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Youku Tudou Management Discusses Q2 2013 Results Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2013 Youku Tudou Earnings Conference Call. [ Instructions] I must advise you that this conference is being recorded today, Friday, the 9th of August 2013.I will now like to hand the conference to your first speaker for today, Mr. Ryan Cheung, Corporate Finance Director of Youku Tudou. Thank you, sir. Please go ahead.Thank you, operator, and welcome to our second quarter 2013 earnings conference call. Let me introduce the management team on the call today. They are Chairman and CEO, Victor Koo; our Board Director and President, Dele Liu; and Michael Xu, our Chief Financial Officer and Senior Vice President.For today s agenda, Victor will kick off with a strategic overview of our multi screen online video services and sales performance in Q2. Dele will discuss our company s operations and content strategy, and Michael will discuss the second quarter 2013 unaudited financials. And then we ll open the floor for questions.As a reminder, the financial results and the webcast of this conference call are all available at the Investor Relations sections of the Youku Tudou website. A replay of the call will be available on the website in a few hours. I refer to you to our Safe Harbor statement in our earnings press release, which applies to this call, as we will make forward looking statements. In addition, please also refer to our Basis of Presentation sections on our press release. Finally, please note that, unless otherwise stated, all figures mentioned during this call are in renminbi.Let me now turn the call over to our Chairman and CEO, Victor Koo. Please proceed.Thank you, Ryan. Good morning and good evening, everyone. Thank you for joining us. We delivered a solid financial performance with Q2 revenue reaccelerating in line with our guidance, further cost structure optimization as we finalize our merger integration. We also achieved significant margins improvement and lowering loss in Q2.First of all, I would like to share our strategic views on the online video industry, progress made to solidify our multi screen leadership and monetization opportunities. Multi screen video consumption is a game changer for Internet television. Internet users are now able to watch videos anytime, anywhere on any device and switch seamlessly between devices. This has always been our vision when we started the company, and this trend will continue as more Internet enabled devices have video capabilities. With multi screen Internet video content consumption becoming the standard and Internet television increasingly mainstream in China, we are at the center of exciting growth opportunities over time. We are the clear leader in multi screen video. Youku and Tudou are becoming more and more differentiated in terms of brand leadership, content breadth, especially broadly, original and user generated content and cross screen product experience. This allows us to grow our user base and further widen our reach throughout China.In particular, we see terrific growth in our mobile traffic under 3 key industry measures for online video: video views, active user and time spent. Mobile video views grew more than 100% within 6 months to over 200 million according to our internal tracking data. The latest iResearch data released in June shows that Youku app reaches, on a daily basis, close to twice that of our closest competitor. In addition, 180 million hours were spent on Youku s mobile platform in June, more than twice the user engagement of our closest competitor. In combination with the scale of our PC traffic, we are the clear leading multi screen online video company in China.In this multi screen era, we see online video user behavior change. We observe that user time spent on our platform has extended from traditional evening prime time slots to now more video consumption throughout the entire day. Smartphones and tablets are now used in multiple locations instead of just offices or homes to access our content library. Users are watching a larger variety of content genres as it has become easily available on different screens. Seeing this multi screen behavior change, we have made investments in cross screen product innovation.For example, in Q2, we rolled out new versions of Youku Tudou and Paike apps and also upgraded our web user interface and underlying architecture to achieve more consistent and interactive user experience for multi screen purposes. With our multi screen user base and product offerings, we have a solid foundation to deliver clear and distinct value on multi screen video advertising solutions to our clients and paid services to our users.Our sales team held a roadshow to introduce our multi screen video advertising solutions to brand advertisers and agencies surrounding 3 major advertising formats: TV commercial, content marketing and interactive solutions. We believe through multi screen on Youku Tudou, advertisers can reach out to the widest available viewer base, making their brand more visible and recognizable in their target market. Initial responses from our clients were promising, but it will take time to make multi screen advertising mainstream. We are now educating our clients and grow demand for multi screen advertising. We do not expect meaningful revenue contribution for mobile until 2014.Turning now to our Q2 revenue, I m pleased to see growth reaccelerated on improved execution following the merger integration completion. We are the leading destination for international FMCG brands, as our combined platform reaches over 80% of the online video audience in China. We remain committed we re committed to our sales goals, which are to add new brand advertisers, penetrate into lower tiered cities, promote multi screen and content marketing solutions.During the quarter, we added 116 brand advertisers, including Novartis, Centauri, Vertu and Chinese brands such as [indiscernible]. Advertising budget from sectors such as IT and electronics and e commerce have seen notable growth in Q2. In addition, our sell through, especially in lower tiered cities, improved as we are further penetrating Moncler Outlet Store Usa into these regions.On top of that, one of our key sale strategies is to develop content marketing solutions for our clients. I m pleased with the progress that we made on this front. We continue to win new brand sponsorships and product placement in the last quarter. Besides the sponsorships from Deerway, DHL and Ford on Tudou Video Festival as mentioned in the previous call, both Youku and Tudou s original shows in the last quarter have signed sponsorships from P Unilever, Grand Cherokee, Nestl, Mong Yow [ph], et cetera.With that, I will now turn the call over to Dele to go over our integration and content strategy.Thank you, Victor. Hello, everyone. I m pleased to announce that all key areas of operation have been successfully integrated as of the second quarter 2013. We optimized our cost structure, reaccelerated our revenue growth and our industry leadership position has been further cemented. In addition, our 2 platforms and brands, Youku and Tudou, are increasingly differentiated to attract and retain its respective users.Youku is a mainstream brand, while Tudou represents a young and edgy culture. We are pleased to report that we have significantly improved our cost structure. Bandwidth costs grew only 2% quarter over quarter despite exponential growth in traffic driven by mobile. We expect bandwidth unit cost to decrease due to technological innovations in data compression and network architecture and bandwidth cost as a percentage of revenue will continue to drop. We started to work with Qualcomm H.265 technology, which transmits quality videos using less bandwidth.Personnel related expenses were flat quarter over quarter, as we have kept our headcounts largely unchanged close to merger, and we expect moderate growth in personnel related expenses in the next 2 quarters. We continue to improve our content economics in the second quarter. We take a balanced approach for investing in content. We are relying less than before on hot content to generate traffic. The hot domestic TV dramas, which most of our peers are pursuing, generates only 6% to 8% of our videos viewed in the second quarter. In fact, our users, mostly come and stay on our platform to watch our library content, user generated content and original content.We made further progress in building our UGC ecosystem to differentiate Youku and Tudou from our peers. During the second quarter, both Youku and Tudou successfully held their entry events of the year, Youku talent show and Tudou Video Festival. The Tudou Video Festival, which ran its 6th annual session this year, attracted 18,000 entries, and together, they generated more than 200 million views on Tudou since their release.Both Youku and Tudou launched the content partner program to share advertising revenue with content partners with the content they upload. Content creators are who are accepted to the program will receive financial, technical and marketing support. This includes having their videos for prioritized in search results on both platforms. They can also leverage the unrivaled reach of our distribution platform to over 400 million viewers in China.On top of this, Tudou has unveiled a content incubation fund that finances its UGC talents by connecting them with sponsors to launch their careers onto a larger platform. Sponsored by corporations like Ford, Deerway and DHL, this fund helped finance Tudou s content partners to create high engaging content channels. YoukuOriginal and Tudou Original are clearly gaining traction and accumulating millions of devoted fans who come to enjoy the shows day by day. Youku s original shows, such as Morning Call, Friend [ph], Youku Entertainment News, [Chinese], Miss Puff, [Chinese], et cetera, constantly consistently ranked as the top 10 most viewed programs of the site. Tudou Groovin is also a top 10 most viewed show on Tudou.We are now adding feature documentaries and comedy specials to our original content capabilities. In Q2, Youku Original launched a new documentary series, On the Road [ph], which has attracted over 30 million videos viewed with 8 episodes. Tudou Moncler Sartre Bluette Baby Hooded Kids Blue Jackets also recently rolled out a real life show called Tudou Show Box [ph], which becomes one of the most popular shows on Tudou. We ll continue to build on our initial success with original production and ramp up the quality as we gain more and more experience.With that, I would like to pass the floor to Michael, our CFO, to go over the financial results with you.Thank you, Dele. Hello, everyone, and thank you all for joining our conference call today. Let me now walk you through our financial highlights for the quarter. The amounts mentioned here are in RMB, unless otherwise noted. Before we drill down to each line item, you should be aware that if you add up some non GAAP financial figures such as content costs, tax, cost of revenues, gross profits, net operating loss, et cetera, disclosed by Youku and Tudou in their respective earnings release in Q2 2012, the results may be significantly different from the pro forma non GAAP numbers for Q2 2012 disclosed in this earning release. The reason is the pro forma financials for Q2 2012 is calculated based on the assumption that a merger was completed on January 1, 2012. Therefore, to get pro forma financials, the combined historical financials has to be adjusted to reflect P impact of assets write up and assets write down Moncler Slippers Green Rubber Sole Brown Cow Leather due to the merger.For the second quarter, our consolidated net revenue were RMB 754 million, a 30% increase year on year, meeting the consolidated net revenue guidance previously announced by the company. Consolidated advertising net revenue were RMB 727 million, also in line with our guidance. Consolidated bandwidth costs were RMB 164.1 million, representing 22% of consolidated net revenue, as compared to RMB 177 million, representing 31% in the same period in 2012. Consolidated non GAAP content costs were RMB 289 million, representing 38% of consolidated net revenues as compared to RMB 194 million, representing 34% of the same period in 2012. On the other hand, the combined historical non GAAP content costs for Q2 2012 before any pro forma adjustments were RMB 248 million, 43% of combined historical net revenue for Youku and Tudou.Consolidated non GAAP gross profits were RMB 204 million, representing 27% of the gross margin and a growth by 77% compared to non GAAP gross profits of RMB 116 million, representing 20% of gross margins for the same period in 2012. Consolidated non GAAP operating expenses were RMB 261 million, a 2% increase year on year. Detailed discussion of each component of operating expenses is as follows: consolidated non GAAP sales and marketing expenses were RMB 150 million, an increase of 12% year on year. This increase was primarily due to higher commission expenses paid to our sales force, in line with our revenue growth. Consolidated non GAAP product development expenses were RMB 55 million, an increase of 14% year on year. This increase was primarily due to higher personnel related expenses for our product development in mobile, search, social and paid services. Consolidated non GAAP general and expenses general and administrative expenses were RMB 55 million, a decrease of 22% year on year. Consolidated non GAAP net loss were RMB 45 million and has narrowed down to 63 and has narrowed 63 down 63% down in the corresponding period in 2012.

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