Good evening, ladies and gentlemen. Welcome to NetDragon's 2017 fourth quarter and fiscal year earnings conference call. Accompanying this call, we also have a live webcast on our website where you will be able to view the earnings presentation. After the presentation, there will be time for a Q&A session. Until the Q&A session, all participants are in listen-only mode. Before the presentation, I would like to remind you all that this call may contain forward-looking statements, which may not be relied upon in the future for various reasons. Non-GAAP data is included as part of this presentation. Non-GAAP data is not expressly permitted by the Hong Kong Financial Reporting Standards and therefore may not be comparable with other similar indicators. For more details on the non-GAAP financial measures, please refer to the disclosed documents on the company's IR website at www.nd.com.cn/ir.
The company's results were released earlier today and are available on our IR website. A webcast replay of the conference call can also be found there following the conclusion of this call. Now please allow me to introduce our management team who will join us today, Dr. Simon Leung, Vice Chairman and Executive Director of NetDragon, and Mr. Ben Yam, Chief Financial Officer. Simon will begin with a review of recent developments in NetDragon operating performance, followed by Ben, who will review the company's financial performance. Following the presentation, they will both be available to answer your questions during the Q&A session. With that, I would like to turn the call over to Simon. Simon, please go ahead.
Well, thank you, Joseph. Good afternoon. Great to be here to be with you first time in 2018. Today what we're going to do is we're going to look at Q4 of 2017, and then give ourselves a report card on 2017. More importantly, to look forward to 2018, hopefully give you a good view of how we are looking at the market going forward. With that, I'm going to talk about Q4 a little bit. I'm going to hit the high-level highlights because Ben will go through all the detailed numbers. Q4 is a good Q4. We continue to grow. We see growth in both learning and gaming. In learning, both the China market and also international markets see significant growth, especially China market. We almost double our revenue YoY.
We continue to grow our users in China, and also we launched finally social commerce in the U.S. We will be in a position to talk about it in more detail when we talk about Q1 results. For gaming, we're doing well in both new player acquisition and monetization. That's why both our ARPU and APA are increasing. Ben, again, will take you through the numbers. MAU increased as a result of new user acquisition. Eudemons is actually getting recognized on the Tencent open platform. With that, what I'm going to do is actually I'm going to take everybody back and take a look at 2017 compared to what we took you through at the end of 2016. I would say we have done well. Are there more areas that we can do even better? Absolutely. But I think overall, we have a very good 2017.
So let's take a look at some of the highlights. For learning, let's start with learning in the international market. As we indicated at the end of 2016, we anticipated the growth will be even faster than 2016, and we did that. So we have a growth of 32% YoY for the year on a fast-growing 2016 already, which is actually we're really happy with that. Our international market, i.e. Promethean, turned full year profitability in 2017, and we gained number one market share in the international market, which is very exciting, and we maintain the market share. We do all this while we are also streamlining our operating expense. So our YoY operating expense has gone down while we are growing. So that's attributed to the profitability.
On the product side, we basically set the industry standard with our leading technology of in-glass writing technology in all our panels. So now everybody is following. We also move our headquarter to the West Coast from the U.S. because we want to get closer to the talent because we are going move towards the software side of the system. So being on the West Coast allow us to get access to even better talent and also we'll be closer to our strategic partners like Microsoft. Our V5 product it actually gave us a great animation to go after the market. Last but not least is actually our entry into the One Belt One Road market.
We won last year the first phase of the Moscow tender, and I'm sure we have more update because hopefully you would have seen the press release on the phase two already. Let's turn our attention to China. China, significant growth, our growth even faster than the international market, albeit is a smaller base. So we expect the growth rate YoY will continue. Like we said earlier, we continue to acquire users in China. So this year will be our year of focusing on engaging them. The other exciting news is actually we start to commercialize our other products, especially our VR editor. That will give us a new source of revenue for 2018. Let's go take a look at gaming. This sound like a broken record now because for the last eight quarter, we've been growing significantly.
For the whole year, we grew close to 40%, based on our IP maximization strategy and also our expansion into mobile. It's actually, if you look at all the new mobile games that we have, that we're being recognized, we're getting a lot of accolades. Also the revenue, we are seeing significant growth. So we have last year, because of quarterization, but nonetheless, we are seeing eight months of monthly gross billing over CNY 100 million, which is actually the milestone that we're pretty proud of. For Heroes Evolved, we again, we grew our revenue in the second half over the first half. So that means we are acquiring a lot more new customers, which is a good news. And we're also getting recognition from the market. With that, I'm going to pause, hand it over to Ben. Ben will take you through the details of the financial highlights.
Then I will come back and talk about 2018.
Well, thank you, Simon. If we turn to page 11, let me walk you through the financial highlights. I think if you look at the top line in terms of the revenue, we are looking at a 40% YoY growth on the back of growth of both our gaming and also the education businesses. If you look at our top line on a sequential basis, revenue is flat, and that is very much because of the seasonality of the overseas education business, because as we have guided all along, Q4 and Q1 are traditionally the slowest quarters of the year, consistent with the patterns in the previous several years. That effect is also offset partially by the growth of the China education business as we continue to see a lot of traction in China.
On top of that is also offset by the slight decrease in our gaming revenue on a sequential basis. If you look at the bottom line, we have a non-GAAP operating profit of CNY 8 million versus a loss of CNY 67 million last year in Q4. In terms of operating loss, the GAAP operating loss also narrowed significantly to less than one-third from Q4 of last year. The loss attributable to owners of the company lowered also significantly by 46%. In terms of cash, we remained at a very strong cash position at about CNY 1.7 billion on cash on hand, including liquid investments. If we turn on to the next page, moving on to the bridge.
First of all, on a YoY basis, you can see that the turnaround of our bottom line, from an operating loss position last year into a profitable position, is really driven by our dual growth driver as both our gaming and education business contributed to increasing gross profits. On top of that, you can see that one of the bridging items, exchange gain of CNY 34 million or a reduction in exchange gain of CNY 34 million, which is really very much of a non-cash item. If you kind of normalize our non-GAAP operating profit, if you add back the exchange loss, the normalized non-GAAP operating profit should be over CNY 20 million. Next page, looking at the quarterly bridge. Again, I think that China education revenue contributed significantly in a favorable way because we are continuing to see a lot of traction in China in Q4.
You can see that there is also a bridging item in the government grant. Again, this is a recurring subsidy that we receive in China, we see each year, and that is heavily back-end loaded each year as well. Obviously, you can see that that offset the seasonality factor in the international education business, which I mentioned earlier. Overall, again, we had a profitable non-GAAP operating profit in this quarter. The next page is the segmental financial highlights. I will let you read the numbers, but I would turn, going to page 15, which is our financial highlights for the learning business. First of all, on the international front, our revenue grew very strongly by 31% YoY in Q4. On a full-year basis, it is 32%. Gross margin, again, as we have guided all along, it has been around 30%.
In fact, if you take out the Russia tender, our gross margin in Q4 actually increased by 2.1% YoY in Q4. Again, the Q4 to Q3 variance in the international revenue is due to the expected seasonality factor. On the bottom line, Promethean achieved positive EBITDA of CNY 53 million for the full year 2017, and that is a tremendous turnaround from the CNY - 51 million last year. In terms of China, revenue surged hugely by 130% in Q4. On a full-year basis, increased by 82%, and on the back of very good traction we are seeing with our products in China. Backlog of CNY 280 million or CNY 279 million as of the end of Q4. In terms of the contracted sales figure, we are looking at about CNY 100 million in Q4, and on a full-year basis, CNY 426 million.
Both of these figures represent a very significant growth from the prior year. Moving on to the gaming financial highlights. Again, substantial YoY growth by 25% in Q4 and 38%, close to 40% YoY growth for the full year of 2017. A lot of that is driven, again, by our mobile gaming revenue, increased by 85% YoY in Q4 and close to double, 92%, on a full-year basis. If you look at the kind of the sequential QoQ revenue for our gaming business, we had a stable performance in Q4 versus Q3. That is because we had a spectacular quarter for Eudemons Online PC and pocket version in Q3. In Q4, we allow monetization to taper off because we wanted to solidify our user base and also in favor of a more balanced gaming ecosystem.
On a YoY basis, if you really look at Eudemons Online Q4, it really increased by 15% YoY even on a high base in Q4 of last year. In Q4, if you look at the taper-off effect of the Eudemons PC and pocket version, that is actually offset by the increase in revenue for the new mobile game of Eudemons Online, which we work together with Kingsoft. I thought that it would be useful to talk about the sequential trend for our gaming revenue. If you look at the segmental profit of our gaming business, we have a huge growth, 65% YoY in Q4 and 82% for the full year in 2017.
If you look at outside of the top line, the bottom line, if you look at our metrics all around, it really is a strong broad-based uptick in virtually all of the key metrics. ARPU increased by 15% to CNY 424. Active paying account, 27% increase. MAU increased by 38% YoY to 13 million users. That is kind of capped off our very healthy year for the gaming business. With that, I am going to turn back to Simon, and he will talk about the 2018 outlook.
Thank you, Ben. Let us take a look at 2018. I am going to hit again the highlights. We expect profitability for the company, both GAAP and non-GAAP basis. We see gaming continue to grow in double digits. That said, I do not think we can repeat the 38% growth again in 2018. The growth will be primarily driven by the mobile games. Learning will be another banner year. I am sure you have seen the highlights. We just released a press release talking about us winning another big contract in Moscow, which I will go into a little bit deeper in the next few slides. This year is going to be our year of investment in AI/deep learning and big data.
We do see a big growth area in this, and which is something that we have a lot of technologies between the technology in NetDragon and our acquisitions of ChiVox two years ago, and also our acquisition of Cherrypicks Alpha. With that, let us take a look at the different segment of our business. For learning, the overseas market will continue to grow in 2018. We see the growth will be in the 20% kind of range. We will continue to make inroads in One Belt One Road countries, i.e., something like Moscow. Again, I will talk about it. We have just launched our new line of product. Version 6 of our ActivPanels is receiving a lot of accolades from the Bett Show in London in January. We will continue to drive engagement of the community and also will start to monetize social commerce, which we have launched in Q4.
Let us take a quick look at the city of Moscow. Actually, we have the order already. We will start shipping tomorrow and we are going to see the revenue all in Q2, which will be a quite interesting Q2 for us. The size of this project is actually 2x of the size of the one in 2017, which is the second phase of a multi-phase rollout plan by the mayor of Moscow, which we are seeing a trend, whether in the country or in big cities, a lot of the countries or cities are looking at multi-year rollout of technology into the classroom. So we are seeing great opportunity for us. That is a quick look at the Moscow tender. The next one is actually, I know some of you say maybe our presentation is too boring, so I will show you some pictures. I do apologize.
There's a picture of me talking to the audience in BETT. As you can see, we are the predominant kind of vendor in the largest education show in Europe. It's actually that kind of signify how much progress that we have made as a company in education in Europe with the acquisition of Promethean. We will continue our presence in all these markets overseas. With that, I'm going to talk a little bit about China. We continue to acquire and engage our teachers, but we also start to build our community of students, because with students, we can also drive the engagement of the teachers. The two actually go hand in hand. We also will unveil our Promethean China strategy.
We have designed a new line of product that we will bring into China and leveraging our teachers community that we built using 101 Education PPT, then we start penetrating into the school. That's also part of the strategy of connecting students and teachers and also drive up engagement. The other one is actually, we have a plan to commercialize our VR editor in a much grander scale than what we saw in Q4. Like I said, that will create an additional revenue stream for us. Let's turn our attention to gaming. While we are maintaining our current strategy, we will also expand into HTML5 games, both in China and also overseas. I will talk a little bit about JumpStart, how it fits into our gaming strategy overall.
We see very strong pipeline, again, with new games, and then we intend to deploy many of them in the second half of 2018. Like I said before, mobile game will be driving the growth in 2018. We didn't talk a lot about JumpStart before, but I'm going to spend a few minutes on JumpStart, which is the company we acquired last year. They have three big franchise. The one in the bottom is actually School of Dragons. We will see a lot of growth in that game in the next two, three years, partly because we are adding a lot of features in the game. The other part is actually there's a new movie coming out from DreamWorks in 2019 that will drive revenue. So between new features, additional marketing, and also the movie, we have high anticipation of revenue for that game.
The two on the top is actually the other two franchise that we are rebuilding to be reopen. One is JumpStart Academy, which is actually where the name JumpStart come into play. This is actually the set of games that will go into the school and also go into the home. We will see the new game start to roll out in the second half of 2018, because we have made some significant investment into this game in the last few months, and then we'll continue to invest into it because that's going to be our main franchise. The other one is actually Neopets, and that's related to the HTML5 games and also social games. This is a game with 65 million registered users. Actually, a lot of them is actually at the age range of 18- 30, so they have that spending power.
We are building two new games on top of the existing games. We start to roll out one of the games in the second half of the year. Again, we do expect a good result from those. Again, our gaming strategy is actually not only coming out from China now, it is actually a global strategy for us, both in educational games and also in our traditional gaming area. With that, I am going to pause and then I am going to turn it over back to Joseph, and we can open it up for question and answers.
Thank you, Simon. Operator, if I can ask you to open up the questions.
Sure. Thank you, Simon and Ben. Now we will begin the question and answer session. If you wish to ask a question, please press star followed by one on telephone pad and wait for your name to be announced. You can feel free to ask a question in both English and Chinese. Our first question comes in of [Ryan Roberts], MTS Partners. The line is now connected to [Ryan Roberts]. Please go on.
Ben and Simon, thank you very much for taking my question, and congratulations on the nice end of the year. My question is actually on learning. You mentioned for 2018, it is going to be a banner year. Another, excuse me, another banner year. One of the keynotes there is investing in AI, big data, and some machine learning. Can you give a sense of what that is going to look like, in terms of maybe product strategy on the one hand, and maybe on the other hand, what kind of impact we should expect there to see on the investment side? Thank you.
Ryan, thank you. This is Simon. We've been taking your question every quarter, so welcome back. Let's look at it from different angles. On our core product, which is actually the classroom product, we're going to see in the incumbent market, we continue to see double-digit growth. On top of that, like I said, remember, we see a lot of progress in terms of the One Belt One Road countries, starting with the Moscow rollout. It's actually purely from a revenue standpoint. We are very confident there will be another banner year, because it's like the fact that we got the contract right at the beginning of the year, and then we see many other kinds of tender in the pipeline. So that's one part of it.
I think for AI and big data is actually, this year is more an investment year, because we need to start developing the product. What it does is actually is part of our community strategy. Number one is actually, then we can take the community and can help them to learn and to provide them with more specific recommendation. We can even move towards customized recommendation to help them to learn. The other thing we can do is actually, we can create, I will call, like, a better term, virtual assistants that can help the teachers to really take a lot of their daily work away from them, so they can more focus on collaborating with the students and all that. This is actually the AI area, or deep learning area, cover different parts of our community strategy.
At the end of the day, it will drive up the engagement. This year, from a revenue standpoint, predominantly, it's going to be coming from our current product line. But I would tee up a very nice kind of community engagement area that we can monetize even more in 2019.
Yeah. Thank you. If I could just ask a real quick follow-up. On the gaming side, on the pipeline, it sounds like that's more second half. Is that roughly in line with what you're expecting?
Yeah. It's actually towards the end of Q2, and then we'll have more coming out in second half.
Got you. Thank you very much. Appreciate it. It's very helpful.
Thank you.
Thank you. Once again, if you wish to ask a question, please press star followed by one on your telephone keypad. Our next question comes in of Susanna Chui from DBS. Susanna Chui, please ask a question. Please ask a question.
Susanna, hello? Maybe she's on mute.
Susanna, we cannot hear you.
Maybe we will go to the next one, and then when Susanna come back, then we can talk to her.
Okay, sure. Once again, if you wish to ask a question, please press star followed by one on your telephone keypad and wait for your name to be announced. All right. The next question is from Susanna. Please ask a question.
Oh, sorry. Hey, Ben. I just muted the telephone. And congratulations for the very good result from Simon and Ben. I would like to update the latest of the Eudemons Mobile. And the second question is, I would like to also update the publisher of Eudemons Online Mobile. Will it be a much stronger publisher, and how do you forecast the Eudemons Online Mobile, the forecast? Thank you.
Okay, Ben, why don't you. Yeah.
Yeah. So, thank you, Susanna, for your question. So if you look at Eudemons Mobile, I believe you're talking about the new mobile game that we're working together with Kingsoft. So as you are well aware, we had a spectacular start in Q4 for our new Eudemons Mobile game, and we have over CNY 100 million gross revenue for this game. So after the initial launch, the revenue kind of taper off a little bit. So we're experiencing kind of a fluctuation in the gross revenue for the new mobile game. And we're also in discussion with Kingsoft as well to talk about how we're going to bring the revenue back up for this game.
So right now, it's a little bit hard to give a very concrete guidance in terms of the outlook for this game, but we're confident that we're going to stabilize the revenue of this game at a respectable level. So I guess the other question we have is the new mobile game for Eudemons Online , which we are in talks with new publisher. So for this one, I guess what I can say is that the discussion is still ongoing. So we still cannot say which publisher it is gonna be, but the progress is on track, and we're kind of looking forward to announcing this collaboration or this partnership in the very near future.
Looking forward to it.
Me too.
Thank you.
Ok.
Thank you.
Thank you. Once again, if you wish to ask a question, please press star followed by one on telephone keypad and wait for your name to be announced. [Non-English content ]. Our next question comes from Joanne Song from Industrial Securities. Please ask your question.
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Our next question comes from [Jeff Hao] from Milestone Asset Management. Please ask your question.
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Thank you. Once again, if you wish to ask questions, please press star followed by one on your phone keypad. That will put you through. There are no further questions at this time. I will now hand the conference back to today's presenters. [ Non-English content ]
Simon, any final remarks?
Well, thank you for calling in. I am sure I will be talking to all of you again. Just to reiterate, for 2018, we expect another very good year, both in gaming and in learning. I think we are going to make a lot more progress in learning, both the international market and the China market. With that, thank you so much for calling in. I am looking forward to talking to you individually, and I am looking forward to the next call. Thank you.