Earnings Call: Q2 2014

Aug 13, 2014

Ladies and gentlemen, thank you for standing by, and welcome to the Tencent Holdings Limited 20 14 Second Quarter Visa Announcement Conference Call. You. I must ask note that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Kathleen Chen from Tencent. Please go ahead, Ms. Chen. Thank you, operator. Good evening. Welcome to our annual conference call for the second quarter of 2014. I'd Katherine Chen from the IL 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 that may not be realized in future for various reasons. Information about general conditions is coming from a variety of sources outside of Tencent. This presentation also includes some unaudited non GAAP financial numbers. That should be considered in addition to, but not as a substitute for matching of the company's financial performance prepared in accordance with IFRS. Detailed discussion of the risk factors and our non GAAP matches, please refer to our disclosure documents down on www. 10cent.com/rrop. Let me introduce the management team on the call tonight. We have our Chairman and CEO Pima, President Martin Lau, Chief Strategy Officer James Mitchell and Chief Financial Officer, Sean Bo. Filling will kick off with a short overview Martin will discuss this as strategic highlights. John will speak to business review and John will go through the financial before we take your questions. I'll now turn the call over to Puneet. Thank you, Catherine. Good evening, everyone. Thank you for joining us. In the second quarter of 2014, we continued to deepen user engagement on our mobile platforms. We have further enriched our top line to online offerings through different strategic investments in category leaders, including net income for a mapping service provider and 58.com, a local listing platform. In terms of revenue, both our smartphone games business and our online advertising business led to a larger significant growth. Now let me highlight the financial numbers for you. Total revenue was RMB19.7 billion, up 37% year on year. Value added services was RMB15.7 billion, up forty 6% year on year, of which social network revenue was RMB4.6 billion, up 47% year on year. And online games revenue was rmb 11,100,000,000, up 46% year on year. Online advertising revenue was RMB2.1 1,000,000,000, up 59% year on year. And e commerce transactions revenue was 1 point 1,000,000,000, down 14% year on year. Non GAAP operating profit was rmb 7,700,000,000, up 53% year on year. Non GAAP net profit was RMB 5,900,000,000, up 42% year on year. Touching on some of our key online platforms. On our core communication and social platforms, total MAU for QQ was RMB829 1,000,000, reflecting which smart devices MAU grew 45% year on to RMB521 1,000,000. PCU increased 19% year on year to RMB206 1,000,000 over three quarters of which were mobile users, reaching a WeChat achieved combined MAU of RMB458 1,000,000. Up 57% year on year. Total MAU for Qzone was RMB 645,000,000 of which smart devices MAU rose 37 percent year on year to 497000000. Our online games platform continued its leadership on both PC and mobile. Our integrated media platforms, a strong growth in active users and traffic on kiki.com, Tencent News app and news park inks within MobileTQ and we've seen. Our video platform also led to strong growth with the daily video views doubling year on year. That's all for me tonight. I will invite Martin to discuss strategic highlights. Thank you, Pony, and good evening. Good morning. I will give you some update on how we are leveraging on our mobile franchise to further develop our advertising business as this quarter is a strategic highlight. And I divide it into sort of 3 different platforms. Number 1, for our new news for our news platform, we have further reinforced our leadership mobile news service, which include news platforms within Mobile QQ Innovation as well as our Tencent news app that runs on smartphones. As of the quarter end, our new services achieved 180,000,000 daily active users, a mobile, and this, refers to the people who actually read a piece of news, and that's actually double our daily active users on PC, previously achieved. And within this large number of daily active users, we have also added quite a lot of high end measures to our overall demographics compared to the PC era. Our total daily page views across mobile and PC has also increased over 100% year on year, and that's mainly driven by growth in mobile. The new, mobile app formats within our news app and news plugin had one initial recognition from brand advertisers, revenue generated from our mobile news services has more than doubled quarter on quarter from a relatively low base, but that's encouraging sign. In order to develop this amazing market, we're going to introduce a new ad formats and continue to educate advertisers, especially those high end advertisers who like our Broadridge and also our attractive demographics. Number 2 for our video platform, our video mobile video traffic has increased significantly in the quarter and has reached approximately half of our total videos view. Unlike the news platform, which requires experimentation with more ad formats, mobile video ads are more straightforward. As currently more than ninety some of the mobile videos were viewed either via Wi Fi or via download. It enables us to quite naturally extend prevailing Trio at format from PC. On the other hand, mobile currently only represent a low teen percentage of our total video ad revenue. And as a result, we see growth potential in this area. We'll continue to invest aggressively in video content and also streaming technologies to strengthen our video platform. We gradually capitalized our novel monetization while balancing the overall U. Experience. Now finally, in terms of our social platform, our performance advertising business on mobile has been growing rapidly, it contributed to approximately 30% of our total performance advertising revenue in the second quarter. With respect to Qzone, which has over 75% of the total MAU for mobile, we had received strong demand for advertisers, especially application developers for our as well as expanding our advertiser base. Foundation platform, we have beta testing tech linked ads to help advertisers such as OTO merchants to grow followers to their official accounts. During the quarter, we invited about 100 accounts to join the experimentation, and we received positive feedback. We plan to expand the test to include more official accounts in the coming months. We believe overall, we're in the early stage of development of mobile performance ads business with better educated advertisers and with further build out of our OCO E Commerce And Content Ecosystem will gradually unlock the potential of this market while keeping a strong focus on the overall user experience. So with that, I'll pass to James to talk about the business review. Thanks, Martin, and good evening, everyone. During the second quarter of 2014, we achieved total growth of 37% year on year or 51% year on year, excluding e commerce transactions. Value added services generated 80% of our revenue, of which online gains contributed 56% on social networks 24%. Online advertising increased 10% of our revenue, breaking into double digits for the first time in our recent history. E commerce transactions represented 7% of revenue. Swiping into value added services segment revenue was rmb 15,700,000,000, up 46% year on year and up 9% sequentially. Our social network revenue was R4.6 billion dollars, up 47% year on year and 15% sequentially. Increased item sale our mobile platforms contributed to both the year on year and quarters reported growth rates. As we add more mobile privileges and cost scriptions packages, the number of subscriptions we provide stabilized and so our subscription revenue grew slightly in the second quarter. Online game revenue was rmb 11,100,000,000, up 46% year on year and up 7% sequentially boosted by front games. For PC client games, revenue was stable sequentially and increased year on year. Looking at our social network from Mobile QQ, we reinforced our historic strength in communities via our new nearby groups and interest tribes functions. We upgraded Mobile Q1 to enable renminbi transactions for both virtual goods and O2O services. For Mobile Q zone, we added privileges such as skins and background theme within mobile to personalize the user interface, helping our subscription revenue. For Weixin, we upsized group chats with our up to 4 reduces per group and added the cash balance feature and even users who have not bundled a bank card to still use Weixin payment. We've been integrating Weixin with partner companies, for example, enabling users to view JD dotcom products via a direct access point and allowing users to access content in site official accounts via Sogou's search results. Moving to PC client games for advanced casual games, Our average concurrent user accounts increased 20 percent year on year to $7,100,000, and our paying user accounts and ARPU also improved. We launched 2 sports games, FIFA Online 3 and Freestyle Football in May, just ahead of the FIFA World Cup. 2 shooting games called a juicy online in North America, hence it's closed beta testing in June. Our Pathlarina game decompression continues to expand both domestically and international linked. The massively multi player online gains, our average concurrent user accounts declined 9% year on year $2,000,000. Revenue grew moderate the year on year as contributions from new titles offset maturity of older games. Within the action game genre, we launched an expansion pack for DNF and start a new post beta testing for 2 new games. For ball playing games, we launched an expansion pack for legend of New Long, that increased the game's user base, and we delayed blade and sold expansion package in August. At the quarter end, we operated 21 smart phone games integrated with mobile QQ and Weixin, which we categorize about 2 thirds is cashier than 1 third is MidCall. Generally speaking, MidCall Games, achieve higher ARPUs on smaller use of Xs than equivalent casual gains, thereby boosting the portfolios overall paying user 1000 ARPU. Due to both new games and the changing mix of games, as well as in game promotions during the quarter, our net revenue increased to about RMB3 billion. According to App Annie, we ranked the number one smartphone game publisher in China as measured by free downloads and revenue for each of the 1st 7 months 2014. 7 of our games ranked in the top 10 gross in China, so Ios app store in June Our 2nd quarter smartphone game revenue was actually substantially higher than we ourselves expected. During the second half of twenty fourteen, will focus on user experience, expanding our game portfolio and platform enhancement. Consequently, it's possible that our smartphone game revenue be more or less stable around current run rates for the next couple of quarters. Turning to online advertising. Segment revenue was 2.1 again to admin fee, up 59% year on year and 75% quarter on quarter, excluding our discontinued search and marketplace businesses, our advertising revenue grew 75% year on year. Our brand advertising revenue was B, up 72% year on year and 88% quarter on quarter, within which online video advertising revenue more than doubled year on year. Sequentially, advertising revenue grew strongly due to seasonality, increased online video traffic, the FIFA World Cup event and traffic contributions to JD dotcom from our portal. Our top 5 advertiser industries for food and beverage, automobile, online services, personal and real estate. Our performance advertising revenue was 1,000,000 in Ninty, up 79% year on year and 55 on quarter on quarter. The increase was primarily from the insertion of news feeds ads into mobile Tucson, as Martin discussed, although also from traffic contributions to JP dotcom from QSone. ID commerce transactions revenue was rmb 1,300,000,000, down 40% year on year and down 48% quarter on quarter. The decline primarily reflected our sending traffic to JD dotcom, hence reduced seeing sales volume at our principal operations at Yixin, to a lesser extent, the decline reflected a full quarter impact consolidation of our marketplace businesses. Consistent with our new strategy of focusing on our partnership JD dotcom, we expect e commerce segment revenue and costs to continue dropping rapidly in the coming quarters. And with that, I'll pass it to John to walk through the financials. Thank you, James. Hello, everyone. For the second quarter of 2014, total revenue was rmb 19,700,000,000, up 37% year on year. Or 7% quarter on quarter. We recorded net other gains of RMB691 1,000,000 versus RMB 1,600,000,000 last quarter. Operating profit was rmb 7,800,000,000, up 72% year on year or 1% quarter on quarter. Share of profit of associates and joint venture was RMB 23,000,000 compared to RMB 44,000,000 last quarter Income tax expense was rmb 1,700,000,000. Effective tax rate for the quarter was 22.4%. GAAP net profit attributable to shareholders was RMB5.8 billion, up 59% year on year. This sequential decrease of 10% was a gain the high base in the first quarter, where we recognized disposal gain of RMB1.9 billion relating to our strategic partnership with JD dotcom. Non GAAP net profit attributable to shareholders was RMB5.9 billion, up 42% year on year, or 13% Q on Q. Diluted EPS was 0.627 dollars for the quarter. We booked net other gains of R691 $691,000,000 in the second quarter, of which SIM disposal gain relating to JD dotcom was RMB676 1,000,000 and deemed disposal gain relating to Q2 mobile was RMB 141 1,000,000. This were possibly offset by a donation of RMB 100,000,000 RMB 10% charity fund and impairment or wish made for investing companies at 325,000,000,000. On a non GAAP basis, operating profit was rmb 7,700,000,000, up 53% year on year or 19% quarter on quarter. Net profit attributable to shareholders was rmb 5,900,000,000, up 42% year on year or 13% quarter on quarter. Let's turn to segment gross margin. Gross margin for value added services was 70%, up 6 percentage points year on year, and flat quarter on quarter. The year on year margin improvement reflected high proportion of revenue generated from self developed products, Gross margin for online advertising was 45%, down 9 percentage points year on year or up 10% points quarter on quarter. The year to year decrease mainly reflected the accelerated amortization of radio content costs, while the sequential recovery was due to revenue growth in the system now strong second quarter. Gross margin for e commerce transactions was minus percent, down 13 percentage points year on year or 11 percentage points quarter on quarter. Both year on year and quarter on quarter to were due to inventory provisions and discounts. Moving on to operating expenses. Selling and marketing expenses was RMB 2,000,000,000, up 60% year on year or 6% quarter on quarter. The year to year increase primarily reflected cash subsidies relating to tech C Booking apps, online game promotions and marketing of our mobile products. In the second quarter, we scaled back cash subsidies relating to textbooking app and step up gain promotional expenses for key titles. It grew 6% sequentially. G and A expense was rmb 3.4000000000 44% year on year or 18 percent quarter on quarter. Higher R and D expenses in Fabcor contributed to both year on year and quarter on quarter increases included under G And A. Research and development expense was rmb 1,900,000,000, up 52% year on year, and 24% quarter on quarter. As a percentage of quarterly revenue, was 10% and G and A 17%. R and D represented 10% of quarterly revenue of 54% of G A expense. Share based compensation was 3% of quarterly revenue. At the quarter end, we had approximately 25,000 employees, down 2% year on year and 7% quarter on quarter. Mainly due to headcount moving from e commercebusinesstojd.com. Now let's look at the margin ratios for the 2nd quarter. Gross margin was 61.6%, up four percentage points from the 1st quarter, mainly due to a mix shift to our Highmark And VAS businesses. Excluding E Commerce transactions, revenue and gross margin would be 66.6 percent underlying the screens of our core businesses. Non GAAP operating margin was 38.9 percent, up 3.7 percentage points from the first quarter, mainly as a result of improved gross profits. Excluding e commerce transactions, revenue and costs, it would be 42.2%. Non GAAP net margin was 29.8 percent, up 1.5 percentage points from the first quarter, mainly as a result of improved operating profit, partly offset by increased finance costs and higher income tax expense. Excluding ecommerce transactions revenue and tops, it would be 32.5%. For the second quarter, total CapEx was rmb 917,000,000 down 37% year on year and 19% quarter on quarter. Operating CapEx was rmb 581,000,000, down 20% year on year and 36 percent quarter on quarter. Non operating RMB6 1,000,000, down 54% year on year or up 43% quarter on quarter. Free cash flow was rmb 6,300,000,000, up 59% year on year or 15% quarter on quarter. At quarter end, net cash position was rmb 22,500,000,000, down 33% year on year, and 34% quarter on quarter, mainly due to subscription of JD dotcom IPO shares and strategic investment to expand our Portugal ecosystem. In this connection, I would like to highlight that the fair market value of our listed associate and available for sale investment amounted to RMB 65,000,000,000, indicating our balance sheet is still strong and liquid. This concludes our presentation. Thank you. Thank and wait for your name to be Your first question comes from the line of Dick Wei from Credit Suisse. Please ask your question. Hi, thank you for taking my questions. I have two questions. The first question is on the other revenue line. It looks like we had a pretty strong growth the other revenue to 645,000,000, from like to 84,000,000. And there's no real increase in COGS for that line. Wondering, what is the growth contributed to and what is the outlook going to be like for the next couple of quarters? Follow-up. Thank you. Yes. I would like to sort of trim down your, your, the excitement over this item. Basically, sort of you have the main reason for the in the items that sort of used to be, you know, e commerce business, but now sort of you have to be moved over to other revenue as a result of the internal restructuring of our e commerce business. And, would it be like a, pretty state? So the increase in number is actually moving 1 sort of from e commerce right, to this line item, not so that it's not really growth, per se. I see. I Okay. Got it. So it's not particularly like payment related to the computer? No. I know. Okay. Okay. I see. Good. And then, for the second question is, I think, not in my about it, and we got a pretty good, pro performance at over on the mobile side. One day, can, maybe share some thoughts on what's took out the outlook over the next couple of quarters as well? Thank you. Well, I think as said, sort of in the strategic highlights section, we have a number of different initiatives going on right now. It spans across the news platform, which is sort of near the traditional portal type of advertising business, branded at as well as sort of the video ads on mobile platform, as well as the performance enhancements running on our, social network, on a mobile platform. I think each one of these initiatives, still relatively early stage in terms of the development. Now we do need to make sure that sort of yield the user experience is well respected in each one of these platforms when we, put in the ads. So that's why we felt it will be a continuous effort. It will be a consistent effort, and I believe there actually a lot of potential in this area, but we'll do it relatively cautiously and in a measured way so that we continue to place the user experience at the foremost of our attention. And we will continue to grow these platforms, and that will be sort of the course in front of the and over time, the Cog would actually swallow the horse. Thank you. Operator, next question please. Your next question comes from the line of Dylea from Merrill Lynch. Please ask your question. Good evening. Thank you for taking my questions. I just questions. The first one is about your mobile team outlook. Could you elaborate it more on how on your, comment about, having, a stable revenue stream in the upcoming couple of quarters. Are we seeing a bit of trade off between user engagement and monetization on mobile games that PC games because I remember during, the English growth stage of, PC games, it seems like you didn't have to, a tough, like, manage the monetization of your PC games in order to grow your user engagement. So that's my first question. And then secondly, just for housekeeping purposes, could you share with us the ARPU range of your ATG, MMO and mobile games? Thanks. Sure. In terms of the mobile game outlook, The negative trade off you're concerned about between game usage and game monetization is not something that we have experienced or we necessarily expect to experience. So this is very much just a decision we've made on our side that we can have a set of priorities and we feel that, I mean, we've actually raised it actually over delivered already on financial targets for the gains. And therefore, while we'll continue to monetize the games, we'll also put even more energy into improving key platform infrastructure, improving the user experience. And we also want to, drive more traffic and more support toward the 3rd party games that will be coming onto the form. And as you may know, for those third party games, we actually book revenue on a net basis, net of the developer share. So all else equal, if the total user spending on our platform increases, but the majority of the increase is driven by 3rd party games, and that would that would be less beneficial to net revenue versus the same amount of spending on 1st party games, but I wouldn't be concerned about in the negative trade offs that you raised? In relation to the ARPU for advanced casual gains because of the ARPU it's within $85,000,000 to $220,000,000,000 for an emoji between $240,000,000 to $320,000,000. And in relation to, bathroom games, mobile games, if you realize that portfolio, it will be within 100 to trends and a deeper quarter. Next question, please. Your next question comes from the line of Philip Wang from Morgan Stanley. Please ask your question. Hi, good evening. Thank you for taking my question. My I have two questions. My first one is also a follow-up on the mobile team sales as you're seeing, is it because the slowdown of a new game launch in your pipeline, or, have you observed any particular change in game of behavior that will lead to a a flattish differential growth in the second half. And then our second question is also probably related to this. Have you seen any cannibalization, between your gaming services and also other services you are starting to introduce in your WeChat platform, in terms of user time spend or user engagement. Thank you. Hey, with regard to the first I mean, the short answer would be no to all of the above. So on the first question, slowdown in game notches, I think we actually intend or we have been accelerating the pace of new game launches from year 1 to 2 per month, so close to 4 per month. So that's certainly not a factor. In terms of the game, you of behavior, that continues to move in a positive direction. When we first launched, when people want accustomed to playing games on top, then we launched some very casual games, which people play, but they wouldn't spend money. And more recently, we've been launching some games, which people play, and they do spend money. And so we feel that the behavior is moving pretty much we would want it to move. With regard to the, cannibalization facts we don't see that happening. And largely, we don't see why that ought to happen. The user need for reading news headlines and the user need for playing games, a very different user needs. And then we don't see one of them negatively impacting the other. Well, in fact, would say sort of the games, right, because they are really sort of independent apps leveraging on our platform. So the more gains we have for the movie actually add the total engagement time that we have with respect to the users, right? Take example of, our running game, basically, sort of, if you put that, in, in comparison with, the, the apps in China, the, our running game is probably ranked in the top 5 of all mobile apps in China. So just to give you an idea of how these different games actually add to the overall amount of time that's spent in our ecosystem. K. A quick follow-up. You mentioned that you are starting to put in more resource on the 3rd party team. As you mentioned before, the self developed mobile game, enjoy higher margin. So how would that affect the, the margin outlook for the for your platform? Thank you. Well, consistent with my earlier comment that we actually report revenue for the 3rd party games on a net basis, the revenue you would see, the margin you would see if you do a simple calculation of, you know, operating profit over revenue would be, pretty good for both 1st party and third party games. The cash margin we collect as a percentage of the cash the user spends be a little bit lower for 3rd party gains, but that shows up in a lower revenue line, not in a lower margin percentage. If it's a successful game, whether it's 3rd party or 1st party, it can be a very profitable business for both us and the developer of the game. Yes, I do want to emphasize that we see mobile gaming as a big opportunity and that's why it's important for us to build it out for the long term. So that's why as James mentioned, we are going to spend a lot of development effort in terms of new making sure that the platform actually support better user interaction and user experience. And at the same time, we do want to have a very strong ecosystem of games that include, a lot of third party games for the future. So that's why we despite the fact that sort of on a cash on cash basis, we actually sort of knew captured less of the revenue. We do believe that at this point in time, it's actually very important to direct more traffic and put much more effort in terms of grooming a very big ecosystem of their product games on our platform. Thank you. That's very helpful. Your next question comes from the line of Sing Thiamen from Jefferies. Please ask your question. Thank you, management, and congratulations for a good set of results. I have 2 questions. Number 1, can you further elaborate on how the strategic cooperation with JD helped secure the strong advertising revenue growth this quarter. Was mentioned in the, in the written statement. Number 2 is, can you please give us more, color as to how the partnership with Wubail51.com is going to fit $0.10 overall O2O strategy. Layout? Thank you. Sure. In terms of the advertising revenue, we mentioned that the calibration jd.com is one factor that helps our advertising revenue. It bottoms at the largest factor. Performance advertising on mobile Q zone, the growth in online video advertising, or both larger factors, people covers also a moderate sized factor during the quarter. So it's one of several factors benefiting our online advertising revenue. I'll pass which I'm asking for the cooperation question. Yes. In terms of 58, right? I think it fits over strategy of leveraging our social and communication platform to connect different entities in in the ecosystem. So if you look at sort of your overall communication platform, in the initial phase, it was sort of about connecting people. But over time, we, would like to connect people with services. We want to connect people with goods. We want to connect people with businesses. And that's where, different, strategic investments come into play, right? I mean, if you look at JB, it's about connecting people with goods. And if you look at BNP, it's about connecting people with grow services. In this case, at 558.com, it's about leveraging our platform to connect our users with a lot of services, right, that, that life services, right, things that that would help them to, to, to, manage their movement from one city to another, that help, would help them to surrender an apartment on a short term basis. There are a lot of these sort of lower frequency, but sort of very necessary services that are available on the 58 dotcom, which over time we would like our users to be able to be connected to. And I think that's the overall theme. And over time, with our traffic, with our, sort of the logins, we can actually sort of add to the overall trustworthiness of the 58.com community as well. So, ideally, it's mutually beneficial. Thank you. Your next question comes from the line of Alex Yao from JP Morgan. Please ask your question. Hi, good evening, everyone. Thank you for taking the question. Firstly, can you guys give us an update on the Internet banking strategy. I'll let you guys get a banking license. What will be the banking license allow you guys to do and Can you share with us the latest thinking, in this area? Thank you. In terms of the Internet banking license right now, we have, gotten a license and, I would say sort of in the early stage of, building out the service, and mapping out our business when you're leveraging the license, I think there are still a lot of, things to do with respect to the license, right, because the license doesn't really enable us to roll out our business on a completely national basis in terms of physical location. So it's a license that's, in the process, I would say. Over time, we'll work with the regulators and and try to develop innovative services that will leverage the license to help us to address an increasingly large user base. Now with respect to the, initial thinking, right, around what we've been going to do with, Cisco's banking license. I think the future direction of this bank and this overall event initiative is going to be, number 1, it will not be a direct competition to the current, banks in terms of their businesses. What I mean by that, what I mean is that what we will try to do within this sort of banking and credit initiative is really sort of to serve the underserved segment within, the credit market, ID, a consumer credit, ID, the credit, which are very difficult for banks to, identify, within the cost structure as well as within the current availability of data, because of our large data, because of our consumer touch points, we believe with an advantage of identifying a credit that existing banks are not in a position to serve. And we'll be in a better position to serve. So I think we're digging up the unmet demand within the credit system one of the important thing that we'll be doing. And second thing is, when we look at our future bank, it will be a bank that really sort of cooperate with a lot of other different banks, right, because of sufficienting of sort of digging up the underserved demand. What we will do is actually we will work with a lot of banks who has deposits, you know, we're not going to compete with other banks for deposit. You know, rather, we'll work with them, you know, a lot of banks for their deposit, but they want to find a active borrowers, and we are in the best position to do that. So in the future, we'll be working with a lot of different banks to deliver at this the market to them. I think that's what we envisioned for, our future banking initiative. Now because we need the flexibility of working with these different banks, we need, also the access to a lot of high it, information facilitate. So by having this bank license, they will help us a lot in this process Very helpful. Thank you. 2nd question is on the profitability side. From Q1 to Q2, the, let me contribution from mobile game within the VA has increased from, 12% to about 20, 21%. But why, why is the VA probability broadly stable in the top of two quarters? In the games, on the game side, the BAS was 1. Yeah. So Can you repeat the last part of your question? Yes, sure. I think your view as gross margin was flat to from Q1 to Q2 at about 70%. But clearly the revenue mix of the new link towards the higher modern mobile gaming sites, is there something some some, what what was the reason behind that? Is that, some other low modern business deteriorating or do you just want to get a little bit of color on the overall myriad's gross margin trends? I think historically, our VA gross margin kind of the tick up in Q1 and Q3 because that's when the Gas Top Game business is more healthy, whereas our BAS tend to increase in line with the basis of social network communications user growth. So it's directly the cost increase quarter on quarter through the year growth of revenue is more bumpy toward Q1 and Q3. And that causes the gross margin to sometimes be a little bit weaker in Q2 than Q1. This year, the mobile game film that you've identified would have acted as an offset to that. We can look into it and come back to you offline more detail, but I think that's the most sort of plausible. Helpful. Thank you very much. Thank you, Alex. I'll take your next question, please. Thank you. Your next question comes from the line of from Macquarie. Please ask your question. Thank you for taking my questions. My first question is about the e commerce. It's been a couple of months since your partnership with G And T officially started, Wishing. I was wondering, would you be able to elaborate a bit on what are some of the early results you have seen in terms of the traffic and conversion rate except, etcetera, for this, and, related to that, you highlighted earlier call that you are seeing a lot of momentum in the public accounts from the old to, merchants on Wishing and, what, what's your plan for the next step in terms of converting perhaps some of those merchants into, some sort of a marketplace for for b or for the, smaller bs. And my second question is about the video. Wait, wait, wait, wait, we can add to that. Alex, well, just you said. Yes, I think you have a few questions already. So let's address that bridge before we lose track. The first one with respect to JD dotcom, I didn't know, we'll let JD elaborate on the details, right? But I think what I would say is we are in this sort of early stage of integration, right? I think a lot of the effort in the very initial stage was really sort of just making sure that the actual sort of 6 of the all Office strategic partnerships get done. And sort of JV was very focused on getting their IPO done as well. I think as far as sort of the early results of the integration, I would say on the PT side, a lot of the traffic has already been directed to JVs, JD's more. And also the conversion rate actually increased compared to before. And that's, I think, pretty natural because there's a bigger selection of products, so maybe conversion rate actually increase. Now in terms of sort of EOD, mobile integration, we have, we have launched the level 1 access point in Weixin and lead the we have actually sort of also launched it in Mobile QQ. What I would say is it is generating meaningful GMV but we believe sort of this overall effort is still early stage because right now the user experience is rather simple. It's basically just sort of one click into a normal mall. Right? Over time, I think, you know, there's going to be more innovations that we can do with respect to the access point with more customization with sort of more, exciting experience for the consumers and make it differentiating. So I think that would took time for us to sort of within Weixin and keep you, I think you're always also in an early stage of development because the more, payment users, right? Weixin payment or the QQ wallet users, which we sort of just recently launched, the more likely for users to plug into the access point and be able to to convert into buying users. You know, the more, likewise, the more advertising infrastructure that we can actually provide within mobile QQ and within nation, and that would actually sort of also benefit the the build out of this e commerce ecosystem. So I think overall, it's still sort of relatively early stage, and we'll continue to work with JD to sort of, you know, further explore and develop this new synergies. I did launch track of your, of your second, if I should mention like OTO, I did sort of lost track of your second question about for the OTO and sort of marketplace. So, you know, I apologize on that. Yeah. Oh, no. No. No. I'm sorry. It's a now I was just wondering. It's actually second part of the first question. Now you have a bunch of the public accounts from these merchants, on Wixin, there are a little bit sort of spread out through the whole ecosystem infrastructure. Down the road, do you think maybe data conceivable, you may be, putting together a marketplace, sort of B2C marketplace or C2C markets in within the Wishing ecosystem? Well, I would say to this, right? Number 1, we'll continue to build out those sort of new e commerce and enhancing infrastructure, as I said, right, the payment as well as the advertising, which will deliver more traffic to these new order or e commerce public accounts. The other thing, which I would say is If we are going after the centralized e commerce model, we rather sort of know we work with JD, right? We can actually direct with traffic to the stores that these merchants actually opened up in JT's to be small. And I think that's a more effective way to really help them to generate traffic from a centralized model. Thank you, operator. Next question, please. Thank you. Your next question comes from the line of Wendy Huang from Standard Chocolate Bank. Thank you. I have two questions. First one, I think in past 6 months, you have invested in different kinds of e commerce assets that's helped and are actually 5th flash cell e commerce type of platforms. And we actually have seen the first cell actually usually enjoyed higher mobile penetration rate. So going forward, actually, where you consider to add maybe, flash sale, e commerce business model or this kind of self format to your overall e commerce ecosystem? My second question is about WeChat International extensions. So can see you have over 200,000,000 users outside China already. When do you expect to monetize this overseas traffic and also how do you view the competition in overseas market online and Facebook? Thank you. Okay. In terms of Flash Sale, I think it's a very model, again, what we will be doing is we'll be doing alongside with JD. Within the level 1 access points, there could be sort of different ways to curate the presentation of the product and one of the presentation could be flash sale. And that's something which will sort of pass out with JD. In, yeah, in terms of I think in terms of, reach out on the monetized inside, you know, our games are already available in Malaysia, for example, they're quite popular and they are monetizing in Malaysia, but a much smaller market than, home markets. With regard so either the focus, continues to be growing a user base and then own engagement, for which are Internationally. And some of the activities or services such as games would to both boost engagement and monetize, but for us, the primary value in the near summer fee around the rather than the monetization. So we're not not monetizing internationally, but the focus is on engagement first. And then, you know, the monetization should be a a happy byproduct of that. And with regards to the competitive landscape, I think that, you know, it is extremely competitive, especially in Western markets, still very competitive in the Asian markets. So we have stronger positions in some of the Asian markets. I think the strongest competitor we've faced so far in the most markets is company intervention which is WhatsApp. So that's the competitive landscape. Okay. Thank you. Yes. Thank you. Next question please. The next question comes from the line Elyn Halois from Deutsche Bank. Could you give us an assessment of how recent regulatory announcements may have impacted products such racing in Mobile QQ, if at all, and what we might expect going forward. Well, I think the impact is actually relatively minor. First of all, so if you look at the requirement to have real name our Weixin service, basically, sort of already asked people to find their cell phone. So it's really in nature, and some, you know, a lot of the regulations around, the public accounts, which, it's, it's, 1, it's sort of your subsidiary to our overall communication experience. And 2, most of the traffic sort of new on our public account actually sort of new already, complied with all the regulations. So I think it doesn't really affect platform. It's reset, requesting a scrutiny, you think, have we possibly seen the worst of it for the time being? Okay. That would be it. It's not it's not sort of near that negative. Right. Okay. K. And then I'm just curious, will we expect much more M and A activity, and, you know, related that even further incremental mobile functionality rolled out over the next year, or would you regard the next year as being devoted to this just expanding these existing offerings further integrating some of your success flow to our investments. And can you comment on that? Yes. I wouldn't characterize that activity as sort of that passage I think we had an industry in which sort of innovation is to achieve this success. And so that's why I think while we sort of need to work on the initiatives, which are seeing great traction. We'll continue to sort of look out for new opportunities as well as sort of engaging in innovations, especially when you're talking about functionalities within our mobile platforms, there will be more more functionalities, definitely. I mean, that's actually one area of focus rather than saying it's just working on existing Got it. Forgive me. Just the reason I ask is you could argue that there's been some behavioral fatigue on a lot of mobile platforms that, platform A has serviced wonderfully as a social networking platform. But it's relevant for utility and branching out into other concentric circles is limited. What is your philosophy around waste sheet? And do you feel like there's it's almost in definitely expandable or have we kind of achieved the eightytwenty of what it's going to do for us for the next couple of years? I think What you said is right. I mean, if you do it sort of in basically just accumulated for you. I think that's sort of what you'll be getting, right? If you try to sort of blast the same experience to everybody right? There's a limitation on sort of what you can add. But I think that the beauty of So the mobile internet is that there are a lot of different instances in which a particular person would need a particular service. And then being able to present that capture at that moment, right, and then present it in a natural way, I think is the unique, experience that we want to provide. Right? So if we can provide that, rather than basically just like blasting everybody with the same user experience and then you can sort of, you take the third one, the 4th one may not need it, then that's the end of it. But if we can actually really find the right person, find the right service, find the right moment percent. I think that make it much more expandable. And I think that's what we try to focus on. Thank you very much. Thank you, Alan. Your next question comes from the line of Chau Wang from Nomura Securities. Please ask your question. Hi, thank you for taking my question. I have a follow-up on our mobile game. Could you update on us on your mobile game daily active user? It was a $120,000,000 last quarter. And how should we think about the user quote for the rest of the year, this part that you applied, for that revenue course? Thank you. I think as we mentioned in the introductory remarks, the newer games you have added tend to be games, which are a little bit more mid right in casual. And therefore, they would tend to have, you know, potentially fewer DAUs, but more monetization than, you know, some of the games that we added 6 or 9 months ago. So, if you extrapolate that to the top as a whole and for the platform as a whole, you know, the number of DAUs would be stable despite the increase in, but but broadly stable. Sure. And how the post for the past year? How about what? You're the post for the rest of the year. I think for for for which? Sorry. For for mobile game mobile game? Well, that that's a function of many things. That's function of Weixin used to grow that function of mobile, Q2 used to grow that function of the conversion of those users to pay. And so, obviously, we'd like all of those numbers to take but it remains to be seen by the how fast they did grow. I have a follow-up question on, on, did you, could you share with us your, investment strategy on the content, both in health care and your company? Thank you. Where you have been and we will continue to invest in a very aggressively in video contents, both third party and first party. You can see in our results, both our traffic results with our DOBUs doubling year on year, and I'll start revenue results with our revenue substantially more than doubling year on year. When we buy the right content or when we develop the right content, given our platform advantages, given our massive upstream traffic, given our margin relationship with users, in our ability to buy real market content through our social, social graph. If you have the right content, we can very strong user growth and if we have the users, we can deliver advertising revenues. So we're very committed to increasing our investment in but that party and, self created content. Thank you. Thank you. Operator, in the interest of time, should I take the last question please. Certainly. Your 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 first question is back on the PC games. So while the applicants, as you mentioned, Assurant has to year over year growth is driven by a couple of the new games and also to LOL, I wanted to ask that, it seems that some of them like a CGM seems to be slowing down. So do you think the trend of this slowdown for the advanced pressure gain such as the DNF and crossfire, will continue as these things are aging or there any potential that, you know, there will be re dialing or re accelerate again? And then what is your expectation for the cost to be So with regard to the maturation of legacy advanced casual games, I think you mentioned Dungeon and Fighter. We cast by Dungeon and Fighter as action roles and games. So that wouldn't be included in the advanced casual game category. The other game you mentioned is in a cross fire, that's, again, it's been phenomenally successful over time. It's, again, that we've been publishing now for 5 years or so. And so you have to gain, where, you know, over time, as it become bigger and bigger, that the revenue growth is naturally decelerated, as you might expect. Now at the same time, we believe that the consumer demand fit for playing shooting games that still very buoyant demand. If you look at the United States, if you look at Europe shooting games, so the biggest category and, you know, the biggest shooting game is the biggest game in those markets. So over the past couple of years, we've brought a game called a soft fire, which is a self developed shooting game to be one of the most success titles in our portfolio in terms of traffic, in terms of revenue, in terms of profitability. And so for us, while one particular shooting game may be more mature, the overall category has continued to exhibit growth, continuing to think with the right expansion packs and so forth across car itself. It seems good growth as well. And then finally, in the Court of Duty online, that that is, you know, our version of Court of Duty, which is the most successful shooter franchise globally. And as we mentioned, you know, we've recently taken that into a beta stage beta test. So we'll see how that game proceeds going forward. But the reason I dive into this is detailed, not because, I'm a shooting game fanatic, but more to illustrate the points of what, what, you and I called advice casual game is actually a collection of numerous game genres, with shooting games being 1. And then, you know, we take a game genre strategy on if one title in a game genre, is slowing down, then obviously, we'd love to reaccelerate the growth and 2 things to reaccelerate growth, but we also, even though they have other titles genre that serves slightly different needs. And sometimes the behavior of the overall genre can be different from the behavior of the individual title. I see. I see. And my second question is regarding more on our strategies. We invested quite a few of the new investee companies over the past 6 months. So what is our plan for this stake? As we intended to keep them as the current percentage of ownership or in the future, if the small synergies happen around the road. Is there any possibility that you may consider increasing the state or may have full control on some of this state? Thank you. Well, at this stage, I think we're very focused on, pursuing sort of in integration, of the services so that number 1, where we can actually help these companies to grow and also sort of benefit from, how large user base. Number 2 is, to be able to deliver, better services to our users. So I think, you know, that's sort of really focused on that. We don't have, we don't think a lot about sort of the state itself. We think a lot about sort of how to actually deliver value to our users and also value to our partners. Thank you. Great. Hello. Thanks for taking my question and good evening. I have two questions. So firstly, just getting back to the engagement levels on WeChat, when you combine gaming, chatting, reading moments, shopping, what is the rough average time spent per day per user? What do you think is the natural limit on that figure? And then I have a second question, I think. Well, I think, you know, it it's it's actually, not the appropriate way to look at it, because I think we'll for us, right? What we the communication and sort of the social networking activity is actually within the app, but a lot of the other activities is actually using our platform as effectively a discovery as well a channel as well as a launch had so that the activity of games actually happen within the games themselves rather than sort of what wechat. And, the reading, a lot of times actually is if it happens when people click into the news and then sort of it brings them to our Tencent news app. So what we try to do is actually to divert the year users and heavier user experience toward the individual apps that can deliver that longer time engagement. So I think that's the architecture of our overall platform strategy. And as a result, sort of, it doesn't really sort of get limited by the amount of time that people spend on the app itself. But it's really a function of the range of activities that people would do in their everyday time. Great. And my second question is, can you give us an update on Weixin Wallet, if you can give us just a sense of, you know, what DAUs or MAUs and what type of spending habits you're seeing on Wishing Wallet? Thanks a lot. Well, yeah, at this point in time here, we we, what we can say about the way she want it is that, you know, one, it's actually sort of, you know, very light experience for users. And, as a result, it actually set a new it's very easy for users to, to, subscribe to this service. And number 2 is we have an increasing number of sort of payment applications so that we those applications will help to put in the users. But I have to say sort of New West here in the early stage of developing this ecosystem, right? The more applications that we have, the more likely it would for us to be able to convert users. So I would say something, we have, a reasonable take up, we are still in at the early stage of converting more and more users into Asian payment. I wouldn't rather not go into the specific numbers because of a competitive reason. Thank you. Your last question comes from the line of Thomas Chong from Citigroup. Hi, thanks, good evening. Thanks for taking my questions. I have two questions. The first one is about still about mobile games. Give you have launched the smartphone games for a year already. What lessons have you learned in the past 12 months? And should we expect smartphone games revenue to resume quarter on quarter growth after you do some DRAM in the user engagement. And then I'll hop along. Thanks. I think in terms of timing, we don't give guidance, but earlier in the prepared remarks, I realized I said that you might see us focusing, more heavily on the non financial metrics for a couple of quarters. So just to be clear, a couple a couple, I mean, 2. So, you know, I was really thinking about the balance of this year, given how strongly we're without financing in the first half at the balance of this year that teams will continue to monetize, but they'll also focus very much on adding more third party games focused very enhancing the platform focused very much on improving the user experience. So my comment was really about the, the next couple of minutes, two quarters. With regard to lessons learned, I think other people would probably chime in and supplement me, but one thing that been, very clear to us. It's the more that we integrate the games with the so unique social aspects of inflation and QQ, the more popular they are, the more revenue generated they are. And so that's why the early stages of the Weixin 2Q game center, the 1st party games generated a very disproportionate chunk correctly, not because we wanted to practically favor 1st party games, but because the internal studios picked up very quickly how to fully integrate games with the Weixin in Q2 social world, how to make best use of Weixin' and Mobile Q2. Now we're in the process of extending those learnings to 3rd party games and making sure that 3rd party games, you know, similarly benefit from very powerful integration. So I think that's one important takeaway. A second important takeaway is if you look at the, trajectory of other, chat platforms around the world and how successful they've been in adding mobile games. Now I see some of them have been embracing for that adding the casual mobile games, not so successful at adding the Midcore mobile games, others have successfully transitioned into Midcore in hardcore mobile games as well. I mean, I think our experience so far is that on Weixin and on Mobile Q2, we're very capable of generating casual games hits with tens of minimums of GAUs, but we're also very capable of generating more mid core hits with smaller numbers EAUs, a very healthy revenue generation. That was a big part of the reason of why we generated substantially more by our game revenue in 2Q that we expect it to do. I see. Thanks, James. And my second question is about the use of cash. We see you have invested in China South City earlier this year. And given you rely on JD dot for the e commerce. So, should we still expect Tencent to spend money on logistics and warehousing going forward? Thanks. Well, I think the goal to what the objective investment in China is also the lowest sort of partly the land, but certainly it's not the main focus. I think as we explained earlier, in a few quarters. But the most important thing is actually that we believe China's Outlook is actually sort of building an interesting ecosystem of, offline suppliers. In sort of the offline premise. And over time, this large number of, offline suppliers can actually move online. And, and, sort of, you know, that's actually, you know, the kind of opportunity that we then most focused on. So that's why on one hand, China South City would be working with Jingdong on some of the sort of logistics related stuff. But on the other hand, so they will be working with both us and Jindo on sort of building out the e commerce service for their merchants. I think that's bigger opportunities that we're talking when we make the investment. I see. Thanks. Okay. Thank you very much, for all of you to join the call tonight. We're back in the call now. If you wish to check our press release and financial information, please visit our corporate website at www.sensil.com/aiot. We're also pleased to replay of this webcast on-site shortly, you and see you next quarter. Thank you. That does conclude our conference for today. Thank you for participating Tencent Holdings Limited Twenty Fourteen 2nd quarter results announcement conference call. You may all disconnect now.