Youku Tudou Inc. (YOKU:US), China’s biggest online video company, forecast next year’s earnings will be boosted by lower costs following the acquisition of a competitor.
Industry consolidation has meant the company’s two largest cost components, content and bandwidth, have both begun to decline this year, Victor Koo, Youku’s chief executive officer, said in an interview today. Koo didn’t give a projection on when the company would become profitable.
The company was formed by the completion last month of Youku Inc.’s acquisition of Tudou Holdings Ltd. to extend its lead over websites run by Baidu Inc. (BIDU:US) and Tencent Holdings Ltd. (700) The combination of the online video companies that were China’s two biggest is aimed at reducing content licensing and network costs, and should produce savings of as much as $60 million annually, Youku said in March.
“Last year because of some competitive issues, you saw inflation of content costs,” Koo said at the company’s headquarters in Beijing. “We see a lot of rationalization happening this year and that will improve the financial situation on the P&L standpoint next year.”
Youku’s second-quarter revenue (YOKU:US) rose 96 percent from a year earlier to 387.4 million yuan ($61 million), the company reported Aug. 6, before completion of the Tudou acquisition. That was the slowest growth rate since Youku’s initial public offering in 2010, according to data compiled by Bloomberg. The net loss widened to 62.8 million yuan from 28.1 million yuan.
Youku’s American depositary receipts fell 3.5 percent to $17.54 in New York trading yesterday. They have dropped 1.35 percent since the companies completed the merger on Aug. 23.
The acquisition of Tudou will be fully integrated by the fourth quarter and won’t lead to any layoffs, Dele Liu, Youku’s president, said at a briefing today.
The $60 million savings target will begin to be realized over the next 12-18 months, Koo said in the interview. Achieving profitability (YOKU:US) is “something we are working on,” Koo said.
“We see the path to profitability very clearly,” Koo said. “Revenue is growing very strong. Part of it will be derived from the synergy we see coming from the merger.”
In the first quarter, the last before the acquisition was announced, Youku accounted for 20.9 percent of China’s online video market by revenue, compared with 11.5 percent for second- placed Tudou, according to estimates by research company Analysys International. Sohu.com Inc. was third with 10.9 percent, while Baidu’s Qiyi unit ranked fourth with 6.7 percent market share, more than Tencent’s 4.7 percent, according to Analysys.
By the second quarter, shortly before the acquisition was completed, Youku’s market share had risen to 21.5 percent, while Tudou dropped to fourth with 8.6 percent, according to Analysys. Baidu rose to second place with 10.2 percent, while Sohu remained in third with 9.8 percent.
A third-party audit done for the company after completion of the Tudou acquisition found the combined company has 310 million weekly users, Koo said. The combined company now reaches about 80 percent of China’s online population, up from about 55 percent for Youku on its own previously, he said.
Youku Tudou serves a total of 1.6 billion hours of video every month, which is about 22 percent more than Google Inc. (GOOG:US)’s YouTube, the company said in a statement today. YouTube service is blocked in China.
Concerns that overlap of users between Youku and Tudou may be higher than projected have weighed on the stock. A report on Chinese technology news website DoNews.com saying that the user overlap before the merger could be as high as 50 percent sank the stock by 10 percent on Sept. 17, Muzhi Li, an analyst at Citigroup Inc. in Hong Kong, wrote in a research note a day later. The DoNews report reached a “wrong conclusion” by comparing monthly data with a weekly figure cited by a senior vice president at Youku on Sept. 11, Li wrote.
“There is a lot of exaggeration here,” Koo said today when asked about the overlap.
The company’s audit found the daily overlap in users of the two sites is about 14 percent, while on a weekly basis the overlap is about 18 percent, Koo said.
“The advertising (YOKU:US) backend platform is now consolidated,” he said. “We can eliminate duplicate reach to make sure the return on investment for advertisers is highly effective.”
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