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SouFun Holdings Limited (NYSE:SFUN)

Q4 2013 Earnings Conference Call

February 10, 2014 08:00 ET

Executives

Hong Zhao - Vice President, Finance

Vincent Mo - Executive Chairman

Guan Lanying - Chief Financial Officer

Analysts

Alex Yao - JPMorgan

Eddie Leung - Merrill Lynch

Vivian Hao - Deutsche Bank

Dick Wei - Credit Suisse

Gregory Zhao - Citigroup

Anthony Thong - 86 Research

Fei Lu Fang - Goldman Sachs

Chao Wang - Nomura

Wendy Huang - Standard Chartered

Joyce Zhou - Barclays

Jack Yang - TH Capital

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2013 SouFun Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Monday, February 10, 2014. I would now like to hand the conference over to your first speaker today, Mr. Hong Zhao. Thank you, sir. Please go ahead.

Hong Zhao - Vice President, Finance

Thank you, operator. Hello, everyone and welcome to SouFun’s fourth quarter 2013 earnings conference. On behalf of the company and myself, I will wish every one of you, a very happy Chinese New Year and hopefully this call will give you a good start of the year. In the name of introduction, I am Hong Zhao, I am the Vice President of Finance of SouFun. Joining me today are SouFun’s Executive Chairman, Mr. Vincent Mo and CFO, Ms. Guan Lanying. This conference call is being broadcasted on the internet and is available through our IR website at ir.soufun.com together with our earnings release.

Before we carry on, I would like to remind you that during 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 involve inherent risks and uncertainty. A number of important factors could cause the actual results to differ materially from those contained in any forward-looking statements. SouFun assumes no obligation to update forward-looking statements in the 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 include discussions of certain un-audited non-GAAP financial measures. Our press release contains a reconciliation of the un-audited non-GAAP measures to the un-audited most directly comparable GAAP measures and is available on our IR website. We will have a brief Q&A session after the prepared remarks.

Now, that’s the housekeeping items. And now it comes the prepared remarks. First of all, we are very excited to report to you another strong quarter and a full year 2013 results. This marks the fourth consecutive year since our IPO in which we delivered results that are above the guidance and Street estimates. During the year, we continued to strengthen our market leadership position in new homes and secondary homes markets. Our leadership in new homes market allowed us to drive growth in marketing services and expanding our e-commerce membership services in existing and new cities. Our e-commerce membership services continued the high double-digit growth momentum for the fourth quarter and for the full year. Also our leadership in the secondary home market enabled us – enable our listing services to grow significantly in 2013 finishing the year with more than 120% growth rate on a full year basis.

Our continuous investment in technology and product innovation is also paying off. Our mobile platform, including web and apps, experienced a very strong year-on-year traffic growth and started to bring additional revenue for mobile-based services and products in the fourth quarter. We continued to expand and develop new lines of businesses and are working with strategic partners to develop various products that will meet the diverse needs of our customers and members.

And now, let’s run down some numbers. Revenues totaled $217.2 million in the fourth quarter of 2013, an increase of 47.2% compared to Q4 last year. Revenue for the year totaled $637.4 million increased 48.1% from 2012. Our top line growth was primarily driven by the robust growth in the listing services and SouFun membership services. Compared to 2012 revenue from marketing services grew 21% to $97.1 million in the fourth quarter of 2013 achieving an annual growth rate of 11.4%. We are very encouraged by the improved growth rate and expect further improvement as we strengthen our dominance in the home-related advertising market and expand and penetrate deeper into lower tier cities.

Revenue from our membership services grew 67.2% to $67.1 million in the fourth quarter. On a full year basis, e-commerce membership services grew 84.1% to $188.1 million. These strong results further enhances our leading position in the e-commerce market. We rolled out various enhancements to our e-commerce platform and to further improve the effectiveness of our platform in facilitating property transactions. In 2013, over 130,000 new home sales were completed through our e-commerce membership service platform.

Grouping marketing services and e-commerce revenue together, we will see that in aggregate, our revenue from new homes market grew over 36% in Q4 and approximately 33% for the full year 2013. As mentioned earlier, listing services had a very robust growth during the quarter and for the year preliminarily driven by the growing number of paying agent subscribers as well as increased postings per subscriber. Revenue from listing services grew 91.5% to $50 million in the fourth quarter. On a full year basis, listing services revenue grew approximately 122% to $161.5 million further enhancing our leadership position in the secondary home market.

On cost, cost of revenue increased by 9.8% to $27.8 million in the quarter. On a full year basis, cost of revenue increased by approximately 27% to $102.5 million slower than revenue growth primarily due to the increased staff costs and taxes, which is partially offset by certain accruals on uncertain tax positions that are now reversed due to the expiration of statute limitation. Q4 gross margin improved by approximately 4% from a year ago to 87.2%, while the full year gross margin improved by approximately 3% compared to last year.

Operating expenses, within the operating expenses, our selling expenses in the fourth quarter were $34.8 million, an increase of 25.2% from a year ago. General and administrative expenses were $28.2 million, an increase of nearly 15.4%. Similarly, on a full year basis, selling expenses increased by 22.9% to $185.3 million. G&A expenses totaled $83.4 million, a mere 17.8% increase demonstrating our ability to control cost effectively while maintaining a high rate of top line growth. The increase in operating expenses are primarily due to increased staff cost. Total headcount as of December 31, 2013 was at 9,175 as compared to about 7,743 in the same period last year.

Operating income, a very strong top line growth combined with the expected cost control allowed us to continue to enhance operating leverage. Operating income grew 81% to $126.7 million in the fourth quarter, representing a 10.9% improvement in operating margin compared to Q4 of last year. On a full year basis, operating income grew 76.4% to $350.4 million in 2013 resulting in an 8.9% improvement in gross margin from last year.

Income tax expenses, employing various tax planning strategies we continuously looking for ways to minimize income tax expense and lower our overall effective tax rate. As a result, our income tax expense for Q4 2013 was at $19.2 million, a 17.8% increase compared to a year ago. On a full year basis, our income tax expense totaled $69.8 million or a 24.9% increase compared to last year. The less growth in the annual income tax expenses compared to the growth of income before tax was primarily due to a $15.1 million reversal of dividend related withholding tax accrual in 2013 resulting from certain subsidiary being approved to be subject to a 5% dividend related withholding tax instead of a 10% rate that was used for calculating the original accrual. And also more revenue from lower tier tax rate subsidiaries also contributed to the slower growth in income tax expenses.

On the net income front, Q4 net income increased by 101% to $112.1 million from a year ago. Fully diluted EPS were $1.27 increased by 86.8% from our year ago’s $0.68 on a share. On a full year basis, net income increased by 96.7% to $298.7 million from a year ago. Fully diluted EPS were $3.41 increased by 84.3% from prior year’s $1.85 a share. Adjusted EBITDA increased by 76.1% to $132 million in the quarter as compared to $75 million a year ago. On a full year basis, adjusted EBITDA increased by 73.8% to $371.1 million in 2013 as compared to $213.5 million in 2012.

Cash flow, we continue to enjoy very strong cash flow generation capability of our business. Operating cash flow was $142.3 million in the fourth quarter, a 54.3% increase from last year. As of December 31, 2013, our cash, cash equivalents and short-term investments totaled $591.1 million, up more than 308% compared to the beginning of the year. Included in that cash balance were the net proceeds of approximately $342 million from the private placement of our convertible bond in December 2013. Operating cash flow was $408 million in 2013, a 86% increase from a year ago.

And looking to the future, for the full year of 2014, SouFun expects its annual total revenue to reach between $780 million to $796 million, representing a 22.5% to 25% annual growth. The forecast reflects SouFun’s current and preliminary view and is subject to change.

I want to take this opportunity to thank you for taking the time to join us today for the call. And I will now open the call for your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from the line of Alex Yao from JPMorgan. Please go ahead.

Alex Yao - JPMorgan

Hi, thank you very much for taking the call and congratulations on a very strong quarter. I have two questions. Number one is on your annual guidance, we understand the Chinese property market is not doing well recently, especially in January. So what gave you the confidence that SouFun will continue to grow 20% plus in such a property market environment and what will be the key revenue driver in this year? And secondly is can you comment on your key priority for this year? What will be the top three priorities you want to achieve for this year? Thank you.

Hong Zhao

Thanks Alex. Vincent, do you want to take the questions or do you want me to go ahead?

Vincent Mo

I will take the first question of Alex and you take the second, is that okay?

Hong Zhao

Yes, absolutely.

Vincent Mo

Yes, we had a – we have a guidance for this year 22.5% to 25%, which is the highest in the past three years in my memory. We had one last year which is 20% to 22.5% and in – before that is around 20%. Our confidence comes from actually several aspects. One is that our track record in the past three years, our gross average has been above – annualized has been about 40%. And also another aspect is really during tough times in the past I mean the market is in tough times in the past and multiple years and different cycles of China’s property markets, SouFun has been performing actually the best during those tough times. We are very resilient to the market fluctuation, because of internet penetration and mobile penetration into the traditional real estate industry market and also because of during tough times our clients will rely more on SouFun services and products to do their business. So and third reason behind this theory was our mobile business coming up with our planned financial services come up, we expect that those new things are going to add new streams of revenues to us. So based on all of this planned businesses we are sure that we are very confident to achieve like 22.5% to 25% growth for coming year. So Hong you go ahead with second one.

Hong Zhao

Okay. Alex, on your top three priorities in the coming year, actually, obviously one of the top priority is continue to drive the new – expanding the new lines of business that’s always on top of mind and that’s actually Vincent had pointed out in his remarks as well in the earnings release. And secondly, I think continue to invest in technology and product, really make our product more I guess to really address all the needs of our customers and really getting it well accepted by the users. That’s another definitely one of the top priorities that Vincent himself is personally overseeing the product development. And third thing will be actually on the nationwide basis some national brand promotion initiatives. These will be collectively through e-front that the company will focus on.

Alex Yao - JPMorgan

That’s very helpful. Thank you.

Vincent Mo

Yes, I have on queue homes explanation from the products side, mostly when the focus more specifically on our marketing services which will continue its growth into the coming three even five years. And the new – actually and our new three years already e-commerce business, which has been – we have been implementing to more cities in China and enhancing our position in the existing bigger cities as well. Thirdly is our other than the traditional listing services for the resale market, we are going to focus also on our SouFun online shop for the resale market plus the mobile business and the financial services. Those are more specific products and directions we are going to focus on for this year.

Alex Yao - JPMorgan

Thank you very much.

Operator

Thank you for you questions. Next question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.

Eddie Leung - Merrill Lynch

Hey good evening. Thank you for taking my questions. I have two questions. The first one is about your e-commerce business. Could you give us an update on the – on your estimated penetration of your e-commerce business in the top tier cities? And how should we think about the potential slowdown given a high penetration? And then secondly could you also give us an update and outlook of your new finance channel in terms of any operating metrics or the update of your business model? Thank you.

Hong Zhao

Yes, Eddie thanks for the question. The first one was regarding the, are you looking for an update on the penetration more of a longer term kind of goal. I think in terms of the penetration, we are currently seeing the penetration increasing in the second tier cities and also slightly increasing in the first tier cities compared to last quarter. So it carry – sort of in the first tier cities it seems like the e-commerce has been sort of carrying that momentum, but in the second tier cities it seems it’s been growing a bit faster in terms of penetration rate increases, now would average of almost 8%. So in the long run as we discussed before a 30% type of penetration is definitely not outside the realm of possibility. I mean, we think that the 30% is achievable. Going – obviously going to a deeper penetration or higher percentage of penetration you will be met with more, I guess more competition first of all and then and also you will be more susceptible to the number of projects that’s coming on to the market when you are – when you are at the high level of penetration. But 30% in our analysis seems to be somewhat a reasonable target.

That’s on the e-commerce. And on the financial channels, we launched the financial channel in December and quite frankly now we have limited it to Beijing and Shanghai and still testing the products and also working out all the technical side of the things meaning accepting applicants and working on the sort of the technical interfaces between us and the banks and automating certain things, especially with interfaces and also building a lot more content on to the channel. So that’s where we are on that. I mean going forward there will be a number of ways we are looking out to potential monetization opportunities. One will be the type of listing or revenue – advertising revenue model where you can charge the financial institution who want to list on your website type of fee. And then obviously if you have a successful referral partially in chargeable referral fee. So that will be the major – as far as we can see now that will be the kind of the major monetization opportunities coming out of the financial channel. Right now we haven’t stopped monetizing it, but probably towards the second half of this year as we consistently told you, probably towards the was the second half of the year we will see some monetization.

Eddie Leung - Merrill Lynch

Got it, thanks.

Operator

Thank you for your question. Your next question comes from the line of Vivian Hao from Deutsche Bank. Please go ahead.

Vivian Hao - Deutsche Bank

Hi, Zhao and Mo, thank you for taking my questions. I have two questions here. First of all, we did not observe a very direct correlation of SouFun’s business (indiscernible) factors specific to property market, but even now we have about one-third of our business coming from the e-commerce sector. How vulnerable is our business to the macro cycle (indiscernible) color here? And second question is regarding the secondary listing had a fantastic year last year, but in fourth quarter, do you see any incumbent say in local markets, for example, like Beijing, Shanghai, very formidable right now?

Hong Zhao

I am sorry, Vivian – I am sorry, operator, did we just lose her?

Operator

No. Ms. Hao, please speak directly to the phone.

Vivian Hao - Deutsche Bank

Hello, hi.

Hong Zhao

I am sorry, Vivian. We couldn’t really quite get your questions, because the sound is sort of tapered off.

Vivian Hao - Deutsche Bank

Right, right. Is it better now?

Hong Zhao

Yes, yes, this is much better now.

Vivian Hao - Deutsche Bank

Okay. Let me repeat my questions. I have two questions. First of all is we did not observe a direct correlation of SouFun’s business as (indiscernible) has been in the path. However, we have about one-third of our revenues right now coming from the e-commerce segment which is more transaction-related. So how vulnerable is our business right now versus macro cycle? This is my first question. My second question is regarding competition for our secondary listing segment, do you consider as if there is very strong incumbent players in local markets, especially for the top tiers, Beijing and Shanghai, that will be a very strong competition in the market for the secondary listing business?

Hong Zhao

Okay. Well, Vincent do you want to go ahead or do you want me to kind of take this?

Vincent Mo

You go ahead.

Hong Zhao

Okay. Alright, Vivian on the first question, yes, I mean, about one-third of our revenue now is transactional, somewhat transactional-based model, where if you have a sale, then you can potentially recognize that part of the membership services revenue. That line of business do have certain level of correlation with, I mean, do get impacted, I wouldn’t want to say correlation, because on the one hand, we will continue to grow and penetrating deeper into the city into each one of the existing cities that we are in. And secondly, we still have many more cities, I mean, right now we are in about 35, probably 36 cities now, but we still have a lot more cities that we already have offices in that we haven’t even introduced the e-commerce business. So from that perspective, we are still on a growth trajectory, but in the more – in the more bigger markets like Beijing and Shanghai, where we started this program first, yes I mean, we could get impacted by the transaction volumes, but the other side of the equation is really if we can continue to deepen our penetration in these markets, then we can potentially counter that impact.

So frankly speaking, it’s really – it really is the work of the two forces when they and we also have to see, which one is more severe. I mean, if transaction volume is severely impacted, then yes, it will translate to impact our business. But still if you look at our SouFun as a whole, more than 65% of the business, are still on more of a recurring including the marketing business and including also our listing services, these are relatively recurring and relatively stable type of businesses and we definitely believe that they still have a great potential. They haven’t even marketing services as Vincent had pointed out given that internet penetration has not really reached its maturity and will fall from that as well. So both of these lines we believe will continue to grow and will give us a give foundation for the company’s growth going forward. So that will be the answer to your first question.

The second question was I couldn’t quite make out, I mean, if I am – from what I heard, it seems like you are trying to ask competition landscape in the secondary listing business right?

Vivian Hao - Deutsche Bank

That’s correct.

Hong Zhao

Okay. Yes, I mean, you are right, I mean there are a lot of these local competitors namely some of the recent names we heard, we talked about, but we have been competing with them for long time compared to in every market basically, I mean, in Nanjing, in Shanghai, a lot of these cities we have been competing with all of them for a number of years in the past. And so far, we have been able to grow our market share and win the – getting the upper hand of the competition. That doesn’t mean that we are not going to be careful on it, we will constantly watch out for them and see if they are – if they are gaining market share or if there are new kind of services and products. I mean, nothing prevents us from looking at them – they are monitoring very closely and compete with them directly on every account. So we were very confident that we will continue to gain the upper hand of the competition going forward. Just right now, I mean, what we are focusing on a lot of the new initiatives and also really competition is one of the things on top of everybody’s mind in the company.

Vivian Hao - Deutsche Bank

Alright.

Operator

Thank you for the questions. Your next question comes from the line for Dick Wei from Credit Suisse. Please go ahead.

Dick Wei - Credit Suisse

Thank you for taking my questions, Vincent and Hong. So my first question is probably back on to macro front, I guess you mentioned that if macro trends more sales than developers started to use more of our service. I wonder anything that you see in January that makes us see with that way that gives investor more confident that way maybe in terms of the bigger cities are we seeing and the developers more engaged to go to the e-commerce programs, are they willing to increase the membership fees or anything that you can help us understand the situation? Then I have follow-up questions. Thank you.

Hong Zhao

Specifically about e-commerce or…

Dick Wei – Credit Suisse

I think its e-commerce and marketing I guess both, yes.

Hong Zhao

Both okay, on the new homes front, right, okay. I mean so far we really haven’t seen a – I will call it a dramatic I mean or even significant impact on our business in the first month. Even though a lot of these media or media reports point to a very slow start or a cold start, but if you look at our business in January, I think the numbers at least preliminary numbers came in are still very encouraging. I mean, it’s not with out challenges, but still very encouraging. Especially in the new homes front, I mean it seems like the seasonality wise obviously, the first quarter is always this New Year kind of seeing a place into it. So a lot of projects will be delayed, but usually February-March timeframe, especially March timeframe will be the first sort of spring, high volume type of saying. And as of January, typically is a quite month. So from a seasonality perspective nothing is really ordinary to us. So at least from what we are seeing on the data it’s nothing really is alarming to us from our operation perspective for January.

Dick Wei - Credit Suisse

Okay. Maybe just quickly on that, so are we seeing the developers are more encouraged should use our service compared to may be last year when the market is slightly better?

Hong Zhao

I think, excuse me, I think as Vincent has been talking about this as well before with a number of – with a lot of the investors is that general trend is that people are looking at e-commerce as a good alternative. We sort of created a little bit cannibalization between these services and our marketing services, but this trend seems kind of relatively stabilized and we can get our marketing growth back on track. Now in terms of are they more inclined to choose? This has been a trend actually. Yes, they are more inclined to choose a performance based type of marketing approach which is namely the e-commerce business that we are doing. So from that perspective, yes, but so far we haven’t generate – I mean we haven’t seen a lot of the things – a lot of developers abandoning sort of their marketing, I mean we are still seeing good contract – marketing contracts are coming in. And now they just picked off, I mean we still see the healthy marketing contracts being signed, so does that answer your question. I think what you are looking for is some sort of more of operational, more of a market data where the developer will choose marketing versus e-commerce, but as far as we have seen generally it doesn’t really bring a lot of alarming sign that they all of a sudden they are not choosing marketing altogether matter of fact with CPC marketing contracts being signed and at a good pace.

Dick Wei - Credit Suisse

Okay, got it. And my second question is maybe on the e-commerce membership city penetration I think now we are probably at around I guess you mentioned about 35 cities now and what is the plan for this year, yes maybe by end of this year how many cities are we going to see. And roughly maybe if you can breakout maybe in fourth quarter last year how much of the e-commerce revenues are from the top tier cities. And then what about maybe towards the end of this year what kind of penetration is going to be at? Thank you?

Hong Zhao

Yes, absolutely Dick. From that perspective first of all in terms of 35 cities, the goal this year, well one of the internal plans is to expand it into probably 60 plus cities this year just whenever the city is ready, we will just expand our program to it. And it seems like it’s a very reasonable approach, because a lot of these lower tier cities they haven’t – they have never seen this kind of service and it seems that their interest levels would be extremely high. In terms of the revenue composition for the fourth quarter, Beijing and Shanghai accounted for about 40% of the total e-commerce revenue, down from 60% a year ago, that’s a healthy shift to us. And then if you look at Tier 2 cities that percentage had increased from a 35% a year ago to about 38% in Q4 2013 and the third tier cities is actually showing a very strong growth. The revenue percentage grew from 5% in Q4 of 2012 to 20% in Q3 of – in Q4 of 2013, so that’s a pretty healthy growth in the lower tier cities and that give us confidence that we can continue to expand this program and be successful in those cities.

Dick Wei - Credit Suisse

Alright. And sorry just on this, are we expecting maybe by end of this year maybe the Beijing and Shanghai maybe like 10%, 20% of the revenue and anything that we can share?

Hong Zhao

Actually to be honest it’s hard to predict, but we are not expecting it to go down that quickly because Beijing and Shanghai are still very – they are still very strong I mean they are still biggest market that we have. And quite frankly we like to shift of a 40-40-20 kind of composition. We would like to see also then potentially it drops down let’s say lower than 40%, but given that they are still the biggest markets we don’t think they will dropping down to a 20% that quickly. I think they will still be experiencing good growth in the cities, but the third tier cities will grow a bit faster this year.

Dick Wei - Credit Suisse

Got it, great. Thanks a lot Hong.

Hong Zhao

Yes, thanks Dick. I appreciate it.

Operator

Thank you for your question. The next question comes from the line of Gregory Zhao from Citigroup. Please go ahead.

Gregory Zhao - Citigroup

Hi Mo. Hi Hong. Thanks for taking my question and congratulations on the strong quarters. I have three questions. The first question is about our marketing service, actually in the past quarters we record about flattish or mid-single digit year-on-year growth for this quarter, where you recorded very strong growth, so what’s the reason behind it call of at the upper lift of selling price or is there increase of inventory or the selling through rates? This is my question.

My second question is about our SouFun card business, I think your competitors like E-House also have similar e-commerce products in top tier and in second tier cities and the contract, most of the contracts are exclusive for developers. So when we pitched our products to the developers, how we differentiate our e-commerce products and so what’s the core advantage of us? And my last question is about our mobile business as Mo mentioned that the mobile business is coming up, so currently what’s revenue percentage taken by mobile and what’s the monetization method? Thanks.

Hong Zhao

Thanks, Greg. Great questions. Can I take the last one first? Because there is more data points are easier to address. Mobile business now, because we just started monetizing it back in October, when we hit a million subscriber I mean, million viewer per day. So with very limited number of monetized, but it’s shown a great promise. I mean, right now this account for about in Q3 – in Q4, it accounted for about 1% of total revenue. So that is also a really good start. And on the listing front, it seems like our mobile we are looking at already another 15%, 20% increase already in the mobile subscribers to our listing mobile, mobile listing services. So that’s a very healthy starting trend for us. So that’s the question on the mobile.

On the marketing increases in Q4, to be honest, Q4 is really because the fundamentally the market was quite active, especially in the lower tier cities. We are able to maintain our regular sort of 10% increase in Beijing and Shanghai area in our first tier cities. And then – but the third tier city actually came up very, very strong and is just an underlying market, I mean, you look at the transactions, we do have more developers putting advertising and also on average, I mean, the developers also putting more, spending more money to do an advertising in Q4 and that’s from some of the numbers we can say from the smaller cities.

And the third question is really differentiating your question is mainly the competitors are offering similar products right. And how does SouFun’s product different from all of them? Quite frankly, if you just look at the appearance of it, I mean it’s very similar. I mean, it’s the same discount and then getting – charge the members for the things. But I think with SouFun, the biggest differentiator is that we have a good platform and our platform attracts 3.5 million viewers on a daily basis. And also we have 15 million strong SouFun card members that are registered on our website. And that number has grown too from about 13 million a year ago to now about 14 million, 15 million. So these are some of the, I guess, things that allow us to be more effective in terms of administering this kind of products and programs with developers. So that’s essentially the competitive advantage and we are quick to adapt to, I mean, whenever we need to see, we need to add enhancements and things into the program, we will do so. And also different strategies facing different city, because they do have – every local markets do have slightly different needs and will tailor our program towards it as well. So these collectively are what differentiate us from some of our competitors. I hope that helps.

Gregory Zhao - Citigroup

That’s very helpful.

Operator

Thank you for your questions. The next question comes from the line of Anthony Thong from 86 Research. Please go ahead.

Anthony Thong - 86 Research

Hi, good evening. Thank you for taking my questions. Please note most of my questions have already been answered. So I have here a quick one. Having said that, SouFun recently started buying search ads on Qihoo, especially in (indiscernible), management give some color on this partnership with that impact in marketing dollars, spend dollars are challenging. In other words, are these spendings incremental or out of our budget first on Baidu and how do you picture the total trends traffic acquisition costs to increase in 2015 – 2014? Thank you.

Hong Zhao

Okay, great questions, Anthony. And Vincent, do you want to share some color on this or do you want me to go ahead?

Vincent Mo

Yes, go ahead, yes.

Hong Zhao

Yes. On the promotion spending or search engine spending, it’s going to be relatively incremental. One of the – as we pointed out earlier, one of the priorities this year is to make sure that SouFun’s brand is well-known now, so that in turn it drives a lot of traffic and really increase the effectiveness of various programs that we offer. So that becomes incredibly important. And then so budget wise, we definitely budget a bit more on the search engine or effective traffic entrances purchase that capacity. So this will be incremental. If you look at the traffic, sorry the second question about the traffic acquisition cost is it particularly to SouFun or is it like in general?

Anthony Thong - 86 Research

It’s particularly for SouFun, how much you spend on the search engine as a whole versus last year?

Hong Zhao

Well, this year, I mean, these kind of things tend to be quarter-after-quarter, it’s not – but we are constantly looking for ways to secure longer term partnership with them. And compared to last year, yes, it will be a pretty significant increase, but we just – at this point, we just don’t quite have a good number as far as what percent of increase will it be, but it will be significantly – it will be a significant increase compared to last year’s number.

Anthony Thong - 86 Research

Okay, thank you.

Hong Zhao

Yes, thanks.

Operator

Our next question comes from Lu Fei Fang from Goldman Sachs. Please go ahead.

Fei Lu Fang - Goldman Sachs

Hi, Vince and Zhao Hong. Thanks for taking my questions. I think the 4Q numbers show that e-commerce is modestly slowing from the third quarter and the second quarter in terms of the growth rate while marketing services are clearly peaking up, marketing services used to grow at single-digit, now you have got 21% year-on-year. So how do you manage the relative growth rates of the two sub-segments? And also are we going to see that marketing services and e-commerce revenues will converge in 2014? Thank you.

Hong Zhao

Thanks Fei. Good question. On the marketing services, quite frankly, marketing service is – we see the growth in Q4 very encouraged by it. And definitely, the underlying market has activity, has a good amount of things to it, but on the other hand we are also really managing the cannibalization and offset between the two programs to make sure that we fully sort of exhaust the potential for marketing and then get in with the sort of value-added e-commerce business program, introduce those to them. So that’s how we are going to continue to manage the programs, make sure that we achieve the right amount of balance between the growth of marketing services, traditional marketing services and our e-commerce. And mind you though, I mean, marketing services is not only grow in the single-digit, I think it’s just the past, I would say probably three or four quarters that we have that kind of issue. But since we started addressing especially with the introduction of e-commerce, but since we started addressing that problem internally how to manage two programs, I think we are seeing it improving steadily over time. So that’s a very encouraging trend to us.

So as far as you are seeing, are they going to converge meaning again you’re seeing because right now right on the marketing services are – I think e-commerce already surpassed marketing services, but will they actually exceed marketing service in the near future. I think probably this year probably not likely, but looking at it, I mean it’s awfully close. So I think potentially it could converge in the next year or two, I mean it’s definitely one of the things. And another, does e-commerce been a very high growth line, it tends to have that effect. But one of things is marketing services are still contributing to good 20% I am sorry good 30 some percent of our business. So we will continue to put a lot of emphasis on it and design the products as Vincent had pointed out for the marketing service design products to make sure that we fully take advantage of the increased internet penetration as well as mobile platform to sort of carry back to a growth track.

Fei Lu Fang - Goldman Sachs

Got it, thanks Zhao. A follow-up question on the listing services, how do we think about the growth rate in 2014, because if you look at the quality trends, our leasing services really accelerated at the beginning of 2013 for the base for next year will be slightly higher, so in your growth guidance, full year growth guidance for 2014 what would be the assumption for the secondary home segment?

Hong Zhao

Quite frankly, today I mean we typically – when we could do the guidance we typically do it on an overall basis. So it’s very – we cannot try to kind of dissect it into every business line because collectively we think that listing service will grow faster, but collectively we believe in our judgment that we will hit the 22.5% and 25% mark given the information we have now. But obviously listing services will continue its momentum, and it won’t - but it can’t continue growing at a 150% basis. I mean it’s we also don’t believe that that’s quite sustainable. However, we do believe that it will continue to grow at a higher rate, probably higher than the average.

Fei Lu Fang - Goldman Sachs

That’s great. Thank you.

Hong Zhao

Thank you.

Vincent Mo

Thanks.

Operator

We have another question comes from the line of Chao Wang from Nomura. Please go ahead.

Chao Wang - Nomura

Hi. Thanks for taking my questions. I have two questions. First one is could you give us some guidance on margin especially in your budget on mobile products, that you can share with us both on R&D front and marketing promotional front? Second one is on the listing services, we heard that you are testing a bidding system in Shanghai if that is the case could you give us an update on that? And do you have any plan to grow out it to other cities? Thank you.

Hong Zhao

I am sorry, Wang Chao very nice to have you, but I couldn’t quite make out your question. I know your first question was about the difference in margin between these PC products and mobile products. Right, on the mobile product we really just have very limited data I mean we would just barely introduce that in Q4. Yes, it started contributing about 1% of the total top line, but at this point it’s very hard to come up with a very good estimate of the true margin really what it should be because quite frankly just not enough sample and not enough time first to build that. So sorry to disappoint you on that one, but we will continue to monitor it, I mean this kind of products should give us a comparable margin compared to the PC end. That’s what we are expecting. I mean the second question really I am sorry I couldn’t really make out.

Chao Wang - Nomura

Okay, no problem. And my second one is actually we heard from agency that you are testing the new monetization initiative in Shanghai I am not is that true or not?

Hong Zhao

The new monetization product services in Shanghai?

Chao Wang - Nomura

Yes, so basically you are testing the bidding system, real-time biddings maybe just offering...?

Hong Zhao

I see, okay, you are talking about different – the ways we charge your fees, it based on the collect or….

Chao Wang - Nomura

Right.

Hong Zhao

I see, I see. Obviously there are number of models in the marketplace right, the CPC model or the model we have and so far we are actually constantly testing this kind of stuff. We will pick a city and we want to see hey if we switch to a different fee model what’s going to do, just to make sure that we are picking the best option. And right now we are stick to our current fee structure because based on testing result past testing results we think that this is still the best and most acceptable in the marketplace. But obviously going forward, we will continue to monitor different places to see how if switching to fee model can get us better result, then we will go that route, but until that’s proven we would probably will continue to strengthen our current market and current practice.

Chao Wang - Nomura

Okay, understood, thank you.

Hong Zhao

Okay, thanks.

Operator

Thank you for your questions. The next question comes from the line of Wendy Huang from Standard Chartered. Please go ahead.

Wendy Huang - Standard Chartered

Thank you and congratulations on the strong results. My first question is about your top end growth, so in the beginning of 2013, you guided only a 20% to 23% of your growth but you ended up with 48% of your growth. And now again you are guiding only mid-20s are growth for the coming year, I wonder what’s the uncertainties that you are trying to expect in this kind of conservative guidance, is this uncertainties related to the competition or is it uncertainties related to the macro?

Hong Zhao

Thanks for the question. This is great question. Vincent, do you want to take it or?

Vincent Mo

The one that you answered first, so if I wanted to add something I would add on.

Hong Zhao

If you add, then please feel free to churn in. Actually when we gave this guidance, I mean, a lot of times, it’s a bit of both, I mean, when you say looking at macro, you are looking at all kind of things. Quite frankly we just don’t have that much visibility, I mean, if we have a crystal ball we would have given you the very precise number, but then there won’t be any surprises. I think a lot of these has to do with looking at the current data, looking at the current marketing – market condition. We just – as far as we can see we think that 22.5% and 25% is a reasonable increase growth rate going out. But we also have the tradition of if we see more data, if we have more – accumulated more results say for the first quarter and we see better trend, we could potentially rise it up or revise either way but just we have to sort of do it as we are going on, as we demonstrated in this past year would be increasing our guidance whenever we have more operational data to support a revised guidance, we will do so on the quarterly releases, so.

Wendy Huang - Standard Chartered

I understand that the company may update the guidance based on the increasing visibility that you may get down the road. The reason I actually asked this question is because in your previous comment about macro impact you seems to the thinking that you guys are just (indiscernible) or e-commerce in that just as scratching the surface of the total real estate as budget or the total real estate transactions, then you shouldn’t be actually affected too much by the macro environment, but at the same time your conservatism in giving the guidance seems to suggest that you guys are actually affected by macro, so just…

Hong Zhao

Well, on that point it’s not that we – again we have to take everything into consideration, macro, now we are not – we don’t have direct correlation if we put that in that world. But if the macro becomes it deteriorates really, really I mean, significantly then causing the real estate market to stop, then it will impact us. I mean, it will impact everybody actually in that kind of market condition. So what we are saying now, we mean that we definitely I mean even though right now, the outlook for the – from our perspective, we think that housing market is still – will come back to a relatively new status, a steady growth, but not hyper price inflation type of situation. That’s what we believe in, but there is always that sort of a ball that you just don’t know what could happen. And also some of that realization is depending on how well can we execute our strategy if we continued actually well and we prove that in the first couple of quarters, then we will have more confident that hey, this is more achievable goal and we will then revise that guidance as we have the numbers. That is really the approach that we are taking.

Wendy Huang - Standard Chartered

Sure. My second question is on your operating margin guidance, so in the past several quarters you have always been speaking to a 35% non-GAAP op margin, but in recent quarter, your non-GAAP op margin recorded new high at 59% based on my calculation. So can you give us some update on the non-GAAP op margin level for the 2014? Thank you.

Hong Zhao

Yes. I mean, I think the 35% margin has been well talked about and it doesn’t mean that we have to be at that level, it just means that if it’s above 35%, then management will tend to be a little bit more aggressive in terms of investing in technology, investing in branding and investing in hiring people quite frankly and expanding into other business lines, but if it drops close to or below 35%, then it’s alarming and then we will have to think about a lot of cost-cutting and show the conservative kind of approach. So that’s sort of the thing about 35%. Obviously, we are at much higher margin now we are at 40% some towards the end of this year, we are at actually high 40s, which is going out this year though given that we will have more as we talk about investment into technology investment into our new product developments and also quite frankly investment into branding promotion type of initiatives, the margin could deteriorate a little bit, but we are not looking at material deterioration in margin and certainly as 35% and above is very achievable to us at this stage.

Wendy Huang - Standard Chartered

And I want you to clarify on some basics, so in your previous comments about different gross rates of the marketing services, e-commerce services, you mentioned that the company has been trying to reduce the cannibalization between the two business segments. So are you implying that for the property developers, actually they consider these two fees or both of them are actually cannot their marketing budget or not?

Hong Zhao

Marketing services, traditional marketing services, definitely that money comes straight out of their marketing budget. I mean, that’s kind of no-brainer there, but in terms of the e-commerce, I think the essence of your question is does it make a bigger pie, right rather than just a difference – different kind of a same pie. Quite frankly, I mean, it seems to me and in talking to our operations people, it seems to me that the e-commerce business somehow actually have an effect of increasing the pie a little bit so that they have a little bit more discretional spending to get ahead of internet platforms like SouFun to do more of a performance-based marketing for them just because of this sort of the e-commerce arrangements. So that’s what we see, but there is definitely certain level cannibalization, I mean, that’s because if the developer continued to move to a e-commerce model and not trying to spend money on marketing. Obviously, I mean obviously it will impact marketing, but so far what we have seen is they are willing to show out money for marketing because they still have to do it anyway to get their brands out there, to get people know that they do have this kind of projects out there that they are ready to sign. And frankly by effectively marketing it they can actually enjoy a potentially a better price. And then it comes to e-commerce that will help them to really move the inventory. So it’s more of a combination of things. I mean it depends on the projects, every mix is a little different, but we definitely see that being a combination rather than just one or the other.

Wendy Huang - Standard Chartered

So just to follow-up on that, so are you collecting the e-commerce revenues directly from the product developer or from those home buyers?

Hong Zhao

Membership fee you mean?

Wendy Huang - Standard Chartered

Yes.

Hong Zhao

The member ship fees is charged by – it’s from the members, from the members, from the home buyers.

Wendy Huang - Standard Chartered

If that’s the case then how would it be constituted part of the overall marketing budget for the property developers?

Hong Zhao

Part of the money they still have to give a discount at the end of the day.

Wendy Huang - Standard Chartered

Okay. And also finally you mentioned about 8% average penetration rate of the e-commerce and also you said long-term you are targeting 30%, so what penetration rate of the e-commerce in Tier 1 city right now?

Hong Zhao

I am sorry in Tier 1 cities you mean, it’s at about 20% at this point.

Wendy Huang - Standard Chartered

Okay sure. Thank you very much.

Hong Zhao

Yes.

Operator

Thank you for your questions. Your next question comes from the line of Joyce Zhou from Barclays. Please go ahead.

Joyce Zhou - Barclays

Hi. Thank you for taking my question. So I have a simple question on the cost outlook for 2014 especially you mentioned about your plan to expand to new cities, what about your hiring plan, do you target to hire more people and do you have that target number in front of you by end of 2014? Thank you.

Hong Zhao

Yes, that’s good question actually as we are expanding into the cities, absolutely we will be hiring people. The typical – generally the guidance is if we see the need – if we wanted the revenue to grow at say 25% then the hiring – the headcount increase usually would not exceed 10% to 12%, so that’s our general rule of thumb to make sure that we don’t run a too much of over staffed business. So that’s that. I think given now the hiring target probably would be between 10% to 15% at this point.

Joyce Zhou - Barclays

Okay, thank you. And I have a little follow-up question. So on your mobile revenue target for 2014, currently I know it’s 1% you have like target for end of this year or longer term target? Thank you.

Hong Zhao

From a mobile business?

Joyce Zhou - Barclays

Yes, mobile revenue?

Hong Zhao

Yes, I mean I think right now the target is not necessarily on percentage of revenue, I think right now one of the key focuses for the mobile is continue to drive the traffic growth, because we think that once the traffic is out there, once we are the most dominating platform. And right now in terms of traffic we are probably a – we are in the leading position. However, we wanted to further separate us from the pack – from the competition. So once we achieve that I think money will just come it’s really not a matter of ape, it’s really when. And so right now, we don’t have a firm target to say it has to be 10%, 15% of our total revenue, but (indiscernible) that’s kind of currently where we are now on the mobile, most importantly having the traffic growth.

Joyce Zhou - Barclays

Yes. Can you remind what’s the number of the total user of the listing service on the mobile platform?

Hong Zhao

The number of total mobile let me check. I mean, right now, to be honest it cannot compare to the PC end, the PC end has almost 200,000 of them that have been used. Mobile, I probably think I would get back to you on that number. We should have that mobile subscriber numbers on the – yes, can I get back to you on (indiscernible), sorry.

Joyce Zhou - Barclays

Sure, Zhao. Thank you.

Hong Zhao

Yes, thanks.

Operator

Thanks for your questions. We have another question comes from the line of Jack Yang from TH Capital. Please ask your question.

Jack Yang - TH Capital

Hello, Vincent and Hong. I have a question about the financial business and what ask there are some worries about the tight policy in the mortgage policy this year. And I wonder, it will be appreciated if you can talk about the financial business and the impact for our business as we just started. And also I want to know the – when could the revenue kick in probably this year or is it already in the guidance? Thank you.

Hong Zhao

Again thanks, thanks John and again Vincent do you want to take this question?

Vincent Mo

Go ahead, please.

Hong Zhao

Okay, that’s great. Well on the financial service side I mean one of the key things is the financial has to be part of the – I guess to facilitate or improve our current business that’s definitely one of the key things that we wanted the financial service to do. And so right now it’s the first stage where we do the platform and getting – advocating a lot of products on the website. Second stage will be finding the partners and jointly design certain products to meet the needs of our members as well as the home buyers. And thirdly we could potentially have our own products that’s out there to meet the needs of our members exclusively for SouFun.

And so these are the kind of three stages. Right now we are in the – we are really in the first stage. We launched our platform and then we’re also working with – looking for partner and working with partners and designing certain products and trying to meet the needs. However, in terms of revenue I think it probably will kick in we will see some revenue kicking in starting from the third quarter of this year, second half of this year. And – but we are not expecting it to be significant for the year because really this is the year that we started this. And then next year we probably will see a more meaningful contribution from financial services. And our guidance currently does not include the impact of the financial services to our business.

Jack Yang - TH Capital

So you mean you could have to diversify revenue model for this business, as you mentioned you would design your own products. As far as I know or again do you charge the commission from the banks or you try to do more?

Hong Zhao

As I said earlier I think answering in response to another analyst’s call questions is that we do have on the platform we do have on the platform we do have a number of ways to monetize. I mean it could be one, advertising listing fee for listing the products and also direct lead generation and referral type of fee that if we have a very successful referral, then we will try draw your service fee from the banks. So these are the type of monetization opportunities for the platform, yes.

Jack Yang - TH Capital

Okay. And (indiscernible) has signed contract with the Bank of CITIC, so which banks have we approached possibly to sign the contract?

Hong Zhao

Which bank, well, we actually announced the partnership with (indiscernible), which is a great comprehensive servicing financial institution that are already our strategic, one of our strategic partners so.

Jack Yang - TH Capital

Thank you so much.

Hong Zhao

We have more than 24 banks partnership now.

Jack Yang - TH Capital

Okay, thank you. That’s all from my questions.

Operator

Well, thank you for your questions. You have got the follow-up questions from Vivian Hao from Deutsche Bank. Please go ahead. Ms. Hao, do you want to ask your question?

Vivian Hao - Deutsche Bank

Hi, thank you. Hello?

Operator

Please speak closely to the phone or you may change to the handheld.

Vivian Hao - Deutsche Bank

Hi. I think my questions got answered earlier. Thank you.

Operator

Thank you for your questions. I have got last questions from the line of (indiscernible). Please go ahead.

Unidentified Analyst

Hello.

Hong Zhao

Hello.

Unidentified Analyst

Hi. Just a quick question, can you just distinguish for us what is an – so obviously we have got listing services, marketing services and e-commerce, out of all of those, what is the primary housing transaction split and what is secondary housing transaction-related?

Hong Zhao

Yes, absolutely. The marketing service and the e-commerce business, these two are mostly new marketing – new homes marketing, I am sorry, new homes market and listing services targeting mostly secondary home business, secondary home market.

Unidentified Analyst

Okay, it’s as simple as that.

Hong Zhao

Yes, yes, yes.

Unidentified Analyst

Very good, okay. Well that’s all I had to ask. Thank you very much.

Hong Zhao

No, thank you. And operator, due to the time, can we have just another question? I don’t know how many are in the queue, but then we can just take it offline and they can contact us directly.

Operator

Sir, we have no further questions at this time. I would like to hand it back to you for any closing remarks.

Hong Zhao - Vice President, Finance

Okay, great. Well, again, I want to thank everyone for taking the time and joining us for the call. And as you know, SouFun will continue to do our best to deliver results, consistently deliver results and make money to drive long-term value for our shareholders and so have a good day everyone and Happy Chinese New Year to you all. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes the earnings conference call today. Thank you for your participations. You may now disconnect the line.

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