Earnings Call: Q3 2014

Nov 10, 2014

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the 2014 third quarter 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, Monday, 10th of November, 2014. I would now like to hand the call over to your host today, Francie. Thank you, and please go ahead. Thank you, ladies and gentlemen. Good morning and good evening. I would like to welcome everyone to our 2014 third quarter earnings call. I'm Francie Liu, 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. Thank you. Welcome, ladies and gentlemen. As we can see from the quarterly report, we continue to execute well on our priorities in capitalizing on the mobile transformation, reinforce our R&D competence, and accelerating our global expansion in the area of mission-critical mobile apps, as well as strengthening our global mobile monetization capabilities. We are particularly pleased with the rapid growth of our global mobile monthly active users, which skyrocketed to over 180% year-over-year to a new record of 410 million by the end of September 2014. As the mobile internet market is growing explosively, we continue to invest aggressively in mobile app development and in global market penetration. I believe that we will continue to expand our traffic share and make this year a milestone in our mobile transformation. We also are pleased to report another quarter of strong top-line growth, with revenue posted a growth of 14% quarter-over-quarter and 55% year-over-year to a new record of RMB 852.2 million. As we continue to accelerate the global expansion of our apps and improve our R&D capacity, our operating profit, excluding the impact of share-based compensation cost, declined 25% quarter-over-quarter and 29% year-over-year, which is actually in line with our proactive investment strategy and our effort to lay a sound foundation for our future growth. I believe that it is the right time for us to trade off short-term profit for long-term greater gains in our capacities and the market share in the future. I'm actually very pleased with the outstanding performance and excellent execution of our strategy and priorities, particularly the strong growth momentum of the mobile user base, the progress of our mobile monetization capacity, and the rapid growth of our cloud service. We are very happy and excited to see that Cheetah Mobile delivered a very impressive quarter in term of revenue and operation metrics. The revenue of Cheetah Mobile for the third quarter recorded CNY 446 million, a growth of 26% quarter-over-quarter and 155% year-over-year. The strong growth momentum was supported by the significant progress we have made in exploring global mobile monetization, the mobile traffic expansion, and strengthened monetization capacity and capability of our PC-based user traffic. For the third quarter, Cheetah Mobile generated approximately 24% of its revenue from mobile services, which is another record compared with approximately 8% a year ago. Mobile monthly active users of Cheetah Mobile soared at an expressive rate of over 183% year-over-year to 340.7 million in September, approximately 65% of which were from overseas market. The mobile app Clean Master continued to rank number one in two categories on Google Play. As we are expanding the geographic coverage, I believe our mobile user base will continue to grow with this strong momentum. In the third quarter, our flagship 3D MMO game, JX Online 3 continued to show great growth potential with revenue posted a growth of 10% quarter-over-quarter, and 48% year-over-year to CNY 182.6 million. The large expansion pack of the year, Cang Xue Long Cheng for JX Online 3, will be launched on 24th of this month. We expect the revenue on the user population of JX Online 3 will hit a new record high. We also are pleased to tell that we have 13 mobile game under development, and two of which will be commercially launched in this quarter. On the WPS side, revenue for WPS Office for this quarter increased 11% quarter-over-quarter, but decreased 6% year-over-year to CNY 73.5 million. The monthly active user of WPS personal edition continued to rise to over 76 million in September compared to 55 million in the same period last year. In the third quarter, we strengthened our effort in global market expansion of our WPS Mobile Office and achieved encouraging result. The global mobile monthly active users of our WPS Office continue to grow, and has grown 127% year-over-year to 59 million in September compared to 26 million in the same month last year. In July, WPS Mail was launched to add another key function to our mobile productivity tools and to improve the mobile experience of Android users. We are very excited to report the material progress in the development of our cloud computing and cloud service business in the third quarter. We have set up the game cloud service alliance and gradually started to build the game ecosystem. Now, more than 50 games are operated on our platform, and some of which are very popular. The growth of our enterprise data storage service has accelerated, driven by the rapid increase in user data volume from Xiaomi, WPS, and Xunlei. The daily average upload into our storage service was approximately 230 terabytes. I want to emphasize here is average daily upload of data at the end of September, which catalyzed the growth of our cloud storage revenue. As far as I know, this effectively makes us the largest independent cloud storage service in terms of daily average data upload. Leveraging the explosive growth of smart device, mobile user data, and cloud computing, we believe that our cloud service will continue to grow with a strong momentum. We will continue to execute our mobile and cloud strategy with the continuous proactive investment in future opportunities, increasing our capacity of mobile monetization, upcoming major expansion pack for our JX 3 online game, and the two mobile game release, as well as the steady growth of our WPS Office market share, and the fast growth of our cloud service. We are well on our way to achieve the goal we set for 2014. Now I would like to attend the call to Francis, our CFO. Francis? Thank you, Dr. Jiang. Good morning, everybody. I will now discuss the Q3 2014 operating and financial result using CNY as the currency. Revenue increased 14% quarter-on-quarter and 55% year-on-year to CNY 852 million. The revenue split was 36% for our game, 52% for Cheetah Mobile, and 12% for office software and others. Others including our cloud computing services revenue. Revenue from our online game business decreased 1% quarter-on-quarter and increased 12% year-on-year to CNY 304 million. The quarter-on-quarter slight decrease was primarily due to the fact that even JX 3 achieved a quarter-on-quarter growth of 10% to CNY 183 million, which was in fact driven by the release of the refined version of the game in July and the in-game celebration for the fifth anniversary of the game of JX 3 in August. However, it was partly offset by the summer holiday on JX Online World. The year-on-year increase was primarily attributable to the sustained and notable growth of JX Online 3 driven by the continued improvement in game experiences and introduction of new excitement to gamer through various expansion pack during the year. Daily average concurrent user, PCU, increased 8% quarter-on-quarter and 1% year-on-year to 600,000. The quarter-on-quarter and year-on-year increase were primarily driven by the open beta testing of a JX online version in Vietnam. Monthly average paying account increased by 5% quarter-on-quarter and 33% year-on-year to 2.4 million. The solid quarter-on-quarter and year-on-year increases in average paying account primarily reflected the ramping popularity of JX Online 3. Monthly ARPU decreased 5% quarter-on-quarter and 15% year-on-year to CNY 41, which were primarily due to the increased proportion of the paying account from JX Online 3, which we all know that is a time-based game. The ARPU is significantly lower than the in-app billing gains. Revenue from Cheetah Mobile increased 26% quarter-on-quarter and 155% year-on-year to CNY 446 million. The strong quarter-on-quarter and year-on-year increase were primarily due to a solid performance of online marketing services and internet value-added service, driven by the increase of monetization capability of PC-based user traffic, as well as significant ramp of global mobile monetization with the global mobile monetization at an even faster pace. Mobile MAU from Cheetah Mobile increased 20% quarter-on-quarter and 183% year-on-year to 341 million in September 2014. Approximately 65% of mobile MAU were from overseas market, mostly from the U.S., Asia, excluding China and Europe. Compared to approximately 53% in December 2013. Our mobile user installation as at 30th September 2014 has reached 862 million. The robust mobile user growth mainly reflected that our mission-critical application, particularly Clean Master, continued to gain traffic share and were expanding rapidly in the global market through our effort in market exploration, market expansion, and continuous improvement of our user experience. Duba.com aggregates a large collection of popular online resources and provide user quick access to most of the online destination, such as online shopping, video, online game, travel, and local information. MAU of Duba.com personal startup page increased 54% year-on-year to 62 million in September 2014. Revenue from office software and others increased 40% quarter-on-quarter and decreased 3% year-on-year to CNY 102 million. The quarter-on-quarter increase mainly reflected that the robust increase in the revenue contribution from our Kingsoft Cloud, ramping revenues from online marketing service driven by the monetization of WPS free user traffic. Lastly, the steady contribution from the sales of WPS Office. The year-on-year decrease was primarily due to the decline in revenue from sales of WPS Office to government agency, which we have mentioned in last quarter that after the finish of the three-year concentrated government procurement cycle, we are now going into another cycle, the second and third quarter being the lowest starting beginning, and we expected that the trend will be going from fourth quarter onward. The cost of revenue increased 21% quarter-on-quarter and 76% year-on-year to CNY 140 million. The quarter-on-quarter and year-on-year increases were primarily due to a significant increase in channel and content costs associated with the ramping up of revenue from mobile game operation of Cheetah Mobile, as well as higher bandwidth and server hosting costs, along with the increasing user base and user activity of the Cheetah Mobile activities. Gross profit increased 12% quarter-on-quarter and 51% year-on-year to CNY 712 million. Gross profit margin decreased 1% quarter-on-quarter and 2 percentage point year-on-year to 84%. Our R&D expenses, net of government grants, increased 22% quarter-on-quarter and 61% year-on-year to CNY 273 million. The quarter-on-quarter and year-on-year increases were mainly due to the increased staff costs, driven by the expansion of the group mobile application development teams and the increased salary and benefit. Selling and distribution expenses increased 38% quarter-on-quarter and 193% year-on-year to CNY 230 million. The quarter-on-quarter and year-on-year increase were mainly due to an increase in advertising and marketing expenses as the group continued the effort to expand its mobile internet penetration in the global market, as well as an increase in marketing expenses for launching mobile games. Administration expenses increased 11% quarter-on-quarter and 47% year-on-year to CNY 75 million. The quarter-on-quarter and year-on-year increases were largely due to the increase in staff costs and professional fees. Share-based compensation costs increased 14% quarter-on-quarter and 330% year-on-year to CNY 65 million. The quarter-on-quarter and year-on-year increases primarily reflected the new grant of Cheetah Mobile's option and award share to selected employee in connection with its recent IPO. Operating profit before share-based compensation costs decreased 25% quarter-on-quarter and 29% year-on-year to CNY 137 million. The margin of operating profit before share-based compensation costs decreased 6 percentage point quarter-on-quarter and 19 percentage point year-on-year to 16%. Gain on disposal of a business, which probably a lot of us know that is a disposal of a KuaiPan personal version. We caught it at CNY 194 million in the first quarter 2014. Financial income increased 6% quarter-on-quarter and 92% year-on-year to CNY 67 million. Income tax expenses decreased 44% quarter-on-quarter and 2% year-on-year to CNY 20 million. Our effective tax rate decreased 15 percentage point quarter-on-quarter and 3 percentage point year-on-year. The decreases were primarily due to the fact that the gain on disposal of KuaiPan personal version, which actually is in its tax holiday period. It was not subject to tax. As a result, our profit to owner of parents increased 95% quarter-on-quarter and 41% year-on-year to CNY 231 million. Profits to owner of parent before ESOP increased 77% quarter-on-quarter and 51% year-on-year to CNY 265 million. Our statement of financial position, we have cash and deposit of CNY 7.2 billion at end of September 2014. Deferred revenue, both including the current and current portion at September 30, 2014, was CNY 293 million compared to CNY 234 million at end of 2013. Net cash from operating activity decreased 55% quarter-on-quarter and 45% year-on-year to CNY 105 million. The decreases were mainly due to the payment of marketing expenses and R&D costs in third quarter 2014. The CapEx was CNY 373 million in the third quarter 2014, which primarily reflected the recent acquisition mainly by Cheetah Mobile. Now I turn the floor back to Dr. Jiang and the participant for question and answers. Thank you, sir. 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 it to be announced. If you wish to cancel the request, please press the pound or hash key. Your first question comes from the line of Zhong Sha from Macquarie. Please ask the question. Good morning. Thank you for taking my question. I have one question that is about cloud services. It is good to see you are making great progress in that area. Could you talk about what the current monetization for your services related to cloud, and what the future monetization, and what exactly the type of services you are offering to your customers? Thank you. Thank you for the question. This is Hong Jiang. Let me take the question. You may recall, we actually spun off our KuaiPan personal storage service to Xunlei early this year. Kingsoft Cloud is fully focused on the enterprise business, so it is to B businesses. That business model is very clear. You use our cloud computing platform, and we charge you based on the particular configuration of a virtualized server based on the CPUs that you choose, and the combination of memory and other features. We have a price scheme on that, and this is very common among all the service providers, including Amazon and Alibaba. On the data storage side, again, this is a to B business. For instance, we provide cloud service to Xiaomi Cloud, very much like Amazon and Microsoft Windows Azure provide cloud storage service to iCloud for iPhone users. Again, we charge based on the traffic, based on the total volume you store in our storage service platform. In terms of business model, it's very clear. The rapid increase of our data storage volume really is the result of mobile explosion. The mobile explosive growth in terms of the number of mobile devices, and also in terms of usage growth. People took a lot of photos, a lot of short video, and save a lot of data on their mobile phone, which in turn is stored in the cloud. We see that trend continue, and we definitely see that trend continue into the fourth quarter. We are pretty positive on that part of service. On the cloud computing side, we are focused on the game service, essentially the mobile games. If you are familiar with mobile game developers and mobile game operators, very few of them today are actually purchasing their own servers and hiring a large IT team anymore. They are all waiting, and really want to put their games on the cloud computing platform. We are very fortunately given the very competitive features of our cloud computing platform in terms of performance, in terms of speed, in terms of price. We have, again, quite a few big players in the game operation, including our own. The number of servers used by those game operators and also the revenue from those gamers are growing quite fast. Overall, this is a very brief discussion about the cloud service, and hopefully, we will be able to be reporting to you another good quarter in three months, in this area. Thank you. Thank you. That's very helpful. Thank you, Dr. Zhang. Hi, Chloe. We are ready for the next question. Hi, operator. We are ready for the next question. I see Bing Bing is already online. Could you put him through? Hello? Hi, is this Bing Bing? Yeah, this is. Yeah. Hi, good morning. Hi, good morning, Nancy. Good morning, Dr. Zhang and Francis. Thank you for taking my question. My first question is regarding your online gaming business. Actually, your online game business has seen a slight quarter-over-quarter decline in the third quarter. It seems that the growth of paying accounts is still healthy, but ARPU continues to decreasing in a row. The growth pattern seems to be quite different from last year. In the last 3Q, paying accounts decreased meaningfully, but ARPU growth was strong. Can management comment on the difference? I wonder if management can also comment on the future trend of these two metrics. Thank you, and I have follow-up. Thank you, Bing. Let me take this question. This is Francis. Yes, you noticed that there is a continuous decrease in ARPU, but there is a significant improvement in the average paying account. But to be more exact, the previous trend is also the same, with the exception that in last year, we recorded a decline in average paying account, which was primarily due to the impact of the Vietnam market in the previous quarter, in second half 2013. However, if you noted that the ARPU, actually, whenever we have a new game launch, it will drop down a bit. Also, the proportion of our online JX 3 proportion to the total gaming revenues is ever-increasing. We all know that a time-based billing game, ARPU, is significantly lower than the item billing. This is the characteristic of time-based billing, because everybody pays to play, whereas for item billing, a lot of players do not pay at all. So the ARPU for an item billing is significantly higher than a time-based billing. Okay, thank you. My second question is regarding marketing expenses. Can you please share the key areas you invested in these marketing budgets? I noticed that your total mobile installation base for Cheetah Mobile increased strongly over the past quarter. So is this growth still primarily driven by your organic downloads and cross-promotion, or you also invest some marketing budget on the promotion of mobile apps such as pre-installation? Thank you. Let me answer the question, and Dr. Jiang can jump in to supplement. For the marketing expenses, you probably know that majority of the marketing expenses we recorded in Q3 are spent on Cheetah Mobile. Of course, for WPS, we also started to launch some of the promotion campaign, in particular on the globalization. The majority of that are still spending in Cheetah Mobile. In terms of whether the new increase in the mobile user, whether it's growing organically or grow by the effort of marketing effort, I think it's both. You can see that our Cheetah Mobile's Google Play ranking, the customer score in the Google Play are still ranking at 4.7 out of 5. So the organic growth is growing still very strongly. But we actually also increased the marketing expenses to further increase the mobile traffic. So both, basically. Thank you. Thank you. Thank you so much. Your next question comes from the line of Evan Zhou from Credit Suisse. Please ask your question. Hi. Good morning, Dr. Jiang, Francis, and Percy. Thank you for taking my questions. First question is regarding our future margin trajectory. Maybe can we have an update on, say, what kind of visibility we have at this point? Are we still looking at maybe 1Q15 as the trough margin there that we can see right now and improving going forward? Or will we have a new update of our margin trajectory going forward? Thanks. Thank you, Evan. In terms of operating margin, you probably see that on one hand, we have issued a public warning two weeks ago telling the public that because of a continued effort in expanding our marketing and R&D effort. So in terms of operating margin, we have a significant squeeze, which is actually in line with what we continuously communicate to the market. As of today, we still stand by the guidance that we've given to the market at the beginning of the year that the operating margin, because of the continued increase in the R&D and marketing, we would be expected that there will be 10%-20% percentage point decrease as compared to that in 2013. All right. Thanks. Second question is regarding our Cheetah Mobile. I noticed that the PC MAU for the Duba.com PSP seems to be down around 10% quarter-over-quarter. Also on the mobile side, the growth mainly comes from, I think, domestic MAU growth actually outpaced the international MAU growth. Is there any specific reason behind these two areas to try to move? Thanks. Okay, thank you for the question. This is Hong Jiang. Let me take the question. The decline you have seen on the Duba.com is primarily driven by the overall PC activity decline. This is across the board, not just on our own app. The faster growth on the domestic market, on the mobile apps site, this is by design. We have started driving our domestic adoption in the last two quarters, and we are happy to see that number start to grow. The international market is pretty healthy and now accounts for about 65%. We will continue to do that, and I would like to say, the effort on the global market side, particularly in the market where we already have significant penetration, our focus has shifted a little bit on monetization, while we are still enjoying very high rating. Got it. Thanks, Dr. Jiang. Just a quick follow-up. Can we have an update on our CapEx forecast and breakdown in the coming quarters? Thanks. The CapEx, right, Evan? Yes. In terms of CapEx, I would say that we are still in the process of finalizing our 2015 budget, so I will let you and the market know a little bit later. But in terms of the fourth quarter, we have expected that the CapEx will still continue to spend on the expansion of the cloud infrastructure, which you could expect that there is less than CNY 100 million in the fourth quarter. Got it. Thanks, Francis. Thanks. Thank you. Your next question comes from the line of Jeff Hau from China Merchants Securities. Please ask the question. Hi. Good morning, Dr. Jiang, Francis, and Francine. Thank you for taking my question. I just have one question regarding the mobile front of WPS. Given the recent event that Microsoft announced a free version of Microsoft Office mobile app, how will this affect our WPS mobile development, especially in the overseas market? Should we expect more aggressive promotion campaigns going forward? Thank you. Yeah, let me take this question. This is a very good one, actually, giving me the opportunity to elaborate a little bit on our side of the story. First, we are very happy to see Microsoft moved in that direction, because given Microsoft's size and its resources, it actually will help to promote mobile productivity overall in that market. So the market itself will get excited and grow, and we believe that is super important. We are also looking into the Microsoft release and the product itself, and we believe their focus is on the iOS side, and they are using the freemium model, which means that there are features, key features, that still you have to be a subscriber of Office 365. So we are studying that, and at this moment, we have not seen any impact on our Android side yet. Overall, we are looking into this very closely, and overall, we see this is a good thing for the market, and that will benefit us in the long run as well. Sorry, just a quick follow-up. Can you maybe share some operating metrics of your WPS Mail, please? Thank you. You talking about the WPS Mobile or WPS Mail? WPS- We have- Mail app. WPS Mail, right? Yeah. Yeah. We have not officially launched an independent app in the app stores across all the Android app stores. So far, we have piloted with Xiaomi's phone, and the feedback so far has been very positive. While the app itself, given its early beta stage, it does experience some bugs and other feedback. But overall, the feedback has been very positive. We have over 10,000 active users already, and we see that trend continue to grow, and- I want to emphasize that we have not officially put any marketing behind that yet, and we are focusing on improving the product, especially the back end of the product. Hopefully, we will launch the official version across all Android app stores soon. Thank you, Dr. Zhang. Thank you. Thank you. Your next question comes from the line of Alvin Zhang from Morgan Stanley. Please ask the question. Hi. Good morning, Dr. Zhang, Francis, and Frances. Thank you for taking my question. I have two questions. First one is on WPS. We have noticed that the WPS revenue, especially from government agencies, the revenue keeps not so exciting for several quarters. So what is our expectations, like when will it recover to a healthy growth level? Thank you. I have a follow-up. Thank you, Alvin. Let me take this question. The WPS, you are absolutely right that we all noticed that the WPS anti-piracy version revenue contribution from the government section has been low in the second quarter, and it was also not very exciting in the third quarter. But as we mentioned earlier, it is actually at the beginning of the second cycle. We expected that it will be growing steadily in the next few quarter. We actually expected that in the fourth quarter, there will be a significant increase as compared to the second and third quarter. But of course, our main focus is actually on the non-government segment, which is we already share with the public that we consider that the addressable market for the non-government segment is bigger than the government segment. This is on one hand. On the other hand, we also very focusing on the mobile internet. So for the future plan for the company, we put a very strong emphasis on the mobile area. We all understand that is in the early stage, so we are not particularly very excited to do an early-stage monetization. We're still in the process of ramping up the mobile user base. Let me add a little bit here. As Francis mentioned earlier, that we are in the beginning of a new cycle. This is a three-year government procurement cycle. If you understand how Chinese government operate, they always have a slow start, and then at the end, they will rush into it. So we are experiencing that. Francis also already mentioned other things, but one thing I want to add on is that if you look at our value-added service income for the third quarter, it has increased significantly. Basically, we are monetizing our PC WPS user traffic and bring in more value-added services to our users there. In the meantime, we also monetize that traffic. Hopefully, that trend will continue to grow so that in some extent, it will compensate the slow start of government procurement. Okay, got it. Thank you. Thank you. Very helpful. My second question is on mobile games. Could you please give us some updates on the mobile game launch? I think our first mobile game will launch very soon, next week, right? Right. Please. Thank you. It is our plan to launch two games by the end of this year. Hopefully, one will be later this month, and another one will be December, and they are in the final stage of testing. One of them is already finished the testing. We are implementing all the marketing campaigns around it and finalize the procedures with all of our partners. That should come soon, which is the. Next one, we hope will also, soon after that. December is our targeted time for the second game. After that, there should be a number of them, two to three in Q1. Of course, we also will closely monitor marketing and especially the spring holiday break to see if that is good time to launch. Okay. Got it. Thank you. Thank you. Your next question comes from the line of Wendy Huang from Standard Chartered Bank. Please ask the question. Thank you. First, Dr. Zhang, can you clarify that when you say you expect the WPS government revenue to increase significantly in the fourth quarter, do you expect a new round of the government procurement to start from the Q4, and maybe that will have a longer-lasting impact on your next year's financials? Also, can you give us some update on the WPS big corporate contract progress? I have follow-up. Thank you. Yeah. Good morning, Wendy. Thanks for the question. The first question, I am not very clear on exactly what the question is. I do not think we stated that the Q4 will be a big increase on government procurement. Could you repeat the question one more time? My question is, are you actually implying that WPS government procurement cycle will start again in the fourth quarter? Therefore, since this is a new procurement cycle, shall we expect a long-lasting impact on your financials? Yeah. Okay. Thank you, Wendy, for the clarification. No, we do not imply that Q4 will have a sharp increase in government procurement. The government has its own paces, and there are many things going on in the government those days. That also contributed to the slow start. So we do not know, and at least we do not expect that Q4 will have a significant increase or a significant acceleration in government procurement. But, the cycle has started, and it should go faster as time goes. How about the corporate contracts front? Yeah. The enterprise side of WPS purchase showed some softness in the last two quarters, and is picking up a little bit. There are various factors contribute to that. We are studying this particular situation, and hopefully, you will see some improvement in Q4. Okay. Can you give us some updates on your business cooperation with your large shareholder, Tencent? Thank you. Sorry, Wendy, I still didn't get your question. Update on Tencent is still holding a meaningful stake in Kingsoft, and I think so far there has been various cooperation at the business level. Okay between two companies. I think given the recent competitive environment change and also your partnership change with Xiaomi, I wonder if there are any updates on Kingsoft relationship with Tencent that you can- Okay. Sorry, I did not hear you, but now I get it. In terms of our partnership and the cooperation with Tencent, it has been very healthy. Actually, yesterday, we had meetings with a Tencent representative on our board, both on the Qihoo 360 Mobile and our Kingsoft 3888, this company. We are continuing our collaboration, in particular on the Qihoo 360 Mobile side. If you pay attention to our marketing campaigns and our collaborating on the advertising side and collaborating on the cross-promotion side on mobile apps and PC apps. That collaboration is continuing, and we also are in discussion with them on expanding that cooperation to the game side. If there is anything concrete that comes out, we will definitely let you know. But at this moment, I would say we are continuing our close partnership, in particular on the Qihoo 360 Mobile side. Thank you. Thank you. Thank you. Your next question comes from the line of Connie Gu from BOCOM International. Please ask the question. Thank you. Good morning, Dr. Jiang and Francis. I have two questions. The first one is just follow up on the mobile game. Do you have any operating metrics for the two mobile game you mentioned above? Also, your mobile game rollout schedule for 2015 and the revenue guidance for the mobile games. I have a follow-up. Good morning, Connie. Thank you for the question. This is Hong Jiang. Let me try to answer your question. There are two games we are planning to release in this quarter. Both of them, we feel quite good about it. You know well about the game business, and before you launch it, whatever you have, it is just your feeling. The test metrics, which means all the feedbacks, all the tests we have done, have shown those two games are promising. That is all I can say. If you look at our pipeline in 2015, we have over 10 games in the pipeline. Some of them we consider light games, some of them are medium to heavy games. So, in term of the quality of them, we feel pretty good about it. They are still in the stage of development and refinement and testing. Hopefully we can tell you more when we get into the first quarter. At this moment, we feel we are happy with the progress of our game development. In terms of metrics, Francis may want to add more, but at this moment I would say we have changed our management style a little bit. If you follow what Lei Jun has been saying, we de-emphasize much on the so-called KPI, but really ask our team to focus on get the best games. The particular metrics I use to evaluate our game teams is, do you come out with great games? That will attract a large number of users and user activity, but of course, generate a good revenue as well. If you look at mobile games, if one game can generate CNY 10 million per month, you consider that a good game. That is the operating metric we're using. Okay, thank you. The second question is based on your margin guidance for 2015. Will it be in similar trend like 2014, or it might be recovered a little bit after heavy investment in 2014? Also, after spin-off of KuaiPan, will margin for cloud business grow in future, as KuaiPan didn't contribute many revenue before, so the margin might be increased in 2015? Am I correct? Yeah. Chloe, thank you. This is Hong Jiang again. Let me take the second question, and Francis will come back to the first one. On the cost side, yes, selling KuaiPan definitely decreased significantly of our cloud expenses. I guess that was a to C business as a consumer cloud storage, which is completely free to the users, and we will have to bear the cost. Now we turn it around. We provide the underlying services to that service, and that will generate income, actually. So definitely help our bottom line and actually top line as well. As I mentioned earlier in answer earlier question that today our cloud services are all for enterprises, which is to B. The business model is very clear. But in order to compete, to grow faster, we are not putting profitability as the top priority, but definitely that business will start contributing significantly in terms of top line, in terms of income. Thank you, Dr. Jiang. Chloe, let me answer your question on the profit margin guidance. As I mentioned earlier, that we are still in the process of the budgeting process for 2015. While I do not have too much to say on the 2015 profit margin guidance, I can reiterate that for 2014, we are in the process of capturing the internet mobile opportunity. So on one hand, we stand by our guidance given early in the year, but I would further say that it will be at the bottom range of the guidance that we have given out early in the year for 2014. For 2015, I will share with you when we complete the budgeting process of 2015, very soon, probably early next year. Thank you, Francis, and thank you, Dr. Jiang. Thank you. Hi, Chloe. Thank you. With the time limit, we're ready for our last question of the earnings call. Thank you. Certainly. Thank you so much. Your last question comes from the line of Fan Liu from Goldman Sachs. Please ask the question. Hi, Jiang and Francis, thanks for taking my question. I have a question specifically to the overall PC game and mobile game landscape. Could management share with us your view on the future trend of PC game and mobile game, respectively, in terms of the growth profile and the competitive landscape? Recently, we see quite some traditional PC game developers have very strong progress on the mobile game area. Do you think PC game developers actually have near edge to deliver blockbusters amid a constantly intensive competitive mobile market compared to other purely mobile game players? A separate question is, how does the management think of TV games? Will it potentially be the next growth driver for the overall gaming industry? Thanks. Well, let me take the question. This is Hong Jiang. Yes, the PC games decline in term of growth rate has been consistent and very obvious in the last three years, and we have seen mobile games grow very fast, explosively. In the past year and this year, we anticipate about CNY 30 billion in term of the size. We are also happy to see that traditional PC game developers now come out with very promising mobile games. This is my personal view. In the last few years, or the period, you see explosive games, and also you see people just jump into the mobile games. Even some low-quality games do have a lot of people to play it. Today, as the competition becomes more furious and heated up, people are looking for good quality games. There, you do need people has years of accumulation of knowledge and experience and a good taste of games. So that's why you see more and more teams that has more experience came out of more successful games. So we see this is actually a chance for us, and we actually feel pretty good about our two mobile games that are coming out this quarter, the fourth quarter. I don't know if it's a turning point that the traditional PC game developers now have an upper hand. I'm not sure about that. We are come to our own mobile game. We feel pretty good that at least the first two, we feel pretty good about. Hopefully this is also the case for the entire industry. I think to add a last point on the mobile game, I think people start to from very light games into little bit middle and heavy games on the mobile side, given that mobile phone have become more and more powerful. So that's another factor which is taken into consideration. TV games, yes, we definitely are optimistic about the future of TV games, and we set up our first game studio solely focused on TV games in Chengdu a few months back, and we actually introduced the Xiaomi to invest in that, given Xiaomi's push on the smart TVs space. So we definitely feel this will be a good spot to invest in. In term of the type of games on TV, I think we are still exploring that, which type of games are most popular on TV, and they got to be different from mobile because the audience are slightly different because it's more a family environment. Thank you. Thank you, John Zhu. Thank you. Thank you. Okay. Okay. Thank you, everyone. Bye. Thank you all for participating. Thanks. Thank you so much, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may all disconnect.