Article / 22 May 2015 at 6:05 GMT

Earnings review: Youku Tudou rallies on strong guidance

China Watcher / Shanghai
China
  • Online video platform Youku Tudou's first-quarter earnings results were mixed
  • Investors were impressed by second-quarter revenue guidance
  • The firm is seeing strong mobile monetisation but content cost growth persists


By Neil Flynn

Chinese online video platform Youku Tudou released its first quarter earnings on Wednesday evening, with investors impressed by strong second-quarter revenue guidance, and as a result, the firm’s share price rallied 17.16% to $26.97 in Thursday’s trading. However, concerns still remain about the firm’s ability to control content costs, which soared to almost 60% of net revenues during the quarter. 

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 Mobile is expected to contribute more than 50% to ad revenue by year end. Photo: iStock

Headline results are mixed but revenue guidance is strong

Youku Tudou reported non-GAAP net revenues of RMB 1.056bn, which beat the management guidance midpoint of RMB 1.02bn and the analyst consensus of RMB 1.03bn, whilst non-GAAP diluted EPADS of RMB -2.49 fell short of the analyst consensus of RMB -2.25. Nevertheless, investors were impressed by the strong revenue guidance for the second quarter of between RMB 1.47bn to RMB 1.52bn, whose midpoint would represent 46.6% sequential growth and 54.1% annual growth.  

YOKU Revenues
Source: Youku Tudou Investor Relations  

The SEC investigation that was announced during the fourth-quarter earnings release clearly had merit, as the firm has altered the way that it reports its income statement and non-GAAP adjustments. GAAP and non-GAAP revenues now account for barter sub-licensing revenues, and the cost of revenues now accounts for amortisation of licensed copyrights from non-monetary content exchanges. The firm gave no comment on this, and investors should await for the SEC investigation to be concluded.

Mobile monetisation growth shows strong potential

Strong revenue growth was driven by net advertising revenues, which accounted for 78.3% of net revenues. The firm had 440 active brand advertisers during the quarter, of which 106 were new, which maintains the strong growth from the fourth quarter, where the firm gained 113 new advertising clients. The firm is also seeing strong monetisation growth in its mobile platform, as mobile advertising revenues accounted for over 40% of advertising revenues, compared with 35% in the fourth quarter and just over 20% a year ago. This is evidence that the firm’s drive for multi-screen platform growth is showing potential, and investors should expect mobile to contribute over 50% to advertising revenues by the end of the year.

Mobile accounted for 75% of traffic and 65% of user time spent on the platform, whilst 90% of mobile traffic came directly from the native Youku and Tudou apps. With further content diversification into gaming, mobile user metrics should continue to grow in the coming quarters, which the firm will look to use to drive mobile monetisation further.

Broadening cooperation with partners

The firm is in phase 2 of its collaboration with Alibaba, and this has seen Youku Tudou focus on e-commerce initiatives. Professional content creators can select certain goods to be linked to their videos, and users can make purchases without the video being interrupted. In addition, merchants are now able to create their own video and e-commerce page within Youku Tudou, so that they can upload promotional videos and sell products through the site. Whilst this is only available to professional content creators, Youku Tudou will expand this to include user and partner generated content creators.

The firm has also been broadening its content through recent partnerships with aerial drone developer DGI and video game developer Star Game. The DGI Videos partnership has seen the launch of an online aerial videography platform, which allows users to view video content of famous sites from DGI’s drones. The partnership with Star Games saw the firm launch the Star Video Alliance, which will see the release of new video games, and a wider gaming ecosystem, including user created related content. This form of video game related user-generated content is popular in the west, and Youku Tudou is looking to capitalise on this trend.

Content cost growth isn’t sustainable

China’s video platforms need to focus on user and partner-generated content in order to decrease the growth of content costs. As I have discussed before, syndicated content is the driving force behind the exponential growth in content costs in the industry. As more and more wealthy market participants bid for syndicated content, the cost of the content rises, and only the wealthiest firms can afford the content. A prime example of this is the once-dominant Sohu Video platform, which has found that it can’t compete financially in the industry since rivals backed by the likes of Baidu, Tencent and Alibaba can outbid them for content. Youku Tudou has been stating that it is focusing on native content as one of its three growth pillars, but we have seen a notable rise in the content costs as a percentage of net revenues to 58.7%, from 44.8% a quarter ago and 46.3% a year ago. 

YOKU Content Cost Growth
Source: Youku Tudou Investor Relations  Create your own charts with SaxoTrader; click here to learn more.  

Management discussed how user and partner generated content accounts for over 50% of total video views, which is good progress in its bid to diversify its content base, however revenues from these content types continue to be notably lower than syndicated content, which is why investors are seeing persistent growth in both content costs and its contribution to net revenues. It is even more concerning that sequential content cost growth has been higher than revenue growth for the past three quarters, which needs to be addressed. The firm is looking at more e-commerce revenue streams directly related to this content type, but as of yet, the monetisation of syndicated content is lower than it needs to be.

YOKU Revenue and Content Cost Growth
Source: Youku Tudou Investor Relations

With Netflix reported to be looking at entering into China with Alibaba’s Wasu video platform, this would likely put further pressure on syndicated content costs, because Western content is heavily restricted in China. However, one of the most popular shows in China is the Netflix original House Of Cards, which is set to release its fourth season next year. Should Netflix successfully enter into China, then investors should assume that Netflix would retain the right to screen House Of Cards in China, either through their own platform or via Alibaba's Wasu. If Netflix does enter into China, the pool of popular Western content that is available for video platforms to bid for would hence decrease, which would drive up content costs further.



— Edited by Susan McDonald

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Neil Flynn is a portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.
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