SouFun Holdings' (SFUN) Q1 2014 Results - Earnings Call Transcript

May. 7.14 | About: SouFun Holdings (SFUN)

SouFun Holdings Ltd (NYSE:SFUN)

Q1 2014 Earnings Conference Call

May 7, 2014 8:00 a.m. ET

Executives

Hong Zhao – VP, Finance

Vincent Mo – Executive Chairman

Guan Lanying – CFO

Analysts

Frank Fang – Deutsche Bank

Alex Yao – JPMorgan

Eddie Leung – Merrill Lynch

Dick Wei – Credit Suisse

Fei Fang – Goldman Sachs

Philip Wan – Morgan Stanley

Anne Shih – Brean Capital

Wendy Huang – Standard Chartered

Ella Ji – Oppenheimer

Anthony Thong – 86 Research

Operator

Ladies and gentlemen, thank you for standing-by. And, welcome to the Q1 2014 SouFun Holdings Limited 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, Wednesday, May 7, 2014. I would now like to hand the conference over to your first speaker today, Mr. Hong Zhao. Thank you. Please go ahead.

Hong Zhao

Thank you, operator. And, welcome to 2014 first quarter earnings conference call for SouFun. I am Hong Zhao, Vice President of Finance. Joining me today are SouFun’s Executive Deputy Chairman, Mr. Vincent Mo, and CFO Mrs. Guan Lanying. This conference call is being broadcasted on the Internet and is available through our IR website at ir.sofun.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 the 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 following prepared remarks.

Here, let me first start it with the prepared remarks. Despite of headwind in the underlying property market, we managed to deliver another quarter with strong top line and bottom line growth. We continue to focus on strengthening fundamentals of our business and continuously improving our website developing products and services to meet the users’ needs and drive traffic growth in both PC and mobile platforms.

In our new homes market, we’re capturing growth opportunities in marketing services and expanding our e-commerce membership services into most cities. In the secondary and rental homes market, our focus on growing and servicing secondary home and rental agent subscribers further strengthened our market leadership.

Reaching new heights in paying agent subscribers accounts at the end of Q1, a dominating market share in both new and secondary home market will continue to provide advantage client to cease new growth opportunities.

Mobile, which said enough to be a great frontier for us to drive future growth. Our strategic focus and continued investments in mobile platform is producing very encouraging results. Our self-tracking Google analytics registered mobile annuity including $5.5 million in Q1, 2014, more than six times compared to a year ago.

According to our research [indiscernible] phone attracted $63 million monthly business in February of 2014, more than four times larger than the second place application by [indiscernible] currently, more than 51% of our home searches and over 61% of SouFun’s membership registrations are conducted through SouFun’s mobile platform. We believe that mobile will be the most significant in traffic shares, and will continue to bring incremental monetization, as we expand our cooperation with our strategic partners and increase our marketing efforts.

Now, let’s look at the numbers. Revenue totaled a $121.2 million the first quarter of 2014, an increase of $33.2 million – I’m sorry 33.2% compared to Q1 last year. Our top line growth was primarily driven by the growth in listing services and marketing services. Compared to Q1 of 2013, revenue from marketing services grew 31.2% to $46.9 million in the first quarter of 2014.

We’re especially encouraged by the continuous improvement in the marketing and service business, especially, the fact that the lower tier cities contributing much of the growth as our marketing business penetrate deeper into those cities.

Revenue from our e-commerce services grew 11.6% to $29.4 million in the first quarter, as we expanded into lower tier cities. Our strong growth in the second tier cities and third tier cities is partially offset by the difficult property market conditions in first tier cities. In the first quarter of 2014, over 32,000 new home sales were completed through our e-commerce services platform.

Grouping marketing services and e-commerce revenues together, we will see that in aggregate our revenue from new homes market grew approximately 23% in the current quarter. As mentioned earlier, listing services had strong growth during the quarter, primarily driven by the growing number of paying agent subscribers and increased postings per subscriber. Number of paying agent subscribers increased to 33% from a year ago reaching approximately 196,000 at the end of the quarter. Revenue from listing services grew 57.1% to $42.1 million in the first quarter

Now looking at the costs. Cost of revenue increased by 24.3% to $24.9 million in the quarter, the increase in cost was primarily due to increased staff costs and taxes. Q1 gross margin improved by 1.5 percentage points from a year ago to 79.5%. Our operating expenses, our selling expenses in the first quarter were $27.5 million, an increase of 47% from a year ago. G&A were $19.3 million, an increase of 28.3%. The increase in operating expenses were primarily due to increased staff cost and advertising and promotional expenses. Total headcount as of March 31, 2014 was 9,495 as compared to about 7,874 in the same period last year.

In the first quarter of 2014, we substantially increased collaboration with some of the China’s large Chinese based – Chinese language based portals to generate more traffic. In addition, we have launched TV and outdoor and public transit marketing campaigns to increase our brand awareness which in turn brought more users to our web and our mobile applications. Operating income grew 33.1% to $49.5 million in first quarter, in line with topline growth. Income tax expense for the first quarter was $16.2 million, a 30.7% increase compared to a year ago. Our effective tax rate was 26.8% for the first quarter, down more than 3% from the 29% a year ago. We expect certain tax benefits to become effective in the second quarter which is likely to lower our effective tax rate for the remainder of the year.

Q1 GAAP net income increased by 46% to $41.5 million from a year ago. On GAAP basis, fully diluted earnings per ADS were $0.10, increased by 42.9% from prior’s $0.07 per share. Non-GAAP fully diluted earnings per ADS were $0.11, an increase of 37.5% from a year ago. Our adjusted EBITDA increased by 34% to $55.8 million in the quarter as compared to $40.9 million a year ago. We continue to enjoy strong cash generation capability of our business. Operating cash flow was $118.2 million in the current quarter, representing a 97.7% increase from last year. At March 31, 2014, our cash, cash equivalents and short-term investments totaled $943.7 million, up close to 60% compared to the beginning of the year.

Looking into the future, for the full year of 2014, SouFun maintains its current annual revenue guidance. We expect our total revenue to be between $780 million to $796 million for 2014, representing a 22.5% to a 25% annual growth rate. The forecast reflects our current and preliminary view and is subject to change.

Now thank you for taking the time to join us the call today and now I will open up the call for your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Ladies and gentlemen we will now begin the question and answer session. (Operator Instructions) Your first question comes from the line of Frank Fang from Deutsche Bank. Please ask your question.

Frank Fang – Deutsche Bank

Hi, this is Frank on behalf of Vivian. Thank you for taking my question. I have two questions on SouFun’s e-commerce business. The first one is could you please share with us the latest number of your e-commerce project and then also how many projects were added in the first quarter and perhaps in April, thank you.

Hong Zhao

Hi Frank, thanks for the question. Actually for the first quarter, we have – the total number of projects is 1,000 – close to a 1,060, 1056 to be exact and approximately 490 projects are added during the first quarter.

Frank Fang – Deutsche Bank

Thank you and I have a – could you please share with us some update on the penetration of SouFun’s e-commerce business into lower tier cities, thank you.

Hong Zhao

Yes really, compared to – right now in the first tier cities we continue to see penetration rates increases, we’re looking at about according to our numbers 23% penetration in the first tier cities and in the second tier we’ve blended at about 10% for the first quarter and then the lower tier cities were at about 2% as we’re opening up into more cities, we should bring in bigger base, so that’s 2%. And blended nationwide were about 6%. And I want to remind you also our penetration rate, yeah – and our penetration rate is calculated based on the number of project – number of units sold through our program versus the number of units sold during the same period in that particular market excluding the government subsidy type of housing units.

Frank Fang – Deutsche Bank

Okay, thank you.

Operator

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

Alex Yao – JPMorgan

Hi, good morning and good evening everyone. Thank you for taking my question. I have two questions, number one, the growth moment of a different business units that chanced pretty significantly compared to the previous quarters, e-commerce growth momentum slowed down quite a bit, so well the monitoring business has performed very strongly in the quarter, can you guys help us understand the dynamic behind these numbers and why are the e-commerce slowing down, what is the outlook and how about the marketing service.

And second question for the headcount. So over the past several quarters you guys have been adding new headcount to the company, where do you allocate these headcounts here, what part of the business needs a new high most. And then can you share with us the headcount target by the end of this year, thank you.

Hong Zhao

Okay. Thanks, Alex, for the question. First question, actually when you look at the different lines of business, e-commerce business, as we talked about and we understand that it's more tied to the – we’ll get affected by the online transactions because at the end of the day that depends on the sort of activeness of how active the market, the online shopping market really is and we will see that in the first quarter on a year-on-year basis, our first tier cities minimum transaction level drops 40% and second tier cities we’re looking at about 20% down and despite the headwind we still manage to penetrate into more lower tier cities as we look at our total city count, we now have operation, e-commerce services in about 49 cities which compared to 35 at the end of the year which bring in extra incremental revenue.

So that line of business were tend to be – I would said that more closely impacted by the ongoing market condition and I think when you see the advertising, we continue to grow in advertising and lot of that growth is also from our – from the lower tier cities which as we talked to you before our strategy was to continue to penetrate deeper in the lower tier cities and continue to offer the kind of service in and drive on monetization, so it seems like that strategy is being working pretty for you and for us and that bringing us the marketing services growth. Listings, we’re still adding and our focus on listings is therefore looking at adding more subscribers and also providing better services and more diverse services to meet all agents’ needs.

So apparently we are continuing to focus on that strategy to secure more subscribers to this platform. And so far that’s also seemed to be working. So, I guess, when it tied down its pretty much the on-the-line market share and that really is a primary I guess factor for the current sort of revenue mix shifts that you can see. So that’s the answer to the first question. And the second question, you ask about the head account increases and where we are adding. Actually when we look at a numbers, most of the employees were added to the marketing and sales, so which is really define revenue generating type of function. And then also if you look at the different lines, I mean we’re adding more people to secondary and rental homes divisions and as well as new home sales. So that’s where most of these agents tend to concentrate.

Alex Yao – JPMorgan

It’s very helpful, thank you very much.

Operator

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

Eddie Leung – Merrill Lynch

Hey, guys, good evening and thank you for taking my questions. Two questions, number one, I know that you don’t provide quarterly guidance. But, given the reason productivity especially on given first year primary market transactions. Is there any outlooks that you can share with us for the near term especially related to your e-commerce business, should we expect property slowdown first and then you have confident that towards second half of the year we can see a pickup in transactions across-the-board, and if so, what could be the reasons to give you the confidence? And then, secondly, about your secondary listing business, I’m just wondering for 2014, if there any new functions and features related to your secondary listing business that you can share with us. Thanks.

Hong Zhao

Vincent, do you want to add to this?

Vincent Mo

You go ahead first.

Hong Zhao

Okay. Hi Eddie, let me talk about I guess the first question I try to and Vincent will definitely add more on a macro level and trend stuff. E-commerce yes, I mean there is, the factor as I said earlier, we do see the underlying property market being quite soft in the first quarter. And also to be quite frank, I mean, not really seeing a uptick even at the end of April, so it’s quite difficult to tell where I guess the underlying markets are going to go, but what we’re pretty clear about is that, we’re committed to continue to expand into the cities that we haven’t been offering any e-commerce services and also at the meantime trying to provide a more comprehensive solution to the developers rather than just a simple discount, and we’ll add some other features and services to it, so that it becomes more of a valid and viable solution in one stop shop for them. So that’s the first take on that first question. And Vincent do you have anything to add?

Vincent Mo

Yeah, Eddie, this is Vincent. The market is tough actually, since the beginning of this year. We have seen the big cities like Beijing, the transaction volume revenues almost 30% done, the transaction volume. And across the country we have numbers and there are different reports about the slowdown of the real estate market. It’s my judgment – it’s my experience that the current situation will continue for quarter two for sure, and I think it’s going to expand to quarter three, and after six month-ish, it’s my expectation I think the market is going to be stabilized and it may continue, it may recover since then, because we will see the policies from the central government and from local government as well are going to lose in some way. We have already seen six major cities they have been losing the title and polices specifically with the limitation to buy in those cities. So it’s my judgment that the current slowdown will continue for another one or two quarters, I think after six month-ish the market will start to recover and with a more loosing policies and also with the accumulated in a purchasing power. So that’s my thinking. So that’s give us confidence.

Eddie Leung – Merrill Lynch

Thank you, Vincent. And if there any update on any trends to launch any interesting functions and features for your clients on the secondary listing business in this year? Thanks.

Hong Zhao

I mean, Eddie, I think we’ve already, in this flow of services we provide we are already providing the – the online shops is being one of the products we’ve provided and then also continue to provide them the mobile listing functionality which tend to be a very well accepted a platform among the agents. So right now we’re seeing on that platform – on the mobile agent – mobile aps, we’re seeing over 100,000 active users, that’s currently on – almost on daily basis using this platform and we’re now accumulating also more than 50,000 or even close to 80,000 now of the actual payment subscribers on the mobile platform, bear in mind and we just launched the paying services for less than three months. So that’s very encouraging to see the rate of growth on that and we’ll continue obviously to drive the subscriber growth on that online platform. And a start from – we’re also piloting certain features as we previously there to help the online home buyers to get mortgages and goes through the bank at a faster rate getting better approval rates. So we’ll continue to offer that service to the members of our listing service.

Eddie Leung – Merrill Lynch

Thank you, that’s fairly helpful.

Operator

Thank you for your question. Your next question comes from the line of Dick Wei from Credit Suisse. Please ask your question.

Dick Wei – Credit Suisse

Hi, thank you for taking my questions. My first question is on the probably that the full year guidance, I think I’ve missed the comments that Vincent made about the big note for next six months or so or may be stabilizing Q4, is there any risks of kind of missing the full year number, or how would the instance finance help from that your guidance perspective, how should we look at the current full year guidance? Thank you.

Hong Zhao

Dick thanks for the question. Yeah, Vincent mentioned about – we maintained the guidance and looking at the fourth quarter is going to give us, I guess, market would stabilize, give us a better lift, and give certain level of confidence that we can maintain the service at this level. Right now, I think we have a couple of things, one mobile listing are adding incremental revenue, but even it still a small amount, but we’re looking at it to be as we mentioned in the prepared remarks to be contributing more to our topline going forward.

And then as far as financial services, we’re still in a piloting and testing phase and we’ve taken a few cities to expand to kind of do the piloting and so far the results has been encouraging, but we expect that towards the – probably more likely to be the fourth quarter, we’ll see certain level of contribution to our revenue, a meaningful contribution, but right now, it's not very meaningful to talk to the numbers.

Unidentified Participant

I think this event -- I mean Q1 has just expanded. As you know, so far we experienced a different cycles in the past in multiple years actually. We do see challenges there for us, and actually for everybody playing in this real estate industry. But I think it's also an opportunity for us.

In the past, every time when we went through the -- we saw the market actually so far has had managed it to glow its business in a (indiscernible). Actually, after every (indiscernible), we have managed it to gain market share. It's my belief that -- and it's also what we have been doing trying to have more creative and innovative way to hander the common situation of the market (indiscernible).

(indiscernible) in the past and then in also in current efforts, I think after this run over adjustment or sold out the market, we have the opportunity, although I'm not a hundred percent sure. And I do believe that we have opportunity to make (indiscernible) during the tough times as the dominant player in both PC end and also the mobile end, which is something I'm really proud of what we have choose in the past several months.

The products across the board, including listed e-commerce and (indiscernible), I think we can find a way out in the coming quarter and/or those quarter of this year.

Dick Wei – Credit Suisse

Okay. Great (indiscernible). Just another question is maybe more on the competitive landscape on the e-commerce program. I wonder whether you can comment on some of the pricing trend, maybe on a year-over-year or quarter-over-quarter basis, particularly in any changes and how should we look at maybe the volume ways of the (indiscernible) changes to lead to somewhat of this lower growth for an e-commerce this quarter? Thank you.

Hong Zhao

For the first quarter, Dick, I think you're right. At the end of the day, there are many players in this so-called e-commerce market. As we mentioned, we have told you (indiscernible) the e-commerce in current form is more of a performance based marketing to us.

And a lot of this people are doing similar discount programs in the marketplace which has certain effect on the enterprise. But more importantly, I think, is the developers are also viewing this as more of a comprehensive solution for their marketing needs. So they're trying to pack more stuff into the fee that we're charging. Now, looking at the, I'll call it, the take rate, right? I mean we used to be able to enjoy anywhere between probably 80% to 85%, to 90% even of the 1% that we're taking from our membership service fees. And that gradually dropped down to about 70%. And in certain case, it's even a bit lower.

So that's the current situation. But the market is fair to everybody. I think our competitor is also facing that same pressure. It's just that the way that we're doing our business, we can do a lot more efficiently. So that's what we firmly believe at the end of the day. It's who is doing it more efficiently will actually win out this game. So that's our current assessment of the market.

Dick Wei – Credit Suisse

I'm not sure if that changes the (indiscernible) on a year-over-year basis or on a sequential basis. Are you still seeing any change on that?

Hong Zhao

On a sequential, you're talking about next quarter? I -- deterioration in that. Right now, we're not -- I'm sorry, go ahead.

Dick Wei – Credit Suisse

I don't know from Q4 last year to Q1 and then Q1 to Q2 outlook for the take rate.

Hong Zhao

Yeah. I think from Q4 to -- quarter-over-quarter, you don't see a very significant change. At least we haven't seen it from our perspective from Q4 to now. I suspect it'll be, going forward, it would lower a little bit but probably not as significant as what we experience from a year ago. I guess the decrease between Q1 last year and Q1 this year. Sequentially I think the impact will be smaller.

Dick Wei – Credit Suisse

Okay. Great. Thanks, Hong. Thank you, Vincent.

Hong Zhao

Thank you, Dick.

Operator

Thank you for your question. Your next question comes from the line of Fei Fang from Goldman Sachs. Please ask your question.

Fei Fang – Goldman Sachs

Hi. Thanks for the opportunity. I wanted to add my congratulations to the quarter. A follow-up question here on the growth rate. So e-commerce revenues have slowed down to 12% year-on-year from almost triple digits in the past few quarters. And so, this is partially impacted by the weakness around the -- and off for the Chinese New Year period. Are we seeing recovery in April and early May.

Would you say that the worse is already behind us or are we seeing a further slowdown in the coming quarters?

Hong Zhao

Fei, thank you for the question and thanks for congratulating us. Now. Actually, the -- as Vincent has mentioned, I think we'll see that online market continue to slowdown probably for another six months also. And earlier in our remarks, we didn’t see a particular uptake in April or the 1st week of May.

So in other words, it's really unclear to us as far as how the second quarter is going to be. But it seems that the slowing down or sluggish market condition continue to be in place, which tend to be our view of the overall market.

Fei Fang – Goldman Sachs

And also your margin remains relatively strong. Our margin was broadly flattish year on year despite the exceeding investment in mobile products and branding. Should we expect margin to stay broadly flat year on year in the coming quarters?

Hong Zhao

Margin still remain -- you're talking about comparable to previous years? To prior year?

Fei Fang – Goldman Sachs

Year-on-year, yes. Year-on-year trend.

Hong Zhao

Year-on-year, yes. I mean I think the margin -- we're looking at the margin. I think the bottom line is, first of all, our goal is we have to achieve 35%. And that as Vincent had pointed out in various occasions, 35% of our bottom line, I mean we may come up stronger but if necessary for competition reasons or for strategic importance we're willing to go to that level. So hardly we're not -- I think I've seen in the first quarter, we have an experience, like a significant margin decrease of deterioration. So we have to monitor it as we go along.

That's our current assessment.

Fei Fang – Goldman Sachs

All right. Thanks, Hong.

Operator

Thanks for your question. Your next question comes from the line of Philip Wan from Morgan Stanley. Please ask your question.

Philip Wan – Morgan Stanley

Hi. Thanks for taking my question. My question is about your (indiscernible). So we talked about slower e-commerce role to help the lower transaction volume. What about the trend for your online advertising or online marketing revenue, which has been pretty strong in Q1. What kind of (indiscernible) are you seeing going into Q2? Thank you.

Hong Zhao

Thanks for the question. The online market -- I mean I think that kind of marketing services have increased -- it has steady increase in terms of growth rate from Q2, Q4 of last year. We're seeing a 20% increase in Q4 of last year, and we're seeing a 31% improvement. I think it reflects the underlying demand for more advertising spending from the developer side. And also, we're encouraged to see that a lot of this growth coming from lower tier cities [ph] which we have been focused on.

So going down, I mean, we typically don't give specific guidance. But I think marketing services will continue its -- will continue a relatively stable growth pattern and which actually is very encouraging to us, as the market becomes more difficult, I think that line will stay where it should be.

On listing services, I mean this quarter, we continue to see the growth. Going forward, I think we're going to have to monitor again the online market as the secondary home transactions were also seeing a certain level of deterioration as well. So we have to see that transmit -- I guess transfer to our impact, I guess, happen to our list service top line. But we have to monitor very closely of going out in the next couple of quarters as the underlying market continue to be in the soft kind of state.

Overall, I mean we continue to maintain our revenue guidance for the year. So we do have that baseline of confidence.

Philip Wan – Morgan Stanley

Okay. Thank you very much.

Operator

Thank you for your question. Your next question comes from the line of Anne Shih from Brean Capital.

Anne Shih – Brean Capital

Hi. Thanks for taking my question. I just have one more of your spending. Can you provide some color on your promotion when advertising an investment spending? Also, I think last quarter you mentioned that there was going to be an increase in those last two areas, especially say for search engine. Are you still planning on spending more on the same level for the rest of the year?

Hong Zhao

Hi. Thanks, Anne. Yes, we talked to the increase, the marketing effort. As we can see, in the first quarter our marketing and selling expenses actually increased by 47%. However, if you're just looking at the marketing and promotional, advertising and promotion type of spending, we actually had -- we actually increased more than 150%. So that's a pretty substantial increase for us. The bucket is mostly spent on a few areas -- as you mentioned, as I mentioned in my prepared remarks that we have certain selective effective TV channels that we did. We did some branding, advertising, and we also had public transit platforms. We're doing some of the advertising and also outdoor advertising as well.

The goal is to really drive the user growth and traffic growth and drive branding recognition among the users in the city, in the major city that we operate in. And also, we also increased our spending on strategic partnerships with the Baidu (indiscernible) and the like. These are major engines, traffic instances. And we're forming a good alliance with them and using them as a great tool to continue increase traffic to our site. So combined the two, I think we're seeing that this increase is about 150% in total. Going out, we will.

On the FEM and FDO.org can probably maintain the current level of effort going out because the effectiveness. And we continue to monitor the online -- the TV marketing and then outdoors and all this other type of general branding marketing to pick the most effective, most efficient ways to get a best return for our marketing dollar. So, that's the current flat.

Anne Shih – Brean Capital

All right. Thank you.

Operator

Thank you for your question. Your next question comes from the line of (indiscernible) from TH Capital. Please ask your question.

Unidentified Analyst

Hi Vincent and Hong. I have a couple of questions. The first question, Vincent, is what you said about -- you thought that the market could recover the two quarters. I wonder what it takes in your mind for this market to recover your six months or two quarters? I think that's the first question.

The second question is when you look at SouFun's history in the past decade, that there are so many changes policy side [ph]. However, SouFun was able to manoeuvre it and grow and gain market share. And under the condition the real estate market in China actually didn’t really have any meaningful slowdown. So these times seems like it's the first time the slowdown was real. So if we think today's -- the market issue is a new norm and we're not going to see the craziness like what we would thought before. So what is the growth founder for the different lines of business of yours? Your comment last year growth (indiscernible) so rapidly. And the listing relatively slower. And this year from Q1, we saw a different story. Listing service grew much faster than e-commerce.

So I wonder in terms of a new growth outlook for each of the business line under your total guidance about 25% in the growth what each line looks like? Sorry about the long question.

Vincent Mo

Yeah, I think -- this is Vincent. My thinking about the market is now we're continuing for another two quarters. It's my preliminary judgement based on two things. One is really deposit -- which relates to policies from the central government and from the local government that we have. We have seen signals that the government may do something to revitalize the market. So I think that could happen, and which has already happened among six cities. So that's one of many reasons.

Another reason is it really look at the demand for properties in China. It is fundamentally still there. It is still strong. People still want to buy and to have the purchasing power to buy. So with that fundamental in mind and plus the policy adjustment, I think the market is going to recover hopefully after six months. Back to your second question about SouFun’s behave during this slowdown. As you -- actually you notice, and you also mentioned that in the past, we experienced different cycles, multiple cycles in the past but every cycle so far has been managed to grow its business and gain its market share and actually after every cycle and SouFun became much stronger and to a higher level. So this cycle, this slowdown we have been very cautious to talk about it and we actually -- internally we have been doing multiple things trying to mature, we can continue our resilient model or resilient advantage during a slowdown of the market. It’s my belief, our marketing services, ecommerce services and listing services, all of these product lines will keep on growing into the coming rest of the year.

I would expect that the ecommerce will come back with the better growth rate and which is similar to my judgement estimating about our marketing services a year ago, that’s my – it was my expectation our marketing services will get back to double digits growth that, that’s something I kept on talking about marketing services since one year ago. When marketing services grew at a similar digits in growth rate, so with my hands on operating of the business of the company, so I would not be 100% confident, I am 90% confident that our ecommerce business will come back to a much better growth rate, the marketing services, the listing services will also keep its momentum as they have been in the past. So that’s my answers to your questions.

Operator

Your next question comes from the line of Gregory Zhao from Barclays.

Unidentified Analyst

My first question is about [indiscernible] some increase in our deferred revenue compared to the end of last year and just want to know, how much of the listing services and how much contribution from the ecommerce services to the increase of the deferred revenue and will it be released in the Q2 or Q3? This is my first question.

Hong Zhao

Hi, thanks, Greg. Glad to hear from you again. Actually on deferred revenue, the increase – first of all, ecommerce line product does not generate deferred revenue. So the deferred revenue comes obviously from the advertising and listing services and looking at the current numbers, I think they contribute almost equally to the deferred revenue line.

Unidentified Analyst

My second question about our listing services, I think in the new house market share is pretty high and I am asking, around 40% or 50% of market share, in the listing service, what’s your current estimate of the market share you are taking?

Hong Zhao

Greg, when you mentioned about 40%, 50%, is that the advertising market that you were talking about or?

Unidentified Analyst

I mean for just I think some third party research house, gives estimate around 40% or 50% market share of your new apartments services, I want to know, isn’t that number, what’s your estimate of your listing services for the secondary home services market share?

Hong Zhao

Yes, that’s a good question. I think it’s measured in different ways. When we look at the secondary market, a lot of that is the agent paying subscribers, right, the number of agents that are using the platform. As we break down before, on our platform we have 200,00 of these agents that are paying money to use our platform, and collectively in the market, we are looking at roughly about a million to 1.5 million, that’s general number of agents that’s currently active in the market. And based on our market surveillance looking at all the paying agents across among different websites, we are looking at about less than 350,000. So from that perspective, compare 200,000 to the 300,000, or 35,000 gives you a market share of roughly 55% to 60%. And that’s how we calculate our market share. Obviously there hasn’t been a third party report on that. We haven’t seen one that’s available to us.

Operator

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

Wendy Huang – Standard Chartered

First, I want to dig a little bit into your OP margins. OP margin this quarter was 41%, down from 58% last quarter and flattish year over year, I just wondered if you can break down into factors on the seasonality investments in those low cyclical tiers [ph]. And secondly, did you just say that your paying subscriber for the listing services was around 250,000? Just want to actually double check on that number and also can you provide the number of advertisers for your marketing services?

Hong Zhao

Let me answer your first question first, as far as the operating margin, yes, operating margin always has seasonality. If you look at our cost structure, 50% of our total cost is staff cost and that doesn’t change a whole lot. I mean those are relatively fixed. So from that perspective, Q1 usually brings the smallest top line and usually because of Q1 seasonality usually the top line is not a very strong quarter for us, as demonstrated in the past few years. So obviously you still have the fixed cost, right, that carried forward from the fourth quarter of last year and then part of that a smaller top line. So that’s why your operating margin will decline sequentially from Q4 to Q1.

But if you look at the year on year basis, they are relatively stable, they’re relatively stable, and typically we are seeing a slight improvement but because this year we’re increasing quite a bit on the selling – marketing and promotion and then also some SEM, and SEO type of expenses, so we’re coming out pretty much flat. There is no increase in the operating margin, still 41%.

Wendy Huang – Standard Chartered

Just to follow up on that, is the Q1 margin this year – as Q1 margin last year, should we expect for the full year margin for 2014 to end up at similar level versus 2013? If based on what you just said is actually mostly the seasonality factors affecting the margin in Q1?

Hong Zhao

Yes, that assumption can be true if we’re not continue to add more people or grow our headcount more aggressively or investing more aggressively in mobile and other efforts and technology and so forth. So if everything being equal, yes, you will see that happening, the margin will turn to improve quarter over quarter, usually it reaches the highest level in the third quarter and then carry on into the fourth quarter. But this year as we continue to increase the investments in various things, you might not see as much of an improvement as what we experienced in the past couple of years.

So that’s the question on your operating margin, and the second question was really around – sorry, could you repeat that, Wendy, your second question?

Wendy Huang – Standard Chartered

Just want to check the paying subscribers for listing services and the number of advertisers for the marketing services.

Hong Zhao

The number of paying subscribers, we subscribed, it reached 194,000, towards the end of the quarter, and in April, actually we are hitting another record high, surpassed 200,000, reaching about 210,000 as we speak. So on that front and we continue to add subscribers which is very encouraging.

As far as number of advertising, advertisers on our platform, it’s always been a difficult thing to come by – we do have that count but it’s just – based on our count, we are looking at close to 2700 total advertisers and then compared to year ago, we’re looking at almost 24%, 25% increase. But we have to continue to monitor this because the underlying advertiser varies by diversity and also different projects – basically the developer can have multiple projects and cause that number to fluctuate. So we start to track this metric but right now I will caution against using it to calculate a very specific core [ph] or things like that.

Wendy Huang – Standard Chartered

So regarding the 194,000 [indiscernible] it seems a very small increase from 190,000 that you achieved at the year end, and if so, it was actually much lower than I think 250,000 that you achieved in the Q3. So was that due to the seasonality factors or that was actually also kind of in terms of the paying subscriber numbers, was this segment also affected by macro – or the value was actually intact?

Hong Zhao

Yes, Wendy, it is due to the seasonality, because if you look at last year it’s the same thing. We started the quarter with a very relatively low number and this year also we’re seeing it, the first quarter usually in April, the number drops dramatically. I am sorry, in February the number drops dramatically due to the new years and all this august holidays that are packed in there. So usually Q1 is a low point. So if you look at sequentially it will decrease from Q4 usually because that’s tied to the underlying – again the underlying activity of the market. You’ve got more agents selling houses than the listing tend to be more. So seasonality do play into the several accounts, yes.

Operator

Your next question comes from the line of John Chao [ph] from Macquarie.

Unidentified Analyst

I have two. The first one is on your ecommerce business, could you please first remind us your ecommerce penetration in tier 1 cities and in the lower tier cities and could you talk about, in order to increase penetration in the lower tier cities, what are the steps you have taken and perhaps the higher penetration in lower tier cities may have offset some of the weakness you have foreseen for the next couple of quarters? That’s my first question.

Hong Zhao

This is Hong, a good question. We actually talked about the penetration rate earlier, but I will just give a rewind. About 23% in the first tier cities, about 10% in tier 2 and 2% in tier 3. The tier 3 compared to last quarter, tier 3 was at about 3%. But now we added another 10 cities into this mix. So causing the kind of – because the base becomes bigger, so causing the blended third tier penetration rate to decrease a little bit. That’s to the first question.

Second question, as far as penetration deeper into all the cities, yes, we are taking steps to support the lower tier cities ecommerce business, including providing system support, providing headcount support, providing management assistance to help them to grow that part of the business and continue to increase the penetration I guess in all the existing cities as well and also in the meantime looking at entering into different cities. And our goal, as we talked about earlier, right now we are in about 46, 49 cities, some cities only have very, very isolated projects. Towards the end of the year, we are looking at entering into 60 cities, that’s our goal at the beginning of the year and we will keep on track on that goal and we are expecting that the deepening penetration in the second tier as well as third tier cities, and our geographic expansion will bring us more growth as Vincent mentioned earlier, bring the growth back into our ecommerce line.

Unidentified Analyst

Thanks, Hong. Sorry I missed the first bit of your call. And just follow up on this, do you have a rough target that you’re seeing in the industry, what sort of penetration rate you should be able to reach in tier 1, tier 2 and tier 3 cities if you have a rough number you can share with us?

Hong Zhao

Quite frankly, John, I mean that’s -- looking into three years is tough. But I mean we do think that going out, 30% penetration is not unachievable. It's kind of reasonable estimate. And I think second tier cities going out will bring out similar penetrations in the first year.

So in the second tier, we have to grow a bit faster to catch up. Tier two might take a bit longer time to reach that level of penetration because there are just a number of cities. It's just very (indiscernible).

Unidentified Analyst

Okay. Thank you, Hong, for that color.

My second question is on your listing business, it's a two part question actually. The first part is on the pricing part because one of your smaller peers who's specializing sort of existing home sales secondary listing head up at an issue when they've tried to sort of risk pricing. Could you just talk about your pricing power when you deal with the agents for secondary listing business?

And secondly, related to that is some users have been complaining about perhaps state lifting for the secondary lifting. While you're seeing, in your view, what's the best business model to make money longer term from secondary listing? Thank you.

Hong Zhao

John, let's look at the first question as far as listing goes. The pricing, we haven't actually cut our pricing at bay for the past number, probably three years now. We haven't really, I would say, publicly increased our price. But because the platform continues to reach to draw more users to the platform and that in fact they increased the usage of this users. So that brought in additional incremental revenue to us which is kind of just the -- I guess when you real that level, you kind of reached the economy scale. And this group will kind of grow, the partnership is going to grow by itself and increase in usage to a platform.

So we continue to be focused on providing the best service to our subscribers and to the agent, and the like, and best tools for them to make sales.

So that's what we're seeing. And the second question was related to the -- I'm sorry, do I (indiscernible)?

Unidentified Analyst

The entire industry is trying to figure out what's the best way to make money from secondary listing, right? The one model is you and another major compared there have been using is I want to see subscription with a lot of a lifting kind of fake as some of the customers have been complaining, but you charge a monthly fee for a number of listings. But another motto is the click, paper click. They have their own challenges as well. So I feel like the co-industry do try to feel what's the best way and a most user friend in a way to make money from secondary listing.

I would just try to see your thoughts on this topic.

Hong Zhao

Yes. Actually, that's also a good question. I mean I think the industry is facing this paper listing issue. We're not immune from it even though SouFun has always been in the forefront of encouraging true listings. And we actually have our channels that are put out and have the most, I will call it validated and verified housing sources. Those tend to be our -- that shows you the effort that we would put in to make sure that those listings are real and people can trust those listings.

And as far as different pricing models, I mean we will -- we will potentially do some the testing as well of different pricing models and we feel that currently the market accepts this subscription based model. What more, I guess, more than some of the other pricing models, part of the reasoning is I think for the agents to be able to really control the type of spending they have and also be able to achieve (indiscernible) return on their investment, the ROI because subscription level is basically fixed and they can't do the things.

But again, we will continue to look at these issues also and fake listings and figure out ways to improve the quality and improve the user experience apparently. So, that has been one of the efforts that our secondary home business division continue to emphasize and continue to educate our agent subscribers on the benefit of actually posting the right listings and the things to that nature.

Operator

Thanks for your question. Your next question comes from the line of Ella Ji from Oppenheimer. Please ask your question.

Ella Ji – Oppenheimer

Good evening. Thank you for taking my question. I have two questions. First, can we try to break down your marketing strategy in an e-commerce revenue growth by certainly tier of cities. For example, what's your growth rate for those two segments at major tier cities where we saw a big turndown in transaction volume in 1Q? And what's the growth rate at a lower tier cities where market is performing relatively okay and they are also seeing a higher penetration. So any color would be very helpful.

And my second question is as we understand, the current mortgage environment is tied and that's one reason why the market is soft. On the other hand internet finances is a growing new industry and so far as in the past, you talked about your interest in this area. Can you give us some update, -- is there any new business opportunities. You are looking on any corporation with either parties that you think you can tap on and then probably bring more users in transactions to your platform going forward. That's my question.

Hong Zhao

Thanks, Ella. Let me give you the details, additional color on the first question that I think you can probably -- can take you through the second -- on the financial [ph] services. On the revenue, the first you see is we're seeing the revenues, the growth is relatively flat in the first quarter. But most of the growth actually are contributed by the growth in the second and third tier cities, which is to be expected because the underlying market tend to -- had have the -- I guess was impacted the most in the tier one city than it is in the second and third tier. So our revenue growth potentially reflects that as well.

So that would be the answer, or the color to the first question. Vincent, do you want to add comments on financial services?

Vincent Mo

Hello Ella, this is Vincent. And you are right, the big financial institutions -- I mean banks that have been tightening mortgages and pretentions of mortgage approved in the market recently, they also raised the mortgage rate recently. So thus gives us an opportunity to work out something in this direction. So far we actually started the testing this kind of stuff within about a year ago and that we announced last November that we’re going to get into this Internet of financial services. After today, we have been in the retail market in Beijing and Shanghai and now we’re in seven cities. We are expanding the testing to more cities. That’s for the retail market. The main operation is really trying to link the existing plenty of institutions and the probable buyers and the agents together to make the mortgage application approved much easier at a faster and at a reasonable rate.

So, that direction we will keep on going and we are also working with the financial institutions to do something more involved different financial institutions just kind of a joint product from our side. I probably can tell you more in the coming quarter. In the home market, actually the buyers are facing these challenges, which is much longer for them to get mortgage from the big financial institutions. So, we’re working together with our developer clients so that we can lend with some of our partners’ money and profited with our own money to test the market to see how can we find out the opportunity in this type of market. So overall, financial services use a loan strategy for SouFun as well as other contracting businesses as well. So, during this period of time, it’s the area you might want to stack. I think the spelldown of the top market actually gives us opportunity to test the different models and different products and services. So, as we did in the past I think we can find something out during this tough time.

Operator

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

Anthony Thong – 86 Research

Thank you. Thank you for taking my questions. I have two questions. First one related to the new home business. Hong, you’ve mentioned now that you have the 1,600 projects using your e-commerce service in the quarter. So, wondering how many projects were there using your advertising service in the quarter and why was their overlap and how have these small numbers have been trending in the past? I have a follow-up question. Thank you.

Hong Zhao

Anthony, thanks for the question. On that front, I think virtually all of these e-commerce business has certain elements of advertising because we do put on somebody what we call it flagship pages for these projects and they do tend to get some of our available resources. But we look at earlier another caller, I think, Wendy was asking the number of advertisers on our platform and that’s counting just the project is contributing purely to advertising revenue. We’re looking at about 2,700, that’s where we are. But again that number we started to track it a few months back and we’re still trying to make sure that we have a more meaningful number before we can publicly – explicitly use it.

Anthony Thong – 86 Research

I understood. Okay. The second question is about the listing service. If you can just talk about the online stores. And how many stores are there right now on SouFun’s platform now? And have you guys raised the price entering 2014? And also I want to like with you asking how many offline stores are there actually using your listing service, just trying to get understand? And how big the addressable market for these online shops? Now, also I like to ask a question on your bidding service. And then you mentioned earlier, last quarter that [indiscernible] piloting bidding service for the listing service in certain cities. Maybe you can get some color and when would you formally launch this service nationwide? Thank you.

Hong Zhao

Anthony, we have the online shops. We have about 11,000 online shops at the end of the first quarter. That’s the number of shops that we have opened. At the end of the year we had about 10,000. So, that’s kind of deviate the idea of this online shop. And as far as offline shops and the overlap that I said, these online shops we covered most of the major communities in first or second tier cities. Let’s go back and look at that overlap. I don’t have the number right up my hand, but I can give you the number from myself that we have.

Vincent Mo

Anthony, this is Vincent. Although we do not have exact number, I think it’s close to 100% or up [ph]. Most of the online shop owners or operators do have offline shops on the ground.

Anthony Thong – 86 Research

Okay, got it. Thank you. Also on the bidding side, why don’t you maybe plan to expand the bidding service over listing service nationwide?

Hong Zhao

I think we’re still testing that. We haven’t made up the decision as far as to expand the pricing model. Right now, most of all say our listing model continue to be the subscription-based model, but we’ll continue to look at different ways to enhance the monetization of special mobile platform of our listing services.

Anthony Thong – 86 Research

Okay, go it. Thank you.

Hong Zhao

Thanks, Anthony.

Operator

Your next question comes from the line of [Alexandra Bicholera from Sandra Street]. Please ask your question.

Hong Zhao

Oh, we probably lost Alex. Can we skip to the next? Okay.

Operator

I have no further questions at this time.

Hong Zhao

We already have…. Okay, I just wanted to take this opportunity to thank you everyone for joining us for the first quarterly call and we look forward to communicate another quarter to you in the future and also to the extent you have any further questions or want to follow up with us, please contact us directly. We’ll happy to provide you the clarity. Thank you very much and have a good evening or good morning everyone. Thanks.

Operator

Ladies and gentlemen, that concludes our conference for today. Thank you for your participations. You may now all disconnect.

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