Good evening, ladies and gentlemen. Welcome to NetDragon's first quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I would now like to hand the conference over to your host today, Ms. Maggie Zhou, Senior Director of Investor Relations at NetDragon. Maggie, please go ahead.
Thank you. Good evening, everyone, and thank you for joining us today for NetDragon's first quarter 2015 earnings conference call. Before the presentation, I would like to remind you all that this call may contain forward-looking statements, which may include inherent risks and uncertainties, which the company may not be able to fulfill due to various possibilities. 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 ir.netdragon.com. The company's results were released earlier today and are available on our IR website. A webcast replay for the conference call can also be found there following two hours the conclusion of this call.
With me tonight is Dr. Simon Leung, Vice Chairman and CEO of our education business, and Mr. Ben Yam, Chief Financial Officer. Simon will begin with a quick review of recent developments in NetDragon's online education business and the future state strategy. Ben will then review the company's game business and go through the financials. They will both be available to answer your questions during the Q&A session that follows. On behalf of NetDragon, I'd like to take a moment before the call begins to welcome Simon to the team. Simon brings with him over 30 years of experience in the tech industry and strong ties to the education sector.
Prior to joining NetDragon family, Simon has held several senior management roles, including CEO of Harrow International Management Services Limited, the company that oversees the running of all the Harrow International Schools, CEO of Microsoft Greater China Region, and President of Motorola Asia- Pacific. I'm sure that Simon's knowledge and experience will be an invaluable addition to our team and will no doubt aid us in the development of our online education business. With that, I will now turn over the call to Simon.
Thank you, Maggie. Good day to everyone. Thank you for joining us on the call. Before I go into my so-called presentation, I would like to clarify a couple of things. Actually, I am the Vice Chairman of NetDragon, and also I hold the position of CEO of our education business. I just want to make sure. Harrow International Management Services Limited is the arm that managed the Harrow International Schools, physical schools, that gave me the education background. Just some slight clarification. What I am going to do today is actually a quick review of the NetDragon overall state for about a few seconds, and then followed by a brief on the education business, and then I will turn it over to Ben to talk about the gaming business. Okay?
On the NetDragon business, if you step back and look at it feels like you are taking a classic page out of the BCG matrix, if you are familiar with that. You have the cow, you have the star, and you have the baby. The cow for us is actually our gaming business, which you can milk. We can maintain it, we can grow it. As you can tell from our Chairman's press release, we consolidated our market share in the gaming business and our mobile gaming business is taking shape. Ben, our CFO, will go into more detail on that one. Our future star got to be our education business. I think we are going to be talking about the learning business going forward, but I will use the word education for the time being.
Our learning business covers not only education, because vocational training and enterprise training are all in the same business, which I am going to be elaborating later on. We are also incubating some future businesses, which I am not going to go into. We do have a three-prong approach to grow our business. The key is our businesses will leverage all our expertise. When I say expertise, that means our design expertise, our technologies, which is our platform. Essentially, we can get the synergy out of it. On our education business, we want to coin the term lifetime learning, because we do believe people learn all the time. We will take care of all the stakeholders as in parents, teachers, students. In the area of training will be our sponsors, instructors, and learners.
If you really step back and think about it, which is actually everybody, except maybe babies before they can learn. It is a very big market. We want to keep these users with us during their lifetime, so that is why we call lifetime learning, which I will try to elaborate a little bit later on. This is going to be a growing business. We are very excited about it. At the same time, we are also very excited about the possibility of us really impacting the education system of the world in a positive way. The way we are going to be doing it is actually to marry the new technologies with a very old business, education. We will take a very holistic approach. That means we will be covering everybody. We do believe learning and education happens all the time, and anytime, anywhere.
That's why we will be not only focusing on a classroom, which is a traditional place to learn, but also maybe at home, in the offices, and also on the go. We are in a wireless and mobile world after all. Our product approach is actually quite simple if you look at it, is actually we want to build an ecosystem that we can enable learning. Then we also want to create a community of all the learners, so that not only they can use the services, which is on the ecosystem, but they can also elaborate, collaborate among each other. This is actually what we want to do. Of course, it will take a while to get there, but that is our direction. Let me briefly talk about what we meant by ecosystem and communities.
Ecosystem is actually encompassing a common platform, which is actually our cloud platform, with big data capability in it, because I think going forward, analytics is going to be very important for education and learning. Of course, we have services on it. We're going to have tools, because we want to allow other people to put their applications on our platform. Because this is a very inclusive environment, not only for us, NetDragon, but also for our partners. We also work on content. Same thing, we're going to have our own content, but we also welcome our partners to put content on our platform. Of course, we're going to have software and devices, very importantly, because essentially that's how we can gain the experience with our users.
But that said, I think going forward, our devices philosophy will be an open philosophy because we do believe people want choices on devices. When we say devices, it's not only just tablets. It could be any devices. Will be the TV, your phone, your PC. V ery encompassing environment. In terms of community, a very simple way to look at it is actually it will be IM platform, in the form of a social network. Equally important, we're going to have app store in it to allow our partners to put services on our platform and push it to the community. If you step back and look at this, is actually, it's quite simple. Is it going to be a very large community of learners, lifetime learners? In terms of the market, you can look at it's actually the entire population.
We start to realize, actually this market is going to be very, very big because when we step back and look at a community. A couple words on our geographical focus. We are focusing on China right now, definitely. O ur vision is actually we want to be a worldwide player. Not only we want to work on emerging markets like China or India, but we also have the aspiration to go into a developed market like North America, Western Europe, and the likes. Of course, China and India are very important. Just some numbers, 200+ million K-12 students in China. Actually 300 million in India, which is actually quite interesting. V ery natural for us. In a very mature market like the U.S., it's actually 50 million. A gain, the market is actually quite vast. I did talk about the overall vision.
Let's take a look at a market closer to our heart and to our home, which is China. I'll talk to you a little bit about our progress and our product and where we will go from here. When we look at the market, it's actually we see great opportunity for us in China because it's a very, if you look at the players in there, very fragmented, a lot of regional players. The reason for that is actually they're focusing on part of a value chain. I think our CFO, Ben, has been addressing that in previous calls. That's why I think we have an opportunity to consolidate the market and grow the market. The good news is actually the Chinese government has been investing quite heavily in the market.
The broadband penetration into the home and the wireless broadband capability in the schools are quite good. They're going to be continuing to invest, so that gives us great opportunity to put our product in there. Even though we said we're going to be looking at all the environment inside the classroom, outside the classroom, but to start, we're going to start inside the classroom because we believe learning starts in the classroom. The main focus on the stakeholder is going to be our teachers. The teachers, we did extensive studies on their pain points, and our system is designed to address their pain points, to allow them to really focus on teaching and also to enable the learning. Which is actually quite exciting for us.
Our main focus in terms of product in the next two quarters is actually, one is the interactive classroom. I will start thinking about using the word collaborative classroom because it's actually interactive, it seems too limited. W e'll deal with that. Collaborative means there will be synergistic element into this. The product will have hardware and software, and we have networking element in it. It essentially allows the teachers and the student within the classroom to learn and collaborate much more effectively. Of course, I did talk about content. Content is going to be a big element, and the way we approach content will be quite different from our closest competitors. The other key version is actually our IM platform, or in Chinese, it's the Renrentong. It's actually that consists of our platform, cloud offering, content in there.
These two products will be available in the second half of 2015. That's our focus. Of course, the classroom, and then we expand. I'll stop at that one in terms of the product. I do like to address a little on our strategy going forward, because we are dealing with something quite large, very complicated, a lot of technologies involved. W e're going to have a few prong approach in terms of how to get this done. Of course, we will build, we will design, because that's our core expertise. W e also want to leverage our strength, which is our strong balance sheet actually, so we can go and see if there are technologies that we can acquire. As actually if you have seen in the last little while, we have made two announcements.
One is actually an acquisition, the other one is actually an intention. That's not the only way that we can get some of these new technologies. We will also look at partnership. The other thing we will do is actually not only looking at partnership or acquisitions on technology, but we can also look at acquisition for market access or also look at partnership for scale. Because if you think about one of the examples that we have is actually our partnership with Foxconn.
When you go into devices, scale means a lot when you go into some of these hardware, interactive display, and all that. I n a nutshell, that's what we're going to be focusing on. I'm looking forward to meeting and talking all of you in more detail going forward. With this, I'm going to hand over the speaker to Ben, our CFO, and he'll give you a lot more interesting stuff going forward. Ben?
Thank you, Simon, and good evening to everyone. I will go over our games business. During the first quarter, we continued to gain a very good growth momentum for our games business. The highlight of the first quarter is that our new mobile game, Eudemons Online pocket version, gained very strong traction following the official launch in January, and is consistently generating over CNY 10 million per month in gross revenue. Our mobile micro client game, Calibur of Spirit, had a very good start following its public beta launch in January, with monthly active users reaching 7.9 million by the following month. We expect this game to build on a successful launch and continue the growth trend with the increasing exposure it gets from our promotional and marketing events, such as the WCA and other tournaments.
We are also in discussions to begin marketing this game internationally and have been in discussion with several international publishers. We believe that the international expansion of this game will be another future revenue contributor as we leverage the success of this game in China and also the global popularity of multiplayer online battle arena games. Our other new game, Tiger Knight, which is currently in development, has won praise from players and was among the games listed on China Game Weight Rank. It was also awarded Top Online Game of the Year and New Game of the Year. Conquer Online, another of our flagship game, also maintained very strong performance as the overseas version of this game reached record-high revenue in March.
Finally, we have stepped up our efforts to optimize the player mix and monetization of Eudemons Online during the quarter to create a more equal and fair gaming environment and optimize future monetization. This campaign has temporarily reduced the revenue of Eudemons Online in Q1. Based on the current run rate, we expect to see revenue levels of Eudemons Online returning to the normal level during the second quarter. I will now briefly go over the financials for the first quarter. Revenue was CNY 246.2 million, down 13% quarter-over-quarter, and up 13.4% year-over-year. ACU for online games reached 309,000, an increase of 2.7% quarter-over-quarter. PCU for online games was 703,000, an increase of 9.5% quarter-over-quarter. Revenue from online games and other business in China was CNY 204.2 million, down 10.9% quarter-over-quarter and up 8.8% year-over-year.
This was primarily due to a decrease in revenue from Eudemons Online, due largely to a one-off player rationalization effort, as mentioned earlier. Revenue from online games and other businesses generated from overseas market was CNY 42 million, down 21.9% quarter-over-quarter, and up 43.2% year-over-year. The quarter-over-quarter decrease is due to the decrease in revenue from the mobile technology and mobile marketing business of our subsidiary, Cherrypicks, due to seasonality factor. Gross profit was CNY 207.2 million, down 16% quarter-over-quarter, and up 5.7% year-over-year. Gross profit margin was 84.2% compared to 87.2% in the previous quarter. The decrease in gross margin was mainly due to the temporary decrease in revenue from Eudemons Online and a reclassification of certain project staff costs for improved financial statement presentation.
Loss attributable to owners of the company was CNY 10.9 million, an improvement of 43.8% quarter-over-quarter. Non-GAAP profit attributable to owners of the company was CNY 5 million, a decrease of 26.7% quarter-over-quarter and 94.1% year-over-year. Lastly, we continue to be in a very strong net cash position. Our cash bank balance, bank deposits, and liquid investments stood at CNY 3.48 billion as of March 31st, 2015. Liquid investments are comprised of predominantly highly liquid fixed income investments, which are used to enhance the return of our overall strong cash position. Operator, we are now ready for questions. Thank you.
Thank you, sir. Thank you for the presentation. Now we will enter into the question-and-answer session. Please feel free to raise any questions. Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. We have the first question from the line of Zheng Jian . Please ask your question.
H i, Maggie, Ben, and welcome, Simon. This is Zheng Jian from Guosen Securities. I have two questions about the education business. First question, competition strategy. How could we compete with other competitors in this industry, especially on China online education industry like Qutong and other business company? The second question, business model. How could we make money from our education business? Thank you.
Okay, t hank you for the question. It is actually a very good question. In terms of competition, I try to address it at a very high level. We are approaching the market very differently. The competition in a sense is actually very different. Our entry point start with the classroom, and then we grow from there. If you look at a lot of the other players, yeah, there is a lot of them, but they are really going after a lot of them in the after-school market. Point number one, I think the other one is actually the entry point in the school are very different. That is how I look at competition. In terms of monetization, actually, there is a lot of ways to do this, and that is why we excited about this marketplace.
At a very initial level, we are going to be selling our system, collaborative classroom, if you will, but that is not the end game. The reason we are creating the ecosystem is actually that allow us to build a lot of services to offer to all our users and to not only while they are in the classroom, but they also outside the classroom on the go. The same system, we can leverage it and start to sell it into the training area, whether it is enterprise or still in the vocational school area.
I f you kind of look at the future, it is actually, if and when we are successful, we will end up building a very big social network. Actually, that is why I emphasize the term lifetime learning, and that is actually our vision. I think that vision is very different from our closest competitors. You know that model well, so we can monetize it in many different ways. I hope I answer your question.
Thank you so much.
Thank you.
We have the next question from the line of Jeff Howe. Please ask your question.
Hi, thank you for taking my question. I have two questions for Simon about education business. The first is, we all know that you have been focusing on K-12 business in the short term. For example, this year, next year, probably the year after next year. Y ou mentioned that the K-12 is not only the piece in your whole map. C an you talk a little bit more about your development outside the K-12. My second question is about the collaborative classroom and your IM product. From your words, my understanding is that these two products are separate, will be for sale separately. H ow about if, for example, a client only purchased the classroom product but do not purchase the IM product? Will this impact the user experience, for example? Maybe any more color for this issue will be helpful. Thank you.
Okay, I'll start with the second one because it's more straightforward. You can't buy our collaborative classroom without our software because it makes no sense. We are not a hardware supplier. It's actually when I say collaborative classroom, that has both hardware and software networking. It's actually all in one. I think the beauty of our IM platform, I think calling it the IM platform doesn't do it justice because it's actually it has IM, which is a key element. Actually, that is the element to build the social network going forward. We also have content, we also have software in there, is actually which allow the teacher to do their day-to-day job and also communicate with the student and the parents. Stepping back to your original question, this is part of our ecosystem. I think that's the interesting part.
We can give the whole thing to an organization, or we can help them with bits and pieces, but at the end of the day, they all end up in our IM platform. The important part is actually, that relates to your first question. We're going to be focusing on K-12 for a very, very long time, I would say forever, because, actually, that market won't end. More importantly, the K-12 users, when they finish K-12, guess what? They move into a university or do vocational training, or they start work. They still are on our network because, again, our spectrum of learning is across K-12, university, vocational, and enterprise. That's the key. We will be focusing on that for a long time. Now, you did ask about vocational training and enterprise. We are making progress.
I'll start with enterprise. It's actually the same platform. Of course, the services on the platform is different. We work with quite a few enterprises that they use our platform to help their internal training. That is going to be a very big market in China because it's actually a lot of small and medium enterprises in China. It's actually, they're expanding. We're talking about the math is likely 25 million small and medium enterprises in China, so the market is very big. Their challenge is actually because of their scale. They can't afford to invest a lot into the technology, and can't invest a lot into training. W ith technology to help them, I think they can close the gap between them and the larger enterprises. I think that's the beauty of the cloud, and that's the beauty of the internet.
We will put our services on top of those two things we offer to the enterprises. That make life so much easier for them, and that give them the advantage of closing the gap between the bigger players. That's a very good thing. In terms of vocational training, we are working with a lot of our partners. We're putting the content on it. It's actually, you will hear a lot more from us in the near future.
Okay, thank you. Actually, I have two more follow-up questions, if I may. The first is about your overseas expansion. Can you explain a little bit more about how you're going to enter the overseas market, for example, India or U.S.? My second question is about, maybe can you give us some milestones or the targets you're hoping to achieve, say, this year and maybe next year? Thank you.
I can't share the specifics with you at this point. At the right time, we will do that in terms of milestones and targets. In terms of going after the other market is actually, I did talk about the few things. We can build, we can acquire, we can partner. I'll leave it at that. We're going to be looking at different possibilities. T hose two market you mentioned, it definitely on our radar screen.
Regarding your recent attempt to acquire an international educational institution, can you talk a little bit more about this deal? For example, what kind of company is that? Is it a school or a publisher or some kind of content provider?
Everything that we can disclose is on the announcement.
Okay. Thank you, Simon.
Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. We have the next question from Manuel Cheng. Please ask your question.
Hello, I'm Manuel from Metro Daily, a reporter in Hong Kong. I would like to know, does NetDragon have the ratio of the turnover of education business and game business this year? Do you have the ultimate target of the ratio of both business? The second question is that will NetDragon give up your game business? The third question is that when will NetDragon have the profit again? Share a little bit one more question. As we can see, the first quarter of NetDragon performance, the cost is going quite high. When NetDragon put its emphasis on education business, how could NetDragon manage the cost? Thank you.
Hi, Manuel, this is Ben. I think you have several questions. Let me tackle your second question, in relation to the game business. We're definitely not going to give up our game business. Actually, our game business continues to be very robust and continue to be very stable. As you can see from our press release, we're seeing strong growth from our new games, including our Calibur of Spirit and also Eudemons Online mobile version. W e're not going to give up on it. Actually, on the opposite side, we're actually going to continue to grow it.
As Simon mentioned in the very beginning of his presentation, we're going to try to milk it, if you will, to get the most out of it. We may also explore opportunities to make acquisitions, for example, to further enhance our competitive position in this business. As to your first question, may I clarify, are you asking the turnover, the revenue composition between gaming business and education business?
I apologize, sir. This is the operator. The participant has dropped out from the question queue.
Okay, I assume that Manuel was asking that question. Basically, first of all, our financials are shown in our interim report and also on the press release. A vast majority or most of our revenue, at the current stage, comes from our gaming business. We have some revenue from our subsidiary, Cherrypicks. O n the education side, our revenue at the moment is minimal because we are still in product development stage as we get ready to commercialize our products in the second half of this year. I think precise ratio would not be necessary. Unfortunately, I did not hear the third part of the question. The fourth question I believe Manuel was asking, how do we manage the cost of our education business?
Right now, if you look at the first quarter, our education business, we spent approximately about CNY 40 million during the quarter. We expect to continue to ramp up our efforts in R&D, and also go to market. These efforts are going to result in increasing spending. I think if you compare this spending with our net cash balance of over CNY 3 billion at the moment, I think we can manage it. Also, I believe that this is actually the best use of our cash resources at the moment, is to either build our product organically using our internal resources. We can also license it. License, for example, technologies from our business partners, or we can also make acquisitions to acquire companies. We are going to continue to find ways to do these things, to most optimally use our cash. Thank you.
Thank you, sir. We have the next question from the line of Eric Xu from CCBI. Please ask your question.
Good evening, management. I have two questions. One is regarding the education products. I still want to figure out, what do you think of the advantage of your products? You have mentioned that the product is hardware and system integration, and you make your own contents and also acquire the contents from partners. I still want to make it more clear what the advantage is. I mean, other competitors can also do this system integrations work, and they can acquire content from other partners. How do you make sure the content you acquired from partners is of high quality, and also affordable? I mean, you probably could buy content from different partners, but in terms of the app or revenue you get from your customers, it does not necessarily offset the cost. The second is, what is the distribution channel of your products?
Your first product is aiming at the K-12 classroom, but how do you distribute this nationwide? Third is, what are the education revenue prospects in 2015 and going forwards? From the Q1 result, we see almost no growth of education revenue from first quarter 2015 compared to first quarter of last year. How do you expect the revenue trends? Thank you.
Okay. This is Simon, let me address your last question. I have to apologize, I do not know what you are comparing to. We have talked about in the last couple of quarters, and now we are in the product development stage. Our first product will come out in the second half of 2015. That is why you will not be seeing much revenue. Ben actually referred to that earlier in the call. In terms of the product, I have to say, maybe I did not do a good job in describing our offering. I never talk about our product, its hardware and system integration. I use the word ecosystem a lot. I use the word community a lot. It is actually, that is the big difference. I have to admit this is a very big topic.
The ecosystem actually has hardware, software, content, services, tools, analytics capability in there, and the core technologies like voice, like the company we just acquired. I think we need to take this offline because it's actually 30 seconds. I don't think I'm good enough to describe this in great detail. In terms of distribution, it will be depending on which part of the ecosystem that we are offering. I would say our business model will be B2B, B2C, B2B2C, and also O2O. It will be very comprehensive and at times complicated environment. That's why we're going back to the ecosystem.
We are attacking, if you will, the market in a very holistic way. To be very specific, when we try to put our hardware software solutions into the school, we are leveraging our partners. That's the first one, which is the collaborative classroom. In the sense of the IM platform, then we will use the internet model to reach our customer because that's more B2C. Again, it's not a single answer to your question. Thank you.
Okay, noted. Thank you.
Once again, ladies and gentlemen, if you wish to ask question, please press star one on your telephone keypad and wait for your name to be announced. We have the next question from the line of Amy Pang. Please ask your question.
Good evening. I am Amy Pang from Hong Kong Economic Journal. I want to ask about the first quarter loss mainly comes from the education sector. May I know when will the education sector be turned around? The second one is, can you tell me more about the first product that comes from the second half of this year? Thank you.
Thank you, Amy, for your questions. F irst of all, to answer your first question, I think I would not use the word turnaround to articulate the current status of our education business. Basically, right now we are still in a heavy investment stage in the education business, and so are our competitors. It is a very crowded space, everybody is doing a lot of things, and we believe that the only way to grab the market, to win users, would be to invest heavily.
As I mentioned, whether it is to build our product organically, to license things, or to make acquisitions. I n that sense, we are still in the investing mode. I believe that this year, next year, we are continuing going to be in a heavy investment mode. A s we have been disclosing and talking, we are commercializing our product in the second half of this year. Our revenue from education will continue to ramp up from the second half of this year onwards into the next year.
Actually, this is Simon. Let me add one more thing. I think the best way to look at our company right now is actually as two separate businesses. One is the gaming business, very profitable. The other one is actually you can look at as a very big startup. We will be in investment mode for a while. Thank you.
Thank you, Ben and Simon.
Thank you.
As there are no further questions at this time, I would like to hand the call back to the NetDragon management team. Ladies and gentlemen, thank you for your participation in today's conference call. If you have further questions about NetDragon, please feel free to contact the investor relations department. Have a good day, good evening, and thank you.