Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Youku Tudou (NYSE:YOKU)

Q4 2013 Earnings Call

February 27, 2014 8:00 pm ET

Executives

Ryan Cheung - Corporate Finance Director

Cheung Koo Wing - Founder, Chairman and Chief Executive Officer

Dele Liu - President and Director

Ge Xu - Chief Financial Officer and Senior Vice President

Analysts

Philip Wan - Morgan Stanley, Research Division

Jiong Shao - Macquarie Research

Alicia Yap - Barclays Capital, Research Division

Dick Wei - Crédit Suisse AG, Research Division

Alex Yao - JP Morgan Chase & Co, Research Division

Eddie Leung - BofA Merrill Lynch, Research Division

Tian X. Hou - T.H. Capital, LLC

James Gordon Mitchell - Goldman Sachs Group Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Youku Tudou Q4 and Fiscal Year Earnings 2013 Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today, Friday, the 28th of February 2014.

I would now like to hand the conference over to your speaker, Corporate Finance Director, Mr. Ryan Cheung. Thank you, please go ahead.

Ryan Cheung

Thank you, operator, and welcome to our fourth quarter and fiscal year 2013 Earnings Conference Call. First of all, allow me to introduce our management team participating in today's call. They're our Chairman and CEO, Victor Koo; our Board Director and President, Dele Liu; and Michael Xu, our Chief Financial Officer and Senior Vice President. Regarding today's agenda, Victor will begin with strategic overview and our outlook for 2014; Dele will discuss our content strategy; and Michael will discuss fourth quarter 2013 financials. After which, we will take your questions. As a reminder, the financial results that are webcast on this conference call are all available at the Investor Relations sections of the Youku Tudou website. A replay of the call will be available on our website in a few hours. I'll refer you to our Safe Harbor statement in our earnings press release which applies to this call, as we will make forward-looking statements. In addition, please also refer to our business or [ph] presentation sections on our press release. Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in renminbi.

At this time, I will turn the call over to our Chairman and CEO, Victor Koo. Please proceed.

Cheung Koo Wing

Thank you, Ryan. Good morning and good evening, everyone. Thank you for joining us. I wish to start off today by announcing a major milestone for our company, and that Youku Tudou achieved profitability at the operational level for the first time in Q4. Other highlights of Q4 include our total net revenue increasing 42% year-on-year to RMB 901 million, which exceeded the high end of our provided guidance.

Another important milestone achieved in Q4 was that our mobile monetization rose to 10%, a reflection of strong sales execution, as well as the appeal of our multiscreen video marketing solutions. Our leading position as the #1 multiscreen online video company in China continues to remain strong and unchallenged. Robust growth in daily video views for Youku mobile traffic throughout 2013 saw the number exceed RMB 300 million for the year, a figure 3x higher than at the start of 2013, with unique daily views on mobile reached over 50 million.

Independent market research has shown that Youku and Tudou ranked the #1 and #2 online video brands in China. As stated in previous earnings release, scale is critical to online video, and our leadership and traffic and monetization capabilities, have enabled us to reach the scale economics needed to achieve profitability. On the traffic front, we are continuing to see robust growth in our traffic, especially for mobile devices. On top of a rapid rise in mobile daily video views, we saw a significant increase in user time spent on Youku, surpassing the scale of PC. With multiple product upgrades on the Tudou app, Tudou mobile traffic experienced significant improvement, with daily video views growing by 77% from Q3 to Q4, and over 7x from early 2013.

To illustrate, according to our research in December 2013, monthly time spent on the Youku app ranked first, and was the sum [ph] of apps ranked second, through 4 [PH] monthly user time spent.

Data from December 2013 showed that while online video user time in China rose by 125% compared to June of 2013, user time spent on the Youku app rose by 169% over the same period. Youku also ranked first in terms of daily unique visitors and 1.7x higher than the next competitor.

We are now one of the top 5 mobile apps in China in terms of user time spent, which is significant as the other top 5 mobile apps consist of 2 mobile messaging and 2 mobile browsers. As such, we are the only media entertainment app in the top 5. The scale of our 2 platforms, particularly, in regard to the exciting growth in traffic for mobile devices further increases both our reach and user time spent, and well positions us to capture growth opportunities emerging from China's evolving multiscreen environment.

Throughout 2013, our sales team continued to expand our advertiser base and increase revenue per advertiser for existing clients. I am pleased with the execution of the sales strategies which we set at the beginning of 2013. These strategies include: diversifying our client base; improving the sellthrough rate; developing content marketing solutions; and starting our mobile monetizations. One of the direct results of the large-scale growth in traffic is that we have continued to expand and diversify our advertising client base, particularly in regard to domestic clients. For Q4, the company signed up 109 new advertisers, including, [Chinese], [Chinese], Electrolux and Le Meridien. Notably, our domestic FMCG revenue grew by over 77% year-on-year. Other ad revenue from sectors, such as e-commerce and gaming, increased by over 178% and 54% year-on-year, respectively in Q4. As a result, the company experienced an overall increase in sellthrough rate for both platforms, especially in lower tier cities.

Another important sales initiative in 2013 was mobile monetization. The company's plan to roll out our multiscreen advertising package is progressing well. Since the sales roadshow held in June 2013 at which we introduced our multiscreen advertising solutions to brand advertisers and agencies for the first time, the momentum in mobile monetization has been increasing. Our product team has launched a series of product upgrades and synchronized advertising systems across multiple screens. While the sales team continues working to educate our advertising partners while seeking ways to expand demand for our multiscreen advertising solutions. Successful advertising cases include international clients, such as Samsung, LVMH, Chanel, Microsoft and Intel, and domestic advertisers, such as Yulu, Levi, [Chinese], have already started to adopt our multiscreen advertising packages, the response to which has been promising, as multiscreen advertising shows a higher return on investment due to enhanced brand awareness for them. This significant progress has established a solid foundation for our efforts to further monetize our scaling mobile traffic throughout 2014.

Our sales roadshows held last December -- November in Shanghai and Guangzhou further supplemented our advertising partners' growing interest. Case studies on the effectiveness of multi-screen advertising was presented, and multiple ad products were introduced to our clients. The reception was positive and in addition to sectors such as IT, telecommunication, finance and auto, which have already started to allocate budget to mobile, other industries such as FMCG, gaming and e-commerce are gaining traction as we proceed further into 2014.

In addition to opportunities in mobile brand advertising, we launched performance-based advertising solutions, such as our in-app app store and mobile game app store by the end of 2013. As one of the major mobile traffic gateways in China, it is our belief that we can leverage the scale of our mobile platform and create value to our mobile app partners. As such, the potential for mobile monetization is promising, heading into 2014.

2014 is a year of growth, investment and consolidation for the Internet television industry. China's mobile Internet population has already surpassed the number of PC users by the end of 2013. More excitingly, the ministry of industry and information technology rented 3 TD-LTE licenses to operators last December. We expect that faster data transmission will be a catalyst for further adoption of smartphones by users in China.

It is anticipated that about 450 million new mobile devices will be shipped in China during 2014. Having already established a strong leadership position in the 3G era, video is positioned to be the leading application in the 4G era.

We must invest in areas such as human resources, content technology and marketing to further cement our leadership in China's increasingly mobile-focused Internet industry.

During Chinese new year, we cooperated with China Mobile on free-of-charge consumer data traffic packages for users in Beijing and Guangzhou. Online and off-line marketing initiatives were increased in 2014 to enhance our lead in mobile traffic, and increase our user base in the OTT iTV market, as cooperation between Smart TV and set-top box manufacturers were increased.

Before turning to Dele, for his overview of our content strategy, I would like to comment on the industry's Intellectual Property Rights Protection. Youku Tudou, together with our industry peers and content partners, such as the Motion Picture Association of America, MPAA, which represents the leading Hollywood studios and top domestic film companies such as One Dot [ph] Films and Light Media, et cetera, announced a joint declaration last November to fight copyright infringement and piracy, both on mobile and PC Internet in China. We truly believe respect for intellectual property and copyrights is a necessary part of a virtuous cycle to maintain healthy growth of the content ecosystem in China, especially in the mobile Internet era. I'm pleased to see positive signals regarding anti-piracy enforcement from recent government actions which penalize distributors of pirated content. Youku Tudou will continue to strengthen our cooperation with government, relevant authorities and copyright holders to jointly promote the growth of an online video industry in China, in which intellectual property rights are valued. With that, I will now turn the call over to Dele to go over our content strategy.

Dele Liu

Thank you, Victor. Hello, everyone. As we continue to grow the top line and increase our multiscreen traffic despite a significant investment in mobile, we achieved quarterly non-GAAP profitability for the first time in the company's history. Bandwidth cost, as a percentage of revenue, decreased to 20%. As has been previously mentioned, unit bandwidth costs will continue to decrease due to the scale economics and technology innovations in data compression and network architecture.

Personnel-related expenses saw a moderate increase quarter-over-quarter as expected, with a stable headcount and a slight increase in cost and benefits.

As building content from multiple internet-enabled devices increasingly becomes a social phenomenon in China, a diverse and comprehensive content mix is critical to elevating our media value, and further expanding our presence across China. We believe our balanced approach regarding content is important for us to cement our leadership positions and achieve profitable growth.

In regard to content syndication, we have secured a solid pipeline that covers most of the first ran domestic TV series in 2014. We also continued to strengthen our overseas content portfolio. In addition to TV series from the U.S. and U.K., such as Sherlock, Downton Abbey and Bradsville et cetera, we are also leading destination for Wilbur TV series produced in Korea, Hong Kong and Taiwan, as well as Japanese animations and K-POP music. Youku Tudou will continue to focus or invest in original content, partner-generated content and user-generated content throughout 2014. We are entering into our sixth year of developing original content and continue to leverage our experience accumulated over this period. Successful cases, including Old Boys, Morning Call, On The Road, Ms. Puff,and hip-hop content, have developed into our core franchise properties. Another original web comedy series named [Chinese] Surprise, has accumulated a record of over 500 million views, which is comparable to the top-rated TV dramas. Our original series have generated over billions of videos viewed, and are constantly ranked among the top 10 shows in their respective content categories on our platforms.

In addition, Tudou Young Choice Awards, hosted by Tudou and Shenzhen [ph] Satellite TV Station, was held in November last year at Beijing Olympic Sports Center, and was attended by artists and stars from Mainland China, Hong Kong, Taiwan and Korea. This award ceremony selects nominees in music, film and television categories based on online search trends of young internet users, consistent with Tudou's brand positioning. Fans are then encouraged to vote for their favorite idols every day until the polling deadline.

Regarding our competent marketing solutions, the distinct brand positioning of Youku and Tudou also enabled the company to attract a wider range of variety of sponsors. To date, Youku's mainstream and positive approach in contrast to Tudou's young and edgy positioning, have attracted advertisers, such as Chevrolet, Lenovo, Nestle, DHL, Ford, and Jeanswest and Deerway. Recently, Tudou's self-developed web original documentary Into Tibet, has attracted a sponsorship from Mini Cooper, while Youku's On The Road and Morning Call, are now sponsored by Mercedes Benz and Infinity, respectively.

We're the largest UGC and PGC platform in China. We have signed more than 100 exclusive content partnerships to date to share revenue in 2013. Content under such partnerships differ from syndicated TV shows and movies. Notably, total video views generated under our PGC program now numbered over 1 billion in 2013.

Lastly, we're increasingly -- we are increasing our effort to work with television stations and movie companies to bring these web-based content to both the theaters and the home TV screens. On The Road is to air during a prime time evening slot in March, our state broadcaster is CCTV One. Hunan TV, a national provincial satellite station that is watched nationally, became a coproducer of the second season of our popular web comedy series [Chinese]Surprise. Youku Tudou will leverage its online influence, particularly with younger generations who consume entertainment on the web to provide powerful pre cinema and post cinema marketing solutions for feature films.

Besides movie trailers, our products range from box-office rankings, entertainment news, movie premieres, award coverage, behind-the-scene documentaries, celebrities' interviews and movie critic shows. Users can also buy movie ticket and select theater seats directly from Youku and Tudou.

We coproduced the recent hit movie, Firestorm, starring Andy Lau, which recorded over 300 million in box office offices receipts, and Up In The Wind directed by Teng Hua Tao. Another movie set to premier in China -- in Chinese theaters in May, is Old Boys: The Way of the Dragon, a feature film built from 43 minutes micro movie hit in 2010, which was a web phenomenon, with over 80 million video views on Youku.

With that, I would like to pass the floor to Michael, our CFO, to go over our fourth quarter financial results with you.

Ge Xu

Thank you, Dele. Hello, everyone, and I thank you, all, for joining our conference call today. Before walking through the financial highlights, I would like to remind you that Youku and Tudou completed the merger on August 23, 2012, with Tudou's financial results consolidated into the company from the date of the completion of the merger. A comparison of the company's full year 2013 financial results with full year 2012 cannot be provided because the cut-off day of previous periods will not reflect a consistent basis of comparison. For more information, please refer to our earnings call -- please refer to our earnings release released for the consolidated full year 2013 financial results.

Let me now take you through our financial highlights for the quarter. The amount mentioned here are in RMB unless otherwise noted. For the fourth quarter, our net revenue were RMB 901 million, a 42% increase year-on-year and a bit high-end of our guidance. Advertising net revenue were RMB 801 million, meeting the guidance previously announced by the company. The growth was primarily attributable to if the increase used by brand advertisers of advertising services, as evidenced by the rising average spend per advertiser. Bandwidth costs were RMB 178.8 million, representing 20% of net revenue compared to 26% in the same period in 2012. Non-GAAP content cost were RMB 339.7 million, representing 38% of the net revenue compared to 41% in the same period in 2012. We have already secured a solid pipeline of content offerings in -- for 2014 in advance, and the financial commitment by the end of 2013 for this content was RMB 431 million.

Non-GAAP gross profit was RMB 268 million, a 108% increase year-on-year due to strong operating leverage. Without RMB 40 million of impairment of long-life assets, our non-GAAP gross profit would have been RMB 308 million, representing 139% increase year-on-year. Our non-GAAP gross profit margin was 30%. Without the above-mentioned RMB 40 million impairment of long-life assets, it would be 34%.

Our non-GAAP sales and marketing expenses were RMB 196 million, 106% increase year-on-year. The increase was primarily due to a catch-up for sales commission and our sales support expenses to reflect higher estimate as percent of revenue of these 2 items that we did in the past 3 quarters. Non-GAAP product development expenses were RMB 61 million, a 13% increase year-on-year. This increase was primarily due to higher personnel-related expenses for our product development in mobile, search, social and the paid services.

Non-GAAP general and administrative expenses were RMB 21.4 million, a decrease of 32% year-on-year, due to reversal of tax expenses accrued during prior periods as a result of clearance of uncertain tax position in our favor. Non-GAAP net profit was RMB 44.2 million, as compared to a loss of RMB 62.3 million in Q4 2012.

And turning to the cash flow items. As of December 31, 2013, cash, cash equivalent, restricted cash and our short-term investment totaled RMB 3.2 billion. Our acquisition of the intangible assets were RMB 227.5 million in Q4.

Looking out to the first quarter of 2014, we expect consolidated net revenue will be between RMB 680 million and RMB 720 million, which implies a 32% to 40% year-on-year increase, with consolidated advertising net revenue, contributing between RMB 600 million and RMB 640 million, which implies a 40% to 50% year-on-year increase. Now we are ready for Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Philip Wan from Morgan Stanley.

Philip Wan - Morgan Stanley, Research Division

My first question is about your profitability outlook. Since you achieved non-GAAP profitability in Q4, would you be able to share with us how should we look at your profitability trends going into 2014? And then I have a follow-up question.

Ge Xu

First of all, 2014 will be -- we have already seen a healthy trend in our advertising revenue, as well as the mobile -- the monetization of mobile traffic. But on the other hand, we also emphasized in this conference call that this year will be a year for our -- it will be a year of full opportunity, and we are not going to let those opportunity lose from our hands. And as a result, we got to make whatever investment needed to grab those opportunities. And I think as long as we grab those opportunities, then profitability will be a natural result.

Philip Wan - Morgan Stanley, Research Division

Okay. And my next question is about your content. I know you comment about a more diversified content strategy, but could you just share with us what is your budget for this year's content and also, given that your competitors like IG and Tencent seems to be stepping up in terms of getting the premium content. So what's your view in terms of the competitive landscape in terms of content acquisition?

Dele Liu

Thank you. We're committed to offering the most comprehensive content library to our users. So - and we also have a very balanced approach, having user-generated content, partner-generated content, as well as syndicated content purchased from third-party producers. And we -- on the content syndication parts, our strategy is to have a fair and reasonable share to cement our leadership position. So in that sense, we are not going to go after valued instruction deals, but we will maintain our overall leadership on the level of comprehensiveness and overall competitive position in our content portfolio.

Philip Wan - Morgan Stanley, Research Division

Is there any forecast or internal budget that you could share with us for this year, for [indiscernible]?

Dele Liu

For commercial and competitive reasons, we normally don't share our budgets publicly.

Operator

Your next question comes from the line of Jiong Shao of Macquarie.

Jiong Shao - Macquarie Research

I have 2 questions. Michael, you mentioned that this year is going to be an investment year for you. Could you please elaborate a bit on the areas you're going to focus on for your investments? And related to that, I think the company may have mentioned your long-term business model in terms of the margin profile, longer-term not just for this year. Could you please remind us what those targets are? That's my first question.

Cheung Koo Wing

In terms of the investment strategy, let me take that. It's always our strategy to invest to capture the market opportunities going forward. And for 2014, there are a couple of areas. Now, of course, our mobile with 4G, as well as 450 million mobile phones coming online, that's a very important area. And we invest greatly in 2013 and we'll continue to do so in 2014. But as you see, our mobile monetization is also improving very, very rapidly. And we moved to a multiscreen solution on mobile already, so we see that, revenue on that side will also be captured. The other area of course, is OTT and ITV. But in terms of investment level, clearly will be still early days comparing to mobile. And other areas, such as original content, as well as paid services, these are areas that we'll invest in, but they're already contributing positively.

Ge Xu

Talking about long-term profit -- profitability, sorry, the operating margin and gross margin, I think first of all, we have -- you should realize we have a lot of areas which we do, we either under monetized or haven't monetized at all. So in a mature and a stable business environment, I would say, we have the following areas you can see high operating leverage, first of all, content cost and also rebate rates, and also bandwidth cost, as well as human-related headcount cost. So by -- in a more -- in a steady -- in a more stable environment, I would say our operating margin, as well as gross margin will be very much comparable to other more matured Internet company.

Jiong Shao - Macquarie Research

Okay. My second question is on your multiscreen strategy, I think which you highlighted in your prepared remarks. Could you talk about, when include your advertiser customers to put your multi-screen solutions, did you find them allocating incremental budgets for the additional screen, such as the mobile, or they are merely allocating whatever existing budgets to the additional screens? And could you also comment a bit on the bigger screen in people's living room, which is the TV screen, what are you planning to do for grabbing that screen?

Cheung Koo Wing

Well, first of all, in terms of the multi-screen, it really increases the overall reach of web-based and app-based platforms. So for advertisers, it's actually a larger market opportunity. And as such, the budget allocation needs to really address the broader reach, as well as especially on mobile phone, one of the exciting things that marketing partners are looking for is that it's -- close to purchase location, as well as usage location. And so we are creating also marketing solutions that really captures that opportunity, whether it's online to off-line opportunities, or pure app-based marketing products that we are finding increasingly popular. The other thing is, because there's also mobile native products for new areas like mobile games and other mobile apps that are also looking for marketing, so that's also another area for growth. In terms of the large screen, we have a very much a TV app strategy, and this is something that we worked on for quite some time. Very similar to our mobile app several years ago, that area that we worked on for some time and when the user behavior, or when the adoption took place really, starting from the second half of 2012, we saw a substantial increase in traffic. But that's actually an area we worked on much previously. That's the same strategy we have on the TV app, where we've had a dedicated TV app team, as well as a business development team that's worked with both set-top box manufacturers, as well as Smart TV manufacturers for a period of time. And we're starting to see some traffic increase, actually substantial traffic increase in the short-term, but starting from a very low base. So from a scale standpoint, we still haven't reached the same kind of level, I think, industry-wide, comparing to kind of mobile back in 2012. So I think it's a little bit earlier. But we see that also as a tremendous amount of opportunity because it reached an even broader audience with a much larger, or much more impactful viewing experience.

Jiong Shao - Macquarie Research

Right. Could I just follow up on this, should we expect to see a Youku Tudou branded set-top box or even TVs in the next year or 2?

Cheung Koo Wing

Well, I think our strategy on the big-screen is similar to the mobile device, where it's really centered towards the TV app, where we broadly work with the widest possible range of set-top box, as well as Smart TV manufacturers. That's the core strategy.

Operator

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

Alicia Yap - Barclays Capital, Research Division

Victor, Dele, Michael and Ryan. My first question is with your comment on the 10% of mobile revenue in 4Q. So what should we expect, or what is your expectation for the mobile growth in 2014? And related to that, can I get a sense of the current pricings on mobile compared to PC? And then for your mobile ad revenue in 4Q, I wanted to get a sense, most of these come from the pre-rolled ad. And if you can give some colors between the revenue breakdowns, between the app activation, the performance-based and the pre-rolled ad, will be helpful.

Ge Xu

Thanks, Alicia. From 2013, as we mentioned, really started mobile monetization communication in mid-2013, and we've seen very positive signs in the second half of 2013, as we really went from 3% quarter before to 10% in Q4, and we see that positive momentum to continue. Now recall that 2013 we have not really -- while we're communicating the packages were actually not multiscreen. So the actual multiscreen solution really started this year, on Chinese New Year. So you'll see that trend improving in 2014. So we communicated midyear, as well as end of the year with our advertisers, and then we told 2014 we're moving to a multi-screen solution. And starting from Chinese New Year, we see a very, very smooth transition, very similar to when we communicated with our partners on the Youku and Tudou consolidation, and now we've moved to a Youku Tudou combined package. Now from a pricing standpoint, the multi-screen package have basically, a standard price. And if you want to take a specific screen, you actually have to pay more. For example, the tablet screens, I think we are seeing our marketing partners, especially premium brands paying premium for that specific screen. And that would be the similar case for PC, as well as mobile phones as well. So we're highly encouraging our partners to really go multi-screen because that is the widest reach for our marketing partners. But if they've got targeted, basically, preferences, then they can decide to do that but pay a premium price for that.

Cheung Koo Wing

Right now, I think it's too early to comment on the mix between mobile brand advertising versus apps/game, because we just -- the App Store and Game Store, really just started Q4 2013. And as we move forward, as these businesses continue to scale, I think the mix will be more relevant. Right now, it's too early.

Alicia Yap - Barclays Capital, Research Division

I see. I have a second question regarding your content strategies. So with your ongoing strategies are focusing more on the self-developed and also, the library content. So can you share with us some of the feedback from your advertiser that, how are they supporting us on this front, and then how has the traffic for your self-developed content has been trending? And also, do you think without some of the hit content on the TV drama side, would that put you in any disadvantage on user traffic growth or advertiser tractions, or you haven't seen any of that?

Cheung Koo Wing

Well, attractiveness to advertisers primarily consist of the widest platform and the most comprehensive content platform, and that continues to be the case, at a combined basis, at Youku Tudou. I think for the original content, we're seeing increasing traction, whether it is in terms of traffic, brand, as well as monetization. You're seeing -- we've cited specific examples where Mercedes Benz is actually involved now with On The Road, which had a very, very successful marriage ceremony, actually just Tuesday of this week [indiscernible] with [indiscernible], and then basically, Jeanswest continues to sponsor Young Choice with Tudou Groovin'. So whether it's Youku and Tudou, the different brands, really associated with the different brand positioning of our marketing partners is becoming more and more accepted. And so advertisers like Mini Cooper or Jeans West or Ford are looking for younger demographic, and so it's much more associated with the Tudou content portfolio, where some of the more mainstream premium brands actually decide to go with Youku's original content. So we're seeing a wide acceptance, whether you're talking about sponsorship, whether you're talking about product placements, whether you're talking about TVC that is targeted towards these kind of shows, I think we're getting them to age that people understand that web-based content is doing, as well if not better than traditional programming on the Internet. It's highly targeted towards the web audience between historically, 18 to 35 on the PC and now probably, 15 to 45 on the mobile phone. We're seeing a lot more acceptance adoptions because our advertisers are watching this content.

Operator

Your next question comes from the line of Dick Wei of Credit Suisse.

Dick Wei - Crédit Suisse AG, Research Division

First question is on the -- one of the items on the P&L, there is other income line around like RMB 46 million, RMB 48 million, I wonder what that is? And then also is this something that is sustainable?

Ge Xu

They are mostly tax refund and the government subsidies. I would say, over the next 5 -- few years, you're going to see this will be a recurring item, because we have a long-term agreement with governments to get those refunds and subsidies.

Dick Wei - Crédit Suisse AG, Research Division

Okay. And the amount will probably be roughly the same, or would it be more in-line with the what you call, the revenue growth, I just want to get a sense of the contribution?

Ge Xu

It is always [indiscernible] revenue growth.

Dick Wei - Crédit Suisse AG, Research Division

Okay, great. And my second question is on the advertising rate. If you can share with us, what is the ad rate trend for 2014 maybe by cities, by tier of cities, as well as maybe by kind of the multiscreen package of PC-only or mobile-only, et cetera, that will be helpful?

Cheung Koo Wing

Thanks, Dave. I mean with the substantial growth, especially on the mobile phone screen, and as we are encouraging the multi-screen marketing solutions, we've decided really on from a multiscreen basis that we actually didn't raise prices comparing to PC rates of last year. But as I mentioned, if marketers are looking for specific screens, they too, pay a premium price for it, as we're driving more sellthrough rate on our new screens, as well as second, third, fourth tier cities which seen a considerable jump in 2013 which we want to see a continuing trend in 2014.

Operator

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

Alex Yao - JP Morgan Chase & Co, Research Division

I have 2 questions. Number one is a follow-up question on your multi-screen monetization strategy. Does it help monetization more from inventory supplies perspective, because you kind of bundle some of the PC commercial inventory to the mobile? Or does it help monetization more from driving incremental advertiser demand perspective? And also, most of the competitors are also proactively pushing their mobile app solution, how does your multi-screen strategy differentiate to the competitor solutions? Number two question is, can you share with us the most recent update on the traffic and the revenue contribution across your head content and tail content, PGC and the UGC?

Cheung Koo Wing

Let me first of all address the multi-screen monetization, I think Dele will take the content part. Basically, of course, whichever screen it is, whether from a user standpoint, from a marketer standpoint, we have the broadest reach and the highest user time spent, and especially for FMCG categories, they want to be at a platform where they reach Youku Tudou combined, which is over 80% of the online video users, so it's really much -- a very much one-stop shop. At the same time, we do have differentiated solutions, whether it's app-based products that we've launched ahead of our competitors. Plus, our original content solutions, as well as PGC, UGC content solutions, which are our competitors really, either don't have or are not strong in.

Dele Liu

This is Dele here, Alex. We are committed to offering the most comprehensive content products to our users, even in terms of the professional syndicate content, we're still #1. And we're confident that we will continue to be #1. There might be some cases where when the price is totally unreasonable, we may think -- we may pass. In terms of revenue contribution from different content categories, we're clearly seeing increased revenue coming from partner-generated content and user-generated content.

Cheung Koo Wing

Just to add another point. Basically, we're seeing users more and more used to moving between screen from screen, is that especially for long-form content, that after they watch it on a certain screen, for example, on the way back from work to home on a mobile screen, they can get back home, and go to a pad or PC, or even an ITV to watch the remaining content. And so advertisers are also, with the data we have as the leader on older screens, they really want us to be able to follow that user, as well as provide database advertising solutions that we've also watch as well.

Operator

You next question comes from the line of Eddie Leung of Merrill Lynch.

Eddie Leung - BofA Merrill Lynch, Research Division

Just a couple of questions, starting with mobile viewership. Is there any target or aspiration for the management team on the mobile traffic in 2014? Should we expect the proportion from mobile traffic to be significantly more than PC by end of this year? And then, a related question is could you also share with us any significant difference in the consumption pattern, in terms of content of your mobile users versus your PC users? And then, I have 1 follow-up question.

Cheung Koo Wing

Sure. Basically, on the multi-screen side, mobile, whether it's in terms of video views or user time spent, has already exceeded PC as of the end of last year. So we're no longer just #1, #2 online video website, we're very much an app and web-based video platform, really. And we see that growth to continue in 2014, and we anticipate material or robust growth on the mobile screens in 2014 with new adoption of phones, as well as 4G, especially in the second half of the year. And so you should expect by the end of 2014 that our app-based traffic will be considerably higher as a percentage of overall traffic on the multiscreen.

Eddie Leung - BofA Merrill Lynch, Research Division

Victor, how about any difference in the consumption pattern of your users in terms of content on mobile versus PC?

Cheung Koo Wing

Well, it's interesting, actually. Our hypothesis 2, 3 years ago, was that with -- especially with the smaller screen that people would actually would, shall we say, spend the time watch short form video. What we found is actually the -- whether it's content or from a link from a video standpoint, it does not really vary too much or as significantly on the mobile screen. For the tablet, the -- tends to be a little longer, actually. And we anticipate the ITV to be the same, if not longer.

Ge Xu

So mobile users are mostly view -- are watching the long form and short form content, yes.

Cheung Koo Wing

Because initially, we thought it would be a much higher mix of short-form videos on the mobile, but actually it still were a combination of short form and long form on mobile and the PC screen.

Eddie Leung - BofA Merrill Lynch, Research Division

Got that. Just 2 more housekeeping items, perhaps for Michael. Could you explain a little bit more on the decline in G&A expenses in the quarter, and how should we forecast that for the future? And then could you also share with us the number of brand advertisers in the quarter?

Ge Xu

Okay. First of all, for the G&A expenses, the normalized, assuming we do have that reversal. The normalized, the G&A expenses should be in the range of RMB 50 million to RMB 55 million for Q4 2013. But on the other hand, actually, there's another item we haven't put into non-GAAP adjustment, which is the impairment of long life assets which is about RMB 40 million in the content -- in the cost of revenue. So this item and the reversal actually is kind of a wash.

Cheung Koo Wing

They counter balance.

Ge Xu

Yes, they counter balance each other. And as a result, they don't have any impact to the operating income -- sorry, net operating income. And what is the next question?

Dele Liu

Number of advertisers.

Cheung Koo Wing

Number of advertisers, just hold that a moment. The number of advertisers as of last quarter was 481.

Operator

Your next question comes from the line of Tian Hou of T. H. Capital.

Unknown Analyst

This is Chen on behalf of Tian. I have a question about your recent, the popularity of the overseas shows, such as Korean shows, U.S. shows and English shows. I want to ask what's the price inflation trend versus the domestics content? And what's our strategy for purchasing these shows in 2014?

Dele Liu

Yes. We normally sign multiple year, 3- to 5-year contracts, with the international content suppliers, which is actually international practice. So we are very good in that, because the price escalation formula is written into those contracts with reasonable price increase. However, on the domestic side, a lot of the shows are one-time, for example, TV series, they are not multiple seasons. They're normally just 1 season, and 30 episodes per show. And the price can fluctuate very significantly, so there are different patterns. And we are very much committed and we are doing extremely well with Korean drama, U.S. drama, Hong Kong and Taiwan. So overall, we're extremely competitive, we're clearly #1 in all these categories.

Tian X. Hou - T.H. Capital, LLC

Okay. So this is Tian back. Sorry, I was on another call. Okay, so another question is really related to your multiple screen strategy. Multiple screen strategy, I think is much more suitable for users, like if I want a TV on PC, then I can continue on my pad or my mobile phone. I just wonder, since you have a different business model or advertising monetization model on PC and the mobile, how one of the advertisers' advertising -- advertisement be multiple screen? How you charge them? If I am Coca Cola on PC or on mobile, can that also be a continuing -- there is a continuity in their advertisement, so how do you sell that?

Cheung Koo Wing

Well, actually it's quite consistent across screens, whether in terms of marketing format or in terms of pricing especially now we've gone to complete multiscreen solutions, starting after Chinese New Year this year, that to the extent that for example with the TVC or pre-rolled advertisement, where we're basically tying these solutions across the different screens. So as the Coca Cola come, basically it's all based on our multiscreen basis. On the content marketing solution standpoint, it's similar. Actually, advertisers are excited to sponsor as well as put product placements on the show because they know it reaches a much broader audience across the different screens in different times of the day. And so whether you sponsor or do product placements actually already cross screens by default. So from another standpoint, whether the user migrates from screen to screen, as you correctly pointed out, actually those marketing messages, whether through hard TV sale advertising or soft placements, they carry through quite well. And similarly, I think on the user or the consumer side, our membership program, our TiVO packages, basically are also moving multiscreen. And this is product development that we worked on quite a bit over the last 6 months as well. So these products will actually migrate very well across the screens.

Tian X. Hou - T.H. Capital, LLC

That's very helpful. The last question is related to the content portfolio. And if we do a horizontal comparison and your peers in the market seems like spend a lot of money on the license the content and Youku, we really didn't see you spend as much as money as them to do the purchasing or license the content. Rather, you are developing the in-house content. I wonder from traffic point of view, can your in-house content generate the equivalent traffic with those licensed content? And also, when you sell those content and advertising on those content, can you sell at a similar price of those, the proven to be popular licensed content?

Cheung Koo Wing

Well, we have a much more balanced content mix versus our competitors. I think it would be fair to say that we actually have a very strong, as well as a fair share of the syndicated content as well, as Dele pointed out earlier. So I think the perception you have on the syndicated content is probably not entirely correct. From what we've seen from an advertiser perception standpoint, I think those solutions, whether it is original content solutions or syndicated content solutions from a TVC standpoint, from a hard advertising, standpoint, it's actually quite consistent and similar. Whereas, I think with original content, the mix of advertising solutions we can provide to advertisers is actually broader. I think that's probably the right way to think about it.

Dele Liu

As a long-term strategy, we are committed to build our own content production, as well as partner-generated content, where we have a lot of pricing power. We -- in the longer-term, we will rely less and less on those competitive situations where we have to pay unreasonable price.

Operator

Your next question comes from the line of Fay Sang [ph] of Goldman Sachs.

Unknown Analyst

I have a follow-up question on the multiscreen strategy, not in 2014 necessarily but in the long-term. How do you think that a typical user would allocate his or her time watching video on PC versus mobile over the smartphone versus tablet versus TV to across the different screens, which screen will eventually provide the bulk of your traffic and revenue opportunities? Then I have a follow-up question.

Cheung Koo Wing

From a multiscreen standpoint, I'm not sure whether you're familiar with the best-available-screen philosophy, where users at different times of the day will pick the best available screen during the time, as well as during the setting. And so because the mobile phone is actually the device that's with you much more, if you compare it with different screens. TV, you probably with that screen, single-digits, lower single-digit times of the day, with the PC, probably around 10 or low-teens. But with the mobile phone, you're high-teens and if you -- according to the CEO of Qualcomm, someone actually reaches out for their mobile phone on average 150x a day. Thus, you can see an indication of how many times that you actually associated with the device. But of course, the sessions for each of those screens are also different, with while the sessions on TV, for example, are smaller, but time per session is actually higher. But all in all, what you're going to see is actually the mobile phone is going to be bigger than the PC, shortly. Whereas, the times that you're going to be with the TV, probably is comparable or slightly less than the PC. That's probably long-term vision.

James Gordon Mitchell - Goldman Sachs Group Inc., Research Division

That's very helpful, Victor. Numerical question, so marketing grew 101% year-on-year, so can you elaborate on that growth?

Ge Xu

Yes. It actually, it's kind of, it's more due to a catch-up effect. In the first quarter, in the first 3 quarters, we have, we estimate a certain percentage of revenue will be -- we estimate certain, sales support and promotional expenses as a certain percentage of net revenue, advertising revenue. And by the year end, we trued up this percentage, and we found out the previous 3 quarters percentage maybe a bit low, and as a result, we have a roughly RMB 40 million something catch-up that -- which is very much a onetime. So on a normalized basis, you should take off roughly RMB 40 million from this RMB 200 million something, so the run rate is RMB 150 million something.

Operator

Ladies and gentlemen, that is all the time that we have allocated for questions today. I would now like to turn the conference back to your presenter, Mr. Ryan Cheung. Thank you, and please continue.

Ryan Cheung

Thank you, all for joining us on this call. Feel free to contact us if you have any questions. Goodbye.

Cheung Koo Wing

Thank you.

Ge Xu

Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Youku Tudou Management Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts