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Jiayuan.com International Ltd. (NASDAQ:DATE)

Q1 2014 Earnings Conference Call

June 3, 2014 8:00 p.m. ET

Executives

Shirley Zhang – IR

Linguang Wu – CEO

Shang Koo – CFO

Analysts

George Askew – Stifel Nicolaus

Gregory Chow – Barclays

Roger Gu – SWS Research

Operator

Ladies and gentlemen, thanks for standing by, and welcome to the Jiayuan First Quarter 2014 Earnings Call.

[Operator Instructions] I must advice you that this conference is being recorded today, Wednesday, the 4th of June, 2014.

I'd now like to hand the presentation over to your host for today, Shirley Zhang, IR Relations Manager.

Shirley Zhang

Thank you, operator. Welcome to Jiayuan’s first quarter 2014 earnings conference call. On today’s call you will hear from Mr. Linguang Wu, CEO, and Mr. Shang Koo, CFO of Jiayuan.

Mr. Wu will begin today’s call with an overview of Jiayuan’s business highlights and our product initiatives, and Mr. Koo will then talk you through this quarter’s key financial indicators. After the prepared remarks, Mr. Wu and Mr. Koo will be available to answer your questions.

Before we proceed, please note that the discussion today 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. Jiayuan does not undertake any obligation to update any forward-looking statements except as required under applicable law.

Our discussion on this call will include certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited directly comparable GAAP measures and is available on our IR website at ir.jiayuan.com.

As a reminder, this conference is being recorded. In addition, a live and archived webcast of the conference will be available on our website.

I will now turn the call over Mr. Linguang Wu, CEO of Jiayuan.

Linguang Wu

Hello everyone. Thank you for joining our first quarter 2014 earnings conference call.

I'm pleased to report a solid start to the year, with net revenues increasing 20.5% year over year, as we execute our online-to-offline strategy. 2014 is an important year for us as we look to make the investments needed to increase our brand equity and solidify our leadership over our competitors. According to ComScore, we remain by far China's leader in online dates, according to 58.4% of total time spent on online dating match [ph].

Our active users rebounded strongly to 5.4 million during the quarter, while paying user accounts continued to grow reaching 1.5 million accounts. Our user base continues to grow in depth and breadth [ph] [indiscernible] as we now have 190 cities, with over 10,000 monthly active user accounts per city. Of these, 24 cities now have over 50,000 active user accounts each.

We're most excited, however, by the strong triple-digit growth seen in our personalized matchmaking business, which now accounts for 16.7% of total revenues. We expect that going forward it will increasingly form a larger and more meaningful portion of our total revenues as we improve our market share and expand our [indiscernible]. During the first quarter we added 13 new operations in seven cities, giving us a total count of 32 cities and 43 locations China.

Leveraging our [indiscernible] database of marriage-minded single of our proprietary system, we believe we are greatly positioned to consolidate the traditional matchmaking business and benefit directly from the growth expected in [indiscernible] markets. We're not only consolidating traditional matchmaking, but working to grow the enterprise by offering a standardized branded [indiscernible].

While triple-digit growth is impressive, we realize this market is still in its infancy and growing [indiscernible]. With this in mind, we have decided to make certain investments in selling and marketing expansion. We believe our traditionally [indiscernible] brand advertising is a necessary step in order to build upon our leading position online, by increasing our brand equity and to take advantage of this window of opportunities to grow our user base and increase market share both online and in personalized matchmaking.

These investments are expected to continue throughout the year, but I am confident that the long-term focus [ph] will produce [indiscernible] results on improved shareholder value. Our product and R&D teams are working in line with our segmentation strategy and [indiscernible] which are innovating the ways in which users find and [indiscernible] for dates.

As part of our new online initiatives, we have rolled out a number of new products. Both Qiuai and iZhenxin saw very good user growth during the quarter. iZhenxin in particular saw tremendous gains in the first quarter following a year of [indiscernible] to make sure there's no cannibalization effect on our core Jiayuan.com platform.

Aside from our new dating-focused brands, we have been devoting resources towards a new [indiscernible] product that extends our service offering [indiscernible] to couples already in relationship. Last month we announced the Jiayuan soon-to-be-released Smart Bracelet. This bracelet [indiscernible] couples to be at constant communication with each other. The bracelets have been available for pre-order last month and will be ready later this month.

In summary, I'm pleased with the progress we have made so far and momentum we have gained [ph]. I'm very excited by the possibilities and the strong growth in our personalized matchmaking business. 2014 is an important year for us basically as we make the investments in our brand and new products in order to ensure the long-term sustainability [ph] of our business.

Now let's turn to our CFO, Shang Koo.

Shang Koo

Thank you, Linguang. Hello everyone. I'm pleased to report strong top-line results for the quarter.

Net revenues increased 20.5% year over year to RMB134.3 million, primarily due to the strong growth in our personalized matchmaking services and online services.

Despite our increased investment in branding, we remain cash flow positive during the quarter as deferred revenues increased by RMB21.7 million. This was partially due to strong growth in users and sales after Chinese New Year, especially in our personalized matchmaking business, which we expect will help us regain profitability during the second half of the year.

I'd like to remind you that, starting in the fourth quarter of 2013, we began to provide a new revenue breakdown, splitting the personalized matchmaking services and events revenue line into three new lines: personalized matchmaking services and events and others. We believe this split better reflects the changes in our business over the past year and will aid in avoiding confusion with our online VIP subscription packages.

Online services revenue was RMB107.1 million, up 6.9% year over year and flat sequentially. What's more exciting for us is that we continue to see even stronger growth in personalized matchmaking services, which grew 139.1% from last year to RMB22.4 million. This growth was mainly driven by the expansion of our service into new locations and new cities across China during the second half of 2013. We are now present in 43 locations and 32 cities as we leverage our online database of marriage-minded singles.

While still relatively small in scale in terms of percentage of revenue, we expect that this service will continue to see triple-digit growth for the rest of the year as it increasingly forms a larger portion of our revenues going forward.

And now let's take a look at our operating metrics for the quarter.

The number of average monthly active user accounts rebounded strongly during the first quarter of 2014 to 5.4 million. This compares to 5.2 million during the corresponding period of 2013 and 4.9 million for the previous quarter. We expect to see continuous growth in our active user accounts in the quarters ahead.

Thanks to the growing popularity and increasing paying conversion of our mobile platforms, the number of average monthly paying user accounts for the first quarter of 2013 reached 1.5 million, up from 1.3 million for the corresponding period of 2013 and 1.4 million for the previous quarter.

Our average monthly revenue per paying user, or ARPU, for online services for the first quarter of 2014 was RMB23.9, slightly down from RMB26.1 for the corresponding period in 2013 and RMB25.3 for the previous quarter. Mobile users tend to pay less than our PC users. But going forward, we expect ARPU to remain steady around RMB25 range, an increase in the medium term as we ramp up mobile monetization.

Turning now to marketing and R&D. Selling and marketing expenses were RMB83 million for the first quarter of 2014, up 88.1% from RMB44.1 million in the first quarter 2013 and up 87.4% from RMB44.3 million in the fourth quarter of 2013. The increase in selling and marketing expenses was primarily due to the expenses associated with the TV advertising campaign launched during the 2014 Chinese New Year holiday. We expect to maintain our investment in brand advertising over the coming quarters to capture the window of opportunity to market our new offerings and strengthen our industry-leading position.

During the first quarter, R&D expenses were RMB5.5 million, up 3.1% from RMB5.3 million for the corresponding period of 2013 and down 7.7% sequentially. The year-over-year increase resulted from the expansion of our R&D team, as we work to improve our search and matching technology for a better user experience and to develop new products.

And lastly, G&A expenses. In the first quarter of 2014, general and administrative expenses were RMB13.3 million, down 9.9% from RMB14.8 million in the first quarter of 2013, primarily due to decreased rental expenses associated with our self-owned office in Beijing, and a decline in the provision of employee stock option expenses.

We closed out the quarter with a net loss of RMB13.9 million or RMB12.3 million when you back out share-based compensation. This translated into basic and diluted earnings per ADS of RMB0.47.

Despite the net loss, our cash flow remained healthy. Cash flows from operating activities in the first quarter was RMB1.4 million as deferred revenues in the quarter increased by RMB21.7 million sequentially to RMB147.1 million. Our cash, cash equivalent and short-term investment balances now stands at RMB578 million.

In conclusion, we're making a trade-off between shorter-term profitability and the longer-term value of the company, while maintaining healthy cash flow. We already dominate the online portion of dating in China and are leveraging it to go offline. We're very confident about the growth and our visibility across the coming quarters, especially with regard to personalized matchmaking services. We will continue to focus on increasing market share and increasing active users, while we prudently weigh each investment decision in order to sustain our leadership position and create value for our users and shareholders.

With that, let me give you our outlook for the quarters ahead. In the second quarter of 2014, Jiayuan currently expects to generate net revenues in the range of RMB145 million to RMB147 million. This forecast reflects Jiayuan's current and preliminary view which is subject to change.

With that, I'd like to turn the call over to the operator and begin taking some of your questions. Operator?

Question-and-Answer Session

Operator

Certainly. So, ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions]

Our first question today comes from the line of George Askew from Stifel. Please ask your question.

Shang Koo

Good morning, George.

George Askew – Stifel Nicolaus

Thanks. Good morning. Thank you.

As you mentioned, obviously you had a big spike in sales and marketing expenses in the first quarter. You indicated that you'll maintain that higher ad spending going forward. Can you kind of give a little bit more color around that? I mean, will sales and marketing be flat in the next three quarters with what you saw in the first quarter, or are we thinking in terms of percentage of sales? I mean what kind of -- what's your benchmark there for maintaining that higher spending?

Shang Koo

Hi, George. We expect to maintain sales and marketing at around 40% to 45% of net revenues for the full year. Now first quarter, definitely sales and marketing was much higher than that. But typically first quarter is higher than usual than the full year for us, whereas fourth quarter is typically the lowest in terms of percentage of revenue for sales and marketing. This is because users tend to be much more active post Chinese New Year. So it's not as useful for us to advertise later in the fourth quarter because of the lower user activity later on -- after our marketing campaign in the fourth quarter.

So you'll see that -- you'll see after the first quarter of sales and marketing spend, you'll see it coming down in the second quarter. In the second quarter we expect it to be around RMB60 million to RMB65 million range for our sales and marketing. And then you should expect that to increase in the third quarter as there is another major holiday for dating in China, Qixi or Chinese Valentine's Day occurs in the third quarter, and we plan to increase sales and marketing spend during that quarter in response to that. And then you'll see it coming down in the fourth quarter.

George Askew – Stifel Nicolaus

Okay, thank you for that. If you back out the new online brands from your active user accounts, did the core Jiayuan.com brand grow active users sequentially and year over year in the first quarter?

Shang Koo

If we back out the new brands, Jiayuan's core user base was slightly down sequentially and year over year.

George Askew – Stifel Nicolaus

Okay.

Shang Koo

But partially it was a conscious decision to really decrease our marketing spend on -- for Jiayuan for the 25 and younger users and for the less active users, and divert them to other brands, for example, Xialat [ph], which are better suited for the younger user base.

George Askew – Stifel Nicolaus

Okay. That makes sense.

And then finally, obviously you've ramped [indiscernible] business substantially, as you mentioned in the release. What are your latest expectations as to how many locations this -- that business can ultimately support in China?

Shang Koo

Okay. Let me translate that question for Linguang. He can better answer that.

[Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

Yeah. We're trying to accelerate the growth of our offline personalized matchmaking stores in 2014. Previously we planned to grow the number of stores to about 60 by the end of the year. But now we expect to grow it to 80 or higher by the end of 2014.

Now we looked at our active user base in China and look at what that can support in terms of the number of stores. And if you look at the number of cities where we have 10,000 active users in those cities, there's 119 of them. And if you look at the ones with over 50,000 active users, those cities can actually support more than one personalized matchmaking store in those cities. So if you add all those together, we would expect to be able to open over 200 stores in the next few years.

George Askew – Stifel Nicolaus

That's terrific. Thank you very much.

Shang Koo

You're welcome.

Operator

Our next question comes from the line of Gregory Chow from Barclays. Please ask your question.

Gregory Chow – Barclays

Good morning, Linguang and Shang. Thanks for taking my question. I only have two follow-up questions.

The first one is about our new product iZhenxin and Qiuai. What's the current revenue contribution from these new products and the outlook on the future revenue contribution that management expects in the future?

My second question is also about that, early marketing expense, specifically the Qiuai advertising, so after the Q1 Qiuai advertising, how the management thinks about the effectiveness of the selling, marketing around TV? And do you think it's more effective or fancy [ph] to look at more market share? Thanks.

Shang Koo

Okay. Let me translate those questions for Linguang.

[Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

Right now for iZhenxin and Qiuai, we're focused on growing the users rather than revenue. Right now both platforms are growing very fast. Qiuai right now has over 6 million registered users, and it continues to grow user base very rapidly. And once we get to a certain level of active and registered users for both platforms, then we expect to switch on monetization.

For selling and marketing -- [Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

For the sales and marketing expense, two metrics you can look at. One is our active user growth in the first quarter, both for us sequentially and year over year. Jiayuan.com's total active user growth was very healthy. So that showed the effectiveness of the TV branding campaign.

But also our offline personalized matchmaking, our personalized one-on-one matchmaking business grew significantly in the first quarter. And not just in revenues but more importantly in terms of sales, so as we can see from our deferred revenues. So that growth, a big part of it was supported by the increased brand awareness of our TV brand campaign.

Gregory Chow – Barclays

Okay. Thanks very much.

Operator

We have no further questions in queue. [Operator Instructions]

Our next question comes from the line of Yang Zhao [ph] from CTC [ph]. Please ask your question.

Unidentified Participant

Good morning, Lingguang and Shang Koo. And I had just a couple of questions. Firstly, regarding the income tax benefit that it was -- it accounts about RMB3.8 million this quarter. I just wonder where this comes from [indiscernible].

And the next question is about our user base, our one-on-one personalized matchmaking services. Could you give any other sense about the user base, for example, how much customers we have on this kind of service? Thanks.

Shang Koo

Sorry. Did you ask about -- the first question was about income taxes?

Unidentified Participant

Yes. It was about the RMB3.8 million in the quarter.

Shang Koo

Yeah. So we had a lot of deferred tax assets from previous quarters where -- in the first quarter, because of net loss, we were able to take advantage of some of that.

Unidentified Participant

Okay. It's mainly due to the deferred revenue --

Shang Koo

The deferred tax assets from previous years of additional taxes that we paid.

Unidentified Participant

Okay, thanks. How about the user of one-on-one personalized matchmaking?

Shang Koo

Yeah. We don't disclose the number of paying user accounts for our personalized matchmaking business. I think a much more important metric to look at is the number of store locations that we have in China. I think, that growth I think is much more important.

I think going forward, as the business is a little bit more stable, as we will start introducing same-store sales comparisons, to give you a better idea of the growth of those store locations.

Unidentified Participant

Okay, thanks. And a quick follow-up. Could you give some light about the ARPU of one-on-one personalized matchmaking?

Shang Koo

Yeah. Our typical personalized matchmaking contract will typically start out at around RMB10,000 per contract. And that lasts for eight months. So this is pretty typical price for personalized matchmaking business throughout the country. But we believe that with Jiayuan's brand and with our technology and our CRM [indiscernible] and our matching technology and algorithms, we actually offer a much better value proposition than traditional matchmaking services.

So our hope is longer term we can raise our price higher than the traditional matchmaking business. So in that sense, grow the overall industry revenue much more than in the past years.

Unidentified Participant

Okay, got it. Thanks.

Shang Koo

You're welcome.

Operator

Our next question comes from the line of Roger Gu from SWS Research. Please ask your question.

Roger Gu – SWS Research

[Chinese language spoken]

Shang Koo

Yeah. I'll translate the question in English real quick.

So the first question was about the ARPU trends. And the second question was about our monthly active users and the trends for that, especially with the new platforms included.

So I'll let Linguang answer those questions.

Linguang Wu

[Chinese language spoken]

Shang Koo

For ARPU, the major effect on ARPU in the first quarter was due to Chinese New Year holiday. So as our users go home for Chinese New Year, especially the PC users, they will tend to shift the usage from PC in their office to mobile, on their cell phones. And mobile monetization for us at this point is lower than PC. But longer term we expect the mobile monetization to increase as we continue to roll out new features and to improve the mobile payment solutions.

So in the first quarter, if you look at deferred revenues total, you will see that the increase in deferred revenues was a sign of PC users coming back, and mobile users to some extent, coming back post Chinese New Year and buying subscription products, which tend to have higher ARPU. But because we have amortized that over the lifetime of the subscription, you see that as deferred revenues instead of recognizing that in the first quarter. And as a result, you see slightly lower ARPU for the first quarter.

In terms of monthly active users, we had very healthy growth in the first quarter. Now, Jiayuan.com platform, we are shifting some of the advertising resources, especially some of the performance-based advertising resources, away from Jiayuan for some of the lower ROI users on Jiayuan. These are typically younger users that are not as serious about marriage. And we try to shift those advertising to other platforms like Qiuai, for example.

So you will see a slight decrease in the first half of this year, but we expect that to stabilize and to continue increasing -- and to -- and we expect Jiayuan's core platform monthly active users to start increasing in the second half of this year.

Roger Gu – SWS Research

[Chinese language spoken]

Linguang Wu

Xie-xie.

Operator

Our next question comes from the line of Froda Pawerthy [ph] from Silver Horn [ph]. Please ask your question.

Unidentified Participant

[Indiscernible]. My first question is, you mentioned there is a window of opportunity and that's why you increased advertising. Can you give a bit more -- can you explain a bit more why you call it at the moment a window of opportunity?

Secondly, you just mentioned that you expect the users to grow again in the second half of the year, so, on the core platform. Can you tell us what gives you this confidence that in the second half of the year the core user base of Jiayuan.com will start to grow again?

Shang Koo

[Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

So the window, why we're advertising for 2014, one of the big reasons is that we have not made too much brand advertising after our IPO in 2011. So this year was a good opportunity to -- for us to do the large brand advertising campaign, to refresh the brand. And at the same time, as we're launching -- as we're growing our offline matchmaking business, it's an opportunity to market a brand and get more awareness for our offline personalized matchmaking stores. So that's why it's an opportunity in 2014 to grow the business.

In terms of user growth -- [Chinese language spoken]

Linguang Wu

[Chinese language spoken]

Shang Koo

For the second half of this year we will make a major modification to Jiayuan's user base. So we had time to -- because we've launched multiple new platforms, new brands, we've done -- we've been able to touch some features and touch some user interface options on other platforms. And from what we learned from those platforms, we can make some major modifications to Jiayuan's core platform to better-suited for the changing user demographics that we're seeing, and better-suited for the mass market user demographics. So after that change in the second half of the year, we expect users to continue to grow.

Unidentified Participant

Okay. Thank you.

Shang Koo

You're welcome.

Operator

We have no further questions. [Operator Instructions]

And there are no further questions. I will now hand the conference back to Shirley. Thank you.

Shirley Zhang

Okay. Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued to support. And we look forward to talking with you in the coming months. Operator?

Operator

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your attendance. You may all disconnect.

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