Thank you for standing by, and welcome to the Tencent Holdings Limited 2014 fourth quarter and annual results announcement conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press star one on your telephone to join the question queue. Your name will be announced when it is your turn to ask questions. If you wish to cancel your question, please press the pound or hash key. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chan.
Thank you very much, operator. Good evening. Welcome to our annual results conference call for 2014. I'm Catherine Chan from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and our non-GAAP measures, please refer to our disclosure documents downloadable on www.tencent.com/ir. Let me introduce the management team on the call tonight.
We have our Chairman and CEO, Pony Ma, President Martin Lau, Chief Strategy Officer James Mitchell, and Chief Financial Officer John Lo. Pony will kick off with a short overview, Martin will discuss strategic highlights, James will speak to business review, and John will go through the financials before we take your questions. I'll now turn the call over to Pony, please.
Okay. Thank you, Catherine. Good evening, everyone. Thank you for joining us. During 2014, we made significant progress in a number of strategic initiatives that reinforces our platform leadership and enhance our competitiveness. We achieved a major breakthrough in the following areas. In social, we built a vibrant ecosystem connecting users with a range of content and services through Weixin and QQ, supported by content partnerships and strategic investments. In games, we became the leading mobile games platform in China and reinforced our leadership in PC games with healthy growth. In media and advertising, we became the top mobile destination for news in China, and our video platform grew traffic and revenue over 100% year-on-year. In security, we expanded our market share of security software. In app store, Yingyongbao's market share reached 26% market share in China, up from 14% a year ago.
In payments, users bound over 100 million Weixin and QQ accounts to bank accounts, facilitating easy mobile payment. Our affiliate, WeBank, received a bank license, positioning us better cooperatively with existing banks in providing online financial services. At the same time as we focused on these strategic initiatives, we also achieved healthy financial results. For the fourth quarter of 2014, total revenue, excluding e-commerce transactions, was RMB 20.5 billion, up 50% year-over-year. Non-GAAP operating profit was RMB 8.1 billion, up 59% year-over-year. Non-GAAP net profit was RMB 6.7 billion, up 51% year-over-year. For the full year of 2014, total revenue, excluding e-commerce transactions, was RMB 74.2 billion, up 46% year-over-year. Non-GAAP operating profit was RMB 30.5 billion, up 49% year-over-year. Non-GAAP net profit was RMB 24.2 billion, up 43% year-over-year. Turning to our key platform metrics.
Total MAU for QQ was 815 million, within which smart devices MAU grew 33% year-over-year to 576 million. Weixin and WeChat reached a combined MAU of 500 million, up 41% year-over-year. Total MAU for Qzone was 654 million, within which smart devices MAU rose 30% year-over-year to 540 million. Our online games platform extended its lead on PC and mobile. For our media platforms, our PC portal and mobile news app combined made us the largest online news platform in China. We solidified our position as a top video platform with rapid traffic growth due to exclusive content and producing popular in-house programs. For our utility services, we enhanced our competitiveness in mobile security, mobile browser, and app distribution through improvement in core features. I now invite Martin to share with you our strategy highlights.
Thank you, Pony, and good evening, everybody. In 2014, we launched our connection strategy that uses Weixin and QQ to link appropriate content and services to users' everyday lives, and thus expand the scope of our opportunities.
We believe we are very well-placed to execute this connection strategy because firstly, our platforms are leaders on the mobile internet, which is much more closely tied to daily life than the PC internet. Secondly, hundreds of millions of users logged into our platforms every day, sharing content with their friends. Thirdly, our users come back to our platforms repeatedly throughout the day. Fourthly, our partnerships really allowed us to deeply integrate with best-of-breed providers of relevant content and services. As a result, we believe this connection strategy would benefit users, our partners, and Tencent. Users can benefit because they can access a rich mix of content, services, and transactions with a unified login and integrated payment solution. Our partners can benefit from connecting to our users through our platform targeting capabilities and benefit again from our users recommending their products and services virally to each other.
Tencent benefits from deeper user stickiness, as well as expanded advertising and payment opportunities. A core part of our connection strategy is built around partnerships. During 2014, we built out a range of strategic partnerships, adding valuable services and content for our users. On the investing side, we believe that providing the best e-commerce and offline-to-online experiences frequently requires deep domain knowledge as well as large and specialized workforces. As a result, we have invested in a number of companies that possess these attributes, including JD.com, Wuba, Dianping, Didi Dache, and others. We contribute to our investee companies' success by introducing them to new users, helping them managing existing user relationship using our CRM tools, and also facilitating transactions via our payment solutions.
On the content side, we believe that the value of strong IP content is appreciating over time as consumers become more discerning and piracy become less widespread. Because of our large user base and our long-term dedication to IP protection, we are a partner of choice for content providers. During 2014, we have formed exclusive relationships with a range of brand name IPs including NBA, HBO, The Voice of China, Warner Music, Sony Music, as well as a number of key online games. By tapping our partners' resources for key e-commerce, O2O, and content, we can actually focus Tencent's resources on developing a selected set of owned and operated platforms. This renewed focus allowed us to gain significant traction in some competitive product areas.
For example, in the video area, our expanded IP catalog, together with internally produced content, coupled with better use of our mobile distribution capabilities, have accelerated our user growth. In January of this year, we became the most popular mobile video service in China by daily active users. For online reading, we have pooled the resources of several destination sites to create a unified platform for literature and book content. This platform enjoys multiyear exclusive relationship with a large number of leading authors to provide a healthy content pipeline. Our Android app store, Yingyongbao, increased its market share from 14%-26% in one single year, benefiting from its role as a central destination for app downloads for our own and our partners' services.
Our mobile security manager has been increasing its market share consistently and has emerged as the preferred software for providing security to handset manufacturers as well as third-party app stores in China. In addition to this, creating a more vibrant ecosystem also yields more opportunities for our advertising business. We provide an unparalleled range of online advertising venues in China, with particular strength in mobile, video, and social. We believe we are the largest online brand advertising platform in China, and during 2014, we extended our leadership from PC portal to mobile news app. Our video ad business has enjoyed rapid growth, gaining market share, and also gaining major FMCG as significant advertisers. Our Android app store represents an opportunity for future growth with application advertisers. We also introduced cost per action ads in Yingyongbao last November.
In the area of social, we have rapidly grown newsfeed ads in Mobile QQ Zone and WeChat official accounts during 2014. We started to test launch the first feed ads in WeChat Moments in early 2015. Not only that, a vibrant ecosystem also supports our online payment activities. During 2014, our users bound over 100 million WeChat and Mobile QQ accounts to bank accounts, facilitating easy and secure mobile payment. WeChat Pay and QQ Wallet are relatively new consumer-facing mobile payment solutions utilizing Tencent's long-established payment infrastructure. While our own products, such as mobile games and subscriptions, drive new bank account bindings at a very rapid rate, we are progressively adding new use cases to stimulate ongoing engagement, such as charging phone cards, paying utility bills, conducting e-commerce transactions, making hospital appointments, and many others. In February, we repeated our New Year red envelope promotion.
During this period, over 150 million users participated in sending and receiving red envelopes, up more than 15 times compared to last year. Activities such as the red envelope promotion demonstrate the ubiquity and scalability of our payment solution, attract new payment users, and also provide fun experiences to existing users. Payment will help us to facilitate more transactions, increase advertising conversion, and build a gateway for future online finance initiatives. With that, I will pass to James to talk about the business review.
Thank you, Martin. In the fourth quarter of 2014, our total revenue grew 24% year-on-year. Excluding e-commerce transactions, our revenue grew 50% year-on-year. VAS represented 82% of revenue, within which Online Games contributed 57% and Social Networks 25%. Online advertising represented 12% of revenue. For the full year 2014, our total revenue grew 31% year-on-year, and excluding e-commerce transactions, our revenue grew 46% year-on-year. Looking at Value-Added Services, segment revenue was RMB 17.1 billion, up 44% year-on-year and up 7% quarter-on-quarter. Social Networks revenue was RMB 5.2 billion, up 50% year-on-year and up 10% quarter-on-quarter. The year-on-year and quarter-on-quarter growth rates were driven by sales of in-game items and subscription for mobile privileges and for premium entertainment content. Online Games revenue was RMB 11.9 billion, up 41% year-on-year and up 6% quarter-on-quarter. smartphone games and monetization of our popular PC games drove the year-on-year growth.
Sequentially, mobile game revenue benefited from new games, expansion packs, and adoption of gross revenue recognition, while PC game revenue was impacted by adverse seasonality. For the full year 2014, our VAS revenue was up 41% year-on-year. Digging into Social Networks. For Mobile QQ, we upgraded technology for voice and video chat, improving call quality and stability, which resulted in voice and video calls increasing over 300% year-on-year. We improved file sharing between PCs and mobile devices, and file transfers on our platform more than doubled year-on-year. We built out our O2O ecosystem, integrating 58.com's local city service listings with Mobile QQ, which contributed materially to 58.com's mobile traffic during the period. We introduced money management options and improved security features which drove higher adoption of QQ Wallet.
For Weixin, partly to generate advertising revenue, the owners of official accounts produced better and more content for users, which contributed to rapid growth in official account page views. A new, simpler-to-use HTML5 web development kit facilitates more businesses creating more powerful official accounts. We enabled offline merchants to carry out marketing and interact with users inside their shops through Weixin's Wi-Fi alliances. We broadened the scope of in-app search to include friends posts from Moments and nearby restaurants from Dianping's network. Moving to PC client games. For advanced casual games, our average concurrent users grew 22% year-on-year to 7.3 million. League of Legends in China benefited from user growth and enhanced sales of in-game skins. In the sports genre, FIFA Online 3 was the most successful new PC game in any category launched in 2014 in China.
In shooting games, we're diversifying our portfolio to meet changing user preferences. In addition to CrossFire, we operate Assault Fire, which is the most successfully domestically developed shooting game, and we recently commenced larger scale beta testing of Call of Duty Online. Our advanced casual game pipeline includes the military-themed shooter, War Thunder, the science fiction themed shooter, Metro Conflict, battle arena game, Smite, and tower defense game, Orcs Must Die! The massively multiplayer online games average concurrent users were 1.6 million, down 36% year-on-year against a high base period due to the launch of Blade & Soul in fourth quarter 2013. Despite the decline in average concurrent users, massively multiplayer online game revenue moderately increased year-on-year due to monetization initiatives and new products.
We believe there's an industry-wide tendency for some MMOG users to shift their playing time away from role-playing games and toward advanced casual games because of more innovation within the advanced casual game genres. Our response is to launch what we hope are more innovative MMOGs, which we believe can reignite user enthusiasm. Our pipeline includes ArcheAge, a 3D medieval fantasy MMO, Moonlight Blade, an in-house martial arts MMO, and Monster Hunter Online, a co-op player versus monster game based on Capcom's best-selling Japanese game series. For smartphone games integrated with Mobile QQ and Weixin game centers, revenue recognized gross of revenue sharing with third-party developers and related channel costs was RMB 3.8 billion, up 416% year-on-year and up 26% quarter-on-quarter. Historically, we reported revenue for smartphone games net of channel costs and net of developer revenue share.
In the fourth quarter, we changed to recognize such revenue on a gross basis as a result of us becoming the principal rather than the agent for a number of our exclusive smartphone game licensing contracts due to changes in the cooperation models under which we operate those games. Under the gross basis, our reported revenue is now gross of channel costs, such as the iOS App Store revenue share, and gross of developer revenue share for third-party smartphone games. This change increases our smartphone game revenue and costs but does not impact profit. We believe the change brings us into line with general industry practice. On the prior net reporting basis that we used to use, our smartphone games revenue was RMB 2.9 billion, up 12% quarter-on-quarter. Operationally, during the quarter, we extended our presence from casual to mid-core titles, launching 12 mid-core games.
Several of these mid-core titles topped China's iOS App Store revenue ranking. "The Blade of The Three Kingdoms," an action game, was number one in the revenue ranking in November. "The Legend of Sword and Fairy," a role-playing game, was number one in December, and I am MT 2 a strategy card game, was number one in January. We have expanded our success in the shooting genre from PC to mobile with a self-developed mobile shooting game, "WeFire," which ranked number one in February on the iOS App Store revenue ranking. Turning now to online advertising, segment revenue was RMB 2.6 billion, up 75% year-on-year and up 8% quarter-on-quarter. Brand advertising revenue was RMB 1.5 billion, up 62% year-on-year and down 2% quarter-on-quarter. Rapid growth in mobile and video traffic drove the year-on-year revenue increase.
Our brand advertising revenue dipped slightly quarter-on-quarter due to weak seasonality and to the non-recurrence of "The Voice of China Season 3" TV program and the FIFA World Cup soccer event. Our top five advertiser industries were transportation, food and beverage, online services, real estate, and personal care. Our performance advertising revenue was RMB 1.1 billion, up 98% year-on-year and up 24% quarter-on-quarter. The year-on-year growth benefited from increased impression volumes on our mobile social platforms and higher cost per click. The quarter-on-quarter growth flowed from more advertisers and from more advertising activity, notably on the Weixin official accounts. On a full year basis, our advertising revenue increased 65% year-on-year. For brand advertising, our overall video views and video ad revenue more than doubled year-on-year.
We secured exclusive broadcast rights for NBA matches, HBO TV series, and "The Voice of China Season 4," amongst other high-profile content. Our own in-house productions became more popular. For example, we have commissioned a second season of our widely watched self-produced TV drama, "The Death Notice." For our news platform, page views of our mobile news app and news plugin for QQ and Weixin doubled year-on-year, which led to a more than doubling of our mobile news ad revenue. The performance display, more effective targeting, and new mobile ad formats attracted more advertisers. In recent months, we've been testing cost per action-based ads in our App Store rankings. As Martin mentioned, we're now testing feed ads from selected advertisers in Weixin, which have generated enthusiastic initial advertiser and consumer responses.
Consistent with the strategic transition of our e-commerce business, our e-commerce transactions revenue was down 87% year-on-year and down 3% quarter-on-quarter to RMB 446 million. We believe we'll now benefit from the growth of e-commerce in China more efficiently than in the past. First of all, we possess equity stakes in category leaders such as JD.com, Koudai Gouwu, and Meilishuo, which we believe may appreciate in value over time as e-commerce activity grows. Second, e-commerce companies are the biggest industry category contributing to our performance advertising revenue. Now I'll pass on to John to walk you through the financials.
Thanks, James. For the fourth quarter of 2014, our total revenue was RMB 21 billion, up 24% year-on-year or 6% quarter-on-quarter. Gross profit was RMB 12.6 billion, up 44% year-on-year and flat sequentially. Operating profit was RMB 7.4 billion, up 56% year-on-year or down 2% quarter-on-quarter. Income tax expenses were RMB 892 million, up 10% year-on-year and down 36% quarter-on-quarter. The year-on-year increase was primarily due to higher pre-tax profits, higher withholding tax, partly offset by tax reversals recorded for certain subsidiaries in China that qualify for lower corporate income tax rates. Lower income tax expense quarter-on-quarter mainly reflect the tax reversals. Effective tax rate for the quarter was 13%. Net profit attributable to shareholders was RMB 5.9 billion, up 50% year-on-year or 4% quarter-on-quarter.
GAAP diluted EPS was RMB 0.625 for the quarter. For the full year of 2014, total revenue was RMB 78.9 billion, up 31% from 2013. Gross profit was RMB 48.1 billion, up 47% from 2013. Operating profit was RMB 30.5 billion, up 59% from 2013. Net profit attributable to shareholders was RMB 23.8 billion, up 54% from 2013. GAAP diluted EPS was RMB 2.545 for the year. On a non-GAAP basis, operating profit for the fourth quarter was RMB 8.1 billion, up 59% year-on-year or down 2% quarter-on-quarter. Net profit attributable to shareholders was RMB 6.7 billion, up 51% year-on-year or 5% quarter-on-quarter. Operating margin was 38%, up 9 percentage points year-on-year, or down 3 percentage points quarter-on-quarter. Net margin was 33%, up 6 percentage points year-on-year and flat quarter-on-quarter.
Diluted EPS was CNY 0.717 for the quarter. For the full year 2014, non-GAAP operating profit was CNY 30.5 billion, up 49% from 2013. Non-GAAP operating margin was 39%, up 5 percentage points from last year. Non-GAAP net profit attributable to shareholders was CNY 24.2 billion, up 43% from 2013. Non-GAAP net margin was 31%, up 3 percentage points from last year. Let's turn to segment gross margin. Gross margin for value-added services was 64%. On a gross-to-gross basis, it was down 3 percentage points year-on-year and was broadly stable quarter-on-quarter. The lower gross margin year-on-year was primarily due to increased revenue-sharing costs from a larger mix of third-party smartphone games. Gross margin for online advertising was 40%, up 8 percentage points year-on-year and down 12 percentage points quarter-on-quarter.
The higher gross margin year-on-year primarily resulted from lower margin in the fourth quarter of 2013 due to one-off impact of accelerated amortization of video content costs, as well as new revenue contribution from JD.com in the fourth quarter of 2014. Gross margin was lower quarter-on-quarter, mainly due to increases in revenue-sharing costs and video content costs. Gross margin for e-commerce transactions was 41%, up 36 percentage points year-on-year and 16 percentage points quarter-on-quarter. The improved gross margin flowed from Yixun gradually moving to marketplace model. For the full year 2014, gross margin for value-added services was 67%, and on a gross basis 66%, same as prior year. Gross margin for online advertising decreased 1 percentage point to 44%. Gross margin for e-commerce was stable at 6%. Moving on to operating expenses. Selling and marketing expense was CNY 2.1 billion, up 1% year-on-year and 8% quarter-on-quarter.
The year-on-year increase mainly reflected higher advertising spending on our products and platforms such as Weixin Pay and online games, largely offset by lower promotional expenses for WeChat and lower advertising and fulfillment expenses relating to our e-commerce transaction business. The sequential uptake resulted from seasonally greater advertising spending on our products and platforms, such as our mobile payment solution and online games. G&A expense was CNY 3.9 billion, up 44% year-on-year, or 5% quarter-on-quarter. This was primarily driven by increases in R&D expense included under G&A. R&D expense was CNY 2.1 billion, up 66% year-on-year, or 7% quarter-on-quarter. As a percentage of quarterly revenue, selling and marketing expense was 10% and G&A 19%. R&D represented 10% of quarterly revenue. Share-based compensation was about 3% of quarterly revenue.
On a full year basis, selling and marketing expense was CNY 7.8 billion, up 37% from 2013 and represented 10% of annual revenue. G&A expense was CNY 14.2 billion, up 42% over 2013 and represented 18% of annual revenue. R&D expense was CNY 7.6 billion, up 49% from 2013 and represented 10% of annual revenue. As at quarter end, we had approximately 27,700 employees, up 1% year-on-year and 5% quarter-on-quarter. The sequential increase was primarily because we included headcount of the newly acquired online literature business and new hires to support business growth. Looking at margin ratios for the fourth quarter. Gross margin ex e-commerce was 60.7%. On a gross-to-gross basis, it dipped 1.7 percentage points year-on-year and 2.3 percentage points quarter-on-quarter. The year-over-year decrease in gross margin was mainly due to increased revenue-sharing costs from a larger mix of third-party smartphone games.
Sequentially, gross margin declined primarily due to increase in revenue-sharing costs on smartphone games and Weixin official accounts advertising and video content costs. Non-GAAP operating margin ex e-commerce was 38.4%. On a gross-to-gross basis, it was up 2.7 percentage points year-on-year and down 2.6 percentage points quarter-on-quarter. Higher margins year-on-year was mainly due to a decline in selling and marketing expense as a proportion of total revenue, partly offset by lower gross margin. The sequential decline was primarily because of lower gross margin. Non-GAAP net margin ex e-commerce was 32.4%. On a gross-to-gross basis, it is up 1.1 percentage points year-on-year and 0.4 percentage point quarter-on-quarter. The higher net margin year-on-year was mainly due to higher operating margin. The quarter-on-quarter increase in net margin was mainly due to lower effective tax rates as a result of tax reversals that more than offset the different operating margin.
For 2014, basic EPS was up 52% year-on-year to RMB 2.579, and diluted EPS was up 53% year-on-year to RMB 2.545. Non-GAAP basic EPS was RMB 2.624, and diluted EPS was RMB 2.589. Both increased by 42% from last year. Subject to the approval of shareholders at the annual general meeting to be held in May, we are proposing an annual dividend of HKD 0.36 per share. This is 50% above last year's dividend, and the payout ratio is stable at 11%. For the fourth quarter, total CapEx was RMB 1.6 billion, down 5% year-on-year or up 51% quarter-on-quarter. Operating CapEx was RMB 592 million, down 35% year-on-year and 1% quarter-on-quarter. Non-operating CapEx was RMB 1 billion, up 33% year-on-year and 120% quarter-on-quarter. Free cash flow reached RMB 9.2 billion, up 76% year-on-year and 32% quarter-on-quarter.
Our net cash position at year-end was RMB 22.8 billion, down 37% year-over-year or up 7% quarter-over-quarter. Year-over-year decline in net cash was mainly due to strategic investments, partly offset by increase in free cash flow generated during the year. The fair market value of our listed associates and available-for-sale financial assets were RMB 60 billion as at quarter-end. This concludes our presentation. Thank you.
Thank you. Operator, we shall open the floor for the questions.
Thank you. 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 cancel your request, please press the pound or hash key. Your first question comes from Erica Poon from UBS. Please ask your question.
Hi. Thank you, management, for the presentation. I've got two questions. The first question is on the Moments advertising. I understand you've started the beta testing in January. If you can just give us a little bit of feedback, how that's been going and when do you expect to launch it officially, and do you have any targets in terms of the overall revenue expectation? Secondly is, if you can go through some of the cost, how much you've spent in 2014 for video content, some of the subsidies for your O2O initiatives, and also your international expansion of the WeChat, and what is the trend for 2015? Thank you.
Okay. I will take a stab at the first question. In terms of Moments advertising, we actually just started to test launching the service. So far, we have only had around 10 advertisers. The objective of the testing is really for us to figure out the consumer response and also an interaction with the advertisers so that we can keep honing on the system. We believe Moments is important venue for advertising because it has a very significant traffic. At the same time, because it is such an important part of people's engagement with us, we want to do it in a very careful way. We want to make sure that the advertising itself is of high quality.
We want to make sure that the analytics are used correctly so that we match the right advertising to the right users, and the format of the advertising is actually presented in the right way. Also, we want to make sure that the social viral mechanism is actually designed in the right way so that you can, on one hand, maximize the exposure, but also at the same time, do not allow for a spamming of the users. I would say the initial response of the Moments advertising is actually positive from the user's perspective. The advertisers are extremely positive because they get a very focused audience. At this point in time, we believe that it is a good start. We will continue to refine the various components of our overall system, and gradually increase the number of advertisers to be introduced to this program.
I think that is our plan. We believe that it carries a very significant opportunity over the long run. Because of that, we want to do it in the right way, and we will do it in a step-by-step manner. In relation to the Weixin advertising, we actually do have another venue for advertising, which is advertising within the official account. I think on that front, the scale is actually bigger because what we want to do is actually we want to have more advertising dollars spent on the official accounts so that we have more revenue to be shared with the official accounts, and that would act as an inducement for official accounts to be more active and to put in better content. That initiative has been actually underway quite nicely, and we have seen a win-win-win situation among the content providers, the advertisers, and ourselves.
I will pass to James to talk about the costs.
Yes. I think you're asking about the costs related to WeChat international marketing, O2O initiatives, and video content. In general, we don't give very specific numbers, so I apologize for that in advance. To give you some context, with the WeChat international marketing, we spent very aggressively in 2013 on TV marketing, primarily. In 2014, we reduced that spending very substantially. As we look into 2015, you should expect that spending to remain relatively well controlled. The focus now is less about TV marketing for the core WeChat app, that we think has limited effectiveness in most markets, and more about developing adjacent applications and services that will enable WeChat outside China to enjoy some of the similar ecosystem benefits, and therefore differentiation versus competitors that Weixin has enjoyed inside China. With regards to O2O initiatives, that was a large and relatively volatile spending during 2014.
As we look into 2015, O2O is a priority. We'll continue to invest against it, but the spending may be somewhat opportunistic and somewhat lumpy, as it was in 2014. Finally, on video content, we dramatically increased our video content spending from 2013 to 2014. We're extremely happy with the results, both in terms of traction on the traffic side, and as Martin mentioned, we recently became the number 1 in China in terms of mobile video views, and also in terms of the revenue. You can see that our video advertising revenue has more than doubled year-over-year, every quarter now for over a year, despite the base getting bigger and bigger. As a result of our happiness with past success, we're continuing to smoothly increase our video content spending into 2015.
That buys us key content such as NBA basketball matches exclusively, HBO series exclusivity, Voice of China 4 exclusivity, our self-produced programs, and so on and so forth. You should expect us to continue reinvesting aggressively in video content as our video advertising revenue grows.
Next question please.
Thank you. Your next question comes from the line of Natalie Wu from CICC. Please ask your question.
Hi, good evening, management. Thank you for taking my question. I have two questions. The first one is, just wondering, how would you promote your mobile advertising business, especially on those location-based advertising in the future? Will you recruit extra offline sales force for this business? I'm wondering, how would advertising business affect your margin in the future? As we know that there is some profit-sharing scheme regarding your advertising revenue from official accounts, just wondering if this revenue is recorded on gross basis or net of revenue sharing to the official accounts owners. Thank you.
Okay. In terms of the promotion of mobile advertising, it's true that the number of advertisers is actually a very important component of the overall advertising business for performance-based advertising. Now, having said that, what we want to do is actually, if you look at our description of our connection strategy, that we do want to build an ecosystem of services around our high-frequency app, such as Mobile QQ and Weixin. It's actually with a lot of the partners who can actually bring in advertisers. If you look at, for example, e-commerce advertisers, we have JD and some other partnership who can actually, through their open market platform, bring in a large number of advertisers. We have a partnership with Dianping. We have partnership with Wuba, who have access to millions of O2O merchants, and these are all potential advertisers on our platform.
I think for us, it's actually very important to build an ecosystem so that we can leverage on the very specialized sales force that each one of these partners actually bring in, so that we don't have to build as many of the sales force ourselves. At the same time, when we actually can build a very large user base of our payment solution, then we can have our partners. The partners bring in services, the partners bring in advertisers, and we can actually help them to complete transactions within our ecosystem. That would help us to build a very conducive advertising ecosystem in a relatively high leverage, less human-intensive type of fashion. I'll pass to John to talk about the revenue share.
In terms of the revenue recognition of Weixin official accounts advertisement, basically we would book it on a gross basis.
Okay. Thank you. Next question, please.
Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.
Hi. Good evening. Thank you for taking my questions. I have two questions. The first one is more about your strategy. As you mentioned, you have been working more closely with some of your partners. Just wondering, in the long term, how could that affect your opportunities in working with other companies, perhaps also in a similar industry as your partners? That's my first question. Secondly, just a housekeeping question. I wonder if you could share with us the ARPU trend of your different types of games. Thank you. I will get back to the queue.
I think on the strategic front, we do have partners, I think by and large, our platform is an open platform, which actually can support different types of partnership. In some cases, we have basically just a commercial relationship. In some cases, we don't even have a relationship, but we provide the API and some of these partners basically just put their content, put their services on our platform. In some cases, we actually make investments in some of the, I would say, more significant partners. I think in those areas, usually, we make investment in the best-of-breed vertical. These are the market leader within their respective market segment. At the same time, we don't necessarily focus on, oh, we got to help them to gain competitiveness by disabling other people.
What we usually do is actually we sit down together and brainstorm on what are the things that we can do together to leverage our platform better, so that they can actually find their new users, or they can actually manage relationship with their existing users on a more frequent basis, and that they can leverage our infrastructure to spread their already very good word-of-mouth effect more prominently. I think it's actually more of enabling rather than disabling others.
In relation to the ARPUs, for MMOG, quarter ARPU is within RMB 295-RMB 395. For ACG, RMB 95-RMB 235. In relation to smartphone games on Weixin and QQ, on a gross basis, it's within RMB 155-RMB 165. In order to give you a better idea as to the comparative figures, for quarter three, if we treated on gross basis, it would have been RMB 120-RMB 130 per quarter.
Thank you. Your next question comes from the line of Alex Yao from J.P. Morgan. Please ask a question.
Hi, good morning, everyone. Thank you for taking my question. The first question is about your digital content strategy. Can you share with us the rationale of prioritizing the broad digital content investments in 2015? Secondly is, regarding the red envelope campaign you guys did in the Q1, what could be the financial impact? Are you guys going to incur some part of the sales modeling expense in 1Q in regard to this campaign? Thank you.
Maybe I'll start on the digital content strategy and why we're executing it in 2015, and then Martin can take over for the red envelope. With digital content, we've been relatively active in certain formats of digital content, such as games, music, for many years already. It's fair to say that in the last few months, that there's been a step change in the intensity of our focus and investment in digital content. Some of the contributing factors would be fairly obvious. That would be belief that consumers are increasingly desirous of consuming content, be it music on their smartphone rather than music on a Walkman, be it video on their tablet rather than video on a traditional TV device, and so forth.
A second reason is that we think the content suppliers are increasingly focused on tapping into an online audience and customizing their content for an online audience. A third, more immediate reason is that we see some signs that the attitudes toward piracy are changing quite quickly, and that's both at a regulatory level, at a legal level, and also at a consumer level. Given all of the above, we believe we have a platform that's already proven with games, with news, with music, that it can be a very powerful force for distributing the best content to the most users in the most interesting ways.
In terms of red envelope, we are going to incur certain expenses in relation to the promotion because we did put some advertising. We did put some of our own marketing dollars and digital items and things like that into the red envelopes. I would say that's only the first layer of value for the users. The next layer is actually, we invited a lot of merchants to participate in this red packet, red envelope program, so that there are different merchants who have put in either cash or cash coupons and discount coupons, so that forms the next layer, the second level of value for the users. What happens is, a lot of users actually put in red envelope for the other users, right? It's users money going around the system.
If you look at the ratio of 1st versus 2nd, versus 3rd level, it's actually 1 to 10 to 100 in that rough range. There's a vast magnifying impact of our investments, pulling in a lot of merchants and then the revenue also gets a lot of users to participate in a C2C way. That's why the impact of the red envelope, that comes from somewhat investment from us is actually much more magnified.
Thank you. Your next question comes from the line of Dick Wei from the Credit Suisse. Please ask the question.
Hi, thanks for taking my questions. My first question is on WeChat Moments advertising. Understand that Martin mentioned some of this initial feedback. Wonder any more color in terms of maybe the launch plan this year as well as maybe some of the ad formats such as like apps download type of format, then I have a follow-up. Thanks
I think right now we do not have a definitive launch program that we want to announce. Right now, what we're doing is we are doing a lot of data collection based on the initial launch of this app test. We are formulating the next steps as we collect and analyze these data. We don't want to go out and make a commitment on this launch plan as yet. We believe that, as I said, this is a very large, long-term opportunity, and I think it's probably worth the waiting to make it more perfect.
Got it. Then two housekeeping questions quickly. First of all, is that the deferred revenue is up by 10% quarter-over-quarter for the current portion. Wonder how should I read that increase? Maybe secondly is that, wonder if you can share with us the gross revenue for mobile games in second quarter and third quarter. I got the third quarter gross mobile game revenue around RMB 3.3 billion. I am not sure if that is correct. Thanks.
Okay. In relation to the deferred revenue, actually, if you add the current plus the non-current, it increased by about 5%. If you exclude the deferred revenue attributable to the JV related with [eCommerce traffic] , actually it increased by about 8%. I think for a normal season like that, we assume that the increase of about 8% is considered to be higher than other times due to the fact that some of the games we did quite a bit of promotion. However, those games are in relation to games that we need to amortize the items for a period of nine to 12 months rather than six months or four months. Basically it stack up quite a bit this quarter.
The gross revenue, Xueting.
All right. I think the gross revenue for 2Q-
Maybe just third quarter.
Yeah. The third quarter. Yeah, third quarter it's about.
Three quarter.
Why don't we come back and then John will check. Okay. Next question. We'll come back to you.
Thank you.
Thank you. The next question comes from the line of Chi Tsang from HSBC. Please ask a question.
Good evening. Thanks so much for taking my questions. I wanted to ask you a question on smartphone gaming. The note was up about 11%-12% Q1 to Q on a normalized basis. I'm wondering how we should be thinking about smartphone gaming this year in terms of revenue pace. Secondly, I wanted to ask you about Weixin payment. 100 million user accounts is a very large number. I was wondering if you can give us a sense of maybe some of the characteristics in terms of average spend frequency. Any sort of color would be helpful. Thank you.
I'll answer on smartphone game revenue as best I can, and then hand over to Martin for the payment bindings, which we said is over 100 million. On the smartphone game revenue, I think that mathematically, it's extremely likely that the pace of growth for the industry and for us within the industry should be slower in 2015 than it was in 2014, just because in 2014, we were moving from a very tiny base to a bigger number, whereas 2015, we're starting off a bigger number. I think that said, we felt to achieve low double-digit sequential revenue growth from smartphone games in Q4 was a reasonable achievement. We also felt that more importantly, we were executing our strategic objective, which is to enrich the mix of mid-core games and enrich the mix of third-party games within these smartphone games that we publish.
As I mentioned in the prepared remarks, we had the number one revenue game in the App Store in each of, I think, November, December, January, and February. Each month it was a different number one game, but each month it was a mid-core game published by us.
Looking forward, the number of people playing smartphone games in China is already huge. It's more than double the number of people playing PC games. That number of users will probably incrementally increase as more consumers get smartphones. We think the bigger variable is whether the number of smartphone game genres, which historically has been very limited, expands. Right now there's a disparity between people playing relatively few types of games on smartphone versus a relatively wider range of games on PC. If more of those PC game genres successfully make the transition to smartphone, it's likely that they will also be successful in driving up the conversion from free to paying users and, to a lesser extent, enhancing the ARPU of the paying users.
To put this in concrete terms, we were quite excited about the success of Tian Tian Tu Ji or WeFire because historically, shooter games have not made the transition to smartphone. That game does seem to be a relatively successful shooter game on smartphone so far. Overall, we think the smartphone game industry is entering a period of more healthy growth after the unusually rapid growth and the early downturn that we experienced in the first three quarters of 2014.
In relation to the platform games revenue on gross basis for quarter three, it would be around RMB 3 billion. For quarter four, it's around RMB 3.8 billion. You can see that the increase is 20-something%. The quarter three channel cost plus the sharing will be grossed up by about RMB 430 million, whereas for quarter four, it has been grossed up by about RMB 900 million. Thank you.
Well, in terms of Weixin payment, we talked about there are over 100 million accounts that have already been sort of bank account enabled. The number has gone up quite a bit after the Red Envelope promotion during Chinese New Year. I would say that the characteristics of these bound accounts is that typically the users actually sort of use this more frequently compared to sort of the PC counterpart, because it's almost like a wallet that stick to them on a constant basis. There are actually more payment potential. In relation to that, we actually have been trying to add more payment use cases along the way. The first wave of that was really sort of digital items.
It's our games, it's our QQ Coin, but over time, we also sort of add in a lot of quasi digital payment instances, such as cellphone top-ups, such as donation to a whole range of charity organizations. These are all activities which are sort of very easy to do over your cellphone. The second category are really sort of C2C or social activities, such as people sharing a meals bill and people transferring money as well as Red Envelope. These all fall into this category. The third category is sort of e-commerce activities. By partnering with JD and other companies, we actually allowed e-commerce activities to happen within our network, and as a result, that also add to the activity of users. Finally, it's a whole range of O2O services.
You can see people buying group buy coupons, people sort of paying for all sorts of O2O type of services. We also see some people starting to use it offline. For example, if you go to a convenience store, you could use a Weixin payment or QQ Wallet in some instances. We felt that there will be more and more use cases that we'll add, and with a larger and larger number of users, it will also attract more and more merchants to adopt our mobile payment solution. We do envision a scenario in the future that sort of a large number of users will be bonded to our bank cards, and as a result, that would actually open up a big opportunity for us around the entire ecosystem as part of our connection strategy.
Thank you. Your next question comes from the line of Alan Hellawell from Deutsche Bank. Please ask your question.
Thank you very much. Two quick questions. We're obviously aware of the growing success of mobile commerce on Weixin and mobile QQ, largely through the cooperation with partners such as JD.com. It seems as though conventionally defined C2C mobile commerce also seems to be growing very fast, and there's even an entire sub-segment of venture investing focused on enabling C2C on platforms such as Weixin. Just wondering, are you in a position yet to estimate how much C2C GMV might be occurring on Weixin and QQ Mobile, and maybe at what pace it is growing? My second question is, I'm just wondering, should we expect many innovations and new products to flow from the recently secured banking license this year? I was hoping you might be able to more specifically characterize these plans. Thank you.
In terms of C2C commerce, it's true that there are more and more such activities happening on our mobile QQ and WeChat. We can't quantify it at this point in time because there's not a central repository for these transactions, but our feeling is that it's actually already quite substantial. In the past, if somebody had a flower shop and they received orders by taking a call, now some of them actually can sell over our applications. These are hard to quantify, but clearly, when we did the transaction with JD.com, we said the centralized and open platform e-commerce activities, we're going to do it with JD.com. In terms of just facilitating this overall C2C type of decentralized e-commerce activities, we'll continue to explore.
Over a year, I think we're seeing more and more of such activities happening. In the future, what we see is there will be more e-commerce activities happening over our platform. Hopefully, that would actually help us to nurture a bigger advertising business, and it would also give rise to more use cases for our payment solution. In terms of Sorry to interrupt. Go. Yeah, in terms of Go ahead the WeBank license, we got the license last year. We are targeting to open a door in April. I think we are still on track to do that. I think initially, even after it opens door, there will be a lot of testing of some innovative products.
I think the positioning of this WeBank is that on the consumer-facing end, it will be targeting consumers as well as small enterprises who are underserved by traditional banking because it's tougher to find out who they are, where they are, when they need credit. At the same time, when you get them, if they want uncollateralized credit, it's tougher to price their risk. We hope that WeBank can actually leverage a whole host of technology as well as our consumer reach to reach these people, and also help to price the risk at an attractive level. On the back end, WeBank is going to work with existing banks. It's not going to go out and raise a lot of deposits because that would, one, be very heavy in terms of the business model. Two is it would require a lot of capital.
The more deposit you take, the more capital you take. That's the more traditional bank model. Instead, what we characterize WeBank as really a bank cooperation platform with banking license. Because of the banking license, we can actually be part of the network and offer different types of services. On the other hand, it would actually strive to work with existing banks so that once they generate these credit needs, they can actually work with the banks to provide for these credit needs. Okay. Next question.
Thank you. Your next question comes from the line of Cynthia Meng from Jefferies. Please ask your question.
Thank you, management. I have two questions. One is a housekeeping question first. Management mentioned that casual and mid-core and hardcore game players accounted for 21%, 45% and 34% of Tencent gamer base in the first quarter last year. How does this compare to the current mix? That's the first question. Second one is more generally speaking, for the full year, what would be the investment focus for this year? We have seen Tencent has made a lot of investments in the past two years. Is there some more color on 2015? That would be great. Thank you.
By investments, you actually mean equity investments?
Yes.
Okay. All right. I think in terms of the cost investments, marketing, I think James had already talked about content and promotion for payment and O2O. Now, in terms of equity investments, I would say we had a very big year last year. We actually invested in a large number of vertical players. That's really part of our overall connection strategy. If we want to do connection, we want to be able to work very closely with certain companies who we believe has got really the vertical domain knowledge and expertise. In a lot of cases, they have quite a bit of offline assets, be it sales force or distribution network in order for us to leverage. We have done a lot of that. I think in terms of looking at 2015, we'll continue to look for these partners.
Companies who have domain expertise, within industries that we felt clearly has potential for creating something along the line of what Pony said, Internet Plus. Internet Plus a certain industry, we can actually create a unique experience or more efficiency. When we find these partners who have these unique assets and expertise where we can bring value to particular vertical industry, we would make the investment. I would say a lot of them have been already found in 2014. In 2015, we'll continue to look for these opportunities. I think we may invest in content providers in order for us to have closer relationship. In the past, we have invest in game companies, in certain entertainment provision to companies, we'll continue to do that.
I think overseas, if we see companies which clearly have got the management team as well as a positioning within certain markets to do interesting thing, especially the things that we already have seen will work in China, we are very happy to make the investment, too. These are the areas of investment that we look at.
Thank you.
Thank you.
Operator, in the interest of time, we shall take the last three questions, please.
Certainly. Next question comes on the line of Wendy Huang from Macquarie. Please ask your question.
Thanks, management and IR team. I have some short questions. First of all, you just released the Weixin O2O solutions for the 11 industries. I wonder, does this mean Tencent may enter into another round of strategic investment in the offline partners? Associated with that, I think some of the Internet companies recently also started their investment in the hardware, including, I think, Alibaba's investment in Meizu. Will Tencent also consider similar kind of strategic investment? My second question is about your international expansion plan. I think, again, recently, we saw that Alibaba invested in the Snapchat. How will this change a global competitive landscape for WeChat? Can you share some updates on WeChat global expansion and footprint?
Wendy, I'm sorry. We will give two questions for each analyst. We'll take those two questions.
Okay. Sure.
Put you on the queue for a second round, if that's fine. Thank you.
Okay. Thank you.
Yeah. For O2O, I think in line with what we talked about as part of our connection strategy, we do want to connect users with many different industries through our platform. Whether we have to make investment in each one of these verticals, I don't think so. We would try to look for the ones that are most value-creating and the ones that has a unique vertical partner that's best of breed, and maybe the partner itself has got a very strong willingness to work with us. I think there are a lot of factors that go into an investment decision. Even without an investment, we have a lot of business partnerships which actually bring our platform to enable other companies to perform well. At the same time, we also have this open APIs where everybody can use.
I think that are different layers of cooperation that we can actually have with multiple partners. In terms of investment into hardware, I think we don't strive to become a hardware manufacturer. If you think about Tencent strategy, we want to be hardware agnostic. The strategy that we have is that actually creating the best application that actually can go with any hardware. As a result, we don't really look to profit from a piece of hardware or a brand of hardware. We want to work with all the hardware manufacturers. Different hardware manufacturers may have different needs. Some hardware manufacturers say, "Oh, I want to have a business relationship with you." Some of the hardware manufacturers will say, "Oh, would you mind actually putting in some money to help me fund certain project?" We're not completely against those ideas.
It actually help us to build a relationship with the hardware partner. We don't want to get into exclusive relationship with hardware because what we see as us being strong at is really providing a ubiquitous application that sits on top of all kinds of hardware that allows all users to use. In terms of international expansion plan, we have been actually investing in international companies for quite some time. Coincidentally, we actually are an investor in Snapchat in much earlier rounds. I felt we'll continue to look for unique opportunities. We look for opportunities in which there's a very strong management team, very clear business model, and a good product, and we will continue to make those investments.
To date, we have invested RMB billions outside of China, and a lot of them have yielded us pretty good results, and we'll continue to do that.
Thank you. Next question, please.
Thank you, Yoon. Second last question comes from the line of Alicia Yap from Barclays. Please ask your question.
Hi, good evening, management. Thanks for taking my questions. I have one question regarding the WeChat games. Can management share with us some analysis of the gamer profile? For example, how many of the 500 million MAUs are gamers? And are those playing your new mid-core games this quarter, were those also playing your casual games in the beginning? Given they are playing all these games, are they no longer playing the earlier games? I just wanted to get a sense, for example, on average, how many numbers of games per each active gamers are playing for a given time? And have you seen any migration from your PC gamers to the smartphone games? And quickly on the web games, just because a number of the peers are seeing some slowdown on the PC web games, wonder whether Tencent has seen any of this.
Can you give any color? Thank you.
I think on the web games side, you're right that the industry has experienced some pressure. Our own web game business has actually been doing fine, partly because of some big new hits, such as the Naruto game based on the Japanese ninja IP that some of you may know. Frankly, web games is a relatively smaller proportion of our game revenue than it is for some of our listed peers. With regards to the user profile of mobile games, just to speak at a very general high level, as a gross generalization, those people who were playing PC games a year ago have started playing mobile games as well as PC games. They typically do so at different times of day and for different game session lengths.
There's a wider number of people who weren't playing PC games, who are going sort of direct to mobile games as well. When we look at the evolution of the gamer behavior in recent months, then again, as a gross generalization, those gamers who were, let's say, playing harder core games on PC and casual games on mobile might now be sampling some of the mid-core games on mobile as well. That's sort of enriching the activities on mobile. Obviously, over time, we would like some of those people who have gone direct to mobile to play mid-core games, but in the near term, the bigger opportunity is sort of replicating on mobile the behaviors that already exhibited on PC.
Thank you. Your last question for the night comes from the line of Jin Yoon from Mizuho Securities. Please ask your question.
Hi, thanks for taking the question. I'm Miranda Zhuang. I'm sitting on behalf of Jin Yoon. I want to ask questions about the performance-based ads. From your point of view, where do you see the ad money is coming from? Is it more from the shift of ad dollar from the display ads to the performance-based ads, or is it incremental ad dollar? In U.S., we have seen that there is an ad budget category called social advertising. Have you seen this happening in China yet? What's your view on the development for 2015? Thanks.
Yeah. In terms of performance in ads, from our perspective, it's actually sort of your incremental CNY dollars. We have sort of in the 10,000 range of advertisers, and a lot of them are not traditional advertisers on our branded ads. I think there are some big name brand names who are sort of experimenting with performance ads, but sort of a lot of it is actually sort of incremental to their overall budget as well. You're right in saying social advertising is a sort of pretty big category in the U.S., and it's mostly dominated by Facebook, right? What we see
Yes
as our opportunity for China is actually sort of to invent this category for China. Given sort of what Facebook has been achieved in the U.S., we see quite a promising long-term potential for us in this category. Right now, we already have quite a bit of revenue by putting performance-based advertising around QZone feeds as well as these Weixin official accounts. We'll continue to improve the ad targeting technology. We'll continue to sort of improve the design and feature of the ads. We'll continue to figure out what's the best way to sort of encourage positive viral effect of the ads. We'll continue to sign up more advertisers. At the same time, we want to do it in a very well-paced way so that we give them optimal balance between user experience and advertisers' need.
Okay. Thank you very much, operator. We're rounding up the call now. If you wish to check our press release and audit financial information, please visit our corporate website at www.tencent.com/ir. We'll post a replay of this webcast on the site shortly. Thank you and see you next quarter.
Thank you. That does conclude our conference for today. Thank you for participating in Tencent Holdings Limited 2014 fourth quarter and annual results announcement conference call. You may all disconnect now.