JOYY, Inc. Sponsored ADR Class A (JOYY) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the YY, Inc.'s Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions]. I must advise you that this conference is being recorded today, 8th of March, 2013. I would now like to hand the conference over to Anna Yu, YY's Investor Relations Manager. Thank you, ma'am. Please go ahead.

Thank you, operator. Welcome to YY's fourth quarter and full year 2012 earnings conference call. With us today are Mr. David Xueling Li, CEO of YY, and Mr. Eric He, CFO. Following management's prepared remarks, we will conduct the Q&A. Before we begin, I refer you to the Safe Harbor statement in our earnings release which also applies to our conference call today [as we will discuss] forward-looking statements. At this time right now, I'd like to turn the conference call over to Mr. David Li, YY's CEO.

Thank you, Anna. Good morning and good evening. Welcome to YY's first earnings call as a US publicly listed company. Before I begin, I would like to thank investor community, bankers, auditors, lawyers and others who were involved in our IPO process which was successfully completed on November 21, 2012, and all those who helped us achieve this important milestone. Today I would like to share with you three highlights as we discuss our results and business outlook during this call. First, our solid growth and our established leadership position as the largest real-time social platform in China. Second, our unique social engagement platform and scalable and viral ecosystem that we have created around the YY platform. And lastly, YY's strategic focus going forward. To begin with, in our first quarter as a publicly listed company, we delivered solid financial and operational results. Just to provide you with some clear examples, we grew our registered user accounts by 14% quarter over quarter, 17.2% year over year to over and 457 million. We posted over 133 billion voice minutes in the fourth quarter of 2012, helping us maintain our dominant market share for group online communication in China. More importantly, monthly active users on our YY platform grew over by 34% year over year to more than 70 million. In addition, our YY mobile app was downloaded over 9.8 million times during this quarter, a quarter-over-quarter increase of over 54%, bringing the total downloads almost 28 million in 2012. [The growth of] our members demonstrated the tremendous scale that we have created on YY robust technology platform. This momentum enables us to realize strong financial results which exceeded consensus for both fourth quarter and full year 2012. For the fourth quarter we grew revenues by over 136% year over year, and for the full year 2012 we more than doubled our revenues and more than tripled non-GAAP net income to record levels. We believe that those accomplishments demonstrate the increase in user engagement and entertainment appeal on our platform, highlighting the uniqueness of our real-time scalable and sticky ecosystem that we have created around our YY platform. This leads me to my second point as to what YY is and why it's unique. Since the launch of our core product YY client in 2008, we have executed upon new and revolutionary rich communication social platform that is very different from those of other online social media and social networking companies. Traditional social media models such as micro-blogs, social network services, instant message or other similar modes only focus on enabling user connections. The difference with our model is that we set out to enable engagements amongst our audience. We engage people in real-time online group activities through this powerful communications platform, including live voice, video and text. Beginning from this original version, we have successfully proven over the past few years that there is significant demand for online engagement amongst China's 560 million internet users. Our services quickly gained popularity as a result of our platform's ability to address the diversified user demand and interest associated with live online group activities, in particular YY's Voice has been widely utilized among China's online gamers for cross-game communications and collaboration. YY Music provide an online stage for live performance for grassroots [communicants] and celebrities, empowering self-expression and achievement from both performers and their fans. YY's online education platform provides seasoned teachers a platform to share their knowledge with students and make a good living. [inaudible] real-time rich media offerings of multi-purpose activities, we have built a large and [inaudible] ecosystem that is extremely viral in nature. We believe that as our robust technology platform continues to scale and expand, this sparks the creation of new and more innovation channels, content and social interactions and even new business models. This proliferation in activities increase our user engagement and [stickiness] which in turn deliver even improving monetization opportunities for our platform, a strong network [impact] for us. Move on to my third highlight, looking forward we aim to build upon the strong foundation we have already established. We believe we will be able to execute and maintain our growth momentum by further leveraging our strong technology, massive user base, as well as additional liquidity from our IPO. Our strategic focus for 2013 includes, first, continue to penetrating the music and entertainment arenas. Since YY Music's monetization on 2011, it only took 21 months to generate over RMB339 million in revenues, accounting for almost 35% of our total revenues in 2012, we believe that YY Music will become increasingly important driver for both our revenue growth and user expansion. Second, further developing new verticals such as education and conference calls to expand our user base while enhancing our monetization opportunities, creating additional scalable services similar to YY Music. Third, expand our gaming platform by increasing the number of games and games [inaudible] as well as creating innovative new gaming elements. And lastly, building upon our mobile footprint by further developing and expanding the user of YY mobile's [role] gamers and other entertainment options as we see more users connect to our platform from mobile devices. With those initiatives in place, we expect to further solidify our overall market leadership position in 2013, while [inaudible] the footprint of the [inaudible] real-time online social engagement in China. I will now turn the call over to our CFO, Eric, for our detailed financial results.

Thank you, David, and good morning, everyone. Before I get started, I would like to clarify that all financial numbers we are presenting today are in renminbi amounts unless otherwise noted. Moving on to our quarterly financial highlights, net revenues from the fourth quarter 2012 increased by 136.3% year over year to RMB266.8 million. This increase was primarily driven by an increase in IVAS revenues and, to a lesser degree, an increase in our online advertising revenue from 61 advertisers. IVAS revenues, which consist of revenues from online games, YY Music, as well as other sources, includes our membership program, increased by 169.1% year over year to RMB233 million. The overall increase primarily reflects increase in average revenue per user or ARPU and an increase in the number of paying users. Revenue from online game increased by 86.3% year over year to RMB98 million. This increase primarily reflects increase in ARPU of 79.7% to RMB299 -- RMB266 from 268,000 total paying users, and increase in the number of total online games to 73 during the quarter. Revenues from YY Music, which was officially launched in March 2011, increased by 317.7% year over year to RMB106 million from RMB25.4 million. This increase primarily reflects the increase in ARPU of 161.1% to RMB312 and a 51.1% increase in the number of paying users to 340,000. Revenues from others, which primarily consist of the YY VIP membership program, increased by 234.9% year over year to RMB28.8 million. Revenues from the membership program, which was launched in October 2011, increased by 426.5% year over year to RMB25.8 million. This increase primarily reflects a 319% increase in ARPU to RMB88 from 294,000 total paying users. As of December 31, 2012, we had approximately 508,000 members in our membership program, an increase of 221.5% from 158,000 members as of December 31, 2011. Online advertising revenues increased by 28% year over year to RMB33.8 million from RMB26.4 million. This increase reflected a 36.6% increase in average revenue per advertiser or ARPA to approximately RMB554,000. Cost of revenues for the fourth quarter of 2012 increased to RMB138.9 million. This increase was primarily attributable to the increase in YY Music activity costs and bandwidth costs. YY Music activity costs increased to RMB45.3 million from RMB3.5 million in the corresponding period of 2011, reflecting our consistent efforts to incentivize performers and channel owners through the increased commissions, resulting in improved music contents while increasing user engagement and spending. Bandwidth costs increased to RMB42.4 million from RMB25.4 million in the corresponding period of 2011, reflecting the increased amount of bandwidth necessary to support YY Music as well as audio and video functionality offered on an increasing number of YY's channels as well as expansion of our overall user base. Gross profit increased by 124.8% year over year to RMB127.9 million. Gross margin was 47.9% in the fourth quarter of 2012 as compared to 50.4% in the corresponding period of 2011. The slight increase -- the slight decrease was mainly due to the aforementioned increase in YY Music activity costs associated with our efforts to improve musical content and increase user engagement and spending. We anticipate gross margin will recover next quarter, be in line with those in the first quarter of 2012 which was 49.5%. Operating expenses for the fourth quarter of 2012 increased by 44.5% year over year to RMB93.8 million. This increase was primarily attributable to an increase in R&D expenses that resulted from increased headcount in R&D to accommodate the overall growth of our business. Operating income increased to RMB35.2 million compared to an operating loss of RMB6 million in the corresponding period of 2011. Operating margin was 13.2% compared to an operating loss margin of 5.3% in the corresponding period of 2011. This increase in operating margin was primarily due to a slower increase in R&D, sales and marketing, and general and administrative expenses associated with our expansion as compared to the net revenue growth. Net income attributable to YY increased significantly to RMB33.2 million in the fourth quarter of 2012 from RMB4 million in the corresponding period of 2011. Diluted net income per ADS in the fourth quarter of 2012 increased to RMB0.63 or USD0.10 compared to a diluted net loss per ADS of RMB0.74 in the corresponding period of 2011. Non-GAAP net income attributable to YY, which excludes share-based compensation expenses, increased by 80.9% year over year to RMB58.8 million from RMB32.5 million in the corresponding period of 2011. Non-GAAP net income per ADS was RMB1.12 or USD0.18 compared to RMB0.19 in the corresponding period of 2011. As of December 31, 2012, we had cash and cash equivalents of RMB504.7 million and short-term deposits of RMB897.7 million. For the fourth quarter of 2012, we generated net cash from operating activities of RMB128.6 million. For the full year 2012, our net revenues increased by 156.5% to RMB820 million from the prior year, primarily driven by the increased contribution of IVAS revenues, and to a lesser extent, an increase in our online advertising revenue. Gross profit for the full year 2012 increased by RMB194.8 million to RMB403.9 million. Gross margin increased to 49.3% in 2012 from 42.9%. Non-GAAP net income attributable to YY for the full year 2012 increased by 265.8% to RMB189.5 million or USD30.4 million from RMB51.8 million in the prior year. Non-GAAP net income per ADS was RMB3.82 or USD0.61 compared to a net loss per ADS of RMB7.07 in the prior year. Now, our business outlook for the first quarter of 2013, we expect our net revenue to be between RMB280 million to RMB290 million, representing a year-over-year growth of approximately 104.4% to 111.7%. These forecasts reflect our current and preliminary view on the market and operational conditions which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to get the questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Timothy Chan from Morgan Stanley. Please go ahead. Timothy Chan – Morgan Stanley: Very strong first quarter results, and thanks for taking my questions. My first question would be, could you maybe talk more about your strategy in the music business this year? Given the success of [the Nobu] system last year, are there any similar plans for the new services on music? Thanks. And I will have a second question.

(Chinese language spoken)

There will be a lot of improvement in the future, and as one department, online social music business will not change a lot. We will insist on and going forward we will -- to improve music performance quality and to ensure better user experience. Thank you.

I would like to add something. In fact, in our music business, we do have a version of a product which will be associated with our music users. It's not like [the Nobu] system we launched last year, but our music package, the user experience will be totally changed or enhanced. We expect that new package or music product package will be launched somewhere in the first part of the second quarter, beginning of the second quarter, in the month of April or so. Timothy Chan – Morgan Stanley: Thank you. My second question would be, among your new verticals such as education, conference call and game broadcasting, how should we think of the monetization of [inaudible] this year? Thank you.

(Chinese language spoken)

To address your question, right now, currently we don't have plans for monetization on this item. We will insist on further improve user experience, and then we will move on to the next step. Thank you.

I would like to add that for game broadcasting, this is a business that we already start to monetize, so we do expect that for 2013 we are going to generate some revenues from game broadcasting, but I don’t expect this part of the revenue will be significant enough to be itemized separately. Timothy Chan – Morgan Stanley: Thank you.

Thank you. And our next question comes from the line of Alex Yao from Deutsche Bank. Please go ahead. Alex Yao – Deutsche Bank: Hi, good morning and good evening everyone. Thank you very much for taking my question. My first question is the music side. Compared to the third quarter operating metrics, the ARPU of music business increased pretty substantially while the active paying user base actually declined slightly. Can you guys talk about why these core metrics work this direction, and how do you think about the trend in 2013?

Yes, Alex, I think your observation was correct. But I have to remind you that if you look at the long-term growth of our music business, you'd have found that our paying user for our music business in the third quarter last year actually has jumped from the second quarter's number by 50%, five-zero, 50%. So in third quarter, our paying user for music was close to 355,000. In the fourth quarter you see a little dip. We believe that is a very healthy and normal process because, as you know that it will be almost impossible for us to grow our paying users by a very, very strong [clip]. Sometimes because of the product shift, the product design changes a little bit, so that will cause some fluctuation in our paying users. So the ARPU increased a little bit and paying user actually dipped a little bit. However, we are very pleased to see the trend is continuing to grow. In this quarter, 2013, the first quarter of 2013 traditionally is a weak season for our business and we actually [inaudible] that during the Chinese New Year period, our music business and other business had been performing pretty well. So I do expect that the trend, that the paying user will continue to grow in our music business in the future. Alex Yao – Deutsche Bank: Got it. So in terms of active users on your music platform, can you comment on these metrics in third quarter versus fourth quarter and the trend in first quarter this year?

Right. In terms of MAU, monthly active users for music, from the first quarter of last year, we have increased quarter by quarter. So I think the trend is still very healthy. We do see that active users for music will continue to move on and continue to increase. Alex Yao – Deutsche Bank: Got it. Regarding your mobile strategy, can management elaborate a little more on your mobile strategy and how do you think competition from other mobile apps which focus in music as well, something like [Chamba], do you -- how do you see the competition on the mobile side? Thank you.

(Chinese language spoken)

I would like to actually translate a little bit of what David just said. I think there are three major points. Number one point is that, you know, YY has been and will be driven by our users. So we want to actually provide the best user experience and service to our users. It doesn’t matter that the PC user or mobile users. But we actually take some company like Taobao or Alibaba, they actually have provided tremendous great service to their user on PC front, and automatically day by day those users will actually migrate a little bit on our -- on their mobile applications. I think that is going to happen on YY service as well. So our focus, the first important point is to provide the best services to our users regards that's the PC users or mobile users. And gradually those users will actually migrate from one end to the other end. And mobile will become a very good extension of our PC platform. Number two is we haven't launched our video functionalities onto our mobile devices yet, but we do expect that this video functionality will be launched sometime in 2013, which we believe will help us to gain market share significantly when we launch it. So that's something that we are planning right now. Thirdly, I think you asked about the competition. Yes, there are a lot of mobile apps these days, mobile becomes very popular. We do see that the services you mentioned is [Chamba], and also we do see some -- [Weixin's] application in audio communications. But we do think that those applications have very different elements in their services, because YY's service or YY's situation is different from [Chamba] or [Weixin's] communication functionality in the sense that YY is [a console]. People come and go easily whereas the other services, they are [SNS] societies, so they need to communicate with those people who are familiar with each other. So I think the market position and product positions for those two products are different. So we expect that if we can continue to provide good service to our users with the new video functionality, we think that -- we are confident that our mobile strategy will be very successful in 2013 and continue to gain market shares. And I do want to actually provide some numbers so that for you to understand a little bit more. On a monthly basis, there are more than 3 million activations on our mobile YY services. Our monthly active users for our mobile applications is over 8 million already. Thank you. Alex Yao – Deutsche Bank: Very insightful, thank you very much, and congratulations on the successful IPO.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Ravi Sarathy from Citibank. Please go ahead. Ravi Sarathy – Citibank: Good morning, David and Eric. It's Ravi Sarathy from Citi. Congratulations on a great set of results. I've got a couple of questions if I may. The first one is, wanted to chat a little bit about the developments of, still very embryonic, education services. Wanted to see if you've got any KPRIs or qualitative data in terms of the user uptake as well as the service provider uptake in terms of using your platform, and the different types of billing or payment or ARPU dynamics that you have on your platform right now. So that. Second question is focused around the music business. What we saw in Q4 was a very creative proliferation of virtual goods. So you introduced virtual [inaudible] and you broadened beyond the [files] and the basic recognition. I'd love to hear a little bit more about how that's progressing, what kind of success you've had with some of those new products. And on the basis of that, where you see either penetration, paying user penetration, or ARPU going on the music business. Thank you very much.

Ravi, thank you very much for your questions. I think for the education business, it's going to be very important for us in this year. As David just mentioned, we do not actually -- we do not have a concrete plan to monetize our education business. However, our focus at this moment will be user experience, will be how to gain more students onto YY platform. So, currently I think what we can say is our MAU for education channels are -- our MAU for education users around 3 million and we have roughly 20,000 teachers on YY platform. All those numbers are very encouraging. Obviously we are trying our best to expand that number. We will actually put in more resources to develop our education products down the road for 2013. As for the music business, we have seen that the music business is growing very healthily. As I mentioned that despite the fact that in the fourth quarter the paying user actually stalled a little bit, however, if you look at the whole year, 2012, the whole year actually had a significant growth. In terms of paying users on year-over-year basis we actually grew about 50% in our paying users for our music business in 2012 as the whole year. And we see that trend continue in 2013. So that's -- so in terms of user growth, it's very healthy and we expect that it will continue. And in terms of new products, I've mentioned it that for the music package we are actually expected to launch in the beginning of next quarter, second quarter of 2013. We believe that with that new facelift on our music interface, that would help us to gain even more users down the road in the future. Thank you. Ravi Sarathy – Citibank: Thank you very much, gentlemen. That's very helpful indeed.

Thank you. And our next question comes from the line of Yu-Heng Fan from China Renaissance. Please go ahead. Yu-Heng Fan – China Renaissance: Hi, good morning. Thank you for taking my question. My first question is related to your online game business. Can management elaborate a little bit about your strategy for this year, like how many new games we plan to launch this year? Do we have any plan to launch a mobile game? Then I have a follow-up for your gross margin. Thank you.

Yeah. For online game business, as you can see, the growth rate was very good. In terms of paying user in the fourth quarter, actually very good growth from the third quarter level. We are expecting this trend to continue. So, for online game business, our strategy is we will continue to provide the best games or best genre to our users. On average we are increasing our portfolio, game portfolio, by five to 10 games every quarter, sometimes more, sometimes a little bit slow. So we do expect that we will offer wider selections of the games, web games, to our users. This year or 2012, we have seen that there is a significant popularity among all the mobile games. Yes, we do actually are planning on our mobile game strategy. We are formulating our mobile game teams in 2013. And so I think mobile game is definitely upcoming and it will be very important strategy for our online game business overall. So, mobile game is going to be important for 2013. We expect that we should be able to have some very decent products in 2013. Yu-Heng Fan – China Renaissance: Okay, thank you. And you mentioned in your prepared remarks that you expect first quarter gross margin to improve to 49.5% from 48% in fourth quarter. Can you help us understand what will drive the improvement? Thank you.

Well, the driver for improvement will be from several fronts. I think the most important part will be we continue to streamline our operations, and secondly, I think our bandwidth costs as a percentage of revenue will continue to be optimized. So those fronts will be the savings for us on the gross margin front. Of course, one of the big item is the music share cost, and that in terms of percentage will also help us to create gross margin a little bit in that in the first quarter that music share cost as a percentage of revenue will be moderate a little bit. So, all of those will help us. All of those will help us to improve our gross margin in the first quarter. Yu-Heng Fan – China Renaissance: Right. Thank you very much.

Thank you. And our next question comes from the line of Gene Munster from Piper Jaffray. Please go ahead. Gene Munster – Piper Jaffray: Good morning. I'll add my congratulations. And I had a follow-up question regarding the gaming side. Could you talk a little bit about [inaudible] one, two, three games, consuming games, what percent of revenue come from those games, and maybe specifically, is there any commentary that you have on the [inaudible] how that's been progressing and kind of life expectancy of that [inaudible]. Thank you.

Good. Our web game operation business has been growing very, very healthily, as I said. The paying user continue to grow and we have seen that we have a good growth in the fourth quarter of 2012. And I think during the Chinese New Year period, that that business performed well too. Over the course of last year, our top five games actually has reduced their percentage in terms of total game revenues. The top five games account for roughly 60% of our total game revenue. And top 10 games account for about 75% of the total game revenue. So in the past those two percentage actually was a little bit higher [inaudible] this game has been performing amazingly. Over the course of the last two, three years, this game continues to be one of the top-performing games in our platform. So we have seen the trend has been very stable over the course of last year, and so this game is still within our top five performing games in the platform. Gene Munster – Piper Jaffray: Okay. Is it safe to assume it's the top performing game?

Well, not very much. Sometimes it will actually become number two or number three, but overall if you take a long period time, say, the whole year, I think [DDT] is still top performing game. Gene Munster – Piper Jaffray: Okay. And you said that's been relatively stable and continues to be stable?

Yes. [DDT's] games revenue, user traction continue to be very stable. Gene Munster – Piper Jaffray: Okay, great. Thank you and congratulations.

Thank you. And our next question comes from the line of Alicia Yap from Barclays. Please go ahead. Alicia Yap – Barclays Capital: Hi, good morning, congratulations on the first public results. Thanks for taking my questions. So I just wanted to get a quick sense of the seasonality of your business. So, except Chinese New Year, what would be the kind of like typical quarters look like for your YY business especially?

Yeah, in fact, our seasonality is pretty light. It's not as significant as others. I think as you mentioned it, traditionally the first quarter is a weak quarter because of Chinese New Year, and I just mentioned that we are lucky that Chinese New Year in 2013, you know, our business has been performing quite stable. I think the first quarter is somewhat weaker than the others. And then the second quarter will be a little better than the first quarter in terms of seasonality. And the third quarter, we would see some small seasonality on the weaker side. So, third quarter usually should be a little weaker. And the fourth quarter, again, will come back to become a strong quarter. So I think the pattern for our business is pretty much like that. Alicia Yap – Barclays Capital: Is that, for the 3Q, is the softer seasonality, is that because of the summer holidays, people are going out and not in front of the computer?

Well, obviously that could be a reason. And another reason is because of the summer vacation for student and things like that. So as to the exact reasons, we will never know them clearly, but our experience tell us that third quarter will be a little soft. But as I said, it's not significant. It's not going to impact too much. I think as to our growth trajectory, we do expect that in the whole year our growth trajectory should be positive. So we do not expect the seasonality to be very strong. Alicia Yap – Barclays Capital: Sure, understand. And then is that the same for the gaming business as well or is it slightly different?

From my experience, gaming business really depends, because if you are asking generically the game industry, every company will be different because some game company's product is more geared towards younger students, some is for more adults. And for us, I think we see the third quarter as being a little soft is because of the vacation, is because of our ad revenue usually in the third quarter is a little softer than the other quarters. Alicia Yap – Barclays Capital: I see. Okay, that's very clear. My second question is regarding the increase in the commission for the performance in the channels. So, can you give us a sense on the commission trend over the past few quarters, and should we expect that that is a further increase in commissions going forward?

Yeah. I think for music share cost, as I mentioned, in the fourth quarter you will see that the percentage actually rose a little bit. That actually does not represent we are paying more to the performers. I think our commission policy has not changed that much. I think the commission rate -- the music share cost as a percentage of revenue increased mainly due to our, you know, there's a lot of [monotony] activities for our music business at the end of the year. However, because according to the US GAAP regulation, some of those services we do not provide until the beginning of 2013, the first quarter of 2013. So for some part of the revenue won't be able to recognize in 2012, although that our, you know, commission or our music share cost already paid to all those singers and channel owners. However, that part of revenue will not be able to be recognized in 2012, we will have to recognize in the first quarter 2013. That's why it creates the impression that the percentage actually has gone up a little bit, and I think that is because of the revenue recognition policy because of the service is not being completely rendered, so we will have to recognize some of the revenues or defer some of those activity into the first quarter of 2013. Alicia Yap – Barclays Capital: I see, I see. That's very, very helpful. And then lastly, is there any statistics or metrics that you can disclose on paying user engagement, how much of those actually performed on the mobile devices versus on the desktop? Thank you.

We have not actually monetized on our mobile devices yet, and I don’t think we have a plan for monetization on the mobile devices. So, all of our monetization for the game business, for the music business, as on [PCM], and we have not monetized our education either. So, currently our monetization actually are all derived from our [PCM] business. Alicia Yap – Barclays Capital: I see. So, to follow-up on that, is there any plan on monetizing on mobile? And what has been stopping you?

Well, I do think we will monetize our mobile devices one day, but I cannot tell you when that is going to happen. Just like David, our CEO, said, our focus right now is to improve the user experience, to improve our product quality. When we have a good user traction, we will start to think to monetize on mobile devices. But one thing I do want to point out, because our model is virtual item selling to earn our revenue, with this portion of the business it's relatively easy to monetize on our mobile devices. We do think that if we want to turn monetization on our mobile devices, it should be relatively easy as compared to some other advertising model. So we are confident that one day we will be able to monetize on our mobile devices, but it's just a product strategy, the business strategy, we just want to wait until that we have good traction on our mobile users and mobile products already. Alicia Yap – Barclays Capital: Okay, great. Thank you so much for the answer, and congratulations again on publicly listed company.

Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Tian Hou from T.H. Capital. Please go ahead. Tian Hou – T.H. Capital: Good morning, Li and Eric. I have two questions. One is regarding your user base. For the game business and also for the music business, so, are there any overlapping in the user bases? So I give you follow-up question after this.

Yes, thank you for the question. I think while game business and music business, they are very complementary to each other, so our music user will come to visit our web game platform all the time and our music user will play game sometimes, so, yes, there are some overlapping, but the overlapping is very, very small, in the sense that we would like to see the overlapping in terms of the paying users. Our paying users, the person who pay for the game and the person who pay for the music, the overlapping is less than 5%. Overlapping is less than 5%. However, our VIP membership paying users and music users, the overlapping is between 5% to 10%, is about roughly 8%. So I would say overall the overlapping among our users in terms of paying behaviors are very [minimal], not that much. Tian Hou – T.H. Capital: That's clear. And also for education, as to the company's entering into education area [inaudible] platform in online education, I think that's a great area to go. And I just wonder, what [inaudible] the potential user could be? Is that possibly going to overlap with our existing users or we have to go out to recruit new users?

Yeah, education, as David just mentioned, is [inaudible] strategic direction for us in 2013, but I have to point out that YY's platform has been known for its audio communication capabilities, has been known for the web game, has been known for fantastic concert music type of activities. I have to admit that our education definitely is not our strong hand in the past. So I would say that there will be some user coming from our existing gamers or music lovers, I would say significant of this portion of our education users in the future will come from other sources. We will try to attract new sources of users to use our education service down the road. But yeah, that's our plan. Tian Hou – T.H. Capital: Okay. Last question, regarding the competition, so there are lots of competitors like [inaudible] as well as some other second-tier leading guys are competing in this area. So I wonder what (Chinese language spoken) So what's the [wheel] in this area, Mr. Li?

(Chinese language spoken)

I think, I'll just translate a little bit, I think, first of all, David has not seen too much of the pressure from our so-called competitor, [9158] or [inaudible]. We do see that, because of the technology, our video functionality has very little latency and has very clear image which has given us a very strong competitive edge. We believe with this competitive edge we'll continue to gain our market share. Secondly, I think it's very important to know that in this year we are going to even reinforce and to bring more so-called better high-quality content. We think that those high-quality content fascinating attractive content will continue to help us to gain users. So with that, we do expect that our market share will continue to expand. Tian Hou – T.H. Capital: That's very helpful. Thank you, Eric, Li.

Xie-xie.

Thank you. And our next question comes from the line of Jialong Shi of CLSA. Please go ahead. Jialong Shi – CLSA: Hi, good morning, Li and Eric. Thanks for taking my question. I have a very similar question. I know you guys just launched the new web game called [Haishun]. So, just wondering how the performance of the new game so far. Do you think whether or not it can become as popular as [DDT]?

Thank you for your question. [inaudible] has been a very good partner with us. Their first game [DDT] has been with us for a couple of years. Their second game, [Senchu], was launched on YY's platform. I think [Haishun], the third game of theirs, you know, has chosen YY as one of the debut platform as well. So our business with them has been very cordial and very successful. In terms of the performance of particular games, we are not in the position to comment too much. All I can say is what we have seen for [inaudible] they have been performing quite well, quite stable, and we are very pleased to see that our partner has been doing very, very well. So I think we have been working with their games and their teams in a very seamless fashion. So their performance has been quite stable and very good. Jialong Shi – CLSA: Thank you.

Thank you. This does conclude the Q&A session for today, and I will hand back to YY's CFO, Mr. Eric He, for closing remarks.

Thank you, everyone, for dialing in our conference. Now we conclude our conference call. Thank you very much.