets as well to get them. We’re spending too much money on that because soufun.com the dominant real estate website and portal in China has it's organic traffic at a high rate. So we don’t rely on other parties to drive up our traffic but that said we’re increasing our spending on traffic through multiple channels including internet and including you know other promotions as well but altogether our marketing promotion spending you know is not high. It's I wouldn’t say it's going to be more than $10 million this year. So comparing to our revenue and to our profit it is still a very low rate.

Vivian Hao - Deutsche Bank

So, we probably can assume there will be more operating leverage on the sales and marketing side? As a percentage of revenue, that's probably going to be lower in the future?

Vincent Mo

I wouldn’t say that. I think I want to spend more because you know SouFun’s margin we have a very tight control of our expenses and which has been very effective, we have been maintaining our profit net profit and margin over 75% of which I had been promised in the past two years and after that profit margin, net profit margin is around 40%. So we have a big room to frankly to spend on marketing and promotion of SouFun’s brand and SouFun’s and to bring out SouFun’s traffic as well. So I would like to spend more rather than spend less into the future to make sure you know SouFun dominant market and leadership remain there now and into the next three to five years.

Operator

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

Anthony Thong - 86 Research

I have a question about the government policies. We've learned that the certain local governments, like Beijing government, has rolled out some new regulatory policies points of (indiscernible) to start supplying so-called self-use homes, which are meant to sort of for owners to live in rather than as an investment and I've learned that it will account for 50% of total market supply next year. Just wondering whether those policies will impact your new home business in any way? Thank you.

Vincent Mo

I think there were two signals from the government recently, one signal is from the central government you know President, including President Xi and the (indiscernible) and central government is that the government is going to take care of the welfare and the housing policies so housing demand and let the market handle the market we entered you know probably market I think that is very clear and I think it's very clear and also good signal for the next stage of China’s property market. As you know China’s real estate industry and property market has been playing a very important role in pushing or in supporting China’s overall GDP growth. China’s real estate industry is related to over a dozen important in other industries. So I believe the government including the central government they are still going to pay special attention to this industry and the market and recent signal from the central government I think they will be smarter to handle the property market rather than you know just applying from a short term you know regulatory or administer to regulatory policies to try to manage the industry. So that’s one thing the other signal is something as you mentioned from Beijing municipal government and other local government as we are, as we noticed you know recently. This is because frankly I personally don’t think that the policy is right to work the market out, the reason for that is really two, there are two reasons, one is that this year the big city, Beijing, Shanghai, Shenzhen, Guangzhou all of the big cities and most of the provincial capitals have seen a very rocketed you know increase of the price you know Beijing, Shanghai, Shenzhen, Guangzhou last quarter last month you know all of them had price comparing it to the same months last year, jumped to more than 20%. So that is the very, very strong signal in obviously a hot property market and so that must be put under control. If it's not they would probably the market is going to do you know probably going nowhere so that’s one reason.

Another reason to really at the beginning of the year, the quarter on this year the government especially those big cities they promised a price you know range, they promised they are going to do control the price of the market, the target price in the cities. So now it's very clear, it's very close to the end of the year, they are trying to keep the profits or trying to make sure and show the public they are doing that at least they are putting efforts, it's trying to do that. So I think the most of the recent signal from local government including Beijing is because of this I personally I don’t think that’s going to last a long, it's a short period in a regulation from the local government. So those are direct answers to your question. Going forward about China’s property market I still believe you know I saw China’s economy is going to go on and as long as China’s organization is going to continue and China’s property market industry is going to be a bright industry for the developers and for the property buyers as we’re, as long as the price of property it's not going very high, as long as I think we would see you know around 5% nationally and you know not more than 10% nationally I think that’s your work, it should be healthy for China's property market. So, that said, I mentioned it mostly in the major cities but if we look at China’s properties overall we should divide the China’s property market into at least the two market, you know the market for the major cities and another marketer for the third and the fourth tier smaller cities, for the third and the fourth tier smaller cities I think the property market is under pressure. There are relatively you know a little bit oversupplied for the third and fourth tier they are under pressure going forward and for the Tier 1 cities and the Tier 2 big cities I think the supply is not enough. We need to have more supplies going forward, so that’s my understanding of China’s property market and real estate industry.

Anthony Thong - 86 Research

How about a follow-up, sort of housekeeping question, if I may? Could you update the revenue breakdown for different tier cities and for both e-commerce and listing service? Thank you.

Vincent Mo

We have a rough breakdown of the revenues, total revenue we don’t have exact number for the public for the breakdown of the listing or e-commerce for separate cities. Overall, the total revenue for quarter three in Beijing and Shanghai contributed 38% which is below 40%, we had before Beijing and Shanghai contributed over 40% and now it's 38%, I think it's healthy it's the trend of our operations. We’ve been going forward, I think Beijing and Shanghai we contribute less and less but at a slower pace into the future. So for Q3, Beijing and Shanghai contribute 38% revenues to the company. Tier 2 cities we have nine cities, nine major provincial capitals we categorized into our Tier 2 phase. They contributed 32% to the total revenue and other cities which means 80 plus cities contributed about 30% to our total revenue. So that’s the categorization our contributors to our revenue. Growth wise we’re seeing we still have good growth for the major cities, for Q3 we have about for the Beijing and Shanghai we still have a 47% growth for those two major cities alone their growth rate. For the nine cities we have 48% and for other cities looks like Q3 is not that good for other cities they are only 41% so but the trend in my prediction and in operations of the company I think it's a trend where in Beijing and the big cities their growth rate is going to continue but it's going down process for those middle and the smaller cities. I think they are going to go up. So that’s my prediction among our different cities.

Operator

Your next question comes from the line of Fei Fang of Goldman Sachs. Please ask a question

Lil Fang - Goldman Sachs

Hi, Vincent and Hong. This is Lil Fang calling on behalf of Fei. Thanks for taking my question and congratulations on the great result. I have two questions. The first question is could the management guide how will margins are 4Q and confirming to a whole year look like given such a strong 3Q result? And then second question is regarding to the mobile. SouFun demonstrated core tier progress in mobile year-to-date. Could the management share with us some update on it, operating metrics, like MUV et cetera and then financial metrics, like mobile as a percentage of total revenues? And which business line, meaning marketing, listing or e-commerce, has benefitted from mobile most so far? Thank you.

Vincent Mo

Yeah about the margin first we have seen a growth of our margins in the past four quarters, the most the one margin I pay a special attention to is our net profit margin, everything has gone net profit margin so that’s a non-GAAP of course. So that’s my special margin. So I’ve a, the company has a target which is 35% net profit of margin non-GAAP so it's our you know short and mid-term target. In the past looks like two years or so we have achieved that target. Going forward I think still is 35% net profit margin non-GAAP that still is going to be a guide for our net profit margin and good thing that we have a country, we have around 40% net profit margin. So going forward I’m pleased and you know three to five years we would like to keep the 75% net profit margin non-GAAP so internal target so that’s where your question one. The mobile yeah, the mobile is hot and it's also important than the crucial for SouFun internally. As I mentioned before we passed our 1 million daily unique visitors last month and monthly unique visitors to our mobile devices is almost 20 million so that becomes a substantial number and it's almost 10 times the growth since January of this year to the end of the third quarter. So I’m sure the mobile is going to play a more and more important rule in our future growth. At this stage monetize is something we started last since last quarter we are still in the process of developing more products which we can apply them to our mobile devices currently where two sets of products purely for our mobile devices, one is for the new home which is display ads and it's highly recognized by our clients because it's very cost effective to do mobile display ads.

Quantitatively it's contributing, we collected about RMB 40 million already in the past one quarter plus. So I believe although the overall quantity is not, it's not more than 5% to our traditional marketing service revenues but we believe that number is going to be something over 10% in the coming 2014. So that’s one thing we tested and which is effective and that we believe is going to be say something good into 2014. Another effective product we are testing is really for our listing services, for our broker and agent. As I mentioned earlier we have signed up more than 100,000 users for our mobile listing services and we have about 10% of that are paying us to be listed through our, across our mobile devices. Although the rate is still low and it's still in the testing rate. So those are the things we have been clear picture for the coming year. At the same time we’re also developing more products which is suitable for our mobile devices going forward.

Operator

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

Wendy Huang - Standard Chartered

I have some housekeeping questions on the answers you gave earlier. So, you mentioned that for the traditional internet marketing services the growth rate will be low double-digit going forward. But in Q3, your growth was only 8.5%. So, are you expecting this part of the net growth rate to actually accelerate in the coming quarters?

Vincent Mo

Wendy yes and we believe you know the growth rate from our traditional internet marketing services will continue to grow. It's my expectation and it's going to be in the lower double digit growth rate. We had some transition period in the past several quarters, it's because you know our e-commerce business. Frankly, e-commerce business is a kind of our derivative from our traditional marketing services. So there is compromise or compensation among those two categories of production. With our e-commerce become, it becomes more mature I think our traditional internet marketing services we are also back to you know the so called lower double digit growth rate. So we have confidence in believing that and going forward.

Wendy Huang - Standard Chartered

Okay. My second question is regarding your operating expenses. So, you guided non-GAAP net margin to be 35%, although in Q3, even if we adjusted for the tax reversal, actually non-GAAP net margin were still actually as high as 44%. And in my previous discussion with Hong, I remember you actually mentioned that you will step up to retain your employees and also you just mentioned you were increasing headcount by 10% to 15% in the coming year. So, should we expect that G&A costs actually to be the major part for the potential actually margin decline in the coming quarters?

Vincent Mo

Well Wendy although we do have the target at 35% in the next property margin in mind but in the process in operating was still watching out carefully for our expenses and our cost. SouFun has a tradition and we’re going to continue our tradition you know to watch out for our expenses. So I wouldn’t say that the margin is going to decrease a lot going forward especially for Q4 but if we did it like if we need to promote the company aggressively whether it's product or brands. If we need to invest aggressively in technology including mobile development so we will not hesitate to do that. So to be conservative so we put a 35% in net profit margin there but as you have seen our past quarters numbers the margin has run 40%, so 35% is something we’re very sure we’re going to achieve and beyond that and we will try whatever we could to make our profit margins still very good, very attractive. Because in my mind I know there is you know two other companies with our counterpart globally. One is Rightmove in the UK. Their net profit margin is around 60% or something and also there is similar company in Australia, Sensis, which was related to SouFun before, and their profit was also 60% or something.

So I’ve always been keeping in mind that to see whether we can have a better profit margin whether our you know the economy of scale is going to be effective for SouFun, because when SouFun becomes bigger and bigger and whether it's from new resale market and we will see the economy of scale you know it's to be going, the effect of that is going to come. So we’re sure we can maintain a healthy net profit margin going forward.

Wendy Huang - Standard Chartered

My next question is regarding your e-commerce business. So, can you may be give more color on the average selling price for those new homes selling through your e-commerce platforms?

Vincent Mo

Could you repeat?

Wendy Huang - Standard Chartered

The average selling price for those e-commerce transactions, because my understanding is that you are taking 2% of the new home price on your transactions platform.

Vincent Mo

You mean not the property price right? It's our membership price right?

Wendy Huang - Standard Chartered

Yes, basically you are giving a 3% discount to the end users.

Hong Zhao

Well actually you were right, we have said before that you know our cut is usually around 1% of the price of the homes that we’re selling and right now at the end of September we’re looking at Tier 1, we’re still achieving about you know RMB 1700 per card sale. So it loosely translates into about a probably 100 I mean 1.6 million on average per unit of the whole house that was sold in Beijing, Shanghai and the second tier cities we see a bit of improvement, I mean right now we’re averaging about 6000 per card sale, so and associate cities we’re looking at about between 4000 to 5000. So that’s kind of the breakdown of the units that we’re selling and our 1% fee usually you know is in that range. So you got to just work backwards to get the average unit price in those three categories of city.

Wendy Huang - Standard Chartered

Sure. I think that's very clear. And also, I want to clarify, have you already started to sell the second home on the e-commerce platform already? If yes, then what kind of card are you taking on the second home? And if so, how about the (indiscernible) look like for the second home market transaction? Thank you. That's my last question.

Vincent Mo

I’m sorry, you mean secondary home or?

Wendy Huang - Standard Chartered

Yes.

Vincent Mo

So are you saying are we selling existing homes through our website?

Wendy Huang - Standard Chartered

Right, yeah. Are you extending your e-commerce transaction model from the new home to secure the secondary home?

Vincent Mo

Well right now we’re, here is a thing we provide this platform cost SouFun online shop where we provide the functionality for the home owner to designate a particular agent on their website, on their online shop on SouFun’s website to help them to sell homes, to sell their own homes and we also have functionality there for the user of the web to request that particular agency to search homes for them. At this point we’re not directly entering into the transaction you know the particular transaction not like the e-commerce that we’re doing because at this point it's still a relatively agency dominated market and so we’re mainly providing I guess value added services to them through our online shops and also variety of listing services including our mobile listing products to help the agents to better serve their customer. In return we’re charging a listing fee and also an online shop fee for the services that we’re providing.

Hong Zhao

We’re supporting homes, we’re thinking and we’re testing to setup the transaction platform for the resale market through our SouFun online shop which is and will be more kind of a transaction platform for the resale market, and for our agent and for brokers to use but at this stage we just provide the platform and with different tools to facilitate their transactions but going forward I think we’re going to penetrate deeper into the transaction of the resale market and by providing more products and services and eventually of course if we can establish the transaction platform or e-commerce for the resale market that will be the goal of our resale division.

Operator

Your next question comes from the line of Alicia Yap of Barclays. Please ask your question.

Alicia Yap - Barclays

Just very quickly, if we look at your revenue mix, for example, a year from now, how should we look at the different revenue percentage mix, from the listing versus the e-commerce versus the traditional business? Thank you.

Vincent Mo

Yeah the company the management is the major shareholder and also control of this company so we look at the company long term strategy, we look into the future at least three to five years so that’s our strategy. So we believe with our momentum, with our market leadership we can keep the company growing at least I think 20% to 30% in to the three to five years together. That’s the total revenue thinking but among that new home I think the percentage is the contribution from new home where the trend where we slowly go down but in a slow pace and our resale market the percentage contribution from resale market will go up and but it's going to take some time, the trend is going up trend. I think 4 to 5 years that’s my judgment or expectation in 4 to 5 years and our revenue from resale market is going to be equivalent or catch up with our revenue from new home sector. So that’s the rough estimation at this time, at this stage. Of course we have either home furnishing business, we have a new value added services you know including we’re exploring you know financial services as well. So those new things are definitely going to contribute it to our future growth from now almost you know less than 5%. So that will be the picture of SouFun in the coming three to five years.

Alicia Yap - Barclays

I see. That's very helpful. And then, just lastly, if I may, is that when we look at your business and when you look at your operation every day, what is the biggest risk for your business or what are your the things that you're more afraid of in terms of going wrong on your operations? Thank you.

Vincent Mo

Well they harass [ph] myself and they harass [ph] all my management team. Frankly the biggest challenge to me or to the company is really the talent, the people, the human resources because SouFun is keeping growing relatively rapidly in the past three to five years and we need more people to support our growing business and to support our new business as well. So I have been spending other than product and technology myself you know have been I have been spending lot of time working with my human resources people to make sure that we have the needed talents and enough talents to support SouFun’s growth. But you know everybody knows you know it's not easy to find enough right people and talents to support and also pick time for us to train our internal people to make them smart people. So that’s why we have been frankly internally I emphasized very much on internal training through our SouFun management of school. You know that’s also I think it has helped SouFun a lot in the past and I believe it's going to continue to support SouFun’s growth into the future. So back to your question the risk or the challenges to us is the people.

Operator

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

Gregory Zhao - Citigroup

My first question is about signing the SouFun contract with the developer. Since we signed the contract to you the project is finished and we sell the card. How long will it be?

Vincent Mo

You’re talking about the cooperative period right with the particular developer, Greg?

Gregory Zhao - Citigroup

Yes.

Vincent Mo

Normally that’s a 3 to 6 months period, you know that’s generally how long our cooperative period covers through and it depends on the size of the project as well. So generally 3 to 6 months.

Gregory Zhao – Citigroup

This year, to September, how many contracts have we already signed with developers?

Vincent Mo

Well I can’t really give you a precise contract number Greg because a particular. I do have a project count you know for our e-commerce, off total we so far for the first nine months we had roughly a thousand project that we did across all the cities and in terms of new homes, yeah in terms of visibility in total that will include you know the realized revenue plus the future contracts that are secured, we’re looking at actually compared to our guidance of 615 we’re looking at almost 88% accumulated so far. So I mean hopefully that will give you rough idea of where we’re as far as the contract signing but I think a more meaningful for you in terms of contract count is probably looking at number of projects that we’re doing at any given point in time. So the number I gave you-

Gregory Zhao – Citigroup

Yes, that does. Yes. So, assuming for each project that we have and the developers sell about 300 houses, so in the first nine months we're already guaranteed around 300,000 house, apartments to be sold through the SouFun card, right? Can we understand it in that way?

Vincent Mo

Well who does it guarantee, I think the target is definitely help them to sell as many as possible, generally we’re looking at the total number of units that we signed with the developers that number is almost 330,000 – 340,000 for the first nine months alone.

Gregory Zhao – Citigroup

Okay. And my second question is for while we look at the balance sheet or filing in this quarter, we have increased about $100 million long-term loans. And also, the restricted cash position also increased. So, is that for some potential dividends or on other projects?

Vincent Mo

No that 100,000 that was actually the loan the same SBLC loan that we took out for the dividend payment and some of the operating expenses in Q3. So that increase of a 100 is that covers.

Gregory Zhao – Citigroup

Also, borrowed from overseas banks, right?

Vincent Mo

Yeah correct, yeah, the same arrangement that we have before.

Gregory Zhao – Citigroup

My last question is about mobile, what we're looking at in mobile and PC. I think for our listing service I think that they got synchronized on both PC and mobile as how we opened them at the same time, you can say the same number of listing services. But things for the ranking of those listings are very different from mobile to PC. I think on PC, we have the freshing function to fresh our listing service, and so mobile, so now with our algorithm behind our database to rank the listings and some we do have on the LBS functions embedded into the mobile services? Thanks.

Vincent Mo

Greg you’re very correct. It looks like your expert in our listing services. You are right. While the listing, the listing web based and the listing mobile based they are similar but you know the listing rules behind are something different. You know for example for the mobile application listing you know LBS location is definitely an important factor in our listing presentations you know the final listing the presentations so you’re right the mechanism is similar but there are differences there.

Operator

Your next question comes from the line of Lei Huang of Goldman Sachs. Please ask your question.

Lei Huang - Goldman Sachs

Actually, I'm covering China property stocks in Goldman Sachs. This is my first time dialing to the conference call. I'm very impressed by the another strong result delivered by the Company. I actually saw recent news regarding that you may launch e-commerce version 5.0, which might potentially provide mortgage and financings for the projects that you are working with developer clients. Could the management share some information about how you're going to launch such kind of mortgage financing products?

Vincent Mo

Well give us some more suggestions into the future, we would like to meet you. You’re right we’re starting our financial services but I would say it's only in it's early stage of testing. I would not expect it's going to contribute a lot in Q4 or early 2014. I think it will be something, it may happen in the second half of next year, in substantial way. So far we have over 30 million registered members and we have over 10 million SouFun card members and we have our over 100,000 SouFun card VIP members. We know them quite well. As of membership we’re trying to provide as much help or services to them as possible including information, discount and our financial services. So it's very natural for SouFun to grow into more value added services for our members and also our clients as we’re because the client our members are beginning better and their purchasing power is bigger and then it's definitely it's going to affect our other group of clients which are the property owners and property sellers.

So that’s the natural way we’re moving into financial services. In talking about that the plan is really we’re trying to partnership with China’s real estate or China’s property related financial institutions like banks, like the trust company, like other funds or and federals. So SouFun is really the platform for the financial institutions because they have the product and also you know we have the really well the members we have the you know for those products the route to the users. So that’s something we’re trying to setup this SouFun financial platform for the banks and for the insurance company’s, for other home equity financial services into the longer future. So at this stage as you probably researching from the internet, so we have just pepped in and promoting in a very preliminary product for our members at this stage.

Lei Huang - Goldman Sachs

Yes, thanks. A follow-up question is regarding what kind of the revenue that you are aiming to get from such products. Is that going to be a financing interest or are you going to leverage on providing leverage on your resources with the banks, providing this process and expanding your channels?

Vincent Mo

We will not rely on collecting interest, it's mainly our it's like other tools we’re providing to our clients and probably biased. We’re just we’re going to setup the internet and mobile platform and we’re going to have the process very process can be easily done through our platform so we’re going to collect a fees through the tools and the services who provide who will not rely on the interest rate.

Operator

Your next question comes from the line of Tian Hou of TH Capital. Please ask your question.

Tian Hou - TH Capital

I guess there aren't so many questions left for me to ask. So, the first question is really related to the e-commerce business, so in the last nine months you have accumulated about 1,000 in that range of projects. So, I wonder how many special projects are in the pipeline in Q4. That's number one. Also, how many cities have you established a presence in doing this e-commerce business? So, that's just two questions. And I will have a follow-up after this.

Vincent Mo

Yes as we mentioned we had over 1000 project signed up for the past nine months and we believe and the trend is going to continue in the Q4 so that’s something the momentum is still there, that’s something we’re quite confident. What’s the second question?

Hong Zhao

The second question is really about…

Tian Hou - TH Capital

How many cities?

Vincent Mo

Yeah could you repeat the second question?

Tian Hou - TH Capital

Yes. How many cities have you established such e-commerce business practice?

Vincent Mo

We started with Beijing and Shanghai two years ago and then we expanded into the 11 major cities including our Tier 1, Tier 2 cities and now we’re trying to expand to more cities to run the 30, 35 cities in across quarter three and quarter four, I think to the end of the year we will be in 30 to 34 cities for our e-commerce projects.

Tian Hou - TH Capital

Okay. So, there's another question that I have. If I look at your historical performance in terms of a marketing service and I saw significant growth year-on-year basis. For example, in 2011 you were growing 47%; 2010, you were growing 64%, et cetera in the past. And since you started e-commerce, marketing service is starting to slow down. Last year, it was about 1.3, this year it's about five or six on average for the first nine months. So at the same time, your e-commerce really growing so rapidly. So, I wonder, from advertiser, from a developer point of view, whether either they put the money on your website for the marketing service or e-commerce, for them the same purpose to attract user to buy their apartment. So, in that sense, will advertisers eventually put less money on the marketing service, but put some more efforts on the e-commerce service? So that's my question.

Vincent Mo

Well I believe both the marketing services and e-commerce will grow and I say explained before I think you can also track the numbers of our marketing services the momentum is coming back, the growth is coming back to the double digit, the low double digit growth rate. So because internet penetration especially with mobile applications up and running I believe more and more spending from our developer clients and including agent and brokers client are going to shift their spending to web based and mobile based more effective, cost effective ways of promoting their properties. So I believe the marketing services will kick it's kind of momentum and I believe next year I think we can achieve or we can get back to our lower double digit growth rate. So at the same time of course ecommerce is also in the e-commerce shorter history than our traditional internet marketing services. It's only about 2 years, so in the early stage I think it's transaction related and I believe it's going to be playing more and more important role in helping developers and also brokers to efficiency their transaction happen. So I also see the momentum is going to continue.

Tian Hou - TH Capital

The last question is regarding the upcoming mortgage loan service. Do you need a special lesson to do that, or you're okay?

Vincent Mo

We’re not making any loan, we’re the SouFun financial platform. We provide platform to our financial institutions partners, banks, trusts, companies and other fund companies as well and at the same time also provides the platform to our client to like and our visitors, probably buyers, our developers, our agent brokers. So like SouFun we’re the platform for the buyers and the sellers and the product the financial product for home related financial products. So we don’t do you know it's a not purpose of the company to do loan thing. We’re still going to be service--

Tian Hou - TH Capital

I got it, yes.

Operator

Your next question comes from the line of Alexander Vitkalov of HNC Capital. Please ask your question.

Alexander Vitkalov - HNC Capital

Most of my questions have been answered by you. I do have one question remaining for you. Could you please comment on potential future dividends and sort of the timing of putting the cash offshore?

Hong Zhao

This year we had dividend in August, and although the company we do not have a dividend policy in writing, but we did have four times dividends already since we had our IPO more than three years ago and every time $1 per share so I think my shareholder they love it, so going forward I think we’re you know it's still the Company policy you know we’re going to use the money for firstly for it's expansion and it's needed investment for it's future growth. So that still is priority for using our cash, our money but at the sometime if we do not see in the near future use of the money and if we do not have a big plan which is going to need a lot of money we will dividend it out to our shareholders so that is still the way the company is going to go. Most recently we had a dividend from domestic China to overseas. So we’re going to approve from the Chinese government that we had a about $1 million [ph] dividend out to our overseas companies at a low withholding tax 5% withholding tax so that’s makes our money you know make sure money can flow from inside to outside and from outside to inside. So that’s a good thing to us.

Alexander Vitkalov - HNC Capital

So sorry just to confirm, you basically already have received an approval and wired the money out the 100 million?

Vincent Mo

Yes we did that already. That was done in September.

Operator

Your next question comes from the line of Alan Gibbs of JO Hambro. Please ask your question.

Alan Gibbs - JO Hambro

My question, actually, has just been asked. But I just wanted to reconfirm that question, the part about the dividend and the double borrowings, does that mean, as I understand it in the past, dollars were borrowed to pay the dividend? Is that correct? And has that then now been paid off?

Hong Zhao

I will explain that, I mean the reason in the past when we paid dividends the reason we used that channel of pledge RMB asset and getting the U.S. dollars directly is not because we can’t do so through the channel that Vincent had just mentioned. It is because you know using that channel is economically beneficial because we’re earning more interest on the deposit in the domestic banks than it interest expense that we’re paying on the U.S. dollar dominated loans. So that’s why historically we will be using such a thing to pay for dividends and basically return as many money as possible to our shareholders. Now going forward--

Alan Gibbs - JO Hambro

And it was a financial transaction it wasn’t done because there was the (indiscernible) paying money out of China too.

Hong Zhao

No the policy has always been there for us to get the money out, the police has always been there it's just we have the go through the necessary administrative procedures to do so and we were very successful at the end of the August and we thus put out the first batch of money in September as Vincent just mentioned.

Alan Gibbs - JO Hambro

And also, while I'm on, just quickly, with all the publicity in the forthcoming IPO of Alibaba, do you have a business relationship with Alibaba? Is there anything about Alibaba coming to market or Alibaba's business which should concern or interest SouFun shareholders?

Vincent Mo

Other than I’m a personal friend with Jack Ma. We don’t have a very deep business relationship with Alibaba but we’re growing any potential so that SouFun can partnership with those big players in the internet sphere.

Alan Gibbs - JO Hambro

And do you think something might come of that as we go forward?

Vincent Mo

I think so. Actually we have been partnering with, China is a big internet player in the history. We were strategic partners (indiscernible) so that is 10 years ago and we’re still partners we’re partners with Baidu for more than 10 years and with 360 and so, and other internet players as well. So look into partnership with most of the major players including Alibaba if we find a good way to do that. It must be beneficial to SouFun.

Operator

There are no further no questions at this time. I would now like to hand the conference back to today’s presenters. Please continue.

Vincent Mo

Thank you Grace and just wanted to say thank you to all to all the parties that listen and participate in the call. We look forward to seeing you in future and also looking forward to report another strong quarter and annual results to you probably in February. Thank you very much.

Operator

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

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