Earnings Call: Q4 2013

Mar 18, 2014

Ladies and gentlemen, thank you for standing by, and welcome to the 2013 annual results announcement call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, 18th of March 2014. I would now like to hand the conference over to your host for today, Ms. Francie. Please go ahead, ma'am. Thank you. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2013 annual results announcement call. I'm Francie Lu, the IR director of Kingsoft. I would like to start by reminding you that some information provided during the earnings call may include forward-looking statements, which may not be relied upon in the future for various reasons. These forward-looking statements are based on our own information and information from other sources which we believe to be reliable. Please refer to the other publicly disclosed documents for detailed discussion on risk factors which may affect our business and operations. Having said that, please allow me to introduce our management team who join us today. Dr. Zhang Hongjiang, our Executive Director and CEO, and Mr. Francis Ng, our Executive Director and CFO. Now I'm turning the call to our Executive Director and CEO, Dr. Zhang Hongjiang. Ladies and gentlemen, thank you and welcome. Let me start the call by giving you some high-level overview. Last year, 2013, was really a critical year for Kingsoft. It's a year of transformation. If you think that the year 2012 was marked by the transformation of Kingsoft into an internet company, then the past year will be the first year we started to transform our core business into mobile business. We continue to see a very rapid growth in our monthly active mobile users, posted over 210 million in December 2013, which is a very significant milestone in our mobile strategy. In 2013, all of our three major businesses delivered outstanding performance. In particular, JX Online 3, a flagship game of our online game business, recorded a revenue growth of 92%, following a 99% growth in the year 2012, which has significantly outpaced growth rate of the overall MMO gaming market in China. Mobile monthly active users of Kingsoft Internet Security, KIS, has increased almost fourfold from 46 million in March 2013 to 166 million in December 2013. It took only six months for Clean Master, a mission-critical utility app, reached 84 million monthly active in December 2013 from 13 million in June 2013. Clean Master was the number one Chinese published app, excluding games on Google Play, in term of monthly download in January this year, which is 2014, according to App Annie. In December 2013, over 50% of our mobile monthly active users were from overseas market. KIS is now number one mobile app publisher in the Google Play. Two categories based on the worldwide download in January 2014, according to App Annie, and the number 2 internet security software provider in China, according to iResearch as of December last year. In the fourth quarter, approximately 11% of KIS revenue came from mobile services, representing a fast and strong ramp-up of KIS mobile monetization capabilities, compared with approximately 8% in the third quarter of 2013. Also, our global monthly active user of WPS mobile office has expanded quickly to 34 million in December 2013 from 13 million at the beginning of the year. I am also extremely pleased with the outstanding results, particularly the great success of Clean Master in the global market, the expansion of Kingsoft footprint in the new markets and the substantial progress we have achieved in KIS mobile monetization. Those trends showcase that Kingsoft has already embraced the right set up for strategy, and it successfully adopted the internet trend and the methodologies. The measure we have taken since 2011, which is focusing on core businesses and user experience, adopting MBOs, and shifting to mobile internet services, have all paid off as we continue to execute our strategy and the business plan. We believe that we are well-positioned for tremendous opportunities for gaining and the mission-critical apps brought by the explosive growth of mobile internet. We are thrilled to deliver a 54% annual growth in our revenue in 2013, well above the 38% annual revenue growth in 2012. All of our three major business lines has set up a new record in term of revenue and operating metrics. Later on, our CFO, Francis, will give you more detail. In particular, I want to say a little more about the KIS number here. With a more than doubled year-over-year growth rate, KIS achieved all-time record revenue of approximately CNY 700 million in the year of 2013. This strong growth momentum was supported by the significant increase in traffic from Duba.com personal page, Cheetah browser, and the tremendous growth of its game platform. Through our persistent efforts, there were more than 400 games on KIS game platform in December 2013 already. Revenue from KIS internet value-added services for the year increased 3,367% to CNY 83 million from CNY 2.4 million a year ago. We believe that the evolution of KIS game platform will further enhance our monetization capability in the coming years. The past year marked another year of strong growth for KSO, our Kingsoft Office software division. Revenue from Kingsoft WPS Office for the year of 2013 grew 47% year-over-year to CNY 288.8 million, 51% of which came from enterprise users. This marks a turning point in which the enterprise income is now over the income from the government sector. In August 2013, the Chinese State Council issued a policy on government agencies to use genuine software in order to improve IPR protection. Both Office and antivirus software have been put on the routine software purchase list of the Chinese government agencies. We believe this policy represents a milestone in the IPR protection history in China, and it will benefit our enterprise business in the long run, especially Kingsoft WPS Office. In the past year, we have completed a milestone contract with the global renowned financial institutions, which manifest the high quality and competitiveness of our product and services, and also signal our deeper and broader penetration to the enterprise market. In addition, we are very glad to see that online marketing revenue from WPS is becoming our growth catalyst, supported by the extended user traffic of WPS Personal edition. This is basically our new revenue source, which is the value-added service based on internet traffic. In the year of 2013, our online game business continued to grow at an annual growth ratio of 29%, which outpaced the growth rate of MMO game market in China with a big margin. Our flagship game, JX Online 3, following an annual revenue growth of 99% in 2012, increased 92% year-over-year to CNY 456.7 million with the release of a series of expansion packs in 2013. In November 2013, JX Online 3 achieved a new record in term of revenue and also APA with the launch of a new expansion pack. The revenue of another game, MAT, Myth Unite Tarot, for the year of 2013 also increased 43% year-over-year to CNY 88.6 million. The significant revenue growth of JX Online 3 and MAT in the past two years in many ways, demonstrated the success of our strategy to provide better-than-expected game experiences and service through consistent effort in game innovation and development. In February 2014, this last month, Westhouse introduced the Xiaomi Ventures as its strategic investor. Having Xiaomi as a shareholder and important business partner, Westhouse will benefit the development of our mobile game business in the coming years. We have also expanded into enterprise data storage service and cloud storage platform service in 2013 from consumer data storage. The growth of user base of Kingsoft Cloud accelerated to 52 million in December 2013. This is in terms of our Kuaipan, the personal storage service, through product innovation and also strategic cooperation with Xiaomi and the smart TV producers. In 2013, we also have included some globally renowned venture capital fund and internet companies as the strategic investors of our major subsidiaries, and the company issued a convertible bond of HKD 1,356 million in July 2013. On the 27th January, about two months ago, KIS, in 2013, KIS Holding made its initial confidential filing with the U.S. Securities and Exchange Commission. Sorry, let me correct here. It is two months ago, on the 27th January, KIS made its initial confidential filing with the U.S. SEC for the proposed initial public offerings and the listing of its securities on the NASDAQ Global Market, or the New York Stock Exchange. We believe all those measures and activities will help us to strengthen and accelerate the execution of our mobile strategy and moving the company further ahead. Now, I would like to turn the call to Francis, our CFO. Thank you, Dr. Zhang. Good evening and good morning, everybody. I am going to walk you through the 2013 Q4 results and the whole year financial results. I am starting from the Q4 using CNY as a currency. The revenue increased 21% quarter-on-quarter and 55% year-on-year to CNY 669 million, and the revenue speed was 43% for our online game and 57% for our application software. The revenue from our online game business increased 6% quarter-on-quarter and 20% year-on-year to CNY 289 million. The QoQ increase was mainly due to the continued growth of the flagship game, JX Online 3, after the release of the expansion pack, in November 2013. The year-on-year increase was primarily attributable to the strong performance of JX3, which has grown for the past 10 consecutive quarters, with the release of the attractive expansion pack on a quarterly basis. The daily average PCU, a measure for game popularity, increased 3% QoQ and about flat year-on-year to 0.6 million. The monthly average paying account increased 4% QoQ and 13% year-on-year to 1.9 million. The sequential and year-over-year increase in APA were primarily attributable to the solid growth of the APA from JX Online 3, which was partially offset by a decline in the APA of the JX series in Vietnam. Our monthly ARPU increased slightly 2% quarter-on-quarter and year-on-year at CNY 49. Revenue on our application software business increased 40% QoQ and double year-over-year to CNY 378 million. This robust QoQ increase was mainly due to a strong growth of online marketing service driven by the Double 11 shopping carnival and accelerated growth of revenue from our game operation platform of KIS. The remarkable year-on-year increase in revenue primarily reflected the combination of the following few factors. First, the strong growth of online marketing revenue from KIS, driven by the rapid traffic growth of duba.com personal startup page and Cheetah browser. Secondly, the accelerated growth of revenue from game operation platform of KIS. Third, we record sales and online marketing revenue from Kingsoft WPS Office. Our cost of revenue increased 12% quarter-on-quarter and 73% year-on-year to CNY 990 million. The QoQ increase was primarily due to the increased staff costs associated with the strengthened operation team of KIS, and the increased bandwidth and server costs associated with the KIS and Kingsoft Cloud. The year-over-year increase was mainly driven by the growing user traffic of KIS, and the gross GP margin increased slightly 1% quarter-on-quarter and decreased 1% year-on-year to 87%. Our R&D costs increased 3% quarter-on-quarter and 55% year-on-year to CNY 176 million. The QoQ increase in our R&D cost was largely due to the amortization of acquired intangible assets. The year-over-year increase was mainly attributable to the expansion of R&D talent, with a purpose to further the development of mobile business and cloud-based analytic engine, and also on the increased salary and benefits. Our selling and distribution expenses increased 110% quarter-on-quarter and 96% year-on-year to CNY 165 million. The QoQ increase was mainly due to the marketing expenses for the promotion of mobile applications of KIS in the global market, and the marketing activity for the release of expansion pack for JX3 online suite in November. The year-on-year increase was primarily attributable to the higher marketing expenses incurred to accelerate the expansion of global user base of the mobile application of KIS. Administrative expenses increased 4% quarter on quarter and 29% year on year to CNY 52 million. The QoQ increase was mainly due to the higher professional fees and staff costs. The year-on-year increase was primarily due to an increase in staff-related expenses. The share-based compensation cost increased 9% quarter on quarter and 20% year on year to CNY 70 million. Quarter on quarter and year-over-year increase were primarily due to the new grant of option and RSU for certain subsidiaries. Other income and gain decreased 66% quarter on quarter and increased 106% year on year to CNY 7 million. The quarter on quarter decrease was mainly attributable to the recognition of CNY 50 million of financial incentives from the local government in Q3 2013, which was not incurred in fourth quarter. Our expenses record a gain of CNY 8 million, which was mainly reflected the reversal of the impairment of investment in a joint venture in previous year. Operating profit before share-based compensation costs increased 5% quarter on quarter and 60% year on year to CNY 201 million. The margin of operating profit before share-based compensation cost decreased 5 percentage point quarter on quarter and increased 1% year on year to 30%. Our finance income increased 14% quarter on quarter and 46% year on year to CNY 40 million. Our income tax expense decreased 47% quarter on quarter and 31% year on year to CNY 11 million. Our effective tax rate decreased 5 percentage point quarter on quarter and year on year to 5%. The increase was primarily due to that certain subsidiary of the group were identified as the national key software enterprise in the year 2013 and entitled to preferential income tax policy. As a result, our profit to owners of the parent increased 2% quarter on quarter and 33% year on year to CNY 166 million. Profit to the owner of the parent, excluding the share-based payment, increased 1% quarter on quarter and 31% year on year to CNY 178 million. Now let's come to full year 2013. Revenue increased 54% year on year to CNY 2,173 million. Online game make up 50% and increased 29% year-on-year to CNY 1,096 million. Application software make up the other 49%, increased 94% year-on-year to CNY 1,056 million. Our GP margin decreased slightly one percentage point year-on-year to 86%. Profit to owner of parent increased 55% year-on-year to CNY 671 million. Profit to owner of parent, excluding the share-based payment, increased 52% year-on-year to CNY 717 million. The profit margin excluding share-based payment was 33% for 2013, versus 34% for 2012. On our balance sheet, we have cash and time deposit amount to CNY 4.48 billion at year-end 2013, representing cash per share of CNY 3.9 per share. Our deferred revenue, including the current and non-current portion, at end of 2013 was CNY 234 million compared to CNY 200 million last year. The increase was primarily due to the increased sales of prepaid card in year 2014. The net cash generated from our operating activity increased 79% year-on-year to CNY 996 million. Our capital expenditure was CNY 135 million and CNY 85 million for the year ended 2013 and 2012. We slightly increased the capital expenditure by around CNY 60 million. Let me turn the floor back to Dr. Zhang to talk about the outlook of Kingsoft for 2014. Dr. Zhang. Thank you, Francis, and thank everyone again. Looking forward, I would like to start with our KIS business. KIS will continue to invest very aggressively in product innovation in order to provide new and improved product and services to our users, and to expand its worldwide user penetration in both PC and mobile internet markets. On the PC end, we expect revenue from online marketing and web game operation to keep its strong growth momentum, supported by the expanded user base of Duba.com, its regulated personal start page, and its Cheetah browser, as well as broader collaboration with our business partners. On the mobile end, Clean Master will maintain its strong growth to be a KIS flagship mobile app as it continue to deliver innovation and better than expected mobile experiences to our global users. Also leveraging the fast development of mobile internet market, the user base of Cheetah Browser, Battery Doctor, and other KIS mobile applications will continue to expand. We are very excited to see the promising and rapid growth in mobile game and marketing revenue, mainly supported by the soaring user base of KIS mission-critical mobile apps. We expect that a KIS mobile platform will continue to attract user activities, game developers, and business partners, so that the revenue from KIS mobile monetization will become our growth catalyst in the coming years. On the game side, our JX Online 3, the leading domestic 3D MMO game, will maintain its growth momentum as we continue to provide innovative and improved user experience and services to its players. A number of expansion packs for JX and Mission Against Terror will be launched in this year to further enhance the game experience and to stimulate and consolidate our game popularity and increase our game population. For now, more than five mobile games are under full swing development, of which two to three games are in the pipeline for release in the next few months. We expect that the revenue from our online game business will achieve double-digit growth rate in 2014 again. On the Kingsoft Office side, we expect that the enterprise sales will maintain its strong growth rate, benefiting from the improved IPR protection policies and enforcement, and improve the user experience of our product. In addition, Kingsoft Office will actively explore the monetization approach of its free user traffic of our WPS Personal edition which I mentioned earlier, have already exceeded 60 million monthly active users. This will become a growth catalyst for Kingsoft Office in the coming years. More importantly, Kingsoft Office will focus and invest very aggressively on the mobile Office apps, both the existing WPS Office app and the new Office app for mobile, which is under development, and to expand its worldwide mobile user base. Looking ahead, Kingsoft will continue to invest heavily in mobile and cloud services. I want to emphasize this is, again, mobile and cloud services are our focusing point and for heavy investment in 2014. As discussed above, we expect the top line of the group to maintain its fast growth momentum and to reach a new high in 2014. Kingsoft will always embrace the internet trend and strive to deliver product and services that exceed our users' expectations. I am confident that by focusing on product and service innovation, exceptional user experiences, and being responsive to the fast-changing markets, we will continue to increase shareholders' value in the coming years, starting in 2014. Thank you. Hi. This is the end of the presentation by Francis Ng and also our CEO, Dr. Zhang, and now is the time for our Q&A session. 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 the 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. The first question comes from the line of Jiang Xiao from Macquarie. Please ask your question. Thank you very much for taking my questions. Congrats on very strong results and on a great 2013. I have three questions, and I am going to ask them all at once. The first question is that could you talk a bit about your mobile game development plan and strategy and your mobile game platform strategy for this year? My second question is for KIS. I think Dr. Zhang mentioned a revenue number from games for KIS in his prepared remarks, but I just want to make sure I got the right number. Could you repeat that number? Also, for this year and next year, following a very strong growth of KIS in 2013, what are the main growth drivers to continue to drive very high growth rate for this business for the next couple of years? My third and last question is on WPS. Could you talk about some of the key drivers behind the strong performance in Q4? Also, Dr. Zhang mentioned that, I think I heard that value-added services as another driver for WPS business now. Could you elaborate a bit more on what exactly are those value-added services? Thank you. Okay. Thank you, Jiang, for your question. I took some note on two questions. If I miss any, you can remind me the question again. The first question you asked is about our mobile game developer strategy and our mobile game platform strategy. Those are very good questions. First of all, the mobile game development is under our game division, which is mostly Westhouse. As I mentioned earlier, we have about eight mobile games are under development, and from about eight game studios and mobile game studios. Actually, I want to take the opportunity to say that actually last year, in 2013, was the year that we have recruited very aggressively and put together quite a few mobile game studios. That is the reason why we could have put together about eight games in the pipeline this year. We still need to see how those games will pan out. If any one of them will take off is a big bet. At this moment, the only thing I can say is that we have invested very heavily here, and the team are working very hard to push out the games. This definitely was a major focus of our game business last year. All the new increased investment last year was on the mobile game side. That is the game development part. The mobile game platform, not part of business, is mainly in with the KIS. Given the traffic KIS has, over 150 million monthly active users on the PC end, and slightly more than that on the mobile end. Together, we command over 300 million monthly active users. A large part of that user number activities are actually game players. How to channel those traffic into our mobile game center was a major focus for that. What I can say is the progress was very impressive last year. I mentioned the value-added services, which are mostly from the games, increased more than 3,000% last year to CNY 83 million from a year ago, which was only CNY 2.4 million. That's your first question. Let me jump to the third question. I can't remember the second question. Francis, you remind me later. You asked about WPS value-added services. More specifically, it's very similar to the KIS approach, which is you basically monetize your traffic. Keep in mind that last year, our monthly active user for PC version of WPS, personal version on PC, the monthly active user has already reached over 60 million a month. That is a huge amount of traffic. To serve those users better, we actually created a website, which hosts a huge number of file templates, many kind of templates. That generate tremendous traffic from our users. Our office users go there to download the various templates for their personal use, for their work. That traffic, we put some advertisement there. That's a simple way, a very straightforward way to monetize that traffic. Given the increased number of mobile monthly active users, now we have over 32 million monthly active users on mobile, and that traffic alone also can be monetized, and we already started monetizing that as well. Both on the PC end and on the mobile end, we are confidently looking to see a huge increase in term of revenue. Okay. Sean, thank you for your question. Let me tackle the second question, which is on KIS. Sean asked about what are the main growth driver to maintain the high growth of KIS business. I think we are very confident that KIS will continue its explosive growth in the coming year. As you can clearly seen that after the successful transformation, KIS as a part of the Kingsoft business, has actually evolving into a major mobile and global platform. You can see that, as mentioned by Dr. Jiang earlier, there are some very successful mission-critical apps. Take for example, Clean Master, which has increased from nothing to close to 100 million monthly active user by end of 2013. By now, it has already exceeded the 100 million magic number. We are very confident that for KIS, the mobile monthly active user contributed by its mobile suite, Clean Master, Battery Doctor, Photo Grid, and Handyshaft, will definitely exceed 300 million mark by the second half 2014. We have a very high chance that we will be exceeding that number as well. To answer your question, I think the keyword mobile and global are the key driver for our KIS business. Let me add on a few points on this second question on top of what Francis has already mentioned. If you look at our KIS businesses, this is a business that is completely internet model into market. It is a business operation and marketing, and also it is a family model. What we have seen last year is a transformation from a PC-based internet business to a mobile internet-based business. In particular, as Sergio mentioned earlier, Clean Master has become a flagship app. When its monthly active user reaches 100 million, it has really become a super app, not to mention it is the nature of mission-critical. Combine that with Battery Doctor and PhotoGrid, and the other consumer apps. Basically, KIS is already a leader in the consumer apps. In particular, if you look at the numbers on Google Play, Clean Master is the number one in its two category in terms of downloads. If you look at this, basically it is a combination of consumer apps and the huge volume of monthly active users and the traffic it generated, actually makes KIS also a platform. If you think about it, landing page is a platform on PC, and the traffic also help them to establish a game center, which is on a platform. The traffic will also establish KIS as an app distribution platform. Today, we already see revenue come in from this particular platform, and we will see the revenue growth very rapidly in 2014. Basically, Okay the active users, the traffic, reaches to a huge volume, you make yourself a platform. Could I please follow up with two things very quick on just what you just said? Firstly, on Clean Master and the Battery Doctor, those are very popular apps. I use those myself. But those are kind of free, right? So longer term, what is your monetization plan for some of these popular apps? Second follow-up is back to WPS. You talked about a very sizable consumer free user base. Do you have any plan to make the consumer version of WPS into a sort of SaaS model, just go straight to offer those office productivity software from the internet directly? Yeah. Okay, again, let me take the two follow-up questions. On the monetization model of the mobile apps, actually, I already answered that question. The traffic itself, it can be used for advertisement. So that is a revenue source. The traffic can channel users to get our game center. That is another revenue source. The traffic, the update and upgrade of those apps can help introduce other apps into the user's phone. So all those are channels of revenue. The effort and exercise that we did last six months have already proven this is very effective, not only on the KIS, but also on the WPS mobile apps. On the WPS side, you mentioned about why we do not have a SaaS model, are we going to introduce SaaS model? The answer is yes or no. Yes, we actually have the product somehow ready for the SaaS model, but we have not launched it because the initial test we had three years ago basically tells us people do not want it. In China, really, people still prefer to have the software run on its own device. In the past, it was because of network issues. Today, it is because of cost issues, and the 3G network and Wi-Fi. 3G network is still very expensive, and Wi-Fi not always available. Actually, if you look at this situation is actually to our advantage, because WPS is the only office app that has a user in all platforms, Windows, Linux, Android, iOS. So, it is actually put us in a very advantageous position compared to our competitor, which is Microsoft Office. Sergio, I wanted to Xiong, I wanted to add a little bit more color on the monetization on the two super app that you mentioned, Clean Master and Battery Doctor. While we have yet to start seriously monetizing Clean Master, Battery Doctor, we actually already piloted the monetization at end of last year. You could see that there was a game called Ten Ten ICO. We used the Battery Doctor to promote that game as our first exclusive game, which was actually within three days launching, going to the top 10 grossing. Now we generate the gross revenue of around CNY 10 million per month. That is actually a very valid way to prove our capability of this super app to monetize. The other thing is that you also notice one of the characteristics of our Clean Master is that we actually have more than 50% of our user from overseas. That is also a characteristic you might want to notice. That means that Clean Master is actually a platform, a super app, which will eventually develop into a platform that bridge China to the rest of the world. We will be able to become a major platform, enable us to promote the app developer in China to go overseas and much more so. Especially, the games developer in China can use this platform to launch it in the overseas market. Okay, thank you. Okay, great. Thanks, gentlemen. The next question comes from the line of Ms. Wendy Hung from Standard Chartered. Please ask your question. Thank you. Firstly, I want to follow up on the Clean Master and the Battery Doctor monetization. These products have shown overseas presence. How are you going to monetize them in the overseas market? Okay. Wendy, thank you for the follow-up question. Actually, we do not see much difference in the ways of monetizing this mobile traffic. Francis just mentioned one particular example that using Battery Doctor to promote one particular game. The ways that are widely acceptable in the U.S. and other developer markets are that you use your super app to help promote other apps or games when you do update, when you do upgrade. There are just millions of ways. Of course, the one thing you want to make sure is you do not deteriorate users' experience when you are doing those things. So far, the pilot and experiment we have done on the Battery Doctor has made us very confident that we should be able to monetize this heavily in the coming years. Actually, the reason I asked about the potential different monetization in overseas and China is because we are actually seeing the mobile app ecosystem are quite different in China versus, for example, the U.S. Based on what you just mentioned, it seems like you will not really differentiate the way to monetize your apps given. No, I am not saying we are not going to differentiate. We will find ways. We will look into the users preferences, the way, the frequency, and the appearance of all those apps. Yes, we are going to differentiate it from geography to geography. But what I want to say is every geography, there are effective ways to monetize those traffic. Okay. Also, can you give us your current stake in the games subsidiary? I understand that you currently probably only have over 70% in Xishanju, but how about your ownership in the Kingsoft Games subsidiary? Wendy, could you repeat your question again? Yes. My question is about your stake, actually interest in the Kingsoft Games subsidiary. Right. Games subsidiary? Wendy, let me answer this question. We actually own approximately 80% of the games subsidiary, Xishanju. I am not sure whether your question coming out from the recent announcement that Xishanju probably have a profit sharing of around 30%-40% of the game revenue. If that is the question, I think I have answered in other venue that the parent company, actually, during the establishment of the gaming subsidiary, we actually retain the IPR of certain games. In the profit sharing, the group actually take up 60%-70% of the gaming revenue that generated from our current existing game. But if you talk about the stake, we currently own around 80% of the games subsidiary. I see. But Xishanju is only one of many games subsidiaries that you are having, right? That is right. How about your ownership in the overall games business? I can answer your question in that way. Westhouse actually accounts for almost 90% of all our game revenue, 80%-90%. Westhouse is the majority of our gaming revenue from our gaming development business. Thank you. But if you talk about the other Lastly- Yeah, please go on. Sorry. Lastly, can you give more color on the margin outlook and sales marketing costs? Last quarter, you provided very helpful number guidance. Just wonder if you can provide more color for the Q1 2014 as well as the full year 2014. Also, regarding your sales marketing costs, can you give us some sense about the allocation between the domestic marketing as well as overseas marketing campaigns? Thank you. Now, you talked about the guidance for 2014. Is it the general, or is it only on the gaming sector? For the overall company, not just for the game. Okay. For the overall segment, let me give the direction first, and then I will give a very brief guideline on the overall. If you look at our four business segments. On our gaming segment, I believe that in 2014, we are confident that we will still be growing very healthily, beat the market, I mean, the MMORPG market. Because now the current revenue of our gaming development segment is mainly contributed from our online game. We haven't taken into account our mobile game. So in my guidance for 2014, I do not take the mobile game into consideration, even though Dr. Jim mentioned that there will be a number of major mobile games we'll be launching in the coming months. But in this guidance, on a conservative basis, I just use the online gaming market, which will be healthy, outbeat the market growth. The market growth going at high teens will definitely exceed that one. On the second business, the KIS business. This business almost continue to grow at over 100% in the last two years. With the significant growth in our user base, as we mentioned earlier in the call, we are very confident that this over or close to 100% growth in top line will continue in 2014, and probably year after. So it will be continue with an explosive internet growth on the KIS business. Our Kingsoft business, similar to the online gaming business, it will be a very healthy growth. The reason is that we are actually enjoying the benefit of the government enforcement in IPR protection, and also the continuous enhancement in our user experience. We have actually positioned ourselves to be one of the most advanced user experience productivity software. We will continue to develop in that area. On our cloud business, it's still at its infant. I think we are now looking into a significant growth in the revenue number. So overall, I believe that 2014 will continue to enjoy a very strong growth on the top line. You also asked about the selling and marketing expenses and other R&D expenses. I would say that while we will continue to be growing very strongly on our top line with the improvement in the monthly active user base and the advancement in the mobile and global footprint, we will be in another investment year. Which mean that we are actually target gear up to invest it in our R&D area and also in our marketing area. We actually finished the board meeting earlier today. The board, again, the tune is that in 2014, we do not put a very strong emphasis on the profitability, the near-term profitability as our key KPI. Our key KPI will still be putting on the strong mobile and global advancement, user base, and top line. I think this answers your question, Wendy. Yeah. Can you maybe quantify what kind of margin decline or in what size shall we expect? What kind of magnitude would that be? For example, Baidu mentioned that there will be no profit growth. Sohu mentioned that there will be no margins. If you can actually give any similar guidance like other companies provided after board meetings, that would be very helpful. I don't think that we will be going to that extreme. In 2014, I believe that Kingsoft will still be profitable on the bottom line. But as I said that the board did not keep a key focus on the bottom line. If I answer you that we will not be reporting any profit, that we go to the extreme. But it will be hard for us to give. What I meant is. line-by-line guidance. What I meant is actually if you can give more quantify, a little bit, that will be helpful rather than just giving a directional comment. Wendy, sorry. I could not give detailed numbers on the guidance, on the bottom line. But I will say that it will be lower than 2013. Marginal. The margin- Marginal. The operating margin, because it will be another investment year. Okay. Thank you, Francis. Thank you, Wendy. Your next question comes from the line of Ms. Connie Gu from BOCOM International. Please ask your question. Good evening, Dr. Jun, Francis. Thank you for taking my question. Just a quick question on mobile games. Can you please share some details on cooperation with Xiaomi on mobile games, and are you going to operate a game platform with Xiaomi? How do you share revenue afterwards? Also some big color on KIS IPO progress. Thank you. Let me first comment on the game a number of distributors instead of one exclusive distributor. When it comes to Xiaomi, we definitely like to have Xiaomi's Game Center as our preferred publisher. At this moment, we are collaborating very closely with Xiaomi's Game Center, and definitely the number of mobile games under development in Kingsoft Studios will be launched, at least some of them will be launched on the Xiaomi's game platform. But definitely we also look at our KIS game platform as well as other game platforms. Definitely, Xiaomi's investment into Westhouse will help this partnership, and which honestly was one of the major reasons why we initiated that investment. Again, for our mobile game, we like to also cooperate with other game distributor or publishers. Connie, let me tackle the report on the KIS IPO process. As we mentioned earlier, we announced that KIS has submitted the first confidential filing in January this year. While I am not allowed to speak too much about the details of the IPO process, I can advise that the progress are on track. Connie, I hope you understand we are not allowed to disclose too much information about the process. What I can say is that- Yes, sure. No problem. it's on track. Thank you. Our next question comes from the line of Mr. Thomas Chung. Please ask your question. Hi, good evening, Dr. Jun and Francis. Congratulations on a solid quarter. I have two questions. My first question is back to the KIS. I just want to get a sense about the revenue growth for 2014. Which countries drive the revenue growth? Is it the U.S. or the China market? My second question is about the user base. You guys will ramp up the user base and double the user base to over 300 million this year. May I know the marketing channels that you will use to promote the apps? My first question, sorry, my first question is about the mobile revenue contribution for KIS. Is there any chance that it will surpass the PC? Thanks. Let me answer the question. Thank you for the question, Thomas. Your question is that let me work backwards because I cannot remember clearly. Your last question is that whether our mobile revenue contribution will exceed the PC contribution. Yes. The answer is positive. Because as I said that is the key theme for Kingsoft, and in particular for KIS, is global and mobile. The global contribution will definitely exceed PC base, but not in 2014. As you can see that in 2013, the contribution from our mobile business contribute approximate around 8%, I think around 8% annually, and it is 12% in Q4. It ramped up very quickly. In 2014, again, this is because KIS is in the process of IPO. I cannot comment into too detail, but I can tell you that in 2014, it is ramping up very quickly, but it will not surpass PC. But eventually, hopefully, in 2015, it will be exceed the PC revenue. This is your last question. The second question you asked about the channel to promote, to grow the user base. I think this is a very good question. I can share with you that the reason why we always take a very conservative approach on our guidance, and our guidance are actually result, usually exceed what we guide in the past few quarter, is that the team actually are very good at developing product. You can see that in the Clean Master or Battery Doctor. The growth are, on a very large extent, organic growth. Spread by the word of mouth. We actually do not spend too much into the marketing. But starting Q4 2013, you remember that I said that we start the turbo button, so we will be spending marketing money to acquire traffic as well, on top of what we successfully grow on an organic basis. This is the answer to your question two. And your question one, could you repeat that, Thomas? In terms of the revenue growth- Okay. Yeah. In terms of the revenue growth driver for KIS, should we expect the U.S. revenue to surpass the China market? How should we think about the geographical mix in terms of revenue for KIS in 2014? Yes. Good question. I think that it's also very related to your first question, whether the mobile will exceed the PC. Currently, I think, on the PC side, majority of our revenue are coming from China, as you can see. The advertising revenue, the e-commerce and the value-added service. On the PC side, primarily the existing revenue are mainly coming from China. On the mobile side, we are just starting to monetize that. In the very beginning, using Battery Doctor to monetize on the iOS side. It's also coming from China. But, as you can see that, we said that we have more than half of our mobile active user are from overseas, and it's growing at a very much faster rate than the PC side. So you can see that from that trend, you can tell that our revenue from overseas are on an increasing pace. But in 2013, and probably in 2013, China will still contribute the majority of our revenue. But the overseas revenue are ramping up very fast through the ramping up of our overseas user base. Thanks, Francis, and congratulations on a strong quarter. Thank you, Thomas. Ladies and gentlemen, with that, we conclude our conference call for today. Thank you all for participating. You may all disconnect.