ChinaCache International Holdings Ltd. (NASDAQ:CCIH)
Q1 2014 Results Earnings Conference Call
May 15, 2014 8:00 p.m. ET
Edith Kwan – Director, IR
Song Wang – Founder, Chairman and CEO
Ken Zhang – President
Jing An – Acting CFO
Hello and thank you for standing by for ChinaCache first quarter 2014 earnings conference call. At this time all participants are in a listen-only mode. After management’s prepared remarks there will be a question-and-answer session. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time.
Now, I would like to transfer the call to Ms. Edith Kwan, Investor Relations Director of ChinaCache. Ms. Kwan, please proceed.
Hello everyone and welcome to ChinaCache first quarter 2014 earnings conference call. We distributed our earnings release earlier today. If you have not received a copy, you can find it in the Investor Relations section of our website.
Today you will hear from Mr. Song Wang, Founder, Chairman and Chief Executive Officer of ChinaCache; Dr. Ken Zhang, President of ChinaCache; and Ms. Jing An, Acting CFO of ChinaCache. There will be a question and answer session following management’s prepared remarks.
Before we proceed, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC. ChinaCache does not undertake any obligation to update any forward-looking statements except as required under applicable law.
Our earnings press release and this call includes discussion of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the most directly comparable unaudited GAAP measures and is available on our IR website.
As a reminder, this conference call will be recorded. In addition, a live and archived webcast of the conference call will be available on our IR website as well.
I will now turn the call over to our CEO, Mr. Wang who will make his remarks in Chinese and then I will provide an English translation.
Good morning, everyone. Thank you for joining us to discuss our first quarter results. I am very pleased to report another very successful quarter. With the continued growth of our business, simplified organization structure and improved efficiency, we had a very good start of 2014. We are happy to achieve financial and operating breakeven in the first quarter, thanks to all our employees and management team who made it happen. I have great confidence that ChinaCache is well positioned to build upon this momentum to take our company to next level.
Our net revenue for the first quarter exceeded the top end of our guidance reaching RMB323.9 million and representing a 40.4% year-over-year increase. Adjusted net income in the first quarter reaching RMB2.7 million in the first quarter. Additionally, our customer base is growing at a healthy pace.
Today I want to focus my remarks on the two big achievements in the first quarter. First, our strategic partnership with China Telecom to build and manage a content delivery network and second, we have entered a whole new business area. We are pleased to announce in April that we have signed a formal agreement with People.cn relating to the development of the cloud infrastructure to meet their rapidly growing cloud computing and storage needs.
We are very pleased with these two agreements and we are confident it will be very beneficial for each party. First, let's review our China Telecom partnership. As we announced in late March, ChinaCache and Chine Telecom will jointly build out and manage a CDN platform that combines China Telecom's extensive network resources and vast experience regarding CDN technology and services. Including, telecom support and customer services. China Telecom is world's largest wireline telecommunication, CDMA mobile network and broadband Internet service provider with more than 100 million broadband subscribers. They account for more than 50% of broadband traffic across China and are the largest Internet infrastructure provider.
China Telecom is in need for stronger content delivery capability to handle large data flow and heavy traffic load content as their rapid increase in demand from voice transmission to data transmission. To China Telecom our CDN can help them to strengthen network efficiency and enable their ability to provide more Internet related value-added services to their customers. Also CDN can enhance their ability to support large data transmission and facilitate the development of mobile Internet business. Their large customers including traditional enterprises, media companies, Internet commerce firms and government agencies require faster response time, higher level of reliability and security as well as build network solutions. This is precisely what ChinaCache is able to provide.
The core products we are providing include webpage content and generation, data transfer, rich media delivery as well as services like security. We also provide mobile Internet solutions in support of the 3G and 4G business. There are many significant benefits of this partnership to ChinaCache. First, we can clearly leverage China Telecom's superior performing broadband network.
Second, we can leverage China Telecom's large enterprise sales team to jointly promote a CDN network. Their team has developed mature channels and network covering a broad base of installed customers and they are known for having the largest group of government and enterprise customers in China. It will further increase the CDN penetration across the country, particularly among the Internet enterprise, traditional enterprise and government and media customer segments. In addition, for enterprise and government customers, because we typically bundle our services and connect that with cost in our packages, we can get economy of scale and significant higher margin compared with traditional CDN pricing methods.
I am pleased to say that the partnership is already underway and making significant progress. In a few weeks since the partnership was announced, we have completed the training program for 500 of sales representatives for China Telecom's sales teams in Guangdong, Shanghai, Beijing and Zhejiang Province. This includes areas with the highest concentration of large enterprise customers. Looking forward, we believe this partnership will lead to additional collaboration between the two companies for a series of value-added services, including, big data, mobile Internet and cloud computing.
Now let's discuss our framework agreement with People.cn. We can see the rapid growth of Internet business in recent years and with the quick emergence of cloud computing, there is huge demand in China for cloud data centers. In China, more than 80% of the data centers are provided by carriers and 99% of data centers could only be rented. Therefore, China's data centers cannot meet the customers' requirements in an efficient manner. In recent years, the Internet giants in the U.S. are moving to build their own data centers. This triggered the demand by (indiscernible) companies in China to do the same. We realize there could be a huge market potential and opportunity in this area. Therefore, we converted the purpose of the land we bought last year which was intended for our own use. In that we are now using it to service our customers. To do this, we are helping our customers to build their own data centers. We have established a dedicated team for marketing and operations to support our business in building customized data centers for customers.
Our business model is that first we have already obtained 35,000 square meters of land in Beijing Tianzhu free trade zone. During stage one, a total of three customized data centers will be put up for sale. The target customers are those super-large traditional Internet enterprises as we find that these big companies are considering building their own data centers that our service provides these companies with an effective alternative. At the same time we are tapping into a new market by providing solutions for those companies that no one else is offering. People.cn is our first customer and they already disclosed that they intend to pay ChinaCache RMB650 million for their own customized data center. It will be put into service after one year. Upon the construction completion, ChinaCache will continue to provide support and service for the data center building, including operations and management, as well as our leading CDN solutions and interconnection network support.
ChinaCache's Atecsys data center infrastructure includes three stages. In addition to the three customized data centers in stage one, there will be three buildings each in phase two and phase three. Combined, we have supplied 80,000 square meters of plot area. The total value of this output including managed service income will exceed RMB4 billion in five years. Our first customer, People.cn has prepaid RMB225 million for the cost to construct their center which minimizes any impact on ChinaCache cash growth during the construction phase. Upon the completion of the data center, the ownership will then transfer to the customer. The customer will continue to enjoy long-term Internet solutions and other services from ChinaCache.
People.cn has been our long-term customer. They are a large scale information interaction platform constructed by People's Daily and is also one of the world's largest comprehensive Internet media on the Internet with a market cap of RMB20 billion. The agreement with People.cn is representative of our innovative business model for extending our business in cloud computing. There are a number of advantages to ChinaCache in our approach to this opportunity.
People.cn is experienced in rapidly growing demand for cloud services due to the greater availability of broadband in China and the rapid expansion of mobile Internet use. In this environment, traditional data networks are experiencing bottlenecks as a result of the increased demand. People.cn, like many enterprises in China would like to build a high capacity and customized data center. However, there are other costs to doing this. First, it will require significant time and investment to garner resources needed to build and manage and facility. And second, finding an appropriate land in a tier one city in China in a location with sufficient power supply for a data center would be a significant challenge. People.cn through cooperation with us will be the first large enterprise in China to have its own customer data center like those companies in the U.S. With the land value appreciation every year in China, this investment will reduce our customers' long-term investment in the cloud infrastructure. According to our estimation, the savings on long-term co-location and operation cost a customer may enjoy could be up to 50% over a 20-year period.
Through this program ChinaCache can help our local and overseas customers to leverage huge advantage. Firstly, the land in use for data center is located in Beijing comprehensive free trade zone. The advantage of having data centers in free trade zone is that our customers have access to tax refunds and exemptions for all the equipment they purchase, whether imported or from local suppliers. The percentage is around 15% to 17%. For international companies, this could offset the extra cost of moving data centers to China. Second, for international companies, if they want to move data centers in China, the free trade zone is an ideal option. It is also a good option for those Chinese companies who conduct international ecommerce business as they can operate under a friendly customs policy.
Third, at the ChinaCache data center we can continue to supply managed services and other value-added services (indiscernible). This provides us an additional income stream and this cooperation also further solidifies our customer relationship.
The overseas market already has a mature ecosystem from (indiscernible) assay to managed data center and to cloud computing with different players in each sector. But in China there is only simple businesses like equipment cabinet leasing. Therefore, our innovative business model is created to address infrastructure difference between China and other countries. First, with the rise of cloud technology, there will be more of our customers' desire to own rather than to rent as the data center is seen to be a strategic resource of the company. Second, there is currently a shortage of cloud infrastructure. The development of cloud infrastructure can hardly meet the market demand which creates bottlenecks for our customers. With our help, our customers can have their own data center and can avoid a bottleneck. Finally, there is widely variable network performance in China unlike overseas countries which are covered with efficient network. Obtaining a location in tier one city with effective network resources to run a data center is ratably a scarce resource. We are optimistic about the long-term value of the digital real estate. Once our customers' own this data center, they can avoid the long-term increase in operating cost while enjoying the advantage of a land premium.
In addition to People.cn, our other large Internet customers can also benefit from this opportunity and we look forward to cooperating with them on developing proprietary data centers to meet their rapidly growing demand from cloud computing in China. I am pleased to report this meaningful business achievement in the beginning quarter of 2014. We will continue to drive our execution to deliver them. I will now turn the call over to our President Ken to discuss technology and operation in the first quarter. Ken, please?
Thank you, Mr. Wang. This first quarter was a strong quarter for us and that shows we are staying focused on your execution and gradually improving our product offering. We believe we are on track to achieve growth and further (indiscernible) this year. In addition to the major achievements that Mr. Wang had reported, I would like to run through our progress this quarter towards our two big strategic initiatives, expanding enterprise customer and developing mobile Internet technology. I will also cover our growth drivers for the first quarter and our efficiency enhancement program across the organization.
The China Telecom CDN deal is a milestone in the company's business development. It demonstrates our CDN leadership in China. With this strategic partnership, we can further accelerate our business with enterprise segment. In term of enterprise customers, we have sequentially increased the number of enterprise customer by 7% with revenue from this sector growing by 5% in the first quarter 2014. It is obvious that companies in many industries are shifting from offline to online to build consumer awareness. For example, in automobile industry, many companies are complementing their own Web site now by working closer with Internet portal as they see the need to integrate online and offline marketing channels and to get better consumer efficiency.
Their digital integration initiative in addition to driving current sales are also actively focusing on data compilation and building a knowledge portal. Therefore our total network solution has become a more integral part of their online strategy. For finance industry in China some Internet has shake up the industry recently by promoting aggressively new opportunity in O to O financing. With a service that allows users to invest money stored online into a money market firm. Many traditional banks are facing new competition with this investment option in the market from Internet companies. Not just that, this online finance operation can use big data based on clients transaction activity which analyzes clients behavior and characteristics and offer responsive finance service. This is a completely new trend that may overturn traditional business model entirely so that enterprise customers, especially banks are in need of effective online presence and taken knowledge to help them compete effectively in the market.
This trend quickly heats up the business opportunity for the demand of our one stop network service across China portal, investment funds, security houses and the insurance companies. We will come to see more OtoO trend across other industry likely as it will contribute more opportunity for us to provide services to the market towards the electronic platform as well as to the traditional enterprise model. Meanwhile, for the enterprise customer, we are working towards to change traditional bandwidth pricing policy into platform pricing and solution pricing. This shows vast opportunity and also challenge to us as it is a change of customer mindset and behavior. With the continuous improvement in our internal system, it now helps us to have a more flexible pricing strategy. We can either have by TV, by (indiscernible) by service fee or by platform fee.
We are continuously working towards this as we pave our way for the future mobile Internet business where there is no direct relationship to bandwidth cost. We are confident that the ramp up of our mobile business will help to improve our margin in the longer term.
Next, let's talk more about mobile Internet. In early May, ChinaCache participated in the Global Mobile Internet Conference, one of the main events of mobile Internet in Asia and globally. During this conference, we officially launched and demonstrated our one stop mobile Internet solution, the mobile content-aware networks service, namely mCaN. Our solution is made up of three modules. Set and mobile application organization, mobile SDK integration and the caching of video-access network. Today we are pleased to announce that our mobile Internet solution is applicable for all industry including, finance, social media, ecommerce, gaming and so on.
We deliver an optimized network performance through a wide spectrum product features such as intelligent image compression, phone line optimization, mobile protocol enhancement and the base station caching to create a singular transmission from our ad server through the mobile network and all the way to end-user device. That includes handset, iPad and also home gateway like Wi-Fi access point and set-top boxes. Our initial trial results show that our solution can enhance mobile network up to 60%. We reduced bandwidth usage up to 40% and increased Web site service availability up to 16% during unfavorable networking environment.
We are really pleased the way this went off and the level execution of our business and product development. When we look at our growth, we have also made good progress in view of our major growth driver for the year, the video business. In the first quarter, we supported live broadcast of Spring Festival gala exclusively for CCTV, China Central TV Station with more than 7 million viewers. This show has been a tradition for Chinese family to watch together on a Chinese New Year Eve and is one of the most popular event of the year.
In March, we supported CCTV further for the live broadcast of the National Congress meeting with more than 3 million viewers. And again this is a spotlight event for the whole nation. In the second quarter, we are very excited to be selected to support the live broadcast of the World Cup for CCTV. And we will be exclusively helping to live broadcast this event across the country. We won a solid reputation by providing CDN support for all these nationwide important events. It is strong testament for our proven service and technology.
In terms of product enhancement on the video front, since the first quarter we have been able to handle user-generated content uploaded to our Edge network. Also, we have provided value-added service to monitor live events in real time, including real-time analysis for bandwidth usage, object delivery, streaming connection and storage condition. Going forward, as we continue to see more hardware integration with applications for OTT video and the 4K video delivery, we are confident our platform is capable to fulfill this kind of requirement. As you can see from the first quarter results, we now have better operating leverage through our continued execution of a number of cost efficiency programs.
After the (indiscernible) spring lining in the late 2013, our organic (indiscernible) is now more pleasant with simplifying structure. Also we continue to upgrade our internal system to increase visibility, predictability across organization so we can better match cost with revenue generated. We are also pleased to report that our construction of the resource management system is on track. With a more flexible, scalable pool of network resources, we are confident, in our ability to embrace more market opportunities.
There is a positive market dynamic ahead of us. I have good confidence that we are in strong position to continue making progress towards our strategic initiative. With that, I would like to hand the call or our Jing, our Acting CFO for financial recap.
Thank you, Ken. Hello everyone and thank you for your participation. Today my presentation will start with a review of first quarter 2014 results followed by our guidance for the second quarter of 2014. We will then open the call for your questions. Please note that the denominating currency is RMB unless otherwise specified.
ChinaCache delivered another strong topline performance in the first quarter with net revenue increasing 40.4% year-over-year to RMB323.9 million from RMB 230.7 million in the first quarter of 2013. We beat our original guidance by 5.2% as we showed stronger than expected revenues with particular strength in the media and entertainment and enterprise verticals as each of them increased 1% point in proportion to revenue. Compared to the previous quarter net revenue have slight [correction] by 5.4%. first quarter gross margin was 30.3% compared to 31.6% in the previous quarter. We had lower bandwidth and co-location charges as a percentage of revenue but this was offset by higher equipment depreciation and migration.
In the first quarter, we achieved operating income of RMB0.2 million compared with an operating loss of RMB6 million in the previous quarter. Non-GAAP operating income which excludes share-based compensation expenses and impairment of an available for sale investment, was RMB3.7 million compared with a non-GAAP operating loss of RMB1.1 million in the previous quarter and a non-GAAP operating loss of RMB5.3 million in the first quarter of 2013. We are very pleased that with our strong growth, we have maintained strict control of operating expenses throughout the company.
Looking at the operating expenses line, our general and administrative expenses for the first quarter on the RMB37.2 million or 11.5% of net revenue RMB43.4 million or 12.8% of net revenue in the previous quarter. The decline in general and administrative expenses was primarily attributable to the decrease in personal related expenses. Sales and marketing expenses as a percent or revenue were 10.1%, down from 11.2% in the previous quarter. Total sales and marketing expenses decreased 14.1% to RMB22.7 million quarter-over-quarter, probably due to the cost control measures across the board and reduced personal related expenses.
R&D expenses for the first quarter were RMB28.2 million, 8.7% of the net revenue compared with RMB30.6 million or 9% of net revenue in the prior quarter. The quarter-over-quarter decrease in RMB spending was mainly related to the company incur related personal related expenses. Our total operating expenses including impairments of an available for sale investment were RMB98.1 million or 30.3% of revenue compared to RMB130 million or 33.4% of revenue in the previous quarter. This decrease reflects our focus on controlling expenses and improving our internal operating efficiency.
We continue to refine our ERP system to provide a better visibility across the organization. In addition, we have made a significant improvement to our sales cycle. In the first quarter our DSOs were 98 days. Looking at the bottom line, I am very pleased with our performance for the first quarter. We are off to a good start in 2014 with adjusted net income reach RMB2.7 million in the first quarter compared to a loss of 7.2 million in the previous quarter. Adjusted net income is defined as the net income before share-based compensation expenses, foreign exchange loss or gains, penalties and uncertain tax positions and impairment of an available for sale investment.
Our non-GAAP diluted earnings per ADS in the first quarter were RMB0.11 compared with a loss of RMB0.31 in the previous quarter. Adjusted EBITDA was RMB25.4 million in the first quarter, an improvement of about 25% from RMB20.3 million in the prior quarter. Adjusted EBITDA margin for the first quarter was 7.9% versus 6% in the prior quarter. Adjusted EBITDA is defined as EBITDA excluding share-based compensation expense, foreign exchange loss or gain and impairment of an available for sale investment.
I will conclude my portion of today's call with our second quarter guidance. Based on current business projections, we expect our revenue to be between RMB340 million and RMB345 million representing 31.9% to 33.9% growth over second quarter of last year and 5% to 6.5% growth over previous quarter. In conclusion, I want to emphasize that our results and our guidance demonstrate our commitment to long-term profitable growth.
Now let's open the call for questions.
(Operator Instructions) Your first questions come from (indiscernible). Please ask your questions.
Congratulations on the solid results. And Jing, I just want to ask you about on OpEx side, should we expect the increase in CapEx in the next couple of quarters on the expansion of capacity in some of big nodes kind of affect gross margin and maybe the operating margin in the next few quarters? Thanks.
I think your question is to, one is about OpEx, right. Another one is about CapEx? CapEx...?
Right, right. The CapEx, yeah.
Okay. Let's start with the OpEx first. Actually this quarter we already saw a significant improvement like 3 percentage point in the OpEx. And that's mainly due to that we do have a very strict control on evaluation system of the HR cost. And we will continue to drive -- at the same time we will continue to drive top line growth while managing (indiscernible) and we are very carefully managing our cost in line with our business needs. And actually just management, we have slowed down our overall hiring since the end of 2013. However, this year we are still working to recruit select, new talent in conjunction with our sales force reorganization and HR and R&D teams. We expect to incur a limited additional cost related to these efforts. So that’s about OpEx.
And for the CapEx. We are in the process to build up our new resource management system and this quarter is the first stage and that will continue through the next two quarters. So in the coming two quarters, our CapEx will continually increase. But after that we will finish all the construction, the CapEx will be back to the normal, close to 10% levels. Thank you.
Okay. Thanks. And my second question is on the partnership with China Telecom, when do you expect the revenue contributions from this partnership to be (indiscernible) and also if you compare the gross margin and operating margin with partnership with China Telecom with your current CDN strategy at which point it's a little bit higher. Thanks.
Let me start and I think, maybe Wang Song can help me later. So first of all I think we just signed the contract and we build out the corporation at the beginning of -- at the end of first quarter. So in the second quarter everything is in the warm up section or in the warm up stage. Now the two teams work together and we provide the training program for the sales team of China Telecom and we prepare to do that as a network of -- CDN network of China Telecom. So in the coming second quarter, we don’t really expect to see the revenue coming with us and we expect that maybe from the third quarter of this year, we will start to see the revenue from partnership. And in terms of the margin, we believe that will provide better performance with our average gross margin. So Wang Song?
In the future as the proportion of revenue contributed from this cooperation we expect the margin from part of business will be higher.
I will add one thing. The beginning of cooperation, it will generate revenue and margins to ChinaCache but I think more meaningful contribution next year.
Okay. Thanks. And I will have one more question and then back to queue. So my last question is about your data center business. As Wang Song mentioned, right now you start creating the data center opportunity to sell those specifically to some of the big Internet companies. Jing, I just want to ask you about, how do you recognize the revenue? Is it going to be within one quarter or a couple of quarters and how about margins on this data center business plan?
You know in terms of top line of the business, we have a estimate about like 4 billion to put altogether at this stage. But it is very early stage estimate. And in term of the margin, it's about -- it's really early stage and we have confidence about that but it's about a business secret and we would not talk about this at this stage. And I think maybe Wang Song has something to -- okay, we are fine. Thank you.
Thank you. Next question will come from [Leping Jao] (ph) from CICC. Please ask your questions.
Congratulations for the quarter. I have two questions. So the first one is, that can we expect the profit to continue in second quarter this quarter and full year 2014. And my second question is related to also the IDEC service. Because in my understanding the People.cn cooperation is mainly about IDEC service. So how unique is ChinaCache IDEC for this compared to other peers in the market, for example [China Net Center] (ph) or [21Net] (ph). Thanks.
Okay. Let me take your first question about the sustained result, the profitability, and later I think Edith can help translate your second question about data center to other management team to help you answer the latter one. So the first question about the profitability. You know we are very pleased about our revenue growth combined with continued operating efficiency and economies of scale make us to achieve the profitability in the first quarter. And, however, we are continuing to invest in the marketing and R&D in order to explore several strategic growth opportunity. For that reason, we are not committing to profitability in the very near term on the whole year but we will work very hard to improve our operating efficiency and we are more confident in our ability to achieve and sustain profitability towards the end of the year and into 2015. Thank you.
First of all let me explain the difference of our business model compared to those of [competitors] in China. It's completely different business model compared to China Telecom or China Unicom. The difference is because they would have to invest a lot to build their center. And our business model is that we are customizing the data center for our large enterprise or Internet customer. So the major difference is that we don’t invest heavily to build data center on our own. As President said, we are using the capital from our customers to have them built. On the (indiscernible) is mainly our ability, our experience. Such business model are in fact common in the U.S. or other countries. Like Google or Facebook, they all have third party to have them build their center. So in China really no one else is for providing these services.
So first of all, why we can do it good because first of all the customer really already belong to us and they have this demand. And in China because of its rapid development no matter the power supply or land is all to get resources. So we can see a really good appreciation on the real estate project. So except providing value to our customers, ourselves can also have a very good return on this business. So after building it in the long run, we can also provide the management and other value-added services to customers. So we will have income stream enjoy all the way in the long run. So, so far we don’t see any similar competition here yet.
Yeah, I think I just want to add in one more thing. Actually the major difference is, ChinaCache will not own that business, it will be owned by the customer. Large Internet companies. We won't own that. ChinaCache during the longer run to provide operation and maintenance, all those kind of service support. So this is totally different business model compared to traditional IDC service.
Thank you. Your next questions come from [San LI] from Goldman Sachs.
First, could you just give us more color on the revenue in the first quarter? For example, what's the reason for the particular strength in media and entertainment segments. Was it just because of any special event or it's just that we are taking market share.
First of all in the first quarter, you the growth was across the board. So upside in our media and entertainment vertical which is mainly driven by our video business and part is from gaming industry.
But why -- I mean it was above all expectations. So anything unexpected?
No. Actually, I think this is all from the booming of video and entertainment industry, it just grows with the Internet demand in China. We don’t see any special event in this quarter.
Okay. Good. So the demand is quite good.
Okay. And second, besides the media and entertainment part, could you give us more color on the new business development such as end price in the mobile Internet segments as a percentage of the total revenue in the first quarter.
I think we mentioned the business on enterprises. It is in number of customers of increased and the business is growing faster than other segments. But still it's small percentage in total revenue. It's about 11% of total revenue. So really, really significant yet, but growing. It's among our faster growing segments. And Internet is, as you know China Mobile is deploying 4G in very very fast speed. So by the end of the year they will have 500,000 base stations employed with 4G. So we foresee huge traffic growth in mobile Internet in the second half of this year and the beginning of next year. So we are more in the preparation stage rather than seeing the revenue growth, start the revenue growth right now. It's more, we have product available, we are confident we can take this opportunity when it comes.
Okay. Understood. Maybe you can give us more color on our progress on the mobile side. I mean considering your competitor had already launched the mobile product and actually they claimed to make -- already recognize the revenue on that product in the past quarter. So maybe some color on our progress on in that segment. For example mobile multilayer solutions or anything else.
I don’t want to comment on what our competitor is going but we believe our mobile Internet solution is -- we have the lead in, both in technology and the business development. So as I reported in my speech, we have international cooperation in this field and we have a number of products lining up through the coming up -- during this year. Off course the revenue contribution will not be so significant this year, more meaningful in the beginning of the next year. So we are confident that we have the leading position here.
So actually we have some really major difference from our competitor. Mainly our product is in three modules. One is on the application and content side, two is on the network side. On the network side we feel like it's really the core if we have to work with carriers to deliver this technology not just on our own. Also, we have a team in U.S. that are mainly focusing on the end-device for the mobile solution. So it's really in three modules for our solution.
Thank you. Your next questions come from [Joyce Dow] from Barclays.
I have two questions. The first one is about the data center plan. I understand that you have got prepay from your partners in building the data center. But is that any CapEx still needed from us because you mentioned about the three phases of the plan in the long-term. And the second question is, can you update us the current utilization rate of your CDN. Thank you.
Okay. Let me take your first question about data center CapEx. We got prepay from our customers so that it can mainly help us to -- so we don’t have to use our own money to do the construction. So the CapEx definitely is to build the whole building so we need to invest but it is based on our own cash.
The second question about, your question about penetration in CDN, right, in China.
No, I just want to ask the utilization rate?
Okay. I think what was a normal percentage, in the U.S. more than 50% of the Internet traffic is supported by CDN but in China I think it is only 7% to 8% Internet traffic is supported by CDN. So that shows the growth potential for Chinese CDN market.
We are now approaching the end of the conference call. I will now turn the call over to ChinaCache’s President, Dr. Ken Zhang for his closing remarks.
Okay. In conclusion, I want to thank all our employees who helped deliver a great quarter and our shareholders and partners for their continued support. There is a lot of promising opportunity in this fast growing industry. We are very excited for our prospect in 2014 and we are making significant progress in all our business segments including enterprise and mobile Internet technology. At the same time we continue to focus on delivering financial strength and leading the company to long-term profitability and growth. Thanks for your time today. We look forward to seeing on our next quarterly call. Thank you.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, you may all now disconnect.
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