Good day, thank you for standing by. Welcome to Tencent Holdings Limited Third Quarter 2021 Results Announcement Conference Call. At this time, all participants are in the listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. Now, I'd like to turn the conference over to Ms. Jane Yip from Tencent IR team. Thank you. Please go ahead.
Thank you. Good evening, everyone. Welcome to our 2021 Third Quarter Results Conference Call. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are undermined by a number of risks and uncertainties, and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent.
This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures of the group's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IR section of our website. Let me introduce the management team on the call tonight.
Our chairman and CEO, Pony Ma, will kick off with a short overview. President Martin Lau and Chief Strategy Officer James Mitchell will provide a business review. Chief Financial Officer John Lo will conclude with financial discussion before we open the floor for questions. I will now turn the call over to Pony.
Thank you, Jane. Good evening. Thanks everyone for joining us. During the third quarter, the internet industry, including the domestic games industry and certain advertiser categories, adapted to new regulatory and macroeconomic developments. We are proactively embracing the new regulatory environment, which we believe should contribute to a more sustainable development path for the industry. In the domestic game market, our industry is leading efforts in fully complying with new regulations to significantly reduce minors' game time and spending, fostering a healthier game play environment.
We also invest actively in key strategic areas, as well as in frontiers of technologies, along with making new commitment in common prosperity initiatives. Looking forward, we are committed to delivering superior experiences to users, assisting enterprises to digitalize their operations, and contributing to the society at large. Starting from this quarter, we disclose revenue from domestic and international games as new sub-segments under VAS, reflecting the increasing scale of our international games business. Now let me go through the headline number, financial number for the quarter.
Total revenue was CNY 142 billion, up 13% year-on-year, and 3% quarter-on-quarter. Gross profit was CNY 63 billion, up 11% year-on-year and stable quarter-on-quarter. Non-IFRS operating profit was CNY 41 billion, up 7% year-on-year or down 5% quarter-on-quarter. Non-IFRS net profits attributable to equity holders were CNY 32 billion, down 2% year-on-year and 7% quarter-on-quarter. Moving to our key services.
We focus on upgrading technologies and product innovations, maintaining our first or second place market position across key businesses, including social, games, digital content, payment, and public cloud services. Combined MAU of WeChat and Weixin was CNY 1.26 billion. Mobile devices MAU of QQ was CNY 574 million. Now I will hand over to Martin and James for the business review.
Thank you, Pony, and good evening, good morning, everybody. For 3Q 2021, our total revenue grew 13% year-on-year. VAS represented 53% of our total revenue, within which domestic games sub-segment revenue was 24%, international game sub-segment was 8%, and social networks sub-segment revenue was 21%. Online advertising accounted for 16% of our total revenue, and fintech and business services was 30% of total revenue. For value-added services, segment revenue was CNY 75 billion for the third quarter, up 8% year-on-year.
Social network sub-segment revenue increased 7% year-on-year to CNY 30 billion, reflecting relatively rapid growth from video and music subscriptions and moderate growth from live streaming and in-game item sales. Total VAS subscriptions grew 10% year-on-year to CNY 235 million. Video subscriptions increased 8% year-on-year to 129 million, driven by popular drama series. For example, our self-commissioned TV drama, Crime Crackdown, as well as Honor of Kings tie-in, You Are My Glory, ranked number 1 and number 2 by video views across all online platforms in China for the quarter, broadening our user mix in terms of gender and age.
The success of this series demonstrated our progress in content production and cross-media IP extension. Music subscriptions increased 38% year-on-year to CNY 71 million as more users are attracted by TME's enhanced streaming experience. Looking at our games business. For domestic games, revenue grew 5% year-on-year to CNY 34 billion, primarily driven by Honor of Kings, Call of Duty: Mobile, and Moonlight Blade Mobile. Revenue grew sequentially due to seasonal activities in Peacekeeper Elite and Dungeon Fighter.
For international games, the revenue increased 20% year-on-year to CNY 11 billion, or 28% in constant currency terms, benefiting from robust performance of VALORANT and Clash of Clans. Moving to Weixin, we continue to strengthen its content and commerce ecosystems. In Video Accounts, we're fostering rich and diverse content. An increasing number of content creators from official accounts now express their ideas in video format, contributing to a differentiated set of content in Video Accounts. Our strength in sports coverage, music, and games also enriched and diversified our content offering.
Video consumption grew healthily as we proactively enhanced content and recommendation technology. For mini programs, we're deepening penetration across industries, including restaurants, retailing, and transportation. The number of active mini programs increased by over 40% year-on-year, testifying to the vibrancy of the commerce ecosystem. By integrating WeCom's enterprise communication tool with mini programs, we enabled the direct interactions between individual salesperson and customers in retailers' private domain environment.
As a result, retailers can foster their own customer relationships and drive sales efficiently. For QQ, in our last upgrade for QQ, we have been stepping up our effort and technology on the interactive side. We enhanced video and AI technologies to facilitate creative and efficient content production, driving more UGC activities on our platform. We customized AI tools with festivals and national landmarks, adding more engaging experiences for users to interact with the physical world. We also provided cross-screen interactive effects in video call, offering more entertaining shared experiences.
Through these upgrades, we make users' interaction in QQ more exciting and immersive. Turning to games, first on domestic games. We believe fostering a healthy gameplay environment for domestic market is of paramount importance. Since September 1, we have implemented new measures to fully comply with the latest regulations on restricting minors' game time in China. Subsequently, users under 18 years old accounted for 0.7% of our domestic games time spent in September, reduced significantly from 6.4% in the same period last year.
In addition, these users accounted for 1.1% of our domestic games' gross receipts in September, down from 4.8% in the same period last year. We continue to lead the industry in combating minors' usage of adult accounts. For example, we upgrade our screening system to identify misused adult accounts around the clock. We also proactively assist authorities in cracking down on illegal account transactions. Looking at the highlights of our games business.
For Honor of Kings, we're bringing to life Chinese culture with a series of popular skins, which successfully transmitted provincial arts and traditions to a wider audience. We made significant progress in expanding successful PC franchise to mobile. Wild Rift successfully reactivated an enlarged League of Legends user base by extending the authentic PC experience to mobile devices. In October 2021, it ranked second by DAU among all mobile games in China. We also invigorated auto chess genre by introducing PVE and co-op gameplay in Battle of the Golden Spatula.
It is the second most popular new game launch in China year to date by DAU, only behind Wild Rift. For international games, we have been developing our business for more than a decade now, and its scale relative to our domestic business has been increasing over the last few years. We do expect exciting opportunities ahead in the global games industry as we discussed in our investment strategy with you earlier this year. In order to further develop this high-growth business, firstly, we enhance our upstream game development capabilities. We're increasing investment in talent and leading studios.
Our China-based studio groups, especially TiMi and Lightspeed, are scaling up with new talent hires, not only in China but also globally. Riot and Supercell, which have developed multiple hit games, are also ramping up their development teams. In the meantime, we are acquiring and nurturing specialist genre-leading studios such as Digital Extremes, Grinding Gear Games, and Fatshark, to name a few. We nurture them with our know-how, technology, and funding. Secondly, we're strengthening our global IP portfolio with multiple strategies.
Internally, we extend our globally recognized IPs such as League of Legends, Clash of Clans, as well as Honor of Kings to mobile and to additional genres, expanding our addressable market. We are also creating games with the potential to become new global IPs, such as VALORANT and Brawl Stars. Externally, we partner with renowned IP owners to develop mobile games with global appeal, such as PUBG Mobile, Call of Duty: Mobile, and Pokémon UNITE, and there are more to come.
Thirdly, to support our expansion in multiple regions, we're building up localized publishing and operational capabilities. We're also stepping up our marketing efforts in esports operations to foster player communities. We'll continue to step up our investment in our international games business. Now with that, I'll pass to James to discuss other businesses.
Thank you, Martin. Moving to online advertising, total revenue was CNY 22.5 billion in the third quarter. Revenue growth slowed 5% year-on-year due to weakness from the education, insurance, and game sectors. While consumer staples, internet services, and automobile sectors remain resilient, overall bidding density reduced. We expect advertising pricing industry-wide may remain soft for several quarters due to macro challenges and regulations affecting certain key advertising sectors. We believe the advertising industry should adjust and rebase during 2022, then resume growth as secular growth drivers reassert themselves.
Our social and others advertising revenue increased 7% year-on-year to CNY 19 billion, primarily driven by Weixin mini programs and official accounts, although slowed by weaker eCPMs at our ad network. We're enabling advertisers to connect users with salespeople via embedding WeCom chat salesperson functionality within their advertisements, which is especially effective for lead-driven advertisers such as automobile dealers.
An increasing number of transaction-driven advertisers such as grocery e-commerce merchants use mini programs as their ads landing pages, which helps them better convert traffic into transactions. Our media advertising revenue declined 4% year-on-year due to less revenue from the Tencent News app. On the positive side, we streamed top-tier drama series, variety shows in the Tokyo 2020 Olympic Games, generating improved sponsorship revenue on Tencent Video app.
Looking at fintech and business services, segment revenue was CNY 43 billion, up 30% year-on-year and up 3% quarter-on-quarter. Within fintech services, year-on-year revenue growth was mainly driven by increased commercial payment volume with healthy growth in categories such as groceries, apparel, and transportation. Commercial payment daily active users and per user transactions both increased. Compared to the second quarter of 2021, offline commercial payment volume growth moderated on a year-on-year basis due to control measures against COVID-19 resurgence in certain provinces.
We deepened our cooperation with UnionPay to develop new payments and service interconnection scenarios. Users can now scan Weixin Pay QR codes via the UnionPay Cloud QuickPass app to make offline payments, and Cloud QuickPass also supports top-up purchases for QQ Coins, QQ Music, and Tencent Video subscription services. For business services, revenue grew at a healthy rate year-on-year, benefiting from continued digitalization of traditional industries such as financial services and transportation, as well as videoization of the internet industry.
We see substantial potential in China's under-penetrated customer relationship management market. Our CRM Software as a Service solution, Tencent Qidian, has helped more than 1 million enterprises to enhance cost efficiency in customer service and is increasingly adopted by medium- and large-scale enterprises, including Dell, SF Express, and Siemens. Clients can automate 80%-90% of their customer service workloads via the virtual assistant, leveraging our AI-powered solutions across chat, voice, and other communications channels.
Our Tencent Distributed SQL platform as a service solution, or TDSQL, has served more than 3,000 clients from verticals including financial services, public services, and telecom. Within the financial vertical, we see increasing demand for upgrading database architecture with enhanced security protection. TDSQL serves six out of the top 10 banks in China and increases penetration within financial institutions' core systems due to their trust in our data security, reliability, and consistency. I'll now pass to John to discuss the financial review.
Thanks, James. Hi, everybody. For the third quarter of 2021, total revenue was CNY 142.4 billion, up 13% year-on-year or 13% quarter-on-quarter. Gross profit was CNY 62.7 billion, up 11% year-on-year or broadly stable quarter-on-quarter. Net other gains were CNY 23 billion, up 99% year-on-year or 11% quarter-on-quarter. This mainly comprised non-IFRS adjustment relating to our investee companies, including, number one, deemed disposal and disposal gains of our investee companies in sectors such as games, internet utility, and local services.
Number two, the revaluation gains of certain investee companies in verticals such as e-commerce. Number three, impairment provisions for investee companies in verticals such as fintech and social entertainment. Operating profit was CNY 53.1 billion, up 21% year-on-year and 1% quarter-on-quarter. Net finance costs were CNY 1.9 billion, largely stable both year-on-year and quarter-on-quarter. Share of losses of associates and joint ventures were CNY 5.7 billion compared to share profit of CNY 2.6 billion last year.
The movement reflected the impact of non-IFRS adjustments of certain associates, increased investment in community group buy initiative by certain associates, as well as losses recognized from certain associates in the social media sector, partially offset by enhanced performance of certain associates in the e-commerce sector. On a non-IFRS basis, we recorded share of losses of CNY 282 million this quarter for associates and joint ventures, compared to share profit of CNY 3.2 billion a year ago. Income tax expense was CNY 5.5 billion this quarter. Effective tax rate for the quarter was 12%.
IFRS net profit attributable to equity holders was CNY 39.5 billion, up 3% year-on-year or down 7% quarter-on-quarter. Diluted EPS was CNY 4.074, up 3% year-on-year or down 7% quarter-on-quarter. Now I'll share with you our non-IFRS financial figures. Operating profit was CNY 40.8 billion, up 7% year-on-year or down 5% quarter-on-quarter. Net profits after NCI was CNY 31.8 billion, down 2% year-on-year and 7% quarter-on-quarter. Diluted EPS was CNY 3.269, down 1% year-on-year and 7% QoQ.
Moving on to gross margin. The overall gross margin was 44.1%, down 1.1 percentage points year-on-year and 1.3 percentage points quarter-on-quarter. Breaking into segments. Gross margin for Value-Added Services was 53%, up 0.4 percentage points year-on-year and largely stable quarter-on-quarter. Gross margin for Online Advertising was 46.4%, down 4.5 percentage points year-on-year or 2.4 percentage points quarter-on-quarter. Both year-on-year and quarter-on-quarter decrease reflected increased bandwidth and server costs, including those associated with our Video Accounts service.
Gross margin for FinTech and Business Services was 28.5%, up 0.6 percentage points year-on-year or down 3.5 percentage points quarter-on-quarter. The year-on-year increase was driven by mix shift within Fintech services, partially offset by greater revenue contribution from lower margin business services. The sequential decline mainly reflected our continuous investment in cloud computing, including CapEx and operations. On operating expenses, selling and marketing were CNY 10.4 billion, up 17% year on year or 4% quarter on quarter.
The YoY increase was primarily driven by increased marketing spending on games as well as consolidation of BitAuto. As a percentage of revenues, selling and marketing expenses were 7% of revenues, broadly stable compared to the first quarter of 2020. R&D expenses were CNY 13.7 billion, up 39% year on year or 7% QoQ. R&D expenses represented approximately 10% of revenues. G&A expenses, including R&D, were CNY 10.2 billion, up 39% year-on-year or 3% quarter-on-quarter. Both year-on-year and quarter-on-quarter increase reflected greater staff force.
Excluding share-based compensation, G&A expenses increased by 23% year-on-year and 7% quarter-on-quarter. As a quarter end, we had approximately 107,000 employees, up 38% year-on-year or 14% quarter-on-quarter, primarily due to our increased resources allocated to our strategic growth initiatives. Let's take a look at the operating and net margin ratios. For 3Q 2021, non-IFRS operating margin was 20.7%, down 1.7 percentage points YoY or 2.3 percentage points QoQ.
Non-IFRS net margin was 22.8%, down 3.8 percentage points year-on-year or 2.6 percentage points quarter-on-quarter. Finally, I'll share with you some key financial metrics for the quarter. Total CapEx was CNY 7.1 billion, down 19% year-on-year or up 2% quarter-on-quarter. Within total CapEx, operating CapEx was CNY 5.6 billion, down 28% year-on-year. Non-operating CapEx increased 62% year-on-year to CNY 1.5 billion, reflecting higher spending on land use rights and building constructions. Free cash flow for the quarter was CNY 24.1 billion, down 14% year-on-year or up 40% quarter-on-quarter.
Net debt position was CNY 26.1 billion compared to CNY 21 billion last quarter, mainly reflecting cash flow for M&A activities and payment for repurchase of shares, partly offset by free cash flow generations and on-market diversions of certain business securities. The fair market value of our shareholdings in listed investee companies, excluding subsidiaries, was approximately CNY 1.2 trillion or $185 billion as at the end of the quarter. We repurchased approximately 5.6 million shares with an aggregate cost of CNY 2.2 billion or $334 million for the third quarter of 2021. Thank you. We shall open the floor for questions.
Operator-
Thank you.
Please invite the first question.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to withdraw your request, please press the pound or hash key. Please stand by while we compile the question and answer roster. Once again, it's star one for question. Your first question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.
Good evening, Martin, James, John, and Jane. Thank you for taking my question. My first question is about the buzzword that's floating around so many times nowadays. How would you assess your positioning in the Metaverse, the next iteration of the internet? Do you see this as transformational or an extension of your current business models? How would you size the opportunity versus the current estimates of the gaming industry that are north of $200 billion?
If I may slip in a second one on advertising. In light of the pricing challenges that you talked about, where China macro, PIPL, and regulations all appear to be headwinds, how do you rank these sets of risks? With regard to your comment on a rebasement in 2022, could ad growth rates get back to double-digit growth rates sometime in 4Q, or would it be sometime in 2022, in your opinion? Thank you.
On Metaverse, I think this is actually sort of, you know, a very exciting, but a little bit vague concept. The way we look at Metaverse, in terms of sort of at a high level is that, we felt anything that really makes the virtual world more real and making the real world more rich with virtual experiences can actually sort of, you know, become part of the Metaverse, big word. As a result, we felt, it's gonna be an opportunity that really add the growth to the existing industries. For example, you know, it will be an addition to the gaming industry. It will also be an addition to the social networking industry.
In some cases, when you have real-life applications like business applications, it actually also can be a growth engine for that industry too. The reason is, we felt that there are actually multiple pathways through which you can actually get into the Metaverse opportunity. For example, you can have a very interactive games, very high production and open world type of games. You also can have multiple games under a common worldview or IP. You can have a gaming platform that provide and the infrastructure for people to create a lot of different games within the gaming platform.
You can have a social network which can be gamified and support much more programmable experiences. You also can have a real-world experience, but augmented by augmented reality and virtual reality. That's sort of, you know, how we think about the different pathways through which you can get to Metaverse. Now, in terms of our capabilities and our positioning, right? We felt we actually have a lot of the technology and know-how building blocks for us to explore and develop for the Metaverse opportunity.
For example, we have a lot of gaming experiences. We also have very strong social networking experience. In addition to that, in terms of technology building blocks, we have engine capability, we have AI capability, we have the capability to build a large server architecture that can serve a huge number of concurrent users.
We are very experienced in managing digital content economies as well as real life, digital assets. All in all, we felt that, you know, we have a lot of tech and capability building blocks that will allow us to approach the Metaverse opportunity through the multiple pathways we talked about. Now, with advertising, I would pass to James.
Yeah. Thank you, Piyush. You asked about the various challenges facing the China advertising market and how we would rank them. I think that in terms of size and immediacy, the regulations affecting industries such as education, the games, insurance have you know the most substantial and fastest impact. The macro environment is you know also impactful in that in a very robust macro environment, then one would expect certain categories slower advertising spending, other categories will leap into the gap and sort of backfill and take advantage of the lower prices and higher ROIs.
You know, I think that will happen over time, but in a more challenging macro environment, it happens less quickly than in a more robust macro environment. In terms of the Personal Information Protection Law, also you didn't mention it, but other people may want Apple's IDFA changes, those are relatively less impactful. You know, for the Personal Information Protection Law, we implemented that as of November 1. It's important to remember that people who choose to opt out still see ads, it's just the ads are, you know, less, you know, relevant to their needs.
You know, we think that as a consequence, at least up till now, the opt-out rate has been very low, single digits. For IDFA, you may be aware that in the United States and Western markets, there was effectively two shoes that dropped. The first one was impaired targeting ability, and then the second more impactful shoe was impaired attribution ability. You know, in China, we've been through the targeting challenge, and the attribution challenge appears less, partly because the industry has you know, a variety of mechanisms for deriving attribution, and partly because Apple only represents a teens percentage of internet traffic in China versus a much higher proportion in Western markets.
That's in terms of you know, sort of sizing, prioritizing the various challenges. In terms of timing when advertising may resume a faster growth rate, then you know, obviously it depends very much on any future regulations that emerge, as well as any future macro challenges that emerge. You know, putting those to one side then, a couple of observations.
One is that I think our advertising comps, you know, are generally toughest in the first quarter of next year. In a normal year, the first quarter is seasonally our low quarter, and then you see very strong sequential advertising revenue growth in the second and third quarters versus if you look at, you know, 2021, that clearly wasn't the case. So we have a tough comp in first quarter 2022 that then eases. And then secondly, while there are a number of categories that are weak, and they tend to be the categories that would normally react most quickly to lower pricing by increasing in their volume.
There's other categories that you know are still quite robust, including you know clothing, personal goods, healthcare and so forth. Now, you know, I believe in general, these categories react more slowly. You know, they make more human being driven ad buying decisions rather than the algorithmic ad buying decisions that a mobile game or an online education company might. You know, it's a reality that because pricing has softened, therefore the ROI from buying ads improved. Over time, we would expect some of those slower moving advertiser categories to reassert themselves. Thank you.
Mark, thank you. Our next question comes from Charlene Liu from HSBC. Please go ahead.
Hi, management. Thank you very much for the opportunity and for taking my question. I guess I wanna follow up on a point that James was making, on, you know, I think earlier on you discussed some of the challenged verticals such as education games and insurance and whatnot. I was wondering if you can share a little bit more on how much do these verticals contribute to the advertising business?
You also mentioned that we're seeing some green shoots, perhaps in segment like healthcare. Are these, you know, how much can they really make up for, I guess, the weaknesses that we're seeing in some of the, you know, challenged verticals that you discussed earlier? I have a follow-up f or online game. Thank you.
Well, in terms of making up for weakness, we commented that we expect weakness to persist for several quarters. I, you know, I wanna emphasize the adjective several. This is not something that we believe will return to prior trends immediately. In terms of how much those categories contribute, you know, directionally speaking, games would be in the low- to mid-teens. Education has dropped to low-single digits now. Insurance is a subset of finance, but again, would be a low-single-digit percentage.
In terms of categories that are relatively healthier than financial services, ex insurance, you know, personal care products and clothing, food and beverage. For us, our transportation related advertising has been very strong, which I think partly reflects the reinvigoration of BitAuto and the injection of video content from BitAuto has increased our share of automobile related advertising, and then healthcare. But you know, as I mentioned, these categories tend to you know, make their decisions on a sort of annual or quarterly basis rather than a real time basis. When advertising pricing softens as it has done, they don't react immediately.
Okay. Great. I think on the online game front, in particular for overseas expansion, can you discuss what are some of the challenges you may anticipate, you know, amid our overseas expansion efforts, for online game? And can you also share some details on the pipeline? Thank you.
Well, in terms of the pipeline, you know, both the domestic and the international business, we tend not to talk about games until they're launched or at least until they're very close to launch. You know, just looking at the slide and thinking about what's been publicly announced, you know, TiMi and Lightspeed both announced a number of titles which, you know, are global IPs and you should expect to be released globally. They also have some other titles which are their own IPs, which, you know, we also hope will succeed globally. Although time will tell whether that's the case or not.
You know, Riot has announced a number of games, including the mobile version of VALORANT. Supercell has announced three Clash-based games. Grinding Gear Games has announced Path of Exile 2. Fatshark's announced Darktide, and you know, so on and so forth. None of our studios are sitting still. All of them have you know, products in the pipeline, and some of them are announced products, some of them are you know, unannounced products and therefore a little bit further away.
In terms of the challenges we face, you know, I think that they're pretty similar to the challenges that you know, other companies in the game industry face. You know, just to touch on two that are you know, front of mind at the moment. One is the war for talent. You know, we believe that the game industry is really a talent-driven industry, and so we spend a lot of time, you know, at our own studios and also working with our investee and daughter studios working on, you know, the most appropriate compensation plans. You know, each situation is a little bit different.
But in general, you know, we want our studios to be in a position where they can reward the people who contribute very handsomely. You know, we think we're there and so we can remain in that good position going forward because it is something we spend a great deal of time and energy on. You know, another issue for the game industry globally that's front of mind is the fact that for the industry as a whole in mobile games, the app stores take a bigger profit pool than the game developers do.
You know, I think there's a number of pressures from a regulatory perspective, from a legal perspective, including some announcements today that you know, can have direct bearing on how that profit pool is split between app stores versus game developers that you know, should be helpful for you know, game developers in general, and especially for some of the you know, smaller game developers. Those are, you know, two of the, you know, the game industry outside China faces and that we also face as a participant.
All right. Thank you. Our next question comes from Alex Yao from JP Morgan, please ask your question.
Thank you, management, for taking the question. I have a first question, which is a follow-up on the implementation of PIPL. James, you mentioned that the opt-out ratio is quite low, perhaps around low single digit. Presumably the impact on your on-property advertising operation should be quite small. How about the impact on your ad network business? Can you share some color? Secondly, regarding domestic gaming operation, how will the current game monetization approval suspension change your gaming operation, the product launch strategy in the next couple of quarters? Thank you.
We haven't yet published. Given historically we typically publish a mid-single digit number of new games each quarter, then you can see that we have a backlog that will you know keep us busy for many quarters to come. Obviously it would be better for the industry as a whole if as and when the Banhao issuance resumes in terms of bringing more innovation to market.
But I think you can see that you know between our big existing games between some of the very high DAU new games we've recently launched and our several dozen games with Banhao that we haven't yet launched you know we think we can navigate through this temporary period and get up you know move forward. You know, there, I'd really emphasize the temporary nature. In terms of the question around the ad network, to clarify, our ad network pricing was weaker in the third quarter, but that was due to a combination of the demand factors that we've talked about in terms of regulation from certain sectors, macro challenges.
Then on the supply side, the limitations on so-called flash screen advertising had a bigger negative impact on the ad network business than on our owned and operated inventories. PIPL, you know, didn't and doesn't have as substantial an impact as those two factors.
Thank you. Our next question comes from the line of Robin Zhu from Bernstein. Please ask your question.
Hi, management. Thank you for letting me ask a question. Just two, I guess two questions, please. One, on WeChat Mini Programs, and the e-commerce GMV growth there and the ads growth there. I mean, you guys very helpfully shared some data in the last couple of quarters. If we could get an update on what's going on there, how that's contributing to the advertising growth, and whether you expect any of the, whether it's regulatory or PIPL or something else, to impact growth in the next couple of quarters.
Second question, just on the broader regulatory environment. I mean, it seems optically that the rest of the new announcements have slowed somewhat. You know, last quarter, I think John. No, sorry. In the last quarter management said that look, there's still plenty of stuff to come in on the regulatory front. I wonder if that view has changed as of this quarter. Thank you.
On mini programs, in terms of GMV and apps growth, I think, you know, the overall message we wanna tell you is, it remains healthy and strong. We don't want to make this a permanent item to disclose. As long as the trend is intact, you know, we don't talk about the specific numbers this time around. In terms of the ecosystem, this time around, we actually tried to provide you with additional color regarding the diversity of the ecosystem.
You can see the number of mini programs have actually increased 40%, which means that, it's actually a very vibrant ecosystem covering, an increasing number of different industries and types of applications. This is exactly one of the key drivers behind the strong growth of GMV and apps growth. That's what we do wanna share with you this time around. Now on the second question, maybe James can answer.
The question was around the overall regulatory environment and, yeah, I mean, actually Martin's probably better placed.
Is it the overall?
Yes. Overall regulatory environment.
The overall regulatory environment, I would say last time we were asked about this question, right, you know, and our answer is that there will be more regulations coming. I think, you know, we have been proven to be right. We have seen more regulatory development over the last few months. We also believe that a stricter regulation is a new normal for the entire industry, and that's not just for China but also globally.
We do wanna emphasize that the rationale behind the regulatory push is actually, especially with China, is really the government trying to drive higher quality and sustainable and healthier growth for the entire industry with a focus on consumer rights and privacy protection. That's the reason why we are proactively working with the regulators on implementing all the necessary changes.
We expect once the industry has really complied with the new regulations, have made all the adjustments, then even when new regulations come around in the future, which by nature, you know, if there has been already a lot of regulations, then the regulations in the future on an incremental basis will be smaller in terms of percentage-wise. As the industry adapted further, then the impact on the industry will be less and less over time. That's what we felt.
Thank you. Our next question comes from Guanren Wang from CITIC. Please go ahead.
Hello. Thank you for taking my question. I have two questions. The first one is about content development strategy of WeChat Video Account. Just as you mentioned that Tencent's cross IP strategy has achieved a great success. I think that Tencent has the barrier that competitors cannot surpass in a very short time. I mean, how the WeChat Video Account could benefit from TME or China Literature or the esports? How this Tencent's unique content advantage can empower the development of the short video account? And on the other hand, how the video account distribution mechanism could feedback Tencent's content system?
And the second one is about the changing Internet. Last week, the Tencent Digital Ecosystem meeting was just held, and also the Industrial Internet has been mentioned a lot. I mean, how is the Industrial Internet strategy and how it's progressed and business model and the time node. I hope the management could share more about the Industrial Internet. Thank you.
Okay. On Video Accounts, I think the key point I would like to make is that a Video Account is a product that has seen very healthy growth. It started off from nothing, right? It has grown to a relatively sizable product. But it's still relatively young. In terms of being a short video platform, it's actually much smaller than the market leaders at this point in time. Having said that, right, you know, we are encouraged by the development of our Video Accounts because it has a pretty unique content. There are a lot of Official Accounts content creators who are now
Sharing their knowledge on Video Accounts. We are particularly strong in terms of knowledge-based short video. We also have a lot of other areas of content which are quite unique. For example, sports. During the Olympics, you know, our Video Accounts actually cross benefit with our sports channel and was able to generate a lot of video views from users on the Olympic Games. You know, for now, we felt very encouraged by the development so far of the Video Accounts and also the trend of its growth.
We felt at this point in time, the most important thing for us is actually to continue to enrich the content ecosystem and also keep on improving our recommendation technology so that we can actually allow more users to come into contact with more content. As a result, the amount of time that people actually spend on our Video Accounts would actually increase. Once that's done, right, when that has reached even further scale, then I felt a lot of the cross benefits that you talk about, for example, music, animation, comics, esports, would actually come into play even more.
At this point in time, I think, you know, the key focus for us is actually keep on scaling our Video Accounts in a sustainable and a healthy way. Now, in terms of the Industrial Internet, I think you know it's partly using our technology to actually make the real world experience enriched with virtual experience and also leveraging virtual technology to actually help real life simulations. I think a lot of the core logic is actually similar to what we answered on the Metaverse. I would refer you to the answers that we provide on there.
Thank you. Our next question comes from the line of William Packer from Exane BNP Paribas. Please go ahead.
Hi, management. Many thanks for taking my questions. Firstly, on the domestic gaming regulatory front, the key focus so far has been limitations on the gameplay and spend by minors and gaming approvals. As regulation evolves, do you think we should expect restrictions on adult time or spend on video games?
Just as a quick follow-up, we're seeing an opening of the various platform ecosystem, including Tencent's, and increased interoperability. Could you talk through the key positives and negatives from a financial perspective of these developments? For example, increased adult payment revenue opportunities or increased competition for engagement. Thank you.
William, on your first question, you know, we believe that, up till now, the public concern around the game industry has been, very largely concentrated on the issue of whether children are spending, too much time, in games. You know, the recent regulations, you know, address that head on and, you know, we don't expect the scenario you envisage. The longer answer would be that we think it's actually, you know, very beneficial for a country to, have a robust presence in the gaming industry, you know, both from a sort of technology perspective, but also from a, you know, cultural perspective.
From a technology perspective, you know, games have been at the cutting edge, driving the cutting edge of some of the most interesting hardware innovation. For example, you know, games are the reason why computers have dedicated graphics processing units separate from the CPU. You know, it is the GPUs that are today being used for training and inference in artificial intelligence. At a software level, you know, games have catalyzed the utilization of services like Unreal Engine, which are today, you know, proliferating across enterprise and of course, supporting the immersive internet as well.
At a talent level, you know, some of the highest profile, most successful individuals in the technology industry globally, like an Elon Musk or a Mark Zuckerberg, have, you know, spoken about their enjoyment of games when they were young and how, you know, that set them on the path in the technology industry and, you know, the success that they enjoy today. That's from a technology industry perspective.
From a cultural perspective, you know, the United States is in a very happy position where because of Hollywood, the U.S. can export, you know, American culture globally through attractive movies. You know, Korea is now in a similar position with TV series. Japan is in a similar position with manga and anime. Games represent, you know, one of the only opportunities for countries which, you know, historically haven't been, you know, sort of global participants in cultural exchange to become that.
You know, you can see that today, if you look at the top 100 games in Japan, I think 30 come from China, from mobile games. If you look at the top 100 mobile games in the United States, 20-something come from Chinese companies. You know, we think that it's, you know, advantageous to society on, you know, multiple levels. For that to be a thriving and robust game industry, assuming that the game industry can control adjacent issues such as children playing games too much, which, you know, we believe the China game industry is now doing.
In terms of the interoperability among different platforms, I think we actually provided a very long answer last time regarding our philosophy on the ecosystem consideration. I would say a few things, right? One is, as you said, if there's more interoperability and more openness in terms of the different platforms, we felt it could be good for our business, in particular, with respect to payment and ads business. The reason is, we are the company that probably has got the most engagement, but the least monetized engagement.
If there are more other platforms sending us more commercial activities to us, then there could be financial benefits. I think, you know, we look at this issue from more of the key considerations regarding one, user protection, two, information and content compliance, and three, the impact on the ecosystem. Now, in terms of user protection, if there is a very big platform with a lot of users and there's also commercial interest involved in sending to another platform's users, there could be a spamming that could happen, and that's something we actually try to protect quite carefully.
If there are people sending messages to another group of people, then you know, you wanna balance the interest for the sender versus the receiver. Especially if one sender actually sends to many receivers, and then it's typically called spamming, and it could actually cause a lot of users bearing damage. That's one aspect.
The second aspect is actually information and content compliance. When you have a platform which actually manages millions of suppliers on the other side, and when you know it sends a message or a content over, then whose responsibility is it to ensure that the content and information is compliant with law and regulations? It may be regarding news and fictitious news. It may be about counterfeit products. These are very difficult issues. If you have a single merchant, then it's much easier to police.
You know, if it's a platform with millions and tens of millions of merchants on the other side, then it's much harder to police. Finally, it's on the ecosystem, right? You know, we kept on saying our ecosystem is fundamentally open, and we do prioritize to provide support for SMEs and brands to succeed. That's why when you have another platform with different platform regulations and economic models coming in, then it may be damaging to the ecosystem of a lot of the small, medium enterprises within our platform. That's something that you know, we pay a lot of attention to.
I would say we will continue to proactively explore cooperation with other platforms, but it has to be in a manner that addresses the user protection point, the information and content compliance point, as well as it has to be beneficial to the ecosystem, especially for the small and medium enterprises that are on our ecosystem.
Thank you. Our next question comes from Gary Yu from Morgan Stanley. Please ask a question.
Hi, thank you, management, for the opportunity to ask a question. I have two questions. The first one is regarding your strategic investment, which you kind of mentioned in the first quarter earnings. How should we look at the, you know, impact on SG&A trends going into next year? Should we continue to see increase in, you know, level of investments? Or, will we be able to start to see kind of more normalized margin trend going forward, after this year of step up in investment?
Second is a follow-up on Metaverse. You mentioned about the opportunities and, you know, maybe Tencent position in this space. How should we look at some of the key hurdles in the next couple of years? You know, one area is from a technology front. In terms of hardware, is there something that we look into investing to accelerate hardware development? The second angle is on regulatory front. How should we look at regulatory stance, in terms of Metaverse, given the heavy focus on, you know, addiction issue on the games, side of the world? Thank you.
I'll talk about strategic investment as well. Martin answers the additional Meta question. You know, I think that we are a company that invests aggressively for the future. Since we're optimistic about the future, we're investing optimistically and aggressively. You know, that's reflected in our rapid headcount growth, and that's also reflected in our rapid SG&A expense growth. Within the SG&A expense growth, it's worth you know separating the headline number, which includes stock-based compensation from you know the cash number.
Now in terms of, you know, how this trend would evolve going forward, then, you know, I think Time will tell, but I think the opportunities will only get bigger and brighter in the future, and therefore we'll continue to invest in the future. Therefore, the variable is not, you know, do we slow our rate of investment? It's rather, how quickly will our various investments translate into revenue and margin.
You know, going through the three specific strategic areas that we talked about at the first quarter results, then I think, you know, our investments in business services, for example, enterprise software, you know, translate into revenue, you know, on a measured basis. There are some products we have, typically the smaller ones that you know already monetize.
Because they're subscale, they're low margin, there are other products we have, such as WeCom, such as Tencent Meeting, such as Tencent Docs, which are a very substantial scale and, you know, we're not yet monetizing. We're confident that when we do, they'll generate attractive margins. That's on the business services. For the games, you know, we have an increasing number of games released each year.
Moving from 2022 into 2023, particularly an increase in triple-A games, and that reflects the sizing up of headcount at a number of our key studios in the last two years, and the development cycle for these triple-A or high production value games. You know, the success of those triple-A budget games as we move through 2022 into 2023 will determine the margins for the game industry to some extent. Third, for short video, our bandwidth costs have been increasing quite quickly this year, and one of the drivers for that has been a step up in consumption of short video, particularly of our Video Accounts.
Currently, we monetize short video Video Accounts at a moderate rate through the interactive features. As and when we insert advertising into the Video Accounts, then I think that will have an impact on the margins and the profile of that investment cycle.
Now, in terms of Metaverse, I would say, it's still early days, so there will be a lot of challenges. There's a lot of uncertainty. The future would be very exciting, but then, the way through which it will be realized will probably take longer than people expected and would probably need a number of iterations. I would say that the key challenge is really, as we discuss about the multiple pathways to get to Metaverse, then it's really, what is the most attractive user experience in each of the pathway? And this is the most important question to answer.
You know, if you don't answer that question and just try to take the world, then it's hard to come up with the product and crystallize the product that attract people. The other one is really in order to realize such distinguishing and engaging user experience, so what's the technology that's actually needed? We do believe that the driving force will still be software driven, and you know, the technology that really help us to provide the user experience, be it engine technology, be it the ability to provide very real experience, high fidelity experience across a large number of concurrent users.
AI technology, for example, in order to customize the different experience for different people. Like, you know, there are a lot of these technologies which are really software driven. So hardware will probably be an assisting condition, but not the necessary condition. We felt even in the mobile device right now, it will be quite sufficient in the first place. But of course, if at the time when VR and other hardware becomes clearly necessary, I think the industry is actually ready to embrace it. We actually sort of have the technology to do it.
You know, so in a way, it's gonna be like when people say, "Oh, mobile internet, what exactly is gonna happen?" You know, there will be hardware developers who are developing mobile phones, but then the actual driver will be the apps that actually make use of those mobile phones. I think, you know, that's what happened with the hardware as well in this case. In terms of regulatory, I would say in terms of any service, you just have to be compliant in the different territories that you operate, right? For the global market, there will be a set of regulations.
For the China market, there will be another set of regulations. We felt it's not fundamentally averse to the development of Metaverse. Metaverse in itself will be tech-driven. As James talked about, you know, there is a lot of technologies that's related to the development of games as well as for the Metaverse. As a result, the Chinese government will be in support of the development of such technologies as long as the user experience is actually provided under the regulatory framework.
Thank you. Our next question comes from John Choi from Daiwa Capital Markets. Please ask your question.
Thanks for taking my question. Just quickly two questions here. On cloud computing, I understand that you know, we had a pretty healthy growth, but right now as you know, the overall macro you know, is kind of slowing down, we've been seeing some little bit of delay of so-called the you know, CapEx or IT budget being deployed. Are we likely seeing any of that? Or as we look into 2022, is the growth trend still intact?
Secondly, just a quick follow-up on your international game strategy. If we look into your you know, clearly we've been doing a great job, but mostly from a mobile standpoint of view. You know, if we extend our platform, particularly in console or more on the PC side, more on the casual, what is our strategy there? Should we be expecting more, you know, strategic investments or M&A in this side to acquire more IP? Thank you.
You know, on the cloud question, our view is that, you know, the dominant trend is companies in China increasingly adopting, you know, infrastructure in the cloud, you know, platform in the cloud and software in the cloud. You know, we think that trend continues, you know, with or without a faster or slower macroeconomic environment.
Specifically on the point of CapEx bouncing around, then, you know, I think that's true, and I think that reflects the fact that, in 2020, there was a high degree of uncertainty in the technology industry in China about the ability to continue purchasing, you know, servers and, you know, GPUs and smart NIC cards and so forth. That caused some, you know, stockpiling, which I think has now been unwound. You know, the global supply chain seems to be moving to a more normal base, at least from a sort of a regulatory perspective, vis-à-vis the United States.
I'd say that, you know, at this point in time, we think that the business services will be, you know, less affected by regulation and macro fluctuations than advertising. Your question around console and PC, I wasn't sure I caught the nuance. I mean, obviously we've been creating PC games for many years. More recently, as the x86 architectures have converged between PC and console, we've, you know, started releasing games on console as well, including Pokémon UNITE, most recently.
If you look at a number of our what we refer to as sort of genre leading specialist studios outside China, then the majority of them are actually, you know, console and PC centric. You know, they've developed a reputation and a reality for operating particularly good games within a particular genre on console and PC, and we're now supporting them to do that at a bigger scale than before. In terms of, you know, IP, then generally speaking, IP matters more for mobile, and perhaps a little bit less for PC outside China.
You know, the non-China PC gaming audience is a relatively engaged, sophisticated audience that you know, looks at reviews on Steam and Epic Games Store and you know, collects feedback from other players. What you can often see situations where a development team who works on one particular IP very successfully you know, actually separate from that IP and you know, create something else that is a brand new IP, but ends up being bigger and better.
You know, a stereotypically or classic example would be Epic Games, where for a decade they were associated exclusively with the Gears of War IP, but subsequently they sold Gears of War and you know they focused on creating the Fortnite IP, which is even bigger and better than Gears of War.
Thank you. Our next question comes from Alicia Yap from Citi. Please ask your question.
Hi. Good evening, management. Thanks for taking my questions. I'll have two questions. The first one is regarding your new versions of the CRM, SaaS, QiDian. It seems like you will be launching a new version by the end of this year to provide a deeper integration with between the Tencent Meeting and also the WeCom. How should we think about this upcoming online advertising opportunity within WeChat that could further extend and penetrate into other traditional industry verticals?
And then second question, I guess is, there's a lot of Metaverse question tonight. I guess just to follow up a little bit on this, as related to your international games development and expansion, just wondering if management could share the opportunity that you see in the global context of this Metaverse opportunity. You know, what do we need to prepare in terms of capturing this evolving trend, especially in whether we need to prepare a separate global infrastructure or some social network infrastructure to capture this opportunity in the global context? Thank you.
I think on QiDian, it is a good observation that we actually starting to integrate more among our different enterprise-facing SaaS. You know, there will be more integration between WeCom and Tencent Meeting and Tencent Docs and QiDian and potentially other SaaS as well. WeCom also provide a link into the WeChat, Weixin ecosystem, right?
You know, yeah, I would say, there's fundamental benefits for these different SaaS apps to be talking to each other and that actually sort of, you know, provide a more unified experience for anyone, any enterprise customer who wants to use one or two or many of our SaaS applications. In terms of being able to connect these SaaS to the consumers within Weixin in a controlled and secured way is actually very helpful, both for the enterprise as well as for the consumers so that they can actually get served by the different businesses in a well-protected manner.
when that happens, right, you know, in our prepared comment, we also talk about, you know, when enterprise can use this to foster a selling or serving relationship with their customers, then, it can provide additional GMV to our mini programs, for example. It also can provide a reason for them to advertise more within Weixin. Yeah, Metaverse, I've answered enough. James, maybe you can take a crack at that.
Okay. I mean, I actually hadn't heard Martin's tagline of, you know, making the virtual world more real and making the physical world more rich before, but it's very good, so I repeated it. I think that's the destination. Now, in terms of, you know, the pathways to the destination, you know, it's not necessarily in our interest to talk, you know, at great length about our specific plans, whether inside or outside China. Maybe just to, you know, elaborate on what Martin was saying a little bit and, you know, what different pathways they are, what capabilities they need to aggregate.
I think that the pathway that most closely resembles the Metaverse today is, you know, games, virtual world, open world games. You know, for games, they already have many of the components in place. You know, I think the challenge is, you know, aggregating, you know, more and more virtual experiences, virtual game experiences together. So it's, you know, Fortnite, you know, together with Rocket League, in the Epic example, or multiple different, you know, so-called game experiences, within the Roblox example.
Also providing, more and more powerful tools so that, other amateur but also professional, content creators can create experiences, including non-game experiences, within these virtual worlds. You know, a second path that is you know less well understood is taking user-operated communities that already have a high degree of you know functionality technology bots and then moving them from a text and image basis to more of an immersive video basis. You know, that's an area where you know companies like you know Discord have opportunity.
The third is in taking a pre-existing social network. With the social network, one needs to you know both provide the 3D graphics capabilities that one would you know with a server-based community and also provide the UGC and PGC tools that the game companies need to do. While the social networks such as Meta itself and Snap, you know, have the most capital resources that they also have a good amount of work to do. Anyway, you know, I think that doesn't answer your question directly, but I hope it, you know, sheds some light on how we think about, you know, the pathways and the future and, you know, why we're doing some of the things that we're doing.
Thank you. In the interest of time, we will take the last question.
Thank you. Final question comes from Eddie Leung from Bank of America. Please go ahead.
Good evening, guys. Probably a bit more pouring. So two questions. The first one is regarding cloud. A bit curious if the growth we are seeing right now is primarily driven by new clients or increasing spending of existing clients. 'Cause we know that may have some indications on the margins.
Secondly, just a follow-up question on the headcounts. I understand James has talked a bit about that. If we look at the increase in headcounts this year, we are looking at, you know, even including the additions from some of the acquisitions, companies like Bitauto and Sogou. We are still looking at 20,000-30,000 or more people, right? If we look into next year, what areas can we think about still require more headcounts? Thanks.
In terms of cloud, I would say both indicators are actually quite important, right? You know, in terms of existing clients, I would say if it's just volume growth on low-margin products, then it's less valuable. But if we can actually cross-sell our SaaS and PaaS products to the existing customers, then that will be much better for our overall margin. In terms of number of clients, it's mainly happening at the long tail, right? You know, the medium and small, especially the small companies would be the key driver for the number of clients. Typically, they don't really drive sales and revenue that much.
Even if you have a high percentage growth, the impact is actually lowering the output of the customers, but not really driving the overall business volume. But the important thing is that, you know, these smaller companies would grow over time, and when they grow over time, if they grow with our cloud, then it will be very profitable for us over time, over their lifetime.
That's why our cloud business actually focus on both ends, basically growing the number of customers that we have on the long tail, and at the same time supporting our existing customers so that they can grow their business volume, especially cross-selling them from IaaS to PaaS to SaaS. On the second question. I think in terms of the headcount growth, as you have mentioned clearly earlier, some of them are related to the acquired new subsidiaries, and this accounts for roughly, you know, 9,000 people.
On top of that, we do recruit, you know, new graduates from time to time, and there will be another, you know, 5,000-6,000, you know, on an annual basis. In respect of the areas in which we'll spend, you know, more or we have spent more are basically, you know, the business facing, you know, services, including cloud, including maps, including a lot of, you know, different, you know, business within the CSIG. We also do have some organic growth on our online gaming division.
As James has mentioned earlier, it's very hard to fight for talent, you know, especially in the online games area. We will invest, you know, furthermore on the online games part. The other thing is we'll invest in the content part, because beforehand, a lot of those head manpower has been subcontracted out.
But now we are trying to build up our own team of people, you know, in this area, so as to control the content, well, sort of, to control the content as well as doing a bit of content creation and things like that in order to control the overall quality of the content. Going forward, you know, I think we're not talking about, you know, growth about 30%, if 40%, you know, headcount growth on an annual basis, but it will be more moderate, you know, in 2022 at least.
Okay. Thank you. We are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website. The replay of this webcast will also be available soon. Thank you, and see you next quarter.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may all disconnect.