Earnings Call: Q4 2013

Mar 19, 2014

Thank you for standing by, and welcome to the Tencent Holdings Limited 2013 4th Quarter and Annual Results Announcement Conference Call. At this time, all participants are in a listen only mode. You. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chan. Thank you very operator. Good evening. Welcome to our annual results conference call for 2013. I'm Catherine Chen from the IR team. Before we start the presentation, we would like to remind you that includes forward looking statements, which are underlined by a number of risks and uncertainties and may not be realized in future for various reasons. A measure about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non GAAP financial measures that should be suited in addition to, but as a substitute for matches of the company's financial performance prepared in accordance with IRS. For a detailed discussion of the risk factors in our non GAAP financial show matches, please refer to our disclosure documents downloadable on w ww.tansend.com/ir. Let me introduce the management team on the call tonight. We have our Chairman and CEO, Gunima President Martin Lau Chief Strategy Officer, James Mitchell and Chief Financial Officer, John Lowe. Then we'll kick off with a shorter review. Martin will discuss strategic highlights. James will speak to business review and John will through the financials before we take your questions. I'll turn the call over to Puneel. Thank you. Good evening. Thank you for joining us. During 2013, we witnessed a rapid penetration of smartphones in China, bringing us a great opportunity to further deepen engagement with our users when they are connected anywhere anytime. Now let me share with you our business achievement in 2013. In social, we solidified our leadership in China established our presence in international markets via WeChat. Moreover, we unlock it mobile monetization through games. In online games, we are the largest PC and games platform globally, with 6 games each surpassing 1,000,000 PCU. Leveraging our mobile social leadership and industry know how we quickly build our mobile games platform to become the largest in China with 6 games each surpassing 10,000,000 DAU. In online advertising, we are the large the display advertising platform in China by revenue and we are well positioned in performance advertising and new mobile advertising opportunities. Last September, we entered into a strategic partnership with Sogou to expand our presence in regional expansion, paving the way our recent strategic partnership with JD dotcom. In 20 14, we will continue to invest in our people, platforms and partnerships. We are stepping up investment in digital content, mobile utilities and online payments and exploring new opportunities in O2O and internet finance. Turning to financial highlights. I will quickly run through the headline number. For you. For the fourth quarter of 2013, total revenue was rmb 17,000,000,000, up 40% year on year 9% quarter on quarter. Value added services revenue was rmb 12,000,000,000, up 27% year on year, 3% quarter on quarter. Online advertising revenue was rmb 1,500,000,000, up 58% year on year and 8% quarter on quarter. E commerce transactions, revenue was rmb 3,300,000,000, up 97% year on year, 41% quarter on quarter. Non GAAP operating profit was rmb5.3 billion, up 23% year on year and stable quarter on quarter Non GAAP net profit was rmb 4,500,000,000, up 11% year on year and 3% on quarter. For the full year of 2013, total revenue was rmb 60,000,000,000, up 38% from 2012. VAS revenue was RMB 45,000,000,000, up 26% year on year. Online advertising revenue was RMB 5 1,000,000,000, up 49% year on year. E commerce transaction revenue was RMB 9,800,000,000, up 121% year on year. Non GAAP operating profit was RMB 21,000,000,000, up 22% year on year. Non GAAP net profit was RMB 17,000,000,000, up 19% year on Moving on to our online platforms. Total MAU for QQ was RMB808 1,000,000 within which smart devices MAU was RMB426,000,000 up seventy four percent year on year. After 2 years of hard work, QQ has transitioned it very successfully into a mobile first communications platform. We think that WeChat has a combined MAU of 55,000,000, up 121 percent year on year. Our user base expanded in China and international markets and user engagement different following the launch of games several months ago. For Qzone, total MAU was $675,000,000, which we think reached smart devices was MAU 4 $16,000,000, up 63% year on year. Photo shooting using smartphone and photo sharing on Qzone is a popular trend for the young and active in China. Our online games platform further expand its leadership from PC client games to smartphone games. For our media platforms, we strengthened our lead in news by integrating news feeds via a parting with the mobile we've seen and by enhancing our network app, Tencent News. We further enrich our microblock service by integrating it with our multi leading short form video sharing app. We Xu. Tencent MicroBot has 190,000,000 MAU. For our utility services, We continue to strengthen our presence in mobile security solution and mobile browser. I will now pass on to Martin to discuss strategic highlights. Thank you, Pony, and, hello, everybody. First of all, I would like to talk about our social platforms. Our social forms at the cornerstones of success for $0.10. After 2 years of hard work, we have successfully transitioned QQ from a PC base to a mobile find communication and social networking platform. On the other hand, Weiixin is a mobile centric creation that sweeps across China since January 2011 and is now starting to also establish global presence through a sister product WeChat. We now have $335,000,000 MAU for Weixin, and we check on a combined split basis globally. Weixin offers an integrated sharing service through its in app moments functionality. Now QQ and differentiated users whereas Weixin appears more to white collar users. Secondly, QQ's business model builds on subscriptions through virtual services and privileges and games, whereas in addition to games, we should also explore offline to online ID O2O opportunities in the longer run. Thirdly, QQ connects users with an ecosystem of people and content through groups and open platform, whereas Weixin connects users with content and service providers through official accounts. QQ and Weixin are also highly synergistic has discovered the broadest spectrum of user segments in China and is served as a synchronized publishing and distribution platform for content partners such as game developers. In addition, QQ and Weixin can each evolve quickly to respond to the fast changing user preferences and needs. Thus increasing our overall resilience in the market. Our social platforms I also designed to facilitate the development of a rich ecosystem of services catering to the diversified needs of our users. By integrating services of users choice, our social platform achieve higher user stickiness while creating potential monetization opportunities. The ecosystem of services in which most of them 3rd party services would include games and digital content in which we have developed significant integration expertise on PC. It also includes O2Oecommerceservices, which are more catered to the mobile platform, and in which we're starting to build expertise. Now how do we facilitate the growth of this mobile ecosystem? We do have a whole series of infrastructure features. To do that. For example, our locking status help users to access services of their choice easily. Our social graph helps word-of-mouth to propagate. Our payment system helps our partners to get paid. Our targeted marketing system helps the promotion of these services and our CRM facility, the functionalities help them to stay in touch with our users. We believe these infrastructural features make our social platforms uniquely efficient to build a rich and vibrant mobile ecosystem. Recently, we have conducted several successful experiments in the area of OTO leveraging the unique advantages I mentioned earlier. This include 1st Digit Archer, which is a taxi booking service. We ran a promotional campaign jointly with BD that provide discounts to users and rebates to taxi drivers when users pay the taxi fare patient payment. During the 1st month promotion, our users paid for a total of 21,000,000 trips across 58 Cities in China. 2nd, Lee Taitong, which distributes money market funds managed by leading asset management firms. Since launch in late January, the title has accumulated AUM of over RMB60 billion. We'll gradually evolve the entitlement to become a platform that distributes a broader selection of high quality wealth management products over time. 30, RED Packet, which enables users to distribute and collect lucky money from their social graph during the Chinese New Year. Our users collected over 40,000,000 web packets totaling approximately RMB400 1,000,000 in the course 9 days during the Chinese New Year. In addition to these OTO experiments, we have also strengthened our O2O presence through a significant investment in Dianping. In February, we invest to acquire approximately 20% of DMPING, which is a leading local life information and transaction platform. Our partnership is synergistic in the following way. We provide our users with DMT's high quality local merchant reviews and local deals. We help DMT team to increase user stickiness in Tier 1 And Tier 2 markets and also help it to deepen its presence in other Tier 3 Tier 4 Cities. We enabled Danking's merchants to manage customer relationships via official accounts and complete transactions using Weixin payment. I've also strengthened our presence in physical goods e Commerce through partnership. In early March, we entered into a strategic partnership with JD dotcom, the largest managed physical goods e tailing platform in China, We obtained approximately 15% new shares in JD dotcom and was to provide an additional 5% interest at their IPO. Through this transaction, JD has become our preferred partner in physical goods businesses, We're transferring our marketplace and logistics personnel to JD to capture scale and geographic synergies. Immediately after the transaction, JD dotcom holds a 9.9% interest in issued and we expect JD to eventually exercise the co option to acquire the remaining interests of Yixin. We'll support JD dotcom to grow by providing level 1 access points in motion and mobile QQ. As well as additional traffic and advertising support. Leveraging JD dotcom's rich product selection nationwide logistics network and after sale services, we can enhance end to end shopping experiences for our users. Now JD dotcom is one of the multiple transactions that we have done over the past 6 months in which We build strategic relationships with best in class vertical players at both investor as well as operations level. And the goal of these transactions are to improve user experiences for our users as well as unlocking business synergies. I will invite James to talk about the business review. Thank you, Martin, and good evening. Good morning, everyone. During the fourth quarter, we achieved revenue growth to 40% year on year. Our nine games contributed 50% of our revenue, social networks, 20%, e comm transactions 20% and advertising 9%. Excluding e commerce transactions, our revenue grew 30% year on year in fourth quarter. The full year, total revenue grew 38% year on year and excluding e commerce transactions, total revenue grew 28% versus 2012 indicating to slight revenue acceleration in the 4th quarter versus full year. Diving into value added services, segment revenue was rmb 12,000,000,000 for the 4th quarter, 27% year on year and 3% quarter on quarter. Our online game revenue was rmb 8,500,000,000, up 35% year on year and 1% quarter on quarter. Monetization of our popular games and expanded paying user base new games and contributions from smartphone games drove year on year revenue growth. Sequentially, our game revenue was flat as some of our older titles slowed down partly due to seasonality which was offset by contributions from new games and smartphone games. Our social networks revenue was rmb 3,500,000,000 year on year and 8% quarter on quarter. The drivers of the growth were smartphone games and item sales from open platforms. For the full year, VAS revenue was rmb 45,000,000,000, up 26%. Taking a closer look at social networks, solidified our social leadership, deepened user engagement and unlocked mobile monetization during 2013. Partly as a result of our initiatives to the QQ and Qzone mobile experiences, users of smartphones and tablets grew to over 50% of the total QQ and Qzone user base. During the quarter, we are voice recording functionality to mobile QQ. Daily photo uploads from smartphones to Qzone tripled year on year. Our Weixin and WeChat products expanded their user base globally. As Martin's discussed, we're building out nodes who are ecosystems supported by Weixin payments in China, leveraging our user base things. In terms of monetization, we recognized a full quarter contribution from the games on mobile cable innovation, These games generated over R600 million dollars in revenue, which we share between our social network and online game reporting segment Our subscription products continue to experience revenue pressure due to users shifting to smartphones. Moving on to PC client games, we sustained clear leadership the category, leveraging our user behavior insights, segmentation strategy and operational expertise. For advanced casual games, our combined key for the quarter was 1,000,000, up 30% year on year, and our combined ACU was 1,000,000, up 36% year on year. Measured by peak concurrent user, we ranked number 1 in multiple game categories, including first person shooter, music, racing and back arena games. League of Legends is now arguably the world's most popular online game with over 7,500,000 peak concurrent users globally. Dramatically multiplayer online games, combined PCU for the quarter was $5,600,000, up 40% year on year, and combined ACU was $2,500,000, up 19% year on year. Our recently released licensed player online game to surpass 1,000,000 peak concurrent users in China since 2009. Smartphone games represent a new growth opportunity for us. Since the launch of the game centers on mobile QQ and Weixin last all list, which broadens our game user base, keep it game user engagement and widened game selection. Currently, we have over 100,000,000 unique data of users playing games on mobile QQ and Weixin, and 6 of these games have each exceeded 10,000,000 daily active users. We've redesigned our app store, my app dot com or Yinyongbao into an open platform and distribution hub for long tail games. Our peak daily app downloads have quadrupled over the last 12 month reaching 64,000,000 daily downloads earlier this year. Turning to online advertising. Segment revenue was rmb 1,500,000,000 up 58% year on year and up 8% quarter on quarter. As you may recall, we deconsolidated the search revenue in mid September following the merger search business with Sogou. Excluding Search, our advertising revenue grew 82% year on year and 15% quarter on quarter. Within which, our brand advertising revenue was rmb900 million, up 65% year on year and 12% quarter on quarter, driven by increases in impression volume and pricing on our video platform and portal. Our performance advertising revenue with R600 million dollars, up 118% year on year and up 21% quarter on quarter. For the full year, advertising revenue was 5 1,000,000,000, up 49% year on year. Digging into brand advertising, our top 5 advertising categories included online services, automobiles, food and beverage, consumer electronics, and real estate. Our video brand advertising more than doubled year on year as we increase pre rollouts and achieve better sell through volumes. For mobile brand and we're developing new ad formats that we believe will not impair user experience. For example, we're experimenting with banner ads at the bottom of the content page in the Tencent News app and in the Weixin news plugin and pre roll ads for our Tencent video app. Looking to 2014, we'll invest aggressively in content to build market share our video platform. For example, we've got the exclusive rights to broadcast Voice of China Season 3. For performance to stay advertising Guangji and Tong platforms saw a mix shift of bigger advertisers during the fourth quarter due to e commerce promotions, which enhanced the cost of the revenue click. In terms of mobile performance advertising, we're currently testing news feed ads on mobile Qzone and excellent ads at the bottom of the page on Weixin official accounts. Finally, our e commerce business segment revenue was rmb 3,300,000,000, up 97% on year and 41 percent quarter on quarter. The principal component set up a strong year on year growth across product categories and increased sales sequentially due to the promotional period November December. Our agency revenue commission fees increased due to higher transaction volume. So the full year e commerce transaction revenue was rmb 9,800,000,000 up 121%. And with that, I'll hand over to John. Hello, everybody. For the fourth quarter of 2013, our total revenue was RMB17 billion, up 40% year on year and 9% quarter on quarter. Operating profit was rmb 4,800,000,000, up 28% year on year, and down 1% quarter on quarter. Net other gains was RMB405 1,000,000, mainly comprised of disposal gains for our investing company and government subsidies. Income tax expenses was RMB808 1,000,000 down 15% quarter on quarter due to a decrease in withholding tax recognition and tax reversal resulted from the qualification of tax exemption of a subsidiary. Effective tax rate for the quarter was 17 percent. Net profit attributable to shareholders was rmb 3,900,000,000, up 13% year on year and 1% quarter on quarter. For the full year of 2013, total revenue was rmb 60,400,000,000, an increase of 38% from 2012. Operating profit was rmb 19,200,000,000, an increase of 24% year on year, profit attributable to Shell was RMB 15,500,000,000, an increase of 22% year on year. On a non GAAP basis, operating profit for the fourth quarter was rmb 5,300,000,000, up 23% year on year as flat quarter on quarter. Net profit attributable to shareholders was rmb 4,500,000,000, up 11% year on year and 3% quarter on quarter. Operating margin was 31%, down 5 percentage points year on year and 3 percentage points quarter on quarter. Net margin was about 27%, down 7 percentage points year on year and 1 percentage point quarter on quarter. For the full year of 2013, non GAAP operating profit was rmb 20,800,000,000, up 22% year on year. Non GAAP operating margin was 34%, down five percentage points from last year. Non GAAP profit attributable to shareholders was RMB17.1 billion, up 19% year on year. Non GAAP net margin was 29% down from percentage points last year. Let's turn to segment gross margin. Gross margin for VAS was 6 7%, up 1 percentage point year on year or up 2 percentage points quarter on quarter. The sequential increase was mainly due to higher portion of revenue generated from house PC client games and full quarter contribution from wasting and mobile games, which were mainly developed in house. Gross margin for online advertising was 32%, down 17 percentage points year on year, or down 20 percentage points quarter on quarter. The sequential decrease was mainly due to accelerated amortization in quarter 4 for online video content costs to reflect the change in user viewing patents. Excluding the impact of a steroid amortization of online video content costs, The gross margin for online advertising would have been 54%. Gross margin for e commerce transactions was 5%, down 4 percentage points year on year or down 1 percentage point quarter on quarter. The sequential decrease mainly reflected the impact of promotional sales last November and December. For the full year of 2013, gross margin ratios were vastly stable at 66%, online advertising declined from 49% to 45%, mainly due to accelerated amortization of video content costs, and e commerce increased 1 percentage point from 5% to 6%. Moving on to operating expenses. Selling and marketing expenses were rmb 2,000,000,000, up 86% year on year and 39% sequentially. Both sequentially and annual increase were due to e commerce promotion in the quarter, increase in marketing expenses for PC and spectrum gains, media platforms, and WeChat international markets. Except a percentage of revenue, selling and marketing expenses increased to 12% and from 9% in the fourth quarter of last year. G and A expenses was rmb 2,800,000,000, up 30% year on year and 6% sequentially. The yield on year change mainly reflected increase in R And D expenses and fast course as a percentage of revenue G and A expenses decreased to 16% from 17% in the fourth quarter last year. Included under G And A, R and D expenses was rmb1.3 1,000,000,000, up 21% year on year or down 4% sequentially. Sequentially the R and D expenses decreased 4% as we chewed up related staff costs. R and D expenses represented 8% of quarterly revenue. On a full year basis, selling and marketing expenses was RMB 5,700,000,000, up 90% over 2012 and represented 9% of annual revenue G and A expenses was rmb 10,000,000,000, up 29% over 2012 and represented 17% of annual revenue. Our R and D expenses was RMB5.1 billion, up 22% over 2012 and represented 8% of annual revenue. At quarter end, we had about 27,500 employees which is up 14% year on year or 2 percent sequentially. Year on year increase was mainly due to headcount increase in e commerce business. Let's look at margin ratios for the 4th quarter. Gross margin was 51.7%. The year on year decline of 4.9% was due to increased for e commerce revenue this year and accelerated amortization of video content costs. Non GAAP operating margin was 31.4%, down 4.1% year on year or 2.9% quarter on quarter. Non GAAP net margin was 26 point percent down 6.9% year on year or 1.6% Q on part was mainly due to operating margin decline and lower tax reversal for subsidiaries. During the 4th quarter, we didn't buy back any shares. For the full year, we repurchased a total of 6,600,000 shares for approximately US1.6 billion dollars. The total number of shares outstanding at the end was US1.86 billion dollars, For 2013, basic EPS was up 22% year on year to RMB8.464 and diluted EPS was up 21% year on year to RMB 8.298 RMB. Non GAAP basic EPS was RMB 9 point 16 RMB and diluted EPS was RMB 9.134, both increased by 19% from last year. Subject to the approval of shareholders at the Annual General Meeting to be held on 14th May, we are proposing an annual dividend of US1.2 dollars per share. This is 20% above last year's dividend and the payout ratio is stable at 11%. The CapEx for the quarter was RMB1.7 million, down 6% year on year or up 4% quarter on quarter. Operating CapEx was rmb916 1,000,000, up 55% year on year or down 7% quarter on Non operating CapEx was rmb 763,000,000, down 36% year on year or up 20% quarter on quarter. Free cash flow reached RMB5.2 billion, up 20% year on year and 26% quarter on quarter. Our net cash position at year end remained strong at RMB36.2 billion, up 32% year on year and 5% quarter on quarter. Now I'll walk you through the financial impact relating to the as associate companies starting from 1st Q 2014. For our investment in our share of net income or losses in P And L and recognize our equity interest in the balance sheet. For investment in JD dotcom, we will be consolidating revenues and costs for our physical goods marketplace businesses and continue to consolidate revenues and costs from our principal business after disposal of 9.9 percent interest in Yixin. We will book disposal gain of RMB1.9 billion under other gains or losses and capture our share of Jingdong's debt income or losses under share of profit or loss from associates. We expect to recognize income arising from services provided our partnership agreement and also incur channel calls on JEDT revenue distributed through Jingzo. For the balance sheet, we will recognize our equity holding under interest and associates. For the cash flow statement, there will be an outflow of 2 $15,000,000 at Prosing and further cash flow relating to our subscription of Jingdong hardware shares. Last but not least, we are proposing for shareholders approval, 1 to 5 shares split to facilitate ownership and trading of small investors, such as employees retail investors, you'll keep the board lots of 100 shares unchanged. The shares will effective on 15th May 2014, subject to approvals by shareholders and a stock exchange of Hong Kong. The final dividend for 20 13 of the shares will be $0.24 per share and payable on 30th May 2014. This concludes our presentation Thank you. Questions. Your first question comes from Charles Wong from Nomura. Hi. Good evening. Thanks for taking my questions. My question is just regarding your mobile game. So regarding that 600,000,000 the revenue from mobile pin. Just want to double check whether it's solely booked on the gaming business line or to share between SMS and, then And, also, is this just the, from the data center on your mobile QQ and Wishing, or it also include your legacy mobile game, so called picture cents. And, in social, we assume that, future container is not going out even behind it. And the main driver is, the equation in 2 wheeled smart thinking? Thank you. In respect of the figure that we have disclosed as 600,000,000 if it's, it represents income on both online games. And social networks because part of it belongs to the platform and part of it remains on the gaming side. And it has not included the legacy type of mobile games, those that are not on the smartphones. Thank you. I have just a quick follow-up on the revenue recognition of the mobile game. Is this also based on amortization virtual items. And what is the typical amortization period? How how does that actually compare to a PC game? Thank you Actually, in relation to a platform games, there will be deferral of revenue. However, for most users, they will tend to charge it and use it immediately or within a time or period of 2 weeks or a month. So the deferred revenue would not be at the same proportion as you know, the PC gains. Next question please. Your next question comes from the line Adi Leung from Merrill Lynch. Please ask your question. I'm just wondering on your old to old strategy. Sometimes it seems like you guys are relying more on our partners. Do you anticipate going forward you need to perhaps set up a direct sales force, or a team of our business development people to take into a national, perhaps your local advertising opportunities. So this is my first questions. And then just for housekeeping, I'm wondering if you could share with us the number of official accounts on Lavinci as well as the ARPU trend of O2O initiative, I think we approach it, 1st of all, from a platform perspective, right? We do want to provide any merchants or any sort of individual partner, the basic ability to be involved in the Weixin platform. So what we provide is, official accounts and then sort of within the official accounts, we are going to continue to evolve different functionalities for the different types of industries that the O2O merchant is in, we will offer also wasting payments so that the partner can actually get paid. And we are also going to include additional features for these merchants to be able to promote themselves such as Guangdian Tong target as the marketing system. So all these features will be open to whoever who wants to sort of be involved in the O2O overall ecosystem. Now that's the basic infrastructure. Now in addition to that, we do want to target different verticals in the process of turning these, merchants or these individual their companies into a participant. So we do rely on a certain partners who have all really build a pretty good ecosystem of such vertical industries. For example, dd Bachelor who have got a very big crowd of taxi drivers. For example, the MPN who already connects with 100,001,000,000 of merchants and local restaurants and all sorts of different service providers. So I think your partnership is an important part of the strategy. At the same time, over time, right? We would look at the different verticals and depending on what would be the most effective way of marketing to these, merchants, these vertical merchants, we will decide whether use partnership is the better way or using sort of the self help way for people to sign up or, having direct sales force to cover these merchants. Sometimes for larger merchants, right? Like certain retailers, we do have pretty targeted group of people to cover them on an individual basis. To so that we have more customized solution for them. In relation to the gains ARPU for MMOG, you will fall within 140 to 300. That's a quarterly figure. For advanced casual game, it falls between 80 to 190. I would like to give you another figure in relation to smartphone games. If we view the whole portfolio as one game, we're not talking about one particular game within the sponsoring platform. We're talking about the portfolio of games. If we will, that's a single game, ARPU will fall within 7 60 to 70 rand B per quarter? So in terms of official accounts, we now have more than 2,000,000 official within the Weixin ecosystem. Thank you for your question. Operator, next question please. Hi, thank you for taking my questions. I have a question on the WeChat mobile physical goods e commerce. If there are any progress you can share as well as how are the social recommendations or data analysis helps with the clinician, anything you can share? Thank you. So, Dick, you want to I don't quite get your question, sorry. So can you My question is about the mobile commerce right? Before security periods, I wonder what kind of maybe what kind of conversions we are seeing or what kind of traffic are we seeing of familiar with chat platform. And any of this may be called big data analysis that can help to improve the conversion compared to other platforms in the industry? I think right now it's sort of way too early to talk about this. From a from a physical goods perspective, we just experimented with one entry point with limited product selections. And we have also just started to do some extend out Guangdong into some of the official on an experimental basis, right? So I think we're very early in terms of really leveraging our social platform for the benefit of the physical goods business. Over time, I would imagine that we would have more prominent entry points with a much bigger selection of products. We would also have a social infrastructure and current social sharing of various different products. We would have a much broader coverage of our Guangdong advertising network as well as continuously improving targeting mechanism to improve the conversion rate of the advertising network. So all these will be coming in the future. But right now, there's really sort of we're just scratching the surface in terms of the physical goods e commerce ecosystem for Weixin at this point in time. Great. Thank you very much, Martin. Your next question comes from the line of Alex Yao from Morgan Stanley. Your next question comes from the line of Timothy Chan from Morgan Stanley. Please ask your question. I have two questions. The first one is more about the recheck promotion overseas. Can you comment about the effectiveness of the WeChat promotion and whether you're going to start up the marketing effort again this year? And how should we think about your overall marketing spending this year? And my second question is about your latest video strategy, your views on the competition and also the potential consolidation in the sector? With regard to marketing spending for WeChat specifically, for the full year 2013, we came in line with our estimate of USD 1,000,000 to USD 200,000,000 in marketing spending for WeChat. That was spread pretty broadly across the range of geography Some of those geographies proved less hospitable and improved more hospitable. For 2014, probably be spending a similar amount where we see traction and where we see opportunities to really drive engagement as opposed to just collecting a lot of registered users who don't necessarily engaged. So that's specifically on the marketing spending for WeChat. On marketing spending, in general, we'll have some incremental initiatives, for example, related to popularizing payment of Weixin payment through taxi app and other mechanisms. And then with regards to video, the competitive landscape that we're assuming will be very hence this year, we're budgeting our video content costs to approximately double year on year because we want to outspend the market a little bit. Increase our market share. The bad news on video is we continue to be loss making the good news is that our video advertising revenue is growing at a very brisk pace substantially more than doubling year on year in fourth quarter of 2013. Thank you. Next question please. Your next question comes from the line of Alex Yao from JP Morgan Chase Bank. Please ask your question. Hi, good evening, everyone. Thank you for taking my question. Two questions on my side. Number 1, can you guys talk about your e commerce strategy know that you have transferred pretty much, no, vast majority of your e commerce asset to your partners? And secondly, in the press release, you guys discussed that market competition intensified a competitors aligned their strategies with the mobile opportunities and made aggressive organic and inorganic investments along value chain. So where do you see the most competitive threat? And how would you respond? In terms of e commerce strategy, I think, there will be pronged strategy. The first one is around fiscalgoodecommerce And in a managed way, so basically sort of having a shop front as well as having a marketplace that host a lot of different merchants for selling their products. So this kind of format, we will actually partner with JD dotcom as our as our strategy. Basically, it's a new we would then leverage a lot of our platform advantages as well as our traffic to support jd.com to keep on building their scale of being, the leading B2C merchant as well as to build a large marketplace that host a whole host of different merchants. So that's our strategy on sort of this managed and centralized short fund approach. At the same time, we would also partner with various retailers who actually want to sell their products online particularly on the mobile internet. And a lot of these merchants may just want to have their own shop. They don't necessarily want to be part of a big marketplace that they want to have their own shop and some of them sort of maybe offline retailers, some of them may just have a specific kind of product that they want to sell on the mobile internet. And a lot of them would have their own ways of accumulating different user base and they just want to have a front on the mobile internet. And this is sort of what we call the unmanaged, distributed ecosystem of ecommerce. And that's something that Weixin will continue to support through our official accounts and through our payment system as well as through our Guangdental advertising network. Now in terms of market competition, I think your market competition is just sort of new in tensifying across the board, right? I think it's very clear that mobile Internet has really unlocked a whole range of new possibilities. In the past when we are on the PC internet, you are limited by the device, you're limited by the time on which you are online. But when we get to the mobile internet, basically sort of the mobile device has become an extension of a person's body as well as a person's new everyday life. So all sorts of different lifestyle activities can actually be integrated within the mobile internet device. So that's why everybody sees the opportunity. The opportunity also gives rise to new entrants. It gives rise to ways to which the online industry can connect with traditional industries. So that's why we see competition is in increasing, but at the same time, opportunities is expanding. And under this kind of environment, right? We felt we will be making investments, both in terms of strengthening our own platform, in terms of building an ecosystem that would connect our platforms with all sorts of different industries who wants to get on to the mobile internet and access users And we also want to invest in best in class vertical players so that together, we can build some unique services and unique value add for our users. And these are the areas that we'll be investing our resources. Thank you for your question. Next question please, operator. Your next question comes from the line of Sintemmeh from Jefferies. Thank you management and congratulations for a strong quarter. I have two questions. One is on the focus of investments 2014. And we remember in 2013, management talked about, overseas recheck in expansion as well as e Commerce And Mobile Investments. So now that we have the deal with jianping and JD dot com, the e commerce side, what will be the focus of investments for this year, 2014? Are we still going to continue investing a lot in promotions in the WeChat overseas expansion. That's my first question. And I have a follow-up question. Going forward, a longer term strategy for Tencent in terms of operating models. Now we have a different strategy regarding e commerce. How would we think about the operating model for 10¢? Are we going to focus more on interactive social and entertainment, and the mobile internet, can management give more color on that front, please? Thank you. Great. So in terms of the question about the focus of investment. We see sort of 3 buckets of investments activity for 2014. The first is really driving the mobile internet. We feel that Weixin and mobile QQ are great launch parts or aircraft carriers, which can support a wide range of other applications. We've started to see that with our news application. Started to see that with smartphone game applications, but there's a whole host of other things we can do on mobile Internet and leveraging the success of Weixin and mobile QQ. That's really about taking the investment we've already made and driving incremental leverage from it. A second source of investment is actually putting capital to work. And that would include our popularizing our Weixin payment service, which I alluded to earlier in the context of that the taxi bookings that would include the doubling, approximate doubling of the video content costs I referred to earlier. And that would include, roughly flattish spending year on year on we chat marketing internationally. The 3rd bucket of investments is really investing our time and energy and our traffic maximizing the benefits we can deliver to some of our strategic partners, including JD, including Tianping, including DD Dutch, CRC and so forth. That's about putting dollars to us because we've already put the dollars into acquiring our shares. And so forth. It's more about taking our existing traffic and resources and using them to provide full benefit to our partners. Well, in terms of operating model and sort of newer areas that we're going to be focused on, I think There are certain core businesses that we definitely sort of knew continuing to put in a lot of resources build our operations around. And that will include the social platform, that will include the games, that will include our media and digital content platforms. So these are the areas that we would continue to invest and put in resources need to build up the platforms and the various services. Now there are also areas as we move into the mobile internet, there areas in which we see a much broader ecosystem of various different players And that would include areas like e Commerce, areas like O2O Services, as well as even sort of new areas online finance and sort of, I would say, Verticals, education, health care and other vertical areas. I think in a lot of these new areas, we would approach it from two angles. One is, there are areas that we may actually do it ourselves. If we can have a strong participate in. But I think because these are new areas that require quite a bit of industry know how or even in a lot of areas offline capabilities, then we would actually, rely even more so on what we call the open platform strategy. And within the open platform strategy, I would say there are 2 distinct formats. 1 is taking certain best in breed platform partners. So if clearly, there are partners who have already build a lot of expertise in certain area who have already built an ecosystem of many of the participants such as DDDACUR such as denting such as in the future JD dotcom, we would be working with them and we may sort of approach it in a deep partnership type of model. Which we take investment, we also sort of need to become their deeply related operating partner and try to create value added services for the users. On the other hand, we also would want to work on the ecosystem perspective, we would provide certain basic infrastructures so that, participants can actually just sign themselves on, on their own effort. Right? So we will have a pure open system where a lot of smaller merchants, smaller participants can actually sign up and they can promote themselves using a lot of the infrastructure we have using our lock in status using our social network using our payment system using our Guangdong advertising network. So a lot of these people would also just be able to add themselves onto the network So I think can, get people to our ecosystem. Thank you. Next question comes from the line of Chi Zeng from Citi. Good evening. Thank you for very much for taking my question. I had just a housekeeping question and then a kind of a real question. How keeping question is, I'm wondering, can you expand a bit in terms of your new definition of MAU and also what what is actually different from this MAU versus what you've reported historically. I'm wondering of how that is benchmark versus sort of your global peers in terms of defining MAU Okay. Well, in terms of the mobile MAU, right? What we include in the the definition to activate that, in addition to a log in right, a log in action. We actually have to the user needs to have a proactive engagement with the platform either through sending one message at least or posting a feed into, either the moments or the social network or have actually proactively engaged in a transaction, right? So these are the kind of, we would say, valuable that a person would have to be engaged in in order for us to count as an active user. So that's actually sort of slightly more relaxed from the previous definition in which there has to be one message sent. And And the reason we actually relax a little bit is to say because a lot both our mobile QQ platform and our Weixin platform actually has become a platform and services that extend beyond, just the communication bit, right? So that's why we relaxed it. At the same time, it's actually more stringent than, I would say, a lot of the other definition of monthly active users, which usually count the log in of a user in a month. Great. Thank you for that. And I'm also wondering, just in terms of your Weixin Games monetization, I've seen some sort of news feed that you're I guess you're you're identified roughly between 2 to 300,000,000 in Glacier gains revenue in the 4th quarter. I'm wondering sort of how that might ramp this year given your game portfolio and maybe, you know, different sort of genres that you'd be rolling out on recent gains? Thank you. I think we would expect a fairly healthy growth rate given that the increased number of games given the games will serve increasingly targeted niches and given games that serve targeted niches and typically achieve higher ARPU and RPPU than either the broader mass market gain So I, just by way of background. Yes. Thank you. Next question for you. Your next question comes from the line of Varun Huja from JP Morgan, Hong Kong. Please ask your question. Most of them have been answered. I just wanted to, you know, a broad color on your expansion strategy to financial services. I mean, is it going to be limited to providing enhanced online payment options to subscribers. And basically, you know, just expanding more horizontally to your customers? Or is there something more than that? I mean, if you could just throw some color and potential investments. I understand it's early stages, but any potential investment size that you know you're considering? And secondly, you could just quickly touch on your CapEx guidance for 2014. Thank you. In terms of all finance. I think it was due in a very early stage of, ramping up our knowledge about this industry and sort of finding what are the potential areas that we can add value to our users and we can participate in a value added manner. I would say sort of a few principles, right? Number 1, we do want to, we do want to partner with a lot of a very outstanding financial institutions in the industry. We're not anticipating in the business just sort of need to disrupt others. And what we see is there is a very good set of financial institutions in Hawaii providing good services. And what we try to do actually, so that we'll provide the bridge to connect more users to these financial institutions. And we provide these sort of new good products to the users. Terius, we also stand from users and And what we try to do is actually to complement our range of value add to the users what we see is, after we have provided a very good social functionality, after we have provided digital content and gaining. We see clear needs among our users in getting access to good financial services. That's sort of added in the fact that our lead title has ramped pretty nicely without a lot of promotion within our form. So what we try to do is we would work with our financial institution partners and try to come up with products dedicated to the needs of our users. And we'll add to as the conduits to help them, transact with each other. I think that's the the main principle that we have in mind. Of course, as we continue to build our expertise in the industry, we will have more specific strategy around this. But this is what so far what we can best with you. In terms of CapEx, unfortunately, I won't be able to give any guidance However, I would like to share with you that back in 2010, as a percentage of revenue, operating CapEx represents about 6% And in 2011, it was 11% as a result of building up of infrastructure for our open platform strategy. And in both 2012 2013, our operating CapEx was were 6% for both years. I would guess that, you know, in the future, we won't be seeing, you know, a big OpEx spending just like what we did in 2011. Alright. So is it safe to say that the 6% which you've maintained in 2012, 2013, I mean, it would be in similar range going forward. I think given the scale of business now, you know, unless they are new strategic initiatives, you know, we don't think that, you know, there will be significant change in that level. Thank you very much. Operator, in the interest of time, we shall take the last three questions please. Certainly. Next question comes from the line of Alicia Yap from Barclays. Please ask your question. Hi, good evening, everyone. Thanks for taking my questions. My first question is actually regarding the recap payment. So can management share with us how should we think about the progressions and the trend for the payment monetization for this year? And then related to that for the DDAR trial in the first quarter, how much of that should we expect, the expenses to incur in the first quarter? In terms of Weixin Payments, I would say, The primary goal for us at this point in time is really to increase the number of users that are connecting the bank situation payments. And we're not only not making money. We actually sort of been spending quite a bit of money sort of promote that linkage. But what we see is that once users have bind their bank cards, they can stop to really consume not only sort of new, a few services, but sort of a whole host of different services. And over time, as we continue to build up the ecosystem of the O2O services and will provide more new surveys around payments and that would help to move a lot of these where you should payment users into more active users. So at this point in time, we are spending a lot of effort in signing operation payment users, which I think we're making pretty good progress. In terms of DD. That showed, a lot of the promotional, expenses in your, as you pointed out, will be booked in the first quarter, I would say sort of it's in the several 100,000,000 type of RMB range. We will sort of have the more exact number as we close the quarter, but sort of that's the guidance for now. I see. And then my second question is with regards to the WeChat International. So given what happened to Facebook acquisitions on the WhatsApp and also Rakuten on the Wiper, is management is there any change on management view on the overall international expansion plans and which countries that we plan to continue pushing the user engagement? Thank you. I think we've been pretty vocal that since the middle of last year that the incumbent apps such as WhatsApp are very well established in certain markets, for example, Germany, Spain. In Mexico. And consequently, our belief is that it's difficult for a new entrant to act no matter how good it is to to make dramatic progress in those markets with a very strong incumbent. So since late last year, we've really been focusing on markets where we're strong or greenfield markets. And I think that that inclination is only reinforced by the recent change of ownership of WhatsApp. Yes. I would also say that the international expansion is a really long term initiative. We don't expect sort of you would get it done with just one app, right? I think it's a holistic strategy that we have been approaching and in addition to sort of the promotion that we've had, we also have been building a presence within sort of specific local markets in order to deepen our reach and our involvement in than within different markets. We also have been very active in making investments in entrepreneurial teams so that we can leverage the creativity of the different local markets in order to penetrate those markets. So these strategies will continue. I see. Great. Thank you. Next question please. Your next question comes from the line of Elena Liao from CL SA. Please ask your question. Hi, thank you for taking my questions. My question is related to the payment services. How do you there? And how's that going how aggressive you will expand your online payment in 2014 especially offline and with the new regulation affect your O2O business because that's highly tied to your payment services. Yes, I would say, sort of, you know, around mobile payment, especially sort of when you touch a point, the O to O bit, think this is obviously a new area for all the industry participants, including the regulators, What I would say is, despite we have been some having some discussions with the regulators. I would say a few things, right? One is it is very big opportunity. 2 is there's a clear user need. There's a clear merchants need and there's clear room for innovation And thirdly, at the, at the sort of broad level, the regulators are actually encouraging innovative services. But when it gets into the specific implementation of certain services, I think we need to have a much tighter communication with the regulators because when it actually involves a certain, a bit of innovation, there there needs to be sort of more discussion between the industry and the regulators so that we can explain how the solution is actually implemented to the regulators. And at the same time, the regulators can actually voice their concerns and voice their opinions to us so that we can include their opinions into the Internet of these solutions. So I think it won't be a iterative process. It will be a very interactive process with the regulators, but we what we feel is as long as the demand is there as long as the opportunity that we would be able to find solutions that are acceptable to the regulators that will be sort of welcomed by the users as well as welcomed by the merchants. So we're still long term bullish on this overall market. Okay. Thank you. Thank you very much. Operator, shall we take the last question, please? Last question comes from the line of Thomas Chung from VLCI. Please ask your question. Hi, good evening. I two questions. My first question is about the mobile games. Given there are 6 games which have over 10,000,000 DAU, can management give some sort of color or some sort of ranking in terms of, which, in terms of defending order in terms of revenue contribution of the fixed games. My second question is about the online advertising. Given management's strategic focus in online video advertising this year, should we expect online media advertising to surpass, your traditional portal advertising, for this year or this year? Thanks. Great. So with regards to the revenue ranking for the mobile game, what's interesting is the revenue for the mobile games doesn't directly correlate with the usage. So, some of the most popular games monetize very well and some of the most popular games monetized less well. On the other hand, we have some of the niche games I alluded to earlier, which would have see less than 10,000,000 DAUs, but would achieve very healthy monetization because of the nature of those games because of the nature of the people playing those games. But overall, our belief is that we're creating a platform, the strongest platform has the broadest portfolio, and we're in the very early stages of that broadening of the portfolio, but we're very happy with what we see so far in terms of the ability of new games to expand the cumulative unique daily active users post to just cannibalizing the existing DAUs. And in terms of the abilities of different kinds of games to monetize different kinds of users, So that's on the mobile games. With regard to the online advertising, and I think we saw a healthy above industry revenue growth rates in 2013, sending through the fourth quarter. And that partly reflects the strong growth in our online video product, but it also reflects the a rapid expansion of Guangdian Tong and our traditional portal advertising business continues to grow, albeit at a slower rate than the other 2. So overall, I think we're just very broadly happy with our online advertising business. Thank you very much. Operator, we're rounding up on the call now. If you wish to check our press for the next information, please visit our website on the www.tencent.com/ir. We're also supposed to replay our webcast or website shortly Thank you and see you next quarter. Thank you. That does conclude the conference for today. Thank you for participating. Tencent Holdings Limited Twenty