Youku Tudou Announces Third Quarter 2014 Unaudited Financial Results

Consumer Revenues Grew 473% Year-on-Year; Share Repurchase Totaling US$300 Million Completed

BEIJING, November 14, 2014 /PRNewswire/ — Youku Tudou Inc. (NYSE: YOKU), China’s leading Internet television company (“Youku Tudou” or the “Company”), today announced its unaudited financial results for third quarter 2014.

Third Quarter 2014 Highlights[1]

  • Net revenues were RMB1.11 billion (US$180.3 million), a 29% increase from the corresponding period in 2013.
  • Gross profit was RMB246.9 million (US$40.2 million), a 200% increase from the corresponding period in 2013. Non-GAAP gross profit was RMB260.5 million (US$42.4 million) in the third quarter of 2014, an increase of 159% from the corresponding period in 2013.
  • Net loss was RMB181.4 million (US$29.6 million), a 17% decrease from the corresponding period in 2013. Non-GAAP net loss was RMB102.7 million (US$16.7 million) in the third quarter of 2014, as compared to RMB159.6 million (US$26.0 million) from the corresponding period in 2013.
  • Basic and diluted loss per ADS, each representing 18 Class A ordinary shares of the Company, for the third quarter of 2014 amounted to RMB0.88 (US$0.14) and RMB0.88 (US$0.14), respectively. Non-GAAP basic and diluted loss per ADS for the third quarter of 2014 amounted to RMB0.50 (US$0.08) and RMB0.50 (US$0.08), respectively.
  • Cash, cash equivalents, restricted cash and short-term investments totaled RMB8.7 billion (US$1.4 billion) as of September 30, 2014.
  • Acquisition of property and equipment for the third quarter of 2014 was RMB41.3 million (US$6.7 million).
  • Acquisition of intangible assets for the third quarter of 2014 was RMB344.1 million (US$56.1 million).
  • Share repurchases totaling US$300 million completed the share repurchase program authorized by the Board in August 2014.

“We made positive progress in the third quarter in improving the effectiveness of multi-screen advertising solutions and growing our new consumer revenue streams, which drove the top line growth momentum of 29% increase year-on-year versus 27% growth in the second quarter. The new marketing solutions we announced with Alibaba through our strategic cooperation on big data places us uniquely at the forefront of new trends in digital advertising. Our new consumer businesses enjoyed rapid growth and may help spur further top line growth in future quarters. Meanwhile, our Youku mobile video app is now ranked the second most popular mobile app in terms of user time spent after WeChat,” said Victor Koo, Chairman and Chief Executive Officer of Youku Tudou. “At the same time, we will continue to invest decisively in the future growth of advertising and consumer business, our content eco-system and continued leadership in multi-screen product development. We believe these investments, such as in headcount increase and marketing for new consumer businesses and our original content productions, will help us further capitalize on the opportunities ahead of us in the multi-screen Internet era, and structurally step up the monetization of our mass user base and brand leadership.”

Dele Liu, President of Youku Tudou, added, “With regards to our content strategy, we continued to book further success in establishing a comprehensive content production and distribution eco-system. One of the key highlights for the quarter was the establishment of Heyi Pictures, our movie production and investment division, which is China’s first online and offline film company to incubate content IP, scale up content from micro-movies to silver screen movies and to grow fan communities that can support films and new consumer monetization model. Our most recent deals on the production of Internet-based adaptations to television blockbusters Big Brother and The Voice Kids in 2015 are testament to the growing convergence in online and offline media and entertainment.”

Third Quarter 2014 Results

Net revenues were RMB1.11 billion (US$180.3 million) in the third quarter of 2014, a 29% increase from the corresponding period in 2013, meeting net revenues guidance previously announced by the Company.

Advertising net revenues were RMB985.2 million (US$160.5 million) in the third quarter of 2014, a 32% increase from the corresponding period in 2013, meeting the advertising net revenues guidance previously announced by the Company. The growth was primarily attributable to the increased use by brand advertisers of our advertising services as evidenced by an increase in the number of advertisers and the rising average spend per advertiser.

Consumer revenues, which are mainly derived from our subscription-based and pay-per-view services, were RMB41.8 million (US$6.8 million) in the third quarter of 2014, a 473% increase from the corresponding period in 2013. The growth was primarily attributable to the expansion of our subscriber base and pay-per-view orders.

Bandwidth costs as a component of cost of revenues were RMB229.7 million (US$37.4 million)in the third quarter of 2014, representing 21% of net revenues, as compared to 21% of net revenues for the corresponding period in 2013.

Content costs as a component of cost of revenues were RMB501.8 million (US$81.8 million) in the third quarter of 2014, representing 45% of net revenues as compared to 58% of net revenues for the corresponding period in 2013. Non-GAAP content costs were RMB488.2 million (US$79.5 million) in the third quarter of 2014, representing 44% of net revenues, as compared to 56% of net revenues for the corresponding period in 2013.

Gross profit was RMB246.9 million (US$40.2 million)in the third quarter of 2014, an increase of 200% from the corresponding period in 2013. Non-GAAP gross profit was RMB260.5 million (US$42.4 million) in the third quarter of 2014, an increase of 159% from the corresponding period in 2013 due to strong operating leverage.

Operating expenses were RMB452.5 million (US$73.7 million) in the third quarter of 2014, as compared to RMB312.8 million (US$51.0million) for the corresponding period in 2013. Non-GAAP operating expenses were RMB387.4 million (US$63.1 million) in the third quarter of 2014, as compared to RMB271.9 million (US$44.3 million) for the corresponding period in 2013. Detailed discussion of each component of operating expenses is as follows:

Sales and marketing expenses were RMB287.0 million (US$46.8 million) in the third quarter of 2014, as compared to RMB171.8 million (US$28.0 million) for the corresponding period in 2013. Non-GAAP sales and marketing expenses were RMB262.9 million (US$42.8 million) in the third quarter of 2014, as compared to RMB157.3 million (US$25.6 million) for the corresponding period in 2013. This increase was primarily due to increases in marketing expenses and commission expenses paid to our sales force in line with our revenue growth.

Product development expenses were RMB112.4 million (US$18.3 million) in the third quarter of 2014, as compared to RMB78.6 million (US$12.8 million) for the corresponding period in 2013. Non-GAAP product development expenses were RMB93.6 million (US$15.2 million) in the third quarter of 2014, as compared to RMB67.5 million (US$11.0 million) for the corresponding period in 2013. This increase was primarily due to an increase in personnel related expenses for our product development in mobile, search, social, paid and live broadcasting services.

General and administrative expenses were RMB53.0 million (US$8.6 million) in the third quarter of 2014, as compared to RMB62.5 million (US$10.2 million) for the corresponding period in 2013. Non-GAAP general and administrative expenses were RMB31.0 million (US$5.0 million) in the third quarter of 2014, a decrease of 34% from the corresponding period in 2013.

Net loss was RMB181.4 million (US$29.6 million)in the third quarter of 2014, as compared to RMB218.6 million (US$35.6 million) for the corresponding period in 2013. Non-GAAP net loss was RMB102.7 million (US$16.7 million) in the third quarter of 2014, as compared to RMB159.6 million (US$26.0 million) from the corresponding period in 2013.

Non-GAAP adjusted EBITDA loss was RMB88.9 million (US$14.5 million) in the third quarter of 2014, as compared to RMB141.1 million (US$23.0 million) from the corresponding period in 2013.

Departure of Chief Financial Officer

The Company today announced that its Chief Financial Officer, Mr. Ge Xu, is resigning from his position at the Company due to personal reasons, and will be effective when the Company submits its 2014 20-F filing.

Mr. Xu joined the Company in October 2011 and has made significant contributions to the Company’s growth and development, including enhancing the Company’s financial systems and internal controls.

Mr. Victor Koo, Chairman and Chief Executive Officer of Youku Tudou, said, “I’d like to thank Michael for his significant contributions to the Company. We wish him the best with his future endeavors.”

“During these years in Youku Tudou, I had a lot of fun and excitement, which not many people are privileged to experience. For this, I am grateful to all my colleagues,” commented Mr. Xu.

The Company noted that there were no disagreements between Mr. Xu and Youku Tudou’s Board of Directors or management and that his departure is not related to the Company’s operations, policies, practices or any issues regarding the integrity of Youku Tudou’s financial statements or accounting policies and practices.

Business Outlook

For the fourth quarter of 2014, the Companyexpects net revenues will be between RMB1.15 billion and RMB1.22 billion, with advertising net revenues contributing between RMB1.01 billion and RMB1.07 billion. This forecast reflects the Company’s current and preliminary view, which is subject to change.

Recent Development

As of November 13, 2014, the Company has purchased approximately 16.1 million ADSs in the open market for a total consideration of approximately US$300.0 million under its share repurchase program approved by the Company’s board of directors in August 2014, which has hereby been completed.

Conference Call Information

Youku Tudou’s management will host an earnings conference call at 8:00 p.m. U.S. Eastern Time on November 13, 2014 (9:00 a.m. Beijing/Hong Kong Time on November 14, 2014).

Interested parties may participate in the conference call by dialing one of the following numbers below and entering passcode Youku# (i.e., 96858#) starting 10-15 minutes prior to the beginning of the call.

US Toll Free Dial In:

+1-800-742-9301

International Dial In:

+61-2-8373-3610

Mainland China Dial In:

+86-800-870-0210 / +86-400-120-3170

Hong Kong Dial In:

+852-3051-2792

A replay of the call will be available by dialing +61 2 8199 0299 and entering passcode 31852718. The replay will be available through November 21, 2014.

This call will be webcast live and the replay will be available for 12 months. Both will be available on the Investor Relations section of Youku Tudou’s corporate website at http://ir.youku.com.

About Youku Tudou Inc.

Youku Tudou Inc. (NYSE: YOKU) is China’s leading Internet television company. Its Youku and Tudou Internet television platforms enable users to search, view and share high-quality video content quickly and easily across multiple devices. Its Youku brand and Tudou brand are the most recognized online video brands in China. Youku Tudou’s American depositary shares, each representing 18 of Youku Tudou’s Class A ordinary shares, are traded on the NYSE under the symbol “YOKU.”

Safe Harbor Statement

This announcement contains forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar statements. Among other things, the business outlook and quotations from management in this announcement, as well as Youku Tudou’s strategic and operational plans, contain forward-looking statements. Youku Tudou may also make written or oral forward-looking statements in its filings with the U.S. Securities and Exchange Commission (“SEC”), in its annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including statements about Youku Tudou’s beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement, including but not limited to the following: our goals and strategies; our future business development, financial condition and results of operations; the expected growth of the online video market in China; our expectations regarding demand for and market acceptance of our services; our expectations regarding the retention and strengthening of our relationships with key advertisers and customers; our plans to enhance user experience, infrastructure and service offerings; competition in our industry in China; and relevant government policies and regulations relating to our industry. Further information regarding these and other risks is included in our annual report on Form 20-F and other documents filed with the SEC. All information provided in this press release and in the attachments is as of the date of this press release, and Youku Tudou does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

About Non-GAAP Financial Measures

To supplement Youku Tudou’s financial results presented in accordance with United States Generally Accepted Accounting Principles (GAAP), Youku Tudou uses the following measures defined as non-GAAP financial measures by the SEC in evaluating its business: non-GAAP content costs, non-GAAP gross profit, non-GAAP operating expenses, non-GAAP sales and marketing expenses, non-GAAP product development expenses, non-GAAP general and administrative expenses, non-GAAP profit or loss from operations, non-GAAP net profit or loss and non-GAAP EBITDA profit or loss. We define non-GAAP content costs as content costs excluding share-based compensation expenses and amortization of intangible assets from business combination in relation to user generated content. We define non-GAAP gross profit or loss as the respective nearest comparable GAAP financial measure to exclude share-based compensation expenses and amortization of intangible assets from business combination in relation to user generated content. We define non-GAAP operating expenses as operating expenses excluding share-based compensation expenses, business combination related expenses and amortization of intangible assets from business combination in relation to customer relationship, technology and non-compete provisions. We define non-GAAP sales and marketing expenses as sales and marketing expenses excluding share-based compensation expenses and amortization of intangible assets from business combination in relation to customer relationship. We define non-GAAP product development expense as product development expenses excluding share-based compensation expenses and amortization of intangible assets from business combination in relation to technology. We define non-GAAP general and administrative expenses as general and administrative expenses excluding share-based compensation expenses, business combination related expenses and amortization of intangible assets from business combination in relation to non-compete provisions. We define non-GAAP profit or loss from operations as profit or loss from operations excluding share-based compensation expenses, amortization of intangible assets from business combination and business combination related expenses. We define non-GAAP net profit or loss as net loss excluding share-based compensation expenses, amortization of intangible assets from business combination and business combination related expenses. We define non-GAAP EBITDA profit or loss as net profit or loss before income taxes, interest expenses, interest income, depreciation and amortization (excluding amortization of acquired content), further adjusted for share-based compensation expenses, amortization of intangible assets from business combination, business combination related expenses and other non-operating items.

We present non-GAAP financial measures because they are used by our management to evaluate our operating performance. We also believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies. A limitation of using non-GAAP financial measures is that non-GAAP measures exclude share-based compensation charges that have been and will continue to be significant recurring expenses in Youku Tudou’s business for the foreseeable future.

The presentation of these non-GAAP financial measures is not intended to be considered in isolation from, or as a substitute for, the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the table captioned “Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP financial measures” at the end of this release.

For more information, please contact:

Ryan Cheung
Corporate Finance Senior Director
Youku Tudou Inc.
Tel: (+8610) 5885-1881 x6090
Email: ryan.cheung@youku.com

[1]

The reporting currency of the Company is Renminbi (“RMB”), but for the convenience of the reader, the amounts presented throughout the release are in US dollars (“US$”). Unless otherwise noted, all conversions from RMB to US$ are made at a rate of RMB6.1380 to US$1.00, the effective noon buying rate as of September 30, 2014 in the City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.

YOUKU TUDOU INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except for number of shares)

As of

December 31, 2013

September 30, 2014

September 30, 2014

RMB

RMB

US$

ASSETS

(Unaudited)

(Unaudited)

Current assets:

Cash and cash equivalents

1,764,221

5,073,522

826,576

Restricted cash

2,679

558,318

90,961

Short-term investments

1,409,439

3,112,495

507,086

Accounts receivable, net

1,370,031

1,619,947

263,921

Intangible assets, net

51,942

150,475

24,515

Amounts due from related party

72,040

11,737

Deferred tax assets

7,843

7,843

1,278

Prepayments and other assets

82,300

109,426

17,828

Total current assets

4,688,455

10,704,066

1,743,902

Non-current assets:

Property and equipment, net

222,229

281,937

45,933

Long-term investment

50,000

8,146

Intangible assets, net

1,197,671

1,380,433

224,899

Capitalized content production costs

1,176

9,497

1,547

Prepayments and other assets

197,856

289,739

47,204

Goodwill

4,262,569

4,262,569

694,456

Total non-current assets

5,881,501

6,274,175

1,022,185

TOTAL ASSETS

10,569,956

16,978,241

2,766,087

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

213,825

487,766

79,467

Advances from customers

25,081

25,451

4,146

Amounts due to related party

118

19

Accrued expenses and other liabilities

1,124,342

1,378,582

224,598

Total current liabilities

1,363,248

1,891,917

308,230

Non-current liabilities:

Deferred tax liability

219,519

219,519

35,764

Other liabilities

4,070

8,166

1,330

Total non-current liabilities

223,589

227,685

37,094

Total liabilities

1,586,837

2,119,602

345,324

Commitments and contingencies

Shareholders’ equity:

Class A Ordinary Shares (US$0.00001 par value, 9,340,238,793 authorized, 2,356,529,401 and 3,114,197,551 issued as of December 31, 2013 and September 30, 2014, respectively, 2,356,529,401 and 2,917,676,233 outstanding as of December 31, 2013 and September 30, 2014, respectively)

154

201

33

Class B Ordinary Shares (US$0.00001 par value, 659,761,207 authorized, 659,561,893 and 645,691,903 issued and outstanding as of December 31, 2013 and September 30, 2014, respectively)

49

48

8

Additional paid-in capital

11,058,360

18,790,468

3,061,334

Treasury stock (at cost, nil and 196,521,318
as of December 31, 2013 and September 30, 2014, respectively)

(1,293,644)

(210,760)

Statutory reserves

2,063

2,063

336

Accumulated deficit

(1,878,454)

(2,448,972)

(398,985)

Accumulated other comprehensive loss

(199,053)

(191,525)

(31,203)

Total shareholders’ equity

8,983,119

14,858,639

2,420,763

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

10,569,956

16,978,241

2,766,087

YOUKU TUDOU INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended

For the Nine Months Ended

(Amounts in thousands, except for number of shares and ADS and per share and per ADS data)

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Net revenues (including advertising net revenues from related party amounting to RMB26,738, and RMB69,763 for the three months ended June 30 and September 30, 2014, respectively, and RMB96,501 for the nine months ended September 30, 2014 )

857,743

958,719

1,106,641

180,294

2,127,197

2,765,734

450,592

Cost of revenues (Note 1)

(775,436)

(750,107)

(859,774)

(140,074)

(1,840,483)

(2,224,689)

(362,445)

Gross profit

82,307

208,612

246,867

40,220

286,714

541,045

88,147

Operating expenses:

Product development

(78,622)

(99,116)

(112,434)

(18,318)

(201,501)

(292,250)

(47,613)

Sales and marketing

(171,763)

(212,826)

(287,038)

(46,764)

(464,564)

(686,406)

(111,828)

General and administrative

(62,458)

(74,457)

(53,009)

(8,636)

(221,377)

(174,289)

(28,395)

Total operating expenses

(312,843)

(386,399)

(452,481)

(73,718)

(887,442)

(1,152,945)

(187,836)

Loss from operations

(230,536)

(177,787)

(205,614)

(33,498)

(600,728)

(611,900)

(99,689)

Interest income

7,284

9,923

22,694

3,697

21,553

38,670

6,299

Interest expenses

(545)

Other, net

4,694

3,441

1,542

251

23,695

2,724

444

Total other income, net

11,978

13,364

24,236

3,948

44,703

41,394

6,743

Loss before income taxes

(218,558)

(164,423)

(181,378)

(29,550)

(556,025)

(570,506)

(92,946)

Income taxes

(80)

(12)

(138)

(12)

(2)

Net loss

(218,638)

(164,435)

(181,378)

(29,550)

(556,163)

(570,518)

(92,948)

Other comprehensive (loss) income, before tax

Foreign currency translation adjustments

(10,547)

(13,645)

214

35

(49,970)

7,528

1,226

Other comprehensive (loss) income, before tax

(10,547)

(13,645)

214

35

(49,970)

7,528

1,226

Income tax expense related to components of other comprehensive (loss) income

Other comprehensive (loss) income, net of tax

(10,547)

(13,645)

214

35

(49,970)

7,528

1,226

Net loss per share, basic and diluted

(0.07)

(0.05)

(0.05)

(0.01)

(0.19)

(0.17)

(0.03)

Net loss per ADS (each ADS represents 18 class A ordinary shares),
basic and diluted

(1.31)

(0.88)

(0.88)

(0.14)

(3.36)

(3.05)

(0.50)

Shares used in computation, basic and diluted

2,995,701,280

3,355,310,411

3,724,534,275

3,724,534,275

2,977,998,887

3,369,848,757

3,369,848,757

ADSs used in computation, basic and diluted

166,427,848

186,406,133

206,918,571

206,918,571

165,444,382

187,213,819

187,213,819

The accompanying notes are an integral part of the press release.

Note 1. Cost of Revenues

For the Three Months Ended

For the Nine Months Ended

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

(Amounts in thousands)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Cost of revenues:

Value added, business taxes and surcharges

75,480

89,550

97,760

15,927

198,739

250,268

40,774

Bandwidth costs

181,670

213,538

229,714

37,425

506,826

645,141

105,106

Depreciation of servers and other equipment

21,827

28,756

30,472

4,965

65,681

83,534

13,608

Content costs

496,459

418,263

501,828

81,757

1,069,237

1,245,746

202,957

Total Cost of Revenues

775,436

750,107

859,774

140,074

1,840,483

2,224,689

362,445

YOUKU TUDOU INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended

For the Nine Months Ended

(Amounts in thousands)

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net loss

(218,638)

(164,435)

(181,378)

(29,550)

(556,163)

(570,518)

(92,948)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and impairment of fixed assets

30,342

36,328

38,054

6,200

84,639

106,265

17,313

Bad debt expense

19,945

5,247

(12,546)

(2,044)

37,056

(13,772)

(2,244)

Amortisation and impairment of intangible assets and capitalized content production costs

327,334

229,561

306,460

49,928

642,848

717,798

116,943

Amortization of long-term debt discounts

313

Loss on disposal of property and equipment

788

128

10

2

838

228

37

Foreign exchange loss (gain)

2,540

846

(58)

(9)

2,018

2,952

481

Share-based compensation

48,918

82,131

72,372

11,791

135,297

224,723

36,612

Changes in operating assets and liabilities:

Restricted cash

6,759

(1)

(555,636)

(90,524)

7,453

(555,639)

(90,524)

Accounts receivable

(161,184)

(244,056)

(171,241)

(27,899)

(489,526)

(236,144)

(38,472)

Amounts due from related party

(62,620)

(9,420)

(1,535)

(72,040)

(11,737)

Prepayments and other assets

37,051

(21,120)

21,958

3,577

60,192

(9,777)

(1,593)

Capitalized content production costs

(3,004)

(6,371)

(17,511)

(2,854)

(29,425)

(26,854)

(4,375)

Accounts payable

702

8,631

17,079

2,783

2,017

30,284

4,934

Advances from customers

9,918

(3,229)

1,783

290

44,195

370

60

Accrued expenses and other liabilities

20,027

(16,266)

236,276

38,496

120,541

249,601

40,664

Amounts due to related party

70

48

8

118

19

Net cash provided by (used in) operating activities

121,498

(155,156)

(253,750)

(41,340)

62,293

(152,405)

(24,830)

Cash flows from investing activities:

Acquisition of property and equipment

(67,252)

(84,968)

(41,295)

(6,728)

(129,165)

(154,454)

(25,164)

Proceeds received from maturity of short-term investments

1,358,761

66,037

1,363,276

222,104

2,017,412

2,561,772

417,363

Short-term investments placed with financial institutions

(1,405,173)

(4,698)

(2,859,798)

(465,917)

(2,329,822)

(4,255,735)

(693,342)

Proceeds from disposal of property and equipment

10

88

14

1,282

278

45

Acquisition of shares of an investee

(50,000)

(8,146)

(50,000)

(8,146)

Acquisition of intangible assets

(171,620)

(246,320)

(344,142)

(56,067)

(513,041)

(756,353)

(123,225)

Net cash used in investing activities

(285,284)

(269,939)

(1,931,871)

(314,740)

(953,334)

(2,654,492)

(432,469)

Cash flows from financing activities:

Exercise of employee stock options

27,676

7,355

6,086

992

92,351

25,250

4,114

Principal repayments on long-term debt

(1,111)

(7,677)

Repurchase of ADSs

(1,293,644)

(210,760)

(1,293,644)

(210,760)

Proceeds from Ali investment, net of issuance costs

7,387,520

(7,504)

(1,223)

7,380,016

1,202,349

Net cash provided by (used in) financing activities

26,565

7,394,875

(1,295,062)

(210,991)

84,674

6,111,622

995,703

Effect of exchange rate changes on cash and cash equivalents

(13,087)

(14,491)

272

44

(51,988)

4,576

746

Net (decrease) increase in cash and cash equivalents

(150,308)

6,955,289

(3,480,411)

(567,027)

(858,355)

3,309,301

539,150

Cash and cash equivalents at the beginning of the period

947,810

1,598,644

8,553,933

1,393,603

1,655,857

1,764,221

287,426

Cash and cash equivalents at the end of the period

797,502

8,553,933

5,073,522

826,576

797,502

5,073,522

826,576

Reconciliations of Non-GAAP results of operations measures to the nearest comparable GAAP financial measures (1) (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), unaudited)

1. Non-GAAP Content Costs

For the Three Months Ended

For the Nine Months Ended

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

Content costs

496,459

418,263

501,828

81,757

1,069,237

1,245,746

202,957

Deduct: share-based compensation

12,136

12,694

11,077

1,805

24,264

35,994

5,864

Deduct: amortization of intangible assets from business combination

5,984

2,631

2,557

417

22,056

7,671

1,250

Non-GAAP content costs

478,339

402,938

488,194

79,535

1,022,917

1,202,081

195,843

2. Non-GAAP Gross Profit

For the Three Months Ended

For the Nine Months Ended

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

Gross profit

82,307

208,612

246,867

40,220

286,714

541,045

88,147

Add back: share-based compensation

12,136

12,694

11,077

1,805

24,264

35,994

5,864

Add back: amortization of intangible assets from business combination

5,984

2,631

2,557

417

22,056

7,671

1,250

Non-GAAP gross profit

100,427

223,937

260,501

42,442

333,034

584,710

95,261

3. Non-GAAP Operating Expenses

For the Three Months Ended

For the Nine Months Ended

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

Operating expenses

312,843

386,399

452,481

73,718

887,442

1,152,945

187,836

Deduct: share-based compensation

36,782

69,437

61,295

9,986

111,033

188,729

30,748

Deduct: amortization of intangible assets from business combination

4,155

3,743

3,743

610

12,465

11,229

1,828

Non-GAAP operating expenses

271,906

313,219

387,443

63,122

763,944

952,987

155,260

4. Non-GAAP Sales and Marketing Expenses

For the Three Months Ended

For the Nine Months Ended

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

Sales and marketing expenses

171,763

212,826

287,038

46,764

464,564

686,406

111,828

Deduct: share-based compensation

12,366

24,824

22,256

3,626

35,135

68,252

11,120

Deduct: amortization of intangible assets from business combination

2,077

1,871

1,871

305

6,231

5,613

913

Non-GAAP sales and marketing expenses

157,320

186,131

262,911

42,833

423,198

612,541

99,795

5. Non-GAAP Product Development Expenses

For the Three Months Ended

For the Nine Months Ended

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

Product development expenses

78,622

99,116

112,434

18,318

201,501

292,250

47,613

Deduct: share-based compensation

9,748

19,006

17,624

2,871

26,605

53,836

8,771

Deduct: amortization of intangible assets from business combination

1,395

1,257

1,257

205

4,185

3,771

614

Non-GAAP product development expenses

67,479

78,853

93,553

15,242

170,711

234,643

38,228

6. Non-GAAP General and Administrative Expenses

For the Three Months Ended

For the Nine Months Ended

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

General and administrative expenses

62,458

74,457

53,009

8,636

221,377

174,289

28,395

Deduct: share-based compensation

14,668

25,607

21,415

3,489

49,293

66,641

10,857

Deduct: amortization of intangible assets from business combination

683

615

615

100

2,049

1,845

301

Non-GAAP general and administrative expenses

47,107

48,235

30,979

5,047

170,035

105,803

17,237

7. Non-GAAP Loss from Operations

For the Three Months Ended

For the Nine Months Ended

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

Loss from operations

(230,536)

(177,787)

(205,614)

(33,498)

(600,728)

(611,900)

(99,689)

Add back: share-based compensation

48,918

82,131

72,372

11,791

135,297

224,723

36,612

Add back: amortization of intangible assets from business combination

10,139

6,374

6,300

1,027

34,521

18,900

3,078

Non-GAAP loss from operations

(171,479)

(89,282)

(126,942)

(20,680)

(430,910)

(368,277)

(59,999)

8. Non-GAAP Net Loss

For the Three Months Ended

For the Nine Months Ended

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

Net loss

(218,638)

(164,435)

(181,378)

(29,550)

(556,163)

(570,518)

(92,948)

Add back: share-based compensation

48,918

82,131

72,372

11,791

135,297

224,723

36,612

Add back: amortization of intangible assets from business combination

10,139

6,374

6,300

1,027

34,521

18,900

3,078

Non-GAAP net loss

(159,581)

(75,930)

(102,706)

(16,732)

(386,345)

(326,895)

(53,258)

9. Non-GAAP EBITDA Loss

For the Three Months Ended

For the Nine Months Ended

September 30, 2013

June 30, 2014

September 30, 2014

September 30, 2014

September 30, 2013

September 30, 2014

September 30, 2014

RMB

RMB

RMB

US$

RMB

RMB

US$

Net loss

(218,638)

(164,435)

(181,378)

(29,550)

(556,163)

(570,518)

(92,948)

Add back:

Depreciation and amortization (excluding amortization

of acquired content ) (2)

30,356

36,341

38,068

6,202

84,682

106,306

17,319

Interest income

(7,284)

(9,923)

(22,694)

(3,697)

(21,553)

(38,670)

(6,299)

Interest expenses

545

Income taxes

80

12

138

12

2

EBITDA loss

(195,486)

(138,005)

(166,004)

(27,045)

(492,351)

(502,870)

(81,926)

Adjustments:

Share-based compensation

48,918

82,131

72,372

11,791

135,297

224,723

36,612

Amortization of intangible assets from business combination

10,139

6,374

6,300

1,027

34,521

18,900

3,078

Others, net

(4,694)

(3,441)

(1,542)

(251)

(23,695)

(2,724)

(444)

Non-GAAP EBITDA loss

(141,123)

(52,941)

(88,874)

(14,478)

(346,228)

(261,971)

(42,680)

(1) For more information on the Non-GAAP financial measures, please see the section captioned “About Non-GAAP Financial Measures” in this earnings release.

(2) The amortization expense was related to an advertising license acquired in April 2010. The amortization of acquired content was not treated as a Non-GAAP adjustment.