Earnings Call: Q4 2014

Mar 18, 2015

Thank you for standing order 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 you. 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. Kathleen Chan from Please go ahead, Ms. Chan. Thank you very much, operator. Good evening. Welcome to our annual results conference call for 2014, I'm Catherine Chen from the IRO team of Sensata. Before we start the presentation, we would like to remind you that the increased forward looking statements, which are not 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 Tantan. This presentation also contains some unaudited non GAAP financial measures that should be considered in addition to, but not as a substitute for matches of the company's to performance, prepared in accordance with IFRS. For a detailed discussion of the risk factors and our non GAAP measures, please refer disclosure documents downloadableofwww.tenzen.com/ir. Let me introduce the management team on the call tonight. We have our Chairman and CEO, Pumima, President Martin Lau, Chief Strategy Officer, James Mitchell and Chief Financial Officer, John Lowe. Honey will kick off with a short overview. Martin will discuss strategic highlights. James will speak to business review and John Lewis, route of financials before we take your questions. I'll now turn the call over to Vanessa. Okay. Thank you, Kevin. Good evening, everyone. Thank you for joining us. During 2014, we made significant progress in the 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 build a vibrant ecosystem connecting users with a range of content and services through raising QQ. So supported by content partnerships and strategic investments. In games, we became the leading mobile games platform in China and reinforces our leadership in PC games with healthy growth. In media and advertising, we became the top mobile nation for news in China and our video platform grew traffic and revenue over 100% year year. In security, we expanded our market share of security software. In App Store, in Nong Bao's market share reached 26% market share in China, up from 1,000,000 reaching and QQ accounts to bank accounts facilitating easy mobile payment. Our failures We bank received a bank license, positioning us a better corporate with existing banks in providing online financial services. At the same time, as we focus on these strategic initiatives, we also achieved healthy financial results. For the fourth quarter of 2014, total revenue excluding e commerce transactions was rmb 20,500,000,000, up 50% year on year. Non GAAP operating profit was rmb 8,100,000,000 up 59% year on year. Non GAAP net profit was RMB6.7 billion, up 51% year on year. For the full year of 2014, total revenue excluding e commerce transactions, was RMB74.2 billion, up 46% year on year. Non GAAP operating profit was RMB 30.5 1,000,000,000, up 49% year on year. Non GAAP net profit was RMB 24,200,000,000, up 43% year on year. Turning to our key platform metrics. Total MAU for QQ was 815,000,000. We think we smart devices MAU grew 33 percent year on year to RMB576 1,000,000, which in which we challenged combined MAU of 500,000,000, up forty 1 percent year on year. Total MAU for Qzone was 6 million within which smart devices MAU rose 30% year on year to 540 Our online games platform extended its lead on PCM 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. And now you 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 to users' everyday lives and thus expand the scope of our opportunities. And 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, 100 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 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. Us users can benefit because they can access a rich mix of content, services, and transactions a unified lock in and integrated payment solution. Our partners can benefit from connecting to our users through our platform targeting capabilities and benefit the gain it from deeper ledG is built around partnerships. During 2014, we build 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 is frequently required 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 dotcom, WUBA, DMP, DDDACHTURE and others. We contribute to our investee company 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 a 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 with a partner of choice for content providers, During 2014, we have formed exclusive relationships with Wounded Music, Sony Music as well as a number of key online games. By capping our partners' resources for key e commerce, O2O and content, we can actually focus Tencent's resources on developing a selective 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, web pooled the resources of several destination sites to create a unified platform for literature and book content. This platform enjoys multiyear exclusive relationship with the large number of leading authors to provide a healthy content pipeline. Increased its market share from 14% to 26% in 1 single year benefiting from its role as a central destination for app downloads for our own and the preferred software for providing security to handset manufacturers as well as 3rd party app store in this. 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 PC portal to mobile news app. Our video ad business has enjoyed rapid growth gaining market share and also gaining a major FMCGS, significant advertisers. Our Android App Store represents in our opportunity for future growth with application advertisers. We also introduced cost per action at Yinyoung Bao last November. In the area of social, we have rapidly grown news feed ads in mobile Q zone and Weixin official accounts during 2014 and we started to test launch the first feed ads in recent moments in early 2015. Not only that, a vibrant ecosystem also supports our online payment activities. During 2014, our users bound over 100,000,000 Weixin and mobile QQ accounts to bank accounts. Facilitating easy and secure a mobile payment. Weixin payment and HIGU wallets are relatively new consumer facing mobile payment solutions utilizing 10 page long established payment infrastructure. While our own products such as mobile games and subscriptions drive new bank account bindings at the very rapid rate, we're progressively adding new use cases to stimulate ongoing engagement. Such as charging phone cards, paying utility bills, conducting e commerce transactions, making cost through appointments, and many others. In February, we repeated our new year red envelope promotion. During this period, over 150,000,000 users participated sending and receiving red envelopes, up more than 15 times, 15 times compared to last year. Activities such as the red envelope motion demonstrate the ubiquity and scalability of our payment solution, attract new payment users and also provide fund experiences to existing users. Payment will help us to facilitate more transactions, increase advertising conversion and build a gateway for future online finance initiatives. Now with that, I'll pass to James to talk about the business review. The fourth quarter of 2014, our total revenue grew 24% year on year. Excluding e commerce transactions, revenue grew 50% year on year. CKS represents an 82% of revenue within which online games contributed 57% and social networks 25%. Online advertising represented 12% of revenue. For the full year, 20 4th 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 17,100,000,000, up 44% year on and up 7% quarter on quarter. Social Networks revenue was rmb 5,200,000,000, up 50% year on year and up 10% quarter on quarter. 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 11,900,000,000, 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, expand impacts and adoption of gross revenue recognition, while PC game revenue was impacted by adverse seasonality. For the full year 2014, our vast revenue was up 41% year on year. Digging into social networks, on mobile Q2, we upgrade 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 integrating 58.com's local city service listings with mobile, Q2, which contributed materially to 58.com's mobile traffic during the period. And we introduced money management options and improved security features that drove higher adoption of QQ Wallet. For Weixin, partly to generate advertising revenue, the owners of efficient accounts produced better and more content for users, which contributed to rapid growth in efficient account page views. A new simple to use HTML5 web development kit facilitates more businesses creating more powerful efficient account We enabled offline merchants to carry out marketing and interact with users inside their shops through Weixin's WiFi alliances. We broadened the scope of in app search to include friends posts from moments and nearby restaurants from DN Ping's network. Moving to PC client games. For advanced casual games, our average concurrent users grew 22% year on year to point $3,000,000. 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 C game in any category launched in 2014 in China. In shooting games, we're diversifying our portfolio to meet changing of preferences. In addition to cross fire, we operate a Soul Fire, which is the most successfully domestically developed shooting game, and we recently commenced scale beta testing of Court of Duty Online. Our advanced casual game pipeline includes the military themed shooter war Thunder, the science fiction theme shooter Metro conflict, Banff Arena Games Smite, and Tower Defense Game Hawks must die. The massively multiplayer online games, average concurrent users were $1,600,000, down 36% year on year against a high base period due to the launch of Blade and Soul in the fourth quarter 20 13. Despite the decline in average concurrent users, massively multi fare online game revenue moderately increased year on 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 we hope a more innovative MROGs, which we believe can reignite user enthusiasm. Our pipeline includes RK a 3 d medieval fantasy MMO, Moonlight Blade in in house martial arts, CMMO, and Monster Hunter Online, a co op player versus Monster Game based on Capcom best selling Japanese game series. The smartphone games integrated with Mobile QQ and Way game centers, revenue recognized gross of revenue sharing with 3rd party developers and related channel costs was rmb 3,800,000,000, up 416% year on year and up 26% quarter on quarter. Historically, we reported revenue for smartphone game net of channel costs and net of developer revenue share. In the fourth quarter, we changed to recognize such revenue on a growth space. This is a result of us becoming deprincipal rather than the agent for a number of our exclusive smartphone game licensing contracts due to changes in the cooperation models under which operate those games. Under the gross basis, our reported revenue is now app store revenue share and growth of developer revenue share for 3rd party smartphone games. This change increases our smartphone 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 to be used to use, our smartphone games revenue was rmb 2,900,000,000, up 12% quarter on quarter. Operationally, during the quarter, we extended our presence from casual to mid court titles, launching 12 mid court games. Several of these mid court titles topped China's iOS app store revenue ranking. Blade of the 3 kingdoms and action game was number 1 in the revenue ranking in November. Legend of Sword Fairy, a role playing game was one in December and IIMMT 2, a strategy card game was number 1 in January. We have expanded our success in the shooting genre from see some mobile with a self developed mobile shooting game We file, which ranked number 1 in February on the iOS App Store revenue ranking. Turning now to online advertising. Segment revenue was rmb 2,600,000,000, revenue up 75% year on year and up 8% quarter on quarter. Grand advertising revenue was rmb 1,500,000,000, 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 quarter due to weak seasonality and to the non recurrence of the Voice of China 3 TV program and the FIFA World Cup soccer Our top 5 advertiser industries for transportation, food and beverage, online services, real estate and personal care. Our performance advertising revenue was rmb 1,100,000,000, 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 TVs and recent voice of China 4 amongst other high profile content. Our own in house productions became more popular. For example, with commission to 2nd season of widely watched self produced TV drama that notify. For our news platform, page views of our mobile news app and news plugin for Q3 in Weixin doubled year on year, which led to a more developing of our mobile news app revenue. Performance display, more effective targeting and new mobile ad formats attracted more advertisers. In recent months, we've been testing cost per action ads in our out stores rankings. And as Martin mentioned, we're now testing feed ads from selected advertisers in Weixin have generated enthusiastic financial advertising and consumer responses. Consistent with the strategic transition of our e commerce SI e commerce transactions revenue was down 87% year on year and down 3% quarter on quarter to RMB446,000,000. 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 and category leaders such jd.com, Codai Gauru and Maelishore, which we believe may appreciate in value over time as e commerce activity grow 2nd, e commerce companies are the biggest industry category contributing to our performance advertising revenue. And 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 21,000,000,000, up 24% year on year, or 6% quarter on quarter. Gross profit was rmb 12.6000000000, up 44% year on year and flat sequentially. Operating profit was rmb 7,400,000,000, up 56% year on year or down 2% quarter on quarter. Income tax expenses were RMB892 million, up 10% year on year and down 36% quarter on quarter. The year on year increase was primarily due to higher pretax profits, higher withholding tax, partly offset by tax reversals recorded for certain subsidiaries in China that qualified for lower corporate income tax rates. Lower income tax expense quarter on quarter mainly reflects the tax reversals. Effective tax rate for the quarter was 13%. Net profit attributable to shareholders was rmb 5,900,000,000 up 50% year on year or 4 percent quarter on quarter. GAAP diluted EPS was R0.625 dollars for the quarter. For the full year of 2014, total revenue was RMB78.9 billion, up 31% from 2013. Gross profit was rmb 48,100,000,000 up 47% from 2013. Operating profit was rmb 30,500,000,000 up 59% from 2013. Net profit attributable to shareholders was RMB23.8 billion, up 54 percent from 2013. GAAP diluted EPS was rmb 2.545 for the year. On a non GAAP basis, operating profit for the 4th quarter was rmb 8,100,000,000, up 59 percent year on year or down 2% quarter on quarter. Net profit attributable to shareholders was rmb 6,700,000,000, 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 fraps quarter on quarter. Diluted EPS was RMB0.717 for the quarter. For the full year, 2004 18, non GAAP operating profit was rmb 30,500,000,000, up 49% from 2013. Non GAAP operating margin 39%, up 5 percentage points from last year. Non GAAP net profit attributable to shareholders was rmb 24,200,000,000 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 spectrum gains. Gross margin for Honor 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 of impact of accelerated amortization of video content costs as well as new revenue contribution from JD dot 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 commercetransactions was 41% up 36 percentage points year on year and 16 percentage points quarter on quarter. The improved gross margin flow from Yixin gradually moving to marketplace model. For the full year 2014, Gross margin for value added services was 67% and 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 rmb 2,100,000,000, 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 Payments and online games. Largely offset by into our e commerce transaction business. The sequential uptick resulted from seasonally griggered advertising spending on our products and platforms such as our mobile payment solution and online games. G And A spend was rmb 3,900,000,000, up 44% year on year or 5% quarter on quarter. This was primarily driven by increases in R and D expense included under G And A. R and D expense was RMB2.1 1,000,000,000, up 66% year on year or 7% quarter on quarter. As a percentage of quarterly revenue. Sunlands marketing expense was 10% and G and A 19% R and D represented 10% of quarterly revenue. Share based compensation was about 3% of quarterly revenues. On a full year basis, Selling and marketing expense was rmb 7,800,000,000, up 37% from 2013 and represent a 10% of annual revenue. G and A expense was R14.2 billion dollars, up 42% over 2013 and represented 18% of annual revenue. R and D expense was rmb 7,600,000,000, up 49% from 2013 as a percentage percent of annual revenue. At that 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 headcounts of a newly on our literature business and new hires to support business growth. Looking at margin ratios for 4th quarter. Gross margin ex e commerce was 60.7 percent on a gross to gross basis 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 Sparkling games and Weixin official accounts advertising and video content costs. Non GAAP operating margin ex e commerce was 38.4 percent 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 margin year on year was mainly due to a decline in selling marketing expense as a proportion of pseudo revenue, partly offset by lower gross margins. The sequential decline was primarily because of lower gross margins. Non GAAP net margin exe commerce was 32.4% On a gross to gross basis, it is up 1.1 percentage points year on year and 0.4 percentage points 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 of the result of tax reversals that more than offset the different operating margin. For 2014, basic EPS was up 52% year on year to 2 RMB2.579 and diluted EPS was up 53% year on year to RMB2.545. Non GAAP basic EPS was RMB2.624 and diluted EPS was RMB2.589. Both increased by 42% from last year. Subject to the approval of in May, we are proposing an annual dividend of RMB0.36 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 1,600,000,000, down 5% year on year or up 51% quarter on quarter. Operating CapEx was RMB 592 1,000,000, down 35% year on year and 1% quarter on quarter. Non operating CapEx was rmb 1,000,000,000, up 33% year on year and 120% quarter on quarter. Free cash flow reached RMB9.2 billion, up 76% year on year and 32% quarter on quarter. Our net cash position at year end was RMB22.8 billion, down 37% year on year or up 7% on quarter. Year on year decline in net cash was mainly due to strategic investments by the 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 RMB60 1,000,000,000 at quarterend This concludes our presentation. Thank you. Questions. Your first question comes from Erika 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 moment advertising. I understand you've started the beta testing in January. If you can just give us a little bit of the feedback, how that's been going and when do you expect expectation? Secondly, is, if you can go through some of the, the cost, how much you've spent, in 20 14, for video content, some of the subsidies for your OTO initiatives, and also your on expansion of the WeChat and what is the trend for 2015? Thank you. Okay. I'll take a stab at the first question. In terms of moments advertising, we actually just started to test, launching service. And so far, we have only had around 10 advertisers. And the objective of the testing is really for us to, figure out the consumer response and also the interaction with the advertisers so that we can keep honing on the system. We believe moments important venue for advertising because it has a very significant traffic. But at the same time, because it's 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 matched the right advertising to the right users and the format of the advertising is actually presented in the right way and also sort of new want to make sure that the social viral mechanism is actually designed in the right way so that you can on one hand, to maximize the exposure, but also at the same time do not allow for a spending of the user So, I would say the initial response of the Moments advertising is actually a positive from the user's perspective. The advertisers are extremely positive because they get very focused audience. At this point, time, we believe that it's 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. So I think that's our plan. We believe that it carries a very significant opportunity over the long run but because of that, we want to do it in the right way and we'll do it in a step by step manner. In relation to sort of the Ovation advertising, we actually do have another venue for advertising, which is advertising within the official account. I think on 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 induced and for official accounts to be more active and to put in better content. And 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. And I'll pass to James to talk about the costs. Yes. So I think you're asking about the costs related to which had international marketing OTO initiative some video content. In general, we don't give in a very specific number, so I apologize for that in advance. But to give you some context, with the WeChat, International Marketing, we sent very aggressively in 2013 on TV marketing, primarily in 2014, we reduced that spending very substantially. And then as we look into 2015, you should expect that spending to run relatively well controlled. The focus now is less about TV marketing for the call. We chat app that we think has limited effectiveness in most markets and more about developing being 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 resolute volatile spending during 2014. As you look in 2015 most aggressive priority. We'll continue to invest against it, but the spending may be somewhat opportunistic and somewhat lumpy as it was in 2014. Then finally, on video content, we dramatically increased our video content spending in 2013 to 2014. We're extremely happy with the results, both in terms of track and 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 on year every quarter now for over a year, despite the base getting bigger and bigger. So as a result of our happiness with past success, but continuing to smoothly increase our video content spending into 20 15. That buys us key content such as NBA Buscable matches, exclusively HBO series, excuse a voice of China for exclusivity, our self produced programs and so on and so forth. So you should expect us to continue, invest 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. Have two questions. The first one, I'm just wondering how would you promote your mobile advertising business, especially those local location based advertising in the future. Will you recruit extra and offline sales force for this business and I'm wondering how would advertising business affect your margin in the future? And as there is, 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 owner Thank you. Okay. In terms of the promotion of mobile advertising, it's true that sort of the number of advertisers is actually a very important component of the overall advertising business for performance based advertising. Now hangul said that what we want to do is actually if you look at our description of our connection strategies that we do want to build and ecosystem of, services, around our high frequency app such as mobile QQ and Weixin. And, it's actually with a lot of the partners who can actually bring advertisers. So, if you look at, for example, e commerce advertisers, have JD and some other partnership who can actually, through their open market platform bring in a large number of advertisers. We have, partnership with DMPING. We have partnership with, who have, new access to millions of O2O merchants. And these are all potential advertisers on our cloud form. So I think for us, it's actually very important to build an ecosystem so that we can leverage on the very specialized sales force each one of these partners actually bring in so that we don't have to build as many of the Salesforce ourselves. And 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 and that would help us to build a very conducive advertising ecosystem in a relatively high leverage, less sort of human intensive type of fashion. And I'll pass to John to talk about the the revenue share? In relate in terms of the revenue recognition of Weixin Official accounts at Burvestman, basically we will book it on a gross basis. Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question. You for taking my questions. I have two questions. The first one is more about your strategy. As you mentioned that you have been working more closely with some of your partners. So just wondering in the long term, how could that affect your opportunities in working with other companies are perhaps also in a similar industry as your partners. So that's my first question. And then secondly, just a housekeeping question, I wonder if you could share with us the ARPU trend of your different types of games. Thank you. And then I will get back to the queue. Yes. I think on the strategic front, right, Neil, we we, do have partners and I think by and large, our platform is certain open platform, which actually, can support different types of partnership. In some cases, we have basically just, commercial relationship. In some cases, we don't even have a relationship, but we provide the API and sort of deal with some of these partners basically put their content to put their services on our platform. But in some cases, we actually make investments in some of the I would say more significant partners. I think in those areas, right? Usually we make investment in the best of breed vertical, right? So these are sort of the market leader within their respective market segment. And at the same time, we don't necessarily focus on, oh, we're going to help them to gain competitiveness by disabling other people, right? What we usually do is actually we sit down together and bring 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 can actually manage relationship with their existing users on a more frequent basis and that they can leverage our infrastructure to sort of Brad, they're already a very good word-of-mouth effect, more prominently. So I think it's actually sort of more of enabling rather than sort of you disabling others. In relation to the ARPUs, for MMO G, the Corteva ARPU is within 2.95 to RMB395. For ACG, 95 to RMB 235 B. In relation to smartphone games on Weixin and QQ, on a gross basis, it's within 100 $55,000,000 to $165,000,000. In order to give you a better idea as to compare it to figures, for quarter free, if we, trade it on gross basis, it would have been 120 to 130 RMB per quarter. Thank you. And your next question comes from the line of Alexia from JP Morgan. Please Hi. Good morning, everyone. Thank you for taking my questions. Question is about your digital content strategy. Can you share with us the rationale of prioritizing the broad digital content investments in 2015? And then 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 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, in my can take over for the red end. But I've so with digital content, we've been relatively active in certain formats of digital content such as games. Music for many years already. But it's fair to say that in the last few months, there's been a step change in the intensity of our focus and investment in digital some of the contributing factors would be fairly obvious that we believe that consumers are increasingly desirous of consuming content be it, I mean, music on their smartphone rather than music on a walkman, be it, video on their tablet rather than video 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 it's customizing their an online audience. And then the 3rd more immediate reason is that we see some signs that the attitude what piracy are changing quite quickly. And that's both at a regulatory level at a legal level and also at a consumer level. And so given all of the above, we we believe that 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, right? We are going to incur certain expenses in relation to the promotion because of the new we did put some adverse we did some they put some, of our own marketing dollars and, digital items and things like that into the right envelopes, right? But I would say sort of that's only the first layer of value for the users. The next layer is actually we invited a lot of merchants. The participate in this rep packet, red envelope program so that, there are different merchants who have put in either cash or cash coupons and discount coupons. So that form the mixed layer, the second level of of value for the users. And then what happens is a lot of users actually sort of put in that envelope for the use for the other users, right? So it's users money going around the system. And if you look at the sort of ratio of 1st versus second versus third level is actually 1 to 10 to 100 in that rough range. So there's a vast magnifying impact of our investments pulling in a lot of merchants. And then sort of the revenue also gets a lot of users to sort of participate in a C2C way. So that's why the impact of the envelope that comes from somewhat investment from us is actually sort of much more magnified. Thank you. And your next question comes from the line of Dick Wei from Credit Suisse. Please ask the question. Hi, for taking my questions. My first question is on, still WeChat moments, advertising. I understand that Martin mentioned that some of this initial feedback. I wonder any more color in terms of maybe the launch plan this year as well as maybe some of the add formats such as the apps download type of format and then follow-up. I think right now, we do not have a definitive launch program that we want to announce. Right now what we're doing is sort of we are doing a lot of data collection based on the initial launch of this at test. And we are formulating the next steps as we collect and analyze these data. So we don't want to go out and sort of make a commitment on this launch pen as yet. We believe that, as I said, this is a very large long term opportunity I think it's probably worth the waiting to make it sort of more perfect. Got it. And then 2 housekeeping questions quickly. First of all, is that the deferred revenue is up like 10% quarter over quarter for the current portion. I wonder if any how should I read that increase? And maybe secondly is that, I wonder if you can share with us the gross revenue for mobile games in second quarter 3rd quarter. I I I I got the 3rd quarter across mobile game revenue of around $3,300,000,000. I'm not sure if that's correct. Okay. And into the, deferred revenue, actually, if you add the, current process on current, it increased by about, 5%. If you exclude the deferred revenue attributable to the JV related prepaid BC8 traffic, actually increased by about 8%. I think for a normal season like that, you know, 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, you know, we did quite a bit of promotion and, however, you know, games are in relation to games that will be that we need to amortize the items for of 9 to 12 months rather than 6 months or 4 months. So basically it's back up quite a bit this quarter. Alright. I think the gross revenue for, secure, maybe just the quarter. The first quarter. Yes. So for that, it's about 1,000,000,000 dollars, $3,000,000. Well, why don't we come back? I mean, we'll have the John would check, okay. Next question, then we'll come back to Thank you. From HSBC. Please ask your question. Good evening. Thanks so much for taking my questions. I wanted to ask you a question on smartphone gaming. That the note was up about 11% to 12% Q on Q on a normalized basis. I'm wondering how we should be thinking about smartphone gaming this year. Terms of, you know, revenue pace. And secondly, I wanted to ask you about Weixin payment. A 100,000,000 user counts is a very large number. I was wondering if you can give us a sense of, you know, maybe some of the characteristics in terms of average spend frequency, you know, any sort of color would be helpful. Thank you. So I'll answer on smartphone game revenue as best I can and then hand over to Martin for, the payment bindings with said it's over $100,000,000. So on the smartphone game revenue, I think that mathematically, 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 was starting off a bigger number. I think that That said, we were we felt to achieve low double digit sequential revenue growth from smartphone games in Q4 was a reasonable achievement. And we also felt that more importantly, we're executing our strategic objective, which is to enrich the mix of mid core games and enrich the mix of 3rd party games within the smartphone games that we published. So as I mentioned in the prepared remarks, we had the number one revenue game in the Apple App Store in each of, I think, November, December, January, February, and each month, it was a different number one game, but each month it's a mid core game published by us. So looking forward, the number of people playing smartphone games in China is already huge and it's more than double the number of people playing PC games. That number of users will probably incrementally increase as more was get smartphones. But we think the bigger variable is whether the number of smartphone game genres, which historically has been very limited, expand Because if 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 see. If more of those PC game genres successfully make the transition to smartphone, then it's likely that they will also be successful in driving up the conversion from free to Japan users. And to a lesser extent, enhancing the through for the paying users. So to put this in concrete terms, we were quite, you know, excited about the success of Tianjin 2G or wheat fire. Because historically, shooter games have not made the transition to smartphone, but that game does seem to be a relatively successful shoot a game on smartphones so far. So overall, we do think the smartphone game industry is entering a period of more healthy growth after the unusually rapid arrived and then the early downturn that we experienced in the 1st 3 quarters of 2014. In relation to the platform games revenue and gross basis for quarter 3, it would be around RMB3 billion. So for quarter 4, it's around RMB3.8 1,000,000,000. So you can see that the increase is currently something percent. The quarter 3 channel cost plus the sharing will be gross up by about RMB430 1,000,000. We're at full quarter full year. It's been grossed up by about RMB900 1,000,000. Okay. Okay. Well, in terms of Weixin payments, right? We talked about there are over 100,000,000 accounts that have already been sort of bank account enabled. And the number has gone up quite a bit after the red envelope promotion during Chinese New Year. Now, I would say that the characteristics of this this bind account is that typically the users actually sort of use this more frequently because it and more frequently compared to sort of the PC counterpart, because it's almost like the wallet that stick to them, right? On a constant basis, So there are actually more payment potential. And 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 new digital items. So games. It's our cue coins. But over time, we also sort of add in a lot of quasi digital payment instances such as cell phone top ups, such as donation to whole range of charity organizations, right? These are all activities which are sort of very easy to do over your cell phone. Second category are really sort of new C2C or social activities such as people sharing a meals bill and people transferring money as well as rent outlook, these all fall into this category. The 3rd category is sort of e commerce activities. So 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. And finally, it's a whole range of O to O services So you can see people buying, group buy coupons, people sort of paying for all sorts of OTO type of services. So, and we also see some people starting to use it offline. So for example, if you go to a convenience store, you could use a Weixin payment or TQ wallet in some instances. So it was felt that there will be more and more use cases that we'll add. And with the larger and larger number of users, it will also attract more and more merchants to adopt our mobile payment solution. And we do envision a scenario in the future that sort of a large number of users will be bounded to our bank cards. And as a result, that would actually open up a big opportunity for us around the end entire ecosystem as part of our connection strategy. Thank you. And your next question comes from the line of Ann Holloway from Deutsche Bank. Please ask your question. Thank you very much. Two quick questions. We're obviously where the growing success of mobile commerce on Weixin And Mobile QQ largely through the cooperation with partner, partners such as JD. However, it seems as though conventionally con conventionally defined C2C mobile commerce also seems to be growing very fast. And there's even, an entire sub segment of venture investments 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? And then my second question is, I'm just wondering, should we expect many innovations in 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. Well, in terms of CDC Commerce, so it's true that there are more and more subjectivities happening on our mobile QQ and WATION. We can't quantify at this point of time because there's not a central repository for these but our feeling is that it's actually sort of already quite substantial, but it's a little bit like people moving offline transactions online. So in the past, if somebody had the flower shop and they receive orders by taking a call. Now, some of them actually sort of you can sell over our applications, right? So these are sort of new hard to quantify, but clearly when we did the transaction, with JD. We said the centralized and open platform, the e commerce activities, so we're going to sort of do it with with JD, but then sort of in terms of just facilitating this overall C2C type of utilized e commerce activities will continue to explore. And over a year, I think we're seeing more and more of such activities happening. So 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 sort of give rise to more use cases for our payment solution. Now in terms of Yes. In terms of the WeBank license, we got the license last year. We targeting to open, door in April. I think we are still on track to do that. I think initially, even sort of after it opens the store, there will be a lot of testing of of, some innovative products. I think, the positioning of this, webank is that on the consumer facing we'll be targeting, consumers as well as small enterprises. We who are sort of new underserved, right, 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, un collateralized credit, it's tougher to price their risk. We hope that we bank can actually leverage a whole host of tech as well as our consumer reach to reach these people and also sort of need help to price the risk at an attractive level. And then on the back end, we bank is going to work with existing banks. It's not going to go out and raise a lot of deposits because that would, 1, be, very heavy in terms of the business model. 2 is it would require a lot of capital. The more deposits you take, the more capital you take, that's sort of the more traditional bank mark instead, what we characterize WeBank is really a bank cooperation platform with banking license. So because of the banking licensing, it can actually be part of the network and, offer different types of services. But on the other hand, would actually strive to work with existing banks so that once they generate these credit they can actually work with the banks to provide for these credit needs. 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 Midcore and hardcore game players accounted for 21%, 45% and 34% of $0.10 gamer base in the first quarter last year. How does this come pair to the current mix? That's the first question. 2nd 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 2 years. Is there some more color on 2015? That would be great. So by investments, you actually mean, equity investments? Yes. Okay, all right. Because I think sort of in terms of the cost investments, right, marketing, I think I've already talked about some of the content and new promotion for payment and auto. 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. And that's really sort of new part of our overall, connection strategy. If you 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. And in a lot of cases, they have quite a bit of offline app sets, right, be it sales force or distribution network, in order for us to leverage So we have done a lot of that. I think in terms of looking at 2015, we'll continue to to look for these partners, right? Companies who have domain expertise and then sort of within industries that we felt clearly has potential for, creating something along the line of what Pony said, right, internet plus. So internet plus a certain industry, we can actually create a unique experience or sort of more efficiency. So when we find these partners who have these unique assets and expertise, where we can sort of bring value to particular vertical industry, then we would make the investment. I would say sort of a lot of them sort of have been already found in 2014, but in 2015 we'll continue to look for these opportunities. I think we may invest in sort of new content providers in order for us to sort of new get have have your closer relationship in the past where we've invested in game companies in certain entertainment provision of companies and then we'll continue to do that. I think sort of new overseas new, if we see companies with sort of knew clearly, I've got the management team as well as a positioning within certain markets to do interesting thing, especially sort of the things that we already have seen, we're working China, then sort of we are very happy to make the investment too. So these are sort of the areas of investment that we look at. Thank you. Operator, in the interest of time, which I think the last three questions, please. Certainly. Next question comes from the line of Wendy Huang from Macquarie. Thanks management and IR team. I have some short questions. First of all, you just released the Weixinoto for the 11 industries. I wonder does this mean Tencent may enter into another round of strategic investments in the offline partners associated with that, I think, some of the internet companies recently also started their investment in the hot well, including, I think Alibaba's in Meizu. So we're Tencent also consider similar kind of strategic investment. And my second question is about your international expansion plan. I think again, recently, we saw that Alibaba invested in the Snapchat. And so how will this change global kind of competitive landscape for WeChat? And also, can you share some updates on WeChat global expansion in the footprint. Lastly, I think Wendy, Wendy, I'm sorry. We we we will give you to our air channels. We'll take those 2 questions and then put you on on the queue for a second round if that's fine. Okay. Thank you. Yes, for equation or 2, I think, in line with what we talked about sort of as part of our connection strategy, we do want to connect users with many different industries through our platform. Now whether we have to make investment in each one of these verticals, I don't think we would try to look for the ones that, sort of, most value creating and, the ones that has sort of a unique vertical partner that's best of breed. And maybe sort of the partner itself has got a very strong willingness to work with us. So I think there are a lot of factors that go into an investment decision. But even without an investment, right? We have a lot of business partnerships, which actually sort of bring out platform to enable other companies to perform well. And at the same time, we also have this open APIs where everybody can use So I think that different layers of cooperation that we can actually have with multiple partners. Now in terms of investment into hardware, right? I think, we don't strive to become a hardware manufacturer. If you think about $0.10 strategy, we want to be hardware agnostic, right? The strategy that we have is actually creating the best application that actually can go with any hardware, right? And 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. Now, sort of different hardware manufacturers may have different needs. Some hardware manufacturers say, oh, I want to have a business relationship with you. Some of the highway manufacturers will say, would you mind actually sort of putting in some money to help me sort of fund certain projects. We're not completely, against those ideas. It actually help us to build a relationship with with the hardware partner, but we don't want to sort of get into exclusive relation 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 sort of investing in, international companies for quite some time. And coincidentally, we actually sort of to in the Snapchat in much early rounds. And I felt sort of new, will continue to to look for a unique opportunities, right? 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. And to date, we have invested 1,000,000,000 of dollars outside of China and a lot of them have yielded pretty good results and we'll continue to do that. Thank you. 2nd last question comes from the line of Alicia Yap from Barclays. Please ask your question. Thanks for taking my questions. I have one question regarding, the WeChat games. So can management share with us some some analysis of the gamer profile. So for example, how many of the 500,000,000 MAUs are gamers? And are those your new mid core games this quarter, were those also playing your casual games in the beginning? So given they are playing, you know, all these games are they no longer playing the earlier game? So I just wanted to get a sense, how many of, you know, 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 of the numbers of the peers are seeing some slowdown on the PC web games. So I wonder whether Tencent has seen any of these? Can you give any colors? Thank you. I think on the web game 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 But frankly, web games is a relatively smaller proportion of our game revenues than it is for some of our listed peers. With regard to the user profile of mobile games, just to speak at a very general high level, as it grows 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 today and for different game session. Thanks. And then there's a wider number for Q1 playing PC games who are doing sort of direct to mobile 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 that 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. So 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 submitted on PC. Comes from the line of Jin Jun from Mizuho Securities. I'm sitting on behalf of Jing Young. So I want to ask questions about the performance based ads. So 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 like display ads? To the performance based ads or as incremental ad dollar. And, in U. S, we have seen that there's a ad budget cut we call social advertising. Have you seen this happening in China yet? What's the view on the development for 2015 Yes. In terms of performance ads, right? From our perspective, is actually sort of incremental dollars. We have sort of in the 10,000 range of app advertisers. And a lot of them are not traditional advertisers on our branded ads. I think there are some big name branded, 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 average sort of pretty big category in the U. S. And it's mostly dominated by Facebook, right? So what we see, as our opportunity for China is actually sort of to invent this category for China. And, we see, given sort of what Facebook has been achieved in the U. S, we see, quite a promising long term for us in this category. Right now, we already have quite a bit of the revenue by putting performance based advertising around Qzone feeds as well as these situation official accounts. And, 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 sort of encourage a positive viral effect of the ads. We continue to sign up a more sizes, but 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 needs. Okay. Thank you very much. Operator, we're rounding up the call now. If you wish to check out our press release and our information information, please visit our corporate website at www.santenn.com/ir. We'll a replay of this webcast on-site shortly. Thank you and see you next quarter. Thank you. That does conclude conclude our conference for today. Thank you for participating Tencent Holding Limited 20 14 4th Quarter and annual results and