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

Youku.com Inc. (NYSE:YOKU)

Q1 2014 Earnings Conference Call

May 22, 2014 9:00 p.m. ET

Executives

Ryan Cheung – Corporate Finance Director

Victor Koo – Chairman and CEO

Dele Liu – President

Michael Xu – CFO

Analysts

Wang Chao – Nomura

Alicia Yap – Barclays Capital

Jiong Shao – Macquarie

Eddie Leung – Merrill Lynch

Dick Wei – Credit Suisse

Philip Wang – Morgan Stanley

Fei Fang – Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2014 Youku Tudou earnings conference call.

[Operator Instructions] I must advise you that this conference is being recorded today, Friday, May 23, 2014.

I'll now like to hand the conference over to your speaker today, Mr. Ryan Cheung, Corporate Finance Director. Thank you. Please go ahead, sir.

Ryan Cheung^

Thank you operator, and welcome to our first quarter 2014 earnings conference call.

Let me introduce our management team on the call today. They are Chairman and CEO, Victor Koo, our Board Director and President, Dele Liu, and Michael Xu, our Chief Financial Officer and Senior Vice President.

Regarding today's agenda, Victor will provide a strategic outlook of Youku Tudou going forward and an overview of our performance in the first quarter of 2014. Dele will cover our content strategy and business operations and Michael will discuss first quarter financials, after which we will take your questions.

As a reminder, the financial results and the webcast of this conference call are all available at the Investor Relations sections of the Youku Tudou website. A replay of the call will be available on our website in a few hours. I'll refer you to the Safe Harbor statement in our earnings press release, which applies to this call, as we will make forward-looking statements. Finally, please note that, unless otherwise stated, all figures mentioned during this conference are in renminbi. At this time I will turn the call over to our Chairman and CEO, Victor Koo. Please proceed.

Victor Koo

Thank you Ryan. Good morning and good evening everyone. Thank you for joining us. Youku Tudou kicked off 2014 in a positive direction. Mobile has become the number one screen for Youku Tudou and we are the undisputed leader in all of the important mobile video traffic metrics. The latest iResearch weekly data shows that the Youku app was the number one most frequently used video app in China for a total of 1.4 billion times, a sum over the combined trend used of the second and third ranked apps. In addition, Youku ranked third out of all mobile apps in China in terms of user time spent behind only WeChat and QQ mobile.

Our content strategy has always been to strengthen our position in original, partner and user generated content which are now suitable aspects of our unique content offering contributing to over 40% of our traffic. For example, we also produced breakthrough programs such as our documentary show On the Road you've seen, which was broadcasted on CCTV-1 and achieved over 100 million video views to date for second season. In addition, strengthen and differentiate the brand identity for Youku and Tudou,

Our continued investment in product and content development is paying off and have enabled us to tap into growth opportunities to diversify our revenue mix. Regarding mobile monetization, the results are promising. New multi-screen advertising solutions was introduced to our advertising partners in the second half of 2013. Revenue from mobile devices continued to grow and today and accounts for one third of our total revenue. We also launched performance based advertising solution such as our in-app mobile game and app center by the end of 2013 which has contributed to our mobile monetization.

In addition, we customize our visual content to develop content marketing solutions which has successfully attracted brand advertisers such as Mercedes Benz, Mini Cooper and Infinity as title sponsors.

Our investment has enabled the company to grow at scale in terms of traffic and revenue and today we are increasingly tapping into various growth opportunities across the media and entertainment sector. This is timely as the Chinese internet industry is entering into a new phase of growth with online video emerging as a key category as we head into the multi-screen era. In light with this growth, we are building an immersive culture and achievement platform that integrates online and offline entertainment opportunities and the potential to monetize from consumers as a means and brand advertising client over time.

To this end, we have already stepped into another phase of growth and plan on further transforming Youku Tudou's business model by allowing us to further diversify our revenue, traffic and content. The transformation requires us to make additional investment in the areas of multi-screen development, diversify revenue models and content ecosystem. The strategic investment from Alibaba has boosted our balance sheet which enabled us to accelerate the expansion of new business opportunities. We are certain that these opportunities are significant in the long term and that the investments will pay off over different time horizons.

I do wish to emphasize that in light of the Alibaba deal, Youku Tudou management will remain independent and we will continue to be open to opportunities for cooperation with other strategic partners going forward.

Next, I will like to take a look at some of our recent developments starting with our multi-screen distribution platform. Our growth has seen us change from being a PC video website at the beginning to a video app and web-based platform now as our app traffic exceeded our web traffic. Our mobile app has been the largest and fastest growing source of mobile video traffic with now over 400 million mobile daily video views. I am pleased with its development as we progressed with the aspiration as a multi-screen video entertainment platform. We believe that the overall multi-screen video market still has much room to grow as continuously rising shipments from mobile devices and adoption of 4G by Chinese users pushes mobile traffic even further.

In addition to mobile traffic growth, China is now the largest OTT market worldwide with upwards of 20 million to 30 million sets sold annually. This growth has made OTT a key component of our multi-screen development, a strategy we get to leverage successfully in 2013 based on our leading video brand, vast user and content resources.

Today we have established ourselves as a market leader via an open partnership model and by working closely for our partners to develop Youku Tudou's TV app in order to maximize user experience on the big screen. Of the strategic partnerships we have established with China's leading OTT manufacturers, eight of them including exclusive integration of the pre-installed Youku Tudou app. The results are tangible. Our Android TV ranks number one in downloads according to third party specifics.

Our strategy for 2014 includes more investment while we believe that potential for cooperation with Alibaba Ali Cloud opens specifically will help us further build up partnership in this area.

On top of opportunities in further traffic growth, there are increasing opportunities to fully realize the potential of the online video ecosystem as China continues to evolve into a consumer-driven economy. Our presence now spans across different screens and we are further extracting value from the key vertical categories in entertainment and media.

Future investment which will enable us to grow our existing revenue base and develop additional revenue streams will be made in our current brand advertising business, development of SME clients and our consumer business. The evolution of our advertising solutions has helped us become one of the fastest growing brand advertising platforms in China. Over the years Youku Tudou has aggregated a wealth of data from our multi-screen traffic which improves our ROI as we continue to receive positive feedback from our advertising partners. In addition, advertising solutions has evolved from hard advertising such as [indiscernible] ads, etc., to other forms of advertising such as program sponsorships and product placement.

To further improve our advertising solution and add new features to grow our existing client base, our strategic cooperation with Alibaba will bring in a broader spectrum of data especially as related to ecommerce and payment. Big data will serve to benefit our existing client base as we look ahead to more target advertising offerings across multiple screens, potentially boosting our rate card, increasing mobile ad adoption and provide a better experience for our users.

At the same time, we are rolling out news advertising solutions such as demand-type [ph] platform particularly for SME advertisers to conduct real time bidding. These new initiatives not only optimize the efficiency and conversion of potential SME clients such as ecommerce and mobile gaming advertising campaigns but also automates our sales process.

More importantly, Youku Tudou will increase our investment in building our consumer business. First of all we will continue to develop our content subscription business; specifically our subscription business has already seen notable growth in the last several quarters and recorded three fold growth year-over-year in Q1 2014. I am pleased with the recent government measures to enforce anti-piracy and believe these effort will continue the momentum in our subscription business going forward.

We are also leveraging our marketing and promotion capability to share revenue in movies and mobile games with our business partners. Dele will provide you more details on this later.

We see strong potential in developing our consumer business. Today the strong partnership we have with online and mobile payment services accelerates this progress. Of note, our recently launched interactive entertainment platform enables millions of fans to connect directly with their favorite celebrities and musicians. Virtual booths can be awarded while viewers are watching live broadcasts. We believe that untapped revenue from these consumer businesses and dedicated investment in this area should deliver us high growth and improved margin over time.

Our strong start to 2014 has us feeling excited about our prospects for continuous growth. We're seeing strong returns on the investments we've made which have enabled us to tap into new business opportunities. In the past few years, we have built up our full phase in contents, technology and brand differentiation which solidifies us as the leading multi-screen online video platform. We are now entering a new phase of growth in traffic monetization opportunities. With a strong strategic partner and strengthened financial resources, we are in a favorable position to keep investing in key areas to fully explore those opportunities. We firmly believe that we are in the best position to achieve this based on our multi-screen leadership, diversify content offering and management track record.

At this time, I will turn the call over to Dele, who'll discuss our content strategy and business operations.

Dele Liu

Thank you, Victor. Youku Tudou being the proxy of internet video in China will continue to offer the most diverse and most comprehensive mix of contents namely original content, partner generated content and user generated content as well as professionally syndicated content. In regard to professional content, our strategy is to sign long-term, high quality, multi-season shows including sources of diverse content from Korea, Hong Kong, Taiwan and the U.S. as opposed to hot domestic single season TV dramas.

The diversity of our content today is reflected by the fact that four of the top 10 TV dramas in terms of average video views today per episode in April originated in Hong Kong, Korea and the U.S. We have the largest portfolio of Korean dramas in China and have established partnerships with SBS, KBS, NBC, Korean entertainment company CJ E&M and music labels including YG, JYP and SM. We continue to license high quality U.S. content.

For example we are now broadcasting and promoting the latest season of 24 and we have obtained the rights of the previous eight seasons of 24 exclusively in China, and subsequently build a very strong fan base. We'll like to note that the recent rumor of the Chinese government prohibiting U.S. dramas, from being broadcast is baseless.

We are rapidly expanding our original content production. Overall we have more than 50 original programs on Youku and Tudou including talk shows, reality shows, web-based drama, movies, animations among others. For example, our original show [Chinese language spoken] which was broadcasted on Hunan's satellite TV during the Chinese Spring Festival have accumulate over 600 million videos viewed since it premiered in August 2013. There will be more content to be launched in the second half of 2014 exclusively at Youku Tudou produced jointly with top tier studios in China.

The third annual Youku Original Masters' Short Film Project which invited some of Asia's most renowned movie directors to make sure the films premier at the Hong Kong international film festival held in March. Another initiative has been to support young directors by offering them financial support in addition to inviting veteran directors as mentors. To date, 48 young directors have benefited from the project since 2009 with 18 internet series and 60 short films made and a total number of reel counts exceeded 2 billion.

For user generated and partner generated content, traffic from both have increased to 40% of our platform total videos viewed, specifically on our PGC program, more than 125 exclusive partnerships, content partnerships have been signed with us to share revenue creating more than 150 content. Our PGC have accumulated a total of 3.5 videos viewed since the sharing program was launched in August 2013.

China is now the world's second largest box office market with ticket sales last year reaching about RMB20 billion. The country is expected to take the top spot in the world in 2020. We are now investing in joint production of movies leveraging our big data and movie per motion capability. With our marketing resources as income investment, we'll be investing in 10 dramatic films in 2013 for which we share box office revenue.

Regarding foreign movies, core marketing activities today have including partnering with Disney for Captain America: The Winter Soldier and with Sony Pictures on The Amazing Spider 2. This core marketing campaigns have proven extremely successful with Captain America becoming the seventh highest growth in imported film ever in China and Spider-Man 2 box office returns placed first week in theaters higher than the entire run of the film's prequel in China. Both movies will be available under the paid services at Youku Tudou -- on Youku Tudou later in this year. I am pleased with the overall progress of building up our online cloud, offline content ecosystem and there will be more interesting projects to be launched in the future.

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

Michael Xu

Thank you Dele. Hello everyone and thank you all for joining our conference call today. Let me now take you through our financial highlights for the quarter. The amounts mentioned here are in RMB unless otherwise noted.

For the first quarter, our net revenue were RMB700 million, a 36% increase year-on-year as previously announced by the company. Advertising net revenue were RMB623 million, meeting a guidance previously announced by the company. The growth was primarily attributable to increased used by brand advertisers of advertising services, as evidenced by the rising average spend per advertiser and the number of advertisers.

Bandwidth costs were RMB202 million, representing 29% of net revenue compared to 31% in the same period in 2013. Non-GAAP content cost were RM311 million, representing 44% of net revenues compared to 49% in the same period in 2013.

Non-GAAP gross profit was RMB100 million, a 255% increase year-on-year due to strong operating leverage.

Our non-GAAP sales and marketing expenses were RMB154 million, a 42% increase year-on-year. The increase was primarily due to a higher commission expenses paid to our sales force in line with our revenue growth and our marketing expenditures on our mobile products.

Non-GAAP product development expenses were RMB62 million, a 28% increase year-on-year. This increase was primarily due to higher personnel-related expenses for our product development in mobile, search, social, paid and live broadcasting services.

Non-GAAP G&A expenses were RM27 million, a decrease of 61% year-on-year, due to reversal of bad debt allowance and the litigation expenses. Non-GAAP net loss was RMB148 million, a decrease of 19% year-on-year.

Turning to the cash flow items. As of March 31, 2014, cash, cash equivalents, restricted cash and our short-term investment totaled RMB3.3 billion. Our acquisition of the intangible assets were RMB166 million in Q1.

Looking ahead to the second quarter of 2014, we expect net revenue will be between RMB940 million and RMB1 billion, which implies a 25% to 33% year-on-year increase, with advertising net revenue contributing between RMB910 million and RMB950 million, implying 25% to 31% year-on-year increase.

Now With that we are open for Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions]

Your first question comes from Wang Chao from Nomura. Please ask your questions.

Wang Chao – Nomura

Hi, good morning. Thank you for taking the questions. Firstly, congratulations on your partnership with Alibaba.

So my question is that, wonder if you could elaborate a bit more on the strategic synergy with Alibaba, how you plan to cooperate with each other.

And then a second question also related to that is, so, post Alibaba's investment you now have RMB10 billion cash on your balance sheet. How are you going to utilize the cash? Thank you.

Victor Koo

Thank you. Two part question. First of all let me talk about strategic partnership with Alibaba. As I mentioned in the call, revenue indemnification is a key part of our capitalizing on our new business opportunities, whether it's in terms of our existing brand advertising business in terms of big data for ecommerce as well as payment, we've already received a lot of feedback from our existing clients as well as other potential partners about how to create more targeted campaigns and how it ties in with mobile commerce.

I've also mentioned consumer business as was SME business, is something that we're really working hard to push this year and on the consumer side, I think Alibaba's experience with its Taobao, Tmall or Alipay in terms of consumer commerce and payment will be quite valuable to us and in terms of our subscription on mobile games as well as broadcasting services, we're already discussing a lot of tie-ins with them.

Also, in terms of our demand side platform, based of small medium enterprise portfolio will actually be highly complementary. We worked on this the product and technology platform last year and is now ready and so tying it with Alibaba on this front is something that we also see good potential.

Now besides revenue indemnification, on the multi-screen adoption, I also mentioned on the OTT side, whether it is Aliyun operating system or the investment in Wazhou [ph]. And on the mobile side, in the top 10 apps, actually the Alibaba group has Alipay and Taobao in the top 10 as well as the main investment in UC Weibo also in the top 10 and they've got other strong apps like Momo and given that Youku is also a top three app in terms of user time spend and top 10 app in terms of reach, I think there are also many areas of partnership also at that front. So, whether it's from a revenue indemnification standpoint or from a multi-screen partnership standpoint, we see clear synergies.

Also as a company that have really, is in its 15th year of growth like Alibaba, we view ourselves as Youku Tudou, having gone through seven, eight years as we scale our company to a larger scale company as well as to multi-business company that are experienced although the last seven, eight years I think will be also highly valuable to us as I think about how to manage organization scale and organization and that's an area that will also have a lot of communication about. So that is a summary of what I feel are the benefits in terms of working with Alibaba group. And as we mentioned, we are still open to working with other partners in the ecosystem as an independent company.

The other -- second part is in terms of the financial resources. I think we're really in a new phase of growth investments as an industry as well as a company at Youku Tudou. Building new business opportunities, if you look at our 400 million user base were on multi-screen, our level of monetization at this point per user is still relatively low and big advertisers actually is relatively indirect way to monetize use base and traffic that we still see a lot of growth potential in this area. But in terms of consumers and in terms of small, medium size enterprises, these revenue opportunities require dedicated teams as well as investments to scale this. And so having the additional financial resources will help accelerate that.

The other area is certainly in terms of moving up, as Dele mentioned, in terms of our already very strong, original content portfolio thinking about moving up in terms of quality and investment in original content to create our version of the U.S. examples, Sopranos or Sex and the City for HBO, House of Cards for Netflix or really high quality variety shows like American Idol, The Voice. So thinking really going up in scale fully as well as investments in the original content side.

On the syndicated content side, we'll continue to pursue our fair share strategy as a market leader and financial resources will give us the flexibility to respond to market changes to this.

Also we will in a very disciplined way look at corporate development opportunities that's complementary to our current core competency especially as we look at these new business opportunities as well as look at the 4G mobile as well as our OTT space. There probably is some small size companies that actually will be complementary to our product technology portfolio. So given that we see a continued growth on the mobile 4G and OTT, both organically and through M&A I think we also see investment in that areas as well.

My overall belief is that as we look at the Chinese internet industry over the last 20 years and we are in the 20th year anniversary, whether you look at 1997 to 1998 as the beginning of consumerism is that 2005 and 2006 as the advent of broadband internet, 2013 and 2014 will go down in history as really the beginning of multi-screen internet where you really see a lot new opportunities. For us given over 400 million multi-screen user base and diversifying our revenue, our content traffic, we really think that these strategic and financial resources will be able to bring our company and to elevate our company to the next level.

Wang Chao – Nomura

Thank you.

Operator

Your next questions come from Alicia Yap from Barclays. Please ask your questions.

Alicia Yap – Barclays Capital

Hi, good morning Victor, Dele, Michael and Ryan, thanks for taking my question. My question is relation to your mobile monetization. So it is very impressive with your mobile now contribute about 30% of the total revenue. Can you quantify maybe help us to understand more, what were the biggest changes between like the end of last year until now? If you can help us, is that mainly that you experience that some of the big increases is coming from higher advertiser adoption or is it more from varieties of the -- increased varieties of the advertising format or is it mainly because of the higher mobile video view or you're actually also adding more advertising inventory to the mobile. So, can you help us quantify or understand more like what are some of the biggest beneficial from different things that drive the higher mobile monetization.

Victor Koo

Sure, Alicia. I think in terms of both mobile monetization as well as the web native content, original content monetization, I think those are the two areas we're quite excited about having invested in the last year and a half and really seeing very positive revenue momentum that's driving the revenue growth.

And on the mobile side, actually Q3 of 2013 was up 3% and so it's still now actually over a third now, that's especially after Chinese New Year we've gone to a multi-screen solution where advertisers are really coming in and really adopting the fact that especially for the advertisers that need the broadest reach, that has mobile as the number one screen now. It's almost a screen that they need to be on. And we've seen that change in thinking moving rapidly around the world.

I think for U.S. last year with Facebook and other companies you've seen that very, very quick adoption in U.S. and this year we're really seeing that for our business as a lot of our partners are saying that mobile is a screen that needs to be on. And so, that's why we've seen a very much accelerated momentum especially after Chinese New Year. I think we did a pretty good job the second half of last year to really build up to this and on that side, on the brand advertising side, that's really been really a big paradigm shift.

On the other side, on the performance based side, that's also really helped accelerate this momentum as well in terms of having a mobile game center as well as a app center and we've also worked a lot on the product side here to make sure that the product is actually quite different from brand ad advertising and how those serve those needs of this different kinds of clients.

I think going forward, an another area that we're working on that we're excited about for the second half of the year is one is in terms of big data that I mentioned and two, I was actually thinking about mobile app specific, advertising format. When we really started, we really were explaining to the clients, the first thing is coming from the PC screen, as we go to the different screens, how do you get a broader reach. But now we've really started think about on the mobile screen because of its proximity to users location and time as well as the ability to tie with payments and overall that how do we use marketing formats like click to buy, like other methods that actually can drive kind of further action.

So these are areas that I think our clients are also very excited about and as we scale out those products, I think we'll see that our mobile monetization will continue to grow in the future.

Alicia Yap – Barclays Capital

I see. Great. Thank you. If I can have a second question. Wanted to clarify a little bit, I think Dele mentioned that we will be partnering with some of the movie producers that will may have like 10 domestic funds be shared and we will be able to share revenue and in terms of the cost of size, so wanted to understand if we are partnering with them, what are the cost contributing from us. If it's so, is that mainly on the operating line. And then in the future if we're also able to get some of these content to be broadcasted on our website, are we able to save on the content cost portions? Thank you.

Dele Liu

Thanks, Alicia. Right now we plan three joint-produce movies. We don't contribute the cash. We just contribute our advertising and promotional solutions in exchange for a share of our profits.

Over time, given the experience accumulated, we'll be making much better judgment based on our data and user preferences. We will chose to invest certain amount of cash into future projects and leverage the resources we free into the table and the partnership to build our -- gradually to build our movie business which is going to be internet based, which is going to be very big data driven which is very differentiated from the traditional movie production business.

Victor Koo

This is also very much tied into our original content strategy standpoint. So we've actually developed original content to tie in with this home marketing promotion efforts that Dele pointed out. So this is an area where we have shows like Star Talk [ph] that gets on an average of 10 million video views per day per episode. And we probably select about two to three movies a month that are films and actually select. So it's actually a scarce resource. And so whether it's domestic and international film companies that increasingly are seeing that partnering with us will actually help drive the box office and that our marketing promotion capabilities is actually much broader and much more direct than what you see for example in U.S. and YouTube where you just really promote a trailer or video banner.

So we have a fully integrated solution in terms of content marketing promotion across multi-screens and where actually we tie in with movie ticketing [ph] services where users can pick seats like Fandango. So it's really a fully integrated solution that we really haven't seen anywhere around the world.

Dele Liu

Yes, Dele here again. Actually, the current box office growth in China are mainly coming from third tier, fourth tier cities where they -- there is not the billboards that out home screens to promote. So, our platform is now very affective platform to reach out to the new movie consumers in these regions and it has been proved as most effective way to promote and marketing movies.

Alicia Yap – Barclays Capital

I see. Dele, thank you.

Victor Koo

The first internet movie in terms of Old Boys later in second half of the year. So, because we've had all these cooperation and successful micro movie brands, you'll also see us actually taking these micro movies and these young directors to the big screen.

If you look at the overall film industry starting from 2013, then you see a very, very rapid transition from traditional online directors to young and upcoming directors and a lot of the box office hits starting from last year were actually driven by new directors. And you'll see us actually being more suited in that going forward as well.

Alicia Yap – Barclays Capital

I see. All right, great. Thank you so much.

Operator

Thank you. Your next questions come from Shao Jiong from Macquarie. Please ask your questions.

Jiong Shao – Macquarie

Thank you for taking my questions. I have a couple of them as well. So my first question is on your revenue diversification. I think Victor you mentioned earlier that one of the strategic initiative is to diversify your revenue stream. Right now you're getting most revenue from advertising. I was wondering, could you sort of elaborate a bit on, give us some examples what are the other kind of streams of revenues you're looking to get in the next couple of years.

And related to that, could you just talk about for example how many paying users, who is the subscriber to your services or pay for pay-per-view type and any revenue stream or any data against your portfolio newly launched interactive platforms, so this is my first question.

Victor Koo

Sure, in terms of revenue diversification, I can talk about it in broad terms. But at this point time I think it's too early to disclose any specific data because that's growing very quickly and then that's something that's scaling pretty quickly.

I think first of all from a revenue diversification standpoint, consumer SME and even within the revenue mix of brand advertising there many efforts that we're pushing forward on. On consumer side, in terms of one, whether it's movies as well as mobile games where we started to do revenue sharing with our partners, plus kind of Netflix like subscription business is something that we're working on that we're going to be especially when we see the policy -- always been the two bottlenecks for that business was payment and policy, and payment is actually essentially solved. And in the last six months, we've seen much better improvement in the whole parity picture than probably in the last decade and so that's an area where you'll see us being a lot more sort of aggressive on in terms of whether its regional content or exclusive content for the subscription services. So that's one.

And two, going forward when you have the live broadcasting, we've always had a live business and this is an area we started to monetize through virtual items and virtual goods and this is a product we started working on in the second half of the year given the portfolio of original content, our partnerships will like, performance whether its music or comedy acts and so forth, we've actually done a very big broadcast back in 1999 that was very successful. So we see that this is also an opportunity where we can get a new stream of revenue.

Now, looking at the demand by platform on the SME side, this is an area also where besides the big clients, whether e-commerce or other S&ME platforms on a real-time bidding basis, we will be able to open part of the inventory to SMEs to bid. And this is an area where Ali Baba has a broad portfolio of SME and e-commerce merchants that have interest in different parts of the country. And that's an area that we're setting up a cross-company task force on as well.

We didn't actually big clients. I think we've made good progress, I think, on mobile monetization and monetization of our content-marketing solutions.

There are two areas I think of note is that domestic advertising is a very, very important area of note. If you look at what happens in the satellite television standpoint actually the majority of their advertising is coming from domestic clients. But this is an area where our team have now a lot of experience in the past, because we mostly kind of interacted [indiscernible] team. And after Chinese New Year we brought on it a domestic-advertising team to our own team organization, which means actually in the near term we're going through a transition period for both our interactive team as well as our domestic-client team. But we think this is important for us. And will bear fruit in the second half of the year.

Big data is another one in terms of thinking about how mobile big data will help diversify or help refuel our brand advertising growth.

Jiong Shao – Macquarie

Okay. Great. Thanks, Victor, for the thoughts.

My second question is actually I wanted to get your thoughts around the recent heightened government scrutiny on some of the foreign TV shows, drama series, and some of the UGC content in the country. I just want to see your thoughts on how that may or may not have impact your Youku's business.

Victor Koo

We really haven't seen a lot of impact. I think Dele is closer to it, so maybe I'll refer this to Dele.

Dele Liu

Yes, we continuously strengthen our portfolio of the U.S. drama, Korean drama and Hong Kong and Taiwanese drama. So far we haven't been impacted much. And as far as I understand, some of the shows that was restricted will probably be put back into the market after certain piece or certain parts are cleaned, and we will get back.

As for user-generated and original production, the government required us to self-regulate, self-monitor. And so far our experience has been that we are working extremely smoothly to -- with the government. And since 2006 we have implemented a very rigorous system to screen out racy content. And also from day one Youku and Tudou has been very, very clean website in the interest of advertiser platform. So that's been -- always been providing a safe environment for advertising. And it proves to be both prudent as well as beneficial. And it works in the interests of the advertising businesses.

Jiong Shao – Macquarie

That's good to hear. Thanks, Victor and Dele, for your comments.

Operator

Thank you. Your next question comes from Eddie Leung from Merrill Lynch. Please ask your questions.

Eddie Leung – Bank of America Merrill Lynch

Hi. Good morning. Thank you for taking my questions. I have two questions. The first one is about your mobile traffic. I wonder if you could share some more color on the differences in ad load between PC and mobile, and so-called the user-content consumption pattern as well. Do we see like a higher proportion of UGC happen on mobile versus PC? And if so, would that affect the number of advertising inventory that you hand over to advertisers on mobile? So that's my first question.

And then secondly, just some housekeeping questions on your advertiser side. Could you share with us the number of large advertisers in the quarter? And what's the proportion of revenues coming from large advertisers versus SMEs? And especially those on the real-time businesses. Thanks.

Victor Koo

Let me take the first one and Michael will take the latter one. On the mobile side there are no cross-screens is really dependent on the length of the video. And so we basically have a method where depending on how long the video. So you would be expected to watch more or higher ad load for a movie or for a long form content than you would for a short form. So that's how that works out.

But from a user-consumption standpoint, what we've seen is that actually the PC screen and the mobile screen actually is quite similar, which is actually in the beginning counterintuitive. Because we thought that for the -- on the mobile screen that people would watch more short-form video. But we've seen actually the PC screen and the mobile-phone screen being quite similar.

But we're seeing that the pad, the tablet screen and our TV screen, actually the time is actually longer than both PC as well as the mobile phone. I think in terms of the similarity between PC and mobile phone, I think it's -- a total hypothesis is because a user is basically driven by public transportation. And that we're seeing a lot of users actually watching long-form content in byte size, which means that -- and that's why we focus so much time on cross-screen product features, where users can move from screen to screen.

So when they get off work they may be on the subway watching on the mobile screen. And then they get home and they get back to their tablet or their ITV or their PC, that there's a seamless experience of moving to the next screen. And that's probably a reason why we're seeing a good balance between long-form and short-form content even on the mobile phone.

Michael Xu

Eddie, to answer your question about number of advertisers in Q1, we had 405 advertisers in Q1, which I mean the advertisers who spend market dollars on us, which these numbers look less than Q4, but Q4 is normally a strong season and Q1 is the weakest season in the year.

As for the proportion of revenue from big advertisers, I think we don't see significant change in the -- in terms of percent of revenue contributed by big advertisers, which is still very similar to Q4.

Eddie Leung – Bank of America Merrill Lynch

Thank you, Victor and Michael. Very helpful. Thanks.

Operator

Thank you. Your next questions come from Dick Wei from Credit Suisse. Please ask your questions.

Dick Wei – Credit Suisse

Hi. Thank you for taking my questions. I have two questions. The first question is about your free cash flow [indiscernible] positive in the first quarter. I wonder, is it more seasonal or is it sustainable?

And then the second question is about share buyback.

Victor Koo

Dick, we can't really hear you. Can you please repeat your question? Your line is coming in and out.

Dick Wei – Credit Suisse

Yes, okay. Sorry. Number one was about free cash flow [indiscernible] positive during the quarter. Run-rate sustainable?

And second is about the plan for share buyback. Thank you.

Michael Xu

So, Dick, you're asking for free cash flow, operating free cash flow, you're asking for overall cash flow increase or decrease in the quarter.

Dick Wei – Credit Suisse

Yes, I'm looking at the operating cash flow. If I look at operating cash flow [indiscernible] intangible investment [indiscernible] positive. I'm wondering if that's like a sign of like free cash flow positive down the road. Maybe you can share some thoughts about the cash flow in the future.

Michael Xu

Okay, so put this way. The operating -- actually I didn’t hear very clear about -- I'm making a guess about what you're asking for. You're asking for the free cash flow from operation? Yes --

Victor Koo

Which is positive.

Michael Xu

We have a positive free cash flow operations. And by the way, the whole cash flow in Q1 is positive. As you can see, our cash flow -- our cash balance actually increased a little bit compared with Q4, which is the -- I think that is the first time we've seen this in the history of the company.

Victor Koo

But this is also to some extent attributable to seasonality. Because after the Chinese New Year, it's a time we collect a lot of the receivables on an annual basis.

Michael Xu

That's right.

Dick Wei – Credit Suisse

Got it. And any plans for the share buyback?

Michael Xu

I think we are -- first of all, our -- if we do or don't do a share buyback, it really depends on the relative value of -- what kind of relative value would be accretive to the shareholders? And we are looking into this option. And probably will make a decision soon.

Dick Wei – Credit Suisse

Got it. Thank you.

Operator

Thank you. Your next questions come from Philip Wan from Morgan Stanley. Please ask your questions.

Philip Wan – Morgan Stanley

Hi. Good morning. Thank you for taking my questions. I have two questions.

One is, could you please comment on the overall advertising spending outlook in China as well as the competitive landscape within the online video industry?

And then second, you mentioned investment in new business opportunities, new monetization potential. So, how should we look at the margin trend going forward? Thank you.

Victor Koo

Okay. Let me comment first of all on overall advertising industry outlook. We're seeing recent statistics coming out about traditional media actually the growth has been relatively modest. But overall trend is that offline advertising is shifting to online advertising overall. So that's probably the overall outlook we see on the advertising side.

Dele Liu

I recently read a report which shows that the overall Chinese whole advertising increased by less than 1% year-on-year in Q1. So it's the digital part that's increasing the fastest. The other traditional sectors are mostly decreasing year-on-year.

Michael Xu

As for the margin trend, first of all, let me -- I think if we look at historical numbers and also with the Q1 numbers, we see how margins in terms of gross margins or in terms of net loss, gross margins have been -- have improved very significantly by 255% compared with last year. And also in terms of net loss we've significantly reduced the net loss. So it shows the business leverage is materialized and realized.

And then for the margin trend for the future, it really depends on first of all how active or how aggressive our competitors are chasing up, building up the housing cost prices. Like Victor said, we are not going to [indiscernible] but we will maintain a fair share in terms of ad content. So if the bigger [indiscernible] we may have to respond. That's the first thing. That may have impact on margins in the future.

On the other hand, the other, our revenue is getting -- our revenue and other accounting costs and other [indiscernible] is getting controlled very well and revenue is -- revenue growth is healthy. So that may counter part of the impact on the content cost bidding war [indiscernible]. So I think we are at this moment the margins picture can be fluctuating significantly depending on market situation.

Philip Wan – Morgan Stanley

All right. Thank you for the color.

Operator

Thank you. Next questions come from the line of Piyush Mubayi from Goldman Sachs. Please ask your questions.

Piyush Mubayi – Goldman Sachs

Thank you for taking my questions. My first question is, what percentage of your revenue is coming from bundled price cross-platform sales? Clearly you've done exceedingly well on mobile, don't really understand how that buying process of advertising is working.

And the second is how should we think about the relationship with new shareholders in terms of both traffic and potentially revenue? I wondered if you could talk through that. Thanks.

Michael Xu

The first one is how much is multi-screen.

Victor Koo

In terms of multi-screen, the way we actually sell right now, multi-screen is the default solution for Chinese New Year. And that is advertisers want to actually target a certain screen, like a tablet screen or a mobile-phone screen, they actually have to pay a premium. So you should assume that's actually as the standard proposition that we sell to advertisers.

And in terms of our partnership with Alibaba on the revenue side they're -- this is an area that we're working on right now. There are no specific, shall we say, number on that. And that's an area that would have to be a winning solution for both parties.

Piyush Mubayi – Goldman Sachs

And I just wondered if you could possibly talk through how much traffic is being shared.

Victor Koo

Traffic being shared? Well, this is an area, for example on the mobile side, the different -- our teams are in discussion right now all about different cross-links and so forth. So it's very hard to quantify that right now, because that's all work-in-process.

Piyush Mubayi – Goldman Sachs

And on the PC side?

Victor Koo

On the PC side actually that's an area where Youku Tudou have had partnership with Ali Baba in the past. So they're also advertising on our platform.

Piyush Mubayi – Goldman Sachs

Okay. Thank you very much.

Operator

Thank you ladies and gentlemen. Unfortunately we have run out of time for any further questions. And I'd like to hand the conference back to today's presenter. Please continue, sir.

Victor Koo

Thank you all for joining us on this call. Please feel free to contact us if there are any questions. Goodbye.

Michael Xu

Thank you.

Dele Liu

Thank you.

Operator

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

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

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

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

Source: Youku.com's (YOKU) CEO Victor Koo on Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts