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Jiayuan.com International Ltd. (NASDAQ:DATE)

Q3 2013 Earnings Call

November 20, 2013 8:00 PM ET

Executives

Shirley Zhang – IR

Shang Koo – CFO

Linguang Wu – CEO

Analysts

Gregory Chow – Citigroup

George Askew – Stifel Nicolaus

Andy Yeung – Oppenheimer

David Li

Yang Chao – China International Capital Corporation

Operator

Hello and thank you for standing by for Jiayuan’s 2013 Third Quarter 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 third quarter 2013 earnings conference call. On today’s call you will hear from Mr. Shang Koo, CFO of Jiayuan and Linguang Wu, CEO of Jiayuan will also be available for questions.

Mr. Shang will begin today’s call with an overview of Jiayuan’s business highlights and our product initiatives, and 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 statements 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 Mr. Shang Koo, CFO of Jiayuan.

Shang Koo

Hello everyone. Thank you for joining our third quarter 2013 earnings conference call. Today, Linguang has lost his voice. So I will give an update on the company’s strategy and business in the third quarter on behalf of Linguang.

This quarter, we were pleased to report strong top-line growth of 13% year-over-year. This was driven by robust growth in our personalized match-making business, which grew 61% year-over-year and a solid performance in our core online business. Optimizing user experience and executing on our segmentation strategy resulted in new user growth.

With average monthly active user accounts growing 3.5% year-over-year, the first quarter of year-over-year growth into second quarter of 2012. The increase in active users helped to – helped support healthy growth and average monthly paying user accounts, which reached 1.37 million this quarter, an increase of 7.6% year-over-year.

Through the past year, we have been thriving for sustainable revenue growth by focusing on high ROI users, including user experience to leading edge technology and introducing new products. We’re excited to see early signs of success here. And we’re confident that we execute on our segmentation strategy, we will continue to see impressive momentum.

In particular, our segmentation strategy is in line to help drive user growth in two ways. First, it allows us to better cater the needs of the individual user, both through our marketing efforts and through improved user experience.

Second, it allows us to increase user engagement by cost promoting Jiayuan services across their platforms, for example izhenxin.com, the members only website we launched last October is a perfect complement to Jiayuan.com as it offers our marriage minded singles an additional pool in their search for true love.

In the third quarter, we saw healthy sequential growth in both platforms. In fact, we noticed greater engagement and retention for users that have signed up for both platforms. In line with our strategy, we have introduced three new products in the last two months catering to mobile users.

On November 11, for Single’s Day in China, we launched beta testing of Dali, a mobile centric product leveraging the user base juedui100.com and targeting users in the 18 to 25 age range, available on www.imdali.com and to its own mobile app, Dali is a dealing product with powerful SNS features enabling users to interact in a fun Q&A cell environment. We expect Dali will act as a growth engine along with izhenxin.com to drive Jiayuan’s growth.

In October we launched Qiuyuehui, our new e-commerce app for which were like pre-packaged one-on-one dinner dates and gift sending services. As we previously mentioned in previous calls, Qiuyuehui combines the value of Jiayuan’s industry expertise in designing high quality matches with an added comfort of Jiayuan-verified meeting locations to help make sure a safe and appealing dating environment.

And in September, we launched qiu-ai, our subscription based browse-accessible product, specifically designed for feature phones and delight app environment. Many of our users prefer simple dating tool that focuses on the core features, qiu-ai.com offers that simplicity while utilizing Jiayuan’s proprietary industry leading matching technology.

Although it’s too early to talk about monetization of these new products, we do anticipate our expanding web portfolio will bring us huge growth and renewed momentum in the following quarters.

In addition to developing new products, we’re continually working to develop new features and improved user experience. For example, in October, we launched a new facial recognition feature for Jiayuan.com to help users better identify their ideal match. This is the industry-first and it’s already proving to be very popular. We expect to roll this feature out across more of our products in the months to come.

Our personalized match-making business continues to shine. Revenues from personalized match-making services and events were up 61% year-over-year and a number of average monthly customers served increased 125% year-over-year. Jiayuan’s database of marriage-minded singles China’s largest database of this kind new proprietary CRM system, are huge advantages.

Our team is now able to manage still networks, match-makers, customers and candidates on a single integrated platform. The result in scalability is supporting the expansion of our personalized match-making offer to more Tier-2 and Tier-3 cities. And has helped us standardize our services and introduced tiered pricing to excite the broader customer base. As of September 30, we had 18 locations in total with seven newly added locations during the quarter.

With these strong competitive advantages, Jiayuan is well positioned to be the leader in China’s rapid growing and highly fragmented personalized match-making market.

Looking forward, Jiayuan will focus on growing our personalized match-making business, expanding our mobile offer and strengthening our core online business to generate sustained growth for the quarters to come. We’ll continue to execute on our segmentation strategy and look forward to introducing new mobile products in 2014.

And now, I will continue to discuss more about Jiayuan’s financials.

We’re pleased to see another quarter of strong results. Our net revenue grew to RMB128.7 million, a year-over-year increase of 13.4% and a sequential increase of 7.9%. This was largely driven by healthy year-on-year increase of 7.1% in revenue from our online business and a strong 61.5% increase in revenue from personalized match-making business.

As Linguang mentioned, we were pleased to see average monthly paying user accounts increased to 1.37 million and average monthly active user accounts rose to 5.43 million. Monthly ARPU was down slightly to RMB25.5 million due to those growing number of mobile users who prefer mobile payments.

Personalized match-making services and events accounted for 15.2% for total revenue in this quarter compared to 10.6% for corresponding quarter of 2012. According to our research, traditional match-making a RMB4.2 billion business in China, as the largest online dating platform in China with over 90 million registered users we’re unique positioned to serve this market.

We expect growth from personalized match-making business to continue into the fourth quarter and 2014, with revenues from this segment doubling to over 20% of our total revenues by the end of next year.

Constant revenues in the third quarter were 15.8% year-on-year to RMB45.9 million. While this is largely in line with our business growth, the increase is partially due to costs associated with processing mobile payments, as mobile usage continues to rise. The expansion of our personalized match-making services also contributed to this increase. For the same reasons, our gross margin was down slightly year-over-year to 64.3%.

And advertising rates continued to rise across the board this year with them working to optimize our marketing of higher ROI channels. We got higher than expected sales and marketing expenses this quarter due to the earlier than expected launch of qiu-ai.com in September. With the launch of additional new products, we expect to gain higher marketing expenses in the fourth quarter as we work to ramp up user growth.

For the quarter, we saw 17.8% year-on-year decrease in G&A expenses, reflecting our ongoing efforts on cost control as well as advantages of our self-owned office space. R&D costs were up 19.4% year-on-year, as we focused on hiring more R&D staff to develop new products and enhance in process. We plan to continue to invest heavily in R&D going forward to support our product development efforts.

We will also continue to expand our personalized match-making business to new markets and enhance our current product portfolio to improve user attention and expand user ability. We believe these strategies will help us generate the same growth for the quarters to come.

With that, let me give you our outlook for the quarter ahead. In the fourth quarter of 2013, Jiayuan currently expects to generate net revenues in the range of RMB128 million to RMB130 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

Thank you. (Operator Instructions). Our first question comes from Gregory Chow from Citigroup. Please ask your question.

Gregory Chow – Citigroup

Good morning, hi, Shang. I have two questions. The first question is about our personalized VIP services. I think in this quarter, this service recorded a stronger growth in our online services. So could the management share with us some colors for the longer term development of this part of services?

My second question is about our new products and we see very healthy growth in both paying and active users this quarter and also some good initiatives for metrics of the new products. But when does the management think these new products will eventually drive the revenue growth? Thanks.

Shang Koo

Let me translate the questions for Linguang first. (Foreign Language).

Linguang Wu

(Interpreted). Yes, so VIP business we were really leveraging our online database, the largest database of singles in China to consolidate the existing offline match-making business. We didn’t do this before because we didn’t have the CRM system to really manage our sales staff. We were able to expand our business on back in 2010, 2011 very rapidly.

But after that we actually noted the bottle-neck in management capacity for the personalized match-making business. And that’s why we actually – we limited growth of that business for a short period of time until we had the new CRM system to be managed, to be able to better manage the sales staff and the customer resources.

So, now that this is in place we can much better expand to do – to more locations in China and also expand services to more people as well. As part of that, as part of the benefit of the CRM system, we can actually outsource part of our personalized match-making – part of that – as part of the personalized match-making business to third party match-makers.

For the new products that we launched in the third quarter and the fourth quarter, I think near-term we’re mostly focusing on user growth. So 2014, we expect these new products to contribute significantly to expand overall active user base.

However in terms of revenue we’re not too focused on monetizing from these new products yet. Mostly because we want, one, we want these products to get a larger scale, and two, the new products because they’re more mobile and they’re SNS focused. I think what we want these products to be more interactive or more social and to build up the scale. And charge through other methods.

Gregory Chow – Citigroup

Okay. Thanks very much.

Shang Koo

You’re welcome.

Operator

Thank you. Our next question comes from the line of George Askew. Please ask your question.

George Askew – Stifel Nicolaus

Good morning. Thanks for taking my questions. And I wish Wu and Shang, a speedy recovery. Just kind of a quick question on the match-making services kind of following up on the prior question. Obviously, growing very quickly, what over the next several years, what percentage of total company revenue do you think match-making could represent and how many cities do you think you can target as you roll into the second and third tier cities going forward?

Shang Koo

So, for the match-making business, we’re – we believe we can really expand that to a lot more third tier cities as well. Because the CRM system really is – is very powerful. And that it ensures that our users – that our users are paying clients for our personalized match-making business, and the candidates that we match them up with are controlled on our CRM system.

So, it limits access to the match-makers, the sales staff and the customers based on their different access rights. So this allows us much better to control our resources and also to allow access to third party match-makers, our outsource match-makers to do better serve our clients.

So, to this and actually expand to lower tier cities as well. And we’re looking at expanding at about – at around five to 10 new locations every quarter, for the foreseeable next year. And as a result we believe the match-making business can double in terms of revenue.

Right now the revenue line that you’re looking at is really personalized match-making and dividends. And split for that is about 2:1 split. And so, about 65% of that revenue segment is actually personalized match-making right now. And we believe that can actually double in the next year – over the next year. So, by the end of the fourth quarter in 2014, personalized match-making business by itself can expand from about 10% of revenue right now to 20% of revenue.

George Askew – Stifel Nicolaus

Got it, thank you for that. And then, your new products came in late in the third quarter or early fourth quarter. So, they would not have had much of an impact on the third quarter itself. Can you share with us kind of what you saw in terms of ARPU in the third quarter, clearly it was a bit of a decline, what drove that? And then, how do you expect ARPU to trend as new products are monetized?

Shang Koo

The ARPU decline was mostly due to a slight shift to mobile payment. So our mobile users tend to pay more for – the user behavior, of those users tend to be more micro payments driven. So you actually see slightly lower monetization on those users. And has a greater percentage of our paying users are mobile, so you’ll see some decline in ARPU.

And you should expect that trend to continue into the next year. Although I think the decline won’t be very significant. It should be a few percentage points. It should at the most 10 percentage points total over the next year.

For the new products, we expect them to contribute to actually drag down, well, actually sorry, for Dali and Qiuyuehui actually, we expect that ARPU to be dragged down by the paying users. However, with qiu-ai.com, because we designed monetization of that product specifically for the mobile market, we are shifting – we purposely shifted payments for that product away from micro payment to offset entire cost of the micro payments.

So, that mobile product is actually designed not to use mobile payments, which will actually increase ARPU but the number of paying users for that would be – or the paying ratio of that product would be much lower.

George Askew – Stifel Nicolaus

Got it. Okay, thanks for that. Take care. Thank you.

Operator

Our next question comes from the line of Andy Yeung from Oppenheimer. Please ask your question.

Andy Yeung – Oppenheimer

Hi, good morning. Thank you for taking my questions. My question is actually about your overall strategy going forward. Obviously you’re launching some new products on online services. At the same time, the VIP service and some of your e-commerce business is to be a bit more like on-line off-line oriented. So, going forward would the company plan to focus more on the VIPs, more personalized dating services which is the general online platform?

Shang Koo

Let me translate that for Mr. Wu first. (Foreign Language).

Linguang Wu

(Interpreted). Yes, our longer term strategy is really to build up our new products, especially our mobile products. And as we build out these new products, it allows us to gain the larger user base that we can monetize through other means or that we can convert to our online users and monetize better.

So our focus would still be online in terms of gaining the user base that we need. The reason that – the mobile – the reason that the personalized match-making business is growing so quickly retailing is because we’ve been holding the business back for the last two years.

So, it’s – it was able to ramp up very quickly because there is the pent-up demand because previously we were actually churning ways on customers because we did not have the capacity to serve them. So now that we’ve opened up this business and now that we’re expanding it, it actually can ramp up very quickly.

And the potential of this business is actually huge. The traditional offline match-making business is a RMB4.2 billion business so with Jiayuan’s database of single users, where we see a lot of potential in grabbing a major chunk of that market.

Andy Yeung – Oppenheimer

I see, thanks for that. And then, just one quick question, I’m not sure if I missed that. But can you share with us some of your mobile operating metrics in terms of like number of users and paying user, maintenance spend etcetera on mobile applications?

Shang Koo

Yes, so for mobile users it’s about the – well, for Jiayuan the trend has been about the same as previous quarters. Mobile is a major share – is a significant share of our total usage. For the new products we’re – for Dali and for qiu-ai I think it’s still very early stages.

A short example for Dali, we haven’t launched iPhone app yet, we’ve only launched Android app so that will limit the usage significantly. Dali is still in early beta stages so we don’t expect to see that ramp up until maybe later in December and potentially in early next year. But qiu-ai so far has been doing very well. We’ve been able to rapidly register over 2 million users for qiu-ai already.

Of course qiu-ai because of the design of the product user retention and user conversion is lower than online. But the fact that we’ve been able to ramp up, register users so fast I think is a very positive sign.

Andy Yeung – Oppenheimer

Got it. Great. Thank you.

Shang Koo

You’re welcome.

Operator

Our next question comes from David Li from (inaudible). Please ask your question.

David Li

Hi, good morning everyone. And I have two questions here. And the first question is I saw the MAU is pretty flat, flat compared to the last quarter and the last year. So I wanted to ask you about the opinion about the growth rate in the future, will it maintain flat or will the growth rate will accelerate, is my first question? And my second question is about, I saw the selling and marketing expense, selling and marketing expense is pretty increasingly much. So I wanted to know why it’s huge growth and will it continue to grow in the future?

Shang Koo

Yes. So, I think your first question about the monthly active users, our monthly active users in this quarter actually are first time in over a year we actually we saw sequential year-on-year growth. Whereas in the past we’ve actually seen monthly active user declined for a few quarters.

The reason for the decline in the past was that the much higher advertising cost increase has forced us to limit or steal back our ad-campaigns. We are spending more on those marketing because the prices are increasing. But the amount of sales and marketing – the amount of advertising space that we’ve been purchasing has actually decline over the last two years.

So the decrease in sales and marketing is a big part of reason on why the monthly active users have been declining for a while. The reason for the increase in the third quarter is because we, one, the sales and marketing increase has not been as significant as previous quarters. Two, we were seeing a little bit less competition for the same ad-spots. So the competitive environment is improving and also because our products are getting better.

So Jiayuan’s new features, Jiayuan’s new – and we continue to improve our user experience, continue to improve our user retention. And that has helped us to stabilize and grow our user base. And at the same time I think the segmentation strategy has been really helping and that it allows us to retain users that otherwise would lead Jiayuan because of – because the platform is not suited for them.

For example if a user comes to Jiayuan and they don’t find the platform suitable, they might actually find izhenxin or qiu-ai or Dali more suitable for them as a product because of their – because they’re looking for more serious or a little bit less serious relationship that they can choose which one they want to go.

So, the multi-segment – the multi-brand strategy is actually helping us to grow our user base as well. So, and – the third quarter we’re actually very excited to see active users growing again and recovering from the decline in previous quarters. And we expect to see that growth continue into the fourth quarter and definitely into 2014.

You second question about selling and marketing, so part of the selling and marketing increase in the third quarter, part of that is due to higher advertising costs. And another reason is that we wanted to launch qiu-ai.com a little bit earlier than we expected.

And part of that reason is that qiu-ai we would delay back in the second quarter, we would delay the launch of that. So, we actually had – we actually have several products launching around about the same time. So we accelerated the launch of qiu-ai into September. And that caused additional sales and marketing expenses in September that increased our overall expense.

David Li

Okay. Thank you.

Shang Koo

You’re welcome.

Operator

(Operator Instructions). Our next question comes from Yang Chao from China International Capital Corporation. Please ask your question.

Yang Chao – China International Capital Corporation

Hello, I have a quick question on the offline business of the VIP services. And I think that you mentioned that about – it takes some time to recognize the revenue from the IT services in your last conference. And I wonder how much of the offline business were recognized or how much percent of the offline businesses are percentage of the offline customers are recognized in the revenue in third quarter?

Shang Koo

Yes. So, our personalized match-making business, about – the average contract lives of personalized match-making customer is about eight months. So we would recognize revenue over those eight months.

You would most likely see a slightly more revenue recognized in the first few months of the contract as sometimes we see earlier. So if we can find the right match for our customer we can actually end up the contract earlier. So that’s why there is some accelerator recognition of the match-making revenue. But normally you should see that recognize over about eight months. So each quarter you’ll see about – you’ll see about 3/8 of that recognized.

Yang Chao – China International Capital Corporation

And a quick follow if I can, what do you expect as the number of the revenue from VIP service may increase dramatically in the next few quarters as the number of customers may increase in the past few quarters as way to maybe recognized eight months later?

Shang Koo

Yes, definitely. VIP, our VIP personalized match-making business is growing very rapidly. So in terms of cash flow from that business grew significantly in third quarter, we expect that to grow significantly in the fourth quarter as well. So, you should see a ramp up of that revenue in the fourth quarter as well as in 2014.

Right now, it’s just – with our CRM system we can handle so much more customers. And as we continue to make improvements in our CRM system and continue to standardize their product, I think you’ll see that business growing very rapidly.

Yang Chao – China International Capital Corporation

Okay, thanks.

Shang Koo

You’re welcome.

Operator

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 with you in coming months, operator?

Operator

Thank you for your participation in today’s conference. This concludes the presentation. And you may now disconnect. Have a good day.

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