Thank you for standing by, welcome to Tencent Holdings Limited 2014 third quarter results announcement conference call. At this time, all participants are in the listen-only mode. There will be a presentation followed by question and answer session. If you wish to ask a question, you will need to press star one on your telephone to join the questions queue. Your name will be announced when it is your turn to ask a question. If you wish to cancel your questions, please press the pound or hash key. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chan.
Thank you, operator. Good evening. Welcome to our earnings conference call for the third quarter of 2014. I'm Catherine Chan from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements which are underlined by a number of risks and uncertainties and may not be realized in future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited, Non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and our Non-GAAP measures, please refer to our disclosure documents downloadable on www.tencent.com/ir. Now let me introduce the management team on the call tonight.
We have our Chairman and CEO, Pony Ma, President Martin Lau, Chief Strategy Officer James Mitchell, and Chief Financial Officer John Lo. Pony will kick off with a short overview. Martin will discuss strategic highlights. James will stick to business review, and John will go through the financials before we take your questions. I'll now turn the call over to Pony.
Okay. Thank you, Catherine. Good evening, everyone. Thank you for joining us. In the third quarter of 2014, we achieved another quarter of solid growth in our platforms, revenue, and earnings. Our online advertising business grew significantly year-on-year due to performance advertising on our social platforms. On our various businesses, we retained our leadership in online games, and we virtualized our subscription products via enhanced mobile privileges. We have sharply increased the market share of our app store, Yingyongbao, a key anchor for the mobile ecosystem we are building. Looking forward, we will deepen our partnerships with the category leaders and continue to invest in our people, products, and platforms. Now let me highlight the financial results for you. Total revenue was CNY 19.8 billion, up 28% year-on-year. Excluding e-commerce transactions, total revenue grew 47% year-on-year.
Value-added services revenue was CNY 16 billion, up 38% year-on-year, of which social network revenue was CNY 4.7 billion, up 47% year-on-year, and online games revenue was CNY 11.3 billion, up 34% year-on-year. Online advertising revenue was CNY 2.4 billion, up 76% year-on-year, and e-commerce transaction revenue was about CNY 500 million, down 81% year-on-year. Non-GAAP operating profit was CNY 8.3 billion, up 55% year-on-year. Non-GAAP net profit attributable to shareholders was CNY 6.4 billion, up 47% year-on-year. Moving on to our key online platforms. We achieved strong year-on-year growth in mobile usage and activities on our social platforms. Total MAU for QQ was 820 million, within which smart devices' MAU grew 36% year-on-year to 542 million. QQ PCU increased 22% year-on-year to 217 million. Weixin and WeChat achieved a combined MAU of 468 million, up 39% year-on-year. Total MAU for Qzone was 629 million, of which smart devices MAU rose 26% year-on-year to 506 million.
Our online games platform continued to lead the market on PC and on mobile. Our integrated media platforms grew traffic at healthy rates. Our portal, QQ.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 deepened engagement on both PC and mobile, with total daily video 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 platforms 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 million in September, up 42% year-on-year. This is significantly positive, especially considering the relatively flat overall PC market. PC Manager currently is still the second-largest PC 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 Manager's activated installations grew 92% year-on-year to 585 million 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, 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 manufacturers 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, Yingyongbao, 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 million last month. According to Enfodesk, Yingyongbao's market share jumped from 8% to 24% within the last 20 months. Among all the downloads within Yingyongbao, over two-thirds are third-party apps and approximately 80% are non-games, which shows that Yingyongbao's downloads are representative of the overall market rather than just Tencent's own apps.
Seeing the increasing traffic and greater brand recognition of Yingyongbao, developers increasingly choose to publish apps through Yingyongbao. As of the end of September, the App Store has published over 1.2 million apps, up 10 times since the beginning of this year. We believe Yingyongbao is very important platform that extends our franchise over the mobile internet. It is an important gateway for our users to access third-party apps, also it's a centralized entry point for accumulating natural download traffic. How have we been able to drive this phenomenal growth of Yingyongbao? First of all, we have many large DAU applications that generates app downloads traffic, and Yingyongbao 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 Yingyongbao can generate a lot of tangible value to us. It can generate revenue through revenue sharing with games that we distribute 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 Yingyongbao will continue to extend our ecosystem over the mobile internet. With that, I will pass to James to talk about business review.
Thank you, Martin. Good evening. In the third quarter of 2014, our total revenue grew 28% year-on-year. Excluding e-commerce transactions, total revenue grew 47% year-on-year. VAS generated 82% of our revenue, of which online games contributed 58% and social networks, 24%. Online advertising represented 12%. For Value-Added Services, segment revenue was CNY 16 billion, up 38% year-on-year and 2% quarter-on-quarter. Social network revenue was CNY 4.7 billion, up 47% year-on-year and up 2% quarter-on-quarter. The year-on-year increase was driven by sales of items on mobile platforms and by monthly subscription packages. In the third quarter, we revitalized growth in our subscription revenue by improved mobile privileges. Online game revenue was CNY 11.3 billion, up 34% year-on-year and up 2% quarter-on-quarter.
Following the explosive growth of our smartphone games revenue from under CNY 100 million per quarter to over CNY 2 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 market share. Looking more closely at the smartphone games integrated with Mobile QQ and Weixin game centers, revenue was approximately CNY 2.6 billion. Third 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 prevented 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 eight upgrades for our game, Tiantian Feiche on iOS in the first 6 months of 2014, but zero upgrades between July and mid-October. By the end of October, we have largely integrated the guest logins, our upgrade pack release schedule is back to a more regular cadence, and about 98% of our smartphone game users continue to log in with their WeChat or QQ accounts. So we feel we've resolved this issue and are moving forward. Notwithstanding the guest login disruption, we remained the leading smartphone game publisher during the quarter. We also executed on the broader mobile game initiatives we highlighted last quarter. Specifically, we increased our App Store market share, and we published the most popular licensed games in China with Modoo Marble achieving 1st place in China's iOS App Store in August, Candy Crush Saga in September, and Fruit Ninja in October.
Shifting to PC client games. For advanced casual games, average concurrent users grew 16% year-on-year to 7.7 million. Robust performance of League of Legends and new sports games benefited growth in users and revenue both year-on-year and 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 FIFA Online 3 became the number 1 sports title in China soon after our launch in June, and our self-developed shooting game, Assault Fire, which recently introduced a tower defense mode, has become the number 2 shooting game in China behind our licensed title, CrossFire. We look forward to expanding the shooting genre further with the launch of Call of Duty Online. For massively multiplayer online games, average concurrent users were 1.7 million, down 20% year-on-year. Revenue grew modestly both year-on-year and quarter-on-quarter.
As Dungeon & Fighter entered its sixth year of operation, we're focusing on its core players as we see some lighter users of DNF reduce 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. For Mobile QQ, our location-based groups expanded rapidly in terms of 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 as we added new payment scenarios.
For WeChat, the volume of messages increased significantly with the 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. We introduced a short video feature allowing users to record and share video content in chats and in Moments. Looking at online advertising, segment revenue was CNY 2.4 billion, up 76% year-on-year and up 18% sequentially. Excluding our deconsolidated search and e-commerce marketplace revenues, total advertising revenue grew 91% year-on-year. Brand advertising revenue was CNY 1.5 billion, which was up 85% year-on-year and up 11% quarter-on-quarter due to fast-growing video views and increased contribution from mobile. The FIFA World Cup events and The Voice of China (Season 3) program substantially contributed to our third quarter revenue and costs.
Our top five advertiser industries were food and beverage, automobile, personal care, online services, and consumer electronics. Performance advertising revenue was CNY 917 million, up 93% year-on-year and up 32% quarter-on-quarter, chiefly driven by increased revenue from Mobile QZone advertising and initial contributions from advertising on official accounts in Weixin. Mobile represents approximately 45% of our performance advertising revenue this quarter, up from about 30% last quarter. Given our traffic leadership, logged-in relationship with users, and 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 multiyear growth. For e-commerce, consistent with the strategic transaction of our e-commerce businesses and transfer of traffic to JD.com, our e-commerce transaction revenue declined sharply to CNY 459 million, which was down 81% year-on-year and down 65% quarter-on-quarter.
During the third quarter, we began migrating Yixun 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. With that, I'll pass over to John to walk you through the financials.
Thank you, James. Hello, everyone. For the third quarter of 2014, our total revenue was CNY 19.8 billion, 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 CNY 12.6 billion, up 49% year-on-year. Operating profit was CNY 7.5 billion, up 56% year-on-year. Profit attributable to shareholders was CNY 5.7 billion, up 46% year-on-year. GAAP diluted EPS was CNY 0.605 for the quarter. On a Non-GAAP basis, operating profit was CNY 8.3 billion, 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 our divested search and e-commerce businesses. Non-GAAP net profit attributable to shareholders was CNY 6.4 billion, up 47% year-on-year and 10% quarter-on-quarter. Non-GAAP diluted EPS was CNY 0.688 for the quarter. Let's turn to segment growth margin.
Gross margin for VAS was 67%, up 2 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 platform games. The sequential dip reflected reduced platform games 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 sports event seasonality offset increased costs, including those relating to Voice of China 3. Gross margin for e-commerce transactions was actually 25%, up 19 percentage points year-on-year and up from -7% last quarter. The improved gross margin flowed from Yixin gradually moving to marketplace model. Moving to operating expenses. Selling and marketing expense was CNY 1.9 billion, up 30% year-on-year and down 3% quarter-on-quarter. The year-on-year increase was primarily due to an increase in advertising spending on products and platforms such as online games and online media.
The sequential decrease primarily reflected lower fulfillment expenses for our principal e-commerce transactions and lower subsidies for booking taxi rides. G&A expense was CNY 3.8 billion, up 45% year-on-year or 10% quarter-on-quarter. This was primarily driven by increases in R&D expense and staff costs included under G&A. R&D expense was CNY 2 billion, up 50% year-on-year and 8% quarter-on-quarter. As a percentage of quarterly revenue, selling and marketing expense was 10% and G&A 19%. R&D represented 10% of quarterly revenue. Share-based compensation was 4% of quarterly revenue. As at quarter end, we had approximately 26,000 employees, down 3% year-on-year or up 5% quarter-on-quarter. The year-on-year 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 third quarter.
Gross margin was 63.8%, up 2.2 percentage points from the second quarter, mainly driven by a mix shift away from low-margin e-commerce business and the growth of online advertising revenues. Excluding e-commerce transactions revenue and costs, gross margin would be 64.7%, down 1.9 percentage points from the second quarter, primarily due to a decrease in VAS gross margin. Non-GAAP operating margin was 41.7%, up 2.8 percentage points from the second quarter, mainly as a result of improved gross margin, which was partly offset by an increase in G&A expense. Excluding e-commerce transaction revenue and costs, it would be 42.1%, flat when compared with that of last quarter. Non-GAAP net margin was 32.7%, up 2.9 percentage points from the second quarter, mainly as a result of improved operating margin. Excluding e-commerce transactions revenue and costs, it would be 32.9%, roughly stable with last quarter.
For the third quarter, total CapEx was CNY 1.1 billion, down 35% year-on-year or up 16% quarter-on-quarter. Operating CapEx was CNY 600 million, down 39% year-on-year or up 3% quarter-on-quarter. Non-operating CapEx was CNY 460 million, down 28% year-on-year or up 37% quarter-on-quarter. Free cash flow was CNY 7 billion, up 69% year-on-year and 10% quarter-on-quarter. At quarter end, net cash position was CNY 21.3 billion, 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 were CNY 61 billion as at quarter end. This concludes our presentation. Thank you.
Thank you, John. Operator, we shall open the floor for questions now. We would like to remind when you raise questions, please strictly limit to two questions each time. Thank you.
Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel a request, please press the pound or hash key. The first question comes from the line of Dick Wei from Credit Suisse. Please ask your question.
Hi. Good evening. Thanks for taking my questions. First question is on mobile games. Wonder if it's possible to give some more color for the mobile games during the third quarter, for example, some of the gamers penetration or output or how is the engagement trend given there's lack of upgrade and how do we get more confidence out looking into the fourth quarter on the mixture for some of these gamers to come back in or increase the engagement? Also, if you were just to look at kind of gross revenue without taking out the developer's portion, wonder what the trend would be like, if you can share in the third quarter. Thank you.
Gosh, that's quite a few questions, Dick. It's an important topic. Let's try and address as many of them as we can. I think in terms of engagement, as you would expect, the delayed launch of the upgrades would have had some impact on the growth rate of engagement. By the end of October, we had implemented the software development kit that we needed to implement. Our games now largely have the guest login functionality. As a result, the pace of expansion pack releases has returned to normal. That's flowed through into engagement and other metrics. Overall, our big picture view is that, first of all, this is an industry that's grown explosively quickly, and we're very happy to have participated in the growth, notwithstanding the temporary blip we experienced in the third quarter, fourth quarter.
Overall, we feel that when we spoke to you three months ago, we identified several priorities beyond revenue maximization for our mobile game business, including improving our App Store market share, including launching successful licensed games. We feel we've delivered on both of those objectives, as well as enhancing the underlying mobile game infrastructure, as well as retaining our clear industry leadership.
In terms of the output for the mobile games or patterns, it's between 100-110 for the quarter. We view it on a portfolio basis.
Okay, great. Maybe you can have another question regarding maybe the monetization pace for WeChat. I think we are pretty well penetrated in terms of smartphone penetration for our WeChat. Wonder what do you think about accelerating the pace of monetization beyond what we have for games and a small portion of advertising an official account if you look into 2015? Thanks.
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, we look at the long-term potential of the platform rather than just a few quarters or one or two years. I think, with that in mind, we will monetize on the right rhythm, I would say. Clearly, if you look at what could be there for WeChat and Mobile QQ, there is the mobile game opportunity. There is advertising opportunity, which sort of very clearly if you look at comparables outside of China, that's essentially 100% of the comparable's revenue, and it 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.
We want to use a step-by-step approach in terms of building out the revenue opportunity. When we look at that, 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 a sufficient number of people who have payment within our user base, then advertising become much more effective. We look at the ecosystems of advertisers in there. As a result, we have invested a large number of vertical category leaders. 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.
I think we are building out these infrastructures step-by-step. To some extent, because of the fact that we have unlocked a very big opportunity within mobile games, that's sort of to some extent beyond our original expectation, we could afford to slow down the other monetization a little bit. A lot of the basic infrastructure is being built out. As you can see, we are testing out a lot of the monetization infrastructure without dialing the intensity up because we want to do it in a step-by-step approach. Once we have enough of these levers built out, then we can turn on monetization as we want it to be.
Okay, great. Thanks for the detailed explanation. Thanks, Martin, John, and James.
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. Just on another topic, could you provide us more color on the progress of your lifestyle payment services as well as your online bank? We have heard some news report on potentially some major progress or milestone by the end of this year. Just for housekeeping, could you give us an update of the ARPU of your PC games? Thanks.
Eddie, what do you mean by lifestyle payment? I don't quite understand.
Sorry, your lifestyle services as well as your mobile payment.
Okay. In terms of our mobile payment, the number of users have been actually growing quite nicely. As you can see, we have leveraged the same infrastructure of our mobile payment to power two different mobile payment solutions. One is Weixin Pay, which has been growing. We also have launched the mobile QQ Wallet, which leverages the same mobile payment infrastructure, and that has also been growing very nicely. There's very little overlap actually between the two payment solutions. Just that these two solutions have their own user base, and together they represent a pretty strong growth of our payment solution. 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, Dianping, and we have incorporated Didi Dache.
We have also just incorporated 58.com, wu ba, lifestyle services within our QQ app, right? With the addition of these lifestyle services, we are able to provide our users with a better user experience. At the same time, we are able to create payment instances to drive our payment solution adoption. Over time, we believe these merchants can also be very important advertisers on our platform. I think the whole ecosystem growth is on a consistent basis. Now, in terms of the bank, we have got good progress in terms of the formation of the management team. We have a very solid management team already built out. We have passed a couple of milestones as set by the regulator. I think the progress is ongoing and is actually quite smooth.
In terms of the ARPU, I'll pass to John to talk about the PC game ARPU.
For MMOG, the ARPU range from CNY 270-CNY 390, and for advanced casual games, it ranges from CNY 100-CNY 220 per quarter.
Thank you, Martin and John.
Thank you, Eddie. Next question, please.
Next question comes from the line of Qi Zheng from HSBC. Please ask your question.
Good evening. Thanks a lot for taking my question. Just two questions. I was wondering if you could walk us through how we should be thinking about advertising on WeChat over the next sort of quarters and months in terms of products and in terms of what you think might be advertiser adoption. Secondly, my question is about your sales and marketing. Looks like it grew at a pretty low clip 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. Thank you.
I think in terms of the WeChat advertising, I've 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 all the steps to prepare ourselves for it, and we're not in a rush to do it. At the same time, we will continue to push ahead with it. In terms of the sales and marketing, maybe John can talk. I would say sort of fourth quarter is typically a stronger season for sales and marketing, right? Because it's year-end, we want to make sure that, well, there are a lot of business units which want to leave their marketing budgets toward year-end, and there's also the traditional Chinese holidays, which are conducive for putting out marketing programs. Typically, it's actually a hot season, a heavy season during the year.
I think at the same time, there are less fulfillment costs incurred due to the scaling of our e-commerce businesses.
I was wondering, in terms of WeChat, what's your view on advertising in the Moments page? Thanks a lot.
There is a potential, I think when we start experimenting with it, we'll let you know.
Okay. Thank you.
Thank you, Qi. Our next question, please.
Next question comes from the line of Philip Wan from Morgan Stanley. Please ask your question.
Hi. Thank you for taking my question. My question is about Mobile QQ and WeChat. Could you share with us the user overlap of the two? Also, going forward, how would you like the two different platforms to position setting our mobile SNS service in China?
Well, if you look at the Mobile QQ and WeChat, what I would like to highlight is each of them is sort of very significant. Even if you count out the PC portion, Mobile QQ is in excess of 500 million in terms of MAU, and Weixin and WeChat added together is more than 450 million MAU. There is some overlap between the two, because if you just do a natural addition, it's more than the total internet population in China. I think, we don't actually disclose the actual overlap, but you can almost 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 two of them are growing actually at a very healthy and consistent pace.
The year-on-year growth of Mobile QQ is 36%, whereas the year-on-year growth of Weixin and WeChat is 39%. The two of them are almost growing at the same pace and quite fast, which suggests that both of them are very healthy. What I would say is, Weixin is, on a relative basis, have more exposure on sort of the first tier and higher end users, and more mature users who have not been using QQ in the past. Whereas QQ is actually very strong in second tier, third tier cities. Also QQ has got a PC component and as a result, is actually used quite a bit in the office by white collar workers. At the same time, QQ is actually very popular with the young and especially sort of first time internet users.
Okay. Thank you.
You have a follow-up question?
Right. My question is on advertising business. Since this quarter, your QZone performance-based advertising has been a driver. I just want to ask if you could share with us any operating metrics, for example, the advertising price conversion rate, how would that compare to on the PC platform? That would be very helpful. Thank you.
I believe we mentioned last quarter that the conversion rate on Mobile QZone is multiple times higher than the conversion rate on PC QZone. That comment last quarter would still hold true today. The pricing is not identical to PC QZone. It is moderately higher, primarily because most of the advertisers who advertise on PC QZone would also want to advertise on Mobile QZone. There is an additional category of advertisers in the form of app developers who find this a very powerful medium for distributing and installing their apps. They add some extra bidding tension. In general, we feel that the pricing of Guangdiantong, whether on PC or on mobile, is substantially lower than that of other comparable performance advertising media in China. That is the fundamental reason why we see very healthy advertiser demand for Guangdiantong.
All right. Thanks for the comment.
Thank you for your questions. The next question comes from the line of Alan Hellawell from Deutsche Bank. Please ask your question.
Great. Thank you very much. First question would be, basically, could you even ballpark estimate how much GMV in e-commerce gets transacted on your mobile platforms, both through agreements with JD.com 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, in e-commerce, we don't disclose the actual numbers. I would say two points. Number one is, we have always said, for e-commerce, we would like to create two 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. That's the entry points of our shopping channel within Weixin and within Mobile QQ. I would say, due to the hard work between the two teams, the JD.com team and our teams, there is a continuous increase in terms of the sell through in those entry points. That's sort of on our centralized e-commerce.
In addition to that, we would like to catalyze 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.com's open platform, to transact directly with the users. With that, we actually have seen 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. My second question would be, we hope to return to Yingyongbao. I would love to get a sense as to how much revenue you generate by cooperating games through Yingyongbao. Actually, a more general question, how do we book revenues and costs for third-party games across Tencent's mobile businesses?
In terms of Yingyongbao, right now it's generating not a lot of revenue because, as you can see in our strategy description, Yingyongbao's, number 1, the growth has been actually quite steep in the past year. As a result, 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 the product differentiation up. We actually did very little in terms of monetization. Over time, as sort of Yingyongbao has got very significant traffic, and clearly, the App Store is a very effective way of distributing games and other apps. Particularly with games, there is a clear revenue model. Over time, we would be able to benefit from the publishing of third-party games.
Yingyongbao will become another important platform for us in terms of distribution of the games, in addition to our game center within Mobile QQ application.
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, we net out the cost against the revenue. However, we are in the midst of revisiting whether, for third-party mobile games, we'll book on a gross basis. Anyway, at this point in time, the revenue generated for third-party is not that significant, so the change won't have a material change.
Thanks. Sorry, very quickly. I think one of the powerful tools that Yingyongbao used to rise to such dominance is the very favorable economic terms you guys offer to the third-party app developers. Are there other levers that you're able to pull? Do you offer better revenue share to your operator partners, or are there any other tools that might account for this very impressive rise in market share?
Well, I don't think the favorable commercial terms is actually a key driver of Yingyongbao's growth. As we discussed in the prepared remarks, the growth of Yingyongbao is really because of the fact that in the past, we have a lot of app platforms which do generate app downloads, but they are scattered around within many different apps. What we did with Yingyongbao is actually just create a centralized focal point so that all these downloads will be aggregated within the central point. The result of it is, when the users have gone through one downloading experience, they know that they can actually keep coming back to more app downloads with Yingyongbao. That's actually one of the key reasons why Yingyongbao has picked up market share very nicely.
The other one is, of course, we have actually put in a lot of pretty differentiated functionalities and features within Yingyongbao. We can download apps faster. We can actually download apps with less traffic, especially mobile traffic. We have better security, or we have better recommendation. As a whole, as a better product, it actually helps Yingyongbao to pick up market share. These are the two main reasons.
Thank you.
Thank you.
Next question, please.
The next question comes from the line of Cynthia Meng from Jefferies. Please ask your question.
Thank you, management. I would like to get some more color on the milestones or target for mobile payment membership development as the affiliate companies such as JD.com and Dianping will also benefit from the expanded TenPay user base. If management could give some more color on the membership development momentum, that would be great. Thank you.
Yeah, I would say the momentum has been strong, and it has become stronger after the Mobile QQ Wallet has been introduced because we have two platforms, basically pushing for mobile payment. It has also been stronger after we have incorporated more partners into the mobile payment ecosystem. I would like to give you these two directional comments.
Thanks. Can I also ask a follow-up question on the mobile game pipeline? Should we expect that the next quarter or next year mobile game launch to be at a somewhat stable pace of maybe four games introduced per month. If management can talk about some major genres involved, that would be great. Thank you.
I think 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 two games per month in the earlier months to four or more games per month today. We're pretty happy with that gentle acceleration curve. In terms of genres, we've been quite thoughtful about identifying what are the genres that are currently popular in China, were well-established, what are the genres that are popular, were less well-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 trends we see elsewhere in the world. We're relatively disciplined about trying to bring our users the broader range of genres.
There's also a kind of derivative question, which you may be wondering about as well, which is the mix of casual games that attract a large number of users versus mid-core games that typically attract a smaller number of users but have higher revenue potential. If you look back over the last year, you'll see that we started off with a number of fairly casual self-developed games. We subsequently layered on a few more mid-core self-developed games. In the third quarter, we published a number of very successful licensed fairly casual games. Going forward, you should expect us to publish a number of licensed mid-core games as we continue to build forward. It's an interesting space. We're very clear market leader in terms of our users.
Even with that clear market leadership in terms of users, what we see is that there are certain subcategories, like running games, where we basically own the category because we created the category in China. There's other substantial categories where we really have minimal presence. We think with the right product and the right execution, we can continue to grow the market and grow our presence.
Oh, that's great. Thank you very much.
Thank you, Cynthia. Next question, please.
Next question comes from the line of Alex Yao from J.P. Morgan. Please ask your question.
Hi, good evening, everyone. Thank you for taking my question. Just to 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 what will drive your mobile game revenue growth in 2015? Thank you.
Yeah, I think that for the China market as a whole, one driver will just be increased penetration of smartphones, albeit at a diminishing rate. A second driver will be increased conversion of free users to paying users. A third driver will be increased ARPU, and that will probably manifest itself through a user shift from the casual games I alluded to earlier toward more mid-core games. If you look at the ARPU figures John just quoted, you can see that there's a very wide gulf today still between our mobile game ARPU versus our PC role-playing game ARPU, with our PC advanced casual game ARPU somewhere in the middle. We think that for the industry as a whole, it's still relatively early growth stage, particularly in terms of the mix shift from casual to more mid-core games.
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. What's interesting is we can see in all of those markets over time, A, there's been a shift toward more mid-core games. B, that shift toward mid-core games has enhanced monetization. C, interestingly, a top 10 mid-core game actually has pretty good longevity. If you look at the biggest mid-core games in Japan, in Korea, in the U.S., they've actually typically been at the top of the respective tables for 12 to 24 months. I think that when we look at the industry, while there's sure to be ups and downs along the way on a week-by-week or month-by-month basis, the overall trend for the industry feels comfortable.
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 certainly have the expertise on PC games to do mid-core. If you look at our major PC game titles, they're mostly mid-core or even hardcore, like "League of Legends." If we can transfer that expertise of 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.
Yeah. Our content strategy is to continue to be aggressive. We think if one's a serious participant in the online video industry, and the online video industry is growing at the revenue growth rates it's growing, then one almost 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. I'd emphasize that we don't see that as kind of a panacea to the cost inflation, that that's more about just broadening the range of content available to our users and continuing to grow our video views.
As Pony mentioned in the opening remarks, our online video views increased by about 150% year-on-year in the third quarter, which we assume is substantially better than the industry. We would like to continue growing our online video views at a healthy rate. One way of doing that is by continuing to invest in content. There's other things we're doing as well in terms of optimizing our traffic flows internally so that 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 other pieces of content. We certainly intend 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. In operating, in the interest of time, we'll take the last three questions, please.
Certainly. 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. Specifically, could management comment, what is the split of your smartphone games revenue that come from iOS versus the Android? 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? If you look back, could this issue be avoided at all? Will that happen again and affect your future expansion upgrade on the iOS?
Okay, Alicia. I'll try to answer at least nine of those questions. I apologize in advance if I miss one or two, and you can kind of come back at me and chase me on those. 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 teens proportion of smartphones in China. It's been widely estimated that iOS users would spend two to three times as much as Android users on particular items and so forth. That would give you some sense of the relative breakdown of iOS versus Android.
Now, if the premise of the question was that split in turn flows through into how you think about what happened to our smartphone game revenue in the third quarter, I'd just sort of say that premise is not quite right. Because while the specific login requirements, were for the iOS ecosystem, we also synchronize our upgrade packs between iOS and Android. If something happens that means we can't release a big upgrade pack for a game on iOS, 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. The issues we alluded to in the third quarter apply to both iOS and Android together, not just the one operating system. I think that was the first couple of questions you asked.
Your subsequent question.
Can this be avoided in the future?
About whether this can be avoided in the future. We think that this was a learning experience. iOS is a heavily curated environment, and that can be great for consumers, but we also need to cooperate with the curator. iOS has guidelines and during this process, we came to better understand the nature of those guidelines. We developed a better connectivity with iOS in terms of managing those guidelines going forward. While it would be optimistic for me to 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 an unexpected 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, or we've planned and put in place processes such that going forward, we can come to a much quicker accommodation of what our partners would like us to be doing.
Mm-hmm. Great. Understood. My second question is on the Yingyongbao, right? How should we think about the App Store revenue contribution in the future, given that I think the smartphone shipment growth has been decelerating a little bit. It seems like the total apps download per user also have been seeing some slowdown in the market. What is your view on the future potential of this revenue coming from the Yingyongbao? Thank you.
Well, I think, in terms of Yingyongbao, right, number one, our Yingyongbao market share has actually grown very significantly, and there's a very large volume of downloads. As I said earlier, we have not really monetized the downloads that much. I think that there is sort of a potential for monetizing these downloads, which 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, the incumbent apps has got a stronger staying power to some extent. The situation is actually different from category of apps to category apps. For example, if you're talking about game apps, I think just looking at our user behavior, there's still quite a strong demand for looking for new games. I think that's exactly what will be conducive to the monetization of Yingyongbao over time. Thirdly, I would say Yingyongbao's monetization is not just through games, but also there's an advertising aspect, 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 app network, including our payment solution.
I think, the value of Yingyongbao is sort of just beyond pure game operation.
I see. Understood. Thank you so much.
Thank you, Alicia. Next question, please.
Thank you. The next question comes from the line of Erica Poon Werkun from UBS. Please ask your question.
Hello, good evening, management. My first question is about your international strategy. 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 about a sequential decline in the gross margin on an ex eCommerce basis. 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 to our international expansion, particularly via the WeChat application. We would continue to focus on those markets, and we've been doing that, and we've also launched a couple of other apps in those markets, actually. There's other markets, especially the sort of Western world markets, where advertising is more expensive and less effective, where it was proving harder to make headway. During the third quarter, we've reduced our sales and marketing support for international activities, given that strategic shift. Maybe I'll pass to John on the margin question.
In relation to the different margin, gross margin, ex e-commerce, the reason for that is because of, number one, we have less smartphone games revenue in this quarter, and number two is we have increased content cost, in particular, in relation to provision against incentives for some licensed game content.
Okay. Next question.
Great. Thank you.
Thank you.
Thank you. The next questions will come from Wendy Huang from Standard Chartered Bank. Please ask your question.
Thank you. I have two 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 the U.S. and Kingsoft Cloud in China? Secondly, regarding your comment about mobile game earlier, you mentioned that the net mobile game revenue split between the social networking and game has not materially changed. Does that mean it's still a 1 to 2 relationship? Also, can you provide gross billing breakdown between the Mobile QQ game and WeChat game, as well as the in-house game versus third-party game? Thank you.
Okay. Well, in terms of the cloud service, I think you are spot on. We are indeed actually offering the cloud service to not just 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 helps us to establish a closer relationship with potential partners. That could be our partner on our Yingyongbao, it could be partner on our advertising platform, it could be a partner with our other payment services. That's an important part of our overall offering to our partners. Right now, we are the number 2 player in the market, and it has grown very significantly.
Maybe at some point in time, when we get to the right time, we may give you an update in our strategy section in our presentation. 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 online games, I think the split would be somewhat like two versus three.
Okay.
I think relating to in-house versus licensed 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 licensed games 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 as game publishing platforms, we haven't disclosed beyond saying that they're actually both very substantial and that they bring us different users, and the users, to some extent, enjoy different games. The people playing Weixin tend to enjoy fighter plane games, whereas the people playing QQ might enjoy racing car games, for example. The two of them are both substantial contributors within that aggregate smartphone game figure that we disclosed.
Which one is bigger at the moment, and is there any user behavior difference on Mobile QQ and Weixin platform in terms of the mobile game playing?
Well, I think that we haven't disclosed which is bigger, and you should think of them as being very roughly somewhat similar in size, rather than one being dramatically larger than the other. In terms of user behavior, there are some 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 car 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.
We think that's primarily because the QQ team have had a decade's experience moving people from chat to games on PC, whereas it's a lower conversion rate on Weixin, and we're looking at ways to enhance the conversion rate from people chatting to people playing games on Weixin that we think could be quite effective.
Thank you.
Okay. Thank you, Wendy, and thank you, operator. We're rounding up the call now. If you wish to check our press release and other financial information, please visit our corporate website under www.tencent.com/ir. The first replay of this webcast on the site shortly. Thank you and see you next quarter.
That does conclude our conference for today. Thank you for participating.