Earnings Call: Q1 2013

May 24, 2013

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the 2013 Q1 Results 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. I must advise you that this conference is being recorded today, Friday the 24th of May, 2013. I would now like to turn the time over to Ms. Michelle Harnett. Thank you, ma'am. Please go ahead. Thank you. Ladies and gentlemen, good evening and good morning. I'd like to welcome everyone to our 2013 Q1 earnings call. I'm Michelle Harnett, the Company Secretary of Kingsoft. I'd like to start by reminding you that some information provided to you during the earnings call might include forward-looking statements, which may not be relied on in the future for various reasons. These forward-looking statements are based on our own information and on information from other sources we believe to be reliable. Please refer to other public disclosure documents for detailed discussions of risk factors which might affect our business and operation. Having said that, let me introduce our management team who join us today. Dr. Zhang Hongjiang, our Executive Director and CEO. Lisa Bronté Soon, our Executive Director and CFO. Now I'm turning the call to our Executive Director and CEO, Dr. Zhang Hongjiang. Yes. Good evening, everyone. Thank you for coming to this conference call. I'd like to start by saying that we are very pleased to announce the Q1 result, and we're very pleased to see another very strong quarter, both in terms of bottom line and top line. The total revenue reached to a record high. It's CNY 456.9 million. It's an increase of 6% quarter-over-quarter and 56% year-over-year. Also, in terms of the bottom line, the operating profit posted a growth of 45% Q-over-Q and 93% year-over-year to reach CNY 162 million. The operating metrics for all the main product lines of our business also achieved a very good result and made a new record. Let me go to say a few more words to each of our business. First, we are very thrilled to see a solid and a very impressive start for 2013 for our online game business, despite the adverse impact of Chinese New Year holiday, which usually is a low season. The revenue for online game posted a quarter-over-quarter growth of 11% and year-over-year growth of 40%. Think about this is achieved while the overall online PC game, the growth is much lower than this one. Furthermore, the revenue for online game for Kingsoft continued to increase for the seventh consecutive quarter. In the premium 3D MMO game in Chinese market, our flagship product, JX Online 3, continues the strong momentum of growth, with the revenue achieved a growth of 40% quarter-over-quarter and 110% year-over-year. MAT, which is our first 3D shooting game, also showed a great momentum of growth in term of popularity and revenue. Our web game and also mobile game are in the process of rapid development with the introduction of new talent and studios in early 2013, and in particular, in the last couple of months. We began closed beta test for web game T3, which is also called Cinnamon Master, and launched several casual mobile games. Many of them actually received pretty good reviews and also have a large number of download. We believe those initiatives will enable us to establish our foothold in those rapid growing new market segment because we believe in our capability. Also, we believe that both web game and, in particular, mobile game will continue to grow with very high rate. The monthly PC-based active user base for our KIS family expanded further to over 150 million in March. This actually is very important for our internet security business. Another highlight is that our advertising revenue and the value-added revenue from our security business increased 9% quarter-over-quarter and over fourfold year-over-year. We entered a strategic collaboration with 37wan in February to accelerate our web game operation. Hopefully, this will be one of our growth catalysts in the PC space. More importantly, we continue to invest heavily in the mobile business because we believe that mobile will take off very quickly, and we'd like to capture this window. I'm very glad to see our monthly active mobile users of our KIS product family grow further to over 54 million by the end of first quarter. Let me turn to our WPS business. We see, due to a seasonality effect, our WPS revenue actually decreased 7% quarter-over-quarter, but it still posted an 8% year-over-year growth. We are excited to report that we have signed recently with two anchor users in two big enterprises to deploy WPS in those two Fortune 500 companies. This is a milestone for WPS and marks the adoption of our WPS product in large enterprises and the mission-critical applications. I hope that to review the two companies' name later after getting their permission. The monthly active users of WPS Personal Edition continue to rise through it, and now it's over 48 million at the end of first quarter. We're also super excited to see the global monthly active users of WPS Mobile Office ramped up to 17 million in May 2013, basically in this month. Our WPS Office for iOS, it was officially released in February, has received very positive feedback and ranked top in Apple's App Store in the category of free Chinese business apps. In April, WPS for Mobile was upgraded to version 5.1 to integrate cloud storage in mobile office applications. This is a significant breakthrough in the mobile office functionality. I also want to inform you, and we are very pleased that we have released the WPS 2013 version, and that with the enhanced functionality and improved usability. I'd like to also say a few words about our Kingsoft Cloud business. Our registered users continue to grow. That help us to solidify our leading position in China in this particular market. On March 27th, we also launched the commercial version of Kingsoft Cloud. In particular, the Kingsoft Cloud storage application for business users and our cloud service platform, which is equivalent to the Amazon S3, was also officially released in March. So this is a brief comment on our four businesses. I like to say that with the impressive growth of our JX3 and the improved and continued increasing monetization capabilities of our security business and the continued strong momentum in WPS Office sales and our fast expansion into mobile services, as well as our cloud business, we believe that we have laid a solid ground for a very successful 2013. I am quite confident we will be able to achieve our targets and deliver solid result to our shareholders. I would like to stop here and turn back to Michelle and to have her invite our CFO to comment on our result. Thank you, Dr. Jiang. Thank you, Dr. Jiang. Good evening, and good morning, everybody. This is Francis, the CFO of the company. I will now discuss the Q1 2013 operating and financial results. We will use CNY as the reporting currency. The revenue increased 6% quarter-on-quarter and 56% year-on-year to CNY 457 million. The revenue split was 58% for our online game and 41% for our application software. Our revenue from our online game business increased 11% quarter-on-quarter and 40% year-on-year to CNY 267 million. The quarter-on-quarter increase was primarily due to the strong growth of JX3 and MAT. The year-on-year was mainly due to the strong growth of, again, the JX3, the MAT, as well as the revenue contribution from our newly launched game. Look at the operating metrics. Daily PCU is flat quarter-on-quarter and year-on-year to around 600,000. Monthly average paying account or APA number increased 7% quarter-on-quarter and 33% year-on-year to 1.8 million. This solid quarter-on-quarter and year-on-year increase in APA primarily reflected the ramping paying account of JX3. The monthly ARPU increased 2% quarter-on-quarter and half back year-on-year on CNY 47. Look at our application software. Our application software revenue decreased 1% quarter-on-quarter and increased 107% year-on-year to CNY 188 million. This slight quarter-on-quarter decrease mainly reflected the solid performance of application software, because as you know, Dr. Jun mentioned earlier, Q1 is our traditional weak quarter during the year. The remarkable year-on-year increase was mainly due to the combination of the following factors. First, the robust growth of online advertising revenue, which was again driven by the successful transformation of Kingsoft Internet Security from a traditional software company to an internet company. This is also the message I have been communicating to the investor, that we should not view Kingsoft as a purely online company as we did in the past. We now have a very strong internet company component. Second, the strong sales growth of Kingsoft WPS Office in the domestic market. Our cost of revenue increased 19% quarter-on-quarter and 24% year-on-year to CNY 62 million. The increase was mainly due to the higher bandwidth and server hosting costs, along with the increasing user base and user activity of Kingsoft Cloud and our Kingsoft Internet Security, KIS. Our gross profit increased 4% quarter-on-quarter and 63% year-on-year to CNY 395 million. GP margin decreased 1 percentage point quarter-on-quarter and increased four percentage points year-on-year to 87%. Our R&D expenses, net of government grant, increased 1% quarter-on-quarter and 32% year-on-year to CNY 150 million. This increase is due to the increased staff costs as a result of the expansion of the group's mobile application development teams, and also our increase or improvement in our salary and benefit package to our staff. Selling and distribution expenses decreased 20% quarter-on-quarter and increased 117% year-on-year to CNY 68 million. The quarter-on-quarter decrease was due to the fact that less marketing and advertising expenses in quarter one, as you know, there are no major expansion pack or new game title launch in the first quarter 2013. Whereas we have several new title launch in fourth quarter last year. The year-on-year increase was mainly attributable to the expanded marketing and advertising activity for Cheetah Browser and KIS. Dr. Jun and myself have also frequently communicated to the investor group that in 2013, we will have a lot of business, namely the KIS and WPS are still in its land grabbing status. So we will continue to invest it in our R&D capabilities. Administrative expenses increased 12% quarter-on-quarter and 34% year-on-year to CNY 46 million. The increase was mainly due to an increase in salary and benefits. Our share-based payment or compensation cost decreased 27% quarter-on-quarter and increased 24% year-on-year to CNY 10 million. The quarter-on-quarter decrease was mainly due to the fact that we have more grant make in the fourth quarter of 2012. Our other income and gain increased 384% quarter-on-quarter and 573% year-on-year to CNY 15 million. This increase was due to the recognition of some of the deferred government grants, what we call, which was recognized in the first quarter 2013 upon the completion of final inspection. I wanted to make a remark here. This project was finished, so we will not be expecting the income to be recurring in the rest of 2013. Our other expenses, which we called the written-off of certain other receivables, decreased 44% quarter-on-quarter and increased 13 times year-on-year to CNY 10 million. Our operating profit before share-based payment increased 37% quarter-on-quarter and 87% year-on-year to CNY 172 million. Our margin of operating profit before share-based pay compensation cost increased nine percentage points quarter-on-quarter and seven percentage points year-on-year to 38%. One thing that I have also been communicating to the public in the last few months is that we also recorded a gain on disposal of a subsidiary, which is mainly one of our real estate projects. The company, the board, has decided that Kingsoft will be focused on its core business. So we decided that we sold the project to another professional real estate developer. This disposal resulted in a gain of $48 million we recorded in first quarter 2013. Our financing income decreased 2% quarter-on-quarter and increased 20% year-on-year to $27 million. Income tax expenses increased 49% quarter-on-quarter, 16% year-on-year to $24 million. Our effective tax rate was more or less flat quarter-on-quarter and decreased four percentage points to 10% year-on-year. As a result, our profit to the owner of the parent increased 57% quarter-on-quarter and 124% year-on-year to CNY 196 million. Now, this thing is that as I just go through the results for Q1, you probably have already noticed that we have recorded two one-off expenses in Q1, namely the and the income from disposal of the real estate project. If we take off this one-off impact, the increase in the profit attributable to the owner of the parent will be 20% quarter-on-quarter and 60% year-on-year. Of course, in arriving at this number, I also took out the tax impact on those one-off items. Our profit to owner of the parent before ESOP charges increased 15% quarter-on-quarter and 115% year-on-year to CNY 204 million. Our statement of financial position. We have the cash and time deposit of CNY 2.6 billion at the end of March 2013, which represents cash per share of CNY 2.3. Deferred revenue at 31st March 2013, was CNY 188 million, compared to CNY 200 million at year-end 2012. The decrease was primarily due to the decrease of deferred government grant as a result of completion of the final inspection of the project I mentioned earlier. The net cash from operating activity decreased 58% quarter-on-quarter and increased 127% year-on-year to CNY 998 million. Our CapEx expenditure recorded in the first quarter was CNY 26 million. Now, I would like to turn back the floor to Dr. Jiang to host the Q&A session. Okay, Michelle, can we start the Q&A? Ladies and gentlemen, we will now begin the question-and-answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel a request, please press the pound or hash key. Your first question from the line comes from Martina Ma from Boom Capital. Please ask the question. Hi. Good evening, Dr. Jiang, Francis, and Michelle. Congratulations on another strong quarter. I have two questions. First is regarding the mobile strategy of KIS and cloud. We learned from your press release at WPS iOS version and KIS Cloud have both achieved remarkable achievements so far. Can you add more color on your plan of your mobile strategy, especially for KIS, and how you plan to achieve synergy between Kingsoft Cloud, KIS and Xiaomi? The second question, I think, is for Francis. It's your margin guidance for 2013. In Q1, we found the margins improved significantly. Net margin was 32% in Q1. How should we look at the margins for the rest of the quarter of this year and for the whole year of 2013? Thank you. Thank you for your question. Let me first address your first question. As you may remember from our past conference calls and from our meeting with the analysts in the past year or so, we emphasized a couple of times the entire company is moving into mobile internet. It's not just the KIS or WPS. Actually, if you look at our game division as well, we are all marching into a mobile space with all the resources we have and actually all the new investments are in the mobile internet business. For the KIS in particular, we have achieved a spectacular success last year in term of transforming the company from the licensing model to the freemium model, and had a record high revenue in the last year. The focus this year is how do we transfer the success we had achieved in PC internet into mobile internet. To do so, we have assembled a very strong team. Actually, we picked all the strong folks in that particular division and formed a very strong team to move into mobile by developing new mobile products. If you look at the And also improve our existing product. If you look at our Kingsoft antivirus, mobile version, since its launch, it has received very well by our users. The Battery Doctor continued its growth in term of user base. The new mobile app introduced later last year, the Clean Master, has a tremendous growth as well. All those together made our overall mobile monthly active users close to 50 million monthly active. This is a remarkable growth. This is just like any freemium model, user base is the key, is the foundation for us to monetize later on. By growing the user base, we pretty much assure ourself that we have a foundation we can grow our revenue in the mobile business later on. I hope this address your question on the KIS side. On the WPS side, one number I'd like to share with you is the total mobile monthly user for our Android platform already reached 17 million. In March, we released our first iOS Office application, which is actually a PPT player. To our surprise, the iOS users welcomed the new product, and liked it very much. We are working on releasing more functionalities and features for our iOS products. With that, we believe that we will further increase our Office mobile users. Hopefully, by the end of the year, we will have over 30 million Office users, basically double what we have today. That's what I'd like to share with you on the mobile side. Yeah. Thank you, Dr. Jiang. Francis, do you want to address the second question? Sure, Dr. Jiang. Martina, the answer for or the guidance for the gross margin is that in the first quarter 2013, we recorded a very high operating margin of 35%. Which is significantly higher than the one that we recorded in the last quarter of 2012, which is 26%. We almost had a 9% to 10% increase in operating margin. This increase was primarily due to the following reason. The first is in the selling distribution expenses in the first quarter of 2013, as a percentage of revenue, it's around 15%, whereas the selling and distribution expenses is 20% in the fourth quarter of 2012. So we have 5% changes in selling and distribution expenses. The second one is the one-off income that we recorded on our which is about $9 million, which accounts for a 2% increase in our contribution to our improvement in operating margin. We also recorded less bad debt expenses in first quarter 2013, which explains for about 2%. We also recorded less expenses in our share-based compensation cost, because as I mentioned earlier, that we do issue more RSU in the last quarter of 2012. So this explains the difference in the changes in the operating margin in the first quarter of 2013 and last quarter of 2012. As a guidance for the future, we expected that this operating margin will be decreased a few percentage points to below 30%, because as Dulfin and I always mention that in 2013, we are still in a land grabbing status in certain areas. Namely the KIS, the cloud, and also the WPS. We will continue to invest in our product and user experience. So we'll be continuing to spend more in R&D, as well as the selling and distribution expenses. Because you have already noticed that our user base of KIS has already increased tremendously during 2012. In 2013, we will be continuing to invest in the selling and distribution expenses in order to get more users. So I hope I answered your question, Bettina. Thank you. That's very helpful. Thank you very much, Francis. Yes, I would like to add a few words on Francis' comments. Also, in terms of our marketing expense, marketing spending in the first quarter is a little bit quiet compared to Q4 in our case. We are expecting the marketing activity for our game, as well as our internet security business will heat up as we are getting into May and also June and later on. That will contribute to the decrease of our margin as well. Thank you. Your next question comes from John Shao from Macquarie. Please ask the question. Good evening. Thank you for taking my questions and congrats on the massive beat. My first question is to follow up on your full year guidance. At your analyst briefing recently, you talked about your revenue forecast or expectations for this year and also earnings growth of sort of single digit for this year because of the investment. I was wondering, in light of the very strong Q1 results, do you have any new thoughts about your full year guidance both on revenue and on earnings? That is my first question. Thank you. Yes. Thank you for the question. This is Hong Jiang, CEO of Kingsoft. I would like to take this question first and then ask our CFO, Francis, to add on. As you all may know, the internet market, and in particular in China, is very vibrant, but it also fluctuates all the time. We need to anticipate the changes that may come and that could impact our business. Actually, as we speak, the way how to compensate traffic that is directed to a certain site is constantly changing. That will impact our internet security business because the way to monetizing our user traffic is to direct those to e-commerce sites, search site, and other sites. There is so much dependency on how our partners price the price of traffic. Also, as we get into mobile internet, the competition is even more furious and there are things we may not be able to anticipate. The only thing we can anticipate is there will be things that will be a surprise to us. Having said that, we are pretty confident with our team, and we believe we should be able to hit our target this year. Francis. Thank you, Dr. Jiang. I wanted to add on, to echo Dr. Jiang's comment that we feel very confident about our performance in four of our business segments. However, as I mentioned earlier, we are still in a land grabbing phase for several of our business. So we will be continuing to invest, and also due to the volatility in different segments, we need to anticipate some of the fallback in certain areas. But as a whole, I still stand by the earlier guidance that the management give to the public that we will still be recording a strong growth in 2013. But as the profit margin, currently, the management do not give a very strong KPI target for the team. We still primarily focus on increasing, improving the user experience for our product. So, we will be continuing to invest in R&D and selling and marketing expenses. We will be conservative on our profit guidance for 2013. Thank you, Francis. I would like to add on a little more on that. In particular, I want to emphasize our investment into mobile. We believe that the mobile business is a huge opportunity, but also we believe there is a small window for us to get into it. So, as Francis has mentioned, we did not put our profitability as a core KPI. But the reason for that is we really want to capture all those opportunities to grab more users and to provide better services to our users. This is true for our internet security. This is also true for our game business. So, if there are need to invest more, we will, and we will not just stop because we worry about our profitability. Mm-hmm. Yeah, I agree. That seems to be the right strategy. My second question is a follow-up on, Dr. Jiang, your comment on gaming. The strength on JX3, did you talk about, is that because time-based, is that because of the number of user growth, or is that because of the time they spent sort of getting longer and longer? Also, could you elaborate a bit on your pipeline for your web games and mobile games? How many games do you expect to launch this year? If there is any kind of meaningful revenue contribution we should be expecting. That is my second question. Well, thank you. Let me say the JX Online 3, the growth is definitely because there are huge increase in term of its players. This is more than 100% player, number of players increased. Yes, the players, they play longer, but another thing is that we did introduce some value-added services in this game as well. So there are non-time-based fees, revenues as well. But most importantly is actually the growth in term of players, number of players. I guess this is one thing I want to say a few more words. Once you really consider user as your friend and pay the attention to what user really want, improve the service, then the users, the players will become our advocators. So actually, we got free marketing from the users. That is how that helped us to increase our players for JX3. The same approach has been learned and applied to our MAT product. I am very pleased to see the strong growth in MAT as well. It is not 100% yet, but it is a very high double-digit growth as well. So, this is on JX3 and on our PC game. On the mobile game side, we have assembled six teams across our game division, and we already have five. No, actually, not five. Actually, let me double-check. I think we, yeah, we already have seven casual games on the market, and they are actually quite popular. We have over 5 million downloads already. So those are a great start. But I do want to make it clear that this year, our focus is building a strong team and developing a strong product. So in our overall budget planning, we do not count on mobile games to bring in a lot of revenue. We rather focus on bringing many users in. Yeah. So that is the mobile side. How many more Sorry? How many more web games and mobile games do you plan to launch before the year ends? I think for the year-end, we should have more than 10 mobile games. Apart from casual games, we should have some serious games as well. Half of them, I think, hopefully will create some revenue. Okay. For web games, hopefully we are going to launch one towards the later part of this year. So far, we are quite confident with the testing result we have on that particular game. So we are also building more teams on web games. There will be another one, hopefully, even earlier, maybe in the middle of this year, will come to the market. Mm-hmm. Okay. There will be at least two web games come up. Yeah. Okay, great. I'm sorry, I have one last question. I also want to talk about KIS. Given your strong growth in your advertising business, could you talk about how many customers you have for your advertising business within KIS? If you look at the pricing, how your pricing compare to your biggest competitor, Qihoo, in terms of the keyword and the placement link. Any comments will be helpful. Thank you. Yeah. I'm afraid I cannot give you the number of customers or the names of those customers in term of our advertising business. But I'd like to share with you our overall KIS PC monthly active users is over 155 million, and the major revenue of our security business come from e-commerce, search, and games. That's pretty much what I can say. What's MAU for your Cheetah Browser now? Sorry, just a quick follow-up. Last one, I promise. Yes. It's just over 10 million daily active users. Okay, great. Thank you so much for the very helpful comments. Thank you. Your next question comes from Thomas Chung from BOCI. Please ask the question. Hi, Dr. Jiang. Hi, Francis. Good evening. I have a couple of questions. The first question is about WPS. I noticed that the year-on-year increase for WPS is 8% in the first quarter, and I would like to know about the reason behind, and also whether you are still comfortable with delivering over 20% year-on-year growth for the entire year. Yeah. Actually, we are quite confident we should be able to deliver that. The first quarter this year, just like a year ago, there is a Chinese New Year, right? So this is a low season anyway. As we see from April into May, we see the sales pick up, in particular in the enterprise business. This will be the first time we see our enterprise business actually overpass our government procurement income. So we are pretty confident we should be able to achieve our goal this year. I see, I just want- I wanted to add on a comment, Thomas, Dr. Jiang. I stand by Dr. Jiang's comment that we are still very confident to deliver the 20% plus for the full year growth in WPS. As Dr. Jiang mentioned, Q1 is our traditionally weak season in the year. Also, the two major contracts that we just mentioned, that was not recorded in Q1. You will be seeing that will be recorded in the second quarter. We are still very confident to deliver that profit guidance. Actually, Francis, just a quick follow-up about the 8% year-on-year growth in the first quarter. On a year-on-year basis, we know there is a Chinese New Year holiday. Should I assume the 8% year-on-year growth is due to the difference in timing of Chinese New Year that lead to 8% year-on-year growth? Not exactly. One of the impact adding to that, we have not mentioned earlier is that part of our WPS income are from overseas, which are mainly in Japan. The depreciation of Japanese yen also added to that. We are confident that in the full 2013, we will be able to overcome that by the increase in our enterprise sales we recorded in 2013. I see. Francis, just a quick follow-up. You said Japan revenue contribution in WPS is still about one third, right? No, it's less than that. Okay. My second question is regarding your online games revenue growth. You guys did a very good job in driving online games growth, given the challenging MMORPG environment. My question is about, in terms of the absolute amount of sequential growth, can you comment about, or by descending order, about which game contributes most in terms of absolute amount of sequential growth? Is it JX3 followed by MAT, and finally is about the new games? Yeah, definitely. You are right. JX3 contribute the most, yeah. I see. For your KIS business, I know you guys mentioned about advertising and value-added service. Can you give me some color about the value-added service that you guys provide? Is it coming from games or coming from VIP membership or et cetera? I just want to get a sense, because previously, I seldom heard you guys talking too much about value-added service in KIS, but mostly in advertising. I just want to get a sense about the value-added service you guys provide. Sorry, I didn't get the question. Oh. I want to see, for KIS, the growth is driven by both advertising and value-added service. For value-added service, what is it about? Is it coming from web games? When we say value-added services, we're really referring to monetizing our traffic, internet value-added service on our traffic. And that traffic could be for search, could be for e-commerce. I see. Understood. Hey, Dr. Zhang, my final question is about KIS as well. I just want to get a sense about the revenue contribution for the top 3 advertisers. I would rather say that- In terms of advertising revenue. I do not think I should discuss that. What I want to say is the top three will be the e-commerce, the search, and the game. I see. Thanks, Dr. Zhang. Thanks, Francis. I will get back to the queue. Thank you. Thank you, Thomas. Your next question comes from Jeff Hao from China Merchants Securities. Please ask a question. Hi. Good evening, Dr. Zhang, Francis, and Michelle. I have just two questions. The first question is about the online game. You mentioned Mala Jianghu has performed very good last quarter, I mean, in the fourth quarter of 2012. You didn't mention it in the press release in this quarter. Can you please comment on the performance of this game, please? Yes. Thank you for the question. Let me comment on that. Mala Jianghu had a spectacular start, and then getting into the Chinese New Year season, it flattened out a little bit. That is why we didn't talk much about that. We are working on new expansion pack. Hopefully, we will be able to bring it back on track and continue to grow. Okay. Just a follow-up on the online game sector. Given the very strong growth in first quarter, do you expect this growth momentum to continue for the rest of the year? In online games? Yeah, the online game. Yeah. We are comfortable that we are going to enjoy good growth for the rest of the year, in particular the JX3 and our MAT game. Okay. Thank you. My second question is that we saw a trend of consolidation in the internet security lately. Can you share your views with us about how Kingsoft will be positioning itself during the consolidation, and do you have any M&A plans in the near future? Thank you. Thanks for asking that. I am not sure I agree with you that there is a consolidation in the internet security business. There are alignment and M&A activities in other Business, but not necessarily the internet security business. Okay. Let me come back to the second part. In term of merger and acquisition, yes, we are constantly looking and we will and we are looking at some companies, in particular, small startups, and hopefully we will do some M&A in that space. But the key is to focus into mobile, and if we see opportunity there, either we should grab it by ourselves or we should grab it through acquisition, we will do it. Yeah. Okay. Are you going to focus more on, I mean, M&A on the mobile internet sector, right? Well, the entire company is moving fast into that space, and we should do whatever we can to make sure we position ourselves to win in the mobile internet space. Okay. Thank you. That's all. Thank you. Good. Thank you, Jeff Hao. Your next question comes from Chao Zhang from China Orion Capital. Please ask the question. Hi, congratulations on the strong first quarter. Since you didn't disclose the number of advertisers on the online business, what's the scale of the concentration in your online advertisement client portfolio? Like top 5 or 10 clients account for how much percentage of the online total revenue? Can you talk about that a little bit? Thank you. Okay. I guess you won't let me go. I'll say the top 3 will contribute over 50%. Okay, thank you. I have no further questions. Thank you. Okay. Thank you. Your next question comes from Wallace Lo from Vision Gain Capital. Please ask question. Oh, hi, Dr. Jeff. I have a longer-term question for you. Talking about mobile internet, how do you see Kingsoft business model in the longer term? Will we focus more on applications like KIS, or we will focus more on the gateway types of application like the browser or the search page? How do you see the more long-term sustainable growth model in this space? Thank you for your question. I see browser as a critical component that close the loop for our internet security value chain. We not only have launched the browser for our PC users on the PC, and we will launch one for mobile phone user as well. But keep in mind, the focus is not that we should do a browser or should we do gateway, but the focus is make sure we focus on our strengths, and we come out with a set of apps and services that will attract user and thus create a huge user base. That's the key. In the sense, you may recall Francis used the words a few times, land grabbing. We are in that mode. We are willing to invest more and aggressively ensure that we build a large user base, and with that user base later on, we can monetize on. This is our focus now. My questions will probably be how or any specific strategy to enlarge the user base. Are we still searching for the model, or we have some ideas in mind already? We already have some ideas in our mind. We just, like a year ago, we really didn't talk much about how do we monetize on the PC, but we did that. We launched our browser, and that was a spectacular success. Our revenue from internet value-added services overtook the subscription business and reached a historical high. At this moment, a lot of things are moving, and I don't think we are ready to say that a particular technology will be successful for sure, but we are pretty confident we are going to repeat the success, if not more, what we have done on the PC side, the internet security business. I also like to expand a little bit from here. That is, on our WPS side, you see the strong growth momentum in our mobile office users, in particular Android. We are in the leading position in worldwide market on Android office. We are going to further expand that. Hopefully by the end of the year, both on top of if you put the active users on PC and active users on our WPS Mobile Office, together with the command of more than 100 million monthly active users. The WPS Mobile Office active monthly user alone could be more than 30 million. All that will position ourselves in a very strong place to win out in the mobile space. Okay, thank you for sharing. No more questions. Thank you. Yeah. The next question comes from George Wu from Legends Asset Management. Please ask the question. Hi, I've got two questions, both regarding the KIS business. I would like to know what is your strategy for further monetizing the traffic, especially in per user sense. How will you further grow your advertising revenue? Okay. This is a great question, and the revenue growth on the PC side definitely should come from the advertising. But in term of advertising, here I assume you're referring to both the landing page navigation and the search word and the browser and the other things altogether. So, with more installation, more active users for our browser, our advertising and monetization capability will continue to grow. That's a very good position for us. We see our browser continue to gain more users and more installation and more activities daily. So that definitely will help us on the revenue growth in term of traffic and advertisement. Also we are working closely with our partners on the advertising part to make their advertising more effective, more efficient. In return, we could get more advertising revenue from them as well. I believe that the e-commerce will continue to grow in the coming year. We believe that revenue will continue to grow as well. On the mobile side, we are still exploring how to create more revenue in term of advertisement, but we already started doing that. The one thing that if we look at what we have done in the last year and the first quarter of this year in term of the KIS business, we like to grow more and faster. That will be our gaming business there, the game operation for KIS. That is a huge space for us to grow there. Our focus now is on mobile games. Yeah. Okay. In particular, hello, can you hear me? Yes. In particular, I would like to know more about the advertising rate for e-commerce, because I know there is some kind of consolidation or the e-commerce business is somehow getting more mature as the large winners are getting a higher market share. The competition for e-commerce is somehow less intense than, for example, one or two years ago. Will the advertisers spend less on your landing page? Yeah, I don't see that as a trend. I don't think that happened, but I don't really, in the precision, to release those details on our operating data. Sorry for that. Yeah. Okay. Thank you then. Thank you. Your next question comes from Jennifer Shao from DR Capital. Please ask the question. Hi, I have a question. I want to know the revenue breakdown for the other software segment, especially the breakdown between WPS advertising revenue and also other value-added revenues. I want to know the growth rate for each segment. Francis, you want to take this question? Yes. You are asking about the revenue growth for WPS, is it? Also other income, like advertising and other revenue generated by higher traffic. I think what Jennifer really wants is the breakdown between our KIS and WPS, because those are the main two categories in the application software, right? Yes. Right. Okay. Okay. The advertising, the income from the WPS in Q1. I would say the WPS contributes two-thirds, and the WPS is one-third of the total revenue, and the increases as well. The mix is about right. Yes. Two-thirds from KIS and one-third from WPS. Yes. Can you provide the growth projection for each segment? Jennifer, I think before Francis adding on any more details, let me say we see a continued growth in both business. I do want to say that the KIS business is growing faster. The nature of business is completely internet business, so it is still in a fast-growing mode. WPS also is a double-digit growth, and in particular, our breakthrough in the enterprise spaces. We see that part is very promising, and hopefully, we also will be able to continue to gain shares in the mobile office. Hopefully, later on, we will have ways to bring in revenue as well. Okay. Thank you, Dr. Jiang. Jennifer, let me continue that answer. For the WPS, we do record a decrease in quarter-on-quarter in Q1 2013 because we are in the weak season. Also, as I mentioned earlier, there is the depreciation of JPY from our overseas income deriving from the WPS. But for the whole year, we still stand by our previous guidance that the WPS growth for 2013 will continue to be a very healthy growth of 20% plus in the WPS annual 2013 growth. In our KIS, we record a very slight growth in Q1, but year-on-year, we record a very strong growth of nearly 190% growth year-on-year in the KIS sphere. For the whole year, we are still very confident that KIS will continue to be on its fast track of revenue growth of over 80% in 2013. Okay. Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Thomas Chung from BOCI. Please ask your question. Hi, Dr. Jiang. Hi, Francis. Sorry, I have one additional question. Can you tell me about how many more R&D headcounts are you going to add in this year? Because if we assume that the operating margin will decline because of heavy investment, I would expect you guys to hire a lot more R&D people. I just want to see how many more R&D people you guys are going to add by year-end. Thank you. Yes. This is very good question, and this year, we will add more people for our office of R&D, and we anticipate about 20% growth there, if not more. I think we have 25% growth in R&D personnel for the WPS. We anticipate the same or even more growth in the KIS and in the game business. The growth will be less, but it will still be growth, and in particular, in the mobile game space. I see. Thanks, Dr. Jiang. Thanks for the answer. I will get back to the queue. Yeah. Also, I would like to add on more, that as our business grows and as we become more and more confident and our business becomes more solid, we see more and stronger talent like to join Kingsoft. So as we grow, hiring more people, we are not just hiring to increase the number, we also hire to increase the quality and capability. I see. Thanks. I will get back to the queue. Yeah, that is a great answer. Thank you. Thank you. Bye. Ladies and gentlemen, we have come to the end of the question and answer session. That does conclude our conference for today. Thank you all for your participation. You may now disconnect. Thank you, everyone.