Earnings Call: Q1 2014

May 28, 2014

Earnings release

Ladies and gentlemen, thank you all for standing by, and welcome to the 2014 quarter one result announcement conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. Please be advised that this teleconference is being recorded today, Wednesday, the 28th of May, 2014. I would now like to hand the conference over to your first speaker for today, Ms. Francie Lu. Thank you. Please go ahead. Thank you. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2014 first quarter 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 Deng, our Executive Director and CFO. Now I am turning the call to our Executive Director and CEO, Dr. Zhang Hongjiang. Thank you, Francie. Thank you, and welcome, everyone. Good evening and good morning, ladies and gentlemen. The financial and operating metrics for the first quarter of this year actually demonstrated the success adoption of our mobile business strategy. The reason I am saying that is if you look at our mobile MAU, it has continued to grow rapidly to a new record of 276 million in March 2014, and compared to 62 million a year ago, this is a tremendous growth. As all this business model of mobile internet is still evolving, we have made significant progress in mobile monetization, leveraging the tremendous growth potential of mobile internet business. I believe this year will be magnificent as Kingsoft breaks through in this mobile transformation. We are also pleased to report another strong first quarter result. Our total revenue achieved a new record of RMB 675.6 million, an increase of 48% year over year. We will make proactive investment in mobile business development and also market expansion in the rest of this year, though it may have adverse impact on our operating margins in the short term, which our CFO, Francis, will elaborate more. We firmly believe that those investments are important and critical to support our long-term business growth and help us to align our strategy with tremendous mobile opportunities. Thanks to the strong performance of our JX Online 3, our flagship online game, the revenue for online game posted quarter-over-quarter growth of 2% and a year-over-year growth of 11% to RMB 294.9 million, even under the adverse impact of Chinese New Year's holiday. On April 23rd, we launched a new expansion pack, Zhu Lu Zhong Yuan, for JX Online 3, and have received very positive feedback. By introducing innovative and exciting features such as new character DIY system and also cool physical damage effect, the population of JX Online III consolidated further to a new high. For now, more than five mobile games are also under full swing development, which I feel very excited about. Among those five games, two or three of them are in the pipeline for release in the next three months. on May 8, which is early this month, we held a press conference to preview Zhenzu Yiji, the mobile game in our pipeline, which is a new next-generation 3D mobile game and has received very positive feedback. Hopefully, you will see on the market in the coming months. We are also excited to see an impressive start for Cheetah Mobile this year. Despite the seasonal impact, the revenue of Cheetah Mobile achieved a quarter-over-quarter growth of 17% and a year-over-year growth of 132% from the 292.8 million. Mobile MAU of Cheetah Mobile have increased 385% year-over-year from $46 million in March 2013 to $223 million in March this year. For the first quarter of this year, Cheetah Mobile generated approximately 17% of revenue from mobile services, compared with approximately 11% in the fourth quarter of last year. Due to the seasonal effect, revenue for WPS decreased 39% quarter-over-quarter, but still posted a 49% year-over-year growth to CNY 66.3 million. The MAU of WPS Personal Edition continued to rise to over 66 million. The global MAU of WPS Mobile Office ramped up to 43 million in March this year. Through continuous technical and business optimization, we have dedicated to provide the fundamental cloud storage services for certain of our customers, and our daily data storage growth is close to 200 terabytes a day at the end of the first quarter. Meanwhile, we have focused on establishing a one-stop cloud services platform for game developers by partnering with Xiaomi and leverage the fast-growing mobile game business opportunity. The platform will offer game developers a one-stop shop for solutions and for further deployment and game testing, game operation, and game promotion. We are very confident on the potential of this Game Cloud services. Overall, we had a very impressive and promising start in 2014 with the focused investment in mobile internet businesses and expansion into international market, which strengthened the monetization capability of Cheetah Mobile, continuous optimization of JX Online III, and full swing mobile game development. Strong sales and the fast-growing user bases for WPS, we are in a great position to continue making progress toward our mobile transformation and continue the increase in our revenue and income. Now I'd like to turn the call to Francis, our CFO. Thank you, Dr. Jiang. Hello, everyone. I'm now going to discuss the Q1 result, operating and financial result using CNY as the currency. Revenue increased 1% quarter-over-quarter and 40% year-over-year to CNY 676 million. The revenue split in Q1 2014 is 44% from our online game, 43% from our Cheetah Mobile business, 30% for office software and others. Revenue from the online business mainly consists of revenue from operation of proprietary PC-based online games, mobile games, and game licensing services, which is generated from the group's companies other than Cheetah Mobile and its subsidiaries. Two, research, development, provision of online game across devices. Revenue from our online game business increased 2% quarter-over-quarter and 11% year-over-year to CNY 295 million. The quarter-over-quarter increase was primarily due to the sustained growth of JX3, our flagship online game, as a result of the release of the JX Online 3 new year version. The year-over-year increase was mainly attributable to the continued strong performance of JX Online 3, which has grown for the past 11 consecutive quarters with continuous improvement of game experiences. Daily average PCU decreased 5% quarter-over-quarter and year-over-year to 600,000 from 6 million. The Q-on-Q and Y-on-Y decreases were primarily driven by the decline in the PCU of games in Vietnam, which we have reported in previous quarters that they have more stringent restriction or regulation on online games. Monthly average paying account increased 5% quarter-over-quarter and 12% year-over-year to 2 million. The solid Q-on-Q and Y-on-Y increase in APA primarily reflected the ramping paying accounts of JX Online 3. Monthly ARPU decreased slightly 2% quarter-over-quarter and increased 2% year-over-year to CNY 48. Revenue from Cheetah Mobile business mainly consists of revenue from internet value-added services, online marketing services, and internet security services, which is generated from the Cheetah Mobile and its subsidiary through research, development, and operation of information security software, internet browser, mission-critical mobile application, operation of game, and provision of global content distribution channel for its business partner. Revenue from Cheetah Mobile increased 17% quarter-over-quarter and 132% year-over-year to $293 million. The quarter-over-quarter increase was mainly due to the revenue growth in both the internet value-added services and online marketing services, driven by strong contribution from mobile games and robust user traffic growth of its online platform. The year-over-year increase was primarily attributable to the strong growth in revenue from online marketing services and internet value-added services. Mobile MAU from Cheetah Mobile increased 34% quarter-over-quarter and 385% year-over-year to 223 million in March 2014. With that, approximately 63% of the mobile MAU were from overseas markets, mostly from the U.S., Asia, excluding China, and Europe, compared to 53% in December 2013. Our mobile users as of March 31, 2014 have reached 502 million. This is the total number. This significant increase mainly reflected our mobile mission-critical applications. In particular, the Clean Master was very popular and expanded rapidly in the global market. 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, videos, online games, travel, and local information. MAU of Duba.com personal startup page increased 15% quarter-over-quarter and 42% year-over-year to 54 million in March 2014. The increase mainly reflected the increasing popularity of Cheetah Browser. Revenue from our office software and other business consists of revenue from all other businesses, including office application software, cloud storage, dictionary services, et cetera. Revenue from office software and others decreased 33% quarter-on-quarter and increased 37% year-on-year to CNY 88 million. The Q-on-Q decrease was mainly due to the adverse seasonal impact on Kingsoft WPS Office, which has shown a seasonal fluctuation in the past two years. The solid year-on-year increase was primarily attributable to the record growth in sales from Kingsoft WPS Office, online marketing revenue from our Kingsoft WPS Office. Cost of revenue increased 19% quarter-on-quarter and 73% year-on-year to CNY 107 million. The quarter-on-quarter increase mainly reflected a tremendous increase in the content cost, primarily due to the strong performance of licensed mobile game titles on Cheetah Games platform. The Q-on-Q and Y-on-Y increases were mainly due to higher bandwidth and service costs, along with the increasing user base and user activity of Cheetah Mobile. As you can see previously, we have a tremendous increase in the Cheetah Mobile MAU, in particular, in the Clean Master. The significant increase in the sharing content cost primarily associated with the strong performance of licensed mobile game titles on the Cheetah Mobile platform. Gross profit decreased 2% quarter-on-quarter and increased 44% year-on-year to CNY 569 million. GP margin decreased three percentage points quarter-on-quarter and year-on-year to 84%. Our R&D, research and development expenses, net of government grants, increased 12% quarter-on-quarter and 70% year-on-year to CNY 196 million. The quarter-on-quarter and year-on-year increases were mainly due to the increase in salary and benefit expenses with the expansion of the group's mobile application development team and the increased salary and benefits. At this point, Dr. Jian and myself have continuously notified the shareholders that we will move towards the direction of increased R&D in the mobile direction, and you can see that this is the resulting impact, that we have an increase in our number of staff, and our increase of staff in 2014 is primarily focused on the mobile area. Of course, as of today, if you look at Kingsoft average salary, it's become more and more competitive compared to the peers. Selling and distribution expenses decreased 5% quarter-on-quarter and increased 133% year-on-year to CNY 157 million. The quarter-on-quarter decrease was primarily due to a lack of marketing and advertising expenses for promotion of games, as there were no major expansion packs or new game titles launched in the first quarter of 2014, which we did have a new game title launch in the first quarter in 2014 and the fourth quarter of 2013. The year-on-year increase was mainly attributable to higher selling and marketing expenses as Cheetah Mobile continued its effort to expand the global user base of its mobile application, in particular, Clean Master. Administrative expenses increased 27% quarter-on-quarter and 46% year-on-year to CNY 66 million. The quarter-on-quarter and year-on-year increase were largely due to an increase in staff costs and professional fees. Share-based compensation cost increased 24% quarter-on-quarter and 104% year-on-year to CNY 21 million. The QoQ and YoY increases primarily reflected the new grants of Cheetah Mobile's options and awarded shares to selected employees. Operating profit before share-based compensation cost decreased 25% quarter-on-quarter and 12% year-on-year to CNY 151 million. The margin of operating profit before share-based compensation cost decreased 8 percentage points quarter-on-quarter and 16 percentage points year-on-year to 22%. The gain on disposal in a joint venture classified as held-for-sale was CNY 117 million, which represented the disposal gain of our share in Skypower Limited owned by the company. We have invested in that company for a number of years, and we exited that investment with a profit of CNY 117 million, about five-fold of our investment. Finance income increased 16% quarter-on-quarter and 73% year-on-year to CNY 46 million. Income tax expenses increased 112% quarter-on-quarter and decreased 2% year-on-year to CNY 23 million. Our effective tax rate increased 3 percentage points quarter-on-quarter and decreased 2 percentage points year-on-year to 8%. As a result, our profit to owner of parent increased 48% quarter-on-quarter and 26% year-on-year to CNY 246 million, and our profit to owner of parent before SBC increased 45% quarter-on-quarter and 27% year-on-year to CNY 258 million. Our statement of financial position. We have cash and time deposits of CNY 4.6 billion as of March 31, 2014, represent cash per share of $4 per share. The full revenue at March 31, 2014 was CNY 246 million compared to CNY 2,034 in December 31. The net cash from our operating activity decreased 18% quarter-on-quarter and 20% year-on-year to CNY 78 million. The decreases were mainly due to the payment of discretionary year-end bonus in the first quarter of 2014, and our capital expenditure decreased 35% quarter-on-quarter and 11% to CNY 24 million. With that, I concluded the annual results presentation. Now I hand over the floor back to question and answer. Thank you. Operator, could you please open the line to questions? Thanks. Operator, you may start. We would like to start the Q&A session. Operator, could you please open the line to questions? Definitely. Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. We have your first question coming in from the line of Jian Xiao from Macquarie. Please go ahead. Thank you very much for taking my questions. I have a couple of questions. Firstly, I want to clarify, after the Cheetah IPO, could you talk about how much Cheetah Kingsoft still owns? That's just a clarification. My first question is your partnership with Xiaomi. I think, Dr. Zhang, you talked about in your prepared remarks about the partnership with Xiaomi in terms of the mobile game promotion. I was wondering, could you please elaborate a bit on exactly what that partnership entails and how that's going to help Kingsoft to prosper in the mobile game space? My second question is on your gaming business. The gaming business has year-over-year growth rate slowed down to 10%-11% from 20% in Q4 and from a higher rate last year. How should we look at this business in terms of the growth going forward? Lastly, sorry for so many questions. Lastly, given the reason to sort of debacle or dispute between U.S. and China in terms of computer security, hacking, et cetera, how that may or may not impact the sales of WPS going forward in China? Thank you. Okay. Let me take the first question, which is about our Kingsoft percentage of holding on Cheetah before and after the IPO. Thank you for your question, Sean. First of all, we are still in the first month of the stabilization period. So we are yet to finalize the final issuance, because the green shoe, we are still uncertain about how much of green shoe we will be using the Cheetah IPO. But approximately, if you remember that we approximately issue as a share basis around 10%-14% of our shares to public, together with shared and issued to some of the concurrent private placement. So if you remember that our shareholding on Cheetah is around 54 something percent before the Cheetah IPO. After the Cheetah IPO, it will be diluted by around 10%-15%, which will be approximately about 46%, 47%, 48%, but it depends on the final green shoe situation. The one thing I do wanted to remind that even though that our shareholdings after the Cheetah IPO are below 50%, but if you remember that we have already reported to the shareholder that we adopt a dual-class structure. So our shareholding before the IPO is 10 times the voting right than the ordinary A share that issue on this Cheetah IPO issuance. So we will be continued to consolidate the Cheetah account even though we are slightly below 50% after the Cheetah IPO. This is the question number one on the partnership with Xiaomi. Let me take the other three questions. The partnership between Xiaomi and Kingsoft are multiplefold, and mainly in two fronts. On the game side, since Xiaomi has accumulated over 200 million active mobile users, itself become a game platform. So it has a operation which is very much like other game centers. So now you have the Xiaomi Game Center. So that is one platform we can leverage to promote our mobile games, which is something we definitely will use. So that is one thing, so how to promote our mobile games. And also we entered into a partnership with Xiaomi, with Xiaomi's minority share investment into our Westhouse, our game business. And the investment aimed at strengthening our partnership on the game side, and not only just to have a stronger partnership on the mobile games, but also looking into future on the TV-based games. As you may have noticed in smart TV, which means the TV with the operating system, actually provide a ideal platform for next screen for games, which can be considered extension of mobile games. So that is another area where we cooperate very closely. Lastly, but actually not least, but actually very importantly, is our cooperation on the cloud storage side. The rapid growth of Xiaomi phone user actually has really increased rapidly our storage volume. We talk about the daily volume of 130 terabytes data came from Xiaomi's mobile phone users. As you know, when we talk about cloud services, it is all about scale. How do you quickly build out scale, and which will then give you the advantage of a larger scale of lower cost. So that is another area. Not to mention we have other cooperation on WPS and other things. If you use a Xiaomi phone, you notice that WPS is Chiba, and also Cheetah Clean Master are pre-installed already. Those are the collaboration areas, and we will definitely continue exploring new opportunities of collaboration. Bear in mind, we are two separate independent companies, and we definitely only look into areas that will be a win-win result. On the game result, the 11% year-over-year. If you look at the PC games, the overall market is actually really flatten in the last few months. Particularly in our case, I guess our JX Online III game is our flagship game. Actually, the increased population of gamers are actually college students, or they are back home. When they were back home during Chinese New Year and winter holidays, the activity did drop and that resulted into a decrease in terms of users. Also the continued deterioration in mid-size game market on PC side also had an impact on us. Overall, we are still growing stronger than market average. I would like to take this opportunity to say that we should really look into our future growth on the mobile side. I ask you for your patient support to wait until the launch of our two or three games in the next few months, mobile games, which we hope that will result in rapid growth in terms of income. On the computer hacking and the security front, where I would assume that you are referring to Chinese government's reaction and particular on Windows 8 and the exchange of fire between the two governments. If you ask me about this particular event, I think it is short-term. You may not see much impact for long-term, definitely. The current situation, the recent development definitely will push Chinese government to promote more domestic software and internet services, including cloud services. We view those are our opportunities. Short-term, definitely more WPS, and long-term, also for our cloud and security services. I hope I have answered your questions. That is great. Thank you, Brother Zhang. Thank you, Francie, for your helpful comments. Thank you, Sean. We do have your next question coming in from the line of Thomas Chung from Bank of China. Please go ahead. Hi. Good evening, Brother Zhang, Francis. I have a couple of questions. The first question is about the revenue guidance for the full year for different business segments. Would there be any color about the year-on-year growth rate? My second question is about JX Online III. Can management give us some color about the year-on-year growth for the first quarter of this year? My third question is about the mobile games expectation over this year and next year. How should we think about the mobile games revenue contribution to your online games revenue in the next 1-2 years? Thanks. Thank you, Thomas. Let me answer your very good question, the revenue guidance for full year. First of all, as we did in the past, I will split into the different segments on the revenue guidance. First of all, on the game segment. We're still very confident that we will be still beating, exceeding the mark industrial growth on our online gaming business. If you look at the online gaming business, probably can have a stat that is basically quite flat, the growth on online PC game. I would say that we are a little bit optimistic on that front because we still have a strong momentum on our JX III. I would say that it will exceed the market growth. If you ask me to put down a number, I will put down at around 20% in a range. I don't want to put down a specific number, but in short, I would say that it would exceed the industrial growth, meeting industrial growth. On the Cheetah Mobile end, we have been exceed over 100% growth in the past two years, and we are very confident as we tell the market during the Cheetah IPO that we are confident again, to meet or exceed 100% growth on the top line in 2014. You can see that we have a very steady growth on the PC side, and we have tremendous growth on the mobile user base, even though that we are yet to monetize the mobile user base on a large scale. But you can see that is coming in the coming few quarters, in particular, the mobile game distribution end. If you look at the WPS, I would say that we will continue to maintain a very healthy growth on the WPS in 2014. I would say if you ask me to put down a number, I would say that a healthy growth I would refer to mid 20%, 30%, that range. That is basically our initial revenue guidance for the full year. Francis, my second question is about JX Online 3 revenue growth for the first quarter. Should we expect still 100% year-on-year growth for JX3 in the first quarter? We slowed down. We did not meet 100% in Q1. As you can see, we delayed our large expansion pack launch. We didn't launch it in Q1. But if you look at the Q1 year-on-year growth, we're still achieving a 70%, 80% growth on the JX3, which is still a very strong growth. If you look at that is quite a mature game. Thanks, Francie. My final question is about the mobile games revenue contribution to your online games revenue. Any color about the first quarter, and how should we think about the full year and next year? Thanks. This is a new area. I would say that we actually now have a number of very optimistic, strong mobile games on the pipeline, but we are actually yet to monetize that. There is none in the Q1. Yeah. Let me add on this, on the mobile game. We are in the final stage of identifying partners to launch those games. It really depends on which platform, which partner we go with. For those, if you're in the long term, the profit sharing ratio are very different from platform to platform. I want to second what Francie has said. We are very optimistic on the games in the pipeline, but I would keep the revenue expectation later. All we can say is we have a strong pipeline and our partnership with the potential platform partners are also very strong. If you want to know which partner that we are talking with, we actually talk with quite a few, but definitely including our own platform, which is Cheetah Mobile Games. Basically, the team are chased after by the major platforms. That's actually the confidence of Dr. Jian and myself on the strong mobile game pipeline. Thanks, Dr. Jian. Thanks, Francis. Hey, Francis, I just have a quick follow-up. For the mobile games revenue under your online games line, are we talking about gross revenue or net revenue in the future? Now, actually, very good question. That is a very technical question on online game. It actually depends on how you operate your game. Even for mobile game, there is actually two areas, right? You all know that one is the development. If you ask about our gaming section by Westhouse, they are doing the development. And actually there is another entity in the ecosystem is actually the game publishing or game operating platform, which you will see that that will be mainly carried out by our Cheetah platform, using the marketing platform to either promote the game or operate the game. Now, for the Cheetah game, if you look at the Cheetah Mobile business, we actually started to monetize our mobile user base by launching the Tian Tian Xi You, the Chinese Odyssey, in December 2013 by using the Battery Doctor traffic. At that time, we recognized the revenue by just the profit sharing, because we haven't satisfied all the accounting requirements in the game operator criteria. So we will actually record our share of profit in the gross revenue. But down the road, if you look at, say for example, you look at Cheetah Mobile in Q1, they have another game, which they already satisfied the game operating criteria. So they book the gross billing as gross revenue. And with that, the sharing to the CP, the content provider, will be accounted for as cost of revenue. And also the cost to the App Store, Apple, or in overseas, the Google Play. But in China, we basically are using the Apple Store, which is around 30%, is also accounted for as cost of revenue. I hope I answered your question. For Westhouse, basically, we record our revenue on the portion of the amount that we share from our operator. Thanks, Francie, for the detailed answer. Thank you, Thomas. We have your next question coming in from the line of Liping Zhao from CICC. Please go ahead. Thank you for taking my question. My question is about the Clean Master monetization. Because Cheetah Mobile has already gone public, and we saw the user base ramp up very quickly. What is the management plan to monetize Cheetah Mobile? Thank you. Frank. Yeah. Let me take this question first, and Francis could add on details. If you look at our Cheetah Mobile strategy, the number one thing is build a great product, number two is to grow the user base, and the third step is to monetize it. I would say, in the past, until end of Q1, we have been focusing on the first two steps. That is, building a great product and developing a user basis. From Q2, we will, and we have started the monetization. If you think about it, I'll give you one example. Using Cheetah Mobile in the international market, where we're using that to promote our own app, the CM Security. Within months, we already reached 30 monthly active users of that particular product. But Francie, correct me if the exact number is not there, precise. But this is just to show the power of cross-promotion of our Clean Master. If you think about it, if we're using that capability to promote other people's apps, that will become a revenue. That is one way of the monetization. Similarly, the massive monthly active user traffic can also be used to promote mobile games. Overall, there are two ways of making money. One is promoting games, one is promoting other apps. Or another way is games and advertisements. Yes. Thank you, Dr. Jiang. The number is about right. We actually leverage the massive user base of Clean Master by launching the CM Security. Within two months, we actually exceeded 20 million monthly active users. To add on Dr. Zhang's comment, is that if you look at the monetization, which is a very frequently asked question by the investor, because we have already proven the first, and the most important step is to ramping up the massive user base. The second very natural question is how to monetize that. And the last one, probably, what is your operating leverage after your monetization becomes stable? If you look at the monetization, I think the team are moving really fast. I think if you can expect that the two low-hanging fruit would be game operation by using the massive user traffic on the Clean Master. The other is probably the mobile app. If you look at Facebook or AppMore, they have already success in monetizing their mobile user traffic by generating revenue from the mobile app. Those are the two areas that we can think of. Thanks, Francie and Dr. Jiang. I have a follow-up question. It's about the OP margin, because we noticed that in Q1, the OP margin is less than 20%. How should we forecast it for the full year 2014 and for the following quarters? Thank you for the question. This is actually a very good question, and Dr. Jiang and myself have already repeatedly reported to the market that our strategy of the group is taking this opportunity to invest in the mobile area. Before I answer straight to your operating margin, I wanted to draw your attention to the increase in the headcount and the salary and benefit that we offer to the high-quality talent that we attract during the past year, 2013. We actually, if you look at the headcount, we probably increase our headcount significantly in 2014. The majority of those headcount increase are actually focused on the mobile R&D development. That is reflected in the operating margin. If you look at the operating margin, I will split it down to a number of important components. If you look at the three major components, one is research and development. As we said, a number of very high-qualified talent in the mobile development area. You can see that as a percentage of revenue, our R&D actually increased a few percentage points from 2013. If you remember that at the beginning of 2013, the R&D expenses as a percentage of revenue is 25%, around 25%, and in Q1 2014, it's 29%. Also, the selling and distribution expenses also increased quite significantly, and that you have already seen in last quarter. At the beginning of 2013, our marketing expenses is around 50% of our revenue. By end of the year, in fourth quarter, it already increased to 25% as a percentage of our revenue. That number was slightly decreased a bit in the first quarter of 2014 because we didn't have a major game expansion pack launch in Q1. So that dragged down the number a bit, but that is already around 8-10 percentage point higher than what we spent at the beginning of 2013. So together with that, I would say that the operating margin as a whole, because of the increase in investment in those area, will decrease by, I will give a range instead of a number. I would say that the operating margin will decrease by 10%-20%, down from 35% to, I would say, 15%-20% in 2014 full year. Let me add on, actually repeat what we have been telling our investors in the last few quarters. That is our overall strategy of transforming the company into a mobile internet company. Again, when you are doing this, when you think about mobile internet, the first thing you do is to come out with a great product, which is why we are increasing the investment on R&D, mostly on people's cost. In both of the number of people today, we have higher than also the quality of people, so both contributed to the increase in R&D cost. The second step is to market the product, which, as you look at the result of monthly active users for our mobile apps, both the Qihoo mobile and also WPS. For every app we came out, there are a period of time we rely on organic growth and word of mouth. But then we do want to make sure we move fast and ahead of our competitors. So once they reach a bigger point, we will put in a lot of marketing dollar and promoting dollars into it. So that's what happened to Qihoo's 360 Green Monster since Q4 and definitely in Q1 of this year. You will see our continuous investment in that area. When we came out with our mobile games in end of this quarter and next quarter, you will see a lot of investment there as well. As Francis mentioned early on, Francis and I have been telling our investors, we will increase our investment for the long-term success. Finally, in Q1, you start to see the drastic impact on our profit margin. I want to add one more point, is that we are actually in the transition phase or investment year. In the next 12 months to 18 months, we will still continue to invest heavily in the R&D and selling and marketing. But with the time, we would start to monetize our mobile user traffic, and the revenue will increase accordingly. We believe that, we are very confident that our operating margin after 12 to 18 months will bounce back to our original level of mid-30% to mid-40%. So this is a temporary investment period. Okay, thanks for the elaboration. We have your next question coming in from the line of Evan Zhou from Credit Suisse. Go ahead. Hi. Good evening, everyone. Thanks for taking my questions. My question is a follow-up on our kind of strategy on mobile monetization there. I think we know that our mobile product and the flagship CM series product already got a pretty significant growth in the user base. But just wondering, will we pursue using this user base to promote a more commercial-oriented product, such as the App Store or browsers in this year? Or will we more rely on our existing inventories, on our existing product suite, such as the Clean Master and Battery Doctor, to do the monetization for 2014? That's my first question. This is Hong Zhang. Let me take this question. Oh, definitely we'll continue to do internal product promotion. That includes Cheetah Browser. Yes, definitely includes the Cheetah Browser. We are taking effort to promote other people's apps as well. At the moment, I don't think we are ready to build an App Store ourselves yet. Let me add on that. Ethan, I trust that you still remember that we have been explaining the monetization models of our security software or mission-critical apps. What we believe in the three-stage rocket model is that we have certain apps or software that will appeal to the user needs, that can capture market user traffic, that is the base level. With that market user traffic, we will have other tools to convert those market user traffic to a high-engagement app. Say, for example, in the PC area, we're using the navigation page. On the mobile end, you will be expected that we will have a similar type of product to help us to monetize, to increase the level of engagement with the user. Dr. Jiang just said that Cheetah Browser will be one of that. If you remember that I also discussed with you that there is some other app like the Screen Lock or some other app that we actually are in the pipeline to increase the user engagement. I won't go into detail of that here. I just wanted to tell you that we have a full plan to monetize the user traffic. All right. Thanks, Francis, for the elaboration. My second question is regarding our specific plans on mobile game overseas publishing. I think we've been expanding our team and also establishing some of our sales team in some of the targeting countries. Could you maybe give us more color on the ballpark plan? Say, for example, how many countries we want to target first, and what's going to be the cost and resources we'll put in the next couple of quarters? Thank you. So Evan, could you repeat your question a bit? What is the question? The marketing plans or plan to Regarding the progress about the mobile game, oversee mobile game business, oversee mobile game publishing. How is our latest plan to extend that effort in the remainder of 2014? In short, I would answer that question is that the CEO of Cheetah Mobile has already told the market that after we complete the Cheetah Mobile IPO, he will spend 50% of his time overseas and 50% of his time in the mobile game area. So that you could see that we will be making a lot of progress in those areas, in the overseas market and also in the mobile game market. But I do not have much details to share at this point in time. All right. Understood. Thank you. Thank you, Evan. We have your next question coming in from Yuna from ICBC. Please go ahead. Good evening, Dr. Jiang, Francis, and friends. This is Yuna from ICBC International. I have two questions for QuickCall Lab. First is regarding your mobile games. Dr. Jiang just mentioned that you have newly launched the mobile game called Shenji Yiji, operating very well. Could you give us more color on this, like operating metrics? Also, I would like to know for longer term, does the company have revenue contribution and revenue contribution expectations for the mobile games? Also, can you share with us about the pipelines for the mobile games? Thank you. That is the first question, and I will follow with my second question. Let me take on the first one. Shenji Yiji, we had a preview with the media. We have not yet launched it yet. That is what I I cannot remember exactly what your question was on that, except I want to clarify that it is not launched yet. The operating metrics. She actually wanted to ask about the operating metrics. We are not We are not there yet. Okay. Got it. For longer term, what is the company's expectation for the revenue contribution from mobile games? Just longer term. Depends on how you define longer term, and definitely in the longer term, if you are talking about years down the road, we would like to see our mobile game revenue overtake our PC game revenue versus the mobile game overall revenue increase much faster. But we have to get our first game to launch and succeed. Do you have a pipeline about both the PC games and your mobile games, and a timetable that you can share with us? Yeah. In terms of pipeline, I can share with you, we have over 10 games in the pipeline, and hopefully in the next three to six months, we will see four games launched. But this is our plan. We still need to see the reception of the market to our first game, and then decide on the following games. Okay. My second question is regarding to our company's cloud business. Could you give us some updates about this business and also your cooperation with Xunlei, your relationship with this company, as well as your longer-term development strategy about the cloud business? Thank you. Okay. Well, thank you for giving me this opportunity to elaborate a little more about our cloud business. If you think about the future, we are firm believers that the future of IT belongs to cloud. This is our long-term investment, and in fact, two years ago, we decided this is the area that Kingsoft will invest in long-term, and that we bet on that as our future. So, after two years of development, today, we are a leader in cloud storage services, and I mentioned that in my earlier remarks, that we are growing very fast on our storage service. We talk about 130 terabytes daily increase in term of data volume. If you think about data volume, we are the leader in cloud storage services. Recently, we have launched our cloud virtual server services, which is the cloud computing services, core of cloud computing services. Not only we launched the platform itself, we also launched a vertical of that service, which is the Game Cloud, so that mobile game developers will launch their game services on our platform. So far, we have a few hundred cloud partners that are working with us, and the majority of them are still in the testing periods. But those are the who is who in the mobile game areas. We are optimistic, but it is still a long way to go to claim a victory. But the good news is we are among the top three in that area. That gives me the opportunity to share with you the strategy and the current focus of cloud. One is storage cloud, one is game cloud. Game cloud is really like the AWS services, which is the cloud computing part. Together, we hope that we will continue to grow our storage business, in particular, given that we already have Xiaomi support to help us to scale up the platform. Also, we hope we can succeed in the Game Cloud side, that will basically scale up our cloud computing platform, so that later on, we can expand to other vertical areas and lure over more partners to put their services on our platform. Thank you. I have one other. Answer your question, yeah. Thank you. That's very helpful. The other and last question is regarding a quick follow-up on WPS. Have you signed any new contract for the WPS business in the last quarter? Also, could you give us a split about the revenues by software sales and the online marketing revenues? We saw WPS business saw 30-plus year-over-year growth in the last quarter. Was that mainly driven by software sales, or mainly driven by online marketing revenues? Thank you. Let me take this question first. What I can tell you is that, we are definitely signing up a contract with larger enterprises and government agencies, so we continue doing that in the first quarter. As in the past years, first quarter is actually a slower quarter compared to Q4. The rest of the year, because of the Chinese New Year, you have less enterprises and less government agencies, in particular, government agencies, sign off their contract. Q4 was definitely a heavy quarter for government procurement. In the first quarter, I can share with you is that the government revenue versus enterprise revenue, they are about equal. The growth of what we call value-added services, online marketing, is tremendous. The overall income there, the growth is quite. Now it's over 9%, and this is our online service income. The percentage is continually growing, enter into Q2. Okay, thank you. That's all my questions. Thank you. Okay. Thank you, Jack. Thanks, Dr. John. This will be the end of our 2014 first quarter earnings call presentation. Thank you all for attending and your continuous support in Kingsoft. Thank you. Ladies and gentlemen, that does conclude our conference for today. Yes. Thank you very much, everyone.