Earnings Call: Q1 2014

May 14, 2014

Ladies and gentlemen, thank you all for standing by, and welcome to the Tencent Fourth Quarter Twenty 14 Results Event Call. At this time, all participants are in the listen only mode. There will be a presentation by the question and advise you that this teleconference call is being recorded today. Without further ado, I'll now like to hand a conference call over to your speaker today, Ms. Catherine Chan, ma'am, Please carry on. Thank you, operator. Good evening. Welcome to our analyst conference call for the first quarter of 2014. I'm Kathleen Chen from the IR team of Tencent. This we start the presentation, we would like to remind you that the increased forward looking statements, which are underlined by a number of risks and uncertainties and realized in future for various reasons. Information of our general market conditions coming from a variety of sources outside of consent. This presentation will contain some unaudited non GAAP financial matches that should be considered in addition to, but not as a substitute for matches of the company's financial is prepared in accordance with IRS. For additional discussion of our risk factors in our non GAAP measures, please refer to our disclosure statements downloadable on www.tencent.gov/ir. Let me introduce the management of the team on the call tonight with our Chairman and CEO, Panima President, Mr. Martin Lau, Chief Strategy Officer James Mathew and Chief Financial Officer, John Rowe. Then we will take off with a short EU. Martin will discuss strategic highlights, James, who will speak to your business review and John will go through the financials before we take your questions. I'll now turn the call over to Puneet. Thank you, Catherine. Good evening. Thank you for joining us In the first quarter of 2014, our social platforms and online games businesses delivered solid year on year growth in earnings, while funding continued investment in strategic initiatives. We report strategic partnerships that should help us provide better services to our users. Build market share and improve our financial efficiencies. We will continue to focus on organically growing our core platforms services and to invest in opportunities such as O2O services, online payment and digital content. Now let me highlight the financial numbers for you. Total revenue was rmb 18,400,000,000, up 36% year on year. Value added services was R14.4 billion dollars up 35% year on year, of which social network leverage was RMB 4,000,000,000, up 26% year on year. Online games revenue was RMB 10,400,000,000, up 39% year on year. Online advertising revenue was rmb 1,300,000,000, up 38% year on year and e commerce transactions revenue was RMB2.5 billion, up 32% year on year. Non GAAP operating profit was RMB6.5 billion, up 8% year on year. Non GAAP net profit attributable to shareholders was RMB5.2 billion, up 29%. Moving on to our online platform. Total MAU for QQ grew to RMB848 1,000,000 within which smart devices MAU grew 52% year on year to RMB490,000,000. PCU reached 200,000,000 in April, of which over 2 thirds came from users on smartphones. We think and WeChat have a combined MAU of RMB396 1,000,000, up 87% year on year. We've deepened it. We've seen user engagement in China, we have developed and games and continue to build WeChat user base globally via marketing. Qzone MAU grew to RMB644,000,000 17 3% of the MAU assessed the social network via smart devices. Our online games platforms extended its leadership from PC to mobile. Our media platforms deepen user engagement through content enrichment and integrate user experience. Across portal video and microblog platforms. Our video platform saw significant growth in traffic in the quarter. Martin will have more details for you in the strategic section. For our utilities services, We solidified our number 2 position in mobile security and mobile browser in China. Recently, our partner and investee company in the security space, CPAP has exacted successfully IPO which further demonstrates the success of our portfolio strategy. That's all for me tonight. I will invite Martin to discuss tend to highlight. Thank you, Pony, and good evening, everybody. Just one point to emphasize on Poni's remarks, on this financial information, we have been emphasizing the non GAAP number as sort of the right number to focus on. And I think with this quarter's results, it's even more important to look at the non GAAP number, which is sort of new net earnings growing by 29% as opposed to the 60% headline number, which which includes a lot of extra ordering items. So, so, on my strategic highlights, I do want to give you the update of our industry leading media portfolio. In this media portfolio, we have the number one news portal and the number one news mobile app. We have a fast growing video platform that has just achieved number 1 position in terms of monthly UV and video viewed on PC. The number one music platform across PC and iOS, while a fast group number 2 on a less copy, right, friendly Android platform and a social media product pair that consists of Tencent group lock and a neovideo sharing platform Weixin, which together lead the market in terms of monthly active users. How do we build this portfolio organically apart from professional content management expertise built over the years? Our ubiquitous social platforms have played important roles. Our large user base has a strong demand for various kinds of content. That's really the starting point. Leveraging our social platforms, our media portfolio gains maximum reach to these users. They are also capable of delivering content timely and at the right place at the right time to our users. For example, news plugins within Mobile QQ and Weixin delivered daily news as well as breaking news to our users. Our platforms help content to gain virality through social sharing and also the user generated content with social networks further enriches our media platforms. On the other hand, our media platforms also enrich our social platforms by make content available to users at the right time. In addition, sharing of news, music and video create interaction among the users and also make our platform fun and differentiating. Now on our news. Franchise, that's build upon our content expertise, our social platforms as well as product development capability. And we have over the years built Tencent news into the market leader across mobile and PC. In the PC era, we were a late camera to the portal space and we became the traffic leader in late after a lot of hard work. In the mobile era, we were among the first movers, and we leveraged our franchise and innovation to make ourselves an even stronger leader. By the end of first quarter, our mobile news achieved a daily active user count of 170,000,000 Our daily mobile news PV has grown 300 percent year on year and it's now much bigger than our PC daily TV. We achieved this by leveraging our due product strategy that consists of a news plugin and a dedicated news app. Our news plugin delivers a few headline news to users on Weixin and Mobile QQQ on a daily basis. This timely and convenient light touch delivery allowed us to achieve broad coverage of news content every day more than 100,000,000 people click the headlines and read the news and they form part of our large DAU. Our news plugins also encourage users to download or open our news app for more in-depth news leadership. Our news app is a full function application that delivers deep news content to users. It targets the heavy readers and also allowed customization as well as content sharing among the users. In terms of our video platform, we have staged a major push into this user engagement and advertising revenue after changing our management in the middle of last year. And we've doubled down our effort in the beginning of this year. During this push, we have improved the quality of our mobile video app significantly with a major release last December. We strengthened our content management and curation of our video portal and app along various important content categories such as drama, talent shows, news to name a few. We have supplement to purchase content with our exclusive self produced content We've also leveraged our social platforms and our other media platforms such as music and news more effectively and getting users in touch with our YouTube content. The results of these efforts have been very encouraging. According to 3rd party research, we ranked number 1 in monthly video views, and monthly unique visitors on PC since March. On mobile devices, 500% year on year during the first quarter, but also more than doubled our revenue year on year in the first quarter and in fact that the growth rate in the first quarter of this year is to faster than the first quarter of last year. We will continue to invest in content and apply to capture the vast future opportunities in the video space. Now with that, I will ask James to talk about the business review. Thank you, Martin. Good evening, everyone. In the first quarter of 20 14, our revenue grew 36% year on year, both including and excluding e commerce transactions. Online games contributed 6%, social networks 22%, advertising 6% and e commerce 14% of our aggregate revenue. Within the value added services, Segment revenue was rmb 14,400,000,000, up 35% year on year and up 21% quarter on quarter. Our so network revenue was rmb4 billion, up 26% year on year and 16% quarter on quarter. The acceleration to double digit year on year growth rates flow from social networks revenue share on smartphone gains, continued open platform revenue growth, and less negative subscription revenue trends than in prior quarters. Online game revenue was rmb 10,400,000,000, up 39% year on year and up 23% quarter on quarter. Our PC game revenue benefited from seasonal marketing activities and new game titles. Our mobile game revenue benefited from substantial increases in paying users and ARPU quarter on quarter. Looking at our social network services, QQ and Qzone enjoyed increased mobile engagement. Mobile messages sent from QQ climbed 54% year on year and mobile photo uploads to QSAR and jumped 2 70% year on year. We enhanced synchronization tools for speedy transfer of data between PC and smart device. For Weixin, we integrated DNTeng's user review group by coupons underwaste payment, and we launched social marketing via point of interest based posted on moments. We also broadened out our own service portfolio to include ticketing services to air travel, movie theaters and scenic attractions, all supported by Weixin Payment. For PC5 games, we achieved above industry year on year growth in revenue benefiting from the performance of key titles. For our advanced casual game category, our average concurrent user accounts increased 30% year on year to 1,000,000, and our paying user accounts and ARPU also improved. League of Legends continued to expand globally. Cross fire and assault fire were the 2 most popular first in shooter games in China, cementing our leadership in this important game genre. In April, we moved our internally developed shooter game, age of gunslinger, an electronic arts as needing soccer game FIFA Online 3 into closed beta testing. The map of the multi player online game average concurrent user accounts were stable at 1,000,000 and ARPU ticked up delivering modest year on year increase in revenue. In May, we're putting Arcage, a hardcore high end 3 d game into close beta testing. The smartphone games integrated with MobileQ and Wei Shen, we added 5 games during the quarter, taking us to 13 titles in total. We exceeded 180,000,000 total daily active user accounts for all 13 games, placing us among the biggest smartphone game platforms globally. Counting one person playing multiple games is only 1 DAU, our unique DAUs were over 1,000,000. In March, our team run everyday title achieved over 60,000,000 daily active users, which we think ranks it as the and highest DAU smartphone game globally. Thunder Fighter, a third party game which we launched in March, has achieved 1,000,000 DAUs within a month. Looking at monetization, 6 of these games ranked within the top 10 grossing chart in China's iOS App Store during the first quarter. Comparing the first quarter of 2014 with the fourth quarter of 2013, the number of paying users for smartphone games more than doubled sequentially and the ARPU increased substantially. As a result, revenue approximately tripled to over RMB1.8 billion. Because these games ride on the mobile QQ and Weixin social platforms, we allocated approximately 40% of the revenue to our social network segment and the other 60 to the online games segment. Turning to online advertising. Segment revenue was rmb 1,200,000,000 38% year on year and down 21% quarter on quarter. Excluding the discontinued search business, segment revenue grew 56% year on year. Brand advertising revenue was rmb 700,000,000, up 46% year on year and down 21% Q on Q. Online video was the key driver of the year on year growth, while negative seasonality was the primary factor behind the sequential decline. Our performance advertising revenue was rmb 500,000,000, up 76% year on year and down 22% quarter on quarter. Increased impression volumes and higher CPC boosted the year on year revenue growth. Our transaction with jd.com results in us deconsolidating advertising previously booked at the pipeline and Lungo marketplaces. And I'll turn some temporary disruption to pipeline and Lungo Merchant's advertising Avangia Tong, which together with negative seasonality and e commerce advertising caused the sequential dip in performance advertising revenue. For brand advertising, our top 5 advertiser industries for food and beverage, automobiles, online services, personal care, and real estate. As Martin mentioned, daily video views on our online video platform increased significantly as we build out our content library and improve the user experience. Consequently, our video advertising revenue more than doubled year on year, led by fast moving consumer goods advertisers. Our mobile news service attracted over 100 advertisers. For performance display advertising, we're shifting some of our QQ instant messaging inventory from brand to performance in high in yields. On mobile queue zone, we've introduced news feed advertising, which is achieving click through rates very significantly higher in those of banner ads on PCQ zone. Finally, our e commerce segment revenue was rmb 2,500,000,000, up percent year on year and down partnership@jd.com, so our segment revenue and costs may further reduce in coming quarters. And now I'll hand over John. Thank you, James. Hello, everyone. For the first quarter of 2014, total revenue was rmb 18,400,000,000, up 36% year on year 1,000,000,000, up 54% year on year and 64% quarter on quarter. We recorded net other gains of RMB 1,600,000,000 versus RMB405 1000000 last quarter. We will provide details in the next slide. Share profit Associates and JV was R44 1,000,000 compared to losses of R18 1,000,000 last quarter. The change mainly reflected profit contribution from Epic Games, partly offset by Equity loss picker from DNB Jing JD dotcom and other associates. Net finance cost was rmb 238,000,000 compared to net finance income of RMB 6,000,000 last quarter. The change mainly reflected forest loss relating to U. S. Dollar denominated debts. Income tax expense was rmb 1,200,000,000. Effective tax rate for the quarter was rmb 13 point 3%. Net profit attributable to shareholders was rmb 6,500,000,000, up 60% year on year and 65% quarter on quarter. The strong both reflected organic growth of our core business and recognition of disposal gains. On a non GAAP basis. Net profit attributable to shareholders was rmb 5,200,000,000, up 29% year on year and 17% quarter on quarter, and diluted EPS was 2.75 primarily for the quarter. We booked net other gains of RMB1.6 billion in the first quarter. Of which disposal gains relating to our e commerce businesses was rmb 1,900,000,000 and disposal gains relating to equity interest in China Wuxin was rmb 743,000,000. This were partially offset by weather impacting 1,000,000 RMB donation to Tencent Charity Fund and impairment provision for investing companies of RMB 820 1,000,000. On a non GAAP basis, operating profit for the first quarter of 2014 was RMB6.5 billion, up 28% year on year and 27 percent quarter on quarter. Net profit attributable to shareholders was 5,200,000,000 margin. Gross margin for value added services was 70%, up 4 year on year and 3 percentage points quarter on quarter. Over year on year quarter on quarter increase was due to strong growth as and games, which were mostly developed internally at this stage. Gross margin for online advertising was 35%, down 6 percentage point year on year or up 3 percentage points quarter on quarter. Gross margin for e commerce transactions was 4% down 3 percentage points year on year and 1 percentage point quarter on quarter. Moving on to operating expenses for the first quarter. Selling and marketing expenses was RMB1.9 billion, up 93% year on year or down 9% quarter on quarter. The year to year jump primarily reflected cash subsidies relating to dd.2 promotions and marketing expenses for our mobile products. The sequential 9% decreased mainly 10% of our quarterly revenue. G and A expenses was RMB2.9 billion, up 34% year on year and 6% quarter on quarter. Higher R and D expenses at staff costs drove the year on year increase. Sequentially, lower office expenses during Chinese New Year offset increases in R&D and FAFForce. G and A represented 16% of quarterly revenue point 5,000,000,000 RMB 26 percent year on year and 60 percent quarter on quarter. R and D represents a 51 percent of G And A or 8% of quarterly revenue. Share based compensation as a percentage of revenue was As at quarter end, we had approximately 27,000 employees, up 9% year on year or down 2% quarter on quarter. The sequential decrease was mainly due to the transfer of WANGO and PIPI employees to JD dot com. Let's look at the margin ratios for the first quarter. Gross margin was 57 point percentage points from last quarter. Strong sequential increases mainly due to increased contribution from high margin VAS business and reduction and contribution on low margin harvest business. Excluding e commerce transaction revenues and comps, gross margin would be 60 6.1%, the highest ever over the past 12 quarters underlying this growth on demand levels of our core businesses. Non GAAP operating margin was 35.2percentup5.2percent points from last quarter, mainly as a result of improved gross profit and reduced marketing expenses. Excluding e commerce transactions, revenues and costs, it would be 40.1%. Non GAAP net margin was 28.3% up 1.8 percentage points from last quarter, mainly as a result of improved operating profits. Partly offset by forest loss and high income tax expenses. Excluding e commerce transactions revenue and top, it would be 32.1 dollars. Total CapEx for the quarter was RMB1.1 billion, up 10% year on year or down 32 percent quarter on quarter. Operating CapEx was rmb 903,000,000 up 10% year on year or down 1% quarter on quarter. Non operating CapEx was rmb 235,000,000, up 9% year on year or down 69 percent quarter on quarter. Free cash flow was rmb 5,500,000,000, down 8% year on year or up percent quarter on quarter. The year to year decrease was mainly due to payment of withholding tax in relation to remittance to overseas parent company. Our net cash position at quarter end remains strong at 34.2 percent RMB 5% year on year, The 5% sequential decrease was mainly due to our strategic investment in China Self City, Dan Pei, JD dotcom, and Leju. We expect sizable cash outflows in the second quarter, mainly due to our investments in CJ games. Net info and subscription for JD dot com IPO shares. In April, we conducted a dual trend point issue under our USD 5,000,000,000 global medium term Nuts program. The coupon rate is 2% for the USD 500,000,000 3 year trench and 3.375 percent for the $2,000,000,000 5 year trench. We received net proceeds of approximately two point $49,000,000,000 and will use part of this to refinance existing offshore debts. The remaining balance will be used for a general corporate purposes. This concludes our presentation. Thank you. You. Our first question comes from the line of Wendy Huang from Standard Chartered. Please ask your question. Thank you. I have two questions. First, can you talk about the mobile business outlook and monetization progress for the rest of the year? And secondly, regarding the MA since you just another US2.5 billion dollars. Can you talk about the usage of cash? And also, there's some technical issues, I want to clarify here because you recognize the 820,000,000 impairment provisions in the investees which investors is that related to? And also, given that lots of the transactions that you conducted in first quarter was in the later part of the first quarter. So should we expect the amortization cost for 2nd quarter to triple sequentially? Sure. John will answer the questions on the M and A and either answer attempt to answer the question on the mobile game monetization. As you may have seen, we launched a number of very light games during the course of 2013. As we moved through the end of 2013 into the beginning of 2014, we launched some more mid core game which are more targeted, we believe may have greater longevity and clearly monetize at higher rates, both in terms of converting higher proportion of total users into paying users and in terms of the ARPU generation from those paying users. Looking forward, we see plenty room to continue to add more mid core games and also over time to start introducing some of the harder core titles that are popular in, in a career in Japan. So it's in that context that you should see our recent investments in CJ Games, which is by a substantial distance, the largest mobile game developer in Korea. So we think that it's, relatively early days for games in China. And there's a whole universe of different game genres that we can bring to market either developed internally, which with any done very successfully or developed through some of our business partners. In relation to the usage of cash, actually along with the use to refinance some of the existing debts. In the second part of 2014, there will be about BRL 400,000,000 worth of debts due And in 2015, there will be about 815,000,000 weather depth seals. The remainder will be used for general corporate purposes. In relation to the impact of the acquisitions on our P and L, you're right that some of the transaction happened near the end of quarter 1. And there will be amortization associated with that. However, we must stay in mind that we are not ticking 100% of the amortization. But instead, we'll be taking the percentage of just that we own in that company So, we don't think that would be very significant in that sense. How many years are you actually amortizing those intangible costs? Basically, I think in the internet where we'll be talking about 3 to 5 years, generally for identifiable intangible assets, goodwill, we don't need to amortize. Sure. And also for 820,000,000 impairment per visions that you recognized in the quarter, which indicator is that many related to? Well, we're not we're not disclosing this. I think you should, look at it as certain certain of the impairment actually relates to the e commerce portfolio that we have invested in because we have a change in terms of our overall strategy around e Commerce. And I would say sort of this is also out of, relatively conservative principle. And thirdly, I think you should not look at it as an indication of our overall investment portfolio because if you look at the large investment that we have made, there's actually pretty large amount of, gains that we have not really booked. Please. The next is from Chauwan from Nomura. Please ask your question. Thank you for taking my question. I have two questions. The first one is on the e commerce. After the transaction Jade. I wonder how we manage your relationship with other people's players, especially in social non PC, non home island categories, for example, VIP shops, etcetera, to maximize the monetization of the Classic, especially WeChat and to wireless to traffic. This is the first one. The second one is, I don't know what what is the total revenue in noncurrent assets. Is it still being related? On e commerce, right? I think, given we have a very significant stake in JD, I think the priority for us on the fiscal goods front, especially around BDC is actually sort of new to put JD's growth. Now having said that, we also have advertising business, so that the performance based advertising business which is not bounded by any constraints. So that business can actually work with any e commerce companies, right? And our payments business also, so they can work with many different e commerce companies. So as we said, on the B2C, especially around physical goods centralized products, e commerce format, we are going to sort of provide a lot of support to our close GTF partner JD dot com. At the same time, our advertising and payment business would get us to work with many different e commerce companies that's, operating the space and give us further exposure to the growth of the e commerce business. And at the same time, also have our O2O initiative, which involves working with, traditional retailers and helping these people to move online. And that's something which we are working on as well. So we have multiple venues to benefit ourselves from the overall e commerce industry In relation to the deferred revenue under the non current par the stream relation to the business cooperation with JD when we provide traffic to them. The next is from Piyush Mubay from Goldman Sachs, Hong Kong. Please also question. Thank you for taking my question. Could you talk a little bit about your WeChat promotions internationally? We've seen a few ads around the region on YouTube and they're pretty nifty. Just wanted to get a sense of whether that will be stepped up. And if there's any color you could shed on the market that you've been able to gain, And secondly, on, on online finance, give a sense of where, where the waste and payments use base and payment itself is, we'd be grateful. Thank you. So the marketing spending for WeChat we commented on the results called 2 months ago that the aggregate spend this year would be similar to last year, but how we spent the would be more tightly focused in terms of geographies, more tightly focused in terms of media. And in general, more oriented toward driving engagement rather than just my sync app download. So that's pretty much what we're executing against. The first quarter for a number of reasons is in a not the busiest quarter for marketing around Asia. But but we did some innovative things. And looking at the rest of the year, we'll continue to market reach out in a measured and thoughtful way we've got to continue. We hope to see user growth in key markets. And generally speaking, the markets where we feel particularly strongly positioned would be emerging markets, including emerging markets in Southeast And South Asia. Yes, in terms of wage and payment, the number of users have been growing quite nicely. Now, the growth has really come from, 1, a lot of online payment, use cases, including sort of mobile games, including a lot of, group buy and other online e commerce transactions. And at the same time, some of the users also come some O2O applications such as taxi calling services, well as certain retailers. I think at this point in time, we're still in the process of trying to find more use cases for Weixin payment and also sort of try to really grow those who owe payment scenarios. So that's something that we are focused problem. The next is from Cynthia Ng of Jefferies. Please ask your question. Hi, this is Karen calling on behalf of Cynthia. Thank you for taking our question. A couple of questions. First of all, given the divestiture of Taipei, Longo, and the transition of the good e commerce business to JV. So how should we think about when we model the e commerce revenue? Should we expect it to come down rat or at a more significant pace? And secondly, any initial feedback you can share with us regarding, the experimental rollout Guantan Pao on late fee subscription accounts. For example, the average click through rate or how many official accounts are currently utilizing Guantan Pao? And thirdly, if I may, do share with us the plans on China's Falcon City? Thank you very much. Few questions. With regard to the e commerce revenue, as we mentioned in the introductory remarks, we'd expect both the revenue and the costs for that e commerce business to diminish over the next few quarters as we move toward full consummation of our relationship with Jing Dong. The pace of that diminution remains to be seen, but we definitely expect a downward direction. With regard to Columbia and Tong advertising on Weixin Official accounts, that's an experiment that's currently underway that a number, a few dozen official accounts that are running the experiment. But right now, I'd say that when we look at the mobile advertising opportunity, we're more focused on areas such as, our 3rd party network, for putting Guanbia on Tong Ads on independent mobile app, also putting Guangdian Tong ads inside the Qzone news feed and also putting brand ads top of our news app, advertising, inflation, official accounts is something that we're going to move on a more sort of measured pace and to take a little bit longer to mature. And then the third question with regard to China, South City, I think that in the past, we've identified a couple of areas of Digital Global app. 1 of those was working with China, South City's merchants for offline to online services, which remains a priority. Another one was in the China South City opportunities for co location of warehouses. And that's something where we have an at that company with JD dotcom and we see scope for the 2 of them to cooperate. Thank you very much. Next question, please. The next is from Gateway of Credit Suisse Please ask your question. Hi, thank you for taking my questions. I have a question on WeChat E Commerce. So going forward, this seems like there are going to be 2 entry points for, physical good e commerce, on wheelchair. I think one is like, you mentioned the plasmidase we had issues account and the second is probably level 1 access from JD. I wonder from currently, how do you think the traffic user engagement or maybe for the conversions, comparison between the two entry points? Thanks. Well, 1st of all, I think those are 2 very different concepts, right? One is what we call centralized and curated e commerce platform. So talk about the second module, it's level 1 axis. It's an entry point in which users will click into and it will bring them to a curated set of e commerce products, whereas sort of new, it's actually going through the official accounts. It's a decentralized motor, e commerce and the individual merchants have to sort of find ways to get their official accounts recognized as well as entered into by the users. And we believe on the second one, the most likely consumer the most likely users of these will be the kind of merchants that have offline presence and they have ways through which they can accumulate users and our product would be a way for them to bring their offline users online. And as a result, they can actually maintain a relationship as well as conduct transactions online. So I think those are 2 completely different steps. On the first one, our partnership with JD dotcom will be very focused on this. Right? On the second one, we will be working with a lot of individual merchants in this, what we call, O2O model Now these merchants might also, once you have their products featured in a centralized way in a market And if that's the case, then sort of our relationship with JD would help, these, merchants not only have their own official account, but also have their products featured in centralized place. So I that will be there will be synergies between the two entry points. Now it's at this point in time, still pretty early to talk about sort of all the metrics that you are interested in. We ourselves are in the process of even just designing that level 1 axis, we expect the first experimentation of the level 1 axis for GD Dot come would be launched in June and will continue to refine it over time. Got it. Thanks Martin. Maybe just second question. I wonder if any kind of new thoughts on kind of banking license the Internet finance front? Thanks. Well, I think at this point in time, we don't have much to update, from it's last time. I think there's still a lot of discussion with the regulators on, the details around the license. Got it. Thank you. Thank you. Next question, please. Next is from Vinnie Wong from Bank of America Merrill Lynch Company. Please ask your question. I have two questions here. The first one is on the e commerce business. Could management please provide more color on how our strategies would evolve? To grow Yixin given the non compete agreement signed with JD dotcom and also any update on the online payment services, so that there will be like a cooperation with JD dotcom on the online payment as well? And then secondly, just a housekeeping question, can we have the ARPU trend of the various type of games? Thank you. With regard to the e commerce business, our strategy is to compete to potential co operate with JD dotcom. So we don't have a strategy to grow each and independently of JD dotcom. And we mentioned in the introductory remarks that in actuality, we expect is to decline in contribution, in terms of both revenue and costs over the next few quarters. So just to clear that up, with regard to payment, we obviously see plenty of scope to cooperate with JD dotcom for payment. I'll pass over to John perhaps for the second question. In respect of the ARPU for various type of gains, for MMOG, it falls between $220,000,000 to RMB 300,000,000 per quarter. For advanced casual gains, it falls between $85,000,000 to $220.20 per quarter. And in relation to the mobile games on our 2 platforms. If we treat all games as one single game, the ARPU will be within RMB80 to RMB90 per quarter. Thank you. Oh, sorry, may I have also his last question just on the video front? Since I think it's probably better to keep to questions. Okay. Thank you. So the next is John Shell from Macquarie's Please ask your question. Thank you very much for taking my questions. I have 2 as well. First question is on the reason that regulatory sort of initiatives, as, as you know, there have been some sort of, you know, anti pornography in decency or whatnot, dry from central government. Could you just talk about your thoughts and whether or not, you know, you have been having ongoing discussions with related, government entities. That's my first question. Well, we have always, in sort of putting in very strange and policy original content to sort of new, to be anti pornography. I think the impact on us is sort of not not significant. And I think as a whole, right, it does provide better environment for various types of content. I think a byproduct of that initiative is actually it cleans up certain content sites, which have both pornography as well as prior to content. And that's actually good for the overall industry, especially sort of the larger video sites which are very focused on getting, the licensed video. So I think your overall is actually good for the industry. Okay. Thanks, Sean. My second question is, it is that we need to see, I think you now have an app called We Hua. We Hua. I think it's almost like a VoIP for the VIP Skype type app. And then I was wondering about your product is not ours. Oh, sorry. Sorry. Sorry. Let me get the, could you share with us your thoughts on MVNO? Is that something could potentially be opportunity for? No, we have not applied for admin annual license. Yes, so we feel, yes, we feel sort of voice is not sort of a product that, we want to disrupt, right? So that's not something that we're interested in. And the product you mentioned is not ours. The next is from a Philip 1 of Morgan Stanley. Please ask a question. Hi, thank you for taking my questions and congrats on the 3rd quarter. My question is on Wei Xin. Could you share with us your view in terms of how to balance between adding more functions or services on the product and also use experience. How do you minimize the risk of making waste too heavy for mobile users? Thank you. Well, this is actually essential to our overall strategy and product design. I think, throughout this a whole development process of operation, we have put in a lot of thoughts into how to sort of maintain a light and clean user experience, while providing additional services to the users in a non intrusive way, right? So So there are a lot of details that goes into that philosophy. So we for example, right? If you look at sort of our game center, we put in a lot of restrictions on what kind of messages could be reaching the users through the game center sir. And a lot of the messages were actually routed to the games themselves rather than routed through Weixin So I think you're absolutely right in saying it's actually very important for us to make the balance. And I think so far what we have seen is that we have made the balance quite well. And the user has welcome the additional functionality we have within the app, while at the same time, the, the, the user experience is not getting too cluttered. The new interface is not getting too cluttered. And the performance of the app seems to be very fast and crisp. Next is from Alex Yao of JP Morgan. Please ask your question. Hi, good morning and good evening, everyone. Thank you for taking my questions. I have two questions. Number 1 is, in the prepared remarks, Martin discussed a lot about the building off of your media portfolio, especially on the mobile from the UC perspective, can you talk a little more about the monetization of your media portfolio, especially on mobile, given that you guys PC stage have a massive usage, but, monetization seems to be behind the peers in the traditional traditional way, what's your thought on mobile monetization of this mobile media portfolio? And secondly, a quick follow-up question on the accounting of gaming revenue. How do you guys recognize the payment to the app store or the, to the content developers? I think in terms of the advertising revenue, right? I think there are a number of areas that out sort of our focus. The first one is really still around PC and sort of gradually moving to mobile, which is around video, right? So without that's actually a very big opportunity. It's a major source of user engagement. As I said, there's a lot of time registered in terms of new users viewing video. And there's a very mature model of advertising, right? In the past, I think on the PC, the advertising business did not grow as fast. 1 is because fact that sort of the advertisers need to customize their advertising format to the computer. And also because we we felt the way that advertisers advertise in the traditional PC, a lot of the branded ads, it's based upon recognition of a certain website, not necessarily sort of new with respect to the traffic. But if you look at video, it's and more geared towards sort of very measurable metrics in terms of viewership. So I think that's an important source. On I think we clearly are one of the early movers on mobile media and now we have a very a significant leadership position on viewership around news, around mobile apps, I think what we try to do is actually to lead the wave of mobile advertising. At this point in time, we see is, on mobile, there are 2 sources of advertising revenue. One is based on display branded ads, that's pretty much ties to the PC branded ad, but in that area, we need to help the advertisers to find the right way of advertising. Fine. So let's the right format to advertise on mobile. And we are making good progress on that. And because at this point in time, you have a much larger user base and our user base not only cover the younger users, which typically in the PC world, people say, most of your media users come from the QQ. And as a result, your users are on in the mobile where we actually have integration of our media platform with both QQ and Weixin. And as a result, have very broad coverage of, users and we cover every single demographics that, the advertisers one to target. So if you look at our mobile branded ads, there are a lot of their high end brands advertising on media. And then we believe that's only the beginning. And also on mobile, there's also additional advertising that's coming from the performance side. I think that would be a major source of advertising revenue over time. It does take time for, measurement metrics and the advertising to figure out what's the best way of creating the format of advertising as well as measuring the impact. But over time, we believe if you look at what Facebook had been able to achieve. I think we have, quite a good opportunity within that mobile performance In respect of the accounting of gaming revenue, there are 2 parts of it. The first part you have mentioned the channel call basically they're all net of against revenue to arrive at the net revenue represented. And for the second part is content development costs or sharing with content developers. On the PC client side, it is included as a cost rather than an ad hoc against revenue And on the mobile form side as well as the online gaming side and the development cost will be net of against the gaming side to arrive at the net revenue that we presented. Thank you. Just to clarify, so the $1,800,000,000 gaming revenue you booked for the quarter is actually on net basis, which means that it doesn't it's already net of the channel costs as well as the payment to content developers, card. That's correct. At this point in time, most of our mobile games on platforms, self developed in nature rather than licensed. And that's related to 2 parts, one of which will be performed the other will be online gaming. Thank you very much. Very helpful. Thank you operator. In terms of time, we'll take the last three questions. Please. Okay. The next is from Alicia Yap from Barclays. My question is regarding the mobile games outlook. I think with a very impressive growth on the feature and mobile games, can you share versus it mainly due to the growth of the overall industry demands and the gamer's interest? Or is that really driven by your ability and your benefit of your social graph platform that you have and your ability to understand and better monetize. So in other words, are we gaining shares and also in expense of the the mobile games publisher and also the 3rd party app store? I think if you look over the last 6 months, you could argue some extent, we've been creating a market rather than taking share. Many of the people who are playing our games to people who are not previously playing, you know, mobile games. And, you know, our emergence within the mobile game market in the last 6 months has sort of coincided with a dramatic expansion of the mobile game market. Looking forward, our hope is that, we'll continue to, grow the market at a sort of measured and sustainable and reasonable rate. So in a clearly, we don't expect to triple revenue quarter on quarter every quarter. But we do think that the long term outlook is quite attractive. And again, we believe that the primary role we're playing within the mobile game market is expanding the market by bringing new users and new types of games onto these new mobile social platforms that weren't previously in the market. Do you want to downplay the expectation on sort of mobile game, right? I think when we have $600,000,000 a quarter, people were saying, oh, it's a little too small. And this quarter, we're at 1,800,000,000 and sort of it's a huge growth over the last quarter I think yes, we have a huge jump in terms of revenue. Going forward, I think I want to emphasize what James said, which is Neil, we want to grow it on a sustainable basis as well as measured basis. So I think I want to avoid people making aggressive expectation on this. We will be very patient in terms of growing the revenue and trying to find the right titles for it rather than try to put on a lot too many titles at one I see. That's very helpful. And then second question and last question that I made is on your collaborations with Leju So can you actually elaborate a little bit on what would be the integrations of the service and what should we expect the luxury to benefit form and any other kind of like the vertical investment that you will be also thinking about like the auto and maybe education? Thank you. Well, I would say, the cooperation with Leju will be around the real estate vertical. It will be around how do we, experiment the O2O model for the real estate industry? How exactly we can find the users offline. We can actually sort of get the leverage the Leju's presence offline and help them to get the people who get in touch with their offline premises and get them online so that they can keep on reaching their customers and providing, services to their customers, right? That's one area. I think a lot of the details have yet to be worked out and I think it probably would be better for Leju to talk about it their own earnings call, which is going to be happening quite quickly. Next is from Ming Zhao of 86Research. Thanks for taking my questions. I've got 2 quick questions. First one is on the gaming business. On the PC side, it seems like the best casual game is still doing well, whereas the MMO games have some softness So other than seasonality, how do you guys look at these two segments, both prospects going forward? That's first question. Second question is really on the monetization of your WeChat or Weixin. You've already seen the mobile gaming very strongly. But what's the next monetization engine? Is it amortizing or is it payment. Can you give us some color on that? Thank you. With regards to the mass female type player games, you're correct to identify that growth was less rapid than for the advanced casual games, but the revenue still grew at a very healthy rate year on year. And with the advanced casual games, that's actually a sort of super category that includes dozens of different categories within And so we've seen something like the vast arena category in which league of legends is the leader become quite big, quite fast. It's possible the future, we can see in the sports category with NBA and FIFA becoming big and so forth. The role playing game category is more tightly defined. It's really why genre of games rather than 10 genre of games. And so that sort of mathematically implies that there's more of a finite limit to how rapidly the users can grow in the role playing game category than the advanced casual game category. Now what you are seeing in the role playing game category is historically the preponderance of our users who are playing in a role playing games that were RASKY lower yielding. And over time, we've added some higher yielding title slight new long sightseeing like blade and sold to the mix. And so, whereas with advanced casual games, the primary growth driver could argue the user activity with the role playing games in the growth would be more tilted toward, a mix shift toward higher monetization games. Another lesser point to make, and this is more of an observation is you may have noticed, I know you've been following Chinese game companies for probably feels like decades, but our seasonality within games is quite different from some of the other game companies' seasonality. And what we experienced internally that the big advanced casual games, you tend to benefit particularly from holiday periods for various reasons, whereas the role playing game to keep some of the newer role playing games we've introduced in the last 18 months are less seasonally skewed towards holiday periods. So that's just something else to think about when you about the advanced casual games growing faster from Q4 to Q1 versus the role playing games. Yes. In terms of sort of monetization around Weixin platform, and also around mobile QQ platform, I think the successful launch of mobile games is actually, a big, I would say achievement. And I think at this point in time, frankly, we have proved that a good mobile platform that provides a lot of user interaction that captures a lot of usage. We'll have a good monetization potential. So at this point in time, I don't think the first priority for us is certainly to make a lot of money from the on, but sort of new, we would be more diverting a lot of resources into sort of new building our platforms to encourage more user engagement. I think the vision for us around the 2 big social mobile platforms is really to connect people with various things. And these various things include the 1st mission, which connecting people. And then we would want our platforms to connect our users with content. We want our users to be connected to services and even sort of online at the offline services going forward. So I think a lot of our initiatives will be put around Now in order for that to happen, we do have a need to have a good payment system them so that when people find the content and people find the users, they can actually deliver certain value to the people who provide those services and content We also need to have certain advertising capabilities so that these owners of services can actually find their users. So I think these are going to be developed in the meantime, but the overall mission is actually for us to build an ecosystem that would allow our users to find the platform more helpful and also to capture more usage plan. We believe that if we can do that, then over time, business model would definitely follow. Thank you. The last question comes from the line of Chi Tang of HSBC. Please ask your question. So my first question is regarding the with the 1,800,000,000 of smartphone gaming the math is, about $1,080,000,000 is allocated to online games. I was wondering how much of that is actually coming from, mobile humanization? He's taking a 60% right now. That's right. So It's not exactly that because there's also What are you trying to establish with your question? Because both the mobile QQ and the Weixin portion of the revenue be booked under social networks. Can you just to be clear? So the billion would be booked under gains. And then the balance 700 and something will be booked on to social networks, irrespective of whether the game is played on. So he's trying to figure out what's the split between but it's not related to the that we can take. Well, I think I we're not disclosing that number. We'll give you this disappointing answer. Sorry about that. I mean, I think one element that was very strong was the gross margins for value added services. So I'm wondering if you can give us some color behind that and how sustainable that might be. And I'm also wondering, what you if you could talk about your effective tax rate for the balance of the year. Thank you. I think that as John alluded to in the opening remarks, a substantial chunk of the value added service revenue comes from games. And in the PC era, we were relatively late to enter the game market. And therefore, many of our biggest games, and so very recently were 3rd party games on which we have to pay a very material revenue share as a way to our partners. And that's deducted, that's treated as a cost of sales. With the mobile games, the new smartphone games, A, the accounting is different in that we report our game revenue NASH of the 3rd party revenue share. And B, because we're entering the smartphone games at a much earlier stage with our development, we ourselves we think we're actually pretty good developments of smartphone games. We have some of the bigger, best smartphone games, not only in China, but globally, And consequently on those games, the margin is substantially higher than it would be on an equivalent portfolio or PC game. So that's just something to think about when you're looking at the gross margin for the Internet value added segment. Now obviously, from time to time, we'll launch new projects. Those new projects could be dilutive to gross margins, but at least looking backward at the first quarter, the country that smartphone games was one factor behind the improvement in the gross margin. In terms of the tax rate? In relation to the great. I think if you look into 2014, if we exclude the effect of the noises, such as the deferred tax, you will be within 15% to 18%. Thank you very much. This concludes our conference call for the quarter. If you wish check our press regional financial information, please visit our website at the www.centend.com/ir, which also post a replay of this webcast on the site shortly Thank you and see you next quarter. Thank you. That concludes our conference call today. Thank you all for your participation. You may now disconnect your lines.