Ladies and gentlemen, thank you all for standing by, and welcome to the Tencent first quarter 2014 results event call. At this time, all participants are in the listen-only mode. There will be a presentation followed by the question and answer session, at which time, if you'd like to ask a question, you will need to press star one on your telephone. I must advise you that this teleconference call is being recorded today. Without further ado, I will now hand the conference call over to your speaker today, Ms. Catherine Chan. Ma'am, please carry on.
Thank you, operator. Good evening. Welcome to our annual conference call for the first quarter of 2014. I am Catherine Chan from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in future for various reasons. Information about general market conditions coming from a variety of sources outside of Tencent. This presentation will contain some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors in our non-GAAP measures, please refer to our disclosure documents downloadable on www.tencent.com/ir. Let me introduce the management team on the call tonight.
With our Chairman and CEO, Pony Ma, President, Mr. Martin Lau, Chief Strategy Officer, James Mitchell, and Chief Financial Officer, John Lo. We will kick off with a short overview. Martin will discuss strategic highlights. James will speak to business review. John will go through the financials before we take your questions. I'll now turn the call over to Pony.
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 forged 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 and services and to invest in opportunities such as O2O services, online payment, and digital content. Let me highlight the financial numbers for you. Total revenue was CNY 18.4 billion, up 36% year-on-year. Value-added services were CNY 14.4 billion, up 35% year-on-year, of which social network revenue was CNY 4 billion, up 26% year-on-year. Online games revenue was CNY 10.4 billion, up 39% year-on-year.
Online advertising revenue was CNY 1.2 billion, up 38% year-on-year, and e-commerce transactions revenue was CNY 2.5 billion, up 32% year-on-year. Non-GAAP operating profit was CNY 6.5 billion, up 28% year-on-year. Non-GAAP net profit attributable to shareholders was CNY 5.2 billion, up 29%. Moving on to our online platforms. Total MAU for QQ grew to 848 million, within which smart devices MAU increased 52% year-on-year to 490 million. PCU reached 200 million in April, of which over two-thirds came from users on smartphones. Weixin and WeChat have a combined MAU of 396 million, up 87% year-on-year. We deepened Weixin user engagement in China via Red Envelopes and games, and continued to build WeChat user base globally via marketing. QQ's MAU grew to 644 million, 73% of the MAU accessed the social network via smart devices. Our online games platforms expanded its leadership from PC to mobile.
Our media platforms deepened user engagement through content enrichment and integrates 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 session. 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, Cheetah , has executed successfully IPO, which further demonstrates the success of our portfolio strategy. That's all from me tonight. I will invite Martin to discuss strategic highlights.
Thank you, Pony, good evening, everybody. Just one point to emphasize on Pony's remarks. On the financial information, we have been emphasizing the non-GAAP number as sort of the right number to focus on. I think with this quarter's results, it's even more important to look at the non-GAAP number, which is sort of your net earnings growing by 29%, as opposed to the 60% headline number, which includes a lot of extraordinary items. On my strategic highlights, I do want to give you the updates of our industry-leading media portfolio. In this media portfolio, we have the number 1 news portal and number 1 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 1 music platform across PC and iOS, while a fast-growing number 2 on a less copyright-friendly Android platform, and a social media product pair that consists of Tencent Weibo and a new video-sharing platform, Weixin, which together lead the market in terms of monthly active users. How have we built 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. Now 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 deliver 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 within the social networks further enriches our media platforms. On the other hand, our media platforms also enrich our social platforms by making content available to users at the right time. In addition, sharing of news, music, and video creates interaction among the users, and also make our platform fun and differentiating. Now on our news franchise, that's built upon our content expertise, our social platforms, as well as product development capability. We have, over the years, built Tencent News into the market leader across mobile and PC. In the PC era, we were a latecomer to the portal space, and we became the traffic leader in late 2006 after a lot of hard work.
In the mobile era, we were among the first movers, we leveraged our franchise and innovation to make ourselves an even stronger leader. By the end of the first quarter, our mobile news achieved a daily active user count of 170 million. Our daily mobile news PV has grown 300% year-on-year, and it's now much bigger than our PC daily PV. We achieved this by leveraging our dual 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 QQ on a daily basis. This kind of timely and convenient light touch delivery allowed us to achieve broad coverage of news content. Every day, more than 100 million 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 readership. Our news app is a full-function application that delivers deep news content to users. It targets the heavier readers and also allows customization as well as content sharing among the users. In terms of our video platform, we have staged a major push into this important source of user engagement and advertising revenue after changing our management in the middle of last year. 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 supplemented purchased 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 in getting users in touch with our video content. The results of these efforts have been very encouraging. According to third-party research, we rank number one in monthly video views and monthly unique visitors on PC since March. On mobile devices, our daily video views has grown 500% year-on-year during the first quarter. We've also more than doubled our revenue year-on-year in the first quarter. In fact, the growth rate in the first quarter of this year is actually faster than the first quarter of last year. We will continue to invest in content and the platform to capture the vast future opportunities in the video space. Now, with that, I will pass to James to talk about the business review.
Thank you, Martin. Good evening, everyone. In the first quarter of 2014, our revenue grew 36% year-on-year, both including and excluding e-commerce transactions. Online games contributed 56%, social networks 22%, advertising 6%, and e-commerce 14% of our aggregate revenue. Within the value-added services, segment revenue was CNY 14.4 billion, up 35% year-on-year and up 21% quarter-on-quarter. Our social network revenue was CNY 4 billion, up 26% year-on-year and 16% quarter-on-quarter. The acceleration to double-digit year-on-year growth rates flowed from social networks revenue share on smartphone games, continued open platform revenue growth, and less negative subscription revenue trends than in prior quarters. Online game revenue was CNY 10.4 billion, 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 Qzone jumped 270% year-on-year. We enhanced synchronization tools for speedy transfer of data between PC and smart device. For Weixin, we integrated Dianping's user reviews and Group Buy coupons under Weixin Payment, and we launched social marketing via point-of-interest based posts on Moments. We also broadened out our O2O service portfolio to include ticketing services for air travel, movie theaters, and scenic attractions, all supported by Weixin Payment. For PC client games, we achieved above-industry year-on-year growth in revenue, benefiting from the robust performance of key titles. For our advanced casual game category, our average concurrent user accounts increased 30% year-on-year to 6.9 million, and our paying user accounts and ARPU also improved. League of Legends continued to expand globally.
CrossFire and Assault Fire were the two most popular first-person shooter games in China, cementing our leadership in this important game genre. In April, we moved our internally developed shooter game, Age of Gunslingers Online, and Electronic Arts' leading soccer game, FIFA Online 3, into closed beta testing. For massively multiplayer online games, average concurrent user accounts were stable at 2.3 million, and ARPU ticked up, delivering modest year-on-year increase in revenue. In May, we're putting ArcheAge, a hardcore high-end 3D game, into closed beta testing. For smartphone games integrated with Mobile QQ and Weixin, we added 55 games during the quarter, taking us to 13 titles in total. We exceeded 180 million total daily active user accounts for all 13 games, placing us among the biggest smartphone game platforms globally. Counting one person playing multiple games as only one DAU, our unique DAUs were over 120 million.
In March, our Tiny Run Everyday title achieved over 60 million daily active users, which we think ranks it as the second highest DAU smartphone game globally. Thunder Fighter, a third-party game which we launched in March, has achieved 16 million DAUs within a month. Looking at monetization, six 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 CNY 1.8 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 game segment.
Turning to online advertising, segment revenue was RMB 1.2 billion, up 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 million, 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 million, 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 revenue previously booked at the PaiPai and Wanggou marketplaces, and also in some temporary disruptions to PaiPai and Wanggou merchants advertising via Guang Dian Tong, which together with negative seasonality in e-commerce advertising, caused the sequential dip in performance advertising revenue.
For brand advertising, our top five advertiser industries were 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, enhancing yields. On mobile Qzone, we've introduced news feed advertising, which is achieving click-through rates very significantly higher than those of banner ads on PC Qzone. Finally, our e-commerce segment revenue was RMB 2.5 billion, up 32% year-on-year and down 24% quarter-on-quarter. Sequentially, the revenue declined due to negative seasonality.
We're focusing our e-commerce resources on our strategic partnership with JD.com, so our segment revenue and costs may further reduce in coming quarters. Now I'll hand over to John.
Thank you, James. Hello, everyone. For the first quarter of 2014, our total revenue was RMB 18.4 billion, up 36% year-on-year and 8% quarter-on-quarter. Operating profit was RMB 7.8 billion, up 54% year-on-year and 64% quarter-on-quarter. We recorded net other gains of RMB 1.6 billion, versus RMB 405 million last quarter. We will provide details in the next slide. Share profit of associates and JV was RMB 44 million compared to losses of RMB 18 million last quarter. The change mainly reflected profit contribution from Epic Games, partly offset by equity loss pickup from Dianping, JD.com and other associates. Net finance cost was RMB 238 million compared to net finance income of RMB 6 million last quarter. The change mainly reflected foreign loss relating to US dollar-denominated debts. Income tax expense was RMB 1.2 billion. Effective tax rate for the quarter was 15.3%.
Net profit attributable to shareholders was CNY 6.5 billion, up 60% year-on-year and 65% quarter-on-quarter. The strong growth reflected organic growth of our core business and recognition of disposal gains. On a non-GAAP basis, net profit attributable to shareholders was CNY 5.2 billion, up 29% year-on-year and 17% quarter-on-quarter, and diluted EPS was CNY 2.775 for the quarter. We booked net other gains of CNY 1.6 billion in the first quarter, of which disposal gains relating to our e-commerce businesses was CNY 1.9 billion and disposal gains relating to our equity interest in ChinaVision was CNY 743 million. These were partially offset by CNY 115 million donation to Tencent Charity Foundation and impairment provision for investee companies of CNY 820 million. On non-GAAP basis, operating profit for the first quarter of 2014 was CNY 6.5 billion, up 28% year-on-year and 27% quarter-on-quarter.
Net profit attributable to shareholders was CNY 5.2 billion, up 29% year-on-year and 17% quarter-on-quarter. Let's turn to segment gross margin. Gross margin for value-added services was 70%, up four percentage points year-on-year and three percentage points quarter-on-quarter. Both year-on-year and quarter-on-quarter increase was due to strong growth of platform games, which were mostly developed internally at this stage. Gross margin for online advertising was 35%, down six percentage points year-on-year or up three percentage points quarter-on-quarter. Gross margin for e-commerce transactions was 4%, down three percentage points year-on-year and one percentage point quarter-on-quarter. Moving on to operating expenses for the first quarter. Selling and marketing expenses was CNY 1.9 billion, up 93% year-on-year or down 9% quarter-on-quarter. The year-to-year jump primarily reflected cash subsidies relating to Didi Dache promotions and marketing expenses for our mobile products.
The sequential 9% decrease mainly reflected lower seasonal marketing expenses for online games and e-commerce businesses. Selling and marketing represent 10% of our quarterly revenue. G&A expenses was CNY 2.9 billion, up 34% year-on-year and 6% quarter-on-quarter. However, higher R&D expenses and staff costs drove the year-on-year increase sequentially. Lower office expenses during Chinese New Year offset increases in R&D and staff costs. G&A represented 16% of quarterly revenue. Included under G&A, R&D expenses was CNY 1.5 billion, 26% year-on-year and 16% quarter-on-quarter. R&D represented 51% of G&A or 8% of quarterly revenue. Share-based compensation as a percentage of revenue was 6%. 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 Wanggou and PaiPai employees to JD.com. Let's look at the margin ratios for the first quarter.
Gross margin was 57.6%, up 5.9 percentage points from last quarter. Strong sequential increase is mainly due to increased contribution from high margin VAS business and reduction in contribution from low margin e-commerce business. Excluding e-commerce transaction revenues and costs, gross margin would be 66.1%, the highest ever over the past 12 quarters, underlying the strong fundamentals of our core businesses. Non-GAAP operating margin was 35.2%, up 5.2 percentage 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 foreign loss and high income tax expenses. Excluding e-commerce transactions, revenue, and costs, it would be 32.1%.
Total CapEx for the quarter was CNY 1.1 billion, up 10% year-on-year or down 32% quarter-on-quarter. Operating CapEx was CNY 903 million, up 10% year-on-year or down 1% quarter-on-quarter. Non-operating CapEx was CNY 235 million, up 9% year-on-year or down 69% quarter-on-quarter. Free cash flow was CNY 5.5 billion, down 8% year-on-year or up 5% 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 CNY 34.2 billion, up 5% year-on-year. The 5% sequential decrease was mainly due to a strategic investment in China South City, Dianping, JD.com, and Leju. We expect sizable cash outflows in the second quarter, mainly due to our investments in CJ Games, Navinfo, and subscription with JD.com IPO shares. In April, we conducted a dual tranche bond issue under our $5 billion global medium-term notes program.
The coupon rate is 2% for the $500 million three-year tranche, and 3.375% for the $2 billion five-year tranche. We received net proceeds of approximately $2.49 billion and will use part of this to refinance existing offshore debts. The remaining balance will be used for general corporate purposes. This concludes our presentation. Thank you.
Thank you. Operator, shall we take the first question, please?
Okay, ladies and gentlemen, we will now begin the question-and-answer session. If you would like to ask a question at this time, please press the star sign followed by the number one on your keypad and wait for your name to be announced. If you wish to cancel your asking request, please press the pound or hash key. 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? Secondly, regarding the M&A, since you just raised another $2.5 billion, can you talk about the usage of cash? Also, there's some technical issues I want to clarify here, because you recognized the CNY 820 million impairment provisions in the investees. Which investees is that related to? Also, given that a lot of the transactions that you conducted in first quarter was actually in the later part of the first quarter, should we expect the amortization cost for second quarter to triple sequentially? Thank you.
Sure. John will answer the questions on the M&A, and I'll answer or 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 games, which are more targeted, we believe may have greater longevity and clearly monetize at higher rates, both in terms of converting a higher proportion of total users into paying users and in terms of the ARPU generation from those paying users. Looking forward, we see plenty of 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 Korea or in Japan.
It's in that context that you should see our recent investment in CJ Games, which is by a substantial distance, the largest mobile game developer in Korea. We think that it's relatively early days for mobile games in China, and there's a whole universe of different game genres that we can bring to market, either developed internally, which we've done very successfully, or developed through some of our business partners.
In relation to usage of cash, actually, a lot will be used to refinance some of the existing debts. In the second part of 2014, there will be about CNY 400 million worth of debts due, and in 2015, there will be about CNY 850 million worth of debts due. The remainder will be used for general corporate purposes. In relation to the impact of the acquisitions on our P&L, you're right that some of the transaction happened near the end of quarter one, and there will be amortization associated with that. However, we must bear in mind that we are not taking 100% of the amortization, but instead, we'll be taking the percentage of stake we own in that company. 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 world, we'll be talking about 3 to 5 years. Generally, for identifiable intangible assets, for goodwill, we don't need to amortize.
Sure. Also for CNY 820 million impairment provisions that you recognized in quarter, which entities is that mainly related to?
Well, we're not disclosing this. I think you should look at it as certain of the impairment actually relates to the e-commerce portfolio
we have invested in because we have a change in terms of our overall strategy around e-commerce. I would say this is also out of a relatively conservative principle. 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 a pretty large amount of gains that we have not really booked.
Thank you.
Next question, please.
The next is from Chao Wang from Nomura. Please ask your question.
Thank you for taking my question. I have two questions. The first one is on e-commerce. After the transaction with JD, I wonder how you manage your relationship with other B2C players, especially in those non-PC, non-home finance categories, for example, Vipshop, et cetera, to maximize the monetization of the traffic, especially WeChat and wireless QQ traffic. This is the first one. The second one is, I wonder what is the deferred revenue in non-current assets? Is it game-related? Thank you.
On e-commerce, I think, given we have a very significant stake in JD, I think, the priority for us on the physical goods front, especially around B2C, is actually to support JD's growth. Now, having said that, we also have advertising business, the performance-based advertising business, which is not bounded by any constraints. That business can actually work with any e-commerce companies. Our payments business also can work with many different e-commerce companies. As we said, on the B2C, especially around physical goods, centralized products, e-commerce format, we are going to provide a lot of support to our close strategic partner, JD.com. At the same time, our advertising and payment business would get us to work with many different e-commerce companies, so that's operating the space and give us further exposure to the growth of the e-commerce business.
At the same time, we also have our O2O initiative, which involves working with traditional retailers and helping these people to move online. That's something which we are working on as well. We have multiple venues to benefit ourselves from the overall e-commerce industry growth.
In relation to the deferred revenue under the non-current part, it is in relation to the business cooperation with JD, where we provide traffic to them.
Understood. Thank you very much.
Next question, please.
The next is from Piyush Mubayi from Goldman Sachs Hong Kong. Please ask your 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. I just wanted to get a sense of whether that will be stepped up and if there's any color you could shed on the markets that you've been able to gain. Secondly, on online finance, give a sense of where the Weixin Payment user base and payment itself is. We'd be grateful. Thank you.
The marketing spending for WeChat, we commented on the results call 2 months ago that the aggregate spend this year would be similar to last year, how we spent the money 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 maximizing app downloads. That's pretty much what we're executing against. The first quarter, for a number of reasons, is not the busiest quarter for marketing around Asia. We did some innovative things. Looking at the rest of the year, we'll continue to market WeChat in a measured and thoughtful way. We hope to see user growth in key markets. Generally speaking, the markets where we feel particularly strongly positioned would be emerging markets, including emerging markets in Southeast and South Asia.
In terms of Weixin Payment, the number of users have been growing quite nicely. Now, the growth has really come from, one, a lot of online payment use cases, including mobile games, including a lot of Group Buy and other online e-commerce transactions. At the same time, some of the users also come from O2O applications, such as taxi-calling services, as 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 try to really grow the O2O payment scenarios. That's something that we are focusing on.
Thank you.
The next is from Cynthia Meng 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 PaiPai Wanggou and the transition of physical goods e-commerce business to JD, how should we think about when we model the e-commerce revenue? Should we expect it to come down gradually or at a more significant pace? Secondly, any initial feedback you can share with us regarding the experimental rollout of Guang Dian Tong on Weixin subscription accounts? For example, the average click-through rate, or how many official accounts are currently utilizing Guang Dian Tong. Thirdly, if I may, can you share with us the plans on China South City? Thank you very much.
Okay, that's a 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 Jingdong. The pace of that diminution remains to be seen, but we definitely expect a downward direction. With regard to Guang Dian Tong advertising on Weixin official accounts, that's an experiment that's currently underway, that there's a number, a few dozen official accounts that are running the experiment. Right now, I'd say that when we look at the mobile advertising opportunity, we're more focused on areas such as our third-party network, for putting Guang Dian Tong ads on independent mobile apps. Also putting Guang Dian Tong ads inside the Qzone news feed, and also putting brand ads on top of our news app.
Advertising on Weixin official accounts is something that we're going to move on a more measured pace and to take a little bit longer to mature. The third question with regard to China South City, I think that in the past, we'd identified a couple of areas of strategic overlap. One of those was working with China South City's merchants for offline to online services, which remains a priority. Another one was discussing with China South City opportunities for co-location of warehouses, and that's something where we've connected that company with JD.com, and we see scope for the two of them to cooperate.
Thank you very much.
Next question, please. The next is from Dick Wei of Credit Suisse. Please ask your question.
Hi, thank you for taking my questions. I have a question on WeChat e-commerce. I think going forward, it seems like there are going to be two entry points for physical good e-commerce on WeChat. I think one is like you mentioned the press release via the official accounts, and the second is probably the level 1 access from JD. I wonder, from currently, how do you think the traffic, user engagement, or maybe some of the conversions comparison between the two entry points? Thanks.
First of all, I think those are two very different concepts, right? One is what we call centralized and curated e-commerce platform. If you're talking about the second one, which is level 1 access, it's an entry point in which users will click into it, and it will bring them to a curated set of e-commerce products. Whereas, it's actually going through the official accounts, it's a decentralized mode of 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. We believe, on the second one, 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.
As a result, they can actually maintain a relationship as well as conduct transactions online. I think those are two completely different concepts. On the first one, our partnership with JD.com 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. These merchants might also want to have their products featured in a centralized way in a market. If that's the case, then sort of our relationship with JD would help these merchants to not only have their own official account, but also have their products featured in a centralized place. There will be synergies between the two entry points. At this point in time, it's 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 access. We expect the first experimentation of the level 1 access for JD.com will be launched in June, we'll continue to refine it over time.
Got it. Thanks, Martin. Maybe just second question, wonder if any kind of new thoughts on kind of banking license on the internet finance front? Thanks.
Well, I think at this point in time, we don't have much to update compared to 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 Binnie Wong from Bank of America Merrill Lynch. Please ask your question.
Hi, good evening. Thank you for taking my questions. 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 Yixun, given the non-compete agreement signed with JD.com? Also any update on the online payment services, so that there will be a cooperation with JD.com on the online payment as well. 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 cooperate with JD.com. We don't have a strategy to grow Yixun independently of JD.com. We mentioned in the introductory remarks that in actuality, we expect the Yixun business to decline in contribution, in terms of both revenue and costs over the next few quarters. Just to clear that up. With regard to payment, we obviously see plenty of scope to cooperate with JD.com for payment. I'll pass over to John perhaps for the second question.
In respect of the ARPU for various type of games, for MMOG, it falls between CNY 220-CNY 300 per quarter. For advanced casual games, it falls between CNY 85-CNY 220 per quarter. In relation to the mobile games on our two platforms, if we treat all games as one single game, the ARPU will be within CNY 80-CNY 90 per quarter.
Thank you. Oh, sorry. May I have also this last question just on the video front?
I think it's probably better to keep to two questions.
Okay. Sorry. Okay. Thank you.
Sorry.
Thanks.
Next question, please.
The next is Jiong Shao from Macquarie. Please ask your question.
Thank you very much for taking my questions. I have two as well. First question is on the recent regulatory sort of initiatives. As you know, there have been some sort of anti-pornography, indecency or whatnot drive from central government. Could you just talk about your thoughts and whether or not you have been having ongoing discussions with related government entities? That's my first question. Thank you.
Well, we have always been sort of putting in very stringent policy within our content to be anti-pornography. I think the impact on us is sort of not significant. I think as a whole, it does provide a 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 pornographies as well as pirated content, and that's actually good for the overall industry, especially the larger video sites, which are very focused on getting licensed video. I think overall, it's actually good for the industry.
Okay. Thanks, Martin. My second question is that we noticed you, I think you now have an app called Wehua. I think it's almost like a VoIP, Voice over IP type app. I was wondering about your thoughts on MVNO-
Sorry, that is not ours.
Oh, sorry. It's not yours. Sorry. Could you share with us your thoughts on MVNO? Is that something could potentially be an opportunity for us?
No, we have not applied for MVNO license. Yeah, we feel voice is not a product that we want to disrupt. That's not something that we're interested in. The product you mentioned is not ours.
Okay. Thank you for the clarification, and congrats on the strong results.
Yeah, thank you. Next question, please.
The next is from Philip Wan of Morgan Stanley. Please ask your question.
Hi. Thank you for taking my question. Congrats on this great quarter. My question is on Weixin. Could you share with us your view in terms of how to balance between adding more functions or services on the products and also user experience? How do you minimize the risk of making Weixin too heavy for mobile users? Thank you.
Well, this is actually central to our overall strategy and product design. I think throughout this whole development process of Weixin, 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? There are a lot of details that goes into that philosophy. For example, right, if you look at our game center, we put in a lot of restrictions on what kind of messages could be reaching the users through the game center. A lot of the messages were actually just routed to the games themselves rather than routed through Weixin. I think you're absolutely right in saying it's actually very important for us to make the balance.
I think so far what we have seen is that we have made the balance quite well, and the users welcome the additional functionality that we have within the app, while at the same time, the user experience is not getting too cluttered, the interface is not getting too cluttered, and the performance of the app continues to be very fast and crisp.
Thank you for the color.
Thank you. Next question, sir.
The next is from Alex Yao of J.P. Morgan. Please ask your question.
Hi, good morning and good evening, everyone. Thank you for taking my question. I have two questions. Number 1 is, in the prepared remarks, Martin discussed a lot about the building up of your media portfolio, especially on the mobile, from the usage perspective. Can you talk a little more about monetization of your media portfolio, especially on mobile? Given that you guys on PC stage have a massive usage, but monetization seems to be behind the peers in a traditional way. What's your thought on mobile monetization of this mobile media portfolio? Secondly, a quick follow-up question on the accounting of gaming revenue. How do you guys recognize the payment to the app store or to the content developers? Thank you.
I think in terms of the advertising revenue, right. I think there are a number of areas that are sort of our focus. The first one is really still around PC and sort of gradually moving to mobile, which is around video, right? We felt 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 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.
One is because of the fact that sort of the advertisers need to customize their advertising format to the computer, also because 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 with respect to the traffic. If you look at video, it's more and more geared towards sort of very measurable metrics in terms of viewership. I think that's an important source. On mobile, I think we clearly are one of the early movers on mobile media, now we have a very significant leadership position on viewership around news, around mobile apps. I think what we would try to do is actually to lead the wave of mobile advertising.
At this point in time, what we see is, on mobile, there are two sources of advertising revenue. One is based on display branded ads. That's pretty much tied to the PC branded ad. In that area, we need to help the advertisers to find the right way of advertising, find sort of what's the right format to advertise on mobile. We are making good progress on that. Because at this point in time, you have a much larger user base, 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, as a result, your users are younger.
In the mobile world, we actually have integration of our media platform with both QQ and Weixin, as a result, we have very broad coverage of users, and we cover every single demographics that advertisers would want to target. If you look at our mobile branded ads, there are a lot of very high-end brands advertising on our media, then we believe that's only the beginning. 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 advertisers to figure out what's the best way of creating the format of advertising as well as measuring the impact.
Over time, we believe if you look at what Facebook have been able to achieve, I think we have quite a good opportunity within that mobile performance ad.
In respect of the accounting of gaming revenue, there are two parts of that. The first part you have mentioned is channel cost. Basically, they are all net of the games revenue to arrive at the net revenue represented. 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 a net of against revenue. On the mobile side, basically, we recognize our mobile revenue on the platform side as well as the online gaming side. The development cost will be net off against the gaming side to arrive at the net revenue that we presented.
Thank you. Just to clarify, the CNY 1.8 billion gaming revenue you booked for the quarter is actually on net basis, which means that it's already net of the channel costs as well as the payment to content developers, right?
That's correct. At this point in time, most of our mobile games on platforms are self-developed in nature rather than licensed. They are split into two parts, one of which will be booked under platform, the other will be online gaming.
Thank you very much. Very helpful.
Thank you, operator. In the interest of time, we'll take the last three questions, please.
Okay, the next is from Alicia Yap from Barclays.
Hi, good evening. Thanks for taking my questions. My questions is regarding the mobile games outlook. I think with the very impressive growth on the WeChat and mobile games, can you share with us, is it mainly due to the growth of the overall industry demands and the gamers 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? In other words, are we gaining shares, and also in the sense of the other mobile games publisher and also the third-party app store?
I think if you look over the last six months, you could argue that to some extent, we've been creating a market rather than taking share. Many of the people who are playing our games are people who were not previously playing mobile games. Our emergence within the mobile game market in the last six 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. Clearly, we don't expect to triple revenue quarter on quarter every quarter.
We do think that the long-term outlook is quite attractive. Again, we believe that the primary role we're playing within the mobile game market is expanding the market by bringing in new users and new types of games onto these new mobile social platforms that weren't previously in the market.
I see. That's good.
I do want to downplay the expectation on sort of mobile game, right? I think when we have CNY 600 million a quarter, people were saying, "Oh, it's a little too small." This quarter, we're at CNY 1.8 billion, 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 we want to grow it on a sustainable basis as well as measured basis. I want to avoid people making too aggressive expectation on this. We'll be very patient in terms of growing the revenue and trying to sort of find the right titles for it, rather than sort of try to put on a lot too many titles at one time.
I see. That's very helpful. Second question and last question that I make is on your collaborations with Leju. Can you actually elaborate a little bit on what would be the integrations of the service and what should we expect Leju to benefit from? Any other kind of like the vertical investment that you will be also thinking about, like the auto or 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 leverage 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 in their own earnings call, which is going to be happening quite quickly. Yeah.
Okay. Great. Thank you.
Next is from Ming Zhao of 86Research.
Thanks for taking our questions. I've got two quick questions. First one is on the gaming business. On the PC side, it seems like the casual game is still doing well, whereas the MMO games have some softness. 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. As you've already seen, the mobile gaming growing very strongly. What's the next monetization engine? Is it advertising or is it the payment? Can you give us some color on that? Thank you.
With regard to the mainstream multiplayer games, you're correct to identify that the growth was less rapid than for the advanced casual games. The revenue still grew at a very healthy rate year-on-year. With the advanced casual games, that's actually a sort of super category that includes dozens of different categories within it. We've seen something like the battle arena category, in which League of Legends is the leader, become quite big, quite fast. It's possible in the future we could see the sports category with NBA and FIFA becoming big and so forth. The role-playing game category is more tightly defined. It's really one genre of games rather than 10 genre of games.
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 in the advanced casual game category. Now, what you are seeing in the role-playing game category is that historically, the preponderance of our users were playing role-playing games that were relatively lower yielding, and over time we've added some higher yielding titles like Blade & Soul to the mix. Whereas with advanced casual games, the primary growth driver could arguably be user activity, with the role-playing games, the growth would be more tilted toward a mix shift toward higher monetization games.
Another lesser point to make, 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. What we experience internally is that the big advanced casual games tend to benefit, particularly from holiday periods for various reasons, whereas the role-playing games, particularly some of the newer role-playing games we've introduced in the last 18 months, are less seasonally skewed toward holiday periods. That's just something else to think about when you think about the advanced casual games growing faster for Q4 to Q1 versus the role-playing games.
Yeah. In terms of monetization around Weixin platform, also around Mobile QQ platform, I think the successful launch of mobile games is actually a big, I would say, achievement. 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, will have a good monetization potential. At this point in time, I don't think the first priority for us is to make a lot of money from the platform, but we would be diverting a lot of resources into building our platforms to encourage more user engagement. I think the vision for us around the two big social mobile platforms is really to connect people with various things, and these various things include their first mission, which is connecting people.
Then, we would want our platforms to connect our users with content. We want our users to be connected to services and even offline services going forward. I think a lot of our initiatives will be put around this. Now, in order for that to happen, we do need to have a good payment system 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. I think these are going to be developed in the meantime, but I think 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 time.
We believe that if we can do that, then over time, the business model will definitely follow.
Thank you.
Thank you. Operator, we shall take the last questions, please.
Thank you. The last question comes from the line of Chi Tsang of HSBC. Please ask your question.
Great. Thank you for taking my questions. Good evening. My first question is regarding the CNY 1.8 billion of smartphone gaming. I think the math is about CNY 1.08 billion is allocated to online games. I was wondering how much of that is actually coming from Mobile QQ innovation.
He's taking a 60%, right?
Right.
It's not exactly that, because there's also Exactly that.
What are you trying to establish with your question? Both the Mobile QQ and the Weixin portion of the revenue will be booked under social networks. Just to be clear. The CNY 1.8 billion will be booked under games. The balance of CNY 700 and something will be booked under social networks, irrespective of whether the game is played on-
He's trying to figure out sort of what's the split between
We should involve the future.
It's not related.
Yeah. Well, let's.
We can check.
Well, we're not disclosing that number. After a lot of hard work, we give you this disappointing answer. Sorry about that.
That's fine. I think one element that was very strong was the gross margins for Value-Added Services. I'm wondering if you can give us some color behind that and how sustainable that might be. I'm also wondering 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. In the PC era, we were relatively late to enter the game market, therefore, many of our biggest games, until very recently, were third-party games on which we have to pay very material revenue shares away to our partners. 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 net of the third-party revenue share. B, because we're entering the smartphone games at a much earlier stage of their development, we ourselves think we're actually pretty good developers of smartphone games. We have some of the biggest and best smartphone games, not only in China but globally.
Consequently, on those games, the margin is substantially higher than it would be on an equivalent portfolio of PC games. That's just something to think about when you're looking at the gross margin for the internet Value-Added Services segment. Now, obviously, from time to time, we'll launch new projects. Those new projects could be dilutive to gross margins. At least, looking backward at the first quarter, the contribution from the smartphone games was one factor behind the improvement in the gross margin.
In terms of the tax rate?
In relation to the tax rate, I think if you look into 2014, if we exclude the effect of the noises , such as the deferred tax, it will be within 15%-18%.
Great. Thank you so much.
Yep. Thank you very much. This concludes our conference call for the quarter. If you wish to check our press release or financial information, please visit our website at www.tencent.com/ir. We'll 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.