Good evening, ladies and gentlemen. Welcome to China Literature's 2020 interim results conference call. A copy of the interim results announcement can be found and downloaded from its investor relations website, http://ir.yuewen.com. At this time, all lines have been placed on listen-only mode, and the floor will be open for questions following today's presentation. I would now like to hand the conference over to your host today, Ms. Maggie Zhou, Head of Capital Markets and Investor Relations in China Literature. Maggie, please go ahead.
Thank you, operator. Ladies and gentlemen, welcome to our 2020 first half results conference call. Joining us today on the call, our CEO, Mr. Edward Cheng, our President, Mr. Monkey Hou, and our Vice President of Finance, Ms. [Lillian Moore]. For today's call, Edward will discuss the company's strategies, Monkey will review the company's business, and [Lillian] will go through the financials. We will then open the call for questions. Before we begin, I would also like to remind you that management's comments during the call will include forward-looking statements that are based on our current expectations. All statements other than statements of historical fact during the conference call are forward-looking statements, which are subject to a number of risks and uncertainties, and that may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of the company.
The presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with the IFRS. Please do take a minute to read the risk factors and non-IFRS measure discussion in China Literature's 2020 first half results earnings release. I will now turn the call over to our Chief Executive Officer, Edward.
Thank you, Maggie. Hello, everyone. Thank you for joining this earning call today. This is the first earning call I have ever hosted since joining China Literature April this year. During this very first call, I regret to announce that during the first half of 2020, the company recorded a loss for the first time in many years. The result is not a total surprise. Immediately upon my appointment as CEO, I, together with the key members of the new management team, conducted a deep dive analysis to understand the competitive landscape, as well as the strengths and weakness of the company. We realized that the company is facing many challenges. Starting with the well-known pandemic, a dominating force that has drastically changed the world over the past few months. The business community was paralyzed for at least half of the year.
Large corporations are cutting expenses, and many small and medium enterprises were forced to shut down their operations. Offline consumer demands shrunk dramatically. Streets were almost empty, and the theater chains were locked and closed. While on the supply side, numerous projects, including TV and film productions, were delayed. The release dates are still uncertain for many projects. The pandemic, together with the fluid and changing macro environment, indeed have had a negative impact on our business performance. It is not the fundamental reason for our disappointing results. Looking deeper, we realized that the company has structural issues that have piled up in recent years. These have gradually degraded our market share and neutralized our competitive edge. For example, our core online reading business has been facing challenges. The robustness of the China Literature platform depends on our talented writers and their creative drive.
In the past, we failed to take full care of our writers' feelings and support them adequately through our incentive program. Some of our writers expressed concerns about the previous version of the writers' contract. Writers are the cornerstone of the China Literature's platform, and we need to do more to enhance their trust. Meanwhile, the free-to-read business failed to meet our expectations. Last year, we launched our free reading app, Feidu, as a supplement to our paid reading products. The free-to-read reading products had strong influence in certain markets and over certain user groups. Feidu's overall performance failed to reflect the leading position the company enjoys in China's online literature sector. Turning into our IP business. Consolidation with New Classics Media or NCM, failed to produce the full synergies. NCM is no doubt one of the best creative and production houses in China.
After the NCM acquisition, we tried to systematically convert our leading IP into TV series and films. The results were encouraging, as witnessed by the popularity of "Joy of Life," but far from an overall success. Our integration with NCM fell behind the schedule, largely because we lacked a team with sufficient knowledge of both online literature and drama production to drive progress. At the same time, we lacked a structure, a top-down design to create an IP-centric content and operational strategy, which could maximize the lifetime value of IP by promoting cross-media production. Our past efforts have resulted in some success stories, but the real issue is how to scale. We now know we need a detailed, systematic set of guidelines to turn our valuable IP into comics, animation, TV series, films, and games.
We need to carefully manage the value of each IP over its life cycle and apply a common methodology to the entire IP portfolio in order to maximize portfolio returns. Last but not least, we have many business partners that have not yet successfully been converted into participants in our ecosystem. With business partners in the past, we negotiated deals by focusing on give and take, a typical zero-sum game mindset. With ecosystem participants, the central topic is how to create a long-term and win-win relationship. As we failed to effectively address these challenges in the past years, the company's market position deteriorated, and its competitive edge weakened over time, which is the root cause for the disappointing half-year results. With all that said, it's never too late to change, and the time for change is now.
As soon as we reached this consensus, we quickly organized a special task force to take action. As an example, we quickly addressed the open dispute with writers over the old version of the writer contract. As soon as we realized that the old contract failed to align China Literature's interest with the interests of the writers' community, we initiated a candid dialogue with our writer candidates to hear their concerns, to hear their opinions, and to hear their suggestions. In as little time as one month, we released new contracts that aligned the interests for both parties and stepped up our efforts to fight piracy to better protect writers' rights. All these actions helped us regain the trust of the writer community, strengthen our core business, and attract favorable attention from the market already.
Looking ahead, we will use the same critical thinking and responsive attitude as key tools to address issues in the company's other business lines. I think over the next 6-12 months, we will take major steps to improve our content, platform, and ecosystem. First, we will enhance resources from IP incubation. No doubt, content and IP are our core assets, the foundation of our business value, and our biggest competitive advantage. By increasing investment in content, we will be able to incubate more and better IP, strengthen our fundamentals, and accelerate development across sectors that will translate into faster growth of our IP portfolio. Secondly, we will introduce improvements to our platform. Our platform is not only a content distribution hub, but also a direct link between writers and users or readers. We will improve the social and community features of the platform.
We will also strengthen the connection capability of our platform by establishing stronger connection between the products of China Literature and the Tencent portfolio to leverage Tencent's traffic advantage to achieve more intensive user coverage. Finally, we will introduce enhancements to our IP-centric ecosystem. We can leverage our high-quality IP to build business partnerships and networks in a variety of entertainment content segments, including comics, animation, TV series, films, and games, et cetera. We will be able to access both the upstream and the downstream of these segments, as well as the respective core user groups. We will also be able to monitor the evolution of the business model of each of these segments, and this will make it possible to be better positioned to capture new opportunities arising from our innovative technology, segment business models, and partnership networks.
We believe that building up these three areas will restore China Literature's fundamentals to health. Over the next few years, we expect to build a brand new China Literature. We will continue to focus on incubating best content for the most extensive Internet users possible. We will continue to adapt our leading IPs into a variety of entertainment formats, from comics and animation to TV series, films, games, and even offline theme parks. We are also determined to break into new business opportunities by encouraging innovation and creativity within our organization. We are not expecting a smooth trip to the success. At this moment, we need to take a down-to-earth approach, objectively calculating the difficulties we may face. Preparing ourselves for all possible challenges.
We will work with our strategic partners, including Tencent, to develop the industry together with more open and positive attitudes, and invest in our future with greater courage and patience. We believe that China Literature will enhance its competitive edge and solidify its market leadership as a result, in the end. Thank you, and now I turn the call over to Monkey. Monkey, please.
Thank you, Edward. It's an honor to attend our first earning call since I joined China Literature as president. Edward just explained the high-level strategies, and I will now provide more details on our reading and IP operation business. As Edward mentioned, the free-to-read model is a challenge to our pay-to-read model. In the first half of 2020, our MAU and MPU increased by 7.5% and 9.3% year-over-year respectively. Our growth rate, however, lagged behind major free-to-read service providers. In the past, we have launched our own free-to-read product, but failed to reach expectations. I believe we have been relatively too conservative, worrying that the promotion of free-to-read products would dilute our brand reputation for high-quality content.
This should be changed because for another perspective, only by gaining the market share will we be able to help more users enjoy more quality content, and we can leverage our rich and high-quality library to make this happen. Therefore, we have two major goals. First, we will continue to enrich our content incubation ecosystem, which has been our consistent focus over the years. As of June 30, 2020, our library featured 8.9 million writers and 13.4 million works of literature, and around 31 billion Chinese characters were added to our platform over the past six months. According to Baidu search rankings, 25 out of top 30 online literary works were created on our platform. We will continue to build up our premier library by encouraging quality content production. Second, we will adopt a new strategy to drive user growth.
We will improve our product portfolio, upgrade our business model, strengthen our cooperation with other platforms, including Tencent, and improve our recommendation engine. It is challenging mandate, but we believe that if executed well, it will elevate our online literature business to the next level. Now, turning to our IP operations. Through a deep dive analysis in past months, we have identified a number of necessary improvements. For example, we will improve the transparency of our IP pricing mechanism, speed up the adaptation of high-quality IPs into various media formats, and build plans for launching franchise IPs. To reach these goals, we need to set up a systematic IP development guideline and process, and we expect to make progress in the aspect starting from the second half of the year.
As a new management team, we are committed to driving a long-term growth of the company and delivering greater value for our shareholders. This concludes my session. I will now turn the call to [Lillian] to discuss our financial performance.
Thanks, Monkey. In the first half of 2020, our total revenues increased by 9.7% year-on-year to CNY 3 .3 billion, primarily driven by the growth of our online business. Our online business revenues were CNY 2.5 billion in the first half of 2020, up 50.1% year-on-year, accounting for 76.5% of total revenue, compared to 56% in the last corresponding period. The revenue increase was contributed by the growth of our self-owned platform products, which was primarily driven by the expansion of distribution channels, as well as growing willingness to pay for our reading content. However, we continued to see declines in revenues from Tencent products, mainly due to drops in our paying users on these products in the first half of 2020. Revenues from third-party platforms were also impacted by a drop in revenues from certain distribution partners.
In the first half of 2020, we were able to expand our total user base and increase user spending. Our average MAU grew by 7.5% year-on-year to 233 million, primarily driven by the user growth from our self-owned platform products, which was partially offset by the decrease in MAUs on certain Tencent products. Our average MPUs increased by 9.3% year-on-year to 10.6 million, mainly driven by the growing number of paying users on our self-owned platform products, partially offset by the decrease in paying users from certain Tencent products, as more users were channeled to free-to-read content. Monthly ARPU reached CNY 34.1, up 51.6% year-on-year, mainly because we enhanced the depth of our content operations, optimized our recommendation system, and expanded our content distribution channels during the first half of 2020. Turning to the IP operations and other businesses.
In the first half of 2020, our IP operations and other revenues decreased by 41.5% year-on-year to CNY 765 million, primarily due to the decrease in revenues from NCM during the first half of 2020, which was attributable to the unfavorable external factors, including the profound adjustment in the film and TV industry, as well as the outbreak of the COVID-19 pandemic, which impacted the TV and film industry substantially and led to longer production cycles for NCM's film and TV series. Now, let's look at costs and expenses. In the first half of 2020, our total costs amounted to CNY 1.5 billion, up 13.3% year-on-year. The majority of which are content costs and platform distribution costs. Content costs increased by 4.9% year-on-year to CNY 584 million, mainly due to an increase in our revenues to be shared.
Platform distribution costs increased by 214.3% year-on-year to CNY 619 million, mainly due to the channel expansion for our online reading content and the revenue increase from our self-operated online games. Production costs of TV series and film rights decreased by 81.1% year-on-year to CNY 68 million, mainly due to the decline in NCM's revenues in the first half of this year. In terms of operating expenses, our selling and marketing expenses were CNY 1.3 billion in the first half of 2020, up 30.1% year-on-year, as we invested more marketing dollars to promote our online reading content. Selling and marketing expenses as a percentage of revenue increased to 39% in the first half of 20—
Competitive market. We will make efforts to enhance our IP incubation capability, improve our platform, and build a stronger IP-centric ecosystem. With these, [inaudible] to restore the healthy fundamentals of China Literature. That concludes the financial-related part. Let's move on to the Q&A session.
Ladies and gentlemen, if you wish to ask question, you will need to press star and one on your telephone. As a reminder, if you would like to ask question, please ask in Chinese first, then translate it in English. Again, it's star and one if you wish to ask a question. Your first question comes from the line of Thomas Chong from Jefferies. Thomas, your line is now open.
[Non-English content] Thanks management for taking my questions. I think in the prepared remarks, management has highlighted a number of measures to strengthen the business operations of different segments like the paid reading, IP operations, as well as NCM. I just wondering how management will prioritize all these strategic priorities and which one should we see results in the near term? What should we expect when all these measures are implemented? How should we think about the long- term trend going forward? Thank you.
[Non-English content]
Let me briefly translate our response to this question. After taking over the China Literature management, the new management conducted a deep analysis of the current situation with the company. The company has two major business lines. The first one is online reading platform, in order to meet the readers' demand and also incubate IPs. The second one is very important since the establishment of China Literature, and also the acquisition of NCM is to unlock IP values through various entertainment formats, including comics, animations, film and TV series, etc. The adaptation of IPs. After the deep and cautious analysis of the current situation of the company. In the future, the KPIs of the management will be focusing on three aspects. The first one is continue with efforts on paid reading business model, and need to be strengthened to incubate valuable IPs.
The second one is we haven't done well in the free-to-read business model. We believe when the market is big enough for free-to-read products that possibly IPs can be incubated through this model as well. We will increase our efforts in this area as well. The third one is the NCM. We all know that under the more stringent macro market environment and policy, we have done some impairment on the goodwill, and in the future this will be the part we will focus on to unlock the synergies between the two companies. Thank you.
[Non-English content]
[Non-English content]
Thank you so much. Your next question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Eddie, the line is now open.
[Non-English content] Just wondering if you could give us an update on your recent expansion of distribution and user acquisition channels, as well as any progress in your advertising business. [Non-English content] Thanks.
[Non-English content]
Let me briefly translate for Monkey. In general, as a result of the COVID-19 pandemic, the advertisement industry has been impacted a little bit in the first half year. In our products, our aim is to expand user volume and increase our user retention. We try to enrich monetization models and improve user experience. At the same time, we try different monetization methods, including putting some advertisement in our digital reading platform. Also, we launched a content operation platform with our reading distribution partners. Our reading distribution partners can log on our platform and attract their followers to our platform to consume content. Under this cooperation, we not only provide the content, but also provide the operational platform and have the pricing rights, while our reading distribution partners are only responsible for platform maintenance within their official account, as well as promotions and user acquisition. Thank you.
Thank you.
[Non-English content]
Thank you very much. Once again, ladies and gentlemen, if you wish to ask a question, please ask in Chinese first, then translate it in English. Your next question comes from the line of [Sara Wang] from Morgan Stanley. Sara, your line is now open.
[Non-English content] Thank you management. I have two questions. The first one is on free reading. We have mentioned that we target to gain market share in the free reading market. How is our approach to this? Previously, we mainly conduct free reading business on Feidu app. Going forward, is there any change in our channels? Also, how do we operate together or separately with already established paid reading platforms such as Qidian? Second question is on IP operations. Besides drama series production and the New Classics Media, do we have any updates to share with us on, for example, animation or comics adaption and also games? Maybe, do we have potential cooperation with other companies under the whole Tencent entertainment ecosystem? Thank you.
[Non-English content]
Let me translate for Mon—w e realize that only by gaining the market share will we be able to help more users enjoy more quality content, and we can leverage our rich and high- quality library to make this happen. In the future, we will continue to strengthen our advantages in the paying reading model market, and at the same time, we will actively explore free reading business through combining China Literature's advantages in high- quality content and Tencent's advantage in user traffic. Thank you.
[Non-English content]
Okay, before my translation for Edward's question, just want to clarify on the first question that provided by Monkey that Qidian, our paid reading app, will still be focusing on paid reading. In addition, we'll invest more on the free-to-read business model. To answer the second question that—to translate for Edward, we will collaborate with Tencent's content ecosystem, conducting in-depth cooperation with Tencent in various areas such as film production, animation production, and games development, and carry out IP incubation. In terms of film and TV drama production, NCM that has been acquired by us two years ago is one of the best production houses in China. Jointly, we promoted Joy of Life. Joy of Life has already demonstrated the success of IP adaptation from China Literature. We expect more successful cases to happen from efforts of NCM, China Literature, and Tencent Pictures.
In the future, NCM will mainly focus on the development of top quality projects, and we will also work closely with Tencent Pictures and other industry partners. Because the NCM bandwidth is limited and is mostly focusing on top quality content, so we are very welcome to working with other industry partners to adapt more IPs from China Literature. In terms of animation production, we can share with you guys that we have already initiated the collaboration between the comics and animation team and Tencent Comics. We will coordinate with Tencent Comics and other industry partners to turn our literary IPs into visual comics and animations. We think turning our reading apps into animation is the first step for IP visualization and also a very important step in the entire industry chain.
In terms of games, in the short term, we will cooperate with Tencent Games and other high-quality game developers and distribute agencies related to major characters in our IPs. We will be working together with platforms including Tencent and Bilibili. Thank you.
Thank you so much. Your next question comes from the line of Xueqing Zhang from CICC. Your line is now open.
[Non-English content] I will translate it myself. The first one is about online reading ARPU. Monthly ARPU increased more than 50% year-on-year in the first half of 2020. Wondering what's the main driver of the trend, and how should we think about the trend in the future? My second question is regarding IP operation. Could you please share more color on our plan about building an internal team to turn our valuable IP into various content? Thank you.
[Non-English content]
Let me translate for [Lillian]. For the first half year, the growth in ARPU, mainly from two aspects. One is from the new distribution channels. The growth in distribution channel also bring the growth in ARPU. The second one is self-owned products. For example, Qidian continue to grow. The growth mainly from self-operated platform.
[Non-English content]
Okay, so our strategy is to focus on incubating more valuable IP and also adapt these IPs into various entertainment formats. The actual experience and the know-how in different segments is very important. Also the team need to understand how to bring in important industry partners. This kind of skill set is scarce in the market, not only in China, but globally. In the past, China Literature were more focusing on development within each segment. It is a challenge to run cross-segment development. That's what we are going to focus on in the future. We have already started the process of building a team that is familiar with the industry know-how and cross-segment collaboration, and we expect to show more positive results in future. Thank you.
Thank you.
Thank you so much. Your next question comes from the line of Brian Gong from Citi. Brian your line is now open.
[Non-English content] Okay, I will translate myself. I have noticed that they have free reading channels on mobile QQ Browser and Tencent News. Just wondering if this is the new area where we will expand our free reading business. If that's the case, how much distribution cost will give to Tencent? If there is new writers, what's the profit sharing mechanism with writers? The second question is regarding the marketing cost. The marketing cost surged a lot in the first half year. It seems that we didn't spend too much money on trading this year. Just wondering what's the reason behind the increase and how we should see the trend going forward? Thank you very much.
[Non-English content]
The main strategy is to leverage on Tencent traffic to bring our China Literature's IP to more user base. The channels you have mentioned from Tencent actually are targeted to different user groups and different audiences. The core strategy is to bring more user base to China Literature and to integrate and leverage on Tencent traffic base. At the same time, it's very important to guarantee the writers' benefits. All our works have been authorized by the writers, and we can also see that the contracts did do very well, and we have gained the support from the writers. The new management efforts are targeted to creating more synergy between China Literature and also Tencent platforms. Of course, on the condition of guaranteeing the writers' benefits. Thank you.
[Non-English content]
The S&M expenses increase were mainly driven by two reasons. The first one is we put in some resources to acquire users, and that has driven our growth in our self-operated platform. The second factor is that we have put in some resources to promote our games. That were the two reasons that increased our S&M expenses. Thank you.
Okay, thank you.
Thank you so much. Your last question comes from the line of [Erin Tonglan] from GF Securities. Your line is now open.
[Non-English content] Thanks to the management for taking my question. We noticed that the revenue from Tencent products channel and third-party platforms continued [decreasing]. What's our strategy to the two channels in the future? Thank you.
[Non-English content]
We agree that we have more challenge on the third-party channels, because the third-party channels are primarily relying on the external platform. Currently, they are focusing on paying reading model as well. In the future, we'll combine paying reading content and also free-to-read content. Also, this is focused on licensing our self-owned platform products and Tencent channels, since we have a better control and closer relationship of these two channels. Thank you.
[Non-English content] We know that [inaudible ] has done very good on TV drama series. What's our attitude to film products? Thank you.
[Non-English content]
As to the movie business. The movie business has been impacted largely by the COVID-19 pandemic. The theaters haven't yet resumed operation to the full extent. To our understanding, only 30%-50% has been recovered. The release date of movies still cannot be fixed. Many projects haven't decided on the releasing date. As a result, we cautiously adjusted our strategy towards movies in the short future. We have a very rich inventory in film production. However, we will keep a closer look on the pandemic to see whether there's any recurrence on the pandemic and to decide our future pipeline of our movie business. And also, because the audience poses ongoing safety concern to movie audience. We will decide along with the development of the pandemic. Thank you.
Thank you everyone. Due to the time constraint, we will now conclude today's call. On behalf of the entire China Literature management team, I would like to thank you for your participation on today's conference call. If you have further questions about the company, please feel free to contact us. Thank you and goodbye.
Thank you.
That's the end of the conference for today. Thank you for participating. You may all now disconnect.