Earnings Call: Q4 2012

Mar 19, 2013

Ladies and gentlemen, thank you for standing by, and welcome to the 2012 Annual Results Announcement 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, 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, Tuesday, 19th of March 2013. I would now like to hand the conference over to our first speaker for today, Ms. Michelle Harnett. Thank you. Please go ahead. Thank you very much. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2012 Annual and Q4 Earnings Call. My name is Michelle Harnett, the Company Secretary of Kingsoft. I would like to start by reminding you that some information provided to you during the earnings call might include forward-looking statements, which may not be relied on in the future for various reasons. These forward-looking statements are based on our own information and on information from other sources we believe to be reliable. Please refer to other public disclosure documents for detailed discussions of risk factors which might affect our business and operations. Having said that, let me introduce our management team who join us today. Dr. Zhang Hongjiang, our Executive Director and CEO. Mr. Francis Ng, our Executive Director and CFO. Now, I am turning the call to our Executive Director and CEO, Dr. Zhang Hongjiang. Good evening. Thanks for coming to our conference call. I would like to start by saying that from the announcement of our 2012 results, I would like to emphasize three key points. First, I am very delighted to report that in 2012, we have delivered over 38% annual revenue growth, and our business lines had a record year in term of total revenue and operation metrics. I also want to emphasize on the number two point is that 2012 was a very critical and encouraging historical year for Kingsoft. It actually marked a completion of restructuring the entire Kingsoft Group, followed by our completion of MBO for Kingsoft Office division. Number three point I would like to say is that across all of our business lines, we have achieved or exceeded all of our targets for 2012. In summary, the Kingsoft Internet Security is definitely a highlight here. I would say it has successfully transformed itself to an internet company with advertising revenue continuing to break historical highs. That is supported by a rapid growth user base. Here, I want to emphasize that this can be seen from the record revenue from our Internet security business, also the record high user bases and the shift from the traditional business model where we rely on our members to pay a monthly fee to largely depend on the value-added services, including advertisements. Also, another highlight in our business is our JX Online 3 game that has continued to improve its popularity, and in 2012 has doubled its revenue despite the slow growth of overall MMO gaming market in China. Also, as a leading office software, WPS Office capitalized on a historical opportunity for the development. As the Chinese government continued to improve the intellectual property right environment. By leveraging the accelerated growth of mobile internet user base and the smart devices in China, the active users for our Kingsoft Cloud product, Kuaipan, which is a personal storage service, which is also the first initiative of our strategic cloud business, has expanded further and topped the list of the similar services in China. I am very pleased to announce that Kingsoft's strategy, we call it a three plus one, which basically says that three mature business and one new business, which is the Kingsoft Cloud, has taken shape in 2012 with all the three major existing business lines exceeded target and our new cloud initiative on track. I would like to spend some more minutes to go into a little bit more detail to each of our four businesses. First, let's talk about our game business. Our existing games, the JX series, continued its trend of revenue growth. As I mentioned earlier, in particular, JX Online 3, our flagship 3D MMO game, has doubled its user base and its revenue in 2012, and significantly outpaced the growth rate of the overall MMO gaming market in China. The successful launch of each expansion pack of JX Online 3, which altogether three of them in 2012, has demonstrated our capability of capturing the game's need and optimize gaming experience. This is a very actually daunting job in thinking about JX3 is already a four-years-old game, and the common wisdom that an old game, you usually just expect decline in user bases and in the income. During the year, we have commercially launched three new game titles, and that further enriched our game portfolio. Among which, the first Q version of 3D role-playing game, has shown very promising potential in term of popularity and revenue. Also, we are very actively pursuing the development of web and mobile games. As you will hear more in 2013, we are going to heavily invest in the web and the mobile games. Also, the web game T3, which is the first web game, and also mobile game, 宠物城堡, are in the pipeline to be released soon. Meanwhile, we invested in Shanghai Qiwan, a web game R&D studio to grow our R&D capacity in web games. Let's move to the Kingsoft Internet Security business. That business has completed its transformation into an internet company, as I mentioned earlier, and has reached a new milestone in its monetization capability. Advertising revenue has experienced a fast growth at a triple digit year-over-year, supported by our expanded user base, now is up to 150 million, and our improved monetization capability. We have also been very actively developing other value-added services, especially web game operation. On another highlight, I would say really a milestone in our internet security business, is that on June 19, we officially launched our internet browser, Cheetah, which is a very stylish design and outstanding user experiences. As well as the fast speed is represented by the name. The user base of Cheetah Browser has experienced a tremendous growth since its launch. In the last two months in 2013, the growth continued and actually accelerated. In particular, the creative marketing effort for Cheetah, such as the train ticket purchase application, which was launched in January before Chinese New Year, has really accelerated the growth of the install base for the browser. We believe our browser service will further enhance our monetization capability in the coming years, since that really closed the loop for our business model for the Kingsoft Internet Security businesses. In addition, benefiting from the rapid growth of mobile internet and smartphones, the monthly active user base for our mobile security applications and services has recorded a rapid growth, now is up to 40 million users. This is a monthly active user. I also want to say that in 2012, our WPS business had another tremendous year in term of growth and the revenue. Really, it's because the government has continued to push in IPR protection, and more importantly, our product innovation. The revenue of our WPS Office continued its strong growth momentum in 2012 after a strong year in 2011, and achieved a new record with sales in Mainland China and Japan exceeded CNY 195.8 million. The monthly active user of WPS Personal Edition rose to over 43 million users. That is supported by the improved user experiences. We certainly still have seen the user become more and more active. They are downloading our template and interact with our customer services much more often than before. We are very excited to see the global monthly active user of WPS Mobile Office, which has exceeded 11 million in 2012, this is the monthly active users. This is including both China and overseas users. We are very pleased to hear is that it's a leading mobile office software, and we not only see the strong growth in China, but also see its users growing very fast in over 200 countries and regions. The WPS Office supports now 23 type of main document format over 46 languages. We are very pleased to see it has taken the top spot in Google Play in the business application category in 25 major countries and regions. So we consider this is a milestone result for our WPS Office. Just as of last month, in January, we have also released the iOS version of WPS Office with its first feature for the PPT display function, and it has received very positive feedback from our users and experienced a very large number of downloads every day. Let's now move on to our new business, which is the Kingsoft Cloud. That was established in early 2012 as a spin-off from our WPS Office. We did that to capture the opportunity in cloud storage and computing services. We believe this is the next major trend in computing industry. In order to leverage the accelerated growth of mobile internet user base and also the smart device growth in China, we established a strategic collaboration with Xiaomi, Skyworth TV, AIGO, in 2012. Xiaomi has invested into Kingsoft Cloud as a strategic partner in late last year, in November 2012. In this way, we will allow Kingsoft Cloud to take advantage of Xiaomi's phone rapid growth to expand its storage service to mobile device users. As you may have heard, the Xiaomi phone users are the most active mobile internet users in China. The other good news is that the total registered users of Kingsoft Cloud has expanded further, and that made it on top of the list of similar services, which is the personal data cloud services in China. Overall, we had a very strong year of 2012, and looking forward to 2013, I think we have built a very solid ground for us to continue the growth momentum. Now, let me turn the call to Francis, our CFO, to give further comment on our annual report. Thank you, Dr. Zhang. Good evening, ladies and gentlemen. I'm very pleased to walk you through the financial result for 2012, fourth quarter, and the whole year. Let me first start with the Q4 result using the CNY as the currency. As you can see from the result announcement, we have continued to report another very solid quarter result. Revenue increased 18% quarter-on-quarter and 52% year-to-year to CNY 431 million. The revenue split was 56% for entertainment software and 44% for application software. You'll notice that this is the first time that our revenue contribution from our entertainment software fall below 60%. That means that the revenue from our other non-gaming business has been growing very rapidly. Revenue from our entertainment software business increased 40% quarter-on-quarter and 27% year-on-year to CNY 241 million. The solid quarter-on-quarter increase mainly reflected a combination of a few factors. High popularity of our Q version of the 3D role-playing game, Ma La Jiang Hu, which was commercially launched on December 19. The successful release of the year's largest expansion pack, Nirvana of the Light, 欲与明珠, for JX Online 3 in November. The expansion pack of new JX Online World for JX Online World in October. A full quarter of revenue contribution from our new game title, namely The Legend of the Moon, Legend of Holy World. The robust year-on-year increase was mainly attributable to the ongoing popularity and strong performance of JX Online 3, supported by the successful expansion pack's launch during the year and a stable and very solid performance of other existing games. Lastly, the revenue contribution from our new game title. Our daily average PCU, which is a typical measure for our game popularity, increased 4% quarter-on-quarter and decreased 4% year-on-year to 600,000. Monthly average paying account, APA, increased 8% quarter-on-quarter and 24% year-on-year to 1.65 million. The increase in APA was primarily attributable to the continuous growth of JX3. The monthly ARPU increased 4% quarter-on-quarter and 2% year-on-year to CNY 48. Revenue from our application software business increased 25% quarter-on-quarter and over 100%, 109% year-on-year to $190 million. The sequential and year-on-year double-digit and triple-digit increase was mainly due to the combination of, firstly, enhanced traffic of landing page of Kingsoft Internet Security, the expanded and deeper cooperation between Kingsoft Internet Security and online business company. Third, the rapid traffic growth from Cheetah Browser. Lastly, the recorded high sales from Kingsoft WPS Office, which is, as mentioned by Dr. Zhang earlier, benefiting from the favorable policy of the legitimate software used in China. Also, more importantly, the improved product experience. The cost of revenue increased 17% quarter-on-quarter and 19% year-on-year to $52 million. The increase was mainly due to the increased traffic for Cheetah Browser and the further expansion of Kingsoft Cloud business. Our gross profit increased 80% quarter-on-quarter and 58% year-on-year to $379 million. GP margin was flat quarter-on-quarter and increased three percentage points year-on-year to 88%. Our R&D expenses increased 60% and 29% to $114 million. The quarter-on-quarter increase in R&D cost was mainly attributable to the accrual of year-end bonus. The year-on-year increase was primarily due to the investment in talent for mobile internet and cloud business and the increased salary and benefit. Selling and distribution costs increased 7% quarter-on-quarter and 104% year-on-year to $84 million. The quarterly increase was mainly due to the higher marketing spending for KIS, our internet security company. The year-on-year increase was primarily due to the planned intensive marketing and promotion activity in the fourth quarter to commercialize our new games, launch the year's largest expansion pack for the JX series, and enhance market penetration of KIS and Cheetah Browser. Our administrative expenses remain stable, increased at 11% quarter-on-quarter, and decreased 2% year-on-year to $45 million. The quarter-on-quarter increase was mainly due to the fourth quarter accrual of discretionary year-end bonus. Our share-based compensation cost increased 11% quarter-on-quarter and 240% year-on-year to $14 million. The increase was primarily due to a certain subsidiary awarded share and option granted to certain employees. Our other income and gain decreased 80% quarter-on-quarter and 63% year-on-year to $3 million. This decrease was primarily due to there was more local government financial incentive recognized in the third quarter of 2012. Our other expenses increased $874 million quarter-on-quarter and 700% year-on-year to $80 million. This was mainly due to the written down of inventory of the Pad of our Kingsoft Japan. The operating profit before share-based compensation costs increased 3% quarter-on-quarter and 67% year-on-year to $125 million. The margin of operating profit before share-based compensation costs decreased four percentage points quarter-on-quarter and increased three percentage points year-on-year to 29%. The quarter-on-quarter decrease was mainly due to lower other income and the higher other expenses, which I mentioned earlier, the written down of Pad and receive of less government grant in fourth quarter. The fair value gain, which reflected the change of fair value of an option granted by our Vietnam investment company, VNG Corporation, which resulted in a gain of $16 million compared to new for the third quarter 2012, and a loss of $2 million for the fourth quarter in 2011. Our financial income increased 11% quarter-on-quarter and 27% year-on-year to $27 million. This increase was primarily due to higher effective interest rate. Our income tax expenses increased 3% quarter-on-quarter and 35% year-on-year to $16 million. Our effective tax rate excluding the impact of eShop, decreased one percentage point quarter-on-quarter, and four percentage points year-on-year to 9%. As a result, our profit to owner of parent increased 16% quarter-on-quarter and 58% year-on-year to 125 million. Now let me turn to the full-year variance. The revenue increased 38% year-on-year to 1.4 billion. Our entertainment software made up 60%, increased 23% year-on-year to 851 million. Application software made up 39% of our revenue and increased 67% year-on-year to 544 million. Our GP margin increased slightly by 1% year-on-year to 87%. Our profit to owner of parent increased 33% year-on-year to 433 million. Excluding the eShop impact, our profit to owner of parent increased 39% year-on-year to 473 million, and the profit margin, excluding the eShop impact, was 34% for 2012 versus 33% for 2011. On our balance sheet, I am very pleased to report that we still have a very strong liquidity and cash balance. We have a cash and cash deposit of 2.42 billion at the year-end 2012, representing cash per share of RMB 2.1. Our deferred revenue, which included the current and non-current portion, at the year-end was 200 million compared to 182 million last year at the end of 2011. This increase was primarily due to the increased sales of prepaid card in the year 2012. We still continue to report a very strong operating cash flow. Our net cash generated by our operating activity increased 23% year-on-year to 556 million. As to our capital expenditure, we recorded an 85 million capital expenditure for year during 2012, and 168 million in 2011. Now, I turn the floor back to our CEO, Dr. Zhang Hongjiang, to talk about our outlook for 2013. Dr. Zhang? Yes. Thank you again, and also thanks to Frank. Looking forward, I would say, we are very confident for 2013. We will see a continued growth momentum. The JX Online 3 is a leading domestic 3D MMO game. We continue the growth momentum as we continue introducing new and improved expansion pack and also improve the gamer's experience. Ma La Jiang Hu, which was launched in December last year, has enriched our 3D game portfolio and will be another growth catalyst for online game in this year. We expect that JX series games and the Ma La Jiang Hu game will achieve double-digit growth in terms of gaming revenue and APA in 2013. Two more MMO games, the Jiutian Map and the Doomsday Dragon, and also a number of web games and many mobile games are in the pipeline to be released this year. I want to emphasize again, this year our focus is on the mobile game. We will put the majority of our investment in game in the mobile game area to capture the growth opportunity. Also we have three teams started on the web game front, so you will see a number of new web games released into market this year. For the Kingsoft Internet Security business, we will further grow our user base, and in particular for the Cheetah Browser and our mobile users, through product innovation, through improved user experience and strengthen the cooperation with our strategic partners. We expect the revenue from our value-added service, in particular advertising, will keep the strong momentum of growth, and that's supported by the expanded user base and in particular, our browser. In this plan, I also want to emphasize that we'll expand our investment in 2013 into mobile security. The revenue from web game operation is currently in its infant stage for our internet security business. We expect that will be our next growth candidate in 2013, in particular, if we succeed in our mobile user base. Besides, Kingsoft Internet Security will invest heavily, as I mentioned earlier, in the mobile business line, and we will launch a series of mobile apps and services in 2013. That will really transform our security business from PC-centric to mobile-centric, so really make it a mobile internet company. I'm very confident on that, and in particular, I'm very confident on the continued growth momentum of our internet security business. In 2013, we also like to focus our WPS Office on growing enterprise businesses and new revenue sources. I want to emphasize that we already have taken over 60% of government procurement contracts in office software. So this year, our focus will be pushing into enterprises, in particular, state-owned enterprises, with our WPS software. We will see our WPS Office further expand its mobile user base worldwide with new functions, improved user experiences, and our expansion into new platforms, which means that we will launch new apps in the iOS platform. As I mentioned earlier, in February 2013, this year, we already have released WPS Office for iOS with the first feature, which is PPT display, PPT viewing. That has received very positive feedback and experienced a high number of downloads every day. Kingsoft Cloud is our new business, and we will continue the investment mode. We'll invest very heavily in 2013. We are also working with our partners to plan our next move in term of our investment plan into these businesses. As you know, this is long-term, so we are most likely to co-invest with some VC funds into this business to make it grow even faster. In addition to the personal data storage service, we will expand into enterprise data storage service. Actually, the product will launch very soon, later this month. We will also offer cloud storage platform service in this year. So that will complete the entire service portfolio for Kingsoft Cloud, which is you have a cloud platform as a base, and on top of that, you have the personal data storage service plus the enterprise data storage services. The growth of our user base will continue to accelerate in 2013. We are already seeing that happen in the last two months of this year. We believe this will be achieved through product innovation and strategic collaborations with Xiaomi and the smart TV manufacturers, as well as other mobile device manufacturers. Again, this will be a long-term strategic investment. The success of this business will better position us in the coming years. Looking forward, I am very confident, and we believe the top line of our Kingsoft Group will maintain a very fast growth as we continue investing heavily in mobile internet business and cloud services. We are confident that by focusing on product and service innovation, by providing exceptional user experiences, and by capturing future opportunities, we will deliver long-term value to our shareholders. Before concluding my remarks, I would like to announce that the board has recommended a dividend of HKD 0.11 per share for 2012. On behalf of Kingsoft, I would also like to extend our appreciation to Kingsoft customers, shareholders, employees, partners, and you all for supporting us. Now we may start our Q&A. 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 a request, you may dial the pound or hash key. Your first question comes from Jiang Xiao from Macquarie. Please ask your question. Hello? Sorry, sir. Your next question comes from Martina Ma from BOCOM International. Please ask the question. Hi, good evening, Dr. Zhang Hongjiang and Francis. Congratulations on a very strong quarter. I have two questions. The first question regarding your cloud strategy. I am just wondering, what is the difference of the cloud strategy between Kingsoft and other major competitors such as Baidu and Ali? The next question is about your margins. As we can see, the margins for this quarter improved significantly year-on-year. Is it mainly due to the economy of scale or cost control of your company? What is your guidance for the margin trend in 2013? Thank you. Thank you for the question. This is Hong Zhang, CEO of Kingsoft. Let me take the first question, and I will ask Francis to address the second one. As most people have recognized that cloud computing will be the next big thing for the computing industry, many companies have jumped and invested heavily into this space. When we got into this space, there are a few differences between us and our competitors. First, we focus on one thing first, that is personal data storage. Now we are extending into enterprises. We are focused on storage services, cloud storage services, instead of broad cloud computing services like what Ali Cloud has been doing. Compared to Baidu, I would also say that we have moved much earlier than them, and also we have now a broader user base. I would say the competition here is pretty serious, and we will focus on providing the best user experience in terms of the client experience and also the speed and failure rate. We believe that by taking a long-term view and a long-term strategy, long-term focus on storage service only, and gradually expanding into other cloud services depending on our customers' need, actually will position us better than our competitors. If you look at our competitors, you could almost tell that, and also from our user database and the growth and our position in the data storage service space, you can see that this strategy actually worked well in 2012 and will continue to work well in 2013. Just as a reference, in the U.S. market, you have big players like Amazon, Google, and Microsoft all invest heavily in the cloud computing space. Yet you see Dropbox and you see Box.net, both of them, one both focus on enterprise and one focus on personal data storage, have succeeded in the cloud storage services, moved much faster than the big competitors. I would also say one more thing, that is, if you look at the computing industry in the last 50 years, it is mostly new, small startups beating existing bigger players, in particular in the new business area. We are pretty confident we will make that happen again in this particular case. Francis? Thank you, Dr. Zhang Hongjiang. Martina, let me answer the second question, the margin trend. You see that the margin trend for this year have actually increased slightly by 1%. For 2013, I would like to point out that we needed to be a little bit careful about the mix of our contribution from different segments. In the various segment, I would like to point out that our gaming segment will continue to be strong, outpace our competitors. We will be looking at over 20% growth in 2013 on our game. In internet security, which will be even on a much higher pace, what we can be conceptually expected to grow over 80% year on year in 2013. Our Kingsoft Office will also be continued with this pace, even though maybe because of the growth in the base, the percentage growth in 2013 will be slower than 2012. We will be continued to keep on a double digit, over 20% growth in 2013. As you can see that the contribution, because of the growth in our internet security, will be faster than our game and Kingsoft Office segment. So the mix will be different. Also we are now planning to be continued to increase the user base of our internet security area. As Dr. Zhang Hongjiang mentioned earlier, we will continue to be invest in that area. Also we will continue to invest it in our new business, the three plus one, the last one, the cloud business. In a nutshell, if you're looking into the 2013 operating margin, you'll be expecting that the blended operating margin will be growing at a much slower pace than our top line. So we'll be looking in that single-digit digit area. Let me add something here to Francis' comments. As we mentioned earlier, in 2013, we will continue to invest heavily in the mobile and the cloud business. In particular, in our internet security area, as Francis has mentioned, most likely we're going to see our top line continue the same pace as we experienced in 2012 and even faster, given we already complete the loop of our business model, and we are expanding into mobile. But we need to continue invest in that, in particular in boosting our browser user bases, and to expanding that into mobile space to replicate our success in PC space into the mobile space. So you will see a continued growth momentum in our revenue in the internet security and the office business. In the meantime, you also will see us invest heavily into our future. We believe that by doing so, we will not only have a very fast-growing 2013, also that will build a very solid base for the years to come. So, I want to emphasize this point, that please focus more on our growth and also our strategic investment into mobile and cloud businesses. That's what I'd like to add on here. This is more a strategic planning than any other factor. Thank you, Dr. Zhang Hongjiang. Okay, thank you very much. Your next question comes from Wendy Hua from CIMB. Please ask the question. Thank you, and congratulations on the great quarter. My first question is on your game business outlook. You just mentioned that you will launch two new MMORPG games in 2013. So can you give us more color as to which quarter you are going to launch those two games? Also, can you give us some idea about the number of web games and mobile games you are going to launch in 2013? Also, in terms of the way to operate mobile games, will you operate the mobile games all yourself, or are you going to look to some strategic partners or maybe launch mobile games on the WeChat platform? Thank you for the question. Let me try to address them. The two new MMO games we are launching in the second half of this year. The web games, we will launch one very soon, the codename T3. That is our first web game we will launch. That was due to launch actually late last year, but then we see the opportunity to further improve it and move it into this year. So you will see that one launching in the second quarter. Most likely, you are going to see two to three more in the pipeline for web games. We already have five mobile games that launched quietly. That is the casual games that will help boost our popularity among the mobile game players and to establish our user base. The exact number of mobile games, could be 10, could be even more. Really, because mobile game is very different from traditional MMO games. It takes a small team and great idea to build. But we shouldn't expect a large portion of our game revenue come from mobile games in 2013. Although we are going to heavily invest in that area, but the investment is more to establish our position in mobile game and to prepare ourselves to grow our mobile game revenue in 2014. So mobile game is a little bit different than the MMO PC games. So the importance of the game publisher, the operating company, become less here for mobile games, because basically, you can consider mobile game just another app. So you distribute it through app distributing channels, so through the app stores. You don't need an exclusive distributor for that, per se. So we are looking at multiple channels to distribute the games. Of course, there is a few channels like Google Play, like iOS App Store, but mostly through the Android platform app stores that you have at least 10 of them who has a large download base in China. So, I hope I addressed your question. Just to follow up on your comment regarding the mobile games. So currently, you already have five mobile games in operation. Are you actually recording those mobile game revenue in the entertainment software, i.e., the online game revenue part? No. None of those games, except one, actually has started charging users. The revenue is very small, yeah. To comment on what Dr. Jiang just said that in the outlook for 2012, in the gaming sector, I mentioned earlier that we will be looking into an over 20% growth in 2012 as compared to 2012, which does not include the web and mobile game, which is not a focus of our gaming sector in this year, the revenue. In terms of revenue. In terms of revenue. Okay. Francis, maybe just to follow up on your comment regarding that 20% growth, because in 2012, you actually mentioned in your prepared remarks that JX3 actually doubled in terms of use and revenue. What kind of growth do you expect from JX3 in 2013? What can actually attribute to that 20% overall game revenue growth? I think on a very conservative basis, we will be expecting an over 50% growth in JX3, because we have been seeing a very strong momentum after our expansion pack launched in the fourth quarter 2012. We will be expecting an even larger and much larger expansion pack will be launched in mid-year this 2013. The momentum of JX3 is very promising. Let me also add that, if you look at the JX3, after the high growth and 100% growth last year, it actually made itself to be on top of all of our games. The growth of that particular game, JX3, will actually lead higher rate of growth for the overall games for Kingsoft in this year. I think Francis have give you a very conservative estimate of our game revenue this year. Okay. Maybe two more housekeeping questions on your financials. I noticed that your CapEx actually declined from the CNY 168 million to CNY 85 million. I recall that you actually made very heavy investments in launching the new games, purchase the servers, and launch the cloud services. How come the CapEx actually declined in 2012? The CapEx, actually, we record a higher CapEx in 2011. Sure which was spent on the acquire of land use rights for our real estate project in 2011. In 2012, we actually do not spend that much on the land use right. We did not spend that. The CNY 80 million is mainly spent on the acquisition of server and other equipment. I see. Also for the investing cash outflow, actually, that part increased from CNY 600 million to CNY 1 billion in 2012. What has caused that increase in the investing and cash outflow? That is actually just an accounting question. In investing activity, what we actually spend CNY 1 billion is actually in purchasing some of the fixed deposit, the so-called structured deposit. We are adopting a very conservative treasury policy. Those CNY 1 billion is the purchase of structured deposit. I see. It is just a reclassification of the cash and cash equivalents, I guess. That is right, because they are over three months, so they cannot be classified as cash. Okay. Lastly, I have one more question, if I may. Can you give more color maybe on the acquisition of Qiwan, maybe the valuation and also the operation status of Qiwan? Thank you. Q1. Sorry? Q1, the investment in Shanghai evaluation. Oh. It's a tiny Yeah. What is it? It's actually a very small investment. So in the CNY, it's actually very small. I would say in our report, it's insignificant. But that is one of our investment in web games. That is one of our new trial. We have acquired a team that specialize in web game, which is located in Shanghai. Okay. Thank you very much. The next question comes from Billy Leung from OSK. Please ask the question. Hi, Dr. John. Hi, Francis. Thank you for taking my question, and congratulations on the great results. Just to start off with a question on the game side, I realize that the JX and the JX series is actually doing quite well. You mentioned that it increased about 100% during this period. I just wanted to know, does that mean that Moon Shadow Legend, is that performing as your expectations? Yeah. Moon Shadow Legend launched in last quarter of 2012. I would say it met our expectation, not exceed. Okay. On a comparison, Ma La Jiang Hu will compare to Moon Shadow Legend. Which one is doing better? Oh, Mahjong was doing much better. Okay. Thanks. Just quickly onto the second question is I want to concentrate on the software segment. A lot of it is driven by advertising and related, and also the WPS sales. I was just wondering if you could just provide a very rough split of how much each contributes to the segment. Sorry, I beg your pardon, Billy. Could you say that again? Sorry. Just on the software business, the application software business. I realize that a lot of it is driven by ad-related and also by WPS. I was just wondering if you could provide a breakdown of the application software segment in terms of revenue, just a rough breakdown. A rough is 2/3 from internet security business and 1/3 from WPS, roughly. Okay. Thanks. When you say internet business, how much of that is actually advertising related? It is a majority. It is close to 70%. Yes. For the internet security, most of the revenue are from advertising income, revenue. Sure. Okay, fine. Just some final housekeeping questions. I realize that you are picking up inventory right now. I was just wondering what the inventory is related to on the balance sheet. That was related to our trial of selling the Pad in Japan market. Sure. Yes. How is that developing, and do we expect that to be an ongoing business? I think we probably will not be expanding that business, because we find that it is quite a competitive market in Japan for the Pad. Sure. In particular of the new PAT and new competition coming around in the last two quarters. Okay. We should expect that to cease operation. Should we expect that to be fully written down this quarter? No. We actually increased the provision for the PAT in the last quarter 2012 after a serious assessment. We probably believe that is adequate, but not excessive at this point of time. But if we move down the road, additional provision is necessary. We will make that accordingly in Q1. But now we have actually provided more than 50% of the inventory value for PAT, so I think that should be fairly enough for that purposes. Okay, great. Thanks. Just one final question. I do not know if someone has covered it, but relating to VNG Corp, what is that related to? That was actually, we have a partner in Vietnam for the distribution of our game titles. When we invested in that joint venture, actually, no. Actually, when we invested in that, the counterparty gave us a call option. Oh, okay. This is still in place. The call option is still in place, right? That is right. Okay. Thanks. That is all from me now. Thank you. Thank you, Billy. Your next question comes from Thomas Chung from BOCI. Please ask the question. Hi, good evening, everyone. I have a couple of questions. The first question is regarding the number of users for your Cheetah Browser as well as the number of users for your navigation site. If you can provide the monthly active users, that would be great. The number of navigation site users is over 12 million. The Cheetah Browser last year by end of December is over 7.5 million. Those are the two numbers for your references. We have experienced quite a rapid growth for Cheetah Browser in the last three months. I see. Thanks. The second question is, I want to get some more color about the operating margin in 2013. May I know, when you talk about single-digit growth, are you talking about the operating profit to grow at single digit year-on-year, or it is something else? I mean, the profit. Because as I mentioned earlier, there are several business segments. We have faster growth in the internet security business segment. We are going to continue to invest in the mobile side. So we expected that the operating margin from that segment will be very thin. So what I expected that, if you look at the top line of our blended top-line revenue, we will be expected to see, I would say, a double-digit growth. But on the net profit growth, we would be expecting a single digit. Okay. I see. Got it. My third question is regarding the advertiser mix with regard to your KIS business. Can you tell us what is the percentage of your contribution for the top three advertisers in fourth quarter? Let me answer this question by saying that, not to mention the company names, but the sectors. The number one is the e-commerce, and number two is search. Okay. I see. My final question is regarding the seasonality for the first quarter. For advertising and for online games business is pretty soft in the first quarter. I just want to get a sense about the trend for the different business segments for Kingsoft in the first quarter. Let me address this question. First of all, we are very pleased to say that the gaming business, we have not experienced much softness in the first quarter. Of course, the e-commerce has softened a lot in February because of Chinese New Year. In March, we will see a pickup, but it still may not be as high as January. This is what I can share with you. So I am very pleased that our gaming business has not really experienced a softness in February, which was the case in the past. The change really is from the fact that our JX3 and other new games, the users are much younger than before, so they continue to play games during Chinese New Year and during the winter break. Which is actually a very good news for our gaming segment. I see. Thanks a lot, Zhang, and thanks, Francis. I will get back to the queue. Thank you. The next question comes from John Shao from Macquarie. Please ask the question. Yeah. Hi. Thank you very much for taking my questions. Sorry, I was dropped off earlier. I have a couple questions. I am just going to ask them at once. The first question is about your gaming business. You talked about the growth driver being web game and mobile games this year. I was hoping you could elaborate a bit on your business plan in terms of how many studios you are planning to have by end of the year for web games and also for mobile games. My second question is on your cloud storage, the Kuaipan business. To the extent you can, could you share with us some of the operating metrics in terms of the total number of downloads or MAUs, as well as potential product expansion in that area? For example, as you may know, Dropbox recently acquired a mail app. Is there any other sort of app areas that you are considering to expand beyond the storage? Those are my questions. Thank you. Thank you for your question. Let me first address your question about gaming. Actually, I have answered part of the question early on when the question was asked by other friends. I would say that we were a little bit slow in 2012 in moving into web game and mobile game, and we are going to change it this year. This year, we will be in the investment mode. In the Xishanju, our gaming business, you will see three to four web game teams. Three of them are our own team, and one of them will be our investment. We have investment in, which is the Shanghai Qiwan team we mentioned earlier. We will pull out a number of web games. On the mobile front, our studio in Shaanxi, in Zhuhai, and also our studio in Beijing, the studio, they have already come out with five mobile games, and they will continue to produce more web game, mobile games this year. As we mentioned earlier, we are not expecting huge revenue and definitely not profit contribution this year from mobile. We want to become a player and a strong player in both mobile and web game, in particular in mobile. As I mentioned earlier, and actually in the past conference calls in the last year, we have not started anything new in the PC network games. Our focus is in web game, and in particular this year is in mobile game. On your second question on cloud services, this is still very new and very competitive business. I am afraid that I will not be able to release too much on the operating metrics, since we are very much in the investment mode. What I can tell you is that our registered user base increased by three times last year. So is our monthly active users and daily active users actually increased more than that. According to iResearch, we are number one in the personal storage space. This year we are going to expand into the enterprise storage space, and we are very pleased that the beta release of our software already have received very positive feedback from a number of our enterprise trial users and contract already start to come in for that. Unlike the personal storage business, this enterprise storage business are profitable from the very beginning. Our collaboration with- Chris Our collaboration with Xiaomi on cloud service platform, basically by providing a cloud service platform to Xiaomi's user, had already started, and we see tremendous growth in term of data and user basis from Xiaomi user. Okay, great. Thank you very much for that very helpful comments. Okay, thank you. Your next question comes from George Wu from Legends Asset Management. Please ask your question. Hello, I have got two questions. First question, I would like to know more about your revenue or profit as data regard your. Could you share some data with us? Hello? I beg your pardon. The revenue, I lose a bit. What about the revenue? I would like to know more about the revenue and profit or profit margin, something like that, regarding your browser business. Let me address this because a browser by itself is not a revenue generator. Browser is the one critical component of our internet security business model. Having that in our business model basically completed the value chain, so that will increase our profitability and our revenue, our income. The overall result of a GG browser will be reflected in our overall revenue in internet security business or in the total value-added services or advertising services. It is not the browser itself, how much that will generate. Okay. My next question is about the operating margin for 2013. You mentioned that the operating profit will increase by only single digit this year. I understand that most of the operating expenses will go into information security. Can I see that, does it mean that the margin, the segment margin for entertainment software and application will roughly be the same as this year, but the margin for information security will drop quite a lot in next year? Let me answer the question. For the entertainment business, the operating margin, yes, you are correct that they are relatively mature, so there will not be too much fluctuation in the entertainment business margin. But for the KIS, the Kingsoft Internet Security company, as we mentioned earlier, that we are now looking into expanding further on our mobile segment and increase our user base. We will be investing a lot on that area. So the margin on the internet security will continue to be very thin. For WPS, we will be continue to invest in enhancing some of the features, our existing feature. Also we are concentrated into developing into all platform, cross-platform. Epic application. You will be seeing that we will be launching the iOS products very soon. On the WPS, the margin will be dropped down a bit in 2013. Let me add on that, I think on the WPS part Francis has also been consistently conservative here. As we get into enterprises, and we will need to address very heavily the requirement from enterprises, in particular in the banking and financial sectors. We are going to increase our R&D investment in that area, and so that may impact our margin in that business. But overall, we see that will produce long-term growth in our revenue in WPS business. Okay. Thank you for answering my question. Thank you. Your next question comes from Billy Leung from OSK. Please ask the question. Hi. Sorry, Dr. Jiang and Francis. I just wanted to confirm, I know it was asked before, but you mentioned that 2013, you expect the operating profit to increase in single digit, is that correct? We expected on a single digit on the profit, yes. On the operating profit, is that correct? Let me see. Single digit. No, we will be high. Sorry, we will be a little bit higher than that. Okay. Just on the back of the envelope forecast I was looking at, if you are expecting top line to increase, say about 30%, does that mean that margins could drastically drop to below 25% on an operating level? Sorry, let me jump in there. I do not think we should overhang on that. Sure number much. I would say, the outlook for 2013, you will see a tremendous growth, overall, for the company. Sure. We are going to invest heavily into our internet security and into addressing the need of our enterprise customers, for WPS and into the cloud services. So basically what we are saying is we are in the investment mode, and this is like a I would say, this is a result of Kingsoft turning itself into an internet company, where you see fast growth in revenue and you see heavy investment in acquire users in expanding its services and in So that will impact our margin growth. But overall, I would say you will still see a very healthy growth in 2013. The top line growth was healthy. The R&D, as Dr. Zhang Hongjiang mentioned, and also the marketing and distribution expansion, we will be expecting to see that there will be a few percentage point increase as a percentage of revenue in 2013 because of the investment into long term, just mentioned. Okay, thanks. I understand now. Thank you. There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue. I'd like to take this opportunity to thank you all for participating in this conference call and for your questions and for your continued support to Kingsoft. I actually will be here together with Francis for the next three days to meet with more investors and some analysts and some commentators. So hopefully I'll meet you again in those meetings. Thank you. Ladies- Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating.