Earnings Call: Q3 2013

Nov 12, 2013

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the 2013 Q3 Results Announcement conference call. At this time, all participants are in the 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, 12th of November, 2013. I would now like to hand the conference over to our first speaker today, Ms. Francie Lu. Thank you. Please go ahead, ma'am. Thank you. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2013 Q3 earnings call. I'm Francie Lu, the IR deputy 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 operation. Having said that, please allow me to introduce our management team who join us today, Dr. Hong Zhang, 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. Hong Zhang. Thank you. Good evening, ladies and gentlemen. Welcome to the session. We are very pleased to deliver another strong quarter with performance that exceeded our target, especially with seeing the impact of summer holidays. The top line reached another record high of CNY 551 million, an increase of 11% quarter-over-quarter, and 51% year-over-year. In addition, we continue to see robust overall growth of our monthly active mobile users, which posted over 150 million in September, which marks our ascending progress in our mobile strategy. The advertising revenue and the value-added revenue from KIS increased 25% quarter-over-quarter and 144% year-over-year to CNY 171 million. This strong growth momentum was supported by our expanded and deepened collaboration with advertisers and the tremendous growth of KIS game platform. We have continued investing heavily in the KIS mobile application development and are very pleased to see our monthly active mobile users of KIS family exceeded over 123 million in September 2013, threefold compared to 41 million in January of this year. This is a remarkable progress in term of mobile users. Also, we have started monetizing the KIS mobile user traffic with promising results. After over a year of hard work, we now have nearly 400 mobile games on KIS mobile game platform. In the third quarter, 80% of KIS revenue came from mobile service, a breakthrough in our transformation from PC-based web service to mobile. Kingsoft WPS Office also has achieved tremendous growth in the third quarter, with revenue posted 37% quarter-over-quarter and 35% year-over-year growth to CNY 78 million. To improve IPR protection, Chinese State Council issued a policy on government agencies to use genuine software in August 2013. Office software and antivirus software has been put on the routine software purchase list of Chinese government agencies. We believe this is a milestone in IPR protection policy in China that will benefit our enterprise business, especially Kingsoft WPS Office in the long run. The monthly active users of the WPS personal edition continue to grow and has exceeded 55 million at the end of September, which was supported by our continuous effort in improving user experience. We are glad to see revenue from WPS. Free user traffic is becoming our growth catalyst. Also, we are super excited to see the global monthly active user of WPS Mobile Office ramp up robustly to 25 million in September 2013 from 6 million a year ago. I'd like to also report that in the third quarter, our flagship 3D MMO game, the JX Online 3, continued to show great revenue growth momentum with the release of the expansion pack, Chang'an in Troubled Times. Thanks to the growth of JX3 and MIT, the game coming from our Dalian team, our game portfolio recorded a steady performance against a traditionally weak quarter. In November 2013, which is this month, another new expansion pack for JX Online 3 will be launched, targeting at further consolidating the user population and increasing the revenue of the game. Our new 3D MMO game, Jiutian Myth, will be launched in the fourth quarter. In addition, in order to grow the user base further, the commercialization of our initiative in children's game, The Young Elf King, is rescheduled from September to the end of this quarter, the fourth quarter. The game had over 2 million monthly login accounts in September. Now we have 9 mobile games in our R&D pipeline, which will continue to increase the user base of JX3 and the user base of Kingsoft games across various devices. Overall, we have had another strong quarter, and we are confident that we will have a strong 2013. Now I would like to turn the call to Francis, our CFO. Thank you. Thank you, Dr. Zhang. Hello, everybody. I'm now going to discuss the Q3 operating and financial results using CNY as the currency. Revenue increased 11% quarter-on-quarter and 51% year-on-year to CNY 551 million. The revenue split was 49% for our online game and 49% from our application software. You may notice that this is the first time that the revenue contribution from our gaming section fall below 50%. That indicate that our other business are growing much faster. Revenue from our online game business held flat quarter-on-quarter and increased 28% year-on-year to CNY 271 million. JX Online 3 achieved 50% growth quarter-on-quarter to CNY 124 million, supported by the release of expansion pack, Chang'an in Troubled Times in September, which was offset by the adverse impact of our summer holiday on other games. The year-on-year increase was mainly due to the strong growth of JX Online 3. Our daily average PCU held flat quarter-on-quarter and year-on-year to 610,000. Monthly APA decreased 11% quarter-on-quarter and increased 17% year-on-year to 1.79 million. The quarter-on-quarter decrease was largely due to the decline in APA of JX Online World in Vietnam. The solid year-on-year increase in the APA primarily reflected the rapid growth in the number of paying accounts of JX3. Our monthly ARPU increased 12% quarter-on-quarter and 4% year-on-year to RMB 48. Revenue from the application software business increased 23% quarter-on-quarter and 78% year-on-year to 270 million. These remarkable quarter-on-quarter and year-on-year increases primarily reflect the combination of the following factors. Firstly, the robust growth of online advertising revenue from our Kingsoft Internet Security. Second, the accelerated growth of revenue from our game operation platform of KIS. Finally, the strong growth of sales of Kingsoft WPS Office to enterprise customer in the domestic market. Our cost of revenue increased 21% quarter-on-quarter and 79% year-on-year to 80 million, which is basically in line with the growth of our revenue. The sequential increase was mainly due to the increased staff costs associated with the strengthened operating team of KIS. The year-on-year increase was largely attributable to the increased staff costs and also the higher bandwidth and server costs along with the increasing user base. The gross profit increased 9% quarter-on-quarter and 47% year-on-year to 471 million. Our gross profit margin decreased by 1 percentage point quarter-on-quarter and 2 percentage point year-on-year to 86%. Our R&D expenses, net of government grants, increased 25% quarter-on-quarter and 74% year-on-year to 170 million. The increase were primarily due to the increased staff costs as a result of the expansion of the group mobile application development team and the increased salary and benefit. Selling and distribution expenses increased 9% quarter-on-quarter and held flat year-on-year to 78 million. The sequential increase was mainly due to the higher marketing expenses, as we have repeatedly communicated to the market that KIS was actively expanding the user base of its mobile application globally. This was partly offset by the lower advertising expenses for online game, as there are no new games were launched in the third quarter of 2013. Administrative expenses increased 16% quarter-on-quarter and 38% year-on-year to 51 million. The quarter-over-quarter increase was mainly due to the higher rental fees and professional fees. The year-on-year increase was primarily due to the increase in staff-related expenses. Our share-based compensation costs decreased 22% quarter-on-quarter and increased 22% year-on-year to 15 million. The quarter-on-quarter decrease was mainly due to the accelerated amortization of share-based payment related to the new grants of share with graded vesting schedule. This will be a little bit different from the US accounting standard. The IFRS, we adopt a graded vesting period, which means that in the previous few year, the charges to the P&L will be higher, which is known as the straight-line charges under the US accounting standard. The year-on-year increase was primarily attributable to the grants of certain subsidiaries, shares, and options to selected employees. Our income and gains increased 266% quarter-on-quarter and 21% year-on-year to 19 million. The quarter-on-quarter increase was primarily attributable to the recognition of financial incentive from the local governments. Operating expenses before share-based payment increased 7% quarter-on-quarter and 57% year-on-year to 192 million. The operating profit margin before share-based payments cost decreased 1 percentage point quarter-on-quarter and increased 2 percentage points year-on-year to 35%, which is primarily due to the increase in our marketing expenses. Our financial income increased 22% quarter-on-quarter and 42% year-on-year to CNY 35 million. The sequential and year-on-year increase were primarily due to the higher deposit balance. We now have close to CNY 4 billion on our bank. Finance cost increased 452% quarter-on-quarter and 329% year-on-year to CNY 10 million. The sequential and year-on-year increase was primarily due to the accrued interest expenses for the 3% convertible bond which we issued in July 2013, this year. The income expenses increased 31% quarter-on-quarter and 34% year-on-year to CNY 21 million. Our effective tax rate increased 2 percentage points quarter-on-quarter and decreased 1 percentage point year-on-year to 10%, which remained at a low level due to the preferential tax treatment in some of our subsidiaries. As a result, our profit to owners of parent increased 12% quarter-on-quarter and 51% year-on-year to CNY 163 million. Profit to owners of parent before ESOP charges increased 10% quarter-on-quarter and 48% year-on-year to CNY 175 million. Our statement of financial position, as I report earlier, we have a very strong cash and time deposit of CNY 4 billion as of September 30th, 2013. Our deferred revenue, both current and non-current, as at September 30th, 2013, was CNY 209 million compared to CNY 200 million as at end of last year, slightly increased by CNY 9 million. The increase was mainly due to the increase in the sales of prepaid card for our online games. Net cash generated from our cash operating activities decreased 26% quarter-on-quarter and increased 9% year-on-year to CNY 191 million. Our capital expenses decreased 15% quarter-on-quarter and 3% to CNY 21 million. For the capital expenditure, you will expect that will increase a little bit in the coming year as our project in our Zhuhai R&D center will start very soon. This is my report on the financial position for the Q3 2013. Now I turn the floor back to you, Devon, for questions. Thank you. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Jiong Shao of Macquarie. Please ask your question. Good evening. Thank you very much for taking my questions, and congrats for the very strong results once again. I would like to kick off with three questions, if I may. The first question is on your KIS business. I was hoping you can provide a bit more detail to break down your revenue from KIS. How much from advertising, how much from web gaming portal, and how much from the mobile? In the mobile revenue, if you are able to share, how much is from the advertising, how much from sort of the revenue sharing when you operate other people's mobile games? Any kind of color you can provide for your KIS business will be helpful. That is my first question. You want to complete all three questions, or you want me to answer one by one? Okay. I can finish all three questions, if you prefer that way. My second question is on your metrics for your browser and the navigation page. I was hoping you can provide those metrics in terms of the DAUs or MAUs, if you can. The third question is on your operating margins. Great to see that you continue to outperform your profitability. Your operating margins continues to be higher than expected. It seems in the last few quarters has been low to mid-30s. I know investment is a key focus for the company going forward. I was hoping you can talk about what kind of operating margins we should be looking at in the coming quarters. This is it. These are the three questions I would like to kick off with. Thank you. Thank you, Seung. Since all the three questions are financial related, I will give it a try, and Dr. Zhang will supplement later on. The first question is regarding the revenue breakdown for KIS. Seung asked about the breakdown for the advertising game and mobile. While I do not have the very detailed number on hand, I would guide you through the approximate direction. As you can see that the revenue currently, the majority of revenue is still coming from our PC-based business. Within the PC-based revenue, the revenue are mainly coming from our advertising, e-commerce, and also the value-added service, mainly the game revenue. This is still being our major income stream for the time being. As you know that the direction going forward is that our monthly active user for our mobile business are increasing very strongly. You could expect that the revenue and profit coming from that stream will be increasing much faster than our traditional PC base. While the breakdown for our current revenue, breakdown for KIS, the majority income are still coming from our advertising and e-commerce. You can see that the revenue coming from our value-added service increased tremendously, but start with a very low base. Last year, the job done by the KIS team, the most important thing is that they have actually did a very successful transformation. The monthly active user base for our PC user has actually increased tremendously to around 150 million. However, the income from our value-added service for the game side are still yet to go with full spin. But this year, 2013, the revenue from that value-added service will increase tremendously. You can see that there might be even a tenfold increase on that area. But that still relatively feels more as compared to our advertising revenue and game revenue. This is on our PC side. But you can also see that actually there is already have a revenue contributed from our mobile business. But that is just at the beginning because you will see that at the current state, we still very focusing on rapidly ramping up our user base. So that is just starting. The second question that you asked about the operating metrics on a browser. Our navigation page we have a daily active users of about 13 million. As for the Cheetah browser, the monthly active users is over 30 million. Right, Dr. Zhang? That is the number. The last question that you have is on our operating margin. You asked about the guidance for the coming quarters. As we have discussed all the time that in our business, we have a mobile strategy across all our four business segments. So we are actually investing a lot in that area, in particular on the KIS side. You will see that, as we mentioned earlier, the board has adopted a strategy to expand and grab the user base as quick as we can. However, you can see that the channel expenses in the previous two quarter are still below the expected growth. You can see that the selling and marketing expenses in this quarter and last quarter is still around 15% as a percentage of revenue. But you can expect that starting from Q4, that amount will increase quite significantly, because we have already identified channel that we consider that of good price performance, and we are about to invest in that. So in the coming quarter, you would expect that our operating margin will further narrow, I think probably easily by 10 percentage point. So this is my response to your question, Sean. Yes. Thank you, Francis. Yeah. Hi. Here Hongjiang. I would like to add on one thing and emphasize also Winston at one point. That is, if you look at the mobile monthly active user growth, that is a tremendous growth. We are very confident that growth will lead to the revenue growth in the coming months and years. Thank you. Okay. Thank you. Thank you, Hongjiang and Francis. Could I follow up with a couple of things just very quickly? One is that you mentioned or highlight the mobile strength, the 150 million users. Is there any other metrics additional, such as DAUs, et cetera, you can share with us? Also, Francis, you mentioned that for the PC KIS business, majority is from advertising plus e-commerce. Should we sort of consider that majority means two-thirds or three-quarters? Just give us some rough idea, please. Thank you. Roughly, I think at this point of time is around three-quarter, because as I said that the starting base of our game distribution business is small in 2012. This year, even though we have seen a very significant growth, that still account for a relatively small portion of our revenue. Mm-hmm. Okay. For the mobile? Sorry, could you repeat the question again? Okay, sorry. I was asking, it is great to see you now have 150 million users on your mobile apps. I was just wondering, do you have other metrics you can share with us, such as DAUs or MAUs or number of downloads, anything you can share in addition to the 150 million number? Thank you. The 150 million is actually our monthly active user. We are currently not releasing the DAU because that will have approximately the same conversion ratio between the DAU and MAU in the industry. Our competitor are not disclosing the DAU, so we wanted to in line with the disclosure, so we are currently disclosing the MAU for the mobile business. Okay, great. Thank you, Sean. Okay, good. Thank you so much, guys. Your next question comes from the line of Wendy Huang of Standard Chartered Bank. Please ask your question. Thank you for taking my question. First, you mentioned that you will start the construction of the R&D center in Zhuhai very soon. Should we expect the CapEx to surge in fourth quarter? Also, how will that affect the P&L in Q4? Secondly, in your prepared remark, you mentioned the monthly active user of the WPS personal edition was 55 million. You made also a comment saying that this actually showed a continuing growth. However, if I recall correctly, in fact, the MAU of WPS personal edition was actually already 56 million in second quarter. It looks to me that there was actually no growth at all in Q3. Can you maybe clarify on that as well? Thank you. Let me answer the first question, the impact of our R&D center in Zhuhai. There will be minimal impact on our P&L in Q4 because while I said that that will start very soon, we are not expected that will be happening in Q4 first. Secondly, the CapEx that spent in Zhuhai, we will still control that CapEx to a reasonable level in the coming two years, and that will not be reflected in the P&L immediately because that will be capitalized and depreciate across its useful life. Second, you mentioned about the monthly active user for our WPS personal version, it does have an increase. We have now close to 56 million monthly active users. That number has actually been steadily growing over the past month. Okay. Does that mean there was actually a temporary decline before, maybe in September? You start to see the bounce back in October? It's not declining. They're actually increasing steadily. Okay. For that R&D center, what will be the total CapEx? It is our plan that we will be developing that R&D center by phases. I think the first phase probably that will be completed in the next 2, 3 years. We have a CapEx of around CNY 200 million and CNY 300 million in the next 3 years. Okay. This is approximately the size of that R&D center. Thank you. I just have one more last question. Do you have any new contracts up for your WPS Office software, besides ICBC and PetroChina in Q3? Definitely. We have signing contract from time to time. You asked about the massive contract. I think the ICBC, the PetroChina is a very big contract comparatively speaking. We do continuously have contract signed with various enterprise parties, both the government and the non-government sector. If that's the case, maybe you can share with us about the number of the corporate clients you have for the WPS Office software as of now versus Q3 and Q2. Maybe that's something we can refer to. Let me think. At this moment, I don't think we can give you this breakdown. I would like to say one good news is that we have already come to the point that we see more higher percentage of income come from the enterprises than government procurements. That's a milestone change compared to in the past. We also see the penetration into medium-sized companies. Wendy, I wanted to give you a little bit more color. You have a question saying that whether we are declining in our monthly active user base on our WPS, but in fact, the number that on our PC personal monthly active user at the beginning of 2013 is 43 million. The number in September is 56. So they are increasing in a very steady place. The number on our mobile number are even faster. The number at the beginning of the year is around 30 million, and that number increased up to 25 million monthly active users by September. Thank you, Wendy. Thanks. The next question comes from the line of Alex Yao of J.P. Morgan. Please ask your question. Hi, good evening, everyone. Thank you very much for taking my question, and congratulations on a very solid quarter. I have a few questions. Number one is, if we looked at the gaming operating metrics in this quarter, both the DAU and the APA declined quarter-over-quarter compared to the June quarter. We understand there's a weaker seasonality here in Q3. Can you comment, are you seeing any usage shift or usage cannibalization from China's booming mobile gaming market in Q3? How do you think about the impact from your core MMO business from the booming mobile gaming market, in the next few quarters? Secondly, on the mobile monetization, we understand you have a mobile gaming publishing business, which has about 400 game titles. How would you differentiate yourself compared to other peers in the market, such as 91 Wireless? Lastly, regarding mobile advertising, our understanding is that China's mobile advertising market is underdeveloped compared to the U.S. markets. What's your strategy in such a market environment, and which part do you think China is missing compared to the U.S.? Thank you very much. Hi, Alex. Your question, number one is ask about game operating metrics. A bit lost. You said that the number deteriorating, which number are you referring to? For example, the APA, active paying accounts, in this quarter, it was 1.8 million, compared to 2 million in the June quarter. Obviously less people are paying for gaming content in this quarter. Also similar daily average peak concurrent user declined from the second quarter of this year. My question is, we understand there's a seasonality issue in Q3, but do you seeing negative impact from growing mobile gaming usage in China in this quarter? Yes. Thank you for your question, Alex. Actually, the APA number is quite steady, but you are right on, you pick a number that the number in Q2 is 2 million. The drop is basically due to the drop in our overseas market, in Vietnam. The Vietnam market was severely affected by the government policy, so it does drop a bit. But overall, if you look at our PCU, the number are quite steady. Also, if you look at our ARPU, the number are also increased slightly. The drop in the Vietnam APA do not have a very significant impact in our overall revenue from our gaming business. Got it. Can you comment on your mobile gaming publishing strategy, and how do you differentiate compared to the peers? Gaming publishing. Yes. Alex, here from Beyond, thank you for the question. I don't think there are much difference in the way that the key here is to attract good games. The good news is we have signed a couple of very popular games on our mobile gaming platform. The hard work is in how to differentiate the traffic you have, and from those traffic, to find out those game lovers, those users who really are looking for mobile games, and directing them to the game platform. This is still early, but we are seeing tremendous growth, and in particular when after we have established the PC assistant, which help to direct our PC users into our mobile game as well. Things are in good shape and progressing very well. This is what I want to say here. The last question is Sorry. Yeah, go ahead. Yeah. Also, you comment on the mobile advertising in China and overseas. Yes, overseas market is much more mature than Chinese market. Both are growing in very fast speed. We are very hopeful that with our fast-growing MAU and DAU, we will be able to monetizing on those traffic soon. Also, good news is among the increased mobile users, mobile DAU and MAUs, a large portion of that is actually in the U.S. and overseas market. Got it. That's very helpful. Thank you very much for taking the question, and congratulations again on a very solid quarter. Thank you, Alex. The next question comes from the line of Thomas Chung of BOCI. Please ask your question. Hi, good evening, everyone. Thanks, Dollar Zhang, and thanks, Francis, for taking the questions. I have a couple of questions. The first question is regarding the trend in the fourth quarter for the PC gaming business. Should I assume the APA to rebound on a quarter-over-quarter basis in this quarter, benefiting from better seasonality? My second question is relating to the KIS business. Can management give us a sense about how many advertisers are there for the advertising business? My third question is about the margin, as well as the CapEx that was previously mentioned. In terms of the 10 percentage points decline in the operating margin, are we talking about year-on-year or quarter-over-quarter? With regarding to the CapEx, I think Francis has mentioned about CNY 200 million to CNY 300 million CapEx will be spent. Are we talking about 2014, or we are talking about a three-year time horizon? Thank you. Let me answer the last question that is more financially related. The margin, I mentioned that we can expect that there is a significantly increase in the marketing cost, and the operating margins will be leveled by 10 percentage point. That I refer to Q4, quarter-on-quarter, as compared to Q3. This is number one. Number two is the CapEx of CNY 300 million is actually for the first phase, which we expected to be completed in two to three year. So that CNY 200 million to CNY 300 million, I think that will be spent across the next two years. Thanks, Francis. The second question is regarding the APA trend in the fourth quarter as well as the number of advertisers on KIS. Thanks. The APA accounts after the drop in Vietnam, I think they are now stable. Also, if you look at the strong momentum of JX3 and MAT, we expected that the APA will be increasing steadily. Your other question is on how many advertisers in the KIS. Yes. I would say that the major revenue are coming from the advertising, e-commerce, and game publishing. But my apology, I am not in a position to disclose the number of advertisers on that basis. Yeah. The only thing I want to add here is that the number of advertisers are actually increasing, which is very healthy, and we definitely see our improvement on the dependency of fewer advertisers. I see. Thanks, Dr. Chan, Francis. Thank you. Thank you, Thomas. Your next question comes from the line of Billy Bell of RHB. Please ask your question. Hi, Dr. Chan. Hi, Francis. Thanks for taking my question, and congratulations on a great quarter. A few of my questions have been answered already, so I just want to touch on a few more sort of bigger-scale questions. In terms of the mobile, I know that you guys are focusing on user base right now, but it seems that it is rising rapidly. Going forward, the first question is, do you have any plans when we reach that point, how would you monetize on this growing user base? That's the first question. The second question is to do with mobile as well. Again, it's growing rapidly. Is this growing much faster than you have expected, or is it in line with what you expected previously? Those are my two questions. Thank you. Yeah. Let me take the first one. Okay. Thank you for the question. Let me take the first one on mobile. If you pay attention to the mobile growth and also to the market and what happened to PC traffic a few years back, you know that it's critical to grow your user base first. As the market is getting crowded, more people will jump in, and it will become more expensive to grow your user base. That's exactly what we have been doing, and we'll continue doing so. At this moment, our focus is very clear, is on growing the user base, not on monetizing the traffic yet. We are closely monitoring our growth in terms of user base and how user experience are and how good our conversion rate and all those. We will only wait until all those metrics come to the point that we are very sure that we are going to maintain this base, then we'll start thinking about monetizing. The good news is that so far, we are very happy with the progress. Basically, Dr. Chan has already given the response to the question number two as well. Yes. We will be starting to monetize when the user base comes to a significant number, and that will be happening very fast. If you talk about the monetization, I think the monetization on our other business or on the PC side or other business have been well proven. On the mobile side, I think the first stream will probably be coming from the advertising. Yep. Okay. Thanks. Thanks for that. Just to follow up on one question is, the expansion pack for JX3, which is scheduled for open beta release on the 25th of this month. Could you just sort of give us some expectations of what you think of this game compared to the previous expansion packs? We are very optimistic about this expansion pack. In terms of the size, this expansion pack- It's not the biggest one. is not the biggest one in this year. While we are very optimistic, that is not as big as the previous one that we released. Okay. Definitely. Thanks, Francis. Thanks, Dr. Chan. I'll get back in the queue. Thanks very much. Yeah. From the line of Connie Gu of BOCOM International. Please ask your question. Good evening, Dr. Zhang, and thanks. Congratulations on a strong quarter. Actually, many of my questions have been answered already, so I just have a quick follow-up question on your answers just now. In KIS, what is your e-commerce business relationship? Is it basically a direct website that charged by clicks or actions of users, or you have an e-commerce platform? It will be very helpful if you could share with us how much revenue does this section contribute. Thanks. Apology, Connie. I do not hear you quite clearly. You asked about the- E-commerce. For the navigation page, there is some e-commerce revenue, is it? Just now you said for the KIS business, there is some ad revenue and e-commerce revenue and some value-added service revenue. So what is this e-commerce revenue related to? Hello? Good. I think the question is: what is the business model for e-commerce? How do we derive our revenue from that e-commerce? Is it generated from clicks or generated from a profit-sharing basis? Thanks for the question. On the e-commerce side, it actually depends on vendors and depends on the different advertisers. So there are pay by click, there are also revenue sharing by deal completed. For instance, what happened yesterday at the 1111 event, there are a mix of both and both of them increased tremendously for the day. So it depends on different vendors, depend on different advertising source, yeah. Okay. Thank you, Dr. Zhang, and I'll get back to the queue. Thanks. Thank you. Your next question comes from the line of KC Chen of Shin Kong Life Insurance. Please ask your question. Hi. Thank you for taking my question. I just have two questions. The first one is, if we look at KIS revenue, it grew by about 25% quarter-over-quarter. That is only about 8% you mentioned from mobile, so a majority of the contribution must come from PC side. My question is, when I look at your DAU and MAU number of Duba and Cheetah browser, it is actually quite flat quarter-on-quarter. Should we understand that the contribution probably from the increase in sort of ARPU or conversion rate of these products, or you have higher growth from other products like antivirus or other product? That is my first question. Hello? It was hard to understand your question. That is mainly coming from our mobile game publishing business. So mobile game publishing. Yes. Okay. Got it. My second question is, could you remind me, remind us that the main reason for the huge increase in the OpEx in fourth quarter? It is to invest in The operating OpEx, the operating expenses in Q4, is that the question? Yes. The significant increase. That was related to our plan in our marketing effort. So- We gradually increased our R&D expenses in order to invest in the mobile capability. Starting from Q4, our speed on investing in the marketing channel will increase tremendously. I see. Should we expect that kind of leverage to continue through the next couple of quarters, or it is more of a one-off? It's not one-off. I think we're starting to invest in the marketing channel. That will be for a number of quarters. Okay, thanks. As long as we are rapidly increasing our user base. Got it. But first and foremost is that we're very focusing on our user experience and product. So the first and foremost investment is on our R&D. But we are now at a stage that we will be also investing in the marketing money in order to promote and to grow our user base to a faster pace. Okay, I understand. Thanks. Your next question comes from the line of George Wu of Legends Asset Management. Please ask your question. Hi, thank you for taking my question. I've got two questions. My first question is regarding on the APA of JX3. Would you mind talking about, for example, the quarter-on-quarter growth on the APA of JX3? The JX3, from the beginning of the year, it's close to 1 million, less than 1 million. It's 990 million. By Q3, the number grew to 1.3 million now. Okay, so that's roughly similar to the number record in second quarter, right? In second quarter? Yes. Yes, similar to second quarter. My second question is also regarding on the operating expenses. You mentioned that you will invest in the marketing channel in the coming few quarters. Could we expect the magnitude of the investment will be roughly similar in the coming few quarters, or the main investment will be in fourth quarter and the investment will increase or decrease in the coming few quarters? I think it depends on the result of Joe's marketing effort. Okay, thank you. We will be staying at a high level because the business are growing very fast. Okay, I see. Thank you. Your next question comes from the line of Wendy Huang of Standard Chartered Bank. Please ask your question. Thanks for taking my follow-up question. First, could you give us an update on the Kingsoft Cloud user base? I think last quarter, in Q2, the registered user base was around 56 million. So, can you share with us the Q3 number? Also, I think today you made an announcement of filing related to the connected transaction between the KIS Group and Kingsoft Japan. Can you elaborate maybe the background of this connected transaction, and also how will this affect the listed company's financials? Thank you. Hello? Let me take the question. The cloud user base remains about the same, but activity is increasing. The active users is increasing, but the registered users remain about the same. The second question is on the connected transaction. That is actually a cooperation between KIS and Kingsoft Japan. One of the business of Kingsoft Japan is actually to promote some of our Kingsoft product in the Japan market. Because since they are connected person, so the transaction between two entity are needed to be subject to disclosure and approval procedures. And- That has been happening all the time, so that is not something new. Okay. Related to the Kingsoft Cloud, can you give us some update on your cooperation with Xiaomi? Also out of that 56 million registered user base, what percentage or how many million users are actually acquired from the Xiaomi's smartphone channel? Thank you. At this moment, I think we're not in a position to disclose the details with Xiaomi on the user yet due to concern with our competitors. One thing I do want to say is that we are continually increasing our active users from Xiaomi. Basically, you see the volume of data uploaded from Xiaomi has increased tremendously in the last three months. Also we have launched two related apps on the Xiaomi platform, which will further increase the activity on our Kuaipan business. I want to follow up on the cloud. On the cloud enterprise side, I think in Q2, you mentioned that you already had about over 100 enterprise clients for the cloud services, and you were targeting 1,000 enterprise accounts for the cloud product by the end of this year. Can you give us some update on the number of the cloud enterprise accounts by the end of Q3? Also, are you still sticking to the 1,000 targets by the year end? Thank you. Yeah. At this moment, the 1,000 users were our test users, and a percentage of them are converted into our paying user, but the number are still not as significant. At this moment, we basically ignore that. On the other hand, we are seeing the increased number of our Kingsoft Cloud computing users, but both of them are still in the trial period. I think the focus were on improving our user experience, and we have not put a lot of marketing efforts on sale onto this yet. Okay. Thank you. The next question comes from the line of Jiong Shao of Macquarie. Please ask your question. Thanks for taking my follow-up questions. I have a couple. Firstly, could you talk about your pipeline for your web games and the mobile games development for 2014, and what kind of marketing budgets you have planned for promoting those games? For mobile games, specifically, what kind of channels you intend to use to distribute your mobile games in addition to just putting on your own mobile game distribution platform? Lastly, how many mobile games on your mobile game platform you are actually running the games, operating those games for your CP partners. Thank you for answering in advance. Thank you for the question. The pipeline on our mobile game and also web games, at this moment, we are still polishing two of our big titles on mobile games. But at this moment, we're not ready to release it in this quarter. The web game is still under development, and we don't expect a release of the web game this fourth quarter either. So both of them will have to wait until first quarter of next year. Good to know. Talking about the channel for distribution of mobile game, I think definitely our KIS will definitely be one of the major distribution platform, but as well as Xiaomi phone. They are ramping up very fast, so they will be another important channel. Also, we will not be only putting those channel, all the channel that we've been considering, and we were discussing. Okay. How many of those 400 mobile games you are currently on your publishing platform, you are currently actually running those games for the CPs? The 400 games are games we acquired for our KIS mobile game platform. They are not our in-house games. Right. Are you running any of those games for your partners, or basically your partner is just putting them on your platform, you just serve it as a app store, you are not really running those games for them in any capacity? There are a couple of games we are running them. We are licensing them and operate them in our flagship games and others just like app stores. Okay. Dr. Zhang, just want to make sure I understood you correctly. I think you mentioned the two big titles for mobile games and the web game, the expected launch will be Q1 next year. Is that correct? Those will be our own in-house games. Right. That's why- Understood. Yeah. Okay, great. Thank you so much again, guys. Thank you. Your next question comes from the line of Wendy Huang of Standard Chartered Bank. Please ask your question. Thank you for taking my question again. Just two housekeeping questions. One is regarding the KIS PC monthly active user, and what's the number for Q3? I think in Q2, this number was 155 million. Secondly, can you give us some update on the total headcount as of the Q3? Also, should we expect any further increase in the headcount in Q4? Thank you. Yes, Wendy, you are right that the number remains at around 150. That's not show a too much growth this quarter on the PC side. We have already explained in the previous quarter that, on the PC side, we expected it to maintain in that position because the PC growth is flattish. This is your question number one and the second question? Total headcount. Total headcount. We expected that the total headcount number will be continued to increase further as we are investing heavily on our mobile business. What was the total headcount as of Q3 then? As of Q3, we approximately have 1,000 in our KIS, close to 1,800 in our game and roughly about 500 to 600 on our office, R&D. The total number. Okay. So, for each year, do you have any plan like to increase total headcount by, for example, 5%-10%? Sorry. Can you repeat the question? Yeah. Do you have any plan, for example, to increase your headcount by 5%-10% each year? I think the plan for headcount increase really depend on the particular product and services we are working on. For instance, you should expect a headcount increase for our WPS Mobile services continued in this quarter and into next year. And, we have increased tremendously the number of people working on mobile games by acquire more teams from other companies. Not acquire company, but acquire teams. So, you will see increases in the mobile area. But exactly how many people are going to increase? I think 5%-10% should be Definitely we will do that. But I'm not saying we are going to continue growing that speed and that rate. Actually, this year will increase more than that. Thank you very much. There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue. Okay. Well, thank you everyone for attending the meeting and for asking questions. Hopefully, we have answered those questions. If you have further questions, Francis and I can always answer offline. Again, thank you very much for attending. Thank you for your support. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.