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58.com Inc. (NYSE:WUBA)

Q2 2014 Results Earnings Conference Call

August 21, 2014 8:00 AM ET

Executives

Christian Arnell - Christensen IR

Michael Yao - Chairman and CEO

Hao Zhou - Chief Financial Officer

Analysts

Dick Wei - Credit Suisse

Phillip Wan - Morgan Stanley

Wendy Huang - Standard Chartered

Alicia Yap - Barclays

Cheng Cheng - Pacific Crest Securities

Eddie Leung - Merrill Lynch

Jiong Shao - Macquarie

Tian Hou - TH Capital

Antony Tong - 86Research

Christian Arnell

Thank you. Hello, everyone. And thank you for joining us today for 58.com’s Second Quarter 2014 Earnings Conference Call. The company’s results were released early today and are available on the company’s IR website at www.58.com, as well as PR Newswire services.

On the call today from 58.com are Mr. Michael Yao, Chairman and Chief Executive Officer; and Mr. Hao Zhou, Chief Financial Officer. Mr. Yao, will discuss 58.com’s business operations and company highlights, followed by Mr. Zhou, who will go through the financials and guidance. They will all be available to answer your questions during the Q&A session that follows.

I’ll remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company’s control, which may cause the company’s actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and another risks, uncertainties and factors is including in the company’s filings with U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement, as a result of new information, future events or otherwise except as required under law.

It is now my pleasure to introduce Mr. Michael Yao. Mr. Yao, please go ahead?

Michael Yao

Thanks, Christian. Thank you all for joining our conference call. Today I would like to talk about three things, firstly, an update of our business during the quarter, second, the strategic partnership with Tencent, and lastly, my observation and assessment of the local service sector in China.

First of all, we have a great second quarter as our strong growth momentum continued. Almost every operating metric reached at record high. Activity on our platform rebounded (indiscernible) from our seasonal low during Chinese New Year.

According to our internal safety statistic, monthly unique visit to our platform continued to be above 200 million. PC traffic is growing both in terms unique visit and the page views year-over-year. This is quite a remarkable since total PC usage in China has remained relatively flat for quiet some times. This shows that when compared to other big websites, there is still plenty of room for grows on the PCs side.

Mobile traffic on the other hand continued to grow at a much faster rate than PC. Mobile page views particularly to our listing and [19] (ph) pages as a percentage of total page views increased to 54% in the second quarter from 51% last quarter and the 39% a year ago. This means we’re attracting new mobile-only users because our mobile service provides a far better user experience than PC.

Our products and the technical teams really have worked very hard and I thank them for their effort. We are happy to see our merchants-related metric improved across the Board. In the second quarter we have more than 7 million merchants on our platforms, up from 5 million last quarter.

Quarterly subscription-based paying merchant members reached about 1,210,000 compared to 441,000 last quarter and the 298,000 a year ago. If we add another 200,000 non-subscription-based paying users, we will probably surpass 1 million paying users in the near future.

We have also made good progress in up-selling on our marketing service to our paying merchant members. Of the 1,210,000 subscription-based paying merchant members 26 of them purchased extra on their marketing service, such as bidding and (indiscernible) listing. This is up from 21% last quarter and 18% a year ago. This means that our merchants are increasingly willing to pay for performance as online marketing service are short-term flexible solution.

We are also creating an easy payment interface for our mobile apps also our WeChat service account. The adoption of more sales service based on our marketing service helped us to become more efficient overtime. The across the Board improvement in our operating metrics result in revenue growth reaching record high level, something Hao will discuss in more detail later.

We also reorganized our field sales team during the quarter. Our four solid strong field sales team is a competitive advantage for allowing us to establish and effective paying merchant bid rate. Where our nearest classified competitor only has a direct sales in four cities. With better management tool such as (indiscernible) at their disposal. The team’s efficiency almost doubled from last year. We are taking this team to the next level by strengthening the management of each individual reach across all regions.

We have more industry experience during our management team probably bring an in-depth understanding of the vertical and they will help to train our sales team. While our teams are become more professional, we are extended the size and the reach of our service. I want to thank all our field sales team for their motivation. They are clearly a real team and will accomplish a lot more in future.

Then let me allow talking about Tencent, a company that we are expecting a lot. We all began to use which are as a perfect partner in several areas, Tencent has a number of great mobile and the social platform which can integrate our local service information.

These will surely the beneficial to both Tencent and 58 users. The social elements of our offline categories will help us tackle the job issue in China in a better way. Communication between users and merchants is a lot easier with WeChat and Mobile QQ.

In summary, we have already began to work on the many way in which we can collaborate. The new generation renewal from this agreement will take time, expense are put in place. We are very excited about the social opportunity.

Lastly, I want to share you -- with you some latest observation on the local service sector. If I have to use one sentence to describe it, I would say, the market is really exploded. We have grown rapidly since I found the 58.com nine years ago. But I believe that market has just -- has only just began to accelerate.

The rapid proliferation of smartphone has given internet companies the ability to reach more people than ever before. Increasingly, already adoption of online payment and in particular mobile payment has great opportunity to develop new closed loop service.

As a result, we are seeing an increasing amount of money flowing into the sector. The traditional leaders in many local services in great company verticals are changing their business model as they adapt to the new environment. This is happening across global and in China and has created a many great opportunities that we see ahead of us.

We will continue to execute on existing business model because the penetration of mobile users and paying merchant is still very low. We will focus on innovations particularly on mobile. While we are growing organically we will also leverage our business partnership and M&A to create a better local service ecosystem.

Having said this, this market is booming and we expect competition to hit us, as new money is coming in. Having said this before and immediate the winner, we are confident in our ability to compete effectively.

We will focus on investing in marketing to promote our brand and our service to more users and indeed to create new revolutionary products and our sales team to enhance our service. This investment will allow yield business and all profit in the near-term but we are confident that we will generate longer term value for our shareholders.

Our work over the last nine years has result in a platform with 1,200 million users, 7 million merchants and the number one position in our sector. We carry very strong brand recognition and with the support of our new teams, extensive field sales network load, centralized customer service center Tencent and other partners and our strong cash position will remain extremely confident in our ability to strengthen our competitive advantages in order to extend our lead in the future sustainable growth.

And now let me turn over to Hao.

Hao Zhou

Thank you, Michael. Thanks everyone for joining the call. It’s great pleasure to walk you through the second quarter financial results and our guidance for third quarter revenues. We had another record setting quarter revenue wise.

Total revenues rose over 83.9% from last year to US$63 million, above the higher end of our earlier guidance of US$61 million. Breaking down the revenues a bit, membership revenues rose 70.6% to US$35.1 million. This was primarily driven by the increase in the number of paying merchant members, which was approximately 510,000, an increase of 71% from 298,000 in the same quarter of 2013.

We continue to see strong growth on our marketing services revenues, with the jump of 107.7% from last year to US$29.3. So as you can see the revenue mix change is consistent.

Online marketing services revenue continued to grow faster than our membership revenues. Member grows forms a strong basis in that, it not only directly drives the membership revenue increase, but also provides an increasingly bigger pool of the merchant that can potentially purchase extra on our marketing services.

We don’t disclose greater details about the various components of our online marketing services revenues. But we can share with you that our bidding services for instance continue to grow the fastest among all source of online marketing services. All this really shows that our two-step monetization strategy continues to work very well.

Firstly, we encourage non-paying merchants to subscribe to our membership services. Secondly, we up-sell our online marketing services to the merchants that are more internet savvy and those with the bigger budgets. While those merchants better appreciate the ROIs of the online marketing services we bring to them, they will continue to participate and typically pay more for increased traffic.

Gross margin was 94.7%, compared with 93.9% during the same quarter of 2013. Sales and marketing expenses rose 106.6% to US$40.3 million. Even though in total, they are growing faster than revenues, we should really break it down into two pieces and analyze it separately.

The first piece is the advertising expense, which accounted for US$16.5 million and US$4.5 million during the second quarter of 2014 and ‘13, respectively. The increase in the advertising expenses was primarily due to the expenses associated with the marketing of company's mobile platforms and to a lesser degree, our continued investment in branding and PC traffic acquisition.

On mobile last year we invested very little. As we focus more on R&D efforts for our mobile applications. This year our mobile product is largely ready and Chinese cell phone users are changing to smartphones very quickly. So we decided to increase our mobile marketing investments to capture the window opportunity.

This investment includes APP per installations, Android based, app store marketing and traffic position of mobile browser-based traffic. I want to emphasize that all this investment is more user acquisition-related and because we monetized more from the merchants the impact on revenue from these advertising expenses is not direct and immediate.

However, longer term as we become a more dominant player in mobile, there are surely lot of ways to get returns on these investments. Our mobile users as a percentage to the total around 600 million Chinese smartphone users still a very low percentage. So we will continue to invest very aggressively on mobile.

The other piece of the sales and marketing expense, excluding the advertising is largely related to our field sales and customer service teams, which -- the total headcounts of which is around 5,000 people.

Now this piece is more people related and if we back out the advertising expense from the total sales and marketing expense and do the math of the remainder expense as a percentage of the revenues it was 37% in Q2 this year versus %43 a year ago.

So as you can see, we continue to get leverage from our sales and service teams as they continue to increase efficiency. In the next few quarters, we’ll continue to expand the teams and grab more market share.

R&D expenses rose 56.9% from last year. Mainly due to increase personal cost as we added stuff for the development of the new features and services, as well as share-based compensation and increase rental expenses, et cetera. Internally, there are a lot of innovation ideas, particularly around mobile, which are worth committing more resource to.

Also the collaboration with Tencent will likely to acquire us to dedicate more R&D resources to develop these products. Similar to mobile marketing investments, these investments in R&D resources were likely to generate very minimum revenue in the shorter term, but will be instrumental for us to capture the user traffic market share.

And lastly, G&A expenses were US$4.1 million, up 39.5% from last year, mostly because the increased share-based compensation expense, professional fees and other admin related expenses. We closed out the second quarter with net income of US$11.2 million or $12.4 million, when you back our share-based compensation.

This gives us a GAAP margin of 17.3% and a non-GAAP net margin of 19.2 %. Basic and diluted earning per ADS attributable to the ordinary shareholders were US$0.14 and US$0.13 respectively compared with basic and diluted earning per ADS attributable to ordinary shareholders of $0.03 during the same quarter of 2013.

Our cash, cash equivalents, term deposits, and short-term investment balances now stands -- at the end of the second quarter stand at US$414 million. This does not include cash received in early July from Tencent’s investment.

The repurchase of the shares from existing shareholders also happened in early July. So as we speak, the total cash, cash equivalents, term deposits and short-term investment balance we now have, exceeds US$600 million which position us very well for future competition in this sector.

Lastly, moving over to our guidance. We’re expecting revenues to come in somewhere between $66 million and $68 million for third quarter, up 59% to 63% year-over-year. So relatively -- the relative slow down in the growth rate versus last couple of quarter is largely housing sector related as you’d probably know the Chinese housing market has slowed considerably.

The transaction volume of secondary home sales has come down dramatically from -- since last quarter. Real estate agent companies are reacting with cutting down their expenses including their own headcount as well as their expenses spent on Internet platforms such as ours.

Some smaller agencies have even close down the operation entirely. So this impacts both our secondary and rental housing businesses. Even though our housing revenues are still growing year-over-year in second quarter, the growth has come down considerably compare to that in 2013 compared to 2012.

In addition, we don’t see any indication of a fast recovery in the second half in the housing market. So that’s reflected in our guidance for third quarter. Our other categories such job and yellow pages continue to grow very rapidly as we push the penetration rate of paying merchants and online marketing services to higher level.

No, we don’t offer specific bottomline guidance. I would like to share with you the direction of our major expense lines. As Michael already mentioned, the local services sector is really exploding and possibly a lot of money is coming in and the competition might be heating up. In addition mobile technologies and applications are starting to re-shape the local services sector.

Meanwhile, the penetration rate of our mobile users and paying merchants continue to be relatively low. So, we will invest more aggressively on both advertising expenses and R&D expenses to develop innovative services to acquire more users. We will continue to accept our investment brands and the competitive environment to determine the specific amount of these investments. But since I mentioned earlier, these investments are typically user-acquisition related. They don’t directly contribute to additional revenue.

So as result, we could very likely incur losses in the second half of 2014. However, we feel very excited to face this immense local service market in China and that we can participate in these profound changes that are really shaping, reshaping the industries.

Our goal continues to be to sustain our leadership in this sector as measured by user traffic, merchants as well as revenues. Because of the strong network effect and high growth margin nature of our business model, we believe in the longer term, margin can be to quite high and this justifies our current investments.

As Michael said earlier, we have been a leader in this past several years in this sector and with our competitive advantages and our determination, we will be successful in sustaining our leadership positions in the future.

So with that, we’ll conclude our prepared remarks for today. Operator, we’re happy to open the call for questions. Thank you.

Question-and-Answer Session

Operator

Yeah. Thank you. And the first questions comes form Dick Wei from Credit Suisse.

Dick Wei - Credit Suisse

Hi there. Thank you for taking my questions. The first question is that, how you mentioned about the intensifying competition in the local services area. I wonder; how should we look at maybe the financial impact maybe going into next year on the financial side? As such maybe in the longer term, how do we see the landscape going to change, I guess with more of the higher marketing spending and competition in the space? Thanks.

Hao Zhou

Okay, I’ll take this question, Dick, thanks for the questions. You know, I think -- I think it’s probably to early to really comment on specifics on 2015 because as Michael mentioned earlier, first of all it’s a huge market. So apparently lots of companies are investing quite aggressively to grab my market share including us.

And the second is the market is really accelerating in a way a way that, for instance, mobile technology’s applications really open up opportunities for us to grab user or end merchants in a much fast manner that we have been able to in past.

So I think having sad that we are -- clearly you are number one in this sector as measured by traffic, by revenue et cetera. But we want to be cautious to communicate to the investors that even though the competition may heat up, we will be very determined to maintain our leadership positions.

And as Michael had pointed earlier that we have lot of competitive advantages over as accumulated as what we have done in last nine years in terms of we’re the best brands in the sector. We have the biggest traffic and users and merchants. We have the best and mostly widely distributed sales at teams and more professionals, customer services teams.

And we have the most biggest amount of financial resources and we have a lot of support from very longer terms investors as well. So they are -- and including Tencent as the recent strategic investor. So we’re definitely very confidently that as we continued to invest in this areas that we probably stand best chances of continuing the leadership in this sector.

But for specific 2015 financials, I think revenue continued to grow. Our investment will probably continue to grow as well. It’s probably more difficult to comment on the bottomline if that’s what your questions is, to be honest.

Dick Wei - Credit Suisse

Okay. Got it, Hao. Maybe a follow-up question is maybe on the real estate segment, maybe first of all the general market trend that you're seeing. And then secondly, I think, some of the agents in the (indiscernible) area also expect seeing some of the -- how should I put it? I guess unhappiness with our services. So I'm not sure. Any comments on the real estate front, market front trends?

Hao Zhou

Yeah, let me just translate the question very briefly to Michael. [Foreign Language]

Michael Yao

[Foreign Language]

Hao Zhou

Yeah, just to put it in English, the online market transaction volume has really come down dramatically. And according to Michael, it’s probably at a level that’s lower than what it should be. So kind of, it’s hard to really foresee that it will deteriorate much further down the road. However, there is no clear indication of a near-term recovery either.

So that’s what our assessment about the market today. With respect to some real estate agents, sort of, asking price concessions from online marketing services players et cetera. Our comment is because we are really providing lot of traffic and relatively monetize less compared to other platforms. So I think the impact was lot smaller than that impact to some other housing vertical companies.

And as you can see from the public available numbers that some of the major housing vertical players, the growth has come down significantly and almost to a very modest basis. However, what we can share with you is even though our growth rate has come down too but it’s faster than what they have disclosed externally.

So ineffectively -- effectively actually we are gaining market share in this recession period. And hopefully when the market comes back which eventually will, we’ll be in better position to grab even bigger market share.

Dick Wei - Credit Suisse

I have quick follow-up about maybe longer term. What is our relationship with the agent? Are we thinking of current intermediating given that individuals could also list on our site? I wonder what kind of a dynamic that we think will play out?

Michael Yao

[Foreign Language]

Hao Zhou

I think, Dick -- I think we’ll continue to help the agent companies to get more customers, right. That’s what we have been doing and there is a lot more we can do as well, big or small agent companies. And I think in terms of how to market landscaping feature, there is always going to be agent companies.

But at the same time, I think we are monitoring some of the innovations in the market by some other companies. We think internally to as well in terms of more efficient ways to connect the users and homeowners or home lessors et cetera. And we’re going to be ready for these new services if that’s what really users look for.

Dick Wei - Credit Suisse

Okay. Got it. [Foreign Language]

Hao Zhou

Thank you, Dick.

Operator

Thank you. And the next question comes from Phillip Wan from Morgan Stanley.

Phillip Wan - Morgan Stanley

Hi. Thank you for taking my question. My question is also related to the spending on investments going into second half this year, especially on the advertising. Could you elaborate a little bit more on how are you going to measure the returns on such spending? And also, are you going to just compete purely on the advertising as with your -- against your competitors or would you invest in the sales team or network expansion with the less -- likely less one-off nature and obviously will support your ongoing business? Thank you

Hao Zhou

Phillip, thanks for the question. I think it’s an important aspect of our business but it’s not the only one. We have invested, if you remember, quite a big sum in advertising back in 2011. So we are familiar with the channels whether it’s offline, branding channels on TV, outdoor, sort of, a different channels, buses, et cetera as well as online traffic positions.

It’s -- so we know all these channels. We have had experience with the payers and ROIs. Relatively, it’s easier to track the ROIs for the online investments. So we have system that captures the data as a result of these investments on PC and mobile. On PC, we know the number of users acquired, we know the quality of these users.

On mobile, we know it too, on broad based version, and our android-based -- and our app stores, it’s really easy to track how much we’re paying for pre -- for every installation, every activation et cetera. So everything is -- there is an ROI equation behind it and we have teams that focus on it. So that’s on the advertising spends.

And on obviously -- as you have -- I mean that's not the only -- that’s not the only aspect of the business. I think as we and some of our competitors have invested in (indiscernible) before was to investing and that’s continued to relatively matter less and less overtime because, it’s going to be a more comprehensive competition on how do we design our product and how do we engage our users, how do we partner with people like Tencent and Xiaomi to provide a multiple gateways of accessing our services, how do we service our merchants, how do we make probably merchant to say it’s easier and how do we monetize smart more efficiently by online marketing services and how do we build ecosystem as Michael mentioned earlier by even -- by even M&A activities other than growing organically.

So I think -- I think advertising is one aspect in this current period because we used to have a lot of room to grow our users, especially on mobile. We’ll continue to be pretty important. But there are a lot of other things we’re focusing at the same time. And we are -- and because we are relatively more balanced in all these aspects, we definitely believe that longer term we’ll continue to be the winner in this market. I’m not sure, Michael.

Michael Yao

[Foreign Language]

Hao Zhou

That’s our answer to you, Phillip.

Phillip Wan - Morgan Stanley

Okay. Thank you. And my second question is looking at your active merchant numbers for this quarter, a jump of more than 2 million. So I wonder if you can share more color on this which vertical does it belong to. And apart from the key vertical that you have, are you seeing any other vertical picking up; for example, automobile vertical? Would you be able to give us some update on that? Thank you.

Michael Yao

[Foreign Language]

Hao Zhou

Yeah. Just to put in English, every year, the management works in a way that users, end merchants sort of increase their activities. We try a lot of more of those in the second quarter, because that’s how, that’s when business activities come back after Chinese New Year and then typically a very strong quarter-over-quarter growth.

And this is coming from all quarters, all categories. I mean, if to name a few categories as particularly is growing fast jobs, for instance and auto as well, because its, there is, online industries just growing very fast.

And I would just add that it’s -- the number of merchants which is a sub-sector of the total users. I think, as Michael mentioned earlier, our user number continue to reach record high level as well, more than 200 million monthly unique visitors, PC and mobile combined. So as a subset of that, the total merchant numbers are increasing, which is pretty consistent.

Phillip Wan - Morgan Stanley

Okay. Thanks for the answer.

Michael Yao

[Foreign language]

Hao Zhou

Yeah. Michael, just add to that, even though the 7 million is sort of the number of the covered zone type of categories that we have which is a large, but our priority is to really ensure that in the major content categories, namely jobs and housing and pages and auto for instance, we definitely protect our number one leadership position with respect to the listing services.

There maybe some other vertical companies that is in the same sector, but what they provide different type of services, but when it comes to listing we definitely want to make sure that we are number one in the market. Thanks. Thanks, Phillip.

Phillip Wan - Morgan Stanley

Okay. Thanks, Hao. Thanks, Michael.

Operator

All right. Thank you. And the next question comes from Wendy Huang with Standard Chartered.

Wendy Huang - Standard Chartered

Thanks for my taking my question. First, can you maybe disclose your rent exposure to the hotel and housing, respectively? And also, are you actually looking for any cross-selling opportunities among your different categories customers? For example, your auto customers maybe then become the advertisers or customers for your job category as well? Thank you.

Michael Yao

[Foreign Language]

Hao Zhou

Yeah. Just to put in English for the first answer. An auto is a category that we focused a lot on. Overall, yeah, used auto 100%. Overall, it is a pretty big traffic category, but, yes, still generating relatively small revenue because monetization is in very early stage. We pretty much started last year, by putting a sales team in a various cities in China.

And I think, it was to one of the earlier, the first ones, that is doing that. The overall industry is a going to grow very fast. I think, it has been growing very fast and I would say, they are probably going to grow faster in the next few years.

So our -- so it is growing very fast. However, absolute number wise, it’s not a huge percentage of our revenue, okay. And our goal in auto sector is reaching sure that it continues to be the biggest user platform, when it comes to for users, especially for used cars, we are the biggest user platform, that’s our goal for the auto business.

Michael Yao

Okay. [Foreign Language]

Hao Zhou

Yeah. Yeah. And I think, Wendy, the second question is a good question. We typically address that in two aspects, one is from a customer point, by customer we mean that those typically merchants will pay for on our marketing services and the other aspect is from the consumer user point of view.

Now from a customer of view, there is not lot of cross category, cross-selling across different categories, other than jobs, was other verticals. For instance, we do have real estate companies that are our housing customers. But at the same time use our jobs services to have people.

But other than jobs category crossing over other categories is between other, there is little over that. However, on a user -- consumer user point of view, the overlap is much bigger and it’s much more often across different categories. For instance, a consumer user today looks for rent an apartment and the next day he might be looking for moving company and the next day he might be looking for cleaning services and the next day he might be looking for buying a used car, that’s what he need.

So and we have some data to show that around 20%, 30% of consumer users access information in different categories within a months on our platform. So that’s actually very important aspect of our strength be in a multi-category on a customer information and it lowers our overall user acquisition costs, because users may come for something today and if the user experience is good enough, he might be come for something next time without we having to buy the traffic. So that’s very important aspect of our business. Thanks, Wendy.

Wendy Huang - Standard Chartered

And also want to follow-up on your answer to the first question, I think recently we are seeing those specialized auto websites talking about the business opportunity in the used car segment as well and obviously, they have the existing relationship with auto dealers that they can leverage? So when, Michael, were saying about, you are the first ones that building the local sales network, do you mean that you also have the sales people to build the relationship with auto dealers and potentially can proceed a transactions in the long-term? Thank you. And how do you view the competition, how -- more head-to-head competition for those guys? Thanks.

Michael Yao

Wendy, the used auto dealer and the new auto dealer are the different growth, totally different in China, especially in China. The used auto dealer is much, much smaller than the for our network [Foreign Language]

Hao Zhou

Yeah. I think other than the first couple of sentences there, everybody understands. The key point is in China there is lot of auto dealers and some focus on new cars. Typically, they focus, the ones that focus on new cars, don’t focus on second hand cars, and they are -- they have always been dedicated user car dealers, that are always there, that are not working with the vertical auto websites and have been using us actually for longer period of time.

And for instance, before they shops, sort of the licensed dealers that typically have been the customer for the auto vertical websites only starts to focus on used cars recently. So we are talking about different customer segments and so compared to them, I think, we have a pretty unique advantage as well.

Wendy Huang - Standard Chartered

Thanks.

Hao Zhou

Thank you, Wendy.

Operator

Thank you. And the next question comes from Alicia Yap with Barclays.

Alicia Yap - Barclays

Hi. Good evening, Michael and Hao. Thanks for taking my question. I have follow-up questions on the sales and marketing related spend. So, I guess, my question is, we already have 54% of the traffic coming from the mobile platform, is that since we already have good achievement on what we have spent so far on the sales and marketing? So I just wonder how long do you think the aggressive investment will last, right?

And then related to that, given your recent tied-up with Tencent, with opportunity now to either leverage the Mobile QQ or the Weixin, or even the QQ browser, that should help us in strengthen our user acquisition, right? So would that help you or allow you to save some of the investments in your new mobile user acquisition and is there a chance that we can see you scale back on the marketing spend? Thank you.

Michael Yao

[Foreign Language]

Hao Zhou

Yeah. I think, Alicia, thanks for the questions. You are right that we have achieved a quarter-over-quarter. I have percentage of mobile traffic which speaks to the accomplishment of our teams. However, as a penetration point of view, there still a lot more mobile user that could potentially be using our service that are not using it today.

So there is still room for us to promote our services to broader users. And I think, we are making decision that we want to invest more aggressively in the next several quarters is because our observation of the market is that, it’s as Michael said earlier, is really exploding in a way that a lot of money are coming in and is some to our direct competitors, some to smaller start-ups that comes up with different new services, everyone realizes that the local service market is being -- is really being -- is really hitting up.

So we don’t want to miss the win opportunity, even though we have had good accomplishment on mobile traffic and including PC. But I think compared to the potential that’s out there that everybody is investing to grab, we don’t want to be relatively conservative so that we miss the investment opportunities and that would be a future.

And we have being talking to our investors, Tencent including and some other from public markets about our sort of strategy to further invest to gain more market share and we have got a lot of support from them.

So I think most of the special longer-term investment. I understand the market is changing. I understand our competitive advantage and I understand need and the urgency to invest to sustain our market leadership.

And eventually as we benchmark our services -- other service providers globally, this is going to be a winner takes all market. And this is going to be a very high margin business profile, if we are able to create, establish really a big lead in this sector. So, I think that, with that in mind, I think, we will continue to invest pretty aggressively to sustain that number one position in the market.

Michael Yao

[Foreign Language]

Alicia Yap - Barclays

Sure.

Michael Yao

[Foreign Language]

Hao Zhou

Yeah. I think, there is couple of more points is that, users are waken up to use internet and particularly mobile to access local service information, okay. And investing now versus investing future is a probably more economical, because lot of the users are coming on to mobile the first time and they don’t have a buyers, they don’t have sort of establish the way of finding services and that’s best timing for investments and to promote our services to them.

And second comment is, as we are the biggest player in the market and we have the biggest efficiency, we have the high level efficiency. So, for instance, if us and some of our competitors placing the same advertising on the platform, because we are bigger brand we are going to attract more traffic. So same amount dollars investment definitely we get better ROIs comparatively.

Also because our sales network, because our the biggest merchant network and so basically the bidding services for instance enable us to better create this financial cycle where more investment overtime is going to lead to bigger revenues.

So that investment ROI cycle is more effective on our platform versus on smaller platform. So these are additional thought behind our justification of sort of stepping up on marketing investments.

Michael Yao

Yeah. [Foreign Language]

Alicia Yap - Barclays

I see.

Michael Yao

Yeah. [Foreign Language]

Hao Zhou

Yeah. And I think, Wendy, you mentioned about Tencent. With respect to that is what we can share with you is that we -- the teams are talking very closely and we have had some progress on for instance QQ mobile browsers and [Euba] (ph) the Tencent app -- enterprise app store and we are talking to more teams, for instance, Mobile QQ and WeChat, et cetera, for more ways of collaborations. But we do want to be transparent to investors that because both companies are pretty big and every company has their own sort of product launch cycles and also because we cover so many different categories. And each categories will probably require different sort of designs of products that we’re going to launch potentially with Tencent.

So it’s going to be -- it's going to take some time for us to see more integrated products. And our hope is by the end of this year, you will see that we are -- we can launch integrated products in more places than we’re currently are seeing. And they eventually contribute to a bigger level of traffic. And also we can -- we are working to integrate some of the features of Tencent platforms, including the social relationship and the communication tools and to embed that into our products. So the collaboration can be in both ways and we’ll definitely be mutually beneficial for both companies.

Alicia Yap - Barclays

Okay. Great. Thank you so much for the detailed answer.

Hao Zhou

Thanks Alicia.

Operator

Thank you. And the next question is from -- next question is from Cheng Cheng with Pacific Crest Securities.

Cheng Cheng - Pacific Crest Securities

Hi. Thank you. I was wondering if I can get a little bit more color maybe on your headcount for field sales employees and R&D currently, and I guess your plans for expansion of that in the second half?

Hao Zhou

Yeah. I’ll take that question Cheng Cheng. Our headcount is -- for sales is around 4400, that’s the field sales team and we have about 700 to 800 customer service teams that’s collocated in one place. And we have about 800 to 900 R&D folks. So if you compare these numbers versus last year end, they are growing. And there has been our plan to expand the teams in both field sales and customer service and the R&Ds as we said earlier.

But having said we want to ensure investors that -- at the same time, we are working to raise the efficiency of our sales team as well. As I said in my prepared remarks, the percentage of sales marketing expense of these teams exclude advertising -- of revenue of this quarter is actually better than versus a year ago.

That has been better versus previous quarters. So we have always been working -- we have always been raising the efficiency of our sales team and the products that we’re showing and R&D increase the headcount. I think it will continue to increase as well because Tencent’s collaboration and some of the new innovative services et cetera all require additional people. And so I think you will expect some growth in all these three headcount lines towards the year end as well.

Cheng Cheng - Pacific Crest Securities

Okay, great. And I just wanted to follow up. I think Michael mentioned something about the opportunity for closed loop solutions. I'm trying to get maybe some more color on what that would like. Which verticals do you think have the biggest opportunity for these closed loop solutions?

Michael Yao

[Foreign Language]

Hao Zhou

Yeah, Cheng Cheng. In several different categories, we’re exploring opportunities for more sort of enhanced version of services providing to users that we sort of making it easier for the users and making it more secured for instance and taking potentially orders or even payments compared to just pure listing that we have been doing historically.

Relatively we see more opportunities in the local services sector for now. For instance we have -- somewhere we are already doing testing services. Others, we are still thinking, for instance, drive hire services in Beijing for instance. If you were -- I mean that’s quite popular in Korea but if you go and attend a dinner and you happen to drink and you need someone to drive your car back home. Otherwise, it’s not appropriate.

And also other sort of driving trainers for new drivers and things like that. So it’s all local services, sort of a, human-to-human type of services. And also -- I mean there is a huge sector. We’re not going to do everything in-house. I mean, some we’re going to do. We’re going to selectively be doing some of them. For others, we might be collaborating with starting -- start-up companies or even M&A activities because that’s the benefit of being a listed company.

And our goal is to really create a bigger ecosystem with internal services as well as services provided by external partners so that you’ll experience on our platform for 58.com users is superior. It’s really the most -- better user experience on our platform, that’s our goal.

Cheng Cheng - Pacific Crest Securities

Great. Thank you.

Hao Zhou

Thanks Cheng Cheng.

Operator

Thank you. And the next question comes from Eddie Leung from Merrill Lynch.

Eddie Leung - Merrill Lynch

Hey, good evening Michael and Hao. Just a couple of questions about your geographical coverage. You guys mentioned that one of your key strengths would be your geographical coverage. So just wondering if you could update us the number of cities you have sales office. I remember -- I think you mentioned that by end of last year, it's about 20 to 25 to 30. So wondering how's the progress there?

And then just a related question. Could you also share some color with us on the revenue mix by different tiers of cities? Are we still deriving most of the revenues from the top four cities and if so, any progress on the diversification? Any quantitative -- even your rough metrics would be very helpful. Thanks.

Hao Zhou

Yeah. Thanks Eddie. I think the concentration of revenues in different cities is actually more distributed in 58.com’s platform versus other companies because think about the nature of the services we provide is renting apartment or looking for a sort of pretty common blue-collar service jobs or finding a local services and that’s needed everywhere.

It’s needed in Belgium. It’s needed in tier 3, tier 4 cities too. So as a result, I’ll content our user, our content on users, our merchants, as well as revenues is probably more distributed into different cities than most of the other internet companies that some of them are services that are more prevalent than bigger cities but not so needed in smaller cities.

And we -- in terms of your question on the cities that we had the field sales team is 27, has been 27 for the last two years. We expand it to this level back in 2010 and ‘11 and we’re being pretty stable since then. And we will probably remain pretty stable on the number because there is still a lot of room for us to grow in all these 27 cities, for instance, Beijing city revenue being the biggest in China but it’s not a big percentage of the total and still growing. So that sort of -- it’s a top priority for us to continue to grow, deepen our services in these 27 cities versus having to sort of expand our director force in other tiers.

Now obviously, out of 27 cities, we’re working with sales agency company, we’re working with dealers in a way and that covers probably another 200 smaller cities. So overall, we are pretty widely covered and we’re probably more widely covered than our nearest competitor. And I said, it’s not true that our revenue concentrated in top four or five cities. I mean, that would definitely account for less than -- I would say less, probably less than 40% of the total revenue in top five cities and because the revenue distribution curve is pretty wide into Tier 3, Tier 4 cities.

Eddie Leung - Merrill Lynch

Got it. Thanks you very much. Thanks.

Hao Zhou

Thank you, Eddie.

Operator

Thank you. And the next question comes from Jiong Shao with Macquarie.

Jiong Shao - Macquarie

Thank you for taking my question. I have two questions. First, is that could you talk about in Q2 what was your gross adds for your subscribers? I think you have about a 0.5 million subscription merchants. So could you talk about your gross net adds and net adds -- gross adds and net adds? And related to that, what's the renewal rate for the merchant subscribers who had sort of one-year anniversary in Q1? That's my first question. Thank you.

Hao Zhou

Yeah. Sorry for -- our line just got cut. Now we’re back. And Jiong, to answer questions, we have 510,000 subscription based payer members in second quarter and this is more than 70% gross year-over-year versus 298,000 a year ago. But if you look at the quarter-over-quarter number, its last quarter was 410,000. So it has been increasing pretty steadily and that’s the major driver for the membership revenue, gross year-over-year, quarter-over-quarter. I’m not sure if that’s your question?

Jiong Shao - Macquarie

Yes, Hao, thank you for the color. I'm just trying to figure out what's the churn rate, right? If you had a customer or subscriber a year ago who had signed up for a one-year contract, out of 100 of those customers, how many of them renewed for your service? Clearly, as you see tremendous value in your service so they renew, so just want to get a sense of the renewal rate or the churn rate

Hao Zhou

Yeah. We measure internally renewal rates and this is measured by -- contract obviously have different length. But whenever they expire, they either revenue or they don’t renew. So the renewed overall for our members are between 50% to 60%. And so the other thing to add is that the majority of members that don’t renew according to our survey, are those businesses who go out of business actually, because we’re dealing with this very SME macro. And there’s pretty high, sort of dying ratio in a way, in a year time. And so if you take that away, I think majority of our merchants do renew.

And that’s our members. Now however, on online marketing service, the repeated purchase rate, I mean, we don’t use renewal rate for online marketing services. We used repeated purchase rate because for instance, the bidding services is more on a data basis. So either you repeat within a week or within a month. And it’s much higher than members because what we have found is that the more the paying merchants engage with our services. For instance, they buy membership, they also buy others, the more they appreciate the traffic and the ROI of their investment. So they tend to stick, become stickier.

And also our memberships, those who renewed once are more likely to renew the second time and third time. We have a data cost categories. And lastly, I think the renewal rate has been increasing over time because about two years ago, we established a custom service center. And we sort of take the responsibility of current service away from the sales teams and give to that to a dedicated centralized the custom service team. That initiative definitely has been working in our favor because we have seen the renewal rate steadily going up and that is free of lot of the capacity for the sales team so that they can better focus and generate new customers.

So I think overall, we’re pretty about the renewal rate and consistently it’s improving and we’re going to continue to -- into the future.

Jiong Shao - Macquarie

That's really helpful, Hao. Thank you for that. And my second question is back to competition. I'd love to get your view on -- if you look at the local classified ads field, do you feel like this sector is where a natural monopoly should happen or you think the field is big enough to have multiple players?

And also, from the merchant customer's perspective, how elastic is the pricing; i.e., if your competitor coming with half of the price, or even free to list their services, would that create much of a competition or you think it's not just not elastic at all? You're your client just value your service so much, it doesn't -- the pricing is not a major factor? Thank you.

Michael Yao

[Foreign Language]

Hao Zhou

Yeah. For the first questions first, we’ve researched, Jiong, on classifieds globally. And I think what we have learned is eventually, they may start off with several once, but eventually, it evolves into a winner takes all situation. And once the winner is established, its established pretty much and it doesn’t change over time. So that leads us to believe that China should be no exception.

And the reality in China is that we do have some close competitors. They are starting the business and probably around the same period of time and China is much bigger market then probably any other country. So the evolution of market will probably take longer period of time, compared to other smaller countries.

And so I think last year, sort of there is a pretty noticeable gap between us and the second competitor already. And I think, what’s happen this year is because as we’ve said earlier, the total local service sector is really booming, a lot of innovation, lot of money. So competitors can continue to get funding. And the reason why we decided to increase the level of investment is just to try to accelerate the deconsolidation of the market because eventually, we still believe that users need only one, major ones merchants need the same. It’s a best of most efficient format of the competitive landscape. So that’s our goal and our assessment of current situation. [Foreign Language]

Michael Yao

[Foreign Language]

Hao Zhou

No, I think to a second question I think the price is not a major issue because first of all the pricing level was pretty low. And we offer a lot of traffic compared to pretty low level of investment. I mean membershipm for instance, on average 4000 RMB a year which is about 10 RMB a day. So that is very low compared to almost all sorts of classifieds, or online or offline that you can find. And we bring them huge amount of traffic. And so it’s more of our ROI equation that merchants are thinking through when they decide which ones they want to invest. So I think price cuts et cetera is not that effective in our sector.

Jiong Shao - Macquarie Research

Okay, great. Thanks a lot, Michael and Hao. It's really helpful

Operator

Thank you. And the next questions comes form Tian Hou with TH Capital.

Tian Hou - TH Capital

Yeah, Mike and Hao. I have two questions. I go very quick. And one thing's related with Tencent cooperation. As Tencent becomes one of the major shareholders, I guess they're going to open a lot of resources after what you just mentioned. But I’m just really curious, in PC time, Tencent did invested in Elon, but didn't do too much to Elon. Also, Tencent definitely owned 100% of their own e-commerce, but didn't do anything. And at the end, send it to JD. And now on the WeChat, they didn't invest in JD. However, JD's earning report shown that hasn't really seen anything yet. So I wonder, what do you see that gives you the confidence? You're willing to invest a lot in the cooperation with WeChat and Tencent, and for your future mobile development? Michael [Foreign Language]

Michael Yao

[Foreign language]

Tian Hou - TH Capital

[Foreign Language]

Michael Yao

[Foreign language]

Hao Zhou

Yeah, this will take entire audience. I think Tencent has a lot of recourse for resources, and then a lot of it has not been commercialized. And part of the reason is because they don't have -- I mean they are great online but they don’t have very strong offline teams which we have. And I think they have great social and games content. But we have very different set of content.

We focus on very practical use, practical information, on some better service sectors. So its very complementary that what both companies have and that triggers they are confidence we have that is integrated product will really be needed for both users of Tencent and 58.com. It’s not really we're asking for resources to boost our traffic et cetera.

Because it can be some thing that’s mutual beneficial, okay. Now, you did mentioned that the JV volume is there and I think everything takes time. And we do believe that resource of Tencent has lot of value. And over time, I think we’ll able to extract those volumes and at same time get a better user experiences for Tencent users too.

And I think your questions on Elon is very good and that probably has taught them a lesson that if they want to partner with some one, it’s better to partner with number one. So believe that Tencent has made right choice in partnering with the biggest classifieds and that’s a pretty fast decision on their hand. They know what they are doing.

Tian Hou - TH Capital

So let me give you the second question. The second question is related towards your comments in your press release. You say you're continuing investing in growth, including merger acquisitions. And not guaranties just got investment from two big investors, well-known investors. And I wonder why you passed guaranties. You didn't acquire them. If you did, from our point of view, maybe or as an outsider, but at least from our point of view will be game over, and (indiscernible). But you still want to. So who could be your next target? Weixin is the next target. That's the second question.

Michael Yao

[Foreign language]

Hao Zhou

Yes. I think, Tian, let’s engage the English speaking audience on the call. What Michael said is M&A is not -- is part of what we do but it’s not a core strategy to win the market. And so we may be -- we'll be open for proposal from merges if the price is right et cetera. But regard -- without that, I think we do have a very clear strategy to win the market.

So M&A is a necessary tool but it’s not some thing that have to do to win. And some time it does require integration and involves risk as well. So we’re also looking -- we're looking at some of the new service company that represent -- that probably have great teams or great ideas of a proven product, or it fits our strategy into creating the ecosystem et cetera. So it’s not necessary we have to be the compare to that that has the exact the same model as we are. So we want to focus on the key content categories that we have. Tian, that’s the answer to question.

Michael Yao

[Foreign language]

Hao Zhou

Yeah, I think the additional comment is we should be appreciative of the fact that there is competitions because you motivate our team and it’s a good thing. It’s just exciting and I think the fact that the competitor might have $20 million but we’re more efficient so may was $100 million we can able to win the game. So doesn’t change the end-game, but it is absolutely fine.

Michael Yao

[Foreign Language]

Hao Zhou

And I think, you all know that there are also other than casual player there are also vertical player as well. So, I think, if more investment going to this space from our end, you will probably make the competitor advantage when users compare us with vertical players.

So, eventually, all we have to do is making sure that we continue focus on the right things and continue to be the leader. The more investment going to the sector eventually, if we emerge as the final leader it’s going to be beneficial for the entire sector and it is going to be beneficial to us and our users too.

Tian Hou - TH Capital

So can I ask one last question?

Michael Yao

Go ahead.

Tian Hou - TH Capital

It's related to your mobile. 50% traffic comes from mobile. How much revenue comes from mobile, also user behavior, is there any difference on PC and mobile?

Hao Zhou

Yeah. I think I can take that question. We don’t directly segregate mobile revenues. For instance, for membership product, for instance, it’s more time base and the listing show up on both mobile and PC platform. So there is not technically a way for us to directly tell you how much revenue is mobile.

However, we do have data to show that usage on mobile is overall lot more active than that on PC. The average per users page views or the time is spend or the frequency they spend, the access mobile information is two or three times higher than that on PC, across the Board, across all categories almost. So it’s extremely popular services.

And mobile, we have more data. We track all the phone calls, we track locations. So, I think if can monetize already quiet officially on PC, there -- it can only be bigger opportunity for us to monetize mobile.

It just adds monetization of mobile traffic is not near-term priority. We focus for now that is already generating more user base on mobile because the penetration is still low and there is a lot to be done on attracting mobile users and but we don’t -- we’re not concerned about mobile monetization. I think eventually we will catch a big time, okay.

Tian Hou - TH Capital

That's very helpful. Thank you, Michael and Hao.

Hao Zhou

Thank you, Tian.

Michael Yao

Yeah.

Operator

Thank you. And the next question comes from Antony Tong from 86Research.

Antony Tong - 86Research

Good evening. Thank you for the opportunity. I just have a very quick question on the new service operating platform? I notice that you have recently started to promote some online financial services in the proposed field merchants and consumers? So just wondering, can management elaborate to manage on that and your strategy, as well as the long-term goal, because whether that would turn out to be a meaningful revenue contributor in the long run and are there any other new initiatives we should be aware of? Thank you

Michael Yao

Thank you. [Foreign Language]

Hao Zhou

Yeah. Antony, I think, it’s a good question. We are very excited about the prospect of financial services provided on our platform, because as we think about users do look for lot of information, right. They look for apartment, rent or buy. They look for secondary cars, which all that sometimes can be very naturally connected with financial needs.

So providing financial services product is almost a very natural extension, also we have already being providing to our users in terms of housing and jobs and other things. So that’s why we started some trial services around in the financial services sector with the help of some of the other third-party sort of loan providers, et cetera.

And initial results have been very encouraging and a lot of people apply for these products and it just validates the notion that it’s a natural extension of services. Now it’s very early stage, but we do have a delicate team working on it and it hard for us to tell you that the percentage of revenue, et cetera, for the next year or even longer term.

But we all know that it’s a huge sector and there is lot of unmet demand and we definitely going to continue to work on this and so that use -- consumer users, as well as merchant users can benefit from our current services, as well as additional financial services that we going to work to provide them in future. So that’s our feedback to your question.

Antony Tong - 86Research

Okay. That was helpful. Thank you.

Hao Zhou

Thank you, Antony.

Christian Arnell

Thank you. Unfortunately, that’s all the time we have today, if you have any further questions, please don’t hesitate to reach out to us. In closing, on behalf of the entire 58.com management team we’d like to thank you for your interest and participation in today’s call. If you have any interest in visiting the company in China, please let us know and that concludes the call. Thank you.

Hao Zhou

Thank you.

Michael Yao

Bye-bye.

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