Phoenix New Media's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.26.14 | About: Phoenix New (FENG)

Start Time: 20:03

End Time: 21:01

Phoenix New Media Limited (NYSE:FENG)

Q4 2013 Earnings Conference Call

February 25, 2014 8:00 PM ET

Executives

Matthew Zhao – Manager-Investor Relations

Shuang Liu – Chief Executive Officer

Betty Yip Ho – Chief Financial Officer

Ya Li – Chief Operating Officer

Analysts

Philip Wan – Morgan Stanley Asia Ltd

Alex Yao – JPMorgan Securities

George Meng – Macquarie Capital Securities Ltd.

Eddie Leung – Merrill Lynch Far East Ltd.

George Wu – Legends Asset Management

Operator

Ladies and gentlemen thank you for standing by and welcome to the Phoenix New Media Fourth Quarter and Fiscal Year 2013 Earnings Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, the 26 of February 2014.

I would now like to hand the conference over to your first speaker today Mr. Matthew Zhao. Thank you. Please go ahead, sir.

Matthew Zhao

Thank you, operator. And thank you and welcome to Phoenix New Media fourth quarter and fiscal year 2013 earnings conference call. I’m joined here by our Chief Executive Officer, Mr. Shuang Liu; our Chief Operating Officer, Mr. Ya Li; and our Chief Financial Officer, Ms. Betty Ho.

For today’s agenda, management will provide us with a review on the quarter and also include a Q&A session after the management’s prepared remarks. The fourth quarter and the fiscal year 2013 financial results and the webcast of this conference call are available at the Investor Relations sections of www.iFeng.com. A replay of the call will be available on the website in a few hours.

Before we continue, I refer you to our Safe Harbor statements in our earnings press release, which applies to this call, as we will make forward-looking statements. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in Renminbi.

With that, I would like to turn the call over to Mr. Liu Shuang, our CEO.

Shuang Liu

Thank you, Matthew. Good morning and good evening everyone. We are very pleased to close our 2013 is another strong quarter and heading to 2014 on a high note. We achieved robust top line growth of 32% year-over-year, which comparably beat our guidance and non-GAAP net income growth of 254%, which significantly beat the 3%.

Our strong financial performance was fueled by the glowing popularity of our highly recognized brand and expanding platform, on the portal side daily unique visitors on iFeng increased by 23.4% year-over-year to over a $40 million in December. According to iResearch, and our daily page views increased over $375 million making the iFeng homepage, now the second most visited homepage among all Chinese media website after [indiscernible].

Looking beyond our financial and operational success, 2013 saw the evolution of company from a news focus portal leader, into a diversified news and lifestyle of the company, as we expanded into several new verticals such as videos, [indiscernible] as well as hosting many media events on broader subjects further expanding our impact across China’s media front.

On today’s call I would like to highlight a couple of recent initiatives on our progress before we discuss our 2014plan as well as financials. First in conjunction with our convergence strategy, we’re simultaneously focusing on the development of our mobile and video elements. Some of our regional mobile initiatives in 2013 such as a release of an updated mobile app with improved interface and usability as well as our partnership with our China Unicom to offer a mobile video package to their 3G subscribers has already began to show encouraging initial results.

In December of 2013, our mobile internet daily unique visitors have increased to 10% quarter-over-quarter to 24.2 million helping to further drive increase in viewership across our various platforms. In late 2013, we also released another major update to our mobile video mix application which integrates video conference, especially tailored to the iOS7, enhancing our user experience and increasing engagement on this platform, and also innovatively imported some of the best features, layouts and design from a PC website to our mobile application.

Additionally, in the fourth quarter we saw mobile app sales increase at impressive 65% year-over-year, which now accounts for 11% of our total advertising sales. For 2014, we will be emphasizing direct monetization of the mobile platform in sales and stimulus convergence with the group’s overall TV and Internet properties, further advancing our strategy to capitalize on the synergies and economies of scale inherent in our expanding media business.

Turning to our video content offering, in the past quarters we launched the first pair of talk show program Super Mummy which offers new mothers professional advice and tips about nursing and educating babies. The show attracted more than 1 million hits in the first on air week; in order to further advance our reputation in the documentary category on November 13 we hosted the second annual iFeng documentary awards, which was the first documentary award in China awarded by a major internet media company.

From a culture and media industry perspective, we established a new and dedicated platform for identifying and promoting new artists and documentaries. From iFeng’s perspective, this award ceremony along with other initiatives surrounding the expansion of our documentary content help us to forge relationships with emerging artists and content providers as well as enrich our video content library with differentiated and thoughtful contents.

Secondly, turning to our core business focus of our offering proprietary and differentiated contents and providing sales journalisms across our integrated platform. In order to improve our brand awareness and further ingrain our sales in the Chinese media world, we continue to host a series of key marketing events during the fourth quarter. In December we partnered with our parent company, Phoenix Satellite TV to host the 2013 iFeng Finance Summit, which was seen we shift the market and focus on identifying key drivers, the top trainers, sustained its economic growth.

We were able to make the summit, which was broadcast live on both Phoenix TV and Internet an interactive experience with 1000s of our users by allowing them to join the discussion with gap interest through iFeng’s interactive online forum and blogs through these marketing forums and public forums we aim to capture and highlight the most [indiscernible] source on China’s economic development among Chinese government officials, economic leaders and scholars enhancing our media influence in Chinese society.

Certainly our expansion into key verticals has progressed very well, in particular our fashion channel continues to be ranked number one among all Chinese fashion websites, in terms of daily coverage, according to iResearch. In November 2013, we hosted iFeng Second Annual Fashion Award ceremony to recognize Chinese fashion leaders crossing global boundaries and support the Chinese fashion industry’s emergence on the global stage. The ceremony was a popular event generating hundreds of solid approach and discussion by the participating celebrities as well as our users on various social networking platforms.

So attracting more female users we have seen tangible benefits from these initiatives in diversifying our audience base and advertising verticals over the course of 2013. Another example, is our ongoing effort to enhance our real estate channel unique in comparison to other players in this field we established a well rapid information services platforms that is primarily focusing our up scale commercial properties, tourist property and pension property and overseas properties backed by our big data approach, our platform not only provides comprehensive advertisement solutions to realtors, but also present the information in an organized and coherent way to help our high-end users make informed buying decisions.

In the coming years, a key focus of ours is to achieve greatest synergy to accomplish with our parent company Phoenix Satellite TV, as you may have already heard lastly week the company announced that I will also be promoted as COO of Phoenix Satellite TV, in this new role I’m very excited to help spearhead this increasing cooperative efforts between two companies, serving in these core company roles our lead in strategizing, overseeing and allocating resources to implement the convergence of TV and Internet media.

So it’s actually convergence implementation, both companies stand to gain from the mutual errors of overlapping including the targeting and sharing of similar audiences, content providers and advertisers. These mutually vital areas will allow us to seamlessly expand user reach each of our media platforms, provide advertisers a one-stop shop solutions more actively monetize the Phoenix brand verticals and achieve greater cost synergies. On the whole, 2013 which is a year of positive trend, comprehensive expansion platform development mobile build-out, strategic initiative provision and strategizing regarding inter group convergence.

Heading into 2014, we are very confident that we are well positioned and well equipped to expand our user base and meet our audience dynamic needs as we solidify our core capital media leadership in the Chinese market.

With this I would like to turn the call over to our CFO, Betty Yip Ho.

Betty Yip Ho

Thank you, Shuang and thank you all for joining our conference call today. Let me take you through our financial highlights for the fourth quarter and full year of 2013 results. The amounts mentioned here are all in RMB unless otherwise noted. And all numbers are mentioned here are in non-GAAP adjusted numbers. The only difference between GAAP and non-GAAP with the adjustment of the shared based compensation expenses.

IFeng total revenue for the fourth quarter came in at RMB400.1 million, which exceeded the high end of our guidance by about 12.8%. Adjusted income attributable to Phoenix New Media for the fourth quarter was RMB92 million or RMB1.19 non-GAAP net income per diluted ADS.

Let me now run through the other key financial highlights starting with net advertising revenues. Net advertising revenues for the fourth quarter came in at RMB263.9 million, which beat the high end of our guidance by about 6% and represents a respectable year-over-year growth of 36.7%. Average revenue per advertiser increased by 24.9% to RMB0.8 million and advertisers number increased by 9.4% to 349.

Turning to paid service revenue, for the fourth quarter of 2013 iFeng generated RMB136.2 million paid services revenue, which beat the high end of our guidance by 5.6% and represents a year-over-year growth of 24.9%. Mobile value-added services revenue increased by 12.2% to RMB107.7 million, due to the company’s improvement in paid product distribution, diversification and marketing.

Games and other revenues increased by 118.4% to RMB28.5 million, primarily driven by the increase in revenues generated from web-based games on the company’s game platform.

Turning to gross profit and margin. Adjusted gross profit for the fourth quarter of 2013 increased by 60.5% to RMB218.3 million. Our adjusted gross margin for the fourth quarter was 54.6%, up from 45% for the same period in 2012. There are four components of cost of revenues, which are revenue sharing fees relating to paid services. Content and operational costs, bandwidth cost, and sales taxes.

On a GAAP basis, revenue-sharing fees as a percentage of total revenue decreased to 14% from 15.6%. Content related costs and operational costs as a percentage of total revenue decreased to 20.1% from 24.2%. Bandwidth costs as a percentage of total revenue decreased to 4.9% from 6.3%. And lastly, sales taxes as a percentage of total revenues decreased to 7.2% from 8.5%.

Turning to operating expenses, on a non-GAAP basis adjusted operating expenses for the fourth quarter increased by 16% to RMG138.2 million. The increase in operating expenses was primarily attributable to the increase in staff-related costs and expenses associated with company’s marketing and promotional initiatives.

Adjusted sales and marketing, as a percentage of total revenue increased to 21.6% from 22.1%. Adjusted G&A, as a percentage of revenue decreased to 5.8% from 9.4% and adjusted RMB as percentage of revenues decreased to 7.2% from 8%, adjusted operating income for the fourth quarter increased by 382% to RMB80.1 million. Adjusted operating margins for the fourth quarter improved significantly to 20% from the previous quarters 5.5%.

Turning to net income on a non-GAAP basis adjusted net income attributable to – for the fourth quarter increased by 257% to $92 million. Non-GAAP net income per diluted ADS for the fourth quarter increased by 263.9% to RMB1.19 million.

Turning to balance sheet items as of December 31, 2013 iFeng’s cash and cash equivalents with stated cash and bank term deposits totaled to RMB1.4 billion or approximately $233 million as compared to RMB1.25 billion as of 30 September 2013.

Let me briefly run through the quick figures for fiscal 2013, total revenues for 2013 were RMB1.4 billion representing a year-over-year growth of 28.2% from 2012. Net advertising revenues 541.6% year-over-year to RMB863.7 million, paid services revenue grew by 12% year-over-year to RMB560.7 million.

Total 2013 adjusted gross profit increased by 63% to RMB735.4 million, which represent a 51.6% adjusted gross margin which increased from 43.3% in 2012. Non-GAAP operating income increased by 189.8% to RMB264.9 million, adjusted operating margin improved significantly to 18.6% from 8.4% in 2012, non-GAAP net income attributed to items for 2013 increased by 159.6% to RMB296.3 million or RMB3.81 million non-GAAP net income per diluted ADS, non-GAAP net margin for 2013 increased to 20.8% some 10.3% in 2012.

Lastly I like to illiterate my business outlook for the first quarter 2014. We are targeting total revenues to be between RMB340 million to RMB351 million, representing an increase of 20.8% through 24.7% year-over-year. From net advertising revenue we are targeting between RMB230 million and RMB235 million, representing a growth of 38.2% to 41.2% year-over-year.

For paid services revenues, we are targeting between RMB110 million and RMB116 million, representing a decline of 4.3% to a growth of 0.9% from the third quarter of 2013.

This concludes the written portion of our call. We are now ready for questions. Please go ahead operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Philip Wan from Morgan Stanley. Please ask your question.

Philip Wan – Morgan Stanley Asia Ltd

Hi, good morning. Thank you for taking my question and congrats on a very strong results. So I have two questions number one so you mentioned about your vertical strategy and sort of price based on your direction I just want to know if you could share with us a little bit more about your detail given that there are already some category leaders in key verticals such as automobiles property and travel and how could Phoenix New Media compete of differentiation against that. Thank you.

Ya Li

Thanks Philip this is Ya. Yes I think for these verticals you mentioned particularly the auto and travel we have recognized the different roles we are playing compare to those vertical leaders. Our approach is capturing those brand advertising as well as the sales promotion marketing budget. And also we adopt big idea plus big data approach. We believe brand is always a much needed asset for companies to compete beyond just price and we have been playing the goal that’s why we are seeing our auto advertising contributing steadily growing.

The contribution actually has grown to 32% as of the last quarter of our overall advertising revenue. Our advertising – our vertical strategy I think this upon our existing leadership such as the fashion, such as in the entertainment factors. Our goal is to further expand into the lifestyle and consumption oriented verticals, through internal development, through partnerships, through even investments and MMA activities. But obviously we want to continue to adopt a differential strategy against those vertical leaders. I think Shuang Liu have more to add to this.

Shuang Liu

Maybe I can add the few more words. I want to emphasize about the progress we made in terms of vertical areas. Our fashion channel has number one ranking among all these portals. And entertainment channel has number two ranking. And the real estate and auto channels ranking is inline with overall portals ranking. So that provides a solid foundation while future revenue growth. What pleasantly surprises is that emergence of new opportunity in e-commerce related area, in this vertical areas like transaction related TV and transaction related advertising TV particularly in real estate and auto.

And we have – we are determined to come up with more innovative approach to tackle to these two areas. For example, in real estate area, we have partnered with very strong real estate players in Chinese market, we had a joint venture company to boost our efforts in those areas. And auto sector were also in the process of reviewing the internal structure. We’ll pretty soon will come up with new plan to boost our efforts in these areas. We believe vertical areas definitely present a huge opportunities for further monetization in terms of both advertising and also e-commerce.

We are looking at also some other market opportunities to further jumped up our performance in these areas like joint venture, like spin off, like we bringing investor catalyst, it’s all – we are balancing all these options. But we definitely formulate the medium organic growth. I think there is huge competitive advantage we have, which no other players have, like we have a very strong TV presence, we have very strong brand and our portal, has a huge traffic all these I think that loss of revenue synergy and cost synergy. So again it goes to approach to use our top priority but we don’t want to rule out the possibilities of acquiring some new small at a beautiful small enterprise which can supplement our witness in these areas.

Philip Wan – Morgan Stanley Asia Ltd

Okay. Thanks for the color. My second question is about your margin outlook in 2014 given that we saw a very strong market expansion during the year in 2013 and also with the financial issues that we talked about earlier in the call, I just want to see if you could add some color on how should we look at a margin trend for this year? Thank you.

Betty Yip Ho

Hi, this is Betty, thanks for the question. In terms of margins, I guess you’re talking about operating margins. For the fourth quarter of this year our operating margins achieved 20%, which is an increase from 5.5% same quarter last year. It was because mainly due to the increase of the gross margin, gross margin fourth quarter this year we achieved about 54.6% is the highest in our record, it was due to the reason that our revenue mix has been changed.

Our advertising revenue, the portion of our advertising revenue has increased from 66% to about 60%, that’s why increased our gross margin. And for the full year 2013, our operating margin achieved at about 18.6%, and we are looking at to at least maintain the same margin for the coming year.

Philip Wan – Morgan Stanley Asia Ltd

Okay. Thank you.

Operator

Your next question comes from the line of Alex Yao from JPMorgan. Please ask your question.

Alex Yao – JPMorgan Securities

Hi, good morning, everyone. Thank you for taking my question, and congratulations on a very solid quarter. I have two questions, number one is on your advertising outlook. So you guys did a very strong quarter in 4Q and also 1Q guidance is also very strong. Do you expect such a strong advertising growth momentum can continue into the rest of 2014? What are the key drivers that push your revenue growth from vertical perspective, which are the verticals that generate a lot of growth and which are the verticals that underperform compared to the others?

Secondly, I have a question on the video app side, which is a pretty unique content you guys offer in the market, but compared to the commercialization of and the tenant-oriented video content such as TV, drama, and the movie. I think this is a structure on the monetization in this video-based content. Can you just help us to understand why the market from at budget allocation perspective prefer to spend an impairment oriented contents rather than such a news-based content and how can you improve the monetization going forward? Thank you.

Ya Li

Thanks Alex for the questions. This is Ya. First about the outlook, yes, in the fourth quarter we see our advertising grew by 76.7%. I do expect that to be around the same in 2014 i.e., in the week 30. I think that is higher than the previous communications on our own previous expectation in December. I think last year the key driver for our advertising growth first is our continued growth in our PC traffic, but the fourth quarter was 23%. And we have right now combined PC with mobile DAU of about 64 million and our homepage of our PC website ranks number two among all Chinese media websites. I think that’s the foundation for overall advertising growth even that our user profile is dilated to be affluent and well educated.

And secondly, the mobile advertising and video advertising are the two drivers for our overall advertising growth last year. For the whole year, we see our mobile advertising revenue grew by 115% and video advertising revenue grew by 58%. And we think in 2014 those two areas will also grew in high double-digits, while our portal PC advertising will grow in low double-digits. That is our portal growth will still outpace our [indiscernible] other leading portals and when we look at the overall the macro picture, we believe our platform like us will continue to benefit the overall economic shift to online and that is the – I think setting – providing the major driver for advertising transaction or even payment related online content growth.

And when we look at the individual success in the fourth quarter auto sector contributed 32% of ad revenue and the food and beverage with wine – food, beverage and wine contributed 10%, e-commerce 29% and finance contributed 7%, healthcare contributed 6%.

Some of the areas like food, beverage and wine benefited from our development leadership in fashion and entertainment sector as well as our which speaks well four sectors like wine, like regional travel, traditional TV news program advertisers and in 2014 we do expect to see continuous trends in auto sector, in finance sector benefited from the insurance finance momentum, as well as the food, beverage and wine sectors.

That is our second question regarding the video advertising and especially comparison with the TV drama companies, now we believe first in the scale I think they are still different because of I think the competition and also the abundant providers of TV, drama and movie contents, the overall user base for TV drama players actually is greater than the news, video audience.

And secondly there is a better management from the TV, drama advertisers, when we adopt the similar advertising metrics, online, and while as the leader and probably we’re not a very few promoter for online news video content have an established industry wide acceptance of the best measurement metrics for online news, video, advertising, because of the different habit on TV forever these two types of video contents attract even type of users, I think the TV, drama content attracts more households I think household some times household or younger audience much younger audience.

While the news video contents attracts better educated, more affluence, more influential audience and especially in the coming convergence of the 4G mobile internet and also the

internet TV in the living room the news video contents and we’ll be welcome by lot of the mainstream internet users in China and will be valid by more categories of internet advertisers.

Right now we have seen strengths viewing as we mentioned before in the wide regional travel and some industrial group acceptance. These factors are very different from those factors for TV, drama advertising. So I think with the emergence of 4G internet and smart TV in the living room, we will see our news video strategy become better monetized. Hope that answers your question.

Operator

Your next question comes from the line of George Meng from Macquarie. Please ask your question.

George Meng – Macquarie Capital Securities Ltd.

Good morning, everyone. Thank you very much for taking my question. First of all congratulations on a very great quarter, I have three questions if I may. The first one Shuang Liu, first of all congratulations on your new role, I just wonder because you talked about the convergence of multiple screens especially after you’re promoted to the new role, but can you elaborate to us if you have any near-term plans on that. And also directionally do you think that means that you’ll have more video content on iFeng from the Phoenix televisions. And also vice versa meaning are you going to in output some of your iFeng original video content to the TV part. And can you also remind us currently how much of your video content is actually coming from the Phoenix TV, that’s my first question thanks.

Shuang Liu

Okay, let me answer your first question. I’m personally very excited about this new iFeng I think this appointment demonstrates Phoenix TV determination to push the convergence of TV, Internet and mobile. If you look at the all these players in the China’s Internet market. None of these portals has been backed by us strong traditional media like Phoenix TV. And you also look at the all these traditional media players in China’s TV market like CCTV [indiscernible] and Oriental TV, none of them has such a strong new media arm to back home. So, the chemistry between our two sides is very huge. The lots of synergy yet to be released I think my task is to stabilize – to stabilize to overseas and to allocate resources to push that the convergence. So, lots of things we can do on both side like we can co-produce contents, we can run co-branded marketing company.

We can have co-coverage of major world events. We can provide one stop shop solutions to our advertisers, a lots of cost synergy and the revenue synergy. In terms of constant sharing, I think its two way traffic. Phoenix TV will dismantle all the used technical hurdles between our two companies to make sure the confident on both sides could be shared by each other, anytime, anywhere, seamlessly. So Phoenix TVs could have either access to the original programming we provide.

We can have an instant access to the content library of Phoenix TV. So its got to be two way traffic. But in addition to Phoenix TV content, we also acquire content from other domestic players, so its not our video strategy is definitely news and documentary driven that Phoenix TV content I think…

George Meng – Macquarie Capital Securities Ltd.

And less than 35%

Shuang Liu

Yeah, about 35% of our whole content library. I think that ratio will probably remain the same. Do I answered it correctly?

George Meng – Macquarie Capital Securities Ltd.

Okay, yeah, great. And then my second question is also related to your video content, so you mentioned that you launch this new program called Super Mummy in the fourth quarter, does that mean I think that’s more or like a variety show rather than your traditional news or documentary. So does that mean you’re taking a more diverse approach on the video content and I think because these kind of variety shows are more or longer in terms of duration, is there any impact on your analyst cost? And can you remind us what’s your at revenue contribution from video? Thanks.

Ya Li

Thanks, George. The Super Mummy program launched in May to November and it’s a long format I think – at least some variety show elements in that. It’s a strategy that adopt for those vertical areas where we can both diversify our audience base for example in this case to include the young mommies, young moms as well as draw a lot of vertical advertising budgets. In fact within I think the first day, we attracted two major advertisers and currently I think we sold through half year for 2014 for these program. We are also strategizing and also planning for other long format vertical area shows like this all related to lifestyle and consumptions and we hope this can enrich our video content offerings but it is still different from those TV drama, those comedy shows, produced by the other TV drama video players, we believe these is inline with our growth, our portal strategy, vertical strategy as well as our video strategy, the impact on content consumption is still minimum at this time. And so I don’t think in terms of margin pressure it will have an active impact.

Shuang Liu

Let me add to that…

George Meng – Macquarie Capital Securities Ltd.

Sure.

Shuang Liu

Also let me add that, going forward I mean three to five year timeframe I think the TV station concept itself will become relatively weaker and the content production cost is significant will become stronger. So we’ll definitely be well prepared for that. So we need to come with more inner related internal structure, internal incentive scheme and internal team to get ourselves ready for that kind of a mega trend to more aggressively patent to content production area that step by step. We need to strike a balance between our advertising revenue growth and also our margin improvement.

Ya Li

Also George you also asked the video revenue contribution, isn’t advertising including mobile, the video contribution grew from 14% overall in 2012 to 16% overall in 2013. In the most recent quarter contribution was 17% it would have been greater if our mobile revenue have not grew by triple digit last year, so as indicated only look at Q3 within the advertising contribution the video advertising revenue is nearly 20% already.

George Meng – Macquarie Capital Securities Ltd.

Okay, great and my third and also last question is regarding your mobile apps revenue contribution, you mentioned its about 11% in the fourth quarter, can you give us a little breakdown of this 11% meaning how much of that is coming from your mobile portal or the mobile iFeng website and how much is from your apps and also in terms of the traffic contribution. Do you have anyway to – like how much of your total traffic is now coming from mobile now? Thanks.

Ya Li

Yes, first the revenue split we don’t give that information, but we did disclose that within our $24 million mobile DAU, a larger part is from the mobile websites, a smaller part is from mobile apps including the news apps, the video apps, as well as the newly audio apps. And most of the mobile advertising is still non-video as we only started to sell our mobile video apps and if you look at the traffic contribution relation to 40 million DAU on PC and the 24 million DAU on mobile.

George Meng – Macquarie Capital Securities Ltd.

Great, that’s very helpful. Thank you very much.

Shuang Liu

Thanks.

Operator

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

Eddie Leung – Merrill Lynch Far East Ltd.

Hey, good morning. Thank you for taking my questions and congratulations on the very good quarter. We have been talking about the graph new side of quarter well. So just wondering into 2014, what could be some of the key areas that you guys would put more resources or expand those behind in terms of R&D and marketing and promotions? Thank you.

Shuang Liu

Yes, thanks for the question. In terms of R&D, yes, we certainly, we are accelerating our technology applications into our product to enhance those experience especially in some data base driven PC or verticals, and also in our mobile apps, in area such as personalization and localization those are the two major application area we are trying to increase our R&D efforts.

And not also R&D are helping us saving on contents bandwidth cost as well as the convergence reach the parent company to provide a better program production and co-coverage of major events. And in terms of the marketing, we did announce the last quarter, we held four major events, two new [indiscernible] fashion. And we also spend some outdoor plant advertising in December.

In 2014, we focus our mobile user growth and mobile user experience enhancement. Our marketing and promotional cost will be smartly spend to gain users with high retain rates rather than just blindly spending on those page user growth as some of the earlier practice in the industry. So overall marketing cost, we think our overall operating expense is rather limited, as we continue to leverage the users of the leading content provider, admin provider in China. So events marketing and also the marketing is apparent and the new stream in marketing will still benefit us, these are rather high ROI approach to the marketing strategy.

Eddie Leung – Merrill Lynch Far East Ltd.

Got it. And then I have one last question about your user growth, you have been seeing very good user growth in the past couple of years, so just wondering where you think getting these users, are you guys getting market share in the top tier cities or are you getting more users from the lower tier cities, and in your penetrating beyond your core user base?

Shuang Liu

Indeed yes, our user growth is very comprehensive, we do see a lot of growth including from the third and four tier cities, because we already have reached a scale, our monthly user coverage is more than 60% of the overall Chinese population. I think if you have to see the difference among all users against the competitors, I think major difference maybe the age. We have very few users with age under 15 or 18, while users under age 18 I think contributes more than probably sometimes even 20% of some peers audience base.

I think that’s the major difference. However, we are gaining audience across different layer of the cities. And whether it’s reaching, as we think the audience we gained are also among the high tier, the high end of those regions. For example, even for the third tier or fourth tier city, our audience are generally better additive or more affluent.

Eddie Leung – Merrill Lynch Far East Ltd.

Thank you. That’s very helpful.

Operator

Your next question comes from the line of Yinghan Ding [ph] from Deutsche Bank. Please ask your question.

Unidentified Analyst

Hi good morning, Mr. Liu, Betty and Matthew. Thank you for taking my question. I’m asking question on behalf of Alan Hellawell. Actually I want to – we noticed that sorry, the fourth quarter margin has relatively higher expansion than last quarter and when there among the course of sales category, why the revenue sharing fees is going down with roughly 26% quarter-on-quarter, such a big difference there. Could you please give me more color on this one?

Betty Yip Ho

Yes. Hi, this is Betty. As mentioned before the price of the gross margin this quarter from 49.2% last quarter to 54.6% this quarter, is largely because of the change of the revenue mix. The advertising revenue has been increased from 60% to 66% from last quarter to this quarter; as a result the paid services revenue has been decreasing as well as the cost of revenue has been decreasing because the cost of revenue share related to the paid services. That’s why the gross margin has been improved over the fourth quarter this year. Does that answer your question?

Unidentified Analyst

Yes, thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of George Wu from Legends Asset Management. Please ask your question.

George Wu – Legend Asset Management

Hi, congratulation for the very strong quarter. I would like to ask two questions. My first question is regarding on the Internet advertising market in general. Due to the – and the acceleration and reallocation fund of project and from traditional media to new media especially on the video side, especially in the first quarter?

Ya Li

Okay, yes, combining our observation and also our understanding of the industry expectations, we believe that the market is expecting probably for the relevant to our business. The PC portal stayed stable in 2014, while the video advertisement to grew around 40%, mobile tends to grow out 80%. For us I think we do see the video and mobile advertising to grow as we mentioned in high double-digits while our PC portal will grow in low double-digits versus the peers staying relatively stable.

From traditional media to online media transition actually is very transparent through last couple of years. First of course in online video space of course TV advertising budget has continued to shift including to our own news video programs, it will see the volume beverage companies and that the regional travel budget and also some of the auto even auto budget transferring to our news video driven content. And also for sectors like luxury brands, we do see the trends the advertisement budget migrating from print media such as high end fashion magazine advertising to our fashion vertical advertising.

We believe that trend will continue especially with accelerating e-commerce, Internet finance or those online to off line transaction both with mega trends we further drive traditional media advertising spending to online and we with a strong and high quality user base across China will benefit from that.

George Wu – Legend Asset Management

And that helpful, my second question is regarding on the rate card as well as advertising inventory increase, can you give any highlight on that.

Ya Li

Yes, in January we did increase our premium PC advertising rate by 20%, while video enterprising rate 30%, we plan to increase our mobile advertising rate later in March, although the last year the mobile advertising rate increased by about 50%, but we think that will be a similar for 2014.

George Wu – Legend Asset Management

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Yong Tong Wang [ph] who is a Private Investor. Please ask your question.

Unidentified Analyst

Well, I am a new investor to the company and I have a three, I believe simple questions, number one is what other resources that makes the company different from the competitors in the industry, and number two is in view of the management what are the major challenges for you continued growth, and the last one is do you have plans to provide English version at iPhone.com to expand your audience base, as well as keep more investors better informed. Thank you.

Shuang Liu

Yeah. Hi this Liu Shuang, CEO of the company, welcome on board, first of all.

Unidentified Analyst

Thanks.

Shuang Liu

I think there is a couple of resources we have, it’s increase as well, other players first of all very strong brand, this brand stand for Greater China Conference with respect of individual rights and advocate of the market oriental reform. So we have a very strong SG&A. We reflect the value of advertising and journalism for this strong brand on the media approach to our company aggregation get us aside from other pure tax driven company in the market. And secondly because of the parent company Phoenix TV, we have a exclusive content which is very unique in Chinese market. So it’s a key asset which is irreplaceable by other players. That also stepped us for barrier for other players, which wants to enter into news and documentary related media market.

And thirdly, we have a very strong shareholder Chinese mobile so that give us a very good solid foundation to enter into future related 4G related business. And also I strongly believe in convergence model. As I said my new appointment as CEO of Phoenix TV enabling to better allocate resources to achieve greater synergy among both sides to accelerate the convergence of TV side and mobile side.

I think the future challenge lies in specialty wireless and vertical things simply because we have very strong presence in portal that necessarily translate into past in mobile world. We’ve got to be humble, we’ve got to pay attention, pay respect for the differentiated needs on the mobile world. We’ve got to aggressively recruit top talents in wireless industry. We have to promote with more innovative approach towards e-commerce related areas.

As to any channel in the foreseeable future, we do now have this plan, we have mindful [ph] of advertising revenue, the balance of advertising revenue growth, the further expansion of our market also the improvement in margin, so balancing to these three in the foreseeable future we do not have [indiscernible]. So, that’s the best way to answer well, I recommend you to have discussions. So we can know more about this company. Okay.

Operator

Ladies and gentlemen, I would now like to hand the conference back to today’s presenter Mr. Matthew Zhao. Thank you please continue sir.

Matthew Zhao

Thank you, operator. We have come to the end of our Q&A session and our conference call. Please feel free to contact us if you do have any further questions. Thank you for joining us on this call. Have a good day.

Operator

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

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