Earnings Call: Q3 2014

Nov 12, 2014

Earnings release

Thank you. Announcements Conference Call. Session. 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 Chen from Tencent. Please go ahead, Ms. Chen. Thank you, operator. Good evening. Welcome end this conference call for the third quarter of 2014. I'm Catherine Shen from the RL team of Present. Before we start the presentation, we would like to remind you that increased forward looking and switch on the line by a number of risks and uncertainties that may not be realized in future for various reasons. Information about general market conditions is coming from a variety of fossil outside of Tencent. This presentation also contains some unaudited non GAAP financial measures that should be considered in addition to the non substitute for matches 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 available on www.tenzen.com/ir. Now let me introduce the management team on coordinate with our Chairman and CEO, Pony Ma, President Martin Lau, Chief Strategy Officer, James Mitchell and Chief Financial Officer, John Lowe. Sami 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 go over to Pony. Okay. Thank you, Caitlin. Good evening, everyone. Thank you for joining us. In the third quarter of 2014, We achieved another quarter of solid growth in our platform, revenue and earnings. Our online advertising business grew significantly year on year due to performance advertising on our social platforms. On our advanced businesses, we really changed our leadership in online games and we virtualized a subscription product via enhanced mobile presence. We have sharply increased the market share of our App Store inbound, a key anchor for the mobile Eco than we are building. Looking forward, we will deepen our partnerships with the category leaders. And continue to invest for you. Total revenue was RMB19.8 billion, up 28% year on year. Excluding e commerce transactions, total revenue grew 47% year on year. Value added services revenue was RMB16 1,000,000,000, up 38% year on year. Of which social network revenue was RMB4.7 billion, up 47% year on year. And online games revenue was RMB11.3 billion, up 34% year on year. Online advertising revenue was RMB2.4 billion, up 76% year on year and e commerce transaction revenue was about RMB500 1,000,000 from 81% year on year. Non GAAP operating profit was RMB8.3 billion, up 55% year on year. We non GAAP net profit attributable to shareholders was RMB6.4 billion, up 47% year on year. Moving onto our key online platforms. We achieved strong year on year growth in mobile usage and active on our social platforms. Total MAU for QQ was 820,000,000 within which smart devices MAU grew 6% year on year to RMB 542 1,000,000. QQ PCU increased 22% year on year to RMB217 1,000,000. Weixin and WeChat achieved a combined MAU of $468,000,000, up 39% year on year. Total MAU for Qzone was $629,000,000 of which smart devices MAU rose 26% year on year to $506,000,000. Our online games platform continued to lead the market on PCN on mobile. Our integrated media platforms grew traffic at healthy rates. Our portal cookie.com, mobile news app and news plugin combined are the largest online news platform in China by daily users. Our video platform grew users and deepening engagement on both PC and mobile, with total daily video grew our views up about 150% year on year. With that, I conclude my session and will invite Martin to share with you our strategic highlights. Thank you, Pony, and good evening everybody. In addition to our leading social and media platforms, which pony talked about, we have been building out other internet platform that serve our users as well as our ecosystem partners. These include our security platform and our application distribution platform. Both of which have seen very encouraging development over the past year. And I would like to, discuss a little bit with you. For online security, our PC security software achieved solid growth due to continuous improvement in overall performance. Monthly active users of PC manager reached $128,000,000 in September, up 42% year on year. This is significantly, positive, especially considering the relatively flat overall people market. PC manager currently is due to an 2nd largest piece of security platform, but has been gaining market share on a consistent basis. In May, we released a major upgrade with new security engine and improved user interface, earning top accolades from international rating agencies in terms of virus detection and removal. In addition to comprehensive security features, our PC manager is differentiated in the way that it provides enhanced security protection for QQ accounts game accounts as well as online payments. On the mobile front, our position is considerably stronger than on PC. In the past year, mobile managers activated installations grew 92% year on year to 585,000,000 as it continues to gain market share. We believe our mobile security platform will play an increasingly important role as mobile ecosystem continues to proliferate as and as users conduct more and more valuable activities on their smartphones. In this regard, we have applied an open approach in working with other partners. As a result, more and more handset manufacture choose to partner with us and pre install either our security apps or our security modules in their phones. Most third party Android applications stores in China also adopt our mobile security module to scan apps on their platforms. Another important mobile platform is our application distribution platform In the past year, our Android app store, Yinyung Bao has grown significantly in an organic way. Average daily application downloads more than tripled over the last year and the peak daily downloads reached over $100,000,000 last month. According to infodesk, Innoons market share jumped from 8% to 24% within the last 20 months. Among all the downloads within Yoon Yong Bao, over 2 thirds are third party apps and approximately 80% are non games. Which shows that Inogen Bao's downloads, representative of the overall market rather than just $0.10 on apps. Seeing the increasing traffic and greater brand recognition of Yinyung Bell, developers increasingly choose to publish apps to Yinyung Bell. As of the end of September, the App Store has published over 1,200,000 apps, up ten times since the beginning of this year. We believe Yingbo is a very important platform that extends our franchise over the mobile internet. It is an important gateway for our users to access third party apps and also it's a centralized entry point for accumulating natural download traffic. How have we been able to drive this phenomenal growth of Inung Bao? First of all, we have many large DAU applications that generate app downloads traffic and Yinyu Bao serves as a central repository of these downloads. This way, users who have download experience with us will know how to come back for more apps. We also offer better user experience with faster downloading speed compressing technology, added security and as well as personalization for users based on their own needs as well as what their friends have downloaded. Over the long term, we believe Yoonaba can generate a lot of tangible value to us. It can generate revenue through revenue sharing with games that we distributes within the platform. It can also generate advertising revenue on top of its own traffic as well as promoting our app network to apps it distributes. In addition, its traffic is also valuable to our strategic and business partners. Overall, we believe Ying Huang will to extend our ecosystem over the mobile internet. So with that, I will pass to James to talk about business review. You, Martin. Good evening. In the third quarter of 2014, our total revenue grew 28% year on year. Excluding e commerce transaction total revenue grew 47% year on year. BAS generated 82% of our revenue, of which online games contributed 58% 4%. Online advertising represented 12%. For value added services, segment revenue was rmb 16,000,000,000, up 38% year on year and 2% quarter on quarter. Social network revenue was rmb 4,700,000,000, up 47% year on year and up 2% package. In the third quarter, we revitalized growth in our subscription revenue by improved mobile privileges. Unline game revenue was rmb 11,300,000,000, up 34% year on year and up 2% quarter on quarter. Following the explosive growth of our smartphone games revenue from under RMB100 million per quarter to over RMB2 billion per quarter in just 12 months, Our smartphone game revenue dipped sequentially due to delays in upgrades. For PC client games, the market continued to grow at a moderate pace and we increased our to share. Looking more to the closely at the smartphone games integrated with mobile QQ and Weixin game centers, revenue was approximately rmb2.6 billion. 3rd quarter revenue was lower than we initially expected as the mandated implementation of a new software development kit, which adds guest access options to our games turned out to be unexpectedly time consuming, implementing this new SDK across our game portfolio temporarily entered us from releasing major upgrades on iOS and also due to synchronization requirements across platforms on Android which in turn delayed our sales of virtual items. For example, we released 8 upgrades for our games, Jimmy Speed everyday on iOS in the 1st 6 months of 2014, but zero upgrades between July mid October. By the end of October, we have largely integrated the guest logins. Our upgrade pack release scheduled as batch of more regular cadence and about 98% of our smartphone game users continue to log in with their ratio in or QQ accounts. So we feel we've resolved to see and are moving forward. Notwithstanding the guest logging disruption, we remain the leading smartphone game published during the quarter. Also executed on the broader mobile game initiatives we highlighted last quarter. Specifically, we increased our App Store market share we published the most popular licensed games in China with Moji Marvell achieving 1st place in China's iOS App Store in August, Candy Crush saga in September, fruit nature in October. Shifting to PC client games. For advanced casual games, average concurrent users grew 16% year on year to $7,700,000. Robust performance of league of legends and new sports games benefited growth in users in revenue, both year on year quarter on quarter. Our market share increased as we added new genres of games and deepened our penetration within existing genres. For example, licensed title for our Line 3 became the number one sports title in China soon after our launch in June and our self developed shooting game of SolidFire, which recently introduced a tower defense mode has become the number 2 shooting game in China behind our license title crossfire. We look forward to expanding the shooting genre further with the launch quarter of duty online. For massively multiplayer online games, average concurrent users were 1,700,000, down 26% year on year. Revenue grew modestly both year on year quarter on quarter. As Dungeon and Fighter rented its 6th year of operation, we're focusing on core players as we see some lighter use of DNF reduced their time spent on DNF as they allocate more of their time to our advanced casual games. We're preparing to launch several action role playing games such as Monster Hunter online in order to revitalize this category. Turning to our social network products, mobile continued to drive user growth and interaction. The mobile QQ, our location based groups expanded rapidly in some both the number of groups and the size per group helped by new features and by local offline activities. We integrated more lifestyle options enabling users to easily access shopping, discover restaurant deals and monitor their health inside the QQ app. QQ wallet expanded its user base we added new payment scenarios. For Weixin, the volume of messages increased significantly with the group growth of users, groups, and official accounts, To help users find information more easily, we enabled integrated in app search for contact, chat records, official accounts and related content pages. Introduced a short video feature allowing users to record and share video content in chat and in moments. Looking at online advertising, Segment revenue was rmb 2,400,000,000, up 76% year on year and up percent sequentially. Excluding our deconsolidated search and e commerce marketplace revenues, total advertising revenue grew 91% year on year. Brand advertising revenue was rmb 1,500,000,000, which was up 85% year on year and up 11% quarter on quarter due to substantially contributed to our 3rd quarter revenue and costs. Our top 5 advertiser industries were food and beverage, automobile, personal care, online service and consumer electronics. Performance advertising revenue was R917 1,000,000 up 93% year on year and up 32% quarter on quarter, chiefly driven by increased revenue from mobile Q zone advert and highsing revenue this quarter, up from about 30% last quarter. Given our traffic leadership, log in relationship with users range of inventory types, together with the proven scale of other performance advertising solutions in China and Internationally, we believe this performance advertising business has substantial scope for multi year growth. For e commerce, consistent with the strategic transaction of our e commerce businesses and transfer of traffic to JD dot com, our e commerce transaction revenue declined sharply to RMB459 1,000,000, which was down 81% year on year and down 65% quarter quarter. During the third quarter, we began migrating each chunk from a principal model where we report GMV as revenue to a hybrid principal marketplace model where we only report the commissions as revenue. The different accounting treatment naturally results in a substantial decline in revenue, although not in gross profit. And with that, I'll pass over to John to walk you through the financials. Thank you, James. Hello, everyone. For the first quarter of 2014, our total revenue was rmb 19,800,000,000, up 28% year on year. Total revenue was flat sequentially, mainly due to decline in e commerce revenues as we executed the related strategy transition. Gross profit was RMB12.6 1000000000, up 49% year on year. Operating profit was rmb 7,500,000,000, up 56% year on year. Profit attributable to shareholders was RMB5.7 billion, up 46% year on year. GAAP diluted EPS was RMB0.605 for the quarter. On a non GAAP basis, operating profit was rmb 8,300,000,000, up 55% year on year. And 7% quarter on quarter, mainly due to revenue growth in VAS and advertising businesses, combined with reduced operating expenses related to divest the search and e commerce businesses. Non GAAP net profit attributable to shareholders was 6 point 4,000,000,000, up 47% year on year and 10% quarter on quarter. Non GAAP diluted EPS was 0.688 for the quarter. Let's turn to Segment gross margin. Gross margin for VAS was 67 percent, up two percentage points year on year or down 3 percentage points quarter on quarter. The year on year improvement was primarily due to revenue growth of PC client games and Sparkling games. The sequential reflected reduced bathroom gains, revenue and increased content costs. Gross margin for online advertising was 52% stable year on year and up 7 percentage points quarter on quarter as positive seasonality offset increased costs including those relating to voice of China 3. Gross margin for e commerce transactions was up 25% was actually 25%, up nineteen percentage points year on year and up from minus 7% last quarter. The improved gross margin flow from Yixin gradually moving to marketplace model. Moving to operating expenses. Selling and marketing expense was rmb1.9 billion, up 30% year on year and down 3% quarter on quarter. The year to year increase was primarily due to an lower fulfillment expenses for our principal e commerce transaction and lower subsidies for booking taxi rides. G and A expense was rmb 3,800,000,000, up 45% year on year or 10% quarter on quarter. This was primarily driven by increases in R and D expense and staff costs included under G And A. R and D expense was rmb2 billion, up 50% year on year and 8% quarter on quarter. As a percentage of quarterly revenue, 7 and marketing expense was 10% and G and A 19%, R and D represented 10% of quarterly revenue. Share based compensation was 4% of quarterly revenue. As at quarter end, we had approximately 26,000 employees down 3% year on year, up 5% quarter on quarter. The year to year's decline was mainly due to headcount shift away from our e commerce businesses, which was partly offset by new hires. Quarter on quarter, The increase was due to annual recruitment of university graduates to support business growth. Now Let's look at the margin ratios for the first quarter. Gross margin was 63.8%, up 2.2 percentage points from the 2nd quarter, mainly driven by a mix shift away from lowmarginecommercebusinessandgrowthonlineadvertisingrevenues. Excludingecommercetransaction's revenue and tops, gross margin would be 64.7 percent, down 1.9 percentage points from the 2nd quarter, primarily due to a decrease in fast gross margin. Non GAAP operating margin was 41.7 percent, up 2.8 percentage points from the 2nd quarter, mainly as a result of improved gross margin, which was partly offset by an increase in G And A expense. Excluding e commerce, transaction revenue and cost, it would be 42.1 percent, flat when compared with that of last quarter. Non GAAP net margin was 32.7 percent, up 2.9 percentage points from the 2nd quarter, mainly as a result of improved operating margin. Excluding e commerce transactions, revenue and comps, it would be 32.9%, broadly stable with last quarter. For the first quarter, total CapEx was RMB1.1 billion, down 35% year on year or up 16% quarter on quarter. Operating CapEx was rmb 600,000,000, down 39% year on year or up 3% quarter on quarter. Non operating CapEx was rmb460 1,000,000, down 28% year on year or up 37% quarter on quarter. Free cash flow was 7,000,000,000, up 69% year on year and 10% quarter on quarter. At quarter end, net cash position was rmb 21,300,000,000 down 5% quarter on quarter, mainly due to strategic investments, particularly in mobile gaming developers and O2O service providers to support business growth, which was partly offset by free cash flow generated during the third quarter. The fair market value of our listed associates and available for sale financial assets. We are RMB61 billion as at quarterend. This concludes our presentation. Thank you. We you, John. Operator, we shall open the floor for questions now and would like to remind us each of, you and you raise questions. Please limit strict limit limit you to questions each time thinking. You. The first question comes from the line of Dick Wai from Credit Suisse. Please ask your question. Hi, good evening. Thanks for taking my questions. First question is on mobile games. I wonder if it's possible to give some more color for the mobile games during the third quarter for example, some of the, some of the gamer penetration or ARPU or, how is the engaged trend given there's lack of upgrade and how do we get more confidence out looking into the fourth quarter or into next year for some of these gamers to come back in increased engagement? And also, if you were just to look at kind of gross revenue without taking out the post portion, when there was a trend would be like if you can share in the third quarter? Thank you. That's quite a few questions. Dig, but it's an important topic. So let's try and address as many of them as we can. I think in terms of engagements, then as you would expect, the delayed launch of the upgrades would have had some impacts on the growth rate of engagement, but by the end of October, we've had implemented the software development kit that we needed to implement. Our games now largely have the guest login functionality. And as a result, the pace of expansion pack releases has returned to normal and that's flowed through in to engagement and other metrics. So overall, our big picture view is that first of all, this is a industry that's grown explosively quickly. And we're very happy to have participated in the growth notwithstanding the temporary blip we experienced in third quarter for a quarter. Overall, we feel that when we spoke to you 3 months ago, we identified several priorities beyond revenue maximize from mobile game business, including improving our app store market share, including launching successful license gains. And we feel with delivered on both of those objectives as well as enhancing the underlying mobile game infrastructure and as well as retaining our peer industry leadership. In terms of the, ARPU for the, mobile games or patterns, it's between, 100 210 for the quarter. If we agree with that on a portfolio basis. Okay. Great. Maybe I can have a ended up question regarding maybe the monetization pace for WeChat. I think given the we are pretty well penetrated in terms of smartphone penetration for WeChat. When do we think about accelerating the pace of one station beyond what we have for games and a small portion of advertising and official account if you look into 2015? Sense? Well, I think, this year, we have really unlocked a very big revenue opportunity with mobile games. I think as we look at our platforms, right, we look at the long term potential off the platform rather than just a few quarters for 1 or 2 years. I think with that in mind, we will monetize on on the right rhythm, I would say. And clearly, if you look at what could be, therefore, for, WeChat and mobile QQ there there is the mobile game opportunity. There is advertising opportunity, which sort of near very clearly you've looked at comparable outside of China, that's essentially 100% of the comparable revenue. And supports a very big market cap. We are also clearly seeing an opportunity like that in China because the performance based advertising in China is also a proven market with multiple market players in there. But we want to use a step by step approach in terms of building out the revenue opportunity. And when we look at that, right? We don't necessarily just look at advertising, as one stream, we also look at the entire ecosystem, which would include the availability of our payment system. When there is sufficient number of people who have payment within our user base, then advertising become much more effective. We look at the eco systems of advertisers in there. And as a result, we have invested a large number of vertical category leaders. And over time, when we step by step bring these category leaders and the entire value chain that they represent into our ecosystem, then the revenue opportunity will be even bigger. So I think we are building out these infrastructures step by step and to some extent, right? Because of the fact that we have unlocked a very big opportunity within mobile games. And that's sort of to some extent beyond our or reach new expectation, we could afford to slow down the other monetization a little bit, but a lot of the basic infrastructure is being viewed out. And as you can see, we are testing out a lot of the monetization infrastructure without dialing the the intensity up because we want to do it in a step by step approach. But once we have enough of these levers build out, then we can turn on monetization as we want it to be. Okay. Great. Thanks for the detailed information. Thanks, Martin. John. Thank you, Dick. Next question please. Thank you. The next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question. Hi, good evening. Jeff, on another topic, could you provide us more color on the progress of your lifestyle payment services as well as your online bank because we heard some news report on potentially some major progress or milestone by the end of this year. And then just for housekeeping, could you give us an update of the ARPU of your PC games? Thanks. So, Eddie, what do you mean by lifestyle payment? I don't quite understand. Sorry. Your lifestyle services, as far as your mobile payment. Okay. In terms of our mobile payment, the number of users have been actually going quite nicely. And as you can see, we have leveraged the same infrastructure of our mobile payment to power 2 different mobile payment solutions. 1 is wage in payment, which has been growing. And we also have launched the mobile QQ wallet, which leverages the same mobile payment infrastructure. And that has also been growing very nicely. And And there's sort of there's a little overlap actually between the two payments suggest that these two solutions have their own user base and together they represent pretty strong growth of our payment solution. And in terms of the lifestyle services, I think it's a story of continuous growth, right? We have incorporated, if you think about it in the beginning of the year, DMPING and we have incorporated DD voucher. We have also just incorporated 58 WUVA lifestyle services within our QQ app, right? So with the addition of these lifestyle services, we are able to provide our users with a better user experience And at the same time, we are able to create payment instances to drive our payment solution adoption. And over time we believe these merchants can also be very important advertisers on our platform. So I think the whole ecosystem growth is on a consistent basis Now in terms of the bank, right? We have got, good progress in terms of the formation of the management team. We have a very solid management team already build out. And we have passed a couple milestones as set by the regulator. And I think the progress is is ongoing and is actually quite smooth. And in terms of the app, I'll pass to John to talk about the PC game For LMO, the ARPU range from $270,000,000 to $390,000,000. And for advanced casual gains, it ranges from 100 to 120 per quarter. Thank you, Adi. Next question please. Next question comes from the line of Chi Zeng from HSBC. Please ask your question. Good evening. Thanks for taking my question. Just two questions. I was wondering if you could walk us through sort of the how we should be thinking about advertising on beachhead over the next sort of quarters and months in terms of products and in terms of what you think might be advertiser adoption? And secondly, my question is about your sales and marketing. It looks like it was a it grew pretty at a pretty low on a year over year basis. I was wondering if you can talk about how we should be thinking about sales and marketing in the fourth quarter and in the upcoming few quarters? Well, I think in terms of the WeChat advertising, I actually talked pretty extensively in the first question, I don't have much to add. I would say that there is a pretty big opportunity. We are doing order steps to prepare ourselves for it. And we're not in a rush to do it, but at the same time, we will continue to push ahead with it. In terms of the sales and marketing, maybe John can talk well, I would say sort of fourth quarter is typically stronger season for sales and marketing, right? Because it's year end, we want to make sure that there are a lot of business units, which want to sort of leave their marketing budgets to what year end. And there's also the traditional Chinese holidays, which, conducive for putting out marketing programs. So typically, it's actually a a hot season, heavy season during the year. And I think at the same time, improvement cost incurred due to the descaling of our e commerce businesses? I was wondering, in terms of WeChat, what's your view on amortizing in the moments, page? Thanks a lot. Well, there is a potential, but I think we when we start experimenting with it, we'll let you know. Thank you. Thank you, T. Our next question please. Next question comes from the line of Philip Wong from Morgan Stanley. Please ask your question. Hi. Thank you for taking my question. My question is about mobile q 2 and WeChat. Could you share with us the user overlap that's you. And also, going forward, how would you like the 2 different platforms to position studying our mobile SNS service in China? Well, if you look at the, mobile QQ and, WeChat. What I would like to highlight is that each of them, is sort of very significant right? Even if you count out the PC portion, mobile QQ is in excess of 500,000,000 in terms of MAU And weixin and WeChat added together is more than 450,000,000 MAU. And there is some overlap between the 2, because if you just do a natural addition, right? It's more than the total internet population in China. So I think we don't actually disclose the actual over but you can almost like do the math yourself and you're not going to be far off in terms of overall overlap between the two. What I would like to say is that, with respect to both mobile QQ and WeChat, the 2 of them are growing actually at a very healthy and consistent pace, right? Year on year growth of mobile QQ is 36% whereas the year on year growth of Ovation WeChat is 39%, right? So the 2 of them are almost like growing at the same pace and grew quite fast. Which suggests that both of them are very healthy. And what I would say is Weixin is, on a relative basis, have more exposure on sort of the 1st tier and higher end users who have not and more mature users who have not been using QQ in the past, whereas QQ is actually very strong in 2nd tier, 3rd tier cities, and also QQ has got a PC component. And as a result, actually used quite a bit in the office by white collar workers, and at the same time, Q2 is actually a very popular with the young and especially sort of first time internet users. So you have a follow-up question? Right. So, my question is, advertising business. So since like this quarter, your, QSOL performance based advertising has been a driver. And I just wanted to ask if you could share with us any operating metrics, for example, advertising price conversion rate. How would that compare to you on the PC platform? That would be very helpful. Thank you. I believe we mentioned last quarter that the conversion rate on mobile tune zone is multiple times higher than the conversion rate PCQ zone. And that comment last quarter would still hold true today. The pricing is not identical to a PCQ zone. It's moderately higher, primarily because most of the advertisers who advertise on PCQ zone, but also want to advertise on mobile Q zone, but there's an additional category of advertisers in the form of app developers who find this a very powerful medium for distributing and installing their apps. So they add some a bidding tension. But in general, we feel that the pricing of Guangdian Tong, whether on PCO or mobile is substantially lower than that of other comparable performance advertising media in China. And that's the fundamental and why, we see very healthy advertiser demand for Guangdee and Tom. The next question comes from the line of Alan Halawell from Deutsche Bank. Please ask your question. Great. Thank you very much. First question would be, basically, could you keep involved, like, estimate how much GMV And E Commerce, gets contacted on your mobile platform of both people? Swings with JV and the like, but also through what seems to be a widening array of very creative and informal means of selling items on the platform? Well, e commerce, we don't disclose the actual numbers. But I would say two points. Number 1 is, in terms of we have always said for e commerce, right? We would like to create 2 different experiences. The first one is a centralized entry point for a market where sort of you can find any product that you want to find. And that's the entry points of our shopping channel within Weixin and within Mobile QQ. And I would say Due to the hot work between the two teams, the JD team, our teams, there is a continuous increase in terms of the sell through in those entry points. That's sort of on our centralized ecommerce. In addition to that, we would like to capitalize the growth of decentralized e commerce within our ecosystem, I. E. Basically different merchants that they would be able to form relationship either themselves or through a third party platform like JD's open platform in order to transact directly with the users. And with that, we actually have seen a pretty encouraging signs of results and we're seeing a pretty encouraging trend of growth of these decentralized e commerce. I think these are the two points I would say with respect to e commerce within our social network. Thanks. And my second question would we hope to return to. I would love to get a sense as to how much revenue you generate by cooperating gains through. And as more general question. How do we book revenues in Hawkes for 3rd party games across the intense mobile businesses? In terms of new about right now, it's generating not a lot of revenue because as you can see in our strategy description, right? Yingying about number 1, the growth has been actually quite steep in the past year. And as a result that the most important thing for us to focus on is actually getting the infrastructure up and running, getting our market share up and at the same time getting some of product differentiation up. So we actually did very little in terms of monetization. But over time, as sort of ingleby has got very in traffic. And clearly, the App Store is a very effective way of distributing games and other apps and particularly games, there is a clear revenue model, then over time, we would be able to benefit from the publishing of 3rd party games. And that would Yinggua will become another important distribution of the games, in addition to our game center within, mobile QQ evaluation? In relation to the booking of revenue for mobile games. Actually, at this point in time, we book based on a net basis that is, you know, we net off the, cause, again, we net out the cause against the revenue and, However, we're in the midst of revisiting whether you know for third party mobile games, we'll book on a gross basis and anyway, at this point in time, the revenue generated for 3rd party is not that significant. So the change has a material change. Thanks. Sorry. Very quickly. I think one of the powerful tools that Yimi owned biofuels a ride to such dominance as the very favorable economic terms you guys offer to the 3rd party app developers. Are there other levers that you're able to pull? Like do you offer better revenue share to your operator partners or Are there any other tools that might account for this variance test to drive in market share? Well, I don't think sort of the favorable short term is actually a key driver of Yingying Bao's growth. As we discussed in the prepared remarks, the growth of Yingying is really because of the fact that in the past, we have a lot of app platforms which do generate app downloads but they're scattered around within many different apps. And so what we did with Newnan Valley is actually create centralized focal point so that all these downloads will be aggregated within the central point. And the result of it is when the users have gone through one download and experience, they know that they can actually keep coming back to more that downloads with Ying Unbel. And that's actually sort of one of the key reason why Ying Unbel has picked up market share very nicely. The other one is, of course, we have actually put in a lot of pretty differentiated functionality and features within union about we can download apps faster. We can actually download apps with less traffic especially mobile traffic. And we have better security. We have better recommendation. And as a whole, as a better product, it actually helps you pick up market share. These are the two main reasons. I have a question I would like to get some more color on the milestones or target for mobile payment membership development as a affiliate, companies such as JD And Tianping will also benefit from the expanded campaign user base, if management could give some more color on the membership development momentum, that would be great. Thank you. Has been strong and it the mobile QQ wallet has been introduced because sort of we have 2 platforms basically sort of new pushing for mobile payment and it has also been stronger after we have incorporated more partners into the mobile payment ecosystem. So I would like to sort of give you these 2 directional comments. Can I also ask a follow-up question on the mobile game pipeline? Should we expect that the the next quarter or next year mobile game launch to be somewhat stable at a somewhat stable pace of maybe four games, introduced per month. And his management can talk about some major genres downrose involved, that would be great. Thank you. In terms of the pace of game launches, if you look back over the last 12 months, there's been a gentle acceleration from maybe 2 games per month in the earlier months to 4 or more games per month today. So we're pretty happy with that gentle acceleration curve. In terms of, genres, then, we've been quite thought about identifying what are the genres that are currently popular in China where we're well established, what are the genres that are popular with? That's quite established. And what are the genres that are not popular in China today, but we think, should be popular in the near future based on trend see elsewhere in the world. And so we're relatively, in a discipline about trying to bring our users, the broader range of genres. There's also kind of derivative you may be wondering about as well, which is the mix of, in a casual games that subtract a large number of users versus, mid core games that that, typically attract a small amount of users but have higher revenue potential. And if you look back over the last year, you'll see that we started off with a number of fairly casual self developed games, then we subsequently layered on a few more mid course self developed games. In the third quarter, we published a number of, very successful licensed casual, very casual games. And going forward, you should expect us to publish a number of licensed to build forward. But it's an interesting space. We're very, very clear market leader in terms of our users. But even with that kid market leadership in terms of users, what we see is that there are certain subcategories that like running games where we basically own the we created the category, but as in China, but as other substantial categories where we really have minimal And so we think with the right product and the right execution, we can continue to grow the market and, can it grow our presence. Oh, that's great. Thank you very much. Next question comes from the line of Alex Yao from JP Morgan. Please ask your question. Hi, good evening, everyone, and thank you for taking my question. Just follow-up on the previous question. Can you talk a little bit on the mobile game growth outlook in the next few quarters. For China's overall mobile gaming market, what could be the key driver in 2015? And then what will drive your mobile game revenue growth in 2015? Yes. I think that for the China market as a whole, one driver would just be penetration of smartphones, albeit at a diminishing rate. And then a second driver will be increased conversion of free users paying users, a third driver will be increased ARPU and that'll probably manifest itself through a user shift from the casual games I alluded to earlier toward more mid core games. And if you look at the ARPU figures, John just quoted, you can see that there's a very wide gulf today still between, mobile game ARPU versus our PC role playing game ARPU with our PC advanced casual game market somewhere in the middle. So we think that, for the industry as a whole, it's still relatively early growth stay particularly in terms of the mix shift from casual to more mid core games. And we're relatively confident in that assessment because we do a lot of work in terms of what's happened in Japan, what's happened in Korea, what's happening in the U. S. And in Europe. And what's interesting is we can see in all of those markets. Over time, A, there's been a shift toward, in a more mid core core games has enhanced monetization. And see interestingly, a top 10 mid core game actually has pretty good longevity if you look at the biggest, mid court games in Japan, in Korea, in the U. S. And they've actually typically been, at the top of the respective table for 12 to 24 months. So I think that when we look at the industry, a lot of that is true to the ups and downs along the way on a week by week or month by month basis, the overall trend for the industry feels comfortable. And then the position we're coming into the industry is we have, as I mentioned, by far the largest share of users, we're relatively under monetized in terms of our revenue share versus our user share. And we'd be certainly have the expertise on PC games to do mid core. If you look at our major PC game titles, mostly mid core or even hardcore like league of legends. And so if we can, transfer that expertise at mid core games from PC to mobile, and boost our monetization, then we think we're in quite a comfortable position. Got it. The second question is about the video business. Can you talk about the video business outlook, particularly your content strategy, for 2015? Thank you. Yes. So our content strategy is to continue to be aggressive. Think if once a serious participant in the online video industry and the online video industry is growing at the revenue growth rates, it's growing that then you want to has no choice, but to be competitive in terms of going out there and locking down high profile content like our peers, we are also doing some experiments in terms of content where we actually play a role in the production process, or in the execution process. But but I'd emphasize that we don't see that as a kind of a panacea to the cost in that that's more about just broadening the range of content available to our users and continuing to grow our video views. As Perry mentioned in the opening remarks, our online video views increased by about 50% year on year in third quarter, which we assume is substantially better than the industry. And we would like to continue growing up online video views at a healthy rate. And one way of doing that is continuing to invest in content. There's other things we're doing as well in terms of optimizing our sort of traffic flows internally. So that, you know, we we market the right content to the right users and so that those users who enjoy one piece of content on our video platform, we notify them and bring them back for pieces of content, but, we certainly are content to continue to be aggressive in terms of purchasing content. This is very helpful. Thank you very much. Thank you very much, Alex. Next question please. Then an operating interest of time will take the last three questions. Please. The next question comes from the line of Alicia Yap from Barclays. Please ask your question. Hi, good evening, everyone. Thanks for taking my questions. My questions is related to mobile games. So specifically, management comment, what is the split of your smartphone games revenue that come from iOS versus the Android And in related to that, is there any way you could foresee the issues that you were facing from the iOS requirement that could help you manage or predict the situation better? And if you look back, could this issue be awarded at all And will that happen again and affect your future expansion upgrade on the iOS? At least 9 of those questions. So I apologize in advance if I missed 1 or 2 and you can kind of come back a 1,000,000. It takes me on those. So I think that, the first question with regard to iOS as a percentage of game revenue, If you look at the mobile phone industry in China, I think that iOS is a team's proportion of smartphones in China, but it's been widely estimated that Ios users would spend 2 to 3 times as much as that use on digital items and so forth. So that will give you some sense of the relative breakdown of iOS versus Android. Now if the premise of the question was that that split in turn flows through into how you think about, what happened to our smartphone and game revenue in the third quarter. I just sort of say that premise is not quite right because while these specific login requirements, were for the IOS ecosystem, stimulus. We also, synchronize our upgrade packs between iOS and Android. So if something half that means we can't release a big upgrade pack for a game on iOS, then we won't release the big upgrade pack for Android either until the iOS version is ready in order to ensure consistency of user experience. So the issues we alluded to in the third quarter apply to both iOS and Android together not just for one operating system. So I think that was the first couple questions you asked. And then, your subsequent question about whether can be avoided in the future. So, we think that this was a learning experience. IOS is a heavily curated environment and that's be great for consumers, but we also need to cooperate with the curator. And Ios has a guy lines. And, during this process, we tend to better understand the nature of those guidelines, we've developed a better connectivity with iOS in terms of managing those guidelines going forward. So while it would be, optimistic for me say that there will never be unexpected guidelines in future that we need to comply with. I think the issue this time around was not that there was expected guideline, but that it took us an extended period to figure out how to comply with the guideline whereas now the lines of communication are much clearer and we'd hope with planned and we're building place processes such that going forward, we can come to a much quicker accommodation of what our us would like us to be doing. Great. Understood. And then my second question is on the, right? So how should we think about the App Store revenue contribution in the future given that I think the smartphone shipment growth has been the decelerating a little bit. So total seems like the total apps download per user also has been seeing some slowdown in the market. So what is your view future potential of this revenue coming from the Inno Bao? Thank you. Well, I think In terms of, right? Number 1, our union ball market share has actually grown very significantly and there's a very large volume of downloads. And as I said earlier, we have not really monetized the downloads that much. So I think that there is sort of a potential for monetizing these downloads could be unleashed in the next few quarters. Secondly, I think It is true that people are in general downloading fewer apps as a result sort of the the incumbent apps, right, has got a has got a stronger staying power to some extent But the situation is actually different from category of apps to category apps For example, if you're talking about game apps, then I think just looking at our user behavior, there's still quite a strong demand for looking for new games. And I think that's exactly what what will be conducive to the monetization of Union Bao over time. And, thirdly, I would say, you know, with Limbao's monetization is not just sort of new games, but also there's an advertising back, as I said, there's also sort of an ecosystem aspect, which is if we are able to deliver downloads to different partners, then it's more likely for our app partners to adopt different infrastructure features from us, including our network including our payment solution, right? So I think the value of Yoonbao is sort of just beyond pure game operation. I see. Thank you so much. The next question comes from the line of Erika Poon Wirtgen from UBS. Please ask your question. Good evening, management. My first question is about your international strategy. I'm just wondering if you can just update us on the overall pace of growing your international base for WeChat users and what kind of investments have you allocated to that in the third quarter? The second question is about the gross margin. Just note a sequential decline in the gross margin on an e commerce spaces. I'm just wondering if you can just elaborate a little bit more on that and how much did you spend on the video content? Thank you. I think on the international side, we'd mentioned in prior quarters that there were certain markets that were proving hospitable our international expansion particularly by the WeChat application, and we would continue to focus on those markets. And we've been doing that also launched a couple of other apps in those markets actually. And then there's other markets, especially that the sort of Western World Markets where advertising is more expensive and less effective, where it was proving harder to make headway. And so during the third quarter, we've reduced our sales and marketing support for international activities given that strategic shift. Maybe I'll pass it to John on the margin question. In relation to the dividend margin, gross margin, exe commerce, the reason for that is because of number 1 we have, last you know, smartphone games revenue in this quarter and number 2 is we have increased content costs in particular in relation to, provision against, incentives for some, licensed game content. Okay. Next question. Great. Thank you. Thank you. Thank you. The last questions will come from Wendy Huang from Standard Chartered Bank. Please ask your question. Thank you. I have 2 quick questions. One is, given that there are so many partners on Tencent Ecosystem, do you have the ambition to build a third party cloud service platform similar to Amazon's AWS in U. S. And the Kingsoft out in China? And secondly, regarding your comment about mobile game earlier, so you mentioned that the net mobile game plan is split, between the social networking and again, has not materially changed. Does that mean it's still like 1 to relationship? And also, can you provide a gross beating breakdown between the mobile QQ game and a way as well as the in house gain versus 3rd party gain? Thank you. Okay. Well, in terms of the cloud service, I think you're spot on. We are actually offering the cloud service to not just our partners, right, new to our partners, but also sort of to the wider app community. We believe that it is a way for us to engage with app developers. It's a contribution to the app ecosystem, but also at the same time it help us to establish a closer relationship with potential partners. That could be our partner on our Lingung Bao could be partner on our advertising platform. It could be a partner, with our other payment services. So that's a that's an important part of our overall offering to our partners. And right now, we are the number 2 player in the market and it has grown very significantly. Maybe time when we get to the right time, we may give you an update in our strategy section in our press But this is indeed a business that we're incubating, which has grown to a pretty significant size already. In relation to the booking of mobile games revenue on their platforms and on engage. I think the street would somewhat like 2 withers tree. Okay. So in house versus license games, we've mentioned that the majority of the revenue in both Q2 and Q3 came from in house games. We launched a number of successful license gains during Q3, but they tend to be of the more casual nature rather than the revenue maximization nature. In terms of the revenue split between Weixin and Mobile QQ is getting publishing platforms. We haven't disclosed beyond saying that they're actually both very substantial that they bring us different users and the users to some extent enjoy different games. So the people of FANGuation tend to enjoy fighter playing games whereas the people playing Q2 might enjoy racing card games, for example. But the two of them are both some financial contributors within that aggregate smartphone game figure that we disclosed. But which one is bigger at the moment? And is there any years of behavior difference on mobile QQ and Wixin platform in terms of the mobile game playing? I think that we haven't disclosed which is bigger and you should think of them as being very roughly some or similar in size rather than one being dramatically larger than the other. In terms of user behavior, there are clear differences. One difference, as I alluded to, is what kinds of games people like, maybe the guys who have Weixin already own cars. And so it's less interesting for them to play a racing card game. Another difference is that in general, the conversion rate of users of the chat platform to, users of games or players of games is higher on QQ than it is on Weixin. And we think that's primarily because the QQ team had a decades experience moving people from chat to games on our PC, whereas it's a lower conversion rate on Weixin. And we're looking at ways to enhance the version rate from people chatting to people playing games on Weixin that we think could be quite effective. You. Okay. Thank you, Wendy. And thank you, operator. We're rounding up the call now. If you wish to check our press release the financial information, please visit our corporate website under www.sensen.com/ir. The first replay of Duke's webcast of the site shortly. Thank you and quarter. That does conclude our conference for today. Thank you for participating. 2014, that was a results announcement conference call. You may now disconnect.