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SINA Q3 2007 Earnings Call Transcript

November 15, 2007 | about: SINA

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SINA Corporation (SINA)

Q3 2007 Earnings Call

November 14, 2007 8:00 pm ET

Executives

Cathy Peng - Investor Relations Manager

Charles Chao - President and Chief Executive Officer

Herman Yu - Chief Financial Officer

Analysts

Jason Brueschke - Citigroup

Richard Ji - Morgan Stanley

Analyst for Eddie Leung - Merrill Lynch

James Mitchell - Goldman Sachs

Gene Munster - Piper Jaffray

George Chu - UBS

Wendy Huang - Bear Stearns

Analyst for C. Ming Zhao - SIG

Steve Weinstein - Pacific Crest

Dick Wei - JP Morgan

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the SINA Corporation third quarter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Cathy Peng, Investor Relations Manager. Please go ahead, Madam.

Cathy Peng

Thank you. Good morning. Welcome to SINA’s earnings release for the third quarter 2007. Joining me today are our President and CEO, Charles Chao, and our Chief Financial Officer, Herman Yu. This conference call is also being broadcast on the Internet and is available through the investor relations section of the SINA website.

Before the management presentation, I would like to read you the Safe Harbor statement in connection with today’s conference call. During the course of this conference call, we may make forward-looking statements, statements that are not historical fact, 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.

Further information regarding these and other risks is included in SINA’s annual report on Form 10-K for the year ended December 31, 2006, and its other filings with the Securities and Exchange Commission.

Additionally, I would like to remind you that our discussion today includes non-GAAP measures which exclude stock-based compensation, as well as other items. We use non-GAAP measures to exclude certain items that are not expected to result in future cash payments that are non-recurring or that may not be indicative of our core operating results.

For further explanation of our non-GAAP measures and detailed reconciliations between our GAAP and non-GAAP results, please refer to our earnings [release].

Following management’s prepared remarks, we will open the lines for a brief Q&A session.

With that, I would like to turn the call over to our President and CEO, Charles Chao.

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Charles Chao

Thank you, Cathy. Good morning, everyone and welcome to our third quarter 2007 earnings conference call. I am pleased to report another strong quarter with record total revenues and non-GAAP net income. This marked the sixth consecutive quarter that we were able to grow our online advertising revenues by 40% or more on a year-over-year basis.

Advertising revenues now account for over 70% of our total revenues. We started to see overall operating margin expansion with rapid growth in advertising revenues. Our mobile value-added service business, although continued to decline in the third quarter, we have seen some signs of stabilization for the near-term.

During the third quarter, we continued to see great momentum for the general advertising market in China. SINA’s traditional strongholds in automobile, IT, and [inaudible] remain the largest contributors. For our total advertising revenues, these three sectors combined accounted for 48% of total advertising revenues. In particular, ad revenues from automobile industry grew strongly in the third quarter with over 60% year-over-year increase.

The best performing sector for SINA in terms of year-over-year growth came from the financial sector, which grew over 220% from the same quarter last year and advertising revenues from financial services now account for 9% of our total advertising revenue in the third quarter.

It proves that our investments in the finance sector are really starting to pay off. Over the past 12 months, we have managed to secure exclusive content relationships with a large number of major financial print media and have rolled out a significant number of new products in our finance channel, including live stock quotes, stock messaging board, and a web-based chat program.

These initiatives have enabled us to attract a large number of users to our finance channel. We believe this sector will continue to grow faster for SINA as the financial services sector is still in the early stages of Internet adoption for marketing.

Our strong performance in all those four sectors mentioned above further demonstrate SINA’s strong position as the premium website for high-end product and services with its desirable user demographic and strong brand recognition in China. We intend to further enhance our brand recognition and make SINA the destination site for high-end users in China.

In the month of September, we formally announced our Olympic strategies in China. In conjunction with that, we have announced our exclusive content relationship with major international news agencies and local media alliance with newspapers and TV stations for the Olympic coverage. We have also announced the acquisition of the live score input for the Olympic Games and the formation of our dedicated Olympic reporting team with hundreds of professional staff.

At the same time, we launched our integrated marketing campaign named “My 2008: The World Opens Its Eyes”. The year-long campaign is aiming at encouraging our users to participate and record the events and changes in China in the period leading up to and as well as during the Olympic Games, by fully utilizing our increasingly popular blog and forecasting platforms.

The campaign is also designed to help increase user interactions among all our interactive communities and the communication products. Within the two months of the campaign launch, more than 23 million people have thus far participated in the campaign. Over the next 10 months, we will gradually roll out new themes and events for the campaign and to push the campaign to the climax before the Olympic Games.

My 2008 campaign has not only attracted users participation but also caught the attention among our major advertisers and so far, six of our major customers have become the partners of our My 2008 campaign and that number is still growing.

In order to best position SINA for the Olympic opportunities in 2008, we have also taken initiatives to further enhance our leadership in online sports area by creating more exclusive content. During the quarter, we became the exclusive Internet portal partner in China for English Premier League and Italian Series A League for live broadcast football matches for all matches. We have also renewed our contract to continue to broadcast all matches for the European Championship Cup.

In addition, we have exclusively acquired all video clips for the English Premier League games for the next three years. Our investment in sports content will help us to solidify our strong leadership in the area in this increasingly competitive market for the online sports in China.

Now let me spend some time to talk about our strategic partnership with Google. As we discussed before, this partnership includes both web search and Adsense for content products. During the third quarter, the revenues generated from this arrangement were approximately $800,000, which were not significant to the total revenues. As we explained before, we need two to three months testing period for Adsense while the traffic ramp-up for the web search will take some time.

Our team has been working closely with Google China to improve the search experience for our users and to optimize the keyword placement for the Adsense product on a webpage.

Now let me talk a bit about our mobile service. Although we see some continuing decline in our mobile revenues in the third quarter, based on the current trends, we believe our total mobile revenues may be stabilized for the near term. Having said that, operating margin for the mobile business continue to be under pressure, given the increase in marketing costs for traditional media.

We are exploring new channels for our mobile product promotions and hope to improve our overall margin for the mobile business in the coming quarters.

On a more bright side for the mobile service, we continue to see strong growth in our free WAP portal traffic with daily unique visitors growing by 30% quarter to quarter to reach $1.3 million at the end of third quarter. We continue to believe that mobile Internet will offer great business opportunities in China and we intend to further invest in this area.

Before I turn to Herman for the financial review, I would like to talk briefly about our new initiatives in the online gaming. There is no doubt that online gaming has been one of the hottest sports in China Internet market, with strong growth potential. Historically, SINA has maintained a popular game channel on our portal and has been generating revenues, primarily through online advertising.

In our attempt to take advantage of more business opportunities in this sector, we have recently formed SINA Gaming Business Unit, which integrates our game channel, our casual game platform, and our popular audio-based instant messaging platform, You Talk, for the game.

The newly created gaming unit will be aimed at exploring new business opportunities by offering platform service to game operators and by jointly running online game operations. We have just got started on this initiative and we’ll provide more update on our game efforts in the future quarters.

With that, I will now turn to Herman for the financial highlights for the quarter.

Herman Yu

Thank you, Charles, and thank you all for joining our conference call. I will now take you through the key financial highlights.

Total revenues for the third quarter of 2007 came in at $64.3 million, which is within our guidance range between $63 million and $65 million, and represents a 15% growth year over year and an 8% growth sequentially.

Our advertising revenues, which exclude search revenues for the third quarter of 2007 were $45.8 million, representing a 40% year-over-year growth.

Advertising revenues from China grew 41% year over year and 11% quarter over quarter to $44.9 million. This is very strong performance, considering that we also had a 40% plus year-over-year growth last year, partly arising from our record-breaking coverage of FIFA World Cup.

The growth of our advertising revenues this quarter was supported by new customer additions, as well as increased average spending per advertiser. Compared to the same period last year, the number of advertising customers in China increased 11% while spending per advertising customer grew 27%.

Online advertising revenue now accounts for 71% of SINA’s total revenues, compared to 58% for the same period last year and 69% last quarter. We expect this trend to continue in the near future.

Turning to our non-advertising business, for the third quarter of 2007, our mobile business generated revenues of $16.6 million, which represents a decline of 24% year over year and 2% quarter over quarter. As a result of changes in operating environments, such as stricter controls on television promotion, during the quarter we shifted our direct advertising efforts away from certain SMS products to IVR products. Consequently, SMS revenues declined 20% quarter over quarter to $8.4 million, partially offset by an 82% increase in IVR revenues quarter over quarter to $3.9 million.

For the third quarter of 2007, SMS accounted for 51% of total MVAS revenues while IVR made up 23% of total MVAS revenues. Revenues from 2.5G products, which include MMS, WAP, and [Kajiva], increased 5% quarter over quarter to $3.3 million.

Our non-GAAP gross margin for the third quarter of 2007 was 63% compared to 65% in the same period last year and 63% in the last quarter. Our non-GAAP advertising gross margin for the third quarter was 65% compared to 67% in Q306 and 63% last quarter.

The year-over-year decline in gross margin was mainly due to higher content, bandwidth, and infrastructure related costs. On a sequential basis, advertising gross margin improved as advertising revenues grew faster than associated costs.

Non-GAAP gross margin for our wireless business was 56% in the third quarter of 2007 compared to 62% in the same period last year and 61% last quarter. The decline in non-GAAP wireless gross margin was mainly due to higher content and channel costs.

Turning to operating expenses, our non-GAAP operating expenses for the third quarter 2007 was $23.1 million, compared to $23 million in the same period last year and $22.6 million last quarter. Compared to the same period last year, product development increased 24%, arising primarily from additional IT spending and associated depreciation, while general and administrative expenses decreased 20% year over year, due primarily to bad debt, personnel related expenses, and professional fees.

Our non-GAAP operating margin for the quarter was 27% compared to 24% in the same period last year and 25% last quarter. Interest and other income for the quarter included a $0.9 million foreign currency gain arising from an inter-company dividend payout.

Now turning to net income, non-GAAP net income for the quarter, which excludes stock-based compensation and other items, was $19.1 million, an increase of 31% from the same period last year and an increase of 19% from last quarter.

Non-GAAP net margin for the third quarter 2007 was 30% compared to 26% in Q306 and 27% last quarter. Non-GAAP diluted EPS for the quarter was $0.32 compared to $0.25 in the same period last year and $0.27 last quarter.

Turning to our balance sheets and cash flow, as of September 30, 2007, our cash, cash equivalent, and marketable securities, short-term securities, were $439.4 million compared to $345.3 million at the end of Q306, and $415.2 million at the end of last quarter.

Cash flow from operations for the quarter was $19.6 million, compared to $27.7 million for the same period last year and $20.9 million last quarter. Cash spent on capital expenditure for the quarter was approximately $2.3 million.

Let me now turn to our guidance for the fourth quarter of 2007. We are targeting total revenues of $68 million to $70 million. For online advertising, we are targeting $49 million to $50 million. We are targeting between $19 million to $20 million for our non-advertising business. Excluding any new shares that may be granted, we expect stock-based compensation to be approximately $1.6 million for the fourth quarter of 2007.

This concludes the written portion of our call. Operator, we are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jason Brueschke from Citigroup. Please proceed.

Jason Brueschke - Citigroup

Thank you. Good morning, Charles and Herman. Can I begin by talking about some of the monetization opportunities you have around your Web 2.0 properties? I know that earlier in the third quarter, you had announced some preliminary efforts to do monetization of the blogs and you have a lot of, as you said in the prepared remarks, a lot of very interesting and I think probably compelling different ways of attracting traffic.

But as we look into 2008, can you just give us a sense of when the monetization of these products will become material and how we should think about maybe the ramp-up in the monetization of these new services? And then I have a follow-up question as well.

Charles Chao

On the monetization for the web 2.0 product, I think I’ll just make a correction here. We actually never officially announced any initiative for the web 2.0 monetization on the press. I think there’s some local media report on some initiatives on our experiment for the revenue sharing program on our blog platform. And indeed, we have started the experiment in the late part of Q3 and what we did was selecting about 20, 30 celebrity blogs and to place advertising on their personal blog and we are trying to adopt a revenue share program with these bloggers.

Basically, the results so far have been pretty encouraging and we have received some advertising results effectiveness in these blogs have been very similar to the results we have seen in some of our prime channels, in the front page of prime channels -- I mean, the page views and the click-through rates.

But in terms of our place for rolling out this particular blog sharing program, revenue program, we are still I think in the experimental stage and our plan is to roll out the entire platform in Q1 2008. At this stage, I mean, it is too early to tell the magnitude and the revenue contribution we may have on this particular product going forward and our hope obviously is to ramp up the scaleable revenues by the second half of next year. But at this stage, I think there are a lot of logistic problems we have to overcome and I think it is too early to tell.

At the current stage, as we’ve discussed before, we are still trying to monetize our blog through our traditional advertising format by placing branded advertising on the main page, front page and front page, a lot of channels for blog and also using the user participation for a lot of our overall integrated campaigns for our customers using the blog as a platform.

And to give some sense, I mean, we talked about last quarter we generated -- in Q2, we generate about $1 million from this particular blog platform and in Q3, we probably did about $1.6 million, so there was a quarter-to-quarter increase of 60% and we fully expect that -- I mean, that portion of revenue would continue to grow pretty significantly quarter over quarter and in the next few quarters, basically. I hope that answers your question.

Jason Brueschke - Citigroup

Yes, thank you, Charles. The follow-up question is more of a macro question. When we look at the competitive landscape, Tencent’s actually done extremely well, admittedly off a low base but the base that these guys have is now getting higher. They are probably about 40% your size, maybe two-thirds the size of Sohu by my calculations, and their growth is really high.

Can you maybe look out over the next two years and see what the momentum that Tencent has and some of the strengths relative to what you have? And then maybe the same type of question with Baidu and how search, which in other markets around the world, seems to be impacting a little bit more -- branded advertising hasn’t really seen like we’ve seen that affect at all in China. But between those two companies, which I would include you as the leaders in different segments of that, could you just give us your views of how you think this evolves as we go forward over the next few years? I appreciate it. Thanks.

Charles Chao

I think on a macro basis, obviously the overall advertising market is growing very fast in China and the Internet as a whole is growing faster. The question is really talking about the market share within the Internet players in this market. I think it’s difficult for me to comment exactly what Tencent will do, how they are going to perform in the next two years. But overall, I think Tencent’s advertising revenue, my understanding coming from both their IM platform as well as portal and IM platform obviously has a tremendous amount of traffic, and also the portal site also has a lot of traffic.

And the difference between us and them is basically we probably have very different user demographics and brand recognition among the users and advertisers in China. We are more aimed at high-end users and are the site, the destination site for a lot of more well-educated and high-end users for the China market. And as a result, we are grabbing a lot of shares in terms of, as I mentioned earlier on the conference call, a lot of shares in terms of the high-end products and industry sectors and services, basically, in like automobiles, like digital products, like housing, like financial services.

I think we will continue to do very well in these sectors in terms of both total revenue and market share, and obviously the Internet adoption for marketing becomes more widely accepted in the market, so there will be more industries coming online for their marketing campaign and different companies will have different strengths. And for Tencent, for example, they probably will be doing very well in terms of a lot of consumer product, FMCG, and so on and so forth.

I think there is a lot of room for different companies to grow but each company will have their own strengths in terms of their growth.

With respect to the question on the search, and search definitely is also taking off in China, but again I think we are aiming at a very different customer base. Search probably is more, at this stage more for the small and medium companies, for product and services and for brand advertising. We are more focused upon serving the big clients in their brand advertising needs. So I think that we are in a very different category. I mean, the only question is which sector will grow faster and only the market can tell, basically.

Jason Brueschke - Citigroup

Thank you, Charles. I appreciate it.

Operator

And your next question comes from the line of Richard Ji from Morgan Stanley. Please proceed, sir.

Richard Ji - Morgan Stanley

Good morning. I have two questions. Let’s start with the Olympics, and clearly we know this is going to be the single largest event for next year and the demand, advertising demand is very robust. Do you plan to create additional Olympics channel associated with additional advertising inventory? That’s part of the question.

Secondly, do we also expect to raise advertising rates by a much larger magnitude than before in the early part of next year? And also, last but not least, so far based on your rough calculation, what percentage of Olympic sponsors have already committed their budget with you?

Charles Chao

Let’s see, you have three questions. On the first one, Olympic inventories, we actually have already started our Olympic channel. I think it was at the end of last year in ’06, the fourth quarter ’06. So it has been there for almost a year. So the question really is how much stuff we can add to these Olympic channels.

I think the Olympics is not just about the Olympic coverage. There are a lot of activities and events associated with that particular opportunity in China, so our strategy is not only create more content in the sports area, more offerings in the Olympic channel, but rather we want to utilize the entire strength of the SINA website, basically our total content strength in the news area for the web 1.0 product, like our news, finance, technology, entertainment channels, to create marketing opportunities in the contents for anything associated with Olympic Games.

For example, in our finance channel, we have created a sub-channel for the Olympic related economic opportunities events for China and in our technology channel, we have created a sub-channel for the technology, new products associated with the Olympic Games. For the [inaudible] related stuff, we also have a lot of activities associated with Olympic Games.

We also try to utilize our web 2.0 products, our blog and forecasting platform to encourage users to participate, as I mentioned in the conference call earlier, basically encourage people to participate, to record anything that changes and events happening leading up to the Olympic Games, so we have this huge marketing campaign not only to attract user participation but also try to create a lot of content and events from now until the Olympic Games to really warm up our offerings and coverage for the Olympic Games.

So there are a lot of things we are doing to create Olympic inventories and the marketing opportunities for our customers, basically.

In terms of advertising rates, and there is no question next year will be a big year for advertising and all the major media companies are talking about a rate hike for next year. And we are actually waiting for the market, how they respond to the CCTV’s, you know, the annual bidding for next year’s advertising slots. Basically it’s going to happen probably either this week or next week. I’m not sure of the exact day.

So that usually serves as a basic benchmark for the advertising rates for next year, and there is no question we are going to raise the rate. It’s a matter of how much we are going to raise and I think anything related to Olympics coverage and marketing will be expensive in China and SINA obviously is in a good position to command a premium price over the market, given our strong position in the areas of total online advertising, as well in the sports area.

And in terms of Olympic sponsors, we have thus far, I just briefly checked the numbers of advertisers we have in Q3 and Q4 and thus far I think more than 50% of sponsors have already spent money on us for Q3 and Q4 for Olympic related promotions. That means they put the Olympic logos in conjunction with their advertisement or promotion, and I think there is a -- I think more than 60% or 70% of Beijing local sponsors and partners have placed advertising on websites with logos in Q3 and Q4. I think that number will gradually go up and total dollar amount from these customers will also ramp up.

In terms of next year’s budget, we are still talking to our major customers. At this point, I don’t think there are too many who have set their exact budget for next year. There is probably 10% of these customers have a better idea in terms of how much they are going to spend with us next year, but I think a majority of them are in the stage of negotiations, basically.

Richard Ji - Morgan Stanley

Thank you, Charles. And my last question is again regarding your content alliance. Obviously you guys have been doing a great job in securing some scarce and premium content, including English Premier League soccer games as well as Italian Super League games, plus the financial content. Can you enlighten us about the revenue sharing arrangement or the payment stream you have secured thus far, and what you expect some margin pressure, further margin pressure due to content payment going forward? Thank you.

Charles Chao

I think our content, there is no question in the last couple of years the content costs have increased significantly. But we have been in a very conscious effort to control the content costs in line with our revenue increase in advertising, so if you look at gross margin, it has been held pretty steadily over the last several quarters. I think our strategy basically is to control the content costs to the extent that we’ll be able to generate a stable gross margin for advertising business, basically, and there might be some content hike in terms of the spending during the Olympic Games. Obviously we are expecting a lot more revenues from that coverage, basically.

There is no question the content costs will go up in terms of absolute dollar amount but in terms of content as a percentage of total revenues, we’ll be able to control at a certain percentage so it is not going to impact gross margin going forward.

Richard Ji - Morgan Stanley

Thank you, Charles.

Operator

Your next question comes from the line of Eddie Leung from Merrill Lynch. Please proceed.

Analyst for Eddie Leung - Merrill Lynch

I’m Thomas asking questions on behalf of Eddie Leung. Congratulations on the good results. My question is can you talk about the plans for the music business? Are there any strategies for developing fee-based music downloads in the future? Thanks.

Charles Chao

I’m sorry, the fee-based -- I did not hear the first question.

Analyst for Eddie Leung - Merrill Lynch

My question is can you talk about your music business and are there any strategies for developing fee-based music downloads in the future?

Charles Chao

Yes, in terms of our music strategy, basically we talked about -- I mean, we have set up a platform for the online music listening with four or five major music record companies and so far, I think we have been receiving very good results in terms of our traffic and number of users.

We have also developed a time-based product for music product, music platform, and there is a lot of downloads for our products for the music. Obviously our long-term initiative will be -- I mean, hopefully we will be able to have the download on a fee-based basis, but I think in China it’s still too early, as the entire environment is probably not very suitable for the legal downloads, I mean with a fee-based model.

We are in discussions with these music companies right now to try to implement some fee-based service next year. It’s still in the negotiation stage and we probably will have a better idea next quarter when we report earnings. Obviously right now, we are generating advertising revenues from our music platform, but over the longer term when the legal environment improves in China, given our established platform, we have a strong hope that we’ll be able to charge for the downloads, either to MP3 or to the mobile phone going forward.

Analyst for Eddie Leung - Merrill Lynch

Thank you.

Operator

Your next question comes from the line of James Mitchell.

James Mitchell - Goldman Sachs

Thank you from taking my questions. In terms of the $800,000 Google related revenue for the quarter, was that mostly Adsense revenue within the advertising revenue line? Or was that mostly search revenue within the other revenue line?

And then a follow-up, consequential question; in terms of your non-advertising revenue guidance for the fourth quarter, it looks like you are guiding for about an extra $1 million in revenue. Is that up-lift coming mostly from the mobile VAS business or mostly from the other business? Thank you.

Charles Chao

The answer to your question, both questions, half and half. I mean, for the Google related revenues for Q3, a little bit over 50% is recorded under other revenues for search, and a little bit under 50% is recorded in the advertising revenues for Adsense.

And in terms of the increase of non-advertising revenues in Q4, I think 50% will come from mobile and 50% will come from the increase of search related products coming from Google, basically.

James Mitchell - Goldman Sachs

And looking forward, would you expect it to remain just over 50% of the Google revenue from search and just under 50% from branded advertising from Adsense, or would you expect it to change over time?

Charles Chao

Our current results, for next year, I mean, we probably expect more revenues from Adsense product than from the web search product. We have done a lot of optimizations recently and have really seen some improved results for Adsense product. I think initially, I don’t think we were very happy with the results, so we have worked very closely with Google, optimizing the Adsense product on the website in terms of the placement and key words and everything -- I mean, in terms of the locations where they put these key words, so on and so forth.

And I think we have developed some very good experience and not really seen in Q4, we really see a big improvement in the results for Adsense products, and so going forward next year, we probably will see more revenues from Adsense than from web search.

James Mitchell - Goldman Sachs

Great. Thank you.

Operator

Your next question comes from the line of Gene Munster from Piper Jaffray.

Gene Munster - Piper Jaffray

Good morning. There was I guess mid-quarter a lot of talk of the running man controversy, and I know that Herman, you were very explicit that a lot of your advertisers are currently using running man. Do you think that some of the confusion in the marketplace had an impact on your business?

Charles Chao

Running man, you are saying?

Gene Munster - Piper Jaffray

Right. The whole logo controversy.

Charles Chao

Yeah. I don’t think there’s a -- I know the market has been confused on this particular topic, but when I was answering the question from Richard Ji from Morgan Stanley, I already said that more than 60%, 70% of local partners for the Beijing Olympic Games, which [supposed to be grouped], I mean, people got confused whether they will be able to place the logos on websites or not.

I can tell you, I mean, if you look at websites, almost all of them have placed logos on their advertisements with us, so 70% of these local partners have already done that. I don’t think there is any restriction on that particular issue. In fact, nobody has been talking about that in the last couple of months anymore.

Gene Munster - Piper Jaffray

Okay, so the issue, it was something that people were talking about and now they are not talking about it?

Charles Chao

I don’t see anymore talking on this particular topic in China.

Gene Munster - Piper Jaffray

Okay, excellent. And second is on the gaming side, can you just recap exactly what -- obviously you have a gaming -- advertisers gaming initiative now, a portal. I assume this is all [inaudible] -- you guys don’t have any ambitions to make games, do you?

Charles Chao

I think it’s a very new initiatives we are taking right now and given the size of the gaming market, obviously that offers a lot of business opportunities. Our current strategy probably will try to take advantage of our current product and platform and combine them as one unit.

Historically, these different products and platforms have been different, different departments like the game channel is in the content department and our casual games in the platform is in another department and our IM, audio-based IM product, You Talk, is in a third department. So we are combining these products into one business unit called the online gaming business unit, and try to take advantage of the strengths we have in these areas.

For example, our game channel has always been very, very popular in China for a lot of gamers to get information and to participate in the game communities in China. Also, our audio-based IM product UTalk has been the primary IM product for a lot of gamers in China. On a daily basis, the concurrent users have actually reached 300,000 peak users concurrently.

So it’s a very good platform for people for playing the games. Our initial initiative to combine these departments and these units together to create an overall platform for serving our customers and users. We’re also doing some joint operations for some online games in China. Over the course of the next couple of quarters, we will probably roll out our new initiatives in the online gaming, but at this stage we do not have a plan to develop our own games, basically.

Operator

Your next question comes from George Chu - UBS.

George Chu - UBS

On the cost of video content delivery; you mentioned the gross margin is improving on a sequential basis. Would you say the impact from the cost of the video content delivery going forward will be lessening? Thank you.

Charles Chao

We’re not saying it’s less. I think the cost of video delivery has not been a significant portion of our total cost of advertising revenues for us. If you recall, we have formed a strategic relationship with China Telecom for our video platform. China Telecom has been providing the bandwidth and IDC for our video platform, and this is for the majority of the market in China.

This partnership will help us to really reduce the costs for all of our video delivery in China, in the last couple of quarters. Going forward, obviously, we intend also to increase some of the costs ourselves because there are areas China Telecom has no coverage or has limited coverage and so we still have to buy a lot of the IDC and the bandwidth for our video delivery.

Overall comparing to other companies, video delivery costs will not be significant, the total costs for us, given our relationship with China Telecom. But the overall cost for video delivery will go up, but it will not be very significant as a percentage of total revenues.

Operator

Your next question comes from Wendy Huang - Bear Stearns.