JOYY, Inc. Sponsored ADR Class A (JOYY) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the YY Inc. Second Quarter 2013 Earnings Conference Call. [Operator Instructions]. I must advise you that this conference is being recorded today, Friday 2nd of August, 2013. I would now like to hand the conference over to your first speaker, Ms. Anna Yu, IR Manager of YY. Thank you. Please go ahead.

Thank you, operator. Welcome to YY’s second quarter 2013 earnings conference call. With us today are Mr. David Xueling Li, CEO of YY, and Eric He, CFO. Following management’s prepared remarks, we will conduct a 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 make forward-looking statements. At this time I would now like to turn the conference call over to Mr. David Li, YY’s CEO.

Thank you, Anna. Good morning and good evening everyone. We are very proud of our strong operational performance this quarter that resulted in robust top line growth and continued margin expansion. With the growth in scale and leverage in YY's business operations, we have been able to significantly increase our revenue by over 118% and non-GAAP net income by over 184% year over year during this quarter. With these results, we'd like to further highlight three key areas on this call. First, our continued improvement in overall monetization on our robust large-scale real-time platform. Second, the strong performance of YY Music, as well as the launch of Happy Boy show with Hunan TV. Lastly, our CFO Eric will update you with our broadening user base and the strategic efforts around mobile. First, during this quarter, we saw solid growth in the number of paying users as the average revenue per user or ARPU across the board. This strong user involvement drove revenues to significantly outperform both our expectations and strategic competitors. In particular, the number of paying users of YY Music grew by over 180% year over year, increasing our total paying user accounts on the wireless platform by over 50% year over year to more than 1.1 million. As we have discussed previously, expansion in paying user is particularly important for us as it demonstrates the unique and growing value proposition that we provide to our large audience [inaudible]. As Chinese internet users are increasingly embracing real-time online [inaudible] entertainment, we are very pleased that our users have quickly established and continue to strengthen their playing behavior for the wide array of [leverage] and affordable online entertainment activities that our platform offers. Moving into my second point, YY Music continued to grow at the fastest pace among all of our business lines and has seen increase in attracting user participation, interactions, as well as consumption of our platform. With almostc 180% year-over-year increase in revenues, YY Music has become our largest revenue stream again during this quarter. This remarkable growth is attributable to a few [pay] features associated with our wireline music services. These improved user enjoyment offered by affordable interactive entertainment that is very limited and expensive offline, revenue sharing program that helps retain performers as well as our leading technologies that support large-scale real-time rich media communications. In addition, the new user interface of YY that we launched in April has proven to further improve user experience and engagement by creating a more realistic concert setting. As we head into the second half of 2013, we are very excited about our strategic initiatives designed to further leverage our large-scale interactive online platform and user base. Initiatives like our -- primarily in partnership with Hunan TV and bringing one of China's most popular entertainment shows Happy Boy to our interactive platform. Over the near term we are confident that this revolutionary means allow fans to directly interact with their favorite Happy Boy, participation will increase a new level of real-time interactive reality TV. This new ability to interact will significantly broaden our user demographics as well as elevate our brand recognition with users throughout China. As you can imagine, those [inaudible] initiatives [inaudible] into better understanding our audience [inaudible] and providing [aid] to them in the best way possible. We are working closely with Hunan TV to better understand those dynamics and better leverage them during this event and for similar events in the future. Over the long run this strategic partnership coupled with continuing initiatives to diversify our verticals and enrich our content and product offerings aim to further enhance our user reach, grow our brand recognition, and strengthen our monetization capabilities. At this point, let me hand over the call to our CFO, Eric.

Thank you, David. Good morning everyone. Now I would like to update you on our growing and increasingly interactive user base as well as our strategic efforts on mobile. As David highlighted, we are excited about our overall monetization efforts and seeing user growth as we continue to expand our platform and means of interacting on our platform. As we and other major industry player has been experiencing, the transition of time spent on mobile devices instead of PCs over past several quarters continues to increase rapidly. The transition to mobile devices is where we saw our largest increase of MAUs over the past quarters, which increased by 16% quarter over quarter and 96% year over year. As expected, we saw YY client MAUs increase by about 12% year over year and slightly decline quarter over quarter by less than 2%. This slight decline was surpassed by the growth in Web YY and Mobile YY MAU count, resulting in overall MAU growing by over 3% Q-over-Q to 84.3 million after removing duplicate accounts of users who access our platform from multiple screens. We believe that the aggregate MAU metrics provide a fuller picture of our overall platform engagement, interactions and reach. Going forward we expect this trend to mobile will continue for the industry as well as our company. Speaking more specifically on mobile, we are excited about the strength of our mobile operating metrics. Our Mobile YY app was installed almost 13m times during this quarter, an increase of 14% quarter over quarter and 116% year over year to over 52 million accumulated installations. In an effort to better take advantage of this industry shift in mobile, we have accelerated our development efforts by enhancing our mobile offerings with updated version of Mobile YY last month. The biggest highlights of the new version is that it allows users not only watch but also initiate live video streaming. These improvements and strong growth have allowed us to begin experimenting on monetization front with mobile. It is too early to get into specific details but we have started monetization with [inaudible] we'll be able to provide greater details as the results come in over the coming quarters. With the enhanced video streaming capability as well as interaction functions among users, we hope that our mobile offerings can better help our users generate content, [assimilating inspiration] and shared excitement in their daily life anytime anywhere on most devices. These numbers further validate our belief that the future online social interactions will feature a fully integrated and multi-device real-time communication platform [scale] across multiple interest space categories. We will continue to invest in these initiatives and opportunities that can expand and diversify our entertainment offerings and audience across PC and mobile. Our strength has always been in our innovative and execution capabilities, and we are very confident we will continue to create new innovative ways of leveraging and monetizing our large user base. Now moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all the financial numbers we are presenting today are in renminbi amount unless otherwise noted. Net revenues for the second quarter 2013 increased by 118% year over year to RMB409 million. This increase was primarily driven by an increase in IVAS revenues and, to a lesser extent, increase in our company's online advertising revenues. IVAS revenues increased by 132% year over year to RMB366.7 million. The overall increase primarily reflect an increase in the number of paying users and an increase in ARPU. Let's look at each of our IVAS business lines more specifically. Revenue from online games increased by 87% year over year to RMB152.4 million. This increase primarily reflects an increase in ARPU of 16% to RMB346 and 61% increase in the number of paying users to 440,000 and increase in the number of line games to 96 during the second quarter 2013 from 58 in second quarter last year. Revenue from YY Music increased by 189% year over year to RMB170.6 million. This increase primarily reflect a 174% increase in the number of paying users to 635,000 with ARPU of RMB269 during the second quarter 2013. Revenue from others increased by 149% year over year to RMB43.7 million. Revenue from membership programs increased by 109% to RMB31.6 million. This increase primarily reflects a 114% increase in number of members to 643,000 members as of June 30, 2013 from 301,000 as of June 30, 2012. Online advertising revenue increased by 42% year over year to RMB42.3 million in the second quarter 2013. This increase reflect a 107% increase in average revenue per advertisers to approximately 830,000 from 51 advertisers. Cost of revenues increased RMB190.9 million, which was primarily attributable to an increase in revenue-sharing fee and content costs to RMB89 million in this quarter from RMB22.6 million last year. This increase in revenue-sharing fee and content costs to performers, channel owners and content providers was primarily associated with higher levels of user engagement and spending. Revenue-sharing fees and content costs consist of user-related, game-related open platform related sharing costs as well as other content production and procurement costs, with music-related sharing costs as predominant components of it. Bandwidth costs increased by 30% year over year to RMB40.1 million -- RMB45.1 million as we continue to manage our bandwidth cost through better allocation of bandwidth resources and technological improvement. For the second half 2013, we expect the growth trajectory of bandwidth costs to trail closely with that of revenue as we will expand TV functionality to further improve user experience. Gross profit increased by 136% to RMB218.1 million. Gross margin increased to 53% from 49% in the same quarter last year. The margin increase reflect improved cost efficiency driven by our company's increased scale as well as our ability to control bandwidth costs. Our non-GAAP operating income increased 17% year over year to RMB114.8 million. Non-GAAP operating margin increased 28% from 27% in the same quarter last year. The increase in operating margin was primarily due to increased operating leverage associated with our company's expansion. GAAP net income attributable to YY Inc. increased 437% year over year RMB92.8 million from RMB17.3 million in the same quarter last year. GAAP net margin increased to 23% from 9% in the same quarter last year. Non-GAAP net income attributable to YY Inc. increased by 184% to RMB125.1 million, while non-GAAP net margin expanding to 31% from 23% in the same quarter last year. Diluted net income per ADS was RMB1.58 or US$0.26, compared to a diluted net loss per ADS RMB1.72 in the same quarter last year. Diluted non-GAAP net income per ADS was RMB2.13 or US$0.35, compared to a diluted non-GAAP net loss per ADS of RMB0.74 in corresponding period 2012. For the third quarter 2013, we currently expect our net revenue to be between RMB430 million and RMB440 million, representing year-over-year growth approximately 88% to 92%. This concludes our prepared remarks for today. Operator, we are now ready to take some questions.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes Timothy Chan from Morgan Stanley. Please ask your question. Timothy Chan – Morgan Stanley: Hi, good morning everyone. Congratulations on a very solid quarter, and thanks very much for taking my questions. I have two questions. If we look at your strong music performance in second quarter, I'm wondering what's the driver for that. Is it due to your new music package or new layout of YY Music or is it better seasonality? I have a second question after that. Thank you.

Tim, thank you for your questions. Yes, second quarter was a very good quarter. For the music question, because you asked some specific drivers, so I would -- I will answer your question. Yes, you know, in the second quarter this year, the music performed very, very well as we alluded that the music revenue actually exceeded our expectation as well. Obviously we have a lot of activities going on a daily basis. For confidential reasons, we are not going to disclose all of them. But I can just point out a couple of examples. For example, from the business running angle, we have a lot of marketing campaigns that's geared towards different parties. For example, you know, May 20th, 520 in Chinese can be found like I love you. So, you know, May 20th in fact is the internet Valentine's Day in China. So we build marketing activities around that May 20th activities. So these activities really is geared toward our performance. So we will incentivize our performers who will get as many as [inaudible] then their levels or their ratings will be enhanced. So a lot of performers, they are very incentivized to earn as much as the virtual items they can get. So that's one activity which was very successful. There's another one actually is more related to our Guild. You know, Guild is one of the organizations in YY's platform, they're very active. So every year we will have a rating for our Guild. You know, so the Guild members look upon their rankings of their Guild very, very seriously. So they want to be in the high rank the Guild. So we provide something like a competition among guilds in terms of their activities, in terms of their sponsorship. So the members want to heighten their rankings on their guilds, so they participate on a lot of content. So for that, what we call yearend ceremony [Chinese language spoken] in the second quarter, it was very, very popular as well. There are some other activities we actually was running around users. For example, we will give out some incentive or coupon to our users if they participate more, and they can use that coupon to buy the virtual items. All of those activities in second quarter has been run very orderly and very efficiently, so the music business actually exceeded our expectations. Timothy Chan – Morgan Stanley: That's very comprehensive. My second question would be, could you maybe talk about more of the impact of the Happy Boy show? How should we think of the MAU growth, revenue and cost relating to that show in the third quarter? Thank you.

I think for the Happy Boy show, overall I would like to ask David to tell you about the effect of Happy Boy, and I will take care of the impact on the cost side. So I will ask David to answer the first part of the Happy Boy show, the impact on our user base and our overall business. David please.

[Chinese language spoken]

Yes. In collaboration with Hunan TV, Happy Boy show would give us a lot of help. We gained a lot of experience of how to produce a TV show. And second, with the communication of the TV programs, we -- it's a very strategic step for us to achieve a win-win situation for this collaboration. And third, the communication of how to produce the content of a show would help us to increase our -- to build our brand name and also to gain experience of the TV production.

For the second part of the question regarding the cost and possible financial impact on our financial statement, I would like to address this question. As you all know that this collaboration will not come to us for free. We definitely need to pay something. In fact if you noticed that in the second quarter we already include part of this payment into a line item called Revenue Sharing Fees and Content Costs, for that specific content actually is when we refer to the payment, part of the payment paid to Hunan. Obviously we have not disclosed specifically how much we pay for the confidentiality purpose. We have NDA agreement with Hunan TV. However, we will say that a small portion is being accounted for in the second quarter in terms of the cost. The rest of the portion will be accounted for in the third quarter. So I think to us, as you can see, even taking into consideration of that cost in the second quarter, our margin actually improved in the second quarter. In third quarter I would like to just caution our investors that we believe that Hunan's collaboration is a very good one. However, it's also an experiment. We don't want to draw, you know, give you a very unrealistic expectation in terms of revenue. I think the revenue will be good for us, but I don't think it's going to skyrocket it to the moon, so. And on the other hand, we are not doing any money-losing business either. So overall I think it's a great collaboration, it's a great opportunity for us to learn this ecosystem in the TV station and audiences. We are not going to lose money. And please do not extrapolate the revenue into the moon and expect too much from this collaboration either. Thank you. Timothy Chan – Morgan Stanley: Thank you very much.

Your next question comes from [Lin Yu Joon] from Citigroup. Please ask your question. [Lin Yu Joon] – Citigroup: Hi, good morning. Thank you for taking my questions. I'd like to follow up about the reality TV show that the company participated with Hunan TV. I think the project raised the company's media value. And would that lead the company to expand strategically into the areas like advertising services that the company hadn't, well, other than the online game advertising, but in other TV advertising services that the company hasn't touched before? Would you please elaborate on that? Thank you.

Yeah. We'll ask the CEO to answer the question.

[Chinese language spoken]

Let me just translate what David just said. Well, YY has never actually denied or declined or pushed away any opportunity to run our business, especially with the cooperation of Hunan TV, actually allowed us to understand more of this ecosystem. However, we believe that YY platform and the community actually is more geared towards user paying habits. So we would like to encourage more users to pay for the service instead of running at -- instead of putting running at as a priority. So that is just a basic philosophy that we have for YY platform. [Lin Yu Joon] – Citigroup: Thank you very much. And my second question is regarding the company's potential competition from like Tencent and Baidu. I heard there are some rumors that these are also moving to the real-time TV shows and start to [portion] some of the talent on the platform. Is that true or how does the company think the platform users more stickier and likely to be threatened by this potential competition? Thank you.

[Chinese language spoken]

Two points. I think we have seen or, you know, we have seen a great future for our business and has shown a very bright future growth potential. We don't know if Tencent or Baidu really wants to get into this field. If they do, I think to the industry and to us, it's a good thing, because that will allow us to be known by more users. And with the larger company or larger competitors that come in, they will have a lot of muscles to promote our industry. I think more people, more user is going to know this business in a broader sense. So for the industry, for the companies, are very good. Secondly, in terms of competition, YY is never short of any competition or competitors since we launched the business in 2008. So from the early days we have all the online game companies who roll out very similar service and product to compete with us. And we believe our communities and our ecosystem and the majority of those things and the relationship between the content providers and audiences in YY platform is one of the top ones. We believe that we have the capability to really maintain this ecosystem very solid and grow very steadily. So we are not afraid of competition. In fact we have welcomed competition. That means this is a great business, lots of people want to jump in. It's a good thing for the industry. [Lin Yu Joon] – Citigroup: That's very helpful. Thank you very much. And congratulations for a great quarter.

Thank you.

Your next question comes from Gene Munster from Piper Jaffray. Please ask your question. Mark Marostica – Piper Jaffray: Hi everyone. Thank you. This is Mark Marostica calling in for Gene. Congratulations on the great quarter. First, a very high-level question. Obviously a stellar performance in the quarter, top and bottom line exceeding expectations. How should we think about margins for Q3 and Q4, Eric, considering your point on bandwidth costs accelerating in the back half?

Mark, thank you very much for the question. Regarding the margin question, it's a very good one actually. As we initially guided the investors that the margin actually expanded in the second quarter, and I also mentioned a little bit, briefly, by answering the previous question, because the third quarter our business is going to be affected or impacted by the collaboration with Hunan TV, as you all know that, because the bulk of the content cost or the fee is going to be paid in the third quarter. On the other hand, that collaboration will bring in revenues. So in the third quarter we believe that because of the content cost which will happen in a single quarter, our gross margin may actually be negatively impacted a little bit. However, our operating margins will actually expand further because of our efficiency, because we actually maintain a very good control on bandwidth costs. So it's mixed pictures in the second quarter -- in the third quarter, sorry. So I think overall the margin picture looks optimistic, however, gross margin will be under a little pressure. The operating margin will continue to expand. Of course, you know that net margin is something that I cannot control. For example, in the second quarter our net margin actually expanded greatly. That was part of appreciation of RMB [inaudible] things out because no one knows where renminbi will move. So I would say that on operating basis that is pretty much the picture that I can give to you in terms of guidance. Mark Marostica – Piper Jaffray: And Eric, just a point of clarification, when you talk about operating margin expansion and gross margin compression in the quarter, are you talking sequential move or year-over-year move?

I'm talking about sequential. Mark Marostica – Piper Jaffray: Okay, perfect. And then just one additional question for me in a vertical that you've talked about on another call, the education vertical. I'm just curious if you could give us an update on the education vertical, perhaps talk about MAU for education, when we should expect monetization of that vertical, and ultimately help us size the opportunity there, you know, perhaps how many education channels they're currently operating and such. So I know there are a lot of parts to that question, but net-net just trying to get an idea where you're at currently with education and when we should expect monetization going forward.

[Chinese language spoken]

Well, obviously we have actually, I mentioned a couple of times, education is a huge opportunity. It has a great bright future. However, on YY's platform, education business is still at a very nascent, very early stage. However, over the last couple of months, we do not actually in fact foresee that we're going to change the education business in one or two months. However, we do see some case study which had been very inspiring and encouraging. For confidentiality purpose I'm not going to name names, but I'm just telling you the story. The story is that there's a teacher, actually he's actually migrated from a traditional education organization. At the time he only can make RMB200,000 per month by teaching on offline basis or at the very beginning on the YY platform. After four months this person, this teacher's monthly revenue has grown to RMB900,000. And this actually tells you that a lot of implications. One of that is we have provided a platform that allow traditional teachers being able to survive and do very well on YY platform. And this is very, very encouraging. I think the implication of this is we believe that the teacher, if they are good, and they can actually survive by itself on YY, create a very good cycle and create a very good ecosystem because they can continue to have a large class or private class, attract more students so that their revenue will increase. And then when they have more revenue, they can spend more time to attract more students. So when this ecosystem starts to build and this actually has shown the power of the YY platform. So we are very, very happy to see this kind of encouraging case study happen recently on YY platform. Mark Marostica – Piper Jaffray: Thank you, Eric. I'll follow up a little later.

Your next question comes from Fan Yu-Heng from China Renaissance. Please ask your question. Yu-Heng Fan – China Renaissance: Hi. Good morning everyone. Congrats on a strong [guidance]. Thanks for taking my question. I have a follow-up question on the Happy Boy. Clearly the project will help you expand the user base. I'm just wondering, maybe you mentioned [inaudible] how many new users you have attracted since the program launched in early July?

Yeah, thank you very much for the question. As you know, that Happy Boy is still going on. It's something in process. In fact it just started in July. As you know that now is the beginning of August, and this whole thing will last until September. When we look at this collaboration and activity, we do not measure them on a daily basis, so that's number one. Number two, we think this is a very interesting experiment for us and created some sort of user growth opportunity and broadening our user base. So at this moment it's not so clear that we can provide very specific numbers in terms of the user generation up until now. And because of the confidentiality reasons with Hunan TV, we would like to actually keep these things within ourselves. Maybe at the end of the quarter, if we do have some kind of metrics, we will provide that for the public. Yu-Heng Fan – China Renaissance: Okay, thank you. My second question is regarding your online game business. It seems that you didn't add too many game titles during the second quarter? I'm just wondering, is there any material gain regarding the ARPU and paying user growth in the second quarter?

Yes. I think online game business performed quite well in the second quarter. We actually had a good gain starting from the first quarter of this year [inaudible] continue to perform very well in the second quarter. But on a quarterly basis, we are adding four or five games each quarter, depending on the pipeline, depending on the market conditions. So if you get the pipeline on an annual basis, you're going to see that, on average, we should be able to add five to six. But sometimes it's up and down. So you probably need to bear with us a little bit. Sometimes this pipeline build-up could actually fluctuate quarter by quarter. Yu-Heng Fan – China Renaissance: Okay, thank you. I'll follow up later. Thank you.

Your next question comes from Nick Ning from 86Research. Please ask your question. Nick Ning – 86Research: Hi. Congratulations on the solid results, and thanks a lot for taking my questions. So I wonder if David could share with us more about your region, what kind of company YY is going to evolve into in a longer time like two to three years, what kind of brand projection do you want the public to view YY by that time? And also maybe in terms of the service you offer, what would you expect the revenue mix between our different business [drivers] like games, music and non-entertainment services, maybe education in two years, and how much of your revenue do you expect will be coming from mobile? And do you expect to see something from [inaudible] folks in [inaudible]? Thank you.

Thank you.

[Chinese language spoken]

Okay. I will answer the first part of the question. And I think YY, what YY is going to be or the future direction of YY, we have never changed it. We always said that YY is a rich communication social platform, and our goal is to engage people. And we never deviate that direction. And that's exactly what we want to do. In terms of music, we think that there's a lot of things that we haven't done and we think we are able to do that. For example, you know, when people are singing and entertaining themselves at home, they are just a single person. You know, we actually created a platform, allow those single individuals able to perform in front of thousands and millions of people, make it as a job, make it as a work, make it -- make those persons to make good living on YY platform. So we professionalized this music performance for a lot of individual who want to have the opportunity but did not have the opportunities. However, we would like to push that into a different level because we think some of the talents can become a future star or even a superstar, and we have not finished that. We think that with YY's influence, with YY's large user base, someday we'll be able to create a great star or even a superstar. I think that's one of the reasons that we would like to collaborate with Hunan TV. And hopefully, that is our ultimate, you know, objective. Secondly, in terms of education, we all know that education cost in China is very high. Not only that you pay a lot of tuition, also because of the physical problem, the physical dislocation. You need to jump onto a bus, you know, go to the classrooms, spend hours you're in the road and you have to accommodate the teacher's time. All of those can be resolved because of the YY platform. We provide a real-time video and audio capability, allow people to engage each other to learn something from YY platform. That can save tremendous costs for users, for students. We think that's our future. On the other hand, teachers can only teach 50 students in a physical classroom, offline classroom. But on YY platform, they can teach hundreds, even thousands of users through YY's platform because of our capabilities. So we think that education is rapidly changed. And there are other verticals we think that it's very interesting and can actually utilize YY's technologies to change their industry, the smaller verticals. We already seen that but we would, you know, focus ourselves on a couple of the big ones, and the smaller ones, we will come to that, provide them with greater details into the future. Thank you very much. In terms of the second part of the question, in two years what the revenue mix is going to look like and things like that. To be honest with you, it's really very, very tough to answer at this moment. As you can see the history of YY, we started monetization on user activity in 2011. And all of a sudden, in 2012, music accounts for roughly 30% of our revenue. This year this percentage is likely to go up. So this revenue mix really depends on the progress of our monetization schedules. So at this moment it will be very difficult for us to forecast in two years what the revenue mix is going to look like, but I can almost promise you that in two years we definitely will generate revenue from education business, that's pretty much for sure. In two years we definitely will be able to generate revenues on the mobile end. So those are almost certain. But it's very difficult for me to pinpoint what the percentage exactly at this moment. Nick Ning – 86Research: Okay. Thanks a lot.

Your next question comes from Alex Yao from JPMorgan. Please ask your question. Alex Yao – JPMorgan: Hi. Good morning everyone. Thank you very much for taking my question, and congratulations on the solid quarter. I have two questions. Number one is, can you comment on revenue concentration for music and the gaming business? These two business meet the common 20-80 rule, meaning 20% of the customers generate more than 80% of the revenue? And second question [inaudible] excuse me, for the content strategy, can we see the cooperation with the Hunan TV as indication to adopt more paid content strategy? So going forward in terms of content you will be mix of free content generated by third-party performers plus certain paid content? Thank you.

Yeah. Let me answer the first part of the question first, then David is going to be answering the second question in terms of the content strategy. For the revenue concentration question, yes, actually there is a little bit 80-20 rule for our music revenue specifically. However, our music concentration, music revenue concentration, is very healthy, compared with on the gaming side, because you all know that on any particular game company, the large vendor usually accounts for a big percentage of the revenue. I can give you several percentage in our music revenue. For the top five performers, their revenue, their created revenue actually less than 5% of our total music revenue, top five performer created less than 5% of the total revenue. Top 10 performers created roughly between 5% to 10% of the total music revenue. And I can tell you the top five music channels created roughly one-quarter of our music revenue. Top 10 music channels created roughly one-third of our music revenues. And so -- and people mentioned there are some guild, you know, famous guild, this guild, and [inaudible] somebody call it [Baulker] or somebody, [Huangzhu] or [80 Series]. All those so-called guilds, they created something around teens, around 15% of the total music revenue. That's the best one. And the third one actually dropped below 5% of the total music revenue. So from my angle, when I look at the music revenue, I think the music revenue looks very healthy. You know [inaudible] exist in every industry. So for us, I think the music revenue concentration is much less than the online game business in general in the industry. For the second part of the question, I would like to ask David to answer.

[Chinese language spoken]

Well, two points. One is as I mentioned before, that we want to actually continue on to creating a superstar or a star for the [honorary] peoples in the model of [AKB] [inaudible].

[AKB 48].

[AKB 48], I'm sorry, I didn't get that very clearly. So we will continue to push on to that end, try to create that kind of strength. And secondly, in terms of the content -- purchase of the content cost, in fact that is not our intention. Our intention is to actually collaborate with key operators to produce the common content so that this content will be unique from other just TV content, because TV content is passive. If TV content plus wireline content or interactive content, and that will make the whole thing interactive. So recently we have produced some of the offline content. We will put those clips onto our wireline platform, and if you have time, you can actually review it, which will be a little bit -- which will be very much different from the traditional content. So we believe that a lot of TV operators still are learning or still don't understand the interactive content. So we think that there is a big room and big future for us to develop or to collaborate to produce new forms of content into the future. Alex Yao – JPMorgan: That's very helpful. Thank you very much.

Thank you.

Your next question comes from Alicia Yap from Barclays. Please ask your question. Alicia Yap – Barclays Capital: Hi. Good morning, David and Eric. Thanks for taking my questions, and congrats as well on the very solid results. Just very quickly, just in terms of the margins, wanted to get a sense, I think, Eric, you mentioned on the third quarter margins trend, but for the longer-term outlook, how much room for further margin expansion opportunity?

Yes. I think I already mentioned that the short term our margin trend, our guidance, I would like to repeat it again, you know, for third quarter, as I mentioned, because of the content cost or the cost outlaid to Hunan TV, our gross margin on a Q-over-Q basis will be under a little pressure. However, we believe that our operating margin is going to be -- continue to expand. I think along with that, for longer term, we are very optimistic about our margin pictures. The reason is that -- this is what I call. We are providing lots of philanthropic activities -- philanthropy business, meaning that we collect no money but we create so many business for lots of different content providers. For example, someone actually teach on YY and earn a lot of revenue. We get nothing. So when we start to monetize all those activities, that is going to help us to expand our margins. Look at the year 2011, when we start our monetization on music, our margin started to jump and it continued to expand. We think that trend is going to be repeated in the quarters and years to come into the future Alicia Yap – Barclays Capital: I see. That's very helpful. And so will there be any optimal target level again or is it very hard to tell because the upside is -- could be very high?

Well, I don't want to give you guys unrealistic expectations. I can just tell you that what I -- what we are focusing on is trying to deliver the best quality of service. We want to satisfy users. We want to create user experience. If we can do that, we think the margin will come automatically. So we are not running a company because we want to create margin. No, it's not our purpose. We want to satisfy users' needs. So if you ask me what the margin is going to be next year, to be honest with you, I really don't know. But I know the direction is going to be higher and bigger. Alicia Yap – Barclays Capital: Sure. And then just lastly, very quickly, not sure if it is already in place, but is there any plan to move the current online games platform and expand it into building a mobile games platform start targeting some of these mobile game developers? Thank you.

Yes. As you know that our online game business are mainly the browser gaming business. This business model is full operation, you know, browser games with the game developers. So we do a revenue share with all those game developers. So that is a model we have been running for a couple of years. It has been very, very successful and it's going very nicely. Well, we think that into the future, as I mentioned very, very many times in my script, we think that mobile is going to come in big. We are at the beginning of a 10, 15 years cycle. So we are trying to build a great mobile platform which will allow us to capitalize on this trend. So we I think, we are going to build a very different mobile platform which will allow us to take advantage of our inherited advantage which is we have a lot of gamers on our platform. So I think the mobile platform is going to be a little bit different from our existing online game platform. Alicia Yap – Barclays Capital: All right. Great. Thank you so much.

Thank you.

Your next question comes from Alan Hellawell from Deutsche Bank. Please ask your question. Alan Hellawell – Deutsche Bank: Thank you. Good morning gentlemen, and for the 27th time, congrats on the great numbers. Just a big picture question, we're seeing in the results, among many other things, torrid growth in both users and ARPU. And I'm wondering, Eric, if you can kind of characterize how those interplay or play out going forward just so we can kind of rebate our expectations.

Okay. Yes. As you can see in the second quarter, we had tremendous growth on revenue. And the revenue really actually was driven by two factors, not only the user growth, also the ARPU expansion. But most of the growth came from user expansion. What I mean is we actually have been very successful -- very successful in convert a lot of our active user into paying users. As you can see that our paying user in music area jumped to more than 640,000 something. Our game paying user also had a very decent growth. So that all contributes to our second quarter's great results. But at the same time, the ARPU increased as well. I think this trend will continue, meaning that our goal is to maintain a very steady revenue and income growth into the future. So we will try to manage the business in a very steady way. For example, I already mentioned in our music business we have a lot of marketing campaigns. Sometimes it's geared toward user base growth, meaning that we would incentivize users to participate with a small amount of money. Sometimes we will run marketing activities that is geared toward guild, with all the members in guilds, then they will spend a little more money, and that is going to help on our ARPU. So all of this is going to happen. So it will be very difficult for me to tell you specifically what the percentage will come from user, what percentage will come from ARPU, but I think the trend is our goal is to, you know, to grow both ends into the future. Alan Hellawell – Deutsche Bank: Right. And sorry, my second and the last question, Vivian and I were wondering what you would expect the music revenue share trend to be next quarter and the following quarter.

Well, as I mentioned, in the second quarter, music revenue -- sorry, revenue sharing fees and content costs as a percentage of revenue is a little bit high because that we had added the specific content cost into that element. So it's being skewed a little bit. But overall our music share cost is pretty stable. It's in the range of 35% to 40%, depending on how much of the deferred revenue elements being taken into consideration. As you know that deferred revenue -- when we defer part of the music revenue, in reality we have to pay the cost to the content provider on a current basis. We cannot defer our payment into next quarter's. So sometimes that is going to skewer this percentage a little bit. However, we see the percentage is not going to change significantly into the future. Alan Hellawell – Deutsche Bank: Thanks very much. Appreciate it. Congrats again. Thanks.

Your next question comes from Jiong Shao from Macquarie. Please ask your question. Jiong Shao – Macquarie: Thanks for taking my questions. Firstly, for those us haven't seen the Happy Boy show on YY, could you elaborate on how you're going to monetize or how you are monetizing the Happy Boy show on YY other than the virtual gifts]?

Well, Happy Boy is a great experiment to us, you know, which helps us in many ways. One of the ways that we actually use Happy Boy as a catalyst to monetize on our mobile devices. So when their fans vote for their stars or contestants, they need to actually purchase a small amount of vote. I believe that is RMB1 per vote. So that's going to create some revenue for us. Jiong Shao – Macquarie: Okay. But they are not really actually giving the virtual gifts to the stars themselves?

They are -- yeah, they are casting votes. They have to use Y payment system to purchase votes and then casting the votes. And that will help their star or contestant to level up or, you know, rating will actually increase by getting more votes for themselves. Jiong Shao – Macquarie: Okay, great. Thanks. And also, Eric, you mentioned a couple of times on the mobile strength and a couple of metrics. Can you share with us to the extent you can the percentage of your users just for music already on the mobile platform and the percentage of your paying users on mobile platform or the time spent on mobile platform, whichever way you are able to share will be great.

Yeah. I think specifically it will be very difficult for us to distinguish between what kind of users -- what kind of active user numbers on mobile platform or YY platform, but I think there is a proxy that you may actually use, is that we mentioned that our monthly active users for mobile is roughly 14 million, one-four, 14 million, for last quarter. And our total, aggregate total MAU is roughly at around 82 million. So if you use 14 to divide by 82, that gives you a percentage what is the usage via mobile devices. Jiong Shao – Macquarie: Okay, great. Thank you all.

Your next question comes from [Paul Cheong] from CICC. Please ask your question. [Paul Cheong] – CICC: First of all, congratulations for a good set of results. I'd just like to understand, when you talk about competition, could you list the key differentiation on why your platform is the best and how you can create the stickiness of your users? What needs do you address that other competitors cannot? Thank you.

Yeah. Well, this question regarding the competition, as David mentioned, since we launched products in 2008, we have faced lots of competitors, including the early days, you know, [I-Speak] and all those online game companies, and even the industry giant like Tencent has [inaudible] very similar products as YY. And so, you know, over the past five years we are never short of competition. However, we are the largest market share owner at this moment. I think the key is this. There are two stage of the competition or the competitive level that we are competing with. I would say that for the first two or three years we compete on technology, because we provide better quality of the service, better quality of voice, better quality of videos, because our technology will allow people to get on to YY with least vacancy, with least jitters, with a platform with very little crash. So at the very beginning that was very important because that will affect user experience quite a lot. So because of our superior and proprietary technology infrastructures, we are able to provide a better technology product to our users, so, because all the similar competitors or competitive products are free. So it's really up to users to make a choice. It's not us. We are not selling them. So use chose to use YY. I think over last year also we started entering to a different type of the competition, that is ecosystem, because we already created a market where our content providers can earn a decent living, decent money on our platform, and our users can enjoy as many activities they can find. So when this happens, more content providers will come to YY platform because when they go to other platforms, they won't be able to attract so many trends. So they can now make that much money on other platforms. So they continue to stay at our platform. And our users have the same kind of feeling. If they go to other platform, they don't see that many vibrant, diverse content. So they stick with us. So we created a very positive and formidable ecosystem. This is the key for YY to sustain, to strive to continue to grow. So I think the competition is really two levels. One is technology, second is ecosystem. Thank you. [Paul Cheong] – CICC: Just a follow-up question, when you talk about paying users for music [inaudible] 40,000, so you also mentioned converting active users into paying users. So what's the active users right now?

As we mentioned, we do not actually specifically disclose the paying users -- the active users for each activity, because, you know, accordingly if you use the total paying user, it's roughly about 1.1 million. Out of the 70 million, it will roughly give you conversion ratio. [Paul Cheong] – CICC: Yeah. Okay. The other thing that I'm curious is really turnover of your key talents in the first half of this year versus the historical, say, 2012.

We don't see too much of a turnover. As I said, you know, some content providers or some singers or entertainer, they may actually be approached or lured by our competitors. But oftentimes after three or four months they found out they cannot attract so many fans in other platforms, they come back. So it happens all the time. So we don't see that we lose all the content provider. In fact we see our ecosystem had been very thriving and continue to grow. [Paul Cheong] – CICC: Okay. Thank you very much.

I would now like to hand the conference back to today's presenters. Please continue.

Yes. Thank you very much to everyone. We now conclude second quarter earnings conference call. Thank you very much.