Good evening, ladies and gentlemen. Welcome to NetDragon's 2016 second quarter earnings conference call. Accompanying this call, we also have a live webcast on our website where you will be able to view the quarter 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 at the Q&A session. With that, I would like to turn the call over to Simon. Simon, please go ahead.
Well, thank you, Joseph. Welcome, everyone, to our new time slot. Maybe new is going to be the theme of today because we're going to be talking about new technologies. As a result, we're going to have new products, new opportunities, and everything is going to be new, which is quite exciting. What I will start to do is actually take you through the kind of journey in Q2 and give you a quick overview. Then I'm going to turn it over to Ben, our CFO, to take you through the details of our financial performance in Q2. Then I will come back and give a view of the rest of the year and then leading up to 2017. Hopefully that will be acceptable for all of you.
As expected, as actually we kind of indicated in our last call, we are going to see significant growth of our business in Q2. I hope this is actually our result is not surprising to all of you, but it's good to highlight that we have a record high growth in Q2 driven by both businesses, which is actually very exciting, both the education business and the gaming business. That is the result of all the hard work that we have done in the past many quarters. The other thing which is quite exciting is actually with new technology. As you know, what we have been doing is actually building our technology platform that creates our ecosystem that will allow us to bring new products to the market and also allow us to offer it to our partners.
In Q2, what we have done is actually we integrated the two new technology companies that we either acquired or invested in. One is actually Cherrypicks Alpha, and then the other one is ARHT Media, which is a holographic technology company that we invested in. As you can see later on in our presentation, both of them made a significant impact in our business, not only in Q2, but going forward. We are very excited about the new opportunity that our new technology will bring to us in all the businesses, not only in gaming and education. This has always been our strategy, and we will absolutely stick with that going forward.
The technology will give us more opportunity, not only in our existing businesses, but it will open up new business opportunities for us be it in new geography or new verticals or new industry that we are looking at. Going to our operational highlights, I just want to give you a view of what happened in the market that drive the results. Our international business actually is performing really well, leading by U.S. and the U.K., both of them seeing very significant growth in terms of revenue and also in terms of units. Germany, France, and Italy are doing well. We also won new projects, which is actually exciting. We won and delivered a new project in Turkey, which is part of the One Belt One Road direction that China is looking at. We also won a pilot in Russia. Those are exciting new markets.
While we are growing the revenue, which is actually very exciting, but at the same time, because of the fact that we are growing, that means we are gaining market share. That means we are getting into more classrooms, which is actually the basis of us growing our community. All this is actually really working well with our overall strategy. We also see a growth in China, which is actually very important for us and exciting. A lot of you asked the question in last quarter about Promethean's performance because people say, "Hey, why are you buying a company that has been losing money?" I think the answer is actually, we know how to work the issue, and I'm very happy to report that they turned an operating profit as we kind of indicated and predicted.
Building community is our end game, so very excited to report that we are doing very well in that direction. Again, with the new technology, we're going to be coming out with a lot of new products, and that will help us to address the K-12 market. But at the same time, it will open up more markets for us in our whole concept of lifelong learning. Turning to gaming, the flagship games that we have, both of them and all of them are driving our revenue growth. This has been the theme and the trend for us for the last many quarters. Again, the strategy of having the online game, working with our desktop game, has proven to be a formula of success. We're going to leverage that. The newer game, Calibur of Spirit, also driving a lot of growth.
All in all, it's actually good news all around for our gaming business. Also, we are seeing new ways to monetize our gaming assets, our gaming IP. I'll talk a little bit more about it, and then Ben will also talk a little bit about it during his presentation. I would be remiss if I didn't talk about the hot topic lately, which is actually AR and VR, which is actually something we have been talking about. We have a lot of assets in terms of doing AR and doing VR, and we also went out and acquired a lot of capabilities in AR. That brought us and opened up new opportunities.
Very happy to report one of the big projects that we have won in Hong Kong is actually we won the contract to supply an indoor positioning system and AR application to the Hong Kong Airport Authority, or Hong Kong International Airport. As you know, this is actually one of the world's leading airports. The fact that we can supply our equipment and our technology to them, having us say a lot about our capability. This opened up a very interesting opportunity for us. Of course, we can sell this all across the world to other airports, but with the same system, we also put it into shopping malls like the one we have in Hong Kong, Elements and Taikoo Shing, I think it's called. We can replicate this around the world, and also we can bring this into museums and exhibitions also.
Again, with new technology, we create new opportunities for us. VR and AR have played a major role in a lot of our products and will continue to play a major role in all our businesses going forward. We do believe AR and VR will help us to create a new world or a new way of learning. We can talk a little more about it, maybe during the Q&A. We're going to leverage all the assets that we have in VR and AR that will help us to further grow our business in both gaming and education, and also opening up new verticals. Okay. With that, I'm going to ask Ben to take you through the exciting numbers that we have put up on our website.
Well, thank you, Simon. I'm going to go over the financials at a group level, and then I will go into the specific numbers for our gaming and the education business. On a group level, during the quarter, we have achieved revenue that is the highest in the history of NetDragon. Our revenue for the quarter was RMB 786.9 million, which was a 38% increase quarter-over-quarter and 196% increase year-over-year. Our gross profit was RMB 437 million. That was 26.3% increase quarter-over-quarter and 96.1% increase year-over-year. Our non-GAAP operating profit was RMB 28.1 million, compared to our non-GAAP operating loss of RMB 111.8 million for the first quarter.
The turnaround in the operating profit was mainly attributable to the combination of a very strong performance of our international online education business, as reflected in Promethean's achieving positive operating profit during the quarter, as well as the continuous profitability growth of our gaming business. Our net profit attributable to the owners of the company was RMB 70.7 million, as compared to the net loss attributable to owners of the company of RMB 113.6 million in the first quarter. We also declare an interim dividend of HKD 0.10 per share for the six months ended June 30th. We're proposing a dividend because of our increasing profitability of our gaming business. While we are investing heavily in our gaming and the education technologies, we are very confident that these investments will result in high rewards for our shareholders.
In terms of our cash position, our cash equivalents and liquid investments was approximately RMB 1.2 billion. Let me go into the specific numbers of our gaming and education business. Our gaming business had a remarkable performance in the first quarter. Revenue for the quarter was RMB 296.7 million, which was 24.2% increase year-over-year. The increase in revenue was driven largely by a broad-based increase in revenue for all of our games. In particular, Eudemons Online PC version, as well as the pocket version, recorded the highest revenue, the highest monthly revenue or prepaid income during the quarter. Eudemons Online version was up 6.9% quarter-over-quarter in terms of revenue. Eudemons pocket version was up 42% quarter-over-quarter to RMB 36 million during the quarter.
Calibur of Spirit continued to make a significant revenue contribution during the quarter, as it achieved a sequential revenue growth of 65% in the first half of 2006, compared to the second half of 2015. The core segmental profit for the gaming business during the quarter was RMB 99 million, which was a 5.3% increase quarter-over-quarter, and 56% increase year-over-year. If you look at the outlook for our gaming business, we expect the gaming revenue, as well as our operating profits, segmental profits for our gaming business to continue to increase. These will be driven largely by a robust new pipeline of games, including Calibur of Spirit mobile version and Tiger Knight, which will be launched in the second half of this year.
Also, the English version of Calibur of Spirit, as well as several international language for this game, which we are going to be launched. In addition, we expect the PC version of Calibur of Spirit will continue to increase in revenue as we have several new monetization schemes to be launched in the months to come. Let me dive into the education business. The revenue for the education business was RMB 480 million for the quarter, which was a 71% increase quarter-over-quarter. Going into our international education business. Our international education business had an outstanding quarter, with a 72% increase in revenue quarter-over-quarter, and also a 46% year-over-year increase on a pro forma basis. Our gross margin of our international business also increased, which was 31% in Q2 versus 28% in Q1.
The improvement in gross margin was driven on the back of combination of product mix and also improved cost control. Promethean, which is our international education subsidiary, achieves positive operating profits, and that was on the back of operating leverage, cost control, and also significant streamlining of our business after our acquisition, which led to increase in operational efficiencies. For example, if you look at our first half 2016 SG&A for Promethean, we experienced an 18% decrease in the admin cost while sales and marketing cost as a percentage of revenue also decreased significantly. Looking into our China education business. Revenue in China for our education business was RMB 26 million in Q2, which was up 79% quarter-over-quarter. Our first-half total revenue was RMB 41 million.
A majority of our sales contract of our RMB 96 million sales contracts signed as of the end of the last year has been recognized up to the end of Q2. Looking at our sales contracts in China, actually, as of the end of Q2, we have approximately RMB 48 million of sales contracts which have been signed, but we expect the revenue to be recognized in the next two quarters. If you look at the China sales revenue in the second half of this year, we expect the second half will contribute to the bulk of our full-year sales revenue in China.
That will be on the back of increased sales contracts to be signed as government funding started to flow into the schools in the second half, and also on the back of the product delivery of our existing signed sales contracts, which we expect will be validated by our customers. As the product deliveries are validated, revenue will be recognized in the second half. Looking at segmental loss for education business. The core segmental loss for the education business was RMB 87.7 million, which was a 34% decrease quarter-over-quarter. That is on the back of significant revenue growth during the quarter as we benefit from operating leverage. That is the end of my presentation, and I will pass back to Simon, who will talk about the outlook of our company.
Okay. Thank you, Ben. What I'll do is let you spend the next two slides. One is to summarize our outlook for the rest of the year. Also, I will use one slide to tee it up on some of the things that we're going to be working on, especially now in the end of the year, so we can capture the growth in 2017. Okay. With the rest of the year, I'll start with gaming. Actually, we have talked quite a bit about it, so I'll just summarize some key points. Number one is that we will continue to see growth from our key games that we have, Eudemons and also Calibur of Spirit. What we do is actually, it has been a proven formula of success, so we'll continue to do that.
I think the other exciting part is actually we visualize new increased ways to monetize the game. We are going to leave the detail out from this presentation, but we will see more ways that we can get more revenue, of course, in terms of profit into our gaming business. The other exciting thing is actually our continued expansion in the overseas market. You remember, again, in the last few quarters, we continued to expand. The Calibur of Spirit English version will be launched by the end of the year, which will tee us up for further growth in 2017. On the education side, for the rest of the year, the international business, we fully expect it to continue to grow year-over-year, because we are seeing the demand, we are seeing the business.
Of course, at the same time, we work on the profitability because our work on integration has begun and making good traction, but at the same time, it is not done. We continue to work on it. One big area we are seeing some benefits, but we have not seen the full benefit, is actually our supply chain strategy. ClassFlow is going to be a key focus for us because we have a good start with more classroom that we have in the U.S. and the U.K., so we can roll out more ClassFlow into the schools, i.e., that we can continue to build on the community. Ben talked about it. With the budget cycle and our product situation, we do see the increase of contracts coming in in China. The bulk of the China business will come into the second half of 2016.
Another key element that we are going to be working on in education is actually to leverage our worldwide distribution channel. That is one of the reason that we acquired Promethean because they do business in over 150 countries in the world with all the new products come out as a result of VR and AR, for example like VR Editor, AR Editor, a lot of learning product that is based on both VR and AR, that we can put it through our worldwide channel, that we can distribute it across the world. We are going to spend the rest of the year to really gear that one up, and you will see the results in 2017. The next one is actually a little bit busy, the chart, but it is to show you this is our strategy.
It will continue with this strategy, i.e., we will continue to build on our technology platform, which is part of our ecosystem, to support all the different businesses that we are working on. We talk a lot about gaming and learning. But one thing we have not talked about is that you will start to hear from us, which is actually the entertainment business as a result of our investment in ARHT Media and the JV that we have with them. If you remember in the last press announcement that we have announced two partnerships. One is to work with Tony Robbins, which is a worldwide renowned motivational speaker. We are working with him. As a matter of fact, he just delivered another of his famous lecture from San Francisco to Sydney, Australia, without being physically in Australia.
We work with him, and the other one is to Pioneer Public, which is a company that runs a lot of seminars and all that. If you read our press announcement, we also indicated we continue to sign up, it's actually speakers and celebrities that we can bring around the world. This is actually what I meant by opening up new opportunities and new markets for us. I have to apologize, we can't tell you the name right now, but we have one big event being planned towards the end of the year. I think you'll be very surprised and excited to hear about the name of this particular speaker. I'll leave it like that for now. If you look at one of the boxes, actually, it says more to come. It's actually entertainment is not the only business and only vertical that we're working on.
Based on the technology that we have, we will have more vertical to come, which is actually we can leverage the technologies that we have. With that, I'm going to stop right now. I think you get a little bit tired of listening to us. I will now open it up for Q&A. Operator?
Thank you, Mr. Simon Leung. Ladies and gentlemen, we will now begin the question-and-answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced.
I hope history is not going to repeat itself.
Your first question comes from the line of Connie Gu of BOCOM International. Please ask your question.
Hi, Simon and Ben. Thank you for taking my question. I have a few questions here. Number one is, we do see some AR and VR products launched and will launch soon, such as VR Editor and VR Wiz. Could you please give some more color on these products and how are you going to do promotion for these two products? Will it be sold via school channel in future or free to any users? Number two, for Huayu education business in China, are there any color on Huayu revenue guidance for full-year of 2016 and 2017?
Number three, for Promethean business I can see Promethean's performance very well this quarter, but could you please share more color on product and revenue breakdown and number of products or items, like number of product or item sales or other sort of operating data, if there's any, which could better help us to building up our model? Last one, in terms of margin, Promethean business got profit this quarter, and I know that Q2 and Q3 are strong seasons. I would like to know that, is this a one-time thing, or will it turn to loss later on during the weak season? That's all my questions for now. Thanks.
Okay. Thank you for all the questions. Let me take the easy one, I'll let Ben handle the difficult one. In terms of AR and VR, first of all, is AR and VR, we both have editors. It's AR Wiz, and then VR Editor. The way we're going to do it is actually, by the way, those are only two of the many products that we have. I'm not going to go through all the details. But the distribution model, I think I also talked a little bit about it earlier in my outlook. The way we'll do it is actually is we will put it through all our channels, because that's the most effective way to distribute. That's the reason why we built the channels in China and also we acquire Promethean.
These are the kind of things that we can leverage, the channels that they have. We're going to go to both the school and also to the homes because it's actually these products. For example, AR Wiz and VR Editor, they can go to the school, they can be a B2B product. Some of our other products can be both B2B and B2C. It's going to be going to both. The other strategy that we have is actually, since these are editors, what we're going to do is we're going to provide it to all our partners. What they can do is actually they can go and based on the editor that we have, they can create apps and services. What they can do is actually after they created it, they can put it through our ecosystem. We can go and distribute for them.
That's why the strength of the channels and the strength of our community will come into play to help them out. I think in terms of the business, I'll make a high-level comment, I'll ask Ben to answer maybe a more specific one. We also indicated in our earlier slides, we said the international business will continue to see significant growth year-over-year. We do expect good performance from Promethean. In terms of guidance, we don't give out guidance, but maybe Ben can give some directional comments. Ben.
Yeah, sure. I guess maybe I'll talk about the China education sales first. I think as we mentioned in our presentation, the second half of this year is going to contribute to the bulk of this year's revenue in China. If you're looking at the magnitude of that, I think I would say, the second half compared to first half will be several multiples. Second half will be several multiples of the first half level, in terms of revenue to be recognized and also sales contracts to be signed. Looking forward, if you look at 2017, we expect definitely 2017 will be significantly higher than 2016 as we roll out our VR classroom products and also as our flagship 101 Education PPT product becomes more and more mature and stable. I will leave it at that for our China education sales revenue.
In terms of Promethean, I think you asked the question on the bottom line. If you look at the second quarter, our positive operating profits was a single-digit positive operating profits. As you can imagine, the bottom line is going to be affected by swings of the top line. But I would say that if you look at the trend of the next few quarters, we are very confident that the trend is going to go up, okay? I would say that we're not surprised if we can achieve a positive operating profit in the second half of the year. But again, swings in revenue quarter- by- quarter will affect our bottom line.
I would say in the next several quarters, including in 2017, we do expect our top line of Promethean to continue to grow and we are going to benefit from operating leverage, which will contribute to continuous increase in operating profitability for Promethean in the next several quarters.
Well, let me make two comments on this subject. One is, I just want to remind everybody, the education business, both in China and in the U.S. and U.K., we do have a seasonality curve that we need to take a look at. We talk about it in our last quarter's performance in the international side. It is actually Q2 and Q3 are the big qualifying seasons, and in China it is actually Q3 and Q4. I just want to remind you may see some shifts in terms of between Q3 and Q4. I think for going forward is actually, that is why I try to point out earlier. For Promethean, on the hardware side, our work is not done yet because we have made a lot of progress and Ben talked about it, our percentage of sales expenses to revenue has decreased and we have improved the margin.
We will continue to work on that. I think one big opportunity we have is actually on the supply chain. We continue to work on it. Next question.
Thank you. Yes, thanks. I have just got one more follow-up. For the Promethean business top line, are there any data you can share, like a number of product or item sales sort of things? Thanks.
Well, the way to do it is actually, a better way to do it is actually you should go get some public data. There are companies that publish market data.
Okay.
I think the company is called Futuresource. I think for you to go get it from them will be better coming from us. Okay? Thank you.
Thank you. Thanks.
Your next question comes from the line of Mr. Martin Bao of Bank of China International. Please ask your question.
Thank you. Thank you for taking my question and congratulations on a very big quarter. I have two questions. One question is regarding our new ClassFlow, the product in the international education market. I am wondering whether the management can share with us a little bit more on this product about the monetization method, about the market competition. Any comment will be well appreciated. Also, I am wondering whether the management can share with a little bit about the pipelines with our mobile games. What type of the games will the company mostly focus on? Will company also introduce LBS and AR features, also VR features into these new games in the future? Thank you very much.
Well, I will answer in general first, and then Ben and I will take turn in answering specific one. What we try to point out to everybody is actually AR and VR is going to be a mainstay in our products going forward. Whether it is gaming, whether it is education or entertainment we just talked about, I think you can count on there is an element of AR and VR and 3D in there, because if not, we wouldn't be investing all this into those businesses. So I think that you can count on. Let me talk about the product. I think your question is that you were going to answer it in two parts. The new products that we are talking about going into 2017 for [inaudible], for the international market, again, in two parts. One is actually we will continue to innovate our hardware products.
So we are going to have new panels coming out. We have new panels came out at the very beginning of the year, which is our version 4, and then we have version 4.5 relaunching in Q2, and then we are working on our version 5.0, which incorporates some very exciting capability in there. So at the right time, we will let you know what they are. So we will continue to innovate on our existing product line. The product I am talking about that we are priming the channel for 2017 are the products which is actually based on AR and VR. So we have a product called English Galaxy, for example, which is based on Cambridge English. But in there we have three big element, which is actually quite exciting. One is AR, the other one is VR.
The third one, even more exciting, is actually got machine learning in there, which is something that we can sell both to the school and also to the consumers. So those are the kinds of product we are talking about that we can distribute it through our channel, both in China and in the U.S. When you talk about monetization, I think you are referring to our longer term strategy, which is actually build What we are doing right now is we are building a community of learners. Our goal and our mission is actually to build the world's largest community for learning. So we have a lot of people in the community, so we can monetize it in many different ways. So just like any other businesses that is based on a community.
But that one, I think, is not really for discussion for today because it is actually very complicated. In terms of gaming, I think both Ben and I talked about it at the very beginning. There will be many new games coming out. On the Tiger Knight, maybe I will ask Ben to talk on the specifics of which one will come out.
Sure. In terms of the pipeline of our games, I will talk about the second half. Second half, we are going to be launching, first is Calibur of Spirit mobile game. That will be launched likely in Q4. Tiger Knight, it is also going to be launched within the second half. These two games we expect will contribute revenue in the second half of this year. If you look further, looking forward, if you look into 2017, in terms of what our pipeline of games will look like, I think you can look at it in two dimensions. First, you can look at the fact that we have a very strong IP, so notably Eudemons and also Calibur of Spirit. What we are going to do is we are going to be leveraging these IPs, create new categories of things.
For example, mobile games, for example, browser-based games and also categories like third-person shooting, et cetera. The other dimension that you can look at is the fact that we have a lot of in-house technologies in AR, VR, and also a lot of the gaming technologies which we have developed over the years. We are going to be leveraging these technologies to build exciting new games, leveraging the IPs that I talked about. I think the games in our pipelines are very exciting, and we do have several games in the pipeline at the moment to be launched in 2017.
Okay. I will add a couple more commentary on this one too. I just want to remind everybody, we did say it before, I will say it again, all our new products coming out, there will be an element of AR and VR in there because this is actually what we do well. It is not something that is kind of been doing for the last quarter. We have been doing it for a while. I think on the gaming side, in addition to what Ben is talking about in the specific games, there will be a new business model that we are looking at that will create more opportunities in the area of O2O. I will leave the detail out for the time being.
Again, we are very excited about both the gaming and the education business, not only for the fact that we are doing it well with our existing business model, but we get a new business model into our existing business.
Thank you so much.
Thank you.
We are reminding everyone that participants are requested to restrict two questions at a time. Thank you. The next question is from Mr. Eric Qiu of CCBI. Please ask your question.
Hi, good evening, Simon and Ben, and thank you for taking my questions. My question is regarding the segment profit. I saw that for the online gaming business, it is actually a net loss for the segment profit in second Q. I just wondering what is the reason behind. For the education business, you said second and third quarter are peak seasons. I just wondering what do you expect third quarter comparing to second quarter, which is more peak season? For the first quarter, how should we look at comparing to the second Q and third Q? Thank you.
Yeah. Okay.
Hey, Eric. Thank you for your question. If I heard you correctly, you are saying that our gaming segmental profit was at a loss, which is actually not correct. If you look at slide 12 of our webcast, you can see that our gaming business had a core segmental profit of RMB 99.3 million in Q2. I think that is the clarification on that one.
Sorry, my interpret. I was looking at this page 11, and page 11, the segment profit for the first half for the online gaming was RMB 33 million. I actually deducted it because the first quarter, I have the number of 96 something.
Yes, got it. I understand the numbers that you're looking at. In order to look at a true operating performance, you have to look at the core segmental profit, which you can find the measurement on slide 12 of the webcast and also in the press release. If you look at the so-called segmental profit in the MD&A section of our announcement, that figure actually includes a lot of the so-called non-operating numbers, non-cash and non-operating numbers. For example, if you look at the fair value change of the financial instruments such as the Series A preferred shares, or the CB, the convertible bond, which NetDragon lent to the education subsidiary, there's actually an accounting requirement for us to measure the value of that CB and then make a fair value adjustment to that, and then that would go into the P&L.
Unfortunately, that kind of figure has nothing to do with the operating performance of the company or the gaming business. I think what you need to do is you have to look at a core segmental profit figure.
Yeah. What I would suggest is actually, we can do a follow-up on this one because it's actually this whole accounting issue will take some time to explain. Let me take this opportunity to address your other questions on the seasonality. Let me kind of reiterate. There are two markets, the international and China. The seasonality overlap a little bit. For international, it's Q2 and Q3 are the peak. For China, it's actually Q3 and Q4. Okay, so with that as a backdrop, we look at the business, we will continue to see good performance because the benefit of having a global business rather than just a China business or just a U.S. business is actually we can kind of offset some of these seasonality. The way we look at it is actually Q3 will be a strong performance compared to Q2.
I think Q4 will come down a little bit, but not by much, because don't forget, we have the China business. It's actually taking the void of the decline of the buying season in the international business. Okay. Thank you.
Okay. Thank you.
The next question comes from the line of Simon [inaudible] of CMBI Securities. Please ask your question.
Hi, Simon and Ben. I am Simon from CMBI. I got several questions. The first one is can you please share some data of our education business? Say, suppose, how many student user, how many teacher user in regarding to the Promethean business and education business in China? This is my first question. The second question is I am a little bit wary about the sustainability of our education business, especially the sustainability of the education business in China. Because I know we are doing the business with the school, and this kind of business is similar to doing business with government. If we can catch such a significant improvement this year, can we maintain the growth next year? This is my first two questions. I got two more questions.
Actually, Simon, if you do not mind, I will take the user answer, and then we will go from there. To answer your question, I think we need to answer in two parts. One is if you look at our user base worldwide, it is actually we are in close to 1.6 million classrooms. You can just think about it, that is our user base. Then we have over 2 million teachers, which is actually on our planet. Which is actually as a total number.
The other answer is actually based on that, we are trying to build a community, which going forward that we can monetize the user base in addition to selling equipment into the school. I read in one of the slides that then we have up to 750 users, but mainly a lot of them will be teachers and students. We have not started connecting the parents.
That is actually very good progress. The reason we have not started connecting with the parents is actually because we just announced and actually came out with and launched the parent function of our classroom product. The parents ramp up, you will see towards the end of the year because it actually needs some time to ramp up. That is what we are doing. We do forecast by the end of the year on our community, is actually we are going to have millions of users on it. I cannot tell you exactly what they are because we do have a plan, but it will be millions of users. Okay. Your second one is?
The sustainability of the education business in China.
Okay. Well, actually, first of all, I think you are right. Selling it to the government is actually that depends on the government funding. That is really a China phenomena. I think in international is actually we have different ways to. I think the school is funded in many different ways because sometimes it is by the federal government, sometimes it is actually by the state government, sometimes it is actually by the school itself. It really depends on the structure. I will give you one example. In the U.S., it is actually not the federal government is actually funding it. It is actually not the state. It is actually by the district. The district can really issue bonds and raise money to procure equipment. Which is actually very different buying cycle and buying behavior. Again, the benefit of having a worldwide business is actually we spread the risk.
When you look at sustainability, I think you need to look at us as a company which is a global business rather than just a China business. The other part of your question is actually is your concern about us doing business B2B. That is why, again, I mean, even though we have a global business, but it is still a lot of B2B, and that is why we want to expand our business into B2C. That is why we came out leveraging all the technology that we have, both in VR and AR, that we can start selling products into people's homes, for example, and also selling mobile products in learning. Case in point, where we talk about we have AR Editor and a VR Editor that we can sell to our partners. They can create products that we are selling to people's home.
Our own product, the flagship one is actually called English Galaxy. We will put through our channels, we sell both to the school and also to the home starting next year. Then we have many other products. AR coloring is another one, so I can go on and on. Our strategy is to go both B2B and B2C.
Okay. Thanks for your answer. I got two more questions. You just mentioned about AR/VR technology that we have seen you apply those technologies into your education business. However, is there any possibility we can see the education in China and your business overseas, is there any synergy from these two business in future? That's my first question. My second question is, I think, if you want to do vertical business in education field, because I think more and more video uploads and downloads, maybe you need to acquire a cloud computing companies that you can store your user data. Is there any plan for M&A? That's my last question. Thank you.
Okay. I'll answer the last question first. Are there any plans for M&A? We continue to look at opportunity. I said it before, when we acquire Promethean, it's not our first acquisition, and will not be our last one. I think that will answer your question. The answer is yes, when there is the right opportunity come up. But I do want to answer a specific question. We have no plan to acquire a cloud storage company, because I don't think that is really in our strategy, because there are a lot of people we can partner with, and they will bring the latest and the greatest technology. AWS being one and Microsoft being another one. In China, we can work with different people. We do believe we should focus on what our core competency is. We are really focusing a lot on AR and VR.
I do agree with you, video and even when we do VR broadcast, we do need to have cloud storage. By the way, a lot of our offering right now, they are in the cloud, whether it's ClassFlow or 101 PPT. So we work with different people. In China, we can possibly work with China Telecom, for example. They do provide very good facility for cloud storage. I forgot your other question.
My second question is there any synergy we can see in the future between your Promethean and your education business in China?
Yeah. It is actually, in a way, it is our fault we talk about Promethean and Huayu. It is actually, to me, is one big company. Certainly, the reason we acquire the company is actually so we can find synergy within the one big education business that we have. For example, the VR Editor, it is developed in China, and it is our full intention to just distribute VR Editor outside of China using our channels. Also, it is our full intention to take the VR Editor and offer it to all our partners in other parts of the world. They can create new apps and new services on top of it. And vice versa, by the way, we have a lot of products. For example, our panels, then we can start selling in China. So finding synergy is the top priority for us.
Okay. Thank you.
Thank you.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Participants are requested to restrict two questions at each time. Thank you. The next question comes from the line of Richard Zhang of First Shanghai Securities. Please ask your question.
Hi, Simon and Ben. I am Richard Zhang from First Shanghai. Actually, my question has been asked by several investors, but I just add some questions. First of all, congratulations for our solid results. The result is really good, especially for Promethean. I have two questions. The first is about the business in China education part. Actually, I have heard that there will be a large sales contract will be confirmed at Q3 or Q4, and when will it getting being to the revenue? Will it be confirmed just when the sales contract is signed or it will be delayed or not? My other question is about the overseas education, which is Promethean. Actually, we have got profit on the second quarter.
So my question is, will we add some sales expense so that we can promote our product and further to get the larger profit in the future? Or we will continue to control our costs so that we can confirm our profitability on the product?
Let me try to answer the Promethean one, and then we will go to China. So we will certainly expand our business in Promethean in the international market. The way to expand it is actually is, let me try to do it in different parts. For them to expand the businesses by selling the product that we just talked about through the existing channel, I do not see incremental expenses. That is the beauty of acquiring a company with an international channel organization, so we can reach out. These are basically incremental revenue for all our partners and all that. So from that particular situation, we do not see the increase in expenses. In the market that we currently played in, again, we are going to leverage a lot in terms of our existing channel infrastructure.
When we grow, I think we will only add incremental expenses, and then we can get, hopefully, a lot more revenue based on that. The last one is actually for new markets. I think there are interesting markets that we are looking at. There are emerging markets that we have not been taking full advantage of. For example, all the countries along One Belt One Road, in Africa and in different places. We are looking at that. But we will have a very prudent approach to go after those markets, which is we will do our best to leverage channel partners to help us to go into those markets.
I think if you will see incremental expenses, it will be incremental. It wouldn't be big investment. Going back to China, I think the general comment is actually just depending on the contracts. If you look at some of the contracts that we have signed in the last few quarters, the trend most likely is actually the contract signed, and then your revenue will be recognized over the next two to three quarters, really depending on the terms and the conditions of the contract. Ben, do you have anything to add?
Yeah, I guess I would just reiterate the fact that right now, as of the end of Q2, we do have RMB 48 million in sales contracts that have been signed, but revenue have not been recognized yet. We expect the revenue for those contracts to be recognized in the second half of this year. Also, as I mentioned, in terms of both revenue recognition and also signing of a sales contract, we expect the number in the second half to contribute to the bulk of the full-year number.
The number will be confirmed is RMB 48 million or RMB 480 million? I confused with that.
RMB 48 million.
RMB 48 million. Okay. Thank you. Thank you very much.
RMB 400 million?
The next question comes from the line of Ryan Roberts of MCM Partners. Please ask your question.
Hi, Simon, Ben. Thanks for taking my question. Just a quick one here from me. I know it's late in the call. On the education business, it looks like the gross margin has jumped around a little bit. I'm just kind of wondering, going forward, as we do more of the cost control and the supply chain optimization, how should we be looking at that for, I guess, the remainder of this year and looking further down the pipe?
Well, first of all, I answered the question. I'll let Ben answer the jump around question. We will always control costs. That's where we are doing well, not doing well, controlling costs is always a given. Working on the supply chain also is a given because we want to see continual cost reduction on our products. I think you can count on us working on that one. I'm not too sure I understand the margin question.
Yeah, I think in terms of the gross margin, I think it will be affected by several factors, where I think one is product mix, and then the other is the cost-cutting. Also, another factor is the fact that sometimes we will get into a large sales deal where we could be willing to accept a lower margin if we can get a big contract. I think there are several factors that go into that. But I think on an overall basis, the gross margin of our international business, we expect that it's going to be around 30%, if not more. So we would strive to have a gross margin of 30% or more.
Got you. If I could just ask a real quick follow-up. We talked on the call a little bit about the China international business for education. I was just kind of curious for the Promethean-branded stuff, have we been selling a lot of that into China yet? Because I know that was one of the reasons and one of the ideas about the fit was so well between Promethean and what NetDragon was doing inside China in terms of the channel strength. Just kind of curious how much of that we're seeing that so far and what can we expect going forward?
The answer is actually we started to. Because if you look at our Promethean business, our business is actually primarily in developed markets. U.K., U.S., France, Germany, and Northern Europe. Our product essentially doesn't fit the China market as we speak right now. Okay. That said, I did allude to the fact that we need to create a strategy, and we have a strategy now to go after the emerging market or the developing market, which some parts of China fall into that category. I can't give you the detail at this point, but very soon you'll be hearing from us about how are we going to go after those developing markets? With what kind of product? Just stay tuned on that one.
That said, there are markets in China, like the international school, some of the private schools, our product will fit into those type of school, which is a minority in China at this point. That's why I say we started to, but from an overall market standpoint, we are not there yet. Another case in point, I do believe the private school market in China will continue to grow, so that also works into our strength.
Got you. Thank you very much. It's very helpful, and congratulations on a strong quarter.
Thank you.
The next question comes from the line of Xin Wang of Citigroup. Please ask your question.
Hi, management. Thank you for taking my questions. My questions are regarding your online games business. In addition to the new games you mentioned just now, actually, how many games are under development currently? My second question is, how many R&D staff are working for AR and VR games, and actually, which will come first, AR or VR? Do you think the market demand and the hardware technology are ready for the new AR or VR games to come out? Thank you.
Well, let me address a general question, because Ben has all the detail. AR game is in the market. VR game is in the market. I am sure all of you have actually heard of one of the games which has actually been very popular. By the way, we had that technology four years ago. AR is here. I think for VR, I want to make a general comment.
The way we approach VR games is actually quite different from other companies, because what we are doing right now is actually, our games will have the PC games, we have the mobile games, and then a portion of them will have a VR and then maybe AR. It is actually all our games will have all those elements. We do believe that is a much better way to approach the market.
Case in point is actually, for example, our mobile games. Again, we do it very differently from other people. We do not have a standalone mobile game. Our mobile game is part of our PC games. That is what we do. Again, to answer your question, we believe the opportunities are here. That is why we are doing all these AR, VR games. I will hand it over to Ben to answer the specific questions.
Well, I think if you look at the specific games under development, I think right now we have Calibur of Spirit mobile version. We have Tiger Knight, and we also have Eudemons Online, or the new mobile version of Eudemons Online, which are under development. If you look at 2017, we do have several games in addition to those three games I mentioned, which are either being designed or being developed, depending on how you define development or design.
But we're confident that in 2017, in addition to those three games that I mentioned, we're going to have a handful of games to be launched in 2017. I think to answer your question on the number of people, or the number of staff for our gaming business. Right now, we have roughly about 700 R&D staff in our gaming business.
Obviously, in addition to R&D staff, we also have operations and marketing, as well as back office. But R&D, we have about 700, and that includes about 500 focusing on PC online games and also roughly about 200 focusing on mobile games. In terms of company organization structure point of view, we don't have a specific department that is focusing on AR games or VR games. But the people, the 500 and the 200 R&D staff that we have, they are all working on games in different categories, including VR and AR. We have R&D departments, common platforms that basically handle the R&D of a common platform, including the VR and our AR technologies, which we will leverage as we develop our games.
Yeah. One of the thing-
Thank you.
If you look at, because we have a lot of people working on the technology platform, it is hard for us to take out which one is for which. What we can do is, we can take it offline if we want to get to know some of the details.
Thank you. Just a very quick follow-up. How many of your online games revenue come from mobile games in the first half? Thank you.
Okay. If you just give me a few seconds. Okay. In the second quarter, our mobile gaming revenue was about RMB 39 million. Okay? Then you can do a calculation in terms of the percentage contribution.
Okay, thanks.
Thank you.
The next question comes from the line of Hao Gao of Bank of China International. Please ask your question.
Hello, management. I have one quick question. It's regard to our education business. Could you tee up the overall education revenue contribution from K-12 business for the second quarter? What level do you think it is going to reach at the end of 2016? Thank you.
Ben, did you get the question?
Sorry, could you repeat the question because I think your voice is a little bit soft?
Could you tee up the overall education revenue contribution from K-12 business for the second quarter? And what level do you think it is going to reach at the end of 2016?
Well, I think if you look at the second quarter, I think a vast majority of our education revenue is from K-12. If you look at Promethean, the bulk of revenue is from K-12. I do not have the exact percentage, but I imagine that it is going to be over 95%. And if you look at China also, I would say, vast majority of our China revenue is from K-12. And I think that-
Thank you.
The contribution from K-12 will continue as we approach the rest of the year.
Okay, thank you.
There are no further questions at this time. I would now like to hand the conference back to Dr. Simon Leung for the closing remarks.
Well, thank you. First of all, thank you for coming to our new time slot. I hope that that works out well. I think as a management team, we are very happy with the progress that we have made. We will continue to work very hard to continue to make progress in all areas. We are very excited about our overall strategy, our decision to invest into AR and VR.
We are very happy with that, and we are very excited to see how it impacts our current business and also creates new businesses. Again, the other area that we are going to go into is to really fully leverage the asset that we have acquired, be it in Promethean or Cherrypicks Alpha or ARHT Media, is going to help our overall business, both in the B2B business and into the other B2C business. With that, I am going to close. Thank you for your time. Thank you for the great questions. We will be talking to you very soon. Thank you.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, and you may all disconnect.