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SouFun Holdings Ltd (NYSE:SFUN)

Q2 2014 Earnings Conference Call

August 07, 2014 08:00 am ET

Executives

Hong Zhao - VP, Finance

Vincent Mo - Executive Chairman of the Board

Guan Lanying - Chief Financial Officer

Analysts

Dick Wei - Credit Suisse

Alex Yao - JPMorgan

Eddie Leung - Merrill Lynch

Fei Fang - Goldman Sachs

Vivian Hao - Deutsche Bank

Tian Hou - TH Capital

Philip Wan - Morgan Stanley

Anne Shih - Brean Capital

Alicia Yap - Barclays

Steven Zhu - Pacific Epoch

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2014 Results Conference Call. At this time, all participants are in a listen-only. There will be a presentation followed by question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, 7 of August, 2014.

I would now like to hand the conference over to your speaker today, Mr. Hong Zhao, the Vice President of Finance. Thank you, sir. Please go ahead.

Hong Zhao

Thank you, operator. Hello, everyone. Welcome to SouFun Second Quarter 2014 Earnings Conference Call. I am Hong Zhao, the Vice President of Finance. Joining me today are SouFun's Executive Chairman, Mr. Vincent Mo, and CFO Mrs. Guan Lanying. This conference call is being broadcasted on the Internet and is available through our IR website at ir.fang.com, together with our earnings release.

Before we carry on, I would like to remind you that during the course of this conference call, we may make forward-looking statements, statements that are not historical facts, including statements about our beliefs and expectations.

Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements.

SouFun assumes no obligation to update forward-looking statements in the conference call and elsewhere. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC, including our Form 20-F.

Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website. We will then have a Q&A session after the following prepared remarks.

It has been a very been a very challenging quarter and we managed to deliver approximately 17% year-over-year top-line growth.

During the quarter, we continued to focus on enhancing our mobile and PC platforms, upgrading our products and services to facilitate property transactions and providing financial services to address needs of Chinese real estate market participants.

Traffic to our mobile platform continued its growth momentum during the quarter. Our self-tracking Google Analytics registered mobile monthly unique visits of 37.9 million as of July 2014, more than tripled the [MUVs] a year ago. On a daily basis, our mobile traffic now represents approximately 45% of the total traffic to cell phone.

During the quarter, we also announced our investments in two of the China's leading real estate agency and consultancy companies as part of our online to offline strategy. These strategic investments and partnership will allow SouFun broader and deeper access to property transactions and expand financial services to address the needs of property market participants.

Now, first let's look at the numbers. For the second quarter, our revenue in the second quarter $168.2 million, an increase of 16.7% compared to Q2 of last year.

Our top-line growth was primarily driven by the growth in marketing services. Compared to Q2 2013, revenue from marketing services grew more than 26% to $74.3 million in the second quarter of 2014. We are seeing across the board growth in marketing services in all tiers of cities, reflecting strong demand for our online advertising products by clients as they increase their marketing efforts.

Revenue from our e-commerce services grew 8.1% to $48.6 million in the second quarter. We are now offering e-commerce services in 66 cities compared to 48 a year ago and 59 in the previous quarter. During the quarter over 57,600 new home sales were completed on our e-commerce services platform.

We continue to see strong growth in second and third-tier cities as we increase our penetration in those cities and expand our services into more cities. However, significant slowdown in new home sales and increased payments to third-party, marketing agencies in Beijing and Shanghai negatively impacted our growth in these cities, partially offsetting the growth in our second and third-tier cities.

Grouping marketing services and e-commerce services together, we will see that in aggregate our revenue from new homes market grew approximately 18% during the quarter. Revenue from listing services grew 8.5% to $41.7 million in the second quarter of 2014.

The number of paying agent subscribers in our PC platform increased by 6.7% from a year ago, reaching approximately 184,200. The listing business was negatively impacted by the significant slowdown in a secondary home sales and a reduction of listing fees nationwide.

Our data shows secondary home transactions were down about 56% in the first tier cities and down about 40% in second tier cities, significantly impacting our agency clients business and in turn negatively impacted their spending on online listing platforms. A reduction in listing fees has a negative impact of approximately $4.9 million or approximately 12.8% to our listing services revenue growth in the second quarter.

Cost of revenue increased by 12.1% to $29.3 million in the second quarter. The increase in cost was primarily due to increased staff cost due to headcount and VAT taxes. Q2 gross margin improved by approximately 0.7% from a year ago, to 82.6%.

Within the operating expenses, our selling expenses in the second quarter were $31.7 million, an increase of 38.2% from a year ago. G&A expenses were $25.9 million, an increase of 33.1%. The increases in operating expenses are primarily due to increased staff costs and advertising and promotional expenses.

Total headcount as of June 30, 2014 was about 10,500, as compared to about 8,200 in the same period last year. Most of the headcount increases are sales and marketing, product developments and technology and research, to support expansion of our services and enhancement of our technology and product development.

In 2014, we substantially increased the collaboration with some of China's leading Chinese language portals to enhance traffic to our site. In addition, we have continued to spend on TV and outdoor public transit marketing campaigns to increase brand awareness, bringing more users to our website and our mobile applications.

As a result of the significant increase in headcount and marketing and promotion-related expenses, operating income grew 7.8% to $81.7 million in the second quarter, slower than the top-line growth. However, we believe that investments in personnel and new businesses were affecting the operating income in the short run will enable us to achieve our longer term objectives.

Our income tax expense was $23.9 million for the second quarter, a 3.4% increase compared to a year ago. Our effective tax rate was 26% for the second quarter, down more than 4.9% from 30.9% a year ago. The decreasing in effective tax rate was mainly caused by a $4.7 million one-time tax benefit, due to certain PRC subsidiaries be entitled to tax exemption in May of 2014 for tax years of 2013 and 2014, and to a less extent certain subsidiaries were subject to 5% withholding tax rate for the second quarter of 2014 compared to 10% withholding tax rate in the corresponding period in 2013.

Our second quarter GAAP net income increased by 23.1% to $68.2 million from a year ago on GAAP basis, fully diluted earnings per ADS was $0.15 increased by 15.4% from prior year's $0.13 a share.

Non-GAAP fully diluted earnings per ADS was $0.16, an increase of 6.7% from a year ago. Our adjusted EBITDA increased by 8.7% to $87.7 million in the quarter as compared to $80.7 million a year ago.

As far as cash flow, our cash and cash equivalents as of June 30, 2014 totaled $927.3 million, up 56.9% compared to the beginning of year, but down slightly by 1.7% compared to the beginning of the quarter.

Operating cash flow was $40.1 million in the current quarter, a 49.6% decrease from last year, mainly caused by approximately $21.9 million interrupted loans provided to developers and homebuyers under our financial services program and an approximately $27.2 million decrease in advance payments from our clients as compared to the second quarter of 2013.

Now, on a half-year basis, our revenue totaled $289.4 million in the first half, an increase of 23% compared to last year. Our top-line growth was primarily driven by the growth in marketing services as well as in listing services.

Compared to the first half of 2013, revenue from marketing services grew 28% to $121.3 million in 2014, driven by strong demand from our developer clients, especially in lower tier cities. Revenue from our e-commerce services grew 9.4% to $78.0 million in the first half of 2014, similar to the second quarter sluggish new home sales coupled with increased payments to third-party marketing agencies negatively impact our e-commerce revenue from first tier cities.

The negative impact was however overcompensated by the strong growth in second-tier and third-tier cities. For the first 2014, over 90,000 new home sales were completed on our e-commerce services platform.

Grouping marketing services and e-commerce together, we will see that our revenue from new homes market grew approximately 20% in the first half of 2014. Revenue from listing services grew 28.4% to $83.8 million in the first half of 2014, primarily driven by the stronger year-on-year growth in the first quarter.

As mentioned earlier, significant slowdown in the secondary home sales, coupled with our reduction of listing fees from June 2014 through the end of the year caused a significant decrease in growth rate during the second quarter and can negatively impact the growth of our listing services revenue for the year.

Cost of revenue increased by 17.4% to $54.2 million in the first half of 2014. The increase in cost was primarily due to increased headcount and VAT taxes, first half year gross margin improved by approximately [81.9%] from a year ago to 81.3%.

Within the operating expenses, our selling expenses in the first half of 2014 were $59.3 million, an increase of 42.2% from a year ago. General and administrative expenses were $45.2 million, an increase of 31%. As mentioned, earlier, the increase in SG&A was primarily due to increase in headcount to support our business expansion, technology and product development as well as increased spending on traffic acquisition and marketing campaign.

As a result, our operating income grew 16.1% $131.3 million in the first half year, slower than the top-line growth. Again, we believe, our investment in personnel and new businesses will enable us to reach longer term objectives.

Our income tax expense for the first of 2014 was $39.1 million, a 7.5% increase compared to a year ago. The effective tax rate was 26.3% for the first half of 2014, decreased by 4% as compared to 3.3% for the corresponding period in 2013. As mentioned earlier, the decrease in effective tax rate was primarily due to the one-time tax benefit from certain PRC subsidiaries receiving tax exemption status for tax years of 2013 and 2014, and to a lesser extent the lower dividend withholding tax rates for certain PRC subsidiaries.

First half year GAAP net income increased by 30.9% to $109.7 million from a year ago. On GAAP basis, fully diluted earnings per ADS was $0.25 a share, increased by 25% from the prior year's $0.20 a share. Non-GAAP fully diluted earnings per ADS was $0.26 a share, an increase of 13% from a year ago and adjusted EBITDA increased by 17.3% to $142.5 million in the first half of 2014 as compared to $121.6 million a year ago.

Operating cash flow was $166.3 million in the first half of 2014, a 19.3% increase from last year. The strong operating cash inflow in the first quarter overcompensated the significant cash outflow in the second quarter. We are adjusting our full year revenue guidance for 2014 from between $780 million and $796 million or a year-over-year increase of 22.5% to 25% to between $727 million to $739 million or a year-over-year increase of between 14% and 16%.

To factor in the significant slowdown in the real estate market in China, our reduction in listing services fees for the remainder of 2014 and the longer term we expected to take for new businesses to contribute significantly to revenue growth. This reflects our preliminary view an actual results could be different than our guidance.

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

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions) Your first question comes from the line of Dick Wei from Credit Suisse. Please ask the question.

Dick Wei - Credit Suisse

Hi. Thank you for taking my questions. I have two questions. First question is maybe if you can talk again about our rationale and strategy of investing into the two offline agencies. I understand that the two agencies, while they are larger agencies in China, but their total market share is quite low from the grand scheme of things, so just want to see what is the long-term strategy for the company.

Then my second question is what were the second-hand listing service, what's the outlook for the rest of the year? Do we expect a more other price changes or do we expect some of the volume to pick towards the second half? Thank you.

Hong Zhao

Vincent, do you want to take the question?

Vincent Mo

Okay. Thanks, Dick. Two, questions. I mean, market share for these two top-tier agencies that we collaborate with presents probably right around 6% to 7% roughly of the market. It's not very high, but then they are definitely the leading agency in China. That shows you how fragmented our market really is.

However, being a leading agency, they do have very strong local presence and offline presence, which would allow us definitely a bit deeper access into their transactions. Also, for instance, we are hopeful and also and as we in the release you we are going to form a joint venture with them to further develop and expand financial services to service all their projects that we have and hopefully has corresponding regions, so that's kind of the idea for now.

All the details, teams are coming together and really working out the details our detailed business plan. As we have more details, we will be updating you guys as we go along.

Your second question was related to basically the outlook for the second quarter - I mean, for the first second half - can see the first half was pretty bleak. I mean the entire market seems to be experiencing very sluggish demand and also very low liquidity.

We do see some relief in late July and early August, but you know it's still probably too early to call it end of the slowdown. We are very cautious about it as of now and we need to give a little time to see if the transaction volumes will pick back up and the demand will actually come back to the market.

Also, we also wanted to see definitely the liquidity in the market start to improve. So far, we haven't seen a whole of improvements in that regard, so we remain, I would say, remain cautious about the second half.

Dick Wei - Credit Suisse

Great. Just on the first questions, maybe, if you can share a bit about how should I think about this model for SouFun maybe in a five years time? Is that something that you are able to discuss related to the current and some of the future investment? Thank you.

Hong Zhao

Yes. A good question, for the five years, I think, we actually mentioned something in our previous releases. Five-year plan, the way we look at SouFun, it's going to be first of all, the foundation is going to be online and mobile platform, which is going to continue to have very, very significant amount of traffic. That's our basis for any kind of product offerings that we do.

In the meantime, definitely we are moving more towards transaction, partnering with some of the offline agencies would definitely be one of the avenues to do so and we will continue to explore other ways to just get that and then get more access into the properties, into the property transactions, new homes and secondary homes alike.

Then also, in the meantime, financial services will be kind of another pillar to support our future growth, because as we are getting closer to transaction, one of the key ingredients is definitely the financial assistance to help the homebuyers to get a transaction through. That's kind of the longer term strategy that that we have for now.

Dick Wei - Credit Suisse

Great. Thank you very much.

Hong Zhao

Thanks, Dick.

Operator

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

Alex Yao - JPMorgan

Hi. Good morning, everyone. Thank you for taking my question. Firstly, I would like to follow-up on Dick's question regarding the listing business. We understand the market is weak and that you guys have given 40% price cut to the national agent to help them get through the winter.

The question is, is a 40% pricing cut enough. Can it be worst in second half or do you guys need to change the product designs to help them go through the winter. How are comfortable in terms of recovering the listing business in next year? Thank you. Then I have a follow-up question.

Hong Zhao

Hi, Alex, I will give it a first shot and Vincent will turn in. The first question regarding, is the 40% cut enough. I guess, it depends on whose perspective you are looking at, right? If you look at agencies' perspective, it might be enough. From our perspective, our product do have its value and continue to improve the traffic to our site and we continue to see that and product features and things of that nature, so definitely we think 40% cut for now is a very is a very reasonable deal to all of these agencies, so not likely to have any significant price concession, so that's kind of the current view.

The second question you had is, actually that's the fundamental thing. I think, Vincent had mentioned, in the previous conference calls it really is our product. You know, if we can have the product that's so attractive and so easy to use and bring them a lot of new business, then definitely they were willing to pay. They are continuously moving towards that direction both, from mobile applications as well as from with the offline and hopefully will get us more close that transaction loop, so we can provide better assistance to facilitate a transaction. I am not sure if I get all the points.

Alex Yao - JPMorgan

Yes. That's very helpful.

Hong Zhao

Alex, you said you had a follow-up question?

Alex Yao - JPMorgan

Yes. I do. Then in terms of margins, how should we think about the second half margins trend? Usually, your margin improves into second half, because the better seasonality and stronger revenue growth, but this year assuming there is still seasonality, but you guys are cutting price for one of the highest profitability business, what could be the margin trend into second half. Related question is, how should we think about your investments into next year? Thank you.

Hong Zhao

Yes. I will take the first shot at it again, Alex. I think, the margin-wise, if you look at our second quarter, our second quarter is a challenging quarter for us. You know, we continue to deliver approximately 40% of net margin which is now a small trade.

I think going forward, yes, we are going to be continue experiencing margin pressure. However, I think you know a lot of these spending as you can see, including investing in headcounts that we've done so far and these branding advertising efforts tend to be discretionary.

I will say that if we can be more selective in terms of the headcount, we are going to increase areas of headcount can increase and also we will be very selective in terms of effective programs that's out there, so that will help us to limit the negative net impact on margin, because of growth slowdown. Overall, I think as we said, Vincent had mentioned again too, 35% margin is kind of at least what we are looking at, but right now we are in 40%, so anywhere in this range I think should be reasonable.

Alex Yao - JPMorgan

Okay. Got it. Thank you very much.

Hong Zhao

All right. Thanks, Alex.

Operator

Operator

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

Eddie Leung - Merrill Lynch

Good evening. Thank you for taking my questions. Two questions, the first one is about your e-commerce business. I remember about month ago, you guys mentioned that there could be new business model, new pricing models under consideration in order to provide more balance to property developers under the e-commerce business. Could you give us an update on that front? Are we going to see any new functions and features, maybe some pilot programs shrink and what could be the format, so that's my first question.

Then secondly about your marketing services piece, you see increased strong growth in our first half of the year, while e-commerce has slowed down quite. Are we seeing a purchase shift from property developers from e-commerce actual marketing services or we are looking at different advertisers or marketers for your e-commerce business and your private advertising business at the moment? Thanks.

Hong Zhao

Yes. Eddie, I will probably just answer your second question first. Then probably see how we can address the e-commerce question you raised as the first one.

The marketing services growth was predominantly - we see very strong growth in the second and third-tier cities. That is very strong. As we move through, we do see that developers, because of the pressure to move their inventory, they do tend to spend more money on marketing instead of reducing money, so that's kind of the fundamental drive for the marketing services growth.

I don't think necessary marketing services is replacing the e-commerce growth, I think e-commerce will continue to grow, but the key thing is for e-commerce and as we said earlier, the second and third-tier cities we do see very strong growth, very robust. It is continuously very robust as we increase penetration, but it's really the first-tier cities with the market that has slowed down significantly compared to even beginning of the year and also in peers' competition and alike, so it causes and brings a lot of pressure to the growth in the first tier. That's the fundamental reason, I guess, the slowdowns for e-commerce.

Let's talk a little bit more about the e-commerce business. You had a question that we are going to have a new form of e-commerce was your first question, Eddie?

Eddie Leung - Merrill Lynch

Yes. I think, not long ago, you guys mentioned that there could be new formats or new business models under consideration, right?

Hong Zhao

In e-commerce?

Eddie Leung - Merrill Lynch

Yes.

Hong Zhao

Yes. I think, we probably laid out, I mean, you are probably referring to the conference call we had earlier in mid-June. Yes. As we did mentioned that there was going to be probably three different categories of e-commerce. One is going to be exclusive. The other one is the existing form of e-commerce, where we know you have to some I guess spend on some advertising to the third-party advertising agencies. Then there was another, I believe that's more of a direct e-commerce where we were going to get into the transaction and really use our platform to complete the whole transaction. In that, our plan is too probably to take a bigger cart for the transaction. So far, these are all things that the new model is being really tested and we don't have a whole lot in terms of updates on that.

Eddie Leung - Merrill Lynch

Okay. Thanks.

Operator

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

Fei Fang - Goldman Sachs

Hi. Good morning. Can you update us on your strategy and progress in internet finance area? I understood that it may involve, say, lending to developers and homebuyers, so how would you plan to use your balance sheet going forward and also what procedures or control systems that you have deployed to manage the balance sheet risk? Then I have a follow-up question. Thank you.

Hong Zhao

Thanks, Fei. In terms of the financial service, yes. We have had loans to developer and homebuyers and alike. It go through a review process of course similar to all the loan companies and banks within our system. Then to a certain extent we will make sure there is enough collateral for large amount of loans to further mitigate the risk. As far as how much risk we are going to take on balance sheet.

Quite frankly, our balance sheet is okay, but it's not that big if we expand the whole program nationwide, so we would definitely need outside capital when we bringing in other finance partners to further expand this business as we see significant growth in that business.

Fei Fang - Goldman Sachs

Understood. Thank you. Also, just one follow-up on the marketing services, it's definitely encouraging to see the healthy growth rate despite the slowdown in other segments. Are you seeing any potential headwind in the marketing services segment? Also in your new growth, new revenue guidance for the full year, what's your assumption for the growth rate of the marketing services?

Hong Zhao

Yes. That's a good question. We don't necessarily see a headwind of that marketing services, I think the growth - sort of the subject more of directionally, Fei, we really don't have specific quantitative line or guidance for each line of revenue. In general, we believe that revenue for marketing services will probably grow at probably anywhere from the mid-teens to low-20s.

Then the e-commerce business will probably be right around low-teens, high-single digits. The listing business, because of the price reduction and things of that nature is probably going to be flat for the last year and that's kind of directionally what we are thinking when we are adjusting our annual guidance.

Fei Fang - Goldman Sachs

Understood, thanks very much.

Hong Zhao

All right, Thanks, Fei.

Operator

Thank you. Your next question comes from the line of Vivian Hao from Deutsche Bank. Please ask the question. Ms. Vivian Hao, your line is open. Please ask your question.

Vivian Hao - Deutsche Bank

Hello.

Hong Zhao

Yes.

Vivian Hao - Deutsche Bank

Hi. Sorry. So my question is regarding the secondary listing part. We have seen on the ground, there is a mix of feedback from the agencies seems like not all of them has agreed to this 40%, and some of them have not restated their inventory on our platform. I guess, my question is on, do you see the business model being disrupted and there is a collective bargaining power forged by the secondary agencies through the agency unions to negotiate price with us. How we can improve our business model going forward to regain the bargaining power with the secondary agencies? Thank you.

Hong Zhao

Okay. Thanks, Vivian. I guess, the first question is, are we seeing more of these things going on. First of all, the first round of the things started probably mid-June, early June. The cities like (Inaudible) and for instance and Hangzhou for instance, we have seen agents coming back to the platform, because we do see the paid subscriber accounts increase not quite back to the pre levels, but pretty close.

Even though they are impacted by the environment and the economic environment, they can't really spend as much as before, their business hurting.

Things like that, I think will probably, like you can see and [other event], but we will continue to communicate with them. Then continue to honor whatever we have agreed and we have offered to them. In the meantime, we are looking for ways to get as closer, first of all to the transaction stage and provide products to them and financial services to them to help them to regain business.

Also, in the meantime, we will looking within ourselves and see if there is any other way that we can actually get into the transaction stage, so that, I guess, we will be a little bit less dependent on agencies themselves even though we will be open platform, so they can continue to invest in our platform and continue to get the - of the large traffic we can bring to them.

Vivian Hao - Deutsche Bank

Okay. Great.

Vivian, you said you had a follow-up question? Do you? Or.

Vivian Hao - Deutsche Bank

No. I am fine. Thank you.

Hong Zhao

Okay. All right. Thanks, Vivian.

Operator

Thank you. Your next question comes from the line of Tian Hou from TH Capital. Please ask the question.

Tian Hou - TH Capital

Hi, Hong and Vincent. I have got two questions. One is related to the policy front. I think, a lot of troubles. You guys are experiencing is really the results of the weakness of the market. Recently, we saw some regions, some cities, local government have started to inject some sort of a positive policy such as released restriction policy let people have more rights or to have more opportunity to buy apartments. I wonder what you guys see in that front. If the transaction volume pick up in the second half year, are they going to be benefit you and if so, in which way? That's the first question. I will give you second after the answer.

Hong Zhao

I guess, really the question - I mean, it's good, I mean, there's a parts. One, will the government policy really increase the market volume, transaction volume. I think, there is still, this is my personal view that we still have another side of the equation, which is liquidity in the market. Yes. If we open up the limitation of the control policy definitely is more positive, but without the adequate liquidity to help the homebuyers getting mortgages and really complete the transaction in a timely fashion, a lot of things are still I guess yet to see. At this point, I can't really draw a conclusion that necessarily will be much better in the second quarter in terms of margins.

As far as what we do - I am sorry, your second half of the question again, Tian?

Tian Hou - TH Capital

Let's say, if the policy actually works, and the volume comes back are you guys going to benefit from that? If so, in which way?

Hong Zhao

Yes. Definitely. I mean, if you see transaction volume increase, first of all our benefit of our e-commerce services, which is going to as the marketing getting active, we will be able to get more transactions through our platform and definitely that will increase our revenue from e-commerce and fuel the growth of that.

Then, also, while the agency companies start to see some good revenue growth, because of the transaction improvements, then they will have more money to spend on online platforms, which will also benefit us. Yes, it will definitely benefit our business in the market if the volume sales growth come back.

Tian Hou - TH Capital

Okay. I have a second question related to your guidance. As the conflict between SouFun and agencies has not been done yet, just recently we saw more those news come out so I wonder if your guidance has to do without any cushion for slaughter listing price cut.

Hong Zhao

I don't know if we necessarily have a price cut, though, but then we do factor in current price cut levels that we already promised to our agency clients.

Tian Hou - TH Capital

Okay. That's all my questions. Thank you.

Hong Zhao

All right. Thanks, Tian.

Operator

Thank you. Your next question comes from the line of Philip Wan from Morgan Stanley. Please ask the question.

Philip Wan - Morgan Stanley

Hi. Thank you for taking my questions. I have the follow-up question regarding your listing business, so what are the alternatives for agencies in the secondary housing market to promote their services apart from SouFun. Then how the SouFun's pricing after the after the price cuts compare to your competitors. Then and I have a follow-up question.

Hong Zhao

I am sorry, Philip. What was the first half of the question? What was SouFun's…

Philip Wan - Morgan Stanley

Right, so basically -

Hong Zhao

First of the question.

Philip Wan - Morgan Stanley

Yes, so after the price cuts, how the SouFun's pricing compare to your competitor for the secondary housing listing market?

Hong Zhao

Right. After the price cuts, we believe that we are very competitive in a marketplace actually. One of the data points we got is right now after the price cut, I think our price seem to be among the lowest in Shanghai market, so that give you kind of point of reference. I think it's now very competitive. What was your first part of the question?

Philip Wan - Morgan Stanley

All right, yes. Then also related to this after price cut, have you seen any volume change? For example, would that help you attract more agencies more buy your package?

Hong Zhao

Well, for the cities that have the boycott, we do see (Inaudible) and even Chengdu and Hangzhou, all these cities. We have seen paying subscribers accounts increase, with there is some good comeback, but not quite up to the pre-boycott levels, but they are coming back which is very encouraging. Then overall, we do not see significant subscriber account decreases, because, let me see, I have something to point here.

Our paid subscriber account, actually continued to rise at the end of the quarter two, we have about 148,000 paid subscribers on our platform. Compared to a year ago, this is a 7% increase and sequentially it actually increased from about 164,000 in Q1, so that is still a good increase given the difficulty of the marketplace. From that perspective, we will continue to secure our market share and even grow our market share in this regard.

Philip Wan - Morgan Stanley

Okay. Thank you. Then regarding the investments in property agencies, would you be able to maintain the platform independence as you are going to capture - this direction. Thank you.

Hong Zhao

Yes, store-by-store open platform. It will continue to be open platform for any agency who want to list their properties with us. For any developer who wants to put advertising on our platform and that's hasn't changed at all. It's just that having relationship with these agencies, we might be able to jointly develop deeper business relations and also able to continue to expand our financial services products. We are not precluding any agency from our platform.

Philip Wan - Morgan Stanley

Okay. Thank you. That's helpful.

Hong Zhao

All right. Thanks, Philip.

Operator

Thank you. Your next question comes from the line of Anne Shih from Brean Capital. Please ask the question.

Anne Shih - Brean Capital

Hello. Thanks for taking my questions. I just wanted to get some more color on the sort of the investments that you are making for next year. You mentioned increasing headcount discretionary spending [brand campaigns]. Is that something you are also planning on taking forward and could you also provide some more thoughts on what you are seeing in regards the competitive landscape?

Hong Zhao

Okay. Let me repeat your question. I think, I would see if I get it. The first question is really related to are we going to continue at current level of new investments and in headcounts and as well as advertising and promotional type of expenses, right? The second one was really our competitive landscape has that shifted.

The answer to the first question, I mean, I think, we will continue to monitor the investments. I mean, we are committed to definitely invest more to continue to enhance our platform technology-wise, product development-wise, as well as the front office, our marketing people and sales people to support our expansion? Absolutely. That investment will be there, but it will certainly be adjusted, right? It depends on how quickly we grow in a certain region.

In terms of our competitive landscape, I think we are definitely still the number one platform in terms of the traffic, in terms of the number of paid subscribers on the secondary home front and all that. All these measures, Also, right now with competitive pricing in listing services, we are hoping to attract more users for this platform and further increase our market share, so we are doing everything we can to continue to maintain and strengthen our dominance in the marketplace, so that's the answer to our question.

Anne Shih - Brean Capital

Actually just one more follow-up, on the e-commerce business, could you talk a little bit more about the take rate? I know you are moving over to the new business model, but to the extent that it's still relevant for 2Q, was there any sort of pressure that you saw on 0.7% that was previously discussed?

Hong Zhao

You are talking about the take rate in e-commerce business?

Anne Shih - Brean Capital

Yes.

Hong Zhao

Yes. I think, overall, we are seeing somewhat of a decrease in take rate. You know, right now, our nation-wide basis, we are slightly below 60%. I think as we said it's mostly driven by the spending in the first-cities as competition is getting really serious. The other cities we maintain a relatively reasonable take rates.

Anne Shih - Brean Capital

That's helpful. Thank you.

Hong Zhao

Thanks, Anne.

Operator

Your next question comes from the line of Joe [Mischel] Macquarie. Please ask the question.

Unidentified Analyst

Hi. Thanks for taking my question. I just want to follow-up on your comments about your investments in offline agencies. I seem to recall these agencies that you have invested are the agencies for the new homes.

I was wondering if that's true and if you have plan to investment in more offline agencies both, for the new homes and for the existing homes. In addition to your financial investments in these companies what are the other potential financial help you may be providing to these guys.

In return, would you be able to elaborate a bit on colleagues that they can helpful to these SouFun business. Thank you.

Hong Zhao

…questions.

Vincent Mo

Yes. Yes, that would be great. Hello, this is Vincent. Yes. We invested in two new home business about past one month. The purposes is really trying to expand the SouFun's backyard to mature that we have a broader reach than to the end property buyers.

I think that's the direction - that's the direction - that's the background is the reason we invested. As we announced before, partnership, abroad partnership with the meeting and major agency business given the support our marketing, listing and other existing businesses so that's for sure.

The second thing is really with our reach deep down to the end consumers and it's going to support our future testing financial services as well. Those are the major two reasoning behind. Going forward always we are still keeping our eyes open for potential targets, but we are going to do this very selective and it's based on whether we are going to have spent the after reinvestment.

Unidentified Analyst

Could I just follow-up Vincent, Would your comment include i.e. the keeping eye open for future investment include secondary agencies?

Vincent Mo

Yes.

Unidentified Analyst

Okay. Great. Thanks for the helpful comments.

Operator

Thank you. Your next question comes from the line of Alicia Yap from Barclays. Please ask the question.

Alicia Yap - Barclays

Hi. Good evening, Vincent and Hong. Thanks for taking my questions. Quickly a follow-up on the e-commerce front, so I think as we mentioned the competition in the first tier is intensifying, what happened is the competition getting more intensified into the second-tier city. How much impact will we anticipate, the impact on the take rate given the competition level.

Then I think second question is on the listing business that I know that there is a lot of questions asked on this lever already, and I think as we look longer term into the next year or even further, where should we start to think that it will get more normalized and we should be able to get back to the previous trend? Thank you.

Vincent Mo

This is Vincent again. First question about e-commerce, in our last conference call, specifically about the e-commerce business, I think that we had something - we are transforming our e-commerce business from original mixed up e-commerce models to all of sweet types of e-commerce model.

One is the exclusive arrangement with developers. Second is, really directed sales, which is really commerce. Third is really something still mixed what we have been doing in the past fiscal years, so going forward, I think we are more confident with the exclusive arrangement with developers, which is our e-commerce model one.

We are also very confident with our directed sales of to our websites and the mobile applications, so those two are clearly defined, what we are offering to the developers and what we are getting from developers. I believe in exclusive arrangement with developers and directed sales for developers, those two models will be the focus of our e-commerce business.

With this adjustment and I believe the take rate will go up. Currently, it's really advertising e-commerce and other top-line supports they mixed up so it's as I mentioned times that we are going to refine this model to make sure that this model can or will be able to.

Your second question about the listing services right? Listing services as all of you know that we are having some conflict with our agency clients and I think other times they are right. Consumers are always right, so we are adjusting our model so that we can provide a much better service to our agency clients.

Some time we are going to make sure that in the longer run, that our model can sustained, it can be immune from any potential boycott or collective actions from our clients, so that's something we have been working on. I believe that as long as our platform, our mobile applications, keep our kind of momentum, and I believe they will come back.

Alicia Yap - Barclays

Okay. Great. Thank you.

Operator

Thank you. Your next question comes from the line of (Inaudible) from ICBC International. Please ask the question. Hi, (Inaudible) Your line open. Please your question.

Unidentified Analyst

Hi. Hello. I have a broader question regarding to the market for, how come they compare this year's market with 2012, because in 2012, it's also a weaker company guidance 10% that was 16% year-over-year top-line growth, where whole economy see this year's market. Thank you.

Vincent Mo

Excuse me, could you repeat the question?

Unidentified Analyst

It's a broader question regarding the market, because in 2012, company guidance of 10% to 16% year-over-year top-line growth, because it was also a weaker market in that year, how do compare this year's market with 2012?

Vincent Mo

Okay. Yes. 2012, actually it's starting from 2011. Chinese government started their started their policy, so from 2011 to 2012, otherwise the depressed market condition, but actually second half over 2012, the market that was back and aggressively into 2003 and to the Chinese New Year of this year, so 2012 was the a good, but 2011 was a top month.

What we did in 2011 is that we had our e-commerce business started in 2011, so based on the conditions then, the ecommerce business started - it's a crazies way of doing traditional advertising business rather than collecting money from the developers as we did before 2011 directly and started with the e-commerce business, we started collecting money from our members, the property buyers, so that's the e-commerce business frankly in 2011 to 2012, it was the major drive behind our top-line in 2012.

Now, if you are reading our numbers, you are seeing out e-commerce business is growing. In the second quarter it's only 9%, and first half it's very low double-digit growth, so I mentioned in our press release, so we need to transform and to make sure this e-commerce business after refining and it can affect our gain.

Currently, frankly for the first half of this year, we did not find a very good way to handle the slowdown of the market, so that's why we are experienced a slowest growth in quarter and together in first-half of this year, so we are in the process of changing and transforming the models, so we are sure in one or two quarters, we are going to get it back to our gross momentum again.

Unidentified Analyst

Okay. Thank you. Just a last on company's traffic, after [corporation] had company seen any impact on SouFun's traffic?

Hong Zhao

Not really. Our mobile traffic, it keeps on growing three times compared to the same period of last year.

Unidentified Analyst

Okay. Thank you. One last question, in early this quarter in the conference management mentioned that company's e-commerce business facing tighter competition fourth-tier cities. Second is, tier cites e-commerce are seeing a 10% to 12% year-over-year growth, so for the second half of this year most of the revenues you are generating from e-commerce will come from second and the third-tier cities? How should we expect the trend for this business?

Hong Zhao

I think, to your question on - it might be right, you know we had our most of the growth from second-tier or third-tired cities in quarter two, but it's my believe and after we refine our model, e-com's model, I think both are including third-year or fourth-tier cities from tier-one, tier-two, tier-three cities. I think we are going to have or better growth from those tier cities.

Unidentified Analyst

Okay. Thank you.

Operator

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

Dick Wei - Credit Suisse

Thanks for taking my follow-up. First question is sort of on the e-commerce business transition. I wonder if Vincent mentioned about it, how many quarter is it going to take and is it going to be applied to the secondary listing business as well for more direct e-commerce business. Then I have a follow-up as well. Thank you.

Hong Zhao

This is probably I am second time talking in a conference call, as I mentioned the transformation and refining of our e-commerce model, we have been testing this in the past quarter frankly, and with about 11 projects and this quarter we are going to test more than 100 projects across the countries from tier-one city to tier-two cities, so I believe give us one more quarter, quarter three, quarter four and we will see some significant contribution from, we call it direct e-commerce transactions.

Dick Wei - Credit Suisse

Well, it kind of goes through the secondary listing business wise changing that business model as well, (Inaudible) who have something more interesting as well?

Hong Zhao

For the listing business, targeting and their re-sell market or the agency business listing is going to continue to be our major product in the listing business, including mobile listing and traditional internet and PC and listing.

At the same time, we are also testing new products for our agency companies and our agents as well, including our SouFun, how do I say that?

Vincent Mo

Yes. SouFun is going to take our direct the listing from the property owners as well, so that's a direct listing. At the same time we are also testing directed sales platform for the recent market, so that our agency company and agents with these companies, they can directly take listing from SouFun's listing direct and listing platform and of course. Again, do more business with SouFun and at the same time if we make more money for them and we will also be able to make more money from our listing agency companies.

Dick Wei - Credit Suisse

Great. Vince, I want to add my congrats to you being appointed to CEO, and if you can have any comments on some of the bard changes as well and the resignation of…

Vincent Mo

Dick, you know, frankly I don't want to be the CEO. It's a tough job. I was the CEO. I was the CEO, I was the Executive Chairman. Now, actually, frankly our CEO recently it's really four (Inaudible) we are taking his title again.

Of course I am personally determined that to change and personally determine it to make sure I am 120% committed to this company. As I said, I am transforming this company. I am changing this company, so that we can keep the pace with the change of this whole industry. I am quite confident with SouFun's background that - dominance meaning date we see in the market that we will be also the leading change maker in this industry.

Back to the question about the board change, Jeff, has been supporting company in the four - Jeff has been supporting the company in the past four years. He is the Chief of General Atlantic in Asia, so we including General Atlantic, they have been very supportive to this company, but according to our arrangement, GA is a they have sold most of their tiers, within SouFun, so it's not sort what you have to resign from the board.

Our new board member, (Inaudible) is a business leader in the - and I respect him very much. Since he was the CEO of (Inaudible), so I have been trying to - him to join SouFun's board and to support SouFun's board into the future into a much bigger company, because (Inaudible) he managed the Fortune 500 companies, so that's we invited him to be a board member.

He also understand myself, he understands this company, so he has known this company for almost eight years, so I think he joining of this company is going to be very good to the company's future growth to a much bigger scale in the company. On the other hand, I think his involvement with the company and we will also make corporate governance much stronger, so those are the consideration of the board membership changes.

Dick Wei - Credit Suisse

Great. Thank you, Vincent and look forward to more of the good changes and exciting future for SouFun. Thank you.

Hong Zhao

Thank you.

Vincent Mo

Thank you, Dick.

Operator

Thank you. Your next question comes from the line of [Chung Yang from]. Please ask the question.

Unidentified Analyst

Thank for taking my question. Marketing service obviously the drivers behind 2Q's top-line growth, but I mean, if we look at from an apple-to-apple basis, have developers really increased their marketing budgets or it was more of a function of higher penetration and wider customer base, so basically especially my question was are we still seeing countercyclical in this - and I have a follow-up. Thanks.

Hong Zhao

Yes. We have been watching our 20%-plus growth from our marketing service segment. Last year, my promise was low double-digit growth number for our marketing segment, and we did it last year. This year, we are back to over 20% for the marketing service sector. Going forward, for the coming quarters three, quarter four, frankly I am confident that we are going to at least maintain our current marketing services and growth rate in quarter three and quarter four.

This is in relation to - as I mentioned, we are refining our e-commerce model before this refinement e-commerce business and advertising business, there were somewhat mixed up, so now there is a refinement of our model and we are trying to separate the advertising and a rear ecommerce business, so it is going to help us get more recognition from our developers, the value of our advertising.

In that, you are really thinking that direction, I believe, developers they are again, spend more with advertising with SouFun as they did in the past, so that's why my reasoning behind my confidence in our advertising or marketing service grows in quarters three and quarter four.

Unidentified Analyst

All right. Thanks. My follow-up question is on the financial products. I noticed that recently, we have launched our financial products to a couple of cities, so when I checked the website this afternoon and it looks like P2P financing platform to me so, I was just wondering what was the key differentiator for or SouFun's product and what was our expectation on our financial product in the next couple of quarters. Thanks.

Hong Zhao

Referring to last year's testing about financial service products and the tours, which have shown some good signs. When we announced our financial service initiative about eight months or so ago, we said by the end of the year in quarter four we will see very positive sign and we are getting to there.

Frankly, currently we are doing, we are testing different models including, P2P, including the small and individual loans and including some of our institutional company lending as well. All of this financial services we are doing, we are testing and we are going to do it through our online platform. That will be different from traditional lending or financing business in traditional companies have been doing,

I think, I am very confident and it looks very promise to me and to this company in the longer run with the financial services. On the other hand, financial services is also going to support our advertising clients and our e-commerce clients as well.

I think although it's not easy or tough, it's not something we can make it perfect in a quarter or two, but I believe we are on track going in the right direction.

Unidentified Analyst

All right. That was very helpful. I am really looking forward to the positive progress on that front. Thanks.

Hong Zhao

Thank you.

Operator

Thank you. Your next question comes from the line of Steven Zhu from Pacific Epoch. Please ask the question.

Steven Zhu - Pacific Epoch

Hi. Thank you for taking my question. My question will be on the marketing service part. What has been the percentage of their business that is purely for advertising, not from the e-commerce project.

Hong Zhao

I don't have the exact number for that, but I would say majority of the marketing services recognition came from the advertising. I would say, if it's not a 80%, there will be 75%.

Steven Zhu - Pacific Epoch

The reason I asked the question is that, with - of project, the developer told us that they don't pay in cash to SouFun further the advertising, but rather providing the exclusive e-commerce business, which is setting e-coupon to the consumer as a reward for you to get business, so I just wonder if you can come off the revenue for your e-commerce part, how will you allocate that into marketing service advertising for…

Vincent Mo

Frankly, for you those e-commerce business, we do not allocate advertising revenue to our marketing service segment at all.

Steven Zhu - Pacific Epoch

If a project is an e-commerce project, then the revenue for online advertising or marketing strategy is zero, all of revenue is recognized through the e-commerce, right?

Hong Zhao

No. It depends on the arrangement. If we have advertising contract signed with the developer that part will be recognized as advertising in our revenue. If we do not have an adverting agreement signed and there is no advertising revenue.

Steven Zhu - Pacific Epoch

Okay. Then come back to previous question, so 80% of your marketing service is from the project that it's advertising only without any e-commerce? Only 20% is from…

Vincent Mo

Let me make it clear, advertising - okay let me clarify that. Advertising comes mostly from developers. We only do advertising business with us. we recognized that fully 100% that part through our marketing service segment and we do have developers who do advertising business with us, who also do e-commerce business with us. We only recognize the advertising part in to our marketing segment. Is that clear?

Steven Zhu - Pacific Epoch

My question is that what is the percentage of both pure advertising clients? I just want to get an idea of pure advertising those people that pay cash for your advertising business. I want to know that ratio what is the percentage of those developers who don't use your e-commerce business, but only pay you for online advertising. I just wanted to get an idea of that percentage in your total marketing service business.

Hong Zhao

I need to find it out. Frankly, I don't have that number in front me. The only thing I know is that 75% if it's not 80% revenue comes from our advertising clients only.

Steven Zhu - Pacific Epoch

Okay. Up to-date otherwise, but what is the ratio between tier-one versus tier-two, tier-three in the marketing service business?

Hong Zhao

You are talking about revenue, Steven?

Steven Zhu - Pacific Epoch

Yes. Revenue, because - tier-one.

Hong Zhao

Yes. I will give you a quick rundown, Steven. About 27% of the total marketing services revenue in Q2, coming from the first-tier city, about 30% coming from the second-tier city and about 23 coming from the third-tier cities.

Steven Zhu - Pacific Epoch

27%, Tier-1. 30%, Tier-2?

Hong Zhao

I am sorry. I read it wrong. About 42% actually, about 30% coming from second-tier city and about 42% is coming from third-tier cities.

Steven Zhu - Pacific Epoch

The third-tier city is the largest to bring us the contribution to the advertising business?

Vincent Mo

Yes. That's the number. Why tier-one cities has the low percentage contribution, is because we did a lot of e-commerce in the tier-1 city.

Steven Zhu - Pacific Epoch

Okay. Do you have the same rundown for the e-commerce as well? Just curious.

Hong Zhao

Absolutely. On the e-commerce line, second quarter about 30%, 29% to be exact, is actually coming from first-tier cities and then 45% is coming from the second-tier. Then 26% coming from third-tier.

Steven Zhu - Pacific Epoch

Great. Thanks a lot. That's all my question. Thanks.

Vincent Mo

Great. Thanks, Steven. I believe that's the last question, right, operator?

Vincent Mo

Certainly, sir.

Vincent Mo

Well, with that, I think, I want to thank everybody for joining us today and we look forward to seeing our on our next quarterly call. If you have any questions, reach out to us any time you would like and have a good evening and have a wonderful day. Thank you.

Operator

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

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Source: SouFun Holdings' (SFUN) Management on Q2 2014 Results - Earnings Call Transcript

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