Earnings Call: Q1 2015

May 19, 2015

Earnings release

Ladies and gentlemen, thank you for standing by and welcome to the 2015 quarter 1 results announcement. At this time, all participants are in 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 1 on your telephone keypad. I must advise you that this conference is being recorded today, 19th of May, 2015. I would now like to hand the conference over to your speaker today, Ms. Francie Lu. Please go ahead, ma'am. Thank you. Thank you. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2015 first quarter earnings 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. Good evening, good morning, ladies and gentlemen. Thank you and welcome. I would like to first bring your attention to the announcement of the company with respect to its annual result for last year, 2014, which was published on 20th March this year. As indicated in the business review and the prospects section of the annual report, the Kingsoft Group will continue to execute its investment strategies, which primarily include, first, aggressive investment by Cheetah Mobile in mobile application innovation, big data analytics research, and global market expansion as well as mobile monetization. Second, the All in Cloud strategy the Kingsoft Group unveiled in December 2014, which entails making huge investments into cloud technology development, talent recruitment, market expansion, and cloud service infrastructure building with the aim to build the company into a leading cloud service provider in China in the coming years. As a result of the implementation of the investment strategy I just mentioned now, as disclosed in the 2014 annual result announcement, the profit attributable to owners of the parents before share-based compensation cost for the fourth quarter of last year decreased 24% QOQ. Such trend continues to have impact on the group's performance for the year of 2015. Now let me comment on the result of the first quarter of this year. The result of our business line in the first quarter demonstrated a good start of the effective execution of our mobile transformation, globalization, and All in Cloud strategies in 2015. Our total mobile MAU reached a new record of 536 million compared to 276 million a year ago, and over 66% of our total mobile MAU were from overseas markets by the end of March 2015. In the first quarter, 55% of Cheetah Mobile's revenue was generated from mobile service. That is, for the first time in Cheetah Mobile's operating history, mobile revenue accounted for a majority of the total revenue, a major milestone toward achieving our mobile and global transformation goals. Also, we are most encouraged to see the daily average upload data into our cloud storage service soar to approximately 296 terabytes per day on average in March this year, compared to 122 terabytes a year ago. As the user traffic is migrating fast to mobile internet worldwide and cloud service are becoming mainstream and experience explosive growth in China, I believe that Kingsoft will demonstrate successful mobile transformation and establish new milestones in cloud service in 2015. Now, on the financial side, we are pleased to have delivered another quarter of solid revenue growth. In the first quarter, our revenue reached CNY 1,109 million, a 4% increase QOQ, and a 64% increase YOY. Excluding the impact of share-based compensation cost, the operating profit for the first quarter declined 21% QOQ and increased 30% YOY to CNY 196 million, and operating profit margin decreased by 5 percentage point QOQ and 4 percentage point YOY to 18%. Our proactive investment strategy in mobile transformation, globalization, and cloud business are necessary for us to trade off some short-term profit to capture the vast growth opportunities in the long term. This would further adversely impact our profitability in the coming quarters this year. We are glad with the progress we have made thus far, particularly the outstanding performance of Cheetah Mobile and the Kingsoft Cloud business. The total revenue from Cheetah Mobile this quarter reached to CNY 647 million, representing 121% increase YOY, driven mainly by the continued ramping up of mobile advertising businesses, especially in the overseas market. Cheetah Mobile's mobile business continues to enjoy tremendous momentum during the first quarter. Mobile revenue increased 584% YOY, and now account for 55% of total revenue, with overseas contributing 38% of the total revenue and 70% of the mobile revenue in the quarter. Mobile MAU of Cheetah Mobile grew nearly 100% YOY to 440 million in March. Five of Cheetah Mobile's apps were among the top 40 non-game applications on Google Play in March 2015. Cheetah Mobile remains the top publisher in two categories on Google Play. During the quarter, Cheetah Mobile has further expanded its partnership with leading mobile advertising network worldwide, and made strategic investment and acquisitions of key mobile advertising assets. Cheetah Mobile continues toward its strategic goal to be among the top three global mobile advertising platform. It will remain relentlessly focused on its user product innovation and operational excellence. In order to capture the vast global mobile advertising opportunities ahead, Cheetah Mobile will continue to execute on its strategy to attract more mobile users, further strengthening its capabilities in big data analytics, and improve its mobile advertising technology and platform. In the past year, we have established the competitive capabilities in providing cloud service to meet the need of rapidly growing mobile internet companies with a phenomenal success in the mobile users' data storage services and mobile game platform services. In the first quarter of this year, we continued to provide efficient cloud storage services to Xiaomi, extended our service capabilities into healthcare financial service business as well. Meanwhile, for cloud computing service, we continue to expand our share in mobile game platform market and extended to other non-game industries, such as intelligent hardware and mobile Internet companies. Benefiting from the expansion pack, Cang Xue Longcheng, launched in November 2014, the revenue for our JX3 online for the first quarter reached CNY 210 million, a growth of 6% quarter-over-quarter and 33% year-over-year. We have several mobile game projects currently under development, and some of them are to be launched in the year. In April 2015, we acquired the exclusive authority to use the intellectual property and the content of a popular movie, "Journey to the West: Conquering the Demons" in our mobile game, which will be launched in the coming June. Due to seasonality factors, the first quarter is usually a weak season for Kingsoft WPS business. Revenue from WPS Office, net of advertising revenues derived from collaboration with Cheetah Mobile, decreased 36% Q-over-Q and 18% year-over-year to CNY 55 million. The global mobile MAU of WPS family apps reached 92 million, a 75% increase year-over-year. Among which, MAU of mobile WPS Office reached 71 million. In the first quarter of this year, Kingsoft WPS established a strategic collaboration with Kingdee. In May 2015, WPS Enterprise Mail was launched, adding a key function to our Enterprise WPS productivity suite, which enhanced the email experience for our WPS users. We had a very impressive and promising start to the year, and focused our investment in mobile Internet business and enterprise cloud services. With the robust mobile monetization growth momentum of Cheetah Mobile, continued steady growth of JX Online 3, a number of flagship mobile games in the pipeline, consistent expansion of mobile WPS user bases and the solid growth momentum of cloud service. We are in a great position to continue making strong progress in all of our business priorities in the mobile internet and the cloud strategies. Now I'd like to turn the call to Francis, our CFO. Thank you, John. Hello, everyone. As usual, I'm now going to discuss the Q1 of 2015 operation and financial results using RMB as a currency. Revenue increased 4% quarter-over-quarter and 64% year-on-year to CNY 1,109 million. The revenue split was 29% for our online game, 58% for Qihoo 360 Mobile, and 13% for offices, softwares, and others. Revenue from online game business mainly consists of revenue from operation of our proprietary PC-based online game, mobile game licensing services, which is generated from the group company. Other than Qihoo 360 Mobile and its subsidiary, full research, development, provision of online game across devices. Revenue from our online game business decreased 6% quarter-over-quarter and increased 10% year-on-year to CNY 325 million. The quarter-over-quarter decrease was largely due to the decline in revenue from our existing game. It was partially offset by the continuous revenue growth from JX Online 3. The year-over-year increase was primarily attributable to the notable and sustainable growth of JX Online 3 with continuous improvement in game experiences. You could notice that our average paying account for JX Online 3 has actually achieved over 70% year-over-year in Q1 2015, which show a very strong momentum for this fresh game. The daily average PCU increased 2% quarter-over-quarter and 12% year-over-year to 700,000. The quarter-over-quarter increase was mainly due to the sustained popularity of JX Online 3. The year-over-year increase was primarily driven by the launch of the new version JX Online 1 in Vietnam. Average paying account increased 13% quarter-over-quarter and 56% year-over-year to 3.1 million. Average paying account for JX Online 3 reached 2.7 million, which I mentioned earlier represented a 75% year-over-year increase. The solid quarter-over-quarter and year-over-year increases in APA primarily reflected an ongoing increase in JX Online 3 user. The monthly ARPU decreased 15% quarter-over-quarter and 31% year-over-year to 33. The QOQ and YOY decline were mainly attributable to the increased proportion of JX Online 3, which as you know, is a time-based game and have a lower ARPU than the item billing games. Revenue from Qihoo 360 Mobile business mainly consists of revenue from online marketing services, internet value-added service, and internet security service and others, which is generated from the Qihoo 360 Mobile and its subsidiary through research development, operation of information security software, internet browser, mission-critical mobile application, and operation of game and provision of global content distribution channel for its business partner. Revenue from Qihoo 360 Mobile increased 11% QOQ and 121% year-over-year to CNY 647 million. The quarter-over-quarter and year-over-year increases were mainly due to the increase in revenue from mobile advertising business, which was driven by the strong demand for Qihoo 360 Mobile's mobile advertising business in both the domestic and overseas market, as well as the rapid growth of the worldwide mobile advertising market, which is a big trend, as I mentioned in quarter one. That is also lead directly to our strong determination in the all-in strategy for the Qihoo 360 Mobile in 2015. Mobile MAU from Qihoo 360 Mobile reached 444 million in March 2015, a 12% increase quarter-over-quarter and a 99% increase year-over-year. In March 2015, approximately 71% of our mobile MAU were from overseas market, mostly from the U.S., Asia, excluding China, and Europe, as compared to approximately 69% in December 2014. Our mobile user installation reached a new record of 1.341 billion as of 31 March 2015, a 23% increase quarter-over-quarter and a 167% increase year-over-year. The percentage may not be scary, but if you look at the actual number, we actually achieved more than 250 million new downloads in Q1 2015 alone, which is a huge number. The robust mobile user growth mainly reflected our mission-critical application, particularly Clean Master and CM Security, continue to gain traffic share, and we're expanding rapidly in the global market through our effort in market exploration, market expansion, and continuous improvement of our user experiences. The growing number of users, in turn, attracts additional users on our mobile advertising platform, which once again attracts advertisers, which results in a virtuous cycle. Revenue from office software and other business consists of revenue from all the other businesses, including office application software, cloud storage, dictionaries, et cetera. Revenue from office software and others decreased 4% quarter-over-quarter and increased 57% year-over-year to CNY 138 million. The quarter-over-quarter decrease was primarily due to the seasonal adverse impact on revenue from WPS in the first quarter. As you know, during the Chinese New Year, the use of office software will slow down in that particular period. The year-over-year increase was primarily attributable to a significant ramping up of revenue contribution from Kingsoft Cloud, driven by rapid growing demand for cloud storage and cloud computing services from increasing user base. Cost of revenue decreased 1% quarter-over-quarter and increased 110% year-over-year to CNY 224 million. The quarter-over-quarter increase was largely attributable to a higher cost associated with Cheetah Mobile games business, higher bandwidth, the server hosting cost, and depreciation along with the increasing user traffic and activities of Cheetah Mobile, and the rapid development of our cloud services, as well as higher amortization causes from intangible assets resulting from Cheetah Mobile's acquisition. Gross profit increased 5% quarter-over-quarter and increased 56% year-over-year to CNY 886 million. GP margin increased one percentage point and decreased four percentage points year-over-year to 80%. Our R&D expenses, net of government grants, increased 11% quarter-over-quarter and 50% year-over-year to CNY 294 million. The QOQ and YOY increases were largely due to the increased staff costs as a result of the group increased investment in mobile application development, and the increased salary and benefits. Selling and distribution expenses increased 90% quarter-over-quarter and 84% year-over-year to CNY 290 million. The quarter-over-quarter and year-over-year increases primarily reflect our higher marketing spending to expand the mobile user base of Cheetah Mobile in the global market. As I mentioned earlier, the new download in Q1 2015 amounted to over 250 million for Cheetah Mobile app. Administrative expenses increased 13% QOQ and 53% year-over-year to CNY 101 million. The quarter-over-quarter increase primarily due to an increase in professional fee, and year-over-year increase was mainly due to a higher professional fee and also an increase in staff costs. Share-based compensation costs decreased 2% quarter-over-quarter and increased 180% year-over-year to CNY 158 million. The year-over-year increases were primarily driven by the new grant of Cheetah Mobile option and award share to select employees. Operating profit before share-based compensation costs decreased 21% quarter-over-quarter and increased 30% year-over-year to CNY 196 million. The margin of our operating profit before share-based compensation costs decreased five percentage point quarter-over-quarter and four percentage point year-over-year to 18%. Our losses net or gain net recorded a loss of CNY 17 million, which mainly represented impairment costs of our available-for-sale investment and disposal of gain of an associate, compared to a gain of CNY 111 million in the first quarter 2014, which is a sale of our Sky Profit last year. The other gain net in the first quarter 2014 primarily represented a disposal of a Sky Profit owned by the company last year. Finance income decreased 9% quarter-over-quarter and increased 14% year-over-year to CNY 52 million. Income tax expenses increased 78% quarter-over-quarter and 18% year-over-year to CNY 28 million, and our effective tax rate increased 12 percentage point quarter-over-quarter and 11 percentage point year-over-year to 19%. Which was also due to the fact that this smaller profit in the operating entity, which are in tax holiday in Q1 2015. As a result, our profit to owners of the parent decreased 34% quarter-over-quarter and 53% year-over-year to CNY 115 million. Profit to owner of parent before ESOP decreased 23% quarter-over-quarter and 40% year-over-year to CNY 155 million. In our statement of financial position, we show a cash and time deposit of CNY 6.3 billion as at March 31, 2015, representing cash per share of CNY 5.4. Deferred revenue, including both current and non-current as at December 31, 2015, was CNY 341 million, compared to CNY 325 million as at December 31, 2014. The net cash from operating activity was CNY 40 million. This was primarily due to the payment of discretionary year-end bonus in the first quarter 2015. The capital expenditure for the first quarter 2015 was CNY 178 million, which was also primarily used on the acquisition of the hardware in conjunction with our cloud investment. Now, this concludes the financial reporting of my part, and I would like to hand over the floor to the analysts for questions. Hi, operators. This is the end of the presentation by our management team. We are now ready for the Q&A session. Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel a request, please press the pound or hash key. There may be a short pause while we collate the questions. The first question comes from the line of Wendy Wang from Macquarie. Please ask your question. Hi, management. I am Alice, calling on behalf of Wendy. I have a question about your margin guidance for full year 2015, given Cheetah's heavy investment on the overseas expansion and also cloud investments, as you mentioned in your prepared remark. Thanks. Thank you, Alice. Let me take on this question. As we mentioned in the last quarter, the board for Cheetah Mobile and as well as the board for Kingsoft was very excited on the mobile overseas advertising business in overseas. As such, the board has committed an all-in strategy for developing the Cheetah Mobile advertising platform business in overseas. I talked to the public that we will be another year of investment for Cheetah. From the reporting by Dr. Jiang and myself earlier in the call, we are very happy that in the first quarter of 2015, we very successfully executed the board decision in that regard, with a result of a very exciting operating metrics improvement, in particular on the Cheetah Mobile. Increase in the MAU, their monetization on overseas advertising revenue. As for the guidance, I mentioned earlier in the quarter, I usually guide on each of the four segments on the top line, which I could explain in more detail. As for the operating margin, I would give a more soft guidance. But with the determination in supporting the Cheetah Mobile strategy, you expected that there will be a significant impact on the overall operating margin for Kingsoft as a whole. Because if you do a simple calculation, you will notice that, as you see from the report I mentioned earlier, the Cheetah Mobile revenue contribution to Kingsoft Group has increased to over 50%. In Q1, it is 58%. They are going a tremendously high growth way in the coming quarters. Apart from Kingsoft Cloud, which might even enjoy a much higher percentage growth, because they are still in the early stage. But in terms of absolute amount, you could see that the contribution from the growth of Cheetah Mobile will further increase, and the weight of the revenue contribution from the Cheetah Mobile will continue to increase. The Cheetah Mobile team has made it very explicit that the board has committed an all-in strategy for them, so to allow them to operating a zero. You could do a simple calculation that the overall Kingsoft operating margin will further down from the 2014 level. Even though you might see that on our gaming business, the contribution from our mobile game might started to contribute to the bottom line, and which will help us to increase our bottom line to a certain extent. But that cannot be compared to the impact by the all-in strategy in the Qidian Mobile. I would also like to point out to you that you might expect that in 2015, the overall operating margin for Kingsoft as a whole might well go into the single digit. Got to understand. If I may, I have another question about your cloud strategy. Can you share a little bit more color on the cloud business outside Xiaomi system and mobile gaming? How are we looking in terms of new customers or new industry that you're going to expand your cloud business to? Thanks. Alex, yeah. Let me take this question. This is Hongjiang. Thank you for giving me the opportunity to explain a little more about our cloud strategy, our progress in the cloud service sector. Xiaomi remain our single largest client for our cloud storage services. But on the other hand, our cloud service in the mobile gaming platform and also for the internet companies, as well as government and enterprises, have made a tremendous progress in the first quarter and also in month of April. We have recruited a significant number of new clients, particularly in the internet space, including the uprising video mobile app, Kuaishou. I don't know if you know the company. Sure In general, the result is pretty promising and impressive. Both in term of the volume of computing they used, and also the storage they generated. In the game platform space, we continue to lead the market in term of acquire new game into our platform, and also in term of building the ecosystem. Also in the cloud computing space, we have made a tremendous progress in the enterprise apps, including medical and other sectors. Overall, I would say, we had a pretty good first quarter, in the cloud service. Understand. Great. Thanks. The next question comes from the line of Evan Zhou from Credit Suisse. Please ask your question. Hi, good evening, Dr. Jiang. Francis, thank you for taking my questions. Two questions. One is a follow-up on the operating margin guidance. I think people get our idea. I think it's kind of the All in Cloud strategies this year, and it's likely that we're going to enforce in a very strict way this year. But is there any early thought into 2016? My question is because I think last year, around this time, I think we kind of get the guidance around that the margin may recover in early 2015. But what about 2016? Any thoughts will be appreciated. Thanks. Thank you, Evan. Let me take this still on this question. Usually, we give guidance for the current year. But as you point out that we already guide the market that, in 2015, we will be another investment year. In particular, that we are very excited on the opportunity that we face on the Cheetah Mobile, in the overseas advertising business, because we are committed to become one of the top three advertising platform company in the world. That will make us a tremendous opportunity in terms of both the revenue growth, profit growth, and our market valuation. So we are very excited, and therefore, we decided that to delay the profit year for one more year. As I mentioned in the first quarter, based on our previous planning around the IPO time, we expected that in 2014, Cheetah Mobile will be a very significant year for their transformation from a PC-based to a mobile-driven, or primarily mobile internet mobile company. They did a very good result both in term of ramping up their MAU, acquiring the new user, and also in the mobile monetization. According to that plan, in the original plan and in our first budget for 2015, before the board commitment into further enlarge the leading position in that aspect, we actually expected that they will be in a year of starting to harvest in 2015. But because of that excellent opportunity, we decided to go in an all-in strategy for them in 2015. But if you ask me for the guidance on 2016, it might be a little bit too early to comment on that, but I would expect that given another year of investment in the overseas or overall mobile MAU for Cheetah, their target is aiming at 600 million or 550 million plus user by end of 2015. That will already make them to become the top 3 global mobile platform company. So when they achieve that, I have no reason to doubt that they will start to harvest in 2016. So directionally-wise, of course, I cannot give a detailed number, but I would share with you that after the investment year in 2015, they will definitely be rebounds because they will not spend all the money back to the R&D and marketing in 2016. As I could see Got it. Thanks, Marcus. Yeah. Yeah. That's helpful. Yeah, sure. Go ahead. Yeah. I would like to add on one thing, as talking about the prediction for 2016. Of course, I really hated to do that job, but one thing also needs to take into consideration is that we are going to continue invest in the cloud services. The cloud service is very much like Cheetah Mobile. Once you are in the investment phase, and once you are trying to grab market, on one hand, your revenue will grow rapidly, but on the other hand, because initially in the growing phase, you are going to have a low margin. If these two businesses, Cheetah Mobile and cloud business, continue to grow very fast, in particular in the cloud business, if that grows very fast, then the revenue goes up quickly, and that could impact our margin as well. Got it. Understood. Thanks, Dr. Jiang. Second question is also maybe a follow-up on cloud. I think Kingdee actually recently signed a cooperation with JD. JD may have a bigger plan on their cloud business, on top of Baidu and Tencent and Alibaba. I am wondering if you can comment a little bit on the kind of competition environment around the cloud space. Also, we actually recently raised a round of funding for our cloud business from external investors. I am wondering if you can give some color to what kind of capital need down the road, and will there be more capital raising down the road? Thank you. Yeah, we finished our B round fundraising in March. Also keep in mind, last year, we accompanied a commitment All in Cloud. So on the investment side, we are in a very heavy investment mode. But of course, the cloud business is how much you invest really depends on how much revenue you want to generate and how much the customer comes, how many customers, and how much the customer needs to come to you. So it is proportional to the revenue growth. So in that case, we are in a very healthy position. So the investment will continue and driven by the needs of our. Particularly by the increase of the number of our clients and the volume of storage and the requirement of the computing power they bring with it. I do not see any fundraising need in any near future, but we will continue looking into that. Hope I answered your question. Yeah. You talk about the competition landscape, and we know, this year, and actually since the second half of last year, cloud services becoming a mainstream. So people, unlike two years ago, people now have no doubt about the fact that our future belongs to cloud. So all the companies which has IT needs are thinking and moving into cloud. So the market itself is growing very rapidly. Coming with that, definitely there are more companies who want to come into that. In particular, if you are referring Kingdee's case, Kingdee is on the SaaS level, and our services are more on the PaaS level. Kingdee actually signed a strategic partnership with us back at the end of March. There are other competitors, and there are a few things I want to share with you in terms of competition. Number one, we are the largest independent cloud service provider in the storage space, and we are the leading cloud service provider for the mobile platform. We are making tremendous progress into other industry sectors, including online, including Internet, including financial sectors, as well as healthcare. Evan, I wanted to make an additional comment on your previous question. I encourage you to dial in for the Cheetah Mobile earning call in 30 minutes' time, so you will have a direct download from the management of Cheetah. As we talk about the 2016 margin, before we talk about the rebounds of margin, I would also share with you that the recent latest daily overseas advertising monetization already exceeds $600,000 per day, which was growing very fast. There was also a very strong momentum in the domestic mobile advertising monetization as well. The recent number, you could refer to them, but the recent number that I have has already exceeded $1 million per day. That was a very exciting number. When we go into 2016, after we consider that we already enjoy a big enough leading advantage, when we start to harvest, the rebounds could be quite very significant. Understood. Thanks a lot for the color, Francis. Dr. Zhang, thank you. The next question comes from the line of Jeff Hall from China Merchants. Please ask your question. Hi. Good evening, Dr. Zhang and Francis. I have two questions. The first one is: Can you share with us what is the contribution from mobile game in the first quarter, I mean, the revenue in the online game item? My second question is: Can you give us some rough idea about what is the expenditure related to Kingsoft Cloud in the first quarter in terms of R&D or marketing, or G&A? Thank you. Thank you, Jeff, thank you for your question. This is Francis. Your question about the contribution from a mobile game in Q1, I would direct you to one thing, that on our PC game, we have a very strong track on our JX Online suite that is very exciting. So we, actually, in discussion with the game management, they are very confident that they will be able to deliver what they discussed with the board early in the year. The JX Online suite are on a very solid track. As for the mobile game, I would tell you that in Q1, there isn't too much contribution from the mobile game. We didn't separately disclose the numbers, so I cannot share with you, but I could share with you the development on mobile game. One is that we actually acquired a very popular IP, Xungong from Jiaxing Shi, which we are going to launch very soon in the summer. The other is that we have the discussion with the CEO of a game earlier in today's board meeting. They expected that one of the major mobile game will be launched as scheduled in the summertime. So this is my answer on the mobile game contribution in Q1. The other question is, you asked about the expenditure on the R&D and other expenditures on cloud. I want to remind you that we do not separately disclose the financial data for the cloud business alone, which is currently grouped under the office software and others. But later down the road, I can assure you that when they grow for another 2 to 3 quarters, we have no choice but disclosing the separate financial number for them. But if you ask me about the R&D, I think that you wanted to watch the size of the investment, and also you wanted to have a feeling of its profitability. On that front, I will share with you that because of our strategy on focusing on the 2B business, so we actually are under control at the moment. Before there is any significant price war broke out, we are actually on our track to break even in the next few quarters. Okay, this is very helpful. Thank you, Francis. Thank you, Jeff. Thank you. The next question comes from the line of Alvin Jiang from Morgan Stanley. Please ask your question, sir. Hi. Thank you, Dr. Jiang and Francis. Thank you for taking my question. I have a quick question on the mobile game. Actually, I know you're developing some mobile games with the very famous IP. Can you share with us any color on the progress, like what's the progress of development, and when will these games get launched? I have a follow-up. Thank you. Thank you, Alvin. Thank you for the question. You've raised a very good question. Actually, it's a very critical year for Kingsoft in the game transformation to the mobile game. While you know the PC game, we still expected that the cash cow from the JX3 is on track. But actually, the higher opportunity for the team is actually for the successful transformation of our mobile game. We actually have a heavy-weighted expectation on a heavy-weighted game from our very important IP, which is two. One is a JX3 mobile version, the other is the JX series version. Those two game are on track as we reported to you, the market, early in the year. We expected that the JX series mobile game will be launched in Q3. The JX3 will probably at the end of this year. Thank you. This is very helpful. My follow-up question is on the cloud service. I remember in the very beginning of this year, you disclosed some kind of target, like 5% revenue contribution by end of this year, and a break-even point by end of next year. Can you share some progress on this cloud service, and maybe what's your cabinet deployment progress? Sorry, could you repeat the question one more time? Yes, sure. My question is on the cloud service. I remember you disclosed some kind of targets on cloud service, like 5% revenue contribution by end of 2015, and to reach break-even point by end of 2016, and also 5,000 cabinet deployment in three years. Can you share more color on this progress? What is our current progress on this? Yeah. Let me make some general comments on the progress we made, and I will leave the numbers to Francis. Overall, the revenue for the first quarter of our cloud service has increased tremendously compared to the same quarter last year. It is a few times higher than last year. In terms of progress we made, we are pretty happy with the progress. In term of the commitment we made on 5,000 racks to 21Vianet, we are on track on that, and we are cooperating very closely with 21Vianet. In multiple front, not just to use their IDCs, but also making progress in helping gain customers in that respect. Overall, I am not concerned with those targets at all. In term of the break-even point by 2016, I would still stand by our prediction, but I could not predict when and how many price war. When the price, whether it will be price war breakout in the next two year. On the caveat of no price war happen, based on the current cost structure, we could achieve a break-even point on track. Yeah. I also want to add that break-even or making profit compared to growing the market share and pushing the revenue, I would say growing market share and grow the revenue, those are definitely our higher priority. This is a growing business and it grows very fast. Our focus now is to capture this opportunity and capture the market share. Thank you. The next question comes from the line of Alex Yao from JP Morgan. Please ask your question. Hey, good evening, everyone. Thank you for taking my question. I have a question on the pricing strategy of the cloud business. Can you talk about how you price your cloud service? Do you increase or decrease pricing every year? In the States, the leader in the cloud actually used a price leader strategy in a prolonged period of time to gain market share and volume. Is that something you guys are adopting, or the pricing dynamic different in China? Thank you. Yes. I understand you are referring to the U.S. market. For Kingsoft Cloud, we are looking at long-term, and we also look at our investment and the cost of providing those services. So far, we are pretty happy to say we are, in term of the cost and price, we are the market leader. We, in both the storage and the game platform. Because the large part of cloud service cost is actually the hardware and IDC cost. There are some of those costs that is hard to control by us, which is mostly the bandwidth and CDN cost. But on other hand, you can expect the price of hardware will continue to fall, and the efficiency of servers and the storage will continue to increase. So it should not be surprised that the cost of services or the pricing will go down as time goes. In that respect, I was not surprised that in the U.S. market, the price of those services continues to go down. We are pretty confident that we will be able to manage that as well and stay ahead in term of competition. Just a very quick follow-up is, Dr. Zhang, can you give us a rough sense what percentage of the cost is controlled by yourself, i.e., the equipment, hardware, service, et cetera, et cetera, you can control the cost, and what percentage is controlled by someone else, such as bandwidth, those infrastructure-related cost? Then for the infrastructure cost that is not in your control, is that the area you want to cooperate with 21Vianet? Thank you. Well, I do not think I can give you a precise number, but you just mentioned 21Vianet, we are in a strategic cooperation relation with 21Vianet. So we will continue to enjoy the cost effectiveness they will provide to us. Also, you may notice that we signed a strategic partnership agreement with China Telecom. There, we also will benefit from that partnership in term of bandwidth and other IDC services. So, in general, I would say, and also you may have heard, the prime minister of China has urged the telecom service providers to lower the cost for their services. So in the long run, the unit cost will definitely go down, either on the hardware side and also on the infrastructure side. Very helpful. Thank you very much. Hi, operator. We are now ready for one last question. Thank you. The last question comes from the line of Liping Zhou from CICC. Please ask your question. Liping Zhou from CICC, please ask your question. Your line is open to ask question. Hi, this is Liping calling from CICC and on behalf of Xian Kai. My question is about the WPS development. Actually, this quarter, the revenue for WPS is not that great. I am wondering when can we expect the sales to enterprises and government agencies to pick up. The second question is about for WPS. We noticed that the MAUs of WPS is increasing significantly. What is the strategy on monetizing the personal WPS? Thank you. Okay, thank you, Liping. Let me take on your question. You are absolutely right that the number of WPS is not very exciting in Q1. But you should actually need to be aware of two things. One is that WPS is a traditional, low season in Q1 every year. So this is one of the reasons that we report a relatively weak number for Q1 for WPS. The other thing is that you also mentioned about there is a rapid increase in the MAU. You are wondering about what is the monetization for our MAU. As we point out that, following the recent direction of the WPS board, the critical mission for the team is actually to find to improve their mobile user experience on the mobile. So their first priority is actually on the mobile development. They are not yet going to the monetization consideration phase yet, but they are actually very focusing on improving user experience, including they recently launched the new version of their online dictionary. They launched an enterprise mail server. This is all the initiative that they are working on. So actually, the bottom line for WPS in 2015 is not the key focus for them. Thank you, Liping. Okay. Thank you, very helpful. Hi, operator. This is the end of our presentation, and thank you all for attending our 2016 first quarter earnings call. Have a good night. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect. Thank you. Thank you very much. Thank you.