inside taomee (nyse: taom) - by ichinastock

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TAOMEE

iChinaStock.com profiles Chinese firms that are publicly-listed or may list soon in overseas markets

REPORT BY

CHILDREN’S SOCIAL NETWORK AND MEDIA

© March 2011 iChinaStock

NYSE: TAOM

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SUMMARY   Taomee Holdings Limited, one of China's leading children's online entertainment and media companies, plans to list on the NYSE as “TAOM”. At the midpoint, Taomee would raise $71.8 million at a $362 million valuation.

  Taomee operates five virtual worlds for 5-15 year-olds, including "Mole's World” and “Seer". A premium monthly subscription (Taomee's most popular product) to one of the virtual worlds, costs RMB 10 ($1.5)   As of the first quarter of 2011, Taomee had approximately 27.3 million active accounts, 2.7 million paying users, and average revenue per paying user of $4.60.

  In 2010, total revenues were $36 million, 95% online and 5% offline, with net income of $21.6 million. Taomee aims to grow its offline revenues to 50% of the total by co-producing media content (TV, books, etc.) and licensing its IP.

  Taomee’s largest competitor in China is Tencent (0700.HK), which launched an online children's community, "Roco Kingdom" (洛克王国) at the end of 2010. But Taomee claims 69% market share by revenues.

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Taomee

Online (Virtual Worlds) (95% of revenues)

Mole’s World Cuddly moles

Ages 6-14

(China #1)

Seer Sci-fi theme

Boys 6-14

(China #2)

Flower World

Fairy tale story

Girls 5-10

Gong Fu Pai Kungfu Adventure

Boys 8-15

Magic Haqi 3D Virtual World

Ages 6-14

Offline (5% of revenues)

BUSINESS MODEL

Disclaimer: This is not the firm’s official structure, but rather iChinaStock’s representation of the firm’s key properties

“Four of our virtual worlds ranked among the top six most visited online children’s entertainment communities in China, with Seer and Mole’s World, ranking first and second, according to an iResearch Report.”

Source: Taomee Inc. F-1 SEC Filing

Additional products: •  Taomee Bus (SNS) •  Taomee Mom (parental monitoring)

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FOUNDER BACKGROUNDS   Taomee’s founding team comes from Chinese internet giant

Tencent (0700.HK), now also its primary competitor. This includes Taomee Chairman Jason Liqing Zeng, CEO Benson Haibing Wang , CTO Crow Zhen Wei, and COO Roc Yunpeng Cheng.

“One big plus as it grows: Taomee’s leaders know their domestic rivals well. The three founders all worked for Tencent, which is led by billionaire Ma Huateng. There, Wang headed up a successful project called ‘QQ Pet.’ Tencent’s online users paid to feed and take care of an online pet. Ma invited Wang out for lunch when he heard the ambitious Anhui-province-born engineer wanted to leave Tencent back in 2007.”

--Forbes

Source: Forbes, “Watch Out Disney, Here Comes China’s Taomee” http://blogs.forbes.com/russellflannery/2010/09/03/mole-eyes-mouse-watch-out-disney-here-comes-chinas-taomee/

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USERS AND ARPPU

20,367

26,609

30,344

33,989 36,213

25,967 27,329

1,186 1,761 2,961 3,274 3,062 2,415 2,741

$1.70 $1.90 $2.30

$3.00 $3.30

$3.90

$4.60

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1

Unit: 1,000�

Ac1ve Users

Paying Users

ARPPU*


•  *ARPPU (average revenue per paying user – what Taomee terms “ARPU” per quarter) has risen steadily for Taomee, showing the firm is monetizing its user base more and more effectively

•  Taomee attributes the fall in users (active and paying) at the end of 2010 to Tencent’s entry into the market with a new and free virtual world for children

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REVENUES

Note: MAU = monthly-active users (unique log-ins) and Registered Users = activated users Source: Taomee Inc. F-1 SEC Filing

Millions USD

0.0 0.1

7.1

36.0

-0.1 -0.9 1.3

21.6

-‐5

0

5

10

15

20

25

30

35

40

2007 2008 2009 2010

Net Revenues

Net Income (Loss)

Q1 2011: Net revenues $12.4 million Net income $9.1 million

INSIDE HIGH MARGINS


Millions USD

0.1

6.9

33.7

-0.1

-0.2

-‐5.2

0.2 2.3

-‐0.1 -‐0.7

-‐10

-‐5

0

5

10

15

20

25

30

35

40

2008 2009 2010

Net Revenues

Costs of Services 70% margin

85% margin

Offline Online Offline Online

Online

Both Taomee’s online and offline businesses show high profit margins, 85% and 70% respectively. Taomee’s overall margin is 83.7% (2010).

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ONLINE REVENUES: SUBSCRIPTIONS AND VIRTUAL GOODS


•  Taomee’s online worlds monetize via two channels: –  Subscriptions: “Users may choose to pay a RMB10 (US$1.5) fee per virtual world

to access premium features and gain privileges within each of our virtual worlds for 30 days. Users who pay the subscription fee enjoy additional capabilities, special privileges, such as having a higher upper limit for the total number of friends that the users can have and access to exclusive online parties.”

–  Virtual goods: “users pay a fee for each virtual item within our virtual worlds.”

“We generated a significant portion of our net revenues from online business through the time-based revenue stream in 2008, 2009, 2010, and the first quarter of 2011. We anticipate generating more revenues through the item-based revenues stream going forward as we introduce more virtual items. “

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PAYMENT METHOD: PRE-PAID CARDS

Taomee� 65,000 distributors �

5-15 year-old children �

Taomee’s virtual world operations revenues are collected predominantly through the sale of prepaid cards at retail outlets throughout China. In Taomee’s online world, the virtual currency is called “Mibi.” •  Nationwide distribution network : distribution network of over 65,000 retail outlets were located near schools or other places frequented by target users in over 2,100 towns and cities across 31 provinces in China as of March 31, 2011.

•  More than 80% revenue from distributors :In 2008, 2009, 2010 and the first quarter of 2011, 83.5%, 80.1%, 87.1% and 85.1%, respectively, of Taomee’s net sales proceeds collected were from the sales of prepaid cards to distributors.

•  No longer dependent upon any single distributor: Taomee’s largest distributor accounted for 92.0%, 83.6%, 25.9% and 9.8% of its net sales proceeds generated from prepaid card sales in 2008, 2009, 2010 and the first quarter of 2011, respectively.


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PUSH TO OFFLINE

In spite of CEO Wang’s aspiration, online accounts for 95% of revenues at present. Taomee aims to grow offline to 50% of total revenues in the next 5 years.

Planned expansion in offline includes:

•  Children’s books and magazines, based on our franchises developed either by our staff writers or by partnering with authors and publishers;

•  Licensing franchises to leading makers of consumer products for children in China, such as “Mengniu” in beverages and “Roly China” in apparel;

•  Expansion to film and television through the co-production of, or investments in.

“Taomee is not an internet company, it’s a children’s entertainment company.” --Taomee Co-founder & CEO Benson Wang

”China doesn’t have its own Disney, Mattel or Marvel yet, and we hope that this company will evolve into one of them.”

--JP Gan, Qiming Ventures, investor in Taomee

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REGULATORY ISSUES   All media in China is closely regulated and those targeted at children are

especially so   In August 2009, China’s state broadcaster CCTV released a series of

reports alleging that Taomee’s Mole’s World drives internet addiction in children. Internet addiction is treated very seriously in China.

  In response, Taomee assigned high priority to its regulatory policies:

“We aim to create a healthy online environment suitable for children. There is daily server downtime between the hours of 00:00 and 06:00 to encourage children to form healthy Internet usage habits. For every 45 minutes of continued access, children receive a visual reminder and after two hours of continued access, users will experience a decrease in the rate of virtual reward accumulation. These measures encourage our users to develop moderate and sustainable usage habits.”


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PARENTAL ISSUES   In addition to addressing regulatory concerns, Taomee has also

established a site for outreach to parents, called Taomee Mom:

“We launched our website for parents, “Taomee Mom,” in January 2010, as a monitoring and communications channel for parents and guardians. We put in place a sophisticated monitoring system, through which email addresses and cell phones registered by parents and guardians are tied to their children’s user accounts to closely track children’s time spent in our virtual worlds. Parents can also send inquiries and suggestions to our staff and communicate with other parents on Taomee Mom’s discussion board..”


  Parents are an important demographic for Taomee as they control the purse strings and some will even play in Taomee’s virtual world themselves while their children are away.

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COMPETITORS

•  Taomee holds 69% market share by revenue, according to iResearch •  When Tencent introduced Roco Kingdom on July 15, 2010, it offered a six-month free trial period and did not start charging users until January 9, 2011. Taomee attributes a drop in its active and paying users at the end of 2010 to the launch of Tencent’s product, though user growth appears to have stabilized since.

•  Roco Kingdom targets the same user base as Taomee’s virtual worlds and the free trial period attracted some Taomee users to try their product. Roco Kingdom claims 60 million registered users with 0.55 million peak concurrent users.

  Other competitors include Aobi Island by Baitian Info and Hezi World by Bcast Education Software

Taomee’s largest competitor in China is Tencent (0700.HK), which launched an online children's community, "Roco Kingdom" (洛克王国) at the end of 2010.


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MARKET CHARACTERISTICS Taomee cites an iResearch report that it commissioned to address the children’s online entertainment market in China:

1.  Large market size: •  China has 175 million children ages 5-15, of which 90 million are internet users. “Children

represent 21.3% of the total Internet users in China and had an Internet penetration rate of 51.2%.”

2.  Internet is first choice for entertainment: •  “The Internet has gained wide popularity as a media and entertainment form for children in China,

with 67.7% of the Internet users between five and 15 choosing the Internet as their favorite media form, compared to just 18.9% choosing television.”

3.  Dominance of online games: •  “An estimated 75.4 million, or 84.2% of all Internet users between five and 15, cited participating in

virtual worlds and playing other forms of online games as their main reasons for using the Internet, followed by watching animation, films and downloading music”

4.  Geographic, gender, and age gaps •  Internet users are more urban than not. “Of Internet users between the ages of five and 15, 82.4%

are older than ten and 59.4% of these users are boys.”


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LISTING STATUS

•  Taomee filed its IPO prospectus on May 18, 2011. Chinese media expect the listing date to be June 9, 2011

•  Taomee cited three reasons for raising funds via a public listing: •  approximately US$10.0 million to further develop and expand our online

business; •  approximately US$10.0 million to further develop and expand our offline

business; and •  the balance to fund our working capital and for general corporate purposes,

including potential acquisitions, partnerships, alliances and licensing opportunities.

•  In 2009, Taomee received a $5 million investment from Qiming VC. Previous investors in the firm include Zeng Liqing, founder of Tencent, and Sina Vice President Wang Bing.


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OFFICIAL STRUCTURE


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VIRTUAL WORLD LOG-IN ��(E.G., MOLE’S WORLD)

Log-in to Mole’s World

Notes for parents

Create an account

All Products List�

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HOMEPAGE AFTER LOG-IN

User Name �

Games I Have Played (2) �

Visitors to My Page�

Ads for Taomee’s Products�

All Products List�

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PLAYING MOLE’S WORLD

Game actions�

Settings�

Cartoonish avatars�

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TAOMEE BUS SNS

Complete personal profile: 1. Photo 2. School & Class 3. Self-introduction

Newsfeed (includes updates from games)

Status

Blogs

Photos Status Updates

All Products

Users located near you

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TAOMEE MOM��(PARENTAL MONITORING)

View child’s footprint�

Register (tie parent’s email to child’s account)�

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ABOUT ICHINASTOCK

Snowball Finance is a financial media platform that includes two sites. One is iMeigu.com, a Chinese-language site that covers all US-listed stocks. The other is iChinaStock.com, an English-language site that covers Chinese stocks listed in the US. Each site provides stock quotes, business news, and analysis. Snowball Finance has also established my.iMeigu.com, a Web 2.0 platform for global investors to share news and insights on stocks they follow. Snowball Finance also publishes the iChinaStock 30 Index, a representative sample of Chinese stocks on the NYSE and NASDAQ.

© March 2011 iChinaStock

inside taomee (nyse: taom) - by ichinastock

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