Earnings Call: Q2 2014

Aug 19, 2014

Ladies and gentlemen, thank you for standing by, and welcome to the 2014 quarter 2 result announcements 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, the 19th of August, 2014. I would like to hand the conference over to your speaker for today, Ms. Francie Lu. Please go ahead, ma'am. Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2014 second quarter and interim result earnings call. I am 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 am turning the call to our Executive Director and CEO, Dr. Zhang Hongjiang. Thank you, and welcome, ladies and gentlemen. During the first half of 2014, we are pleased to report, we have achieved very significant progress in our mobile internet business. We are particularly pleased with the rapid growth of our global mobile monthly active users, which has increased 242% year-over-year to a new record high of 344 million in June 2012. We have continued to gain traffic share and a competitive advantage with the rapid growth of our recent critical apps. In the coming quarter, we will continue to reinforce our core competencies, expand our mobile user base, strengthen our position in mobile security, mobile office, and mobile games, and speed up the global penetration, and further grow our mobile user base and mobile activeness. The second quarter of 2014 marks another quarter of consistent and strong top-line growth, with revenue posted at growth of 11% quarter-over-quarter and 51% year-over-year to RMB 750.5 million. Excluding the impact of share-based compensation costs, the operating profit recorded RMB 181 million, an increase of 20% quarter-over-quarter and 1% year-over-year. I'm very pleased with the outstanding result, in particular, the progress of mobile monetization. All of our business lines have set a new record in terms of revenue and operational results. The decrease in operating profit primarily reflects our proactive investment in mobile apps development and market expansion, which is in line with our strategy, which we set beginning of this year. As mobile internet is growing explosively, we firmly believe that it is the right time to make investments in mobile business growth. Actually, now is a good window, and we don't want to miss this window. The rapid increase of our overall mobile user base assumes that our strategy is effective. Also, we are excited to see the very impressive growth of Cheetah Mobile in terms of revenue and operating metrics. The revenue for Cheetah Mobile for the past six months achieved a year-over-year growth of 140% to RMB 646.4 million. This strong growth momentum was supported by the significant growth we have made in mobile monetization, robust growth in traffic from duba.com personal starting page. Mobile monthly active user of Cheetah Mobile has increased 255% year-over-year to a new record of 284.3 million in June 2014. Since its launch in September 2012, Clean Master has gained extremely large user base and developed into a super app. During the first half of this year, we launched CM Security and CM Browser, both have gained traction traffic. For the first half of this year, in mobile, in approximately 18% of its revenue from the mobile services, compared with approximately only 3% in the first half of 2013, a year ago. Let me turn into our online game. The revenue of online game for the six months ended June 30th, posted a year-over-year growth of 12%, RMB 602.4 million, outperformed the growth rate of MMO gaming market in China. We are more pleased to see JX Online 3 continue to achieve a 64% year-over-year growth for the first half of this year, and accounted for about 54% of the revenue from our online game. On July 21st, the polished version of JX Online 3 was launched, and has gained solid ground in term of user population, user rating, and revenue. We have 12 mobile games in our development pipeline. A couple of them already in the final stage of internal and public test. Four of those 12 games in the pipeline will be in closed beta testing in the third quarter and hopefully will be launched end of this year. Revenue from our WPS Office for the first half of this year grew about 30% year-over-year to RMB 132.4 million. During the second quarter, we made a significant improvement in WPS Office compatibility with other enterprise application systems, such as SAP OA, et cetera, to enhance our competitiveness and penetration to the enterprise market. In addition, we are glad to see the online marketing revenue from WPS is becoming a growth catalyst supported by the increasing user traffic of WPS Personal Edition and duba.com. Both of them are our value-added services. The monthly active user of our WPS Personal Edition recorded 73 million in June this year, compared to 56 million a year ago. The global mobile monthly active user of WPS Office continued to grow robustly and achieved over 50 million, compared to 21 million a year ago. During the quarter, WPS Mobile Office for Android 6.0 was launched and new features such as simplified UI, new designed mobile phone reading mode, and document synchronization were introduced to enhance the mobile user experiences. I also want to add that Q2 is actually amongst our enterprise income of WPS is significantly higher than government procurement, and also the value-added services as an ascending growth. Also, a couple of weeks ago, we have launched our first mobile email client for Android and has received initially very positive feedback. We believe this product will gain popularity in the coming months. The growth of our enterprise data storage services has accelerated driven largely by the rapid increase of user data from Xiaomi and WPS. The daily upload of data into our storage services is approximately 250 terabytes on average at end of June this year. This made us, made Kingsoft Cloud Storage Service, the largest in term of daily data upload. We will continue to focus on optimizing the underlying storage framework and providing our users with stable, secure, and cost-effective storage services. Also, our OneBox game cloud services platform has grown significantly since the launch in the later March. We have provided game cloud services to around 50 third-party game developers and operators since we launched this service. In the second quarter, we have improved the platform layout based on the feedback from third-party developers. These progresses have laid a solid ground for Kingsoft to become a leading player in China's storage and cloud computing market. I also like to inform our investors that we are in the later stage of a discussion to spin off and sell our Kuaipan Personal service so that Kingsoft Cloud will focus solely on providing storage and computing services to enterprises. We believe this will help to accelerate our cloud development and to make us a leading player in the coming years. Moving forward, we also view cloud as a primary area for us, for Kingsoft, to continue invest in the coming quarter and in coming years. On April 3rd of this year, we made a strategic investment of $90 million US in Xunlei Limited. Also in April, on April the 11th, we issued the convertible bond of HKD 2,327 million. On May 8th, Cheetah Mobile was successfully listed on Nasdaq, on New York Stock Exchange. Also in late June, Xunlei listed in Nasdaq. We believe this event will help us to strengthen and accelerate the execution of our strategies and the expansion of Kingsoft's footprint in the global market. Now, let me turn the call to Francis, our CFO. Thank you, Dr. Jiang. Hello, everyone. I am now going to discuss the Q2 and the first half of 2014 operation and financial results. I am starting from the Q2 using CNY as the currency. Revenue increased 11% quarter-on-quarter and 51% year-on-year to CNY 751 million. The revenue split was 41% for online game, 47% for Cheetah Mobile, and 12% for office software and others. Revenue from our online game increased 4% quarter-on-quarter and 14% year-on-year to CNY 308 million. The sequential and year-on-year increases were primarily due to the sustainable strong performance of JX Online 3, driven by the release of expansion packs in April and June respectively, and our continued effort in improving the gaming experience. Our daily average PCU decreased 5% quarter-on-quarter, and 7% year-on-year to 600,000. The sequential and year-on-year decreases were largely due to a decline in the PCU of games in Vietnam as a result of poor game market condition in Vietnam. Monthly active paying account increased 14% quarter-on-quarter and 13% year-on-year to 2.3 million. The increases were primarily attributable to expanded user base of JX Online 3. Our monthly ARPU decreased 10% quarter-on-quarter and half that year-on-year at CNY 43, which is natural in conjunction with the increase in the new user base. Revenue from Cheetah Mobile increased 21% quarter-on-quarter and 146% year-on-year to CNY 354 million. The quarter-over-quarter increase was mainly attributable to the revenue increase in online marketing services, driven by growth in user traffic on Cheetah Mobile's online platform, as well as the initial monetization of Clean Master. The remarkable year-on-year increases was primarily attributable to the increase in revenue from online marketing service and IVAS. This is driven by our strong user traffic growth and further monetization of our PC and mobile internet platform. Mobile MAU from Cheetah Mobile increased 28% quarter-on-quarter and 255% year-on-year to 284 million in June 2014. Approximately 67% of our mobile MAU were from overseas market, mainly the U.S., Asia excluding China, Europe, as compared to approximately 53% at end of 2013. Our mobile user installation as of June 30, 2014, reached 662 million. These significant increases mainly reflected that our mobile mission-critical application, particularly the Clean Master, were very popular and expanded rapidly in global markets. duba.com aggregates a large collection of popular online resources and provides users quick access to most of their online destinations, such as online shopping, video, online game, travel, and local information. MAU of duba.com personal startup page increased 25% quarter-on-quarter and 17% year-on-year to 68 million in June 2014. Revenue from our office software and others increased 2% quarter-on-quarter and 9% year-on-year to CNY 89 million. The sequential and year-on-year increase were primarily attributable to the increased revenue from online marketing service from WPS Office, driven by the monetization of free user traffic of WPS Office, and the emerging revenue contribution from Kingsoft Cloud. Cost of revenue increased 9% quarter-on-quarter and 76% year-on-year to CNY 116 million. The QOQ increase was primarily due to an increase in bandwidth and server costs as a result of the expansion of Kingsoft Cloud business and user base. The year-on-year increase was mainly due to higher bandwidth and IDC costs, as well as the increased channel and content costs associated with the ramping up of revenue from mobile game operation of Cheetah Mobile. Gross profit increased 11% quarter on quarter and 47% year on year to CNY 634 million. The group's gross profit margin increased 1 percentage point quarter on quarter and decreased 2 percentage points year on year to 85%. Our R&D expenses increased 13% quarter on quarter and 64% year on year to CNY 223 million. These sequential and year-on-year increases in R&D costs were primarily due to the continuous investment in research and development of our mobile application. This has been introduced to you by Dr. Jiang earlier in this call. Selling and distribution expenses increased 6% quarter on quarter and 132% year on year to CNY 166 million. The QOQ increase was mainly attributable to an increase in advertising and marketing expenses for the launch of expansion pack and summer version for JX Online 3. The year-on-year increase was primarily due to higher marketing and promotion expenses for promoting Cheetah Mobile application and its effort in the globalization. Administrative expenses increased 1% quarter on quarter and 53% year on year to CNY 67 million. The year-on-year increase was mainly due to an increase in professional service fee. Share-based compensation cost increased 177% quarter on quarter and 193% year on year to CNY 57 million. The increases in share-based compensation costs primarily reflected the grant of Cheetah Mobile options and awarded shares to selected employees right before the IPO. Operating profit, excluding the impact of SBC, increased 20% quarter on quarter and 1% year on year to CNY 181 million as a result of the combination of the above reasons. The operating margin, excluding the impact of SBC, increased 2 percentage points quarter on quarter and decreased 4 percentage points year on year to 24%. Gain on disposal of investment in a joint venture classified as held for sale was new. This is compared to CNY 170 million in the first quarter of 2014. This is a one-off gain and didn't recur in the second quarter of this year. Financial income increased 34% quarter on quarter and 115% year on year to CNY 61 million. Our income tax expenses increased 55% quarter on quarter and 128% year on year to CNY 36 million, and our effective tax rate increased 14 percentage points quarter on quarter and year on year to 22%. As a result, our profit to owner of the parent increased 52% quarter over quarter and 90% year on year to CNY 118 million. Profit to owner of parent, excluding the SBC impact, decreased 42% quarter on quarter and 6% year on year to CNY 150 million. Our profit margin, taking out the SBC impact, was 20%, 38%, and 32% for the 3 months ended June 30th, 2014, March 31st, 2014, and June 30, 2013 respectively. Now we're going to talk about the first half of 2014. Revenue increased 50% year on year to CNY 1,426 million. Online game make up 42%, increased 12% year on year to CNY 602 million. Kingsoft Mobile made up another 45%, increased 140% to $646 million. Office software and others made up the remaining 30% and increased 21% year-on-year to $177 million. Our gross margin decreased by 3 percentage points year-on-year to 84%. Profit to owner of the parent increased 7% year-on-year to $364 million. Profit to owner of parent, excluding the eShop impact, increased 12% year-on-year to $409 million, and the profit margin excluding the eShop was 29% for the first half of 2014 versus 38% for the same period 2013. Our statement of financial position. We have cash and time deposit of $7.2 billion as at June 30th, 2014. The deferred revenue, both current and non-current, was $272 million as compared to $234 million end of last year. The increase was mainly due to the increased sales of prepaid game card during the first half of 2014. We achieved a net cash from our operating activity decreased 8% year-on-year to $325 million. Capital expenditure increased 89% year-on-year to $195 million. This concludes my presentation on the financial numbers. I now hand over the floor back to Dr. Zhang to talk about the outlook. Thank you. Thank you, Francis. Thank you again, everyone. We had an impressive, encouraging first half of 2014 with the continuous proactive investment in mobile business, mobile app development, strength in the mobile monetization of Kingsoft Mobile, continuous optimization of JX Online 3, a number of mobile games in the pipeline, strong sales and a fast-growth user base of our WPS, and advantageous product partnership with Xiaomi and Tencent. With all that achieved, we are well-positioned to achieve our goal in 2014. On behalf of Kingsoft, I would also like to extend our appreciation to Kingsoft's customers, shareholders, employees, partners, and all of you for supporting us. We now may start our Q&A. Hi, operator. I would like to start our Q&A session, please. Thank you. Ladies and gentlemen. Thank you, ma'am. Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. Our first question comes from the line of Jiong Shao from Macquarie. Please go ahead. Hi. Good evening. Thank you very much for taking my questions, and congrats on the solid results. My first question is about your margins. I think earlier this year, you talked about this year is going to be another investment year for you. The margins should come down compared to last year, which they have, declining Q1 and Q2. I was just wondering, could you talk about the outlook for the rest of the year, how the operating margin will look like compared to, let's say, Q2's level? That's my first question. Let me take this question. We still stand by the guidance that we have been consistent, given to the market since the beginning of the year, that, as you already mentioned, that we decided to capture the opportunity in the mobile internet. We will be invested heavily in the R&D and marketing expenses to expand the market to capture this available opportunity. In short, our operating margin, as I mentioned earlier in the year, that will be decreased by 10%-20% percentage point from last year. This is still a consistent message given to the market. Thank you, Francis. That's good to know. My second question is on the WPS business. The year-over-year growth rate for the WPS business in Q2 was below 20%, which is a bit lower than Q1. Just was wondering whether or not there was any kind of one-time items that negatively impacted the growth rate. Related to that, with the Chinese government latest initiative to drive adoption of the local technologies and local products against the likes of Microsoft, et cetera, what company is seeing in terms of the embracing, the SOEs or the commercial entities plus the government entities embracing the WPS products? Maybe I take the first response to this question, Sean, and then Dr. Jiang can further comment on it. Yes, the growth of our second WPS in Q2 is not very encouraging. This is primarily due to the fact that this three-year government purchase ended in the first quarter of 2014. Starting from Q2 2014, we will be starting another cycle for that government purchase, which we have already seen the evidence of. It is a recurring process and not a one-off. This is good news. So you will see that the revenue from a government actually dropped to a low level as compared to the previous few quarters. But on the contrary, you can see that one good news is that the revenue from our value-added service has actually increased quite strongly. As you can see that it almost comprised 30% of our total revenue from our WPS segment. In short, yes, we experience a moderate growth of WPS in Q2 2014. But this is just the start of another cycle of government procurement. You can see that we actually continue to win contracts from the non-government entity. Say, for example, one of the contract we earn is with a big SOE. I think this is in line with our expectation. So Dr. Jiang, you want to further comment on that? Yes. I would like to add on and emphasize that actually, in Q2, our income from SOE, the large state-owned enterprises, and the financial sector are growing very healthily. The other good news is the value-added service has come out with very high numbers. I'd like to say a few more words about this cycle of this three-year government procurement cycle. Actually, it officially ended December last year, but there are some trading effect, October, in the first quarter of this year. Consider a new three-year cycle is starting, and the fact that we just got a new contract from Qingdao City Government, it just marks the beginning of another three-year cycle. As we get into the cycle, we think that the total revenue of this three-year cycle should be bigger than the last one. But if you imagine about government emphasis on promoting local software, that will definitely benefit us, not just from a government procurement point of view, but also from large enterprises and financial sectors, especially SOEs, which we do feel optimistic going forward. Okay, great. Thanks for the comments there. My third and last question is on your Kuaipan business, your personal cloud storage. You mentioned earlier that you are planning to spin it off. Could you talk about, number one, what is sort of the user metrics for the Kuaipan product and the timing of the spin-off, whether or not you are sort of looking for a strategic investor in that particular BU. Thank you. Thank you for giving me this opportunity to talk a bit more about our cloud and Kuaipan business. Actually, I think Kingsoft Cloud started with our Kuaipan Personal services. After three years, Kuaipan Personal Storage Service is one of the top two, even the top one personal storage service, and has enjoyed a very good branding and popularity among its users. It actually is still the only one that across all platforms, Mac, PC, Mac, Windows, Android, iOS, Web, and Linux. The users continue to grow, and the user data continue to grow every day. Our active number of users are also continuing to grow. But recently, we look at our long-term plan for Kingsoft Cloud, we realized we need to focus on providing a platform and infrastructure services to enterprise users like Xiaomi, like Humai, like other companies, where we have a very solid business model, and also where we see and also experience huge growth. So that actually made us number one in term of daily upload of data into our storage facilities. So we believe that this is the time for us to focus on deliver the best enterprise storage services to Xiaomi and other enterprise users. We believe we have the capability now, after two years accumulation. We also see the cloud computing business, in particular, providing cloud services to host mobile games is another very rapidly growing area. Just think about it, this year's mobile game revenue in China could go over 300 million. So they've been on army this year. So we decided all those opportunities require us to be focused. So we decided to spin off the 2C business, which is our personal storage service. We are in the final stage of discuss with potential buyers. Definitely, we hope that the buyer will be able, after takeover, Kuaipan Personal Service, will become a partner of Kingsoft Cloud so that we can continue push in the same direction. I also like to take this opportunity to share with you and Kingsoft, to say Kingsoft actually views cloud computing and cloud storage a huge direction for the group. We are going to increase our investment in the cloud business, and we definitely always looking for partners. And given Kingsoft Group has a large pile of cash, we will accelerate our investment, because we do believe the time is now, and we are well-positioned to become the leader in this space. Just quick follow-up on this, Dr. Zhang. As you spin off the business and focus on the 2B business for your cloud services, what's your view on the enterprise security offers through cloud? Thank you. I view that as one of the vertical cloud applications. So that is more a level of software as a service, is a SaaS level. And given our competence in this area, and given that we do have a subsidiary focus on enterprise security, we view that as an opportunity. But that may not be done in the Kingsoft Cloud subsidiary. But everything is possible. We do feel that it is one of the important areas, but at this moment, we want Kingsoft Cloud to focus solely on storage and computing platform for games. Okay. Thanks, Dr. Zhang. Thanks, Francis. Thank you, John. The next question comes from the line of Alex Yao from JP Morgan. Please ask your question. Hi. Thank you for taking my question. The first question is about the business development stage across different business units. We understand all the business units are now in different stage of investment. Can you help us to understand where are they in terms of the development stage? If on a scale of 0 to 1, where do you put gaming, Cheetah Mobile, WPS, and cloud into this scale? When would you expect, for example, WPS to catch up with Cheetah Mobile in terms of maturity of the business model and monetization capability? What will drive that happen? Thank you. Thank you, Jeff. Let me take this question and try to address. You're definitely right. With the four subsidiaries, the four product areas, they are in different stages of investment. But one thing is for sure, they all push in full speed into mobile services and in the cloud, of course. Cheetah Mobile, I would say they have already transformed themselves into a mobile internet company, and the fact that they have more than 20 million monthly active users, and also the fact that they have more than 50% of their active users are overseas, shows that they have become a world leader in that space. Also, if you look at their results, actually, the monetization capability for mobile has significantly increased. So I would say they have transformed themselves. They have completed the transform, and now they are in the stage of further strengthening their market position in terms of user base and improving their user experiences. Definitely also improving their monetization capability. That's about Cheetah Mobile. I would say it is now a mobile internet company. Our game business, as I mentioned earlier, we actually completely switched our effort into mobile game development. We have now 12 in the pipeline, and hopefully by the end of the year, we will have 3 to 5 games launched. If you ask me which stage they are, they are in the final stage of launching mobile games and make itself, turn itself into a mobile game player. WPS, the income and the product itself is largely a PC-based license model business. Of course, we will continue to focus on the revenue from enterprises and government sectors. But also, if you look at the monthly active users for personalization, that has reached over 7 million a month. Based on that, we started monetizing traffic. That's why we have seen the large increase in value-added service income. The Android office is already the largest on mobile productivity. Of course, as you have seen from our report, we have not started monetizing the mobile app, the traffic yet, and we do not have a plan to monetize it in this year, the mobile. We still feel that it's still in the early stage of improving our product and add on new apps. I just mentioned it earlier that we just launched a few weeks ago, the Android email client, we believe is the best in the market for Android email. We are also looking into what will be the best user experience in terms of mobile productivity, and what the product types should be like. I would say we still have a long way to go, but we have determined in the end of last year when we come to establishing 2014's plan for a target for WPS, that is, we do not put an emphasize on their profitability, but we emphasize on their value-added service income, on the growth of their PC personalization, and WPS on the growth of monthly active mobile users. I think we are moving in the right direction, and those numbers are increasing. For the cloud, it's still in the early stage and in the investment stage, and we still feel that we're not going to look at a profitability in the next 3 years. But we are very pleased in the storage front. We already become the leader, the largest in terms of daily data upload. Also, I'm pleased to share with you our first half income for the Kingsoft Cloud is About CNY 20 million, and it's increasing. Again, I want to say Kingsoft Cloud is still in the investment stage, and the group is determined to invest heavily into that for the long run. Sorry, Alex, I call you Jeff. No problem. It's a very insightful, very helpful answer. The second question is related to the gaming business. How do you view the gaming business outlook over the next few quarters now that the strongest growing title, JX3, has exceeded 50% of total revenue, and we are looking to launch the mobile product in the coming quarters. Does that mean the investment stage is approaching the end, and likely, the gaming unit will start benefiting from the financial returns of early investment? So maybe the financial metrics such as revenue growth and profitability will start to improve? Or would you say the gaming business remains in heavy investment stage, so a lot of the metrics will remain relatively stable over the next few quarters? At a high level, what do you think about the gaming business outlook? Thank you. Thank you, Alex, for your question. I think you're very spot on that our JX3, the growth still very strong. With strong momentum even is not 100%, but we still expected that it will continue with the strong growth with a 60%-70% annual growth in 2014. So that make us a very strong cash info from the gaming segment. Of course, you already know that it's a very mature, stable, high margin business. As we discussed earlier in the call that the mobile game, we now have more than 12 mobile game on the timeline, and they are in an advanced stage. Four of that will be starting our beta testing in Q3, and it's very likely that we will be start to formally launch two to four game at the end of this year. The rest will definitely be launching one by one in 2015. As you can see that or you do remember that when I give the public guidance for the gaming section growth, I didn't include the mobile game. But judging from the initial data feedback, we are very confident that our mobile game will be successful. So it will help us to further increase the profitability on our gaming segment. One last very quick follow-up question is in terms of the mobile game distribution. We have been seeing some of the larger PC game developers launching mobile game in the past few quarters. But profit actually declined because of the incremental sales and marketing cost incurred. For the Kingsoft mobile game launch over the next few quarters, what is your strategy to maximize the distribution efficiency? And how would you leverage the existing user base of Cheetah Mobile, WPS, et cetera? How should we think about the incremental financial impact from those mobile games? Thank you. Thank you, Alex. As I said earlier in our previous discussion, we are lucky that Kingsoft do have a high chance to be successful in our mobile games strategy. One of the very major reason is that we actually very well-positioned in the ecosystem. We have the support from, as you mentioned, the WPS and probably don't forget about Cheetah Mobile, who now has a very strong mobile user base, both in China and in overseas. And we have also very strong support from our very close partner, Xiaomi and also Tencent. With that, we probably are very optimistic in leveraging those resources in helping our game publishing. Also, another thing is that our mobile game, apart from using the synergy from our sister and brother company, we will also definitely be operating some of the major title by the Seasun game house themselves. With this both channel, we are confident that we will be doing well in the online game publishing. And of course, as you know that once you have a new game title to launch, no matter if it is in the MMORPG or in the mobile game platform, you definitely will incur some of the marketing expenses. But on that two limb, one is leveraging our business partner. If the game are putting on their platform and they are responsible for the operating, then we will record the revenue on a profit-sharing base. So that will not be reflected in our own P&L account. But if we decided to publishing a certain game by ourself, or if we assist on marketing on those games, the advertising expenses will definitely be increasing. That's very helpful. Thank you very much, and congrats on good quarter. Thank you, Alex. Our next question comes from the line of Evan Zhao from Credit Suisse. Please ask your question. Hi, good evening. Thank you for taking my question. Just a quick question on, could you maybe provide some color on the breakdown of our investments, especially in sales and marketing, probably maybe by segment or by any formats? For example, online, offline, or any specific breakdown color will be helpful. Thank you. Thank you, Evan. As you know, our account presentation, in the past, we consistently giving guidance by segment on the revenue. But for the SG&A, R&D, we actually do not give a guidance by segment. Apology, we are not going to do that in this call as well. But if you talk about the R&D, we do discuss a little bit in detail for those operating costs. Take example, R&D, you will see that we have already saw a significant increase in the R&D expenses as a percentage of revenue. That is actually in line with our strategy in expanding into the mobile internet. We could A significant number of talent in those area. You can see that our R&D expenses has actually increased a lot. If you look into what area have we spent our R&D, one is that we actually increase a significant number of headcount on the mobile internet R&D area. Also, if you look at the quality of the talent, you will see that we actually are spending big bucks in recruiting some of the very top talent in those areas. Say, for example, one of the senior executive in WPS, a very senior person we recruited from Microsoft. Maybe Dr. Zhang can share a little bit more color on that area. Yes. In term of investment, a large part of the increase is actually on this front. These are for the mobile game team and for the Cheetah Mobile, Clean Master and CM Security. Of course, also for Kingsoft Cloud. So we are looking at the best talent we can get in China and overseas. Francis just mentioned that we recruited a senior guy. One of the top R&D guys in Microsoft R&D China, who used to work for me back before I left Microsoft, and one of the top R&D guys, and I would say, the best of his kind in China you can get, he has joined us a few weeks back and become the co-CTO for our WPS business. So we will continue investing in hiring the best talent, and I would believe those investments will benefit our long-term growth. Actually, when we come to competing with other competitors, this is the one thing that we feel that we have to do it, and this is now the time to do it. Thank you. Understood. Thanks for the color, Dr. Zhang and Francis. Thanks. Hi, operator. In the interest of time, we would like to take one more question for the call. Thank you. Sure. Thank you, ma'am. Our next question comes from the line of Nayyo. Hi- Nayyo from- Hello? Please go ahead. Hi, Dr. John and Francis. Thanks for taking my question. I have two questions for quick follow-up. First, could you give us more color on your mobile game pipelines for the second half of this year? What kind of mobile games are going to be launched? Also, will you focus on self-developed games or licensed mobile games? Does company have any M&A targets for game developers in the industry? You just mentioned that you don't have expectation of monetization for mobile games for this year, but how about next year? My second question is very quick. Does the company have any stock buyback plans? Thank you. Thank you, Nayyo. As for the mobile game, I think for the sake of time, we are not going into details, but we actually showcased 12 of our mobile games during the ChinaJoy last month. I can share with you a little bit more offline, but for the sake of time, we will not go into detail. But some of the mobile game actually have a character from the Chinese Asian story, including the Chinese Monkey King, Sun Wukong, and some of the game title we have some of the elements from the Caucasian character IP. But I'm not going into detail. Your second question is that whether we have any M&A target on the mobile game developer. We'll keep on looking at that, but we believe that the way that we have been doing in the past year, that's doing quite well. But we are not saying that we will not stop looking into the M&A target. But we believe that recruiting some of the talent and develop with our own talent will also be one of the ways to excel in the mobile game development. The third question you asked is for the public guidance of mobile game in next year. I think I will defer that to later of the year. The reason for that is that we are not giving guidance for 2015 for the moment, not only for mobile game, but for all the other four segments. Second, I think we are in a better position after we see the performance of mobile game in the fourth quarter, then we are in a better position to give guidance on the mobile game revenue and profit for 2015. Thank you. Thank you, everyone. Thank you. Hi, this will be the end of our 2014 second quarter and interim results earnings call. Thank you all for attending and your interest in us. Thanks. Thank you. With that, ladies and gentlemen, we conclude our conference call for today. Thank you all for participating. You may now disconnect.