Thank you for standing by, and welcome to the Tencent Holdings Limited 2013 second quarter and interim results announcement conference call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by question and answer session. If you wish to ask a question, you will need to press star one on your telephone to join the question queue. Your name will be announced when it is your turn to ask a question. If you wish to cancel your question, please press the pound or hash key. I must advise you that this conference is being recorded today. I would now like to hand the conference over to the host today, Ms. Catherine Chan from Tencent. Thank you. Please go ahead, Ms. Chan.
Thank you, operator. Good evening. Welcome to our analyst conference call for the second quarter of 2013. I'm Catherine Chan from IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties, and may not be realized in future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some non-GAAP financial measures that should be considered in conjunction, but not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and non-GAAP financial measures, please refer to our disclosure documents downloadable on www.tencent.com/ir. Having said that, let me introduce the management team on the call tonight.
They are our chairman and CEO, Pony Ma; president, Martin Lau; chief strategy officer, James Mitchell; and CFO, John Lo. Pony will kick off with a short overview of our financials and key platforms. Martin will discuss our strategic highlights, James will speak to business review, and John will go through the financials before we open the floor for questions. Now let me invite Pony to begin.
Thank you, Catherine. Good evening. Thank you for joining us. In the second quarter of 2013, we achieved solid year-on-year growth in revenues, leveraging our online games and online advertising businesses. Despite our long-term investment in e-commerce and mobile platforms, as well as a significant step up in WeChat international marketing activities, we delivered a healthy 23% year-on-year growth in non-GAAP earnings and 39% year-on-year growth in free cash flow. Now let me go through some key financial numbers for you. Total revenue was CNY 14.38 billion, up 37% year-on-year and 6% quarter-on-quarter. Value-added services revenue was CNY 10.75 billion, up 23% year-on-year and 1% quarter-on-quarter. Online advertising revenue was CNY 1.30 billion, up 47% year-on-year and 53% quarter-on-quarter. E-commerce transactions revenue was CNY 2.20 billion, up 156% year-on-year and 15% quarter-on-quarter. Non-GAAP operating profit was CNY 5.05 billion, up 20% year-on-year and flat quarter-on-quarter.
Non-GAAP net profit attributable to shareholders was CNY 4.15 billion, up 23% year-on-year and up 3% quarter-on-quarter. Moving on to our online platforms. For our core communications platform, QQ IM enjoyed a significant year-on-year growth in platform user base as mobile internet grew rapidly further. MAU and PCU growth decelerated as a smaller proportion of mobile users were using multiple accounts compared to PC users. MAU reached 818 million at quarter end, up 4% year-on-year. PCU increased 4% year-on-year to 173 million. Combined MAU of Weixin and WeChat reached 236 million, up 177% year-on-year. Weixin enjoyed rapid user growth due to its innovative features and compelling user experience and has become the leading smartphone-only community in China. For our social network platforms, Qzone MAU grew 5% year-on-year to 626 million as users respond favorably to the enhanced user features for photo and video sharing.
Our online games platforms continue to gain market share through its diversified game portfolio and differentiated game experiences. We own the largest casual game portal in China by MAU, the largest web games platform by revenue and MAU, and the most popular online games platform in China with five client games, each exceeding 1 million PCU. Our media platforms, QQ.com, Tencent Weibo, and Tencent Video, continue to deliver a new content experience to our users and enhance user experiences on mobile. For our utilities services, we continue to build out our presence through our mobile security solution and mobile browser. I will now invite Martin to give you an update on our strategic investment in mobile social platforms.
Thank you, Pony. Good evening and good morning
I would like to, in my section, highlight the mobile communication and social platform that we have and the progress I've made recently. As mobile internet continue to proliferate, we are increasingly adapting to users preference to access our services using a combination of desktops and smartphones. We've made strategic investments to increase mobile engagement on our social platform that include Mobile QQ, Mobile QZone, and WeChat. For Mobile QQ, as you can see on this page, we have completely redesigned this leading and longest-serving mobile communication service for the expanding smartphone user base. During the last two quarters, we have, one, built a tighter relationship between Mobile QQ and Mobile QZone. Two, enabled users to add contacts from their phone book to their QQ buddy list.
Three, we have added fun elements through games, skins, stickers, and communication bubbles in order to make the entire communication experience more fun. These improvements in features and functionalities have significantly boosted engagement and usage among smartphone users. As at the 2Q end, smartphone-based MAU jumped 230% year-on-year to 478 million, that represent about 58% of total QQ MAU. While at this point in time, our primary focus is really to keep on enhancing the user experience and also increasing the smartphone user base, we are gradually exploring monetization opportunities on Mobile QQ through membership privileges, stickers, and over time, games. For Mobile QZone, we decided to refocus the product on our core proposition of sharing everyday experiences with close friends for our users, with particular seamless experience for Mobile QQ users.
QQ users can communicate via Mobile QQ and to share with the bigger community on Mobile QZone. We also emphasized photo sharing as the most popular activity on QZone. We have revamped QZone's photo experience for smartphones. As a result of these efforts, the daily photo uploads jumped five times year-on-year through smartphones, driving growth in user engagement and social interaction. Recent upgrades in technology and user interface also enabled smartphone users to share not only text and photos, but also voice, video, and location with their friends. As at quarter end, smartphone MAU for Mobile QZone reached 357 million, representing 57% of total QZone MAU. Together, Mobile QZone and Mobile QQ help extend our social leadership from PC to mobile. Now moving on to WeChat, our smartphone-only social communication service.
It's delivering innovative features as well as compelling user experience to an increasingly broad user base in China and globally. Ten days ago, we released a new version for WeChat in China designed to deepen user experience and engagement, as well as for us to experiment some monetization. The key features of the 5.0 version include social game center, sticker shop, one-click online payment solution, single official account tab to reduce clutter on chat screen, as well as scanning of words, barcodes, and street views with links to corresponding online services. Internationally, WeChat and its sister product, Weixin, are expanding rapidly its footprint in key markets. According to GlobalWebIndex, a third-party, WeChat and Weixin together ranked the fifth most used smartphone app globally by MAU. In July, we launched a global TV ad campaign in 15 markets featuring soccer superstar Lionel Messi.
The campaign delivered a strong momentum for downloads and user engagement. We plan to continue aggressive marketing of WeChat in international markets this year. To give you some sense, we have earmarked marketing expenses of $100 million to $200 million for the entire 2013. We are also very pleased to report that WeChat has achieved 100 million registered users in the international market. Now I would like to pass on to James to talk about the business review.
Good evening, and good morning. During the second quarter of 2013, we achieved overall revenue growth of 37% year-on-year. The contribution from online games was 53%, social networks were 22%, online advertising was 9%, and e-commerce transactions contributed 15% to our total revenue. Starting with the value-added services segment, social network revenue was CNY 3.16 billion, up 8% year-on-year and down 1% quarter-on-quarter. Item sales on our open platforms grew year-on-year. Our subscription revenues declined as we've been prioritizing building out smartphone functionalities in order to grow our user base before we unlock monetization. Online game revenue was CNY 7.59 billion, up 31% year-on-year and 2% quarter-on-quarter. More game users increased ARPU from our major titles and new games drove the game revenue growth.
Taking a closer look at social networks, our community products are increasingly mobile first, and as Martin has just discussed, we've redesigned mobile versions of our community services with the smartphone front and center. On the monetization front, we recently launched a new Super VIP subscription service priced at CNY 20 per month, which bundles PC and smartphone privileges together with new smartphone specific features. We test launched this subscription package to senior level QQ membership subscribers rather recently and we've received very positive feedback. Our open platform is the largest of their kind in China, incubating more than a million third-party developers to date. 26 apps have achieved monthly revenue of over CNY 10 million, and the most successful app has achieved monthly revenue of over CNY 30 million. In aggregate, we expect to distribute over CNY 3 billion to third-party developers during the course of 2013.
We're now in the process of extending our open platform strategy from PC to smartphone. Starting with games, developers can link their games to our platforms such as Mobile QQ, Mobile QZone, and Weixin, integrate with our OpenID, and leverage our online payment solutions, and selected games will be highlighted in our Weixin and Mobile QQ game center. Moving on to online games more broadly, our QQ Game Platform, where we operate 184 games, saw year-on-year decreases of 5% and 4% in PCU and ACU, reflecting a user shift to open platform games into smartphone game apps. For advanced casual games, we operate nine titles. Year-on-year, their combined PCU grew 37% to 16.8 million, and their combined ACU grew 52% to 5.8 million.
During the second quarter, League of Legends underwent another technical upgrade in China to permit more users per server cluster, which has enabled further user base growth. NBA 2K Online has become the most popular sports title by PCU in China shortly after its open beta launch in mid-May. For massively multiplayer online games, we now operate 15 titles. Year-on-year, combined PCU increased 23% to 5.8 million and combined ACU increased 25% to 2.1 million. DNF continued to see healthy PCU growth as we added new content and higher experience levels. A new game, Blade and Soul, began closed beta testing in China during May. Two weeks ago, we launched our first mobile game that's integrated with Weixin and Mobile QQ called Timi Match Every Day. We're pleased to see a very enthusiastic response from our users.
This game has achieved over 50 million registered users in the last 10 days and has exceeded 25 million daily active users, making it by some distance, the most popular mobile game in China. At this point, we're primarily focused on building out the user base for our mobile game platform. Our online advertising segment revenue was CNY 1.3 billion, up 47% year-over-year and up 53% sequentially. Display advertising revenue was CNY 1.2 billion, up 52% year-over-year and 57% sequentially. We achieved broad-based growth across brand display and especially performance display ads. Better brand recognition also enabled us to gain access to a larger advertising base and achieve higher sell-through rates across our range of media properties. Our search advertising revenue was CNY 113 million, up 11% year-over-year and up 18% quarter-over-quarter.
Improved revenue per thousand impressions contributed to the year-over-year growth, volume from our network alliance reduced as we cleaned out some lower quality alliance relationships, leading to slower revenue growth for search. Digging deeper into display advertising, our top 5 advertiser categories for the quarter for brand display were food and beverage, automobiles, online services, consumer electronics, and real estate. We believe we've gained share, particularly in online services and consumer electronics categories. Our online video advertising revenue approximately doubled year-over-year due to ad inventory expansion and higher sell-through rates. In performance display, eCommerce advertisers contributed significantly to our revenue growth. During the second quarter, we've extended our Guangdiantong targeted advertising solution onto mobile through our mobile ad network.
Our SNS Wind targeted advertising from Tencent Weibo has attracted some early advertisers from the education, eCommerce, automobile industries, and we'll be test launching promoted feeds inside the microblog during the third quarter. Turning to eCommerce transactions, segment revenue was CNY 2.2 billion, up 157% year-over-year and 15% quarter-over-quarter, driven by seasonal marketing activities, regional expansion, and category expansion. In our principal business, more users and increased average order value delivered robust year-over-year revenue growth. Home appliances, a product category we entered relatively recently, contributed heavily to the sequential revenue growth. Besides our regional distribution hubs in Shanghai and Shenzhen, we've been ramping up our Beijing operations to support growth in Northern China and selectively adding warehouses in certain second-tier cities across the country.
In our agent business, revenue grew sequentially on increased commission fees driven by higher GMV. During the quarter, we improved the quality of the search results in Marketplace, which contributed to higher conversions. Our current focus is on improving the overall user experience in the Marketplace by prioritizing the quality of merchants we host and by optimizing our search results. With that, I'll hand over to John to discuss the financials.
Hello, everyone. For the second quarter of 2013, our total revenue was CNY 14.38 billion, up 37% year-on-year or 6% quarter-on-quarter. Operating profit was CNY 4.57 billion, up 16% year-on-year or down 10% quarter-on-quarter. We recorded net other gains of CNY 82 million. Net other gains in the first quarter was higher at CNY 351 million, mainly due to a special dividend from Mail.ru. Net finance income was CNY 14 million as compared to net finance costs of CNY 82 million in the first quarter. The change primarily reflected higher forex gain on our foreign currency denominated debts. Share of profit of associates and joint venture was CNY 31 million compared to CNY 120 million in the first quarter.
We had higher than usual share of profit of associates in the first quarter as Epic Games benefited from the launch of a new console game in the U.S. and Europe. Income tax expenses was CNY 926 million, down 10% from the first quarter and mainly reflected a decrease in withholding tax. Net profit attributable to shareholders was CNY 3.68 billion, up 19% year-on-year or down 9% quarter-on-quarter. On non-GAAP basis, operating profit for the second quarter was CNY 5.05 billion, up 20% year-on-year and stable sequentially. Net profit attributable to shareholders was CNY 4.15 billion, up 23% year-on-year and 3% quarter-on-quarter. Operating margin was down to 35%, which was five percentage points lower than that of last year and two percentage points lower than last quarter.
The year-on-year decrease was primarily due to the margin dilutive effect of our growing e-commerce business and higher marketing costs relating to WeChat. Net margin was about 29%, down 3 percentage points year-on-year and one percentage point quarter-on-quarter. Let's turn to segment growth margin. Growth margin for that was 64%, down two percentage points year-on-year and quarter-on-quarter. The sequential decrease reflected higher operating costs relating to games operating overseas and monetization lagging usage growth of our mobile social networking services. Gross margin for online advertising was 54%, up two percentage points year-on-year and 13 percentage points quarter-on-quarter. Gross margin for e-commerce transaction was 6%, up three percentage points year-on-year or down one percentage point quarter-on-quarter. Moving on to operating expenses. Selling and marketing expenses was CNY 1.24 billion, up 102% year-on-year and 28% sequentially.
Year-on-year, we have stepped up marketing activities relating to WeChat in international markets, new online games, and our mobile internet products. As a percentage of revenues, selling and marketing expenses increased to 9% from 6% for the second quarter last year. G&A expenses was CNY 2.4 billion, up 29% year-on-year and 9% sequentially. The year-on-year change mainly reflected higher staff costs due to headcount growth, annual pay rise, and certain acquisition related items. As a percentage of revenue, G&A decreased to 17% from 18% for the second quarter last year. Included under G&A, R&D expenses was CNY 1.24 billion, up 19% year-on-year and 3% sequentially. R&D represented 52% of G&A or 9% of quarterly revenue. As at quarter end, we had over 25,500 employees, up 28% year-on-year and 4% sequentially. E-commerce business accounted for more than half of the headcount increases, both year-on-year and quarter-on-quarter.
Now we look at the margin ratios. Gross margin was 54.2%, down 1.9 percentage points from last quarter. Excluding e-commerce transaction revenues and costs, gross margin was 62.9%. Non-GAAP operating margin was 35.1%, down from 37.4% last quarter. Excluding e-commerce transaction revenue and costs, it would be 40.4%. Non-GAAP net margin was 29.1%, down from 30.2% last quarter. Excluding e-commerce transaction revenue and costs, it would be 33.3%. During the second quarter, we repurchased 4.59 million shares for approximately HKD 1.13 billion. For year 2013 to date, we repurchased 6.64 million shares for an aggregate of HKD 1.63 billion. The total number of shares outstanding at the end of quarter was 1.852 billion. Basic EPS was CNY 2.009 on GAAP basis and CNY 2.267 on non-GAAP basis.
Diluted EPS was CNY 1.976 on GAAP basis and CNY 2.229 on non-GAAP basis. Total CapEx for the quarter was CNY 1.46 billion, up 60% year-on-year and 42% quarter-on-quarter. Operating CapEx was CNY 729 million, up 5% year-on-year or down 11% quarter-on-quarter. Non-operating CapEx was CNY 735 million, up 236% year-on-year and 242% quarter-on-quarter. The increase was mainly due to the purchase of a new office space. Free cash flow reached CNY 4 billion, up 39% year-on-year or down 33% quarter-on-quarter. This reflected decrease in operating cash flow due to seasonal patterns. Our net cash position at quarter end remained strong at CNY 33.6 billion, up 71% year-on-year and 3% quarter-on-quarter. This concludes our presentation.
Thank you. Operator, let's take the questions, please.
Thank you. We will now begin the question-and-answer session. If you wish to ask a question, please press star one on the telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Dick Wei from Credit Suisse. Please ask your question.
Hi. Good evening. Thank you for taking my questions. I would like to get some more color on international WeChat. First of all, for the 100 million international users, what are the key countries coverage? Also, for what you have budgeted in expanding this year, what are the population or countries coverage? Is it quite limited, meaning that in the future years you will have to spend more than that amount to get more of the global coverage? Lastly, just overall spending on the WeChat infrastructure expenses globally. Thank you.
Dick, in terms of the key markets for our WeChat, you would be able to guess. First of all, it's Asia, the biggest countries would include India, Indonesia, Malaysia, and Singapore as a group. India as a group, Southeast Asia as a group, outside of Mainland China, Greater China, Hong Kong, Taiwan, Macau as a group. At the same time, we also have Philippines and Thailand covered in Asia. In addition to that, we actually also have selected countries in Latin America as well as Europe, and in South Africa, and certain countries in Middle East. We have a pretty broad-based user base actually around the world.
In terms of the spending, I would say at this point in time, we view this smartphone-based communication product as quite a bit of a land grab situation, which means that if you actually don't spend within a year, you're probably not going to be able to capture market share in the future. That's why we view the spending at this stage as being more of a jumpstart spending, and over time, the spending will definitely go down. We're covering actually, if you look at the kind of market that we're hitting with the massive advertising campaign, we already cover 15 markets, and these markets are essentially the largest population market in the world. Pretty much we're covering all the relevant countries.
Great. Thanks, Martin. Just lastly, any comments on the overall WeChat spending as a whole, like division or business?
We don't disclose that.
Okay, great. Thank you very much, Martin. Thank you, everyone.
Thank you very much.
Thank you, Dick. Next question please, operator.
Sure. Your next question comes from the line of Timothy Chen from Morgan Stanley. Please ask your question.
Hi. Thanks very much for taking my questions. I have two questions. Given the strong reception of mobile games on WeChat and QQ mobile platforms launched last week, I wonder if you would be able to talk about some of the initial trends of your new mobile games, such as the user retention and also the output trend compared to your PC games.
Yeah. Well, I think James had already talked about some of the key numbers, right? Number one, the first game that we launched is actually launched across the Mobile QQ and the Weixin platforms. The total registered users within 10 days is 40 million, and the daily active users is 25 million.
I think this is a number that's way above any other mobile game that has been launched in China, and by actually quite a far margin. I think especially in the DAU to registered user number, out of 40 million who are registered users, 25 million are daily active users. Meaning, I think there is a very high conversion rate into active users. This is still very early days. It has been launched only for 10 days, so I think it's hard to sort of start talking about monetization and long-term retention.
I think on monetization, what comment we can make is, at this point of time, the importance that we place on the most highest priority is actually expanding the user base and also developing the habit for users to be playing games, leveraging the communication platform we have and the game center that we actually put on both Mobile QQ and Weixin. I think that will be our primary focus at this point in time. Although we have seen some monetization, and I would say sort of the initial read is encouraging. Now, in terms of the long-term retention, we do believe that at this point in time, the game is actually a very casual, very light-touch type of game. It will have its life cycle, but we also have a portfolio of games that actually will be launched over time.
I think we have a pretty good pipeline to be launched going forward.
Thank you. My second question is, would you be able to talk more about some of the non-game new features on Weixin 5.0, such as the barcode scanning that is related to e-commerce? How should we think about these business models going forward? Thank you.
I think it's a little bit too early to talk about the business model around these services. I think a lot of these features are actually very innovative, and we think could provide a lot of user value. For example, the scanning of Street View can actually sort of allows you to see the street. It's an integration to our map, and it actually allows people to see what's around you. What's the street view around you? I think it carries a lot of user value if people want to use it. Over time, can it actually be tied into all the type of applications? I think it's up for experimentation.
The scanning of barcodes, I think it's a convenient tool for users to look at the product and then sort of start to digitize the product and understand sort of what's behind this product, where can I buy it, what's the price. I think a lot of the features that we add to Weixin at this point in time is purely from a user experience perspective. We also feel that these features can actually link people with the objects, with the environment, and with the businesses that are around them. Over time, there may be some kind of business case for them, but I think it's too early to tell about that. Right now, we try to make these features very good so that it creates user value.
Sure. Thanks very much.
Thank you very much. Your next question comes from the line of Alicia Yap from Barclays. Please ask your question.
Hi. Good evening, everyone. Thanks for taking my questions. My questions, there's a several part of it, I apologize in advance if it's a number of that. My question is related to QZone and WeChat. I think in your release, you know that the smartphone MAU for QZone is 57% of the total MAU, and then your QQ smartphone MAU also reached like 478 million. I just wanted to get a sense comparing to your WeChat Weixin MAU of the 235 million. Wanted to get some color on how many of all these smartphone MAU are overlapping. In addition to that, do you have some statistic to share based on, let's say, the same phone number? Do you know how many of the user actually have all three, QQ, QZone, and Weixin on the same phone?
Do you know how they are spending time spend pattern of all three? A follow-up question on this is that, do you have a plan to segregate your domestic smartphone user to maybe leaving the high-end, the first-tier cities user to Weixin while keeping the lower-end cities user on QQ and QZone? Any comment on this strategic plan would be appreciated. Thank you.
Well, there's a lot of questions, and I try to answer as much as possible. In terms of the way to look at the products, I would say sort of looking at QQ and QZone as sort of your product suites, which provides for communication and social networking, and they are closely linked with each other. Looking at Weixin and within that, the friend circle as sort of a communication plus social product. I think that's sort of two sets of products that you can look at. If you look from that perspective, then QQ and QZone sort of have very, very high overlap, especially on the smartphone part. In terms of the overlap between QQ and WeChat, I would say there is actually quite a lot of overlap.
What happens is WeChat, Weixin actually help us to address a segment of the users who are not the QQ users. These are normally high-end users or more mature users who are living in first-tier cities. There's a very big overlap of users who have been using QQ and now are also using Weixin at the same time. They actually may be contacting the same group of friends or maybe they are contacting different group of friends using two different applications. The third part is QQ has a group of users who are PC users, and also they are younger generation users, and these are the people who have not really started to use Weixin, or they believe that actually QQ's functionality is actually sufficient for them, and their user base as well as their friends are all sort of around QQ.
I think that's the current situation right now. I think if you look at the two products, they definitely have overlap, but they also sort of cover different user segments. QQ has got specific functionalities, especially the PC and mobile experience, cross-platform experience that Weixin doesn't offer. I think over time, these two products will have common features, but also they would have different features, which cater to their own user base. I would envision actually over time there will be a pretty large group of people who will be using both applications. As you actually look at around the world, people in different markets are also using multiple applications for chatting and maintaining contact with their different group of friends.
I think that in China, it's particularly true because you have two flagship products, which both have achieved a very significant franchise within the country.
Thank you. Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.
Good evening. Thank you for taking my questions. I would like to switch the focus back to some of your PC-based business, such as online games and subscription. They did not seem to be very strong on a sequential basis in the same quarter. Could you help much to understand a bit more about the trend? How much of that you think could be more seasonally related, more near term, and how much of that could be more structural? How Tencent would address perhaps the transition of your PC-based business. Thank you.
I think that, Eddie, with regards to the PC games, as you're probably aware, the second quarter is seasonally a slower quarter in China for us due to the examination season for students. That's something that's been sort of true of our business year in, year out. The second quarter is sequentially a slower growth quarter than the first quarter, for example. With regard to our subscription business, the culprits may be a little bit more deep-rooted in as much as we discussed, we are going through a transitional period where we had really built our subscriptional privileges primarily around a PC and to a much lesser extent, a feature phone environment. Now, as Martin highlighted, over half of the users of QQ, over half of the users of QZone in any given month are interacting with those on smartphone as well as or instead of PC.
There, the challenge is not really a one-quarter challenge, it's a more prolonged issue. You can see we're making some early steps in resolving the situation with services like Super VIP, which encompasses both smartphone and PC privileges together at a premium price point. I think that will be a sort of a longer-term transition that we're working through as our users transition from being primarily PC to primarily smartphone driven.
Got that. Thank you.
Thank you. Your next question comes from the line of Chi Tsang from HSBC. Please ask your question.
Great. Thank you very much for letting me ask a question. I just had a couple of things I wanted to ask. In terms of your monthly active users, what percentage of that figure is actually domestic versus international? I'm wondering if you can give us a little bit more color in terms of just average daily users.
Wait a minute. Can you repeat the question because we can't hear it very clearly.
I'm sorry. In terms of your monthly active users on Weixin, that figure that you guys put out, how much of that is actually domestic versus international?
We don't disclose that breakdown in terms of monthly active users. That number is actually a combined number. Separately, we have also made announcement of Internationally, we have reached 100 million in terms of registered users. These are the two numbers that we have given out. We haven't provided a breakdown of the monthly active users into China versus international.
Okay. I'm wondering if you could give maybe a little bit of color in just in terms of usage. How much time do the monthly active users spend on the application sort of on a daily basis? That'd be helpful. Thank you.
Well, I think, the activity right, is actually quite significant. We typically actually look at, for internal assessment first, we actually sort of look at the daily active users as a figure for us to gauge the activity. I would say the daily active user number is actually quite high for Weixin and WeChat, and definitely sort of in line with international competitors.
Great. Can I just ask one more question, just changing gears onto e-commerce then, please? You mentioned in the press release something about competition. I was wondering if you could give a little bit more color in terms of the competitive intensity in the e-commerce space for the second quarter. Thanks a lot.
The competitive intensity tends to ebb and flow a little bit with regard to seasons, because as you may be aware, in China, there's this sort of trend toward e-commerce companies making a big fuss on the fifth day of the fifth month or the 11th day of the 11th month, or what have you. I think if we look back at our very short life history in e-commerce and the seasonal trend would be that in the fourth quarter, there's a number of these big event days. In the second quarter, there's a number of these big event days. In the first quarter, because of Chinese New Year distraction and so forth, there may be a little bit fewer. That's more of a sort of a month-by-month trend.
In aggregate, the e-commerce environment in China, as many of you are aware, is brutally competitive and has been brutally competitive now for a couple of years, and it will probably remain somewhat brutally competitive for some time to come.
Thank you. Your next question comes from the line of Cynthia Meng from Jefferies. Please ask your question.
Thank you very much for taking my questions. I have two questions. First of all, on the sales and marketing expenses, this, as James mentioned some time ago, it has doubled for second quarter. Should we see that as an indicative trend for the rest of the year? When would we expect, or what would it take before investment in sales and marketing will scale back? That's the first question. The second question is, I wonder whether management could give us some more color on the e-commerce category expansion, the success of it, and also any color on mobile. Mobile payment is integrated in the WeChat 5.0 version. How should we see the incremental revenue contribution to overall e-commerce business from mobile? Thank you.
Yeah. In terms of sales and marketing, I think it's definitely a year of investment for us in sales and marketing. As we highlighted, one, in terms of WeChat, we actually sort of embarking on a very aggressive marketing program outside of China. Weixin doesn't really sort of need any marketing, actually, sort of in China once we have reached that kind of franchise situation. WeChat, in the international markets, we do have to spend aggressively. That's number 1. Number 2 is this year is also a very important year for mobile platforms to be established. If you actually look at some of the other industry players, right, people are actually putting billions of dollars to actually acquire mobile platform companies.
Instead of acquiring companies, what we're doing is actually we're spending much less in terms of marketing in order to market the mobile platforms that we have, especially sort of the mobile platforms that are competitive in nature, i.e. the security products, the browser products, and certain of the other sort of media clients. That's something that we have to do in this pretty defining stage of the mobile internet age. Thirdly, we also sort of have a range of new games to be launched. Some of them are self-developed titles, and some of them are actually sort of on the mobile platform. All these would actually sort of add up to the sales and marketing expenses. I think this is definitely a year of investment for us. We definitely believe that over time, these investments will bear fruit.
With regards to e-commerce and categories, we mentioned in the script that we've seen a good growth in the second quarter from household appliances, which is a category that we sort of expanded into from our core 3C consumer electronics products. We'll continue to expand our category range in a measured fashion over time. Right now, if you look at our e-commerce business, it's relatively dependent on a small number of big revenue categories, and over time, we look forward to progressively broadening out as appropriate. With regards to mobile e-commerce, that's something that still is a relatively early stage of evolution in China, and I think many e-commerce companies are now seeing a substantial single-digit percentage of their revenue being generated through mobile devices, and that percentage will presumably increase over time.
We'll obviously do what we can, leveraging our unique mobile assets to try and share in that ourselves, but also to help other independent merchants, e-tailers, to reach out to our consumers through mobile as well.
Thank you.
Thank you. Your next question comes from the line of Jiong Shao from Macquarie. Please ask your question.
Thank you very much for taking my questions. I have two questions. First is on gaming, second is on Weixin. A year ago, I think you mentioned open platform games were about 25% of your gaming business. I was hoping you can give us an update where it is now. Would you be able to share with us in terms of the year-over-year growth rate for the open platform games, mobile games, and the traditional PC games? My second question is on Weixin. I was wondering when you think we can expect Weixin to become a platform for third-party games and apps. Secondarily, as you know, Baidu recently, in fact today, announced its intention to acquire 91 Wireless. I was wondering whether Tencent has any plan to have a separate independent app store outside of Weixin or QQ Mobile or Mobile QQ, rather. Thank you.
Okay. I'll answer the second part of the question first. John would actually come on with the gaming. On Weixin, we have launched our first game, which is actually a self-developed title. As I said earlier, we offer a game platform that's actually across Weixin and Mobile QQ. We will have two flagship products in this game platform. This game platform would actually take a lot of the learnings that we have actually achieved through the open game platform on Qzone and on the PC side. As I said, we have a portfolio of games that are already lined up, some of them are self-developed, but even a larger number of them will be actually sourced from third party. That would actually be coming online in the next few months.
At the same time, we also offer other of our platforms for third-party games, including the app store that we have. Our app store is called the Yingyongbao , which is one of the leading independent app store in China. At the same time, we also have browser and other properties which will actually come into play to constitute traffic volume for third-party games. Over time, we will actually build an open platform on our mobile platform in a similar way to what we have built on the PC. As James has said, on the PC side, our open platform has actually achieved great results, and this is something that we'll take to the mobile side. Looking at the data that we have right now, the power of our social platform is actually, we believe, more valuable than just an app store.
Because for an app store, number one, when you channel a user to download, basically the user goes to that application and you essentially don't have that relationship on an ongoing basis anymore. On our social platform, we actually try to maintain links of the different games and different applications through the buddy list and through a social graph, so that as you can see from the numbers that we have, out of the 40 million registered users, we actually can achieve 25 million daily active users. The conversion from download to being active is very high because of our social graph. I think that would be a common theme for our open platform. It would be very valuable for a lot of the application developers to be able to leverage this social graph to give their applications a very high active rate.
At the same time, it also helps us to maintain a continued relationship with the applications that we promote, rather than in an app store situation, you promote the user to an application, because the user basically just leave and go to the application. Good.
In relation to the percentage of
Sorry, in relation to the open platform, you were talking about the proportion of the community VAS, right? Last year we did provide a figure of 25%, and now that figure is higher than before. That's what we can provide. In terms of the ranking of different type of games, ACG is highest in terms of revenue, followed by MMOG and mini casual games.
Sorry, John, I was asking for the growth rate, which segment of your games has the highest growth rate right now, not the mix?
In terms of growth rate, we don't disclose, but generally speaking, open platform seen relatively rapid growth. PC client game and mobile game, in the second quarter, had more sort of comparable growth rates with each other.
Okay. Thank you very much, guys.
Thank you. Your next question comes from the line of John Choi from Daiwa. Please ask your question.
Okay. Good evening, thank you very much for taking my question, guys. I have a couple of questions. First of all, I would like to have some housekeeping questions on the ARPU on the online game business. It seems like the ACG was very strong for the PCU and also the ACU, although it'd be great if we could have more color. Second question is, I've seen on the last slide, it seems like the mobile game revenue has decreased quarter-on-quarter. Is there any particular reason why the mobile game business has been relatively weak compared to the online game business? Thank you.
In relation to the ARPU, the ACG ARPU for the quarter was CNY 65-CNY 155, and for MMOG, it was CNY 185-CNY 240.
In relation to mobile games, we think this is a long-term growth opportunity. In the second quarter, we've been somewhat focused, as you might imagine, on our preparations for the mobile social games that piggyback on Weixin and on Mobile QQ. We actually were preparing for those game launches earlier in the year, and we launched those games, and we focused first on user base maximization rather than revenue maximization.
The mobile games that we had were really sort of, I would say, the first generation of mobile games, and they include some single download games, some WAP games, and to a limited extent, sort of your smartphone-based games, but very few of them. What we actually launched, I think the first game that we have in the new mobile game era is really sort of new, Timi Match Every Day. That's, I would say, the new start of the mobile gaming business for us.
Okay, is that fair to say that we should be seeing more for the mobile game business with smartphone, which is mainly from Weixin, more relevant for third quarter and onwards?
As we said, the games will actually be tied to both Weixin and Mobile QQ, and it's the power of the two platforms together that will be powering this mobile game business. We are quite optimistic about this business over the long run, as we said earlier, the short-term focus will definitely be building user base and building user habit of playing games from these game centers. We'll be less focused on monetization at this point in time.
Thank you very much.
Thank you. Your next question comes from the line of Thomas Chong from BOCI International. Please ask your question.
Hey, good evening. Thanks for taking my questions. I have two questions. My first question is regarding the monetization potential between WeChat and Mobile QQ. Which application do you see has better monetization potential? Do you think WeChat has more tier 1 users, it would be more easier to monetize than Mobile QQ? Thanks.
I think it's hard to say. Both of them has got sort of very significant users, Mobile QQ actually has got more smartphone users than Weixin at this point in time. From a historical basis, the paying habit has been sort of more developed over the QQ users. I think it really will depend on sort of what kind of applications will be offered. I think in terms of the privileges, we actually are offering the mobile smartphone-based privileges on Mobile QQ first. I would say both of them have got very significant user base. If we actually sort of can develop applications and functionalities that are valuable to them, then the users would have an incentive to pay for these functionalities.
I see. My second question is relating to WeChat, Line, and KakaoTalk. Given WeChat has a lot more users than overseas competitors, but in terms of the economic development, Japan and Korea definitely has a higher GDP per capita than in China. How should we look at the revenue potential for WeChat compared to these two overseas players? Thanks.
That's a somewhat macroeconomic question, but I think at a high-level view would be the higher per capita GDP in Korea and Japan may be conducive to faster ramps. In terms of the long-term destination, China's population tends to mean that a big business in China can become very big indeed. If you look at desktop games as a sort of comparison point, then I think right now the desktop game business in China, it's about CNY 10 billion a year in revenue versus half that and a little less than half that in the two other countries you mentioned. We're primarily focused on that long-term opportunity rather than worrying too much about the near-term path to get to the long-term destination.
Thanks.
Thank you. Your next question comes from the line of Goldman Sachs. Please ask your question.
Thank you. How would you compare the opportunity for WeChat in international markets which are much more competitive versus WeChat back at home?
Well, I think they're actually quite different in nature, right? WeChat has got already a very significant presence in China. I think, the important thing is actually for us to explore what we could do actually, say, to extend it as a platform. Whereas, I think in the international markets, one, we still need to establish new critical mass in different key markets so that a network effect can be built as a communication tool. It's actually much more necessary for us to actually build scale. The second is, in terms of monetization, I think in international, with WeChat, we have a much longer track for us to achieve monetization. Whereas, say, in China, we are already experimenting with it right now.
All right. Thank you.
Thank you so much. Your next question comes from the line of Mark Marostica from Piper Jaffray. Please ask your question.
Yes, I have a couple of questions, and thanks for taking them. First, on e-commerce business, I was wondering if you could disaggregate the performance of the principal versus the agency business for us, how should we think about the pace of transition to agency? My second question relates to Blade and Soul. Curious as to the performance of the game versus your internal expectations so far on closed beta, and what you guys are thinking in terms of timing of open beta. Will it be kind of late this year, or should we be looking into next year? Thanks.
In terms of the e-commerce business right now, the principal business is actually growing faster than the agency business because we actually have put in much more marketing resources to support the principal business. The principal business also benefited from the fact that we have category expansion as well as geographic expansion. At the same time, for the agency business, the focus for us right now is actually to be able to tie the agency business, tie the open platform business with the principal business. Because till now, by and large, the two sets of businesses are still quite unlinked with each other.
Over time, we actually would want to make the agency business, the open platform business, connected with the principal business so that when the user comes into our shopping mall, where they can buy products, consumer electronics and appliances and selected products from our principal business. They can also have a much wider selection of products in our agency business so that they can actually see other products that they can also buy. In that regard, we are actually working very hard to make sure that the back-end system is actually integrated. The SKU database is actually integrated.
At the same time, we are also selecting the high-quality merchants that have been doing businesses on our open platform to actually move into a new environment so that their products can be actually featured to the principal business customers. Over time, what we want to do is actually to have the principal business be the user contact point. At the same time, the agency business can also benefit from the growth of the principal business. Your second question was about a game, Blade and Soul. Okay. Blade and Soul, we have said we will only launch the game when the game is actually achieving a high enough quality and stability. So far, we have been doing tests, there's actually a lot of user excitement about the game. We are in the process of fine-tuning the game.
In the next three to six months, I think we will move into a larger scale of testing. If that actually achieves good result, that would actually give us more go-ahead signals to actually move it into open beta.
Great. Thank you.
Thank you. Operator, in the interest of time, we shall take the last two questions, please.
Certainly. The second last question comes from the line of Jin Yoon from Nomura. Please ask your question.
Hey, good evening, guys. Thanks for taking my question. A question on your advertising side. The numbers came in, obviously, the last couple of quarters, much better than what we would anticipated. Wondering if you could break out for us where the real strength is coming from. Is it really coming from the portal side, Guangdiantong versus online video? How much of your inventory are you guys actually bundling together as packages where you're cross-selling different types of inventory? My first question is on advertising. I have a follow-up question on WeChat. Thanks.
In terms of the advertising revenue growth, I think we used the adjective broad-based in the introductory remarks, which I think is an accurate characterization. We've seen particularly strong growth in terms of Guangdiantong, but we've also seen, as you mentioned, an approximate doubling of revenue in online video advertising year-on-year during the quarter. Our traditional portal business actually continues to grow at a slower rate than the 47% year-on-year that we report. Nonetheless, a fairly healthy rate relative to the overall brand display industry. Broad-based is probably the right phrase to sum it up. In terms of bundling and so forth, we do offer some bundles, but generally speaking, we try and target certain advertising formats, the advertisers who are most appropriate to those formats. Guangdiantong will be particularly successful with e-commerce companies.
Online video might be particularly successful with fast-moving consumer goods and food and beverage companies, and so on and so forth.
Got it. A follow-up question on WeChat. I know a lot of us are anticipating kind of monetization to kick in in the second half of the year and as we go into next year. If we look at the China monetization versus outside of China, international monetization, obviously, different countries are going to have different flavors in terms of gaming and social networking aspect. Are you going to be able to monetize internationally the same way you do domestically in terms of the same degree? Are you going to be able to localize a lot of domestic games abroad? How should we look at the monetization internationally in terms of ramping up versus the domestic side?
Well, as I said earlier, for the international market, the priority is actually sort of to build user base and in particular sort of for some of the selected markets to build critical mass in those markets. It's only when we have sort of a very significant number of active users in a particular market then the monetization will actually sort of become easier. I think right now that building user base would be sort of the primary focus, we're not going to sort of really be thinking about monetization at this point in time. However, I think if you look at on the long term, gaming is actually quite a common theme across different markets. Every market sort of people like to be able to play games.
The game types may be a little bit different from market to market, I think that the consumption of entertainment is actually a common need across different markets. Overall, when we actually establish a particular presence within different markets, we'll have teams, local teams in those markets actually driving the business forward, they would actually be able to figure out what would be the right model for both building market share in those markets from a user-based perspective, as well as in the longer term, sort of building a sustainable business model for those markets. It would come in that order.
Great. Thanks, guys.
Thank you. Your last question comes from Wendy Huang from Standard Chartered. Please ask your question.
Thanks for taking my questions. First question is regarding the cannibalization between the mobile game and traditional PC game. I think in my conversation with other traditional game developer and operators, they seem to indicate that they're not really seeing the cannibalization effect between two, because the mobile game is targeting the casual gamers, and they're playing the game during the fragment timeframe. From your earlier comment, it seems to me that you are seeing a mobile game is affecting your traditional PC game in a meaningful way. Can you maybe-
Wendy, maybe if I could just jump in there and clarify. I think the earlier comment was related to a rather small subset of traditional game revenue, which is the so-called mini casual games. Those would be games like Mahjong or card games that people were playing on the PC, but which deliver a similar or arguably superior experience on the smartphone. That would be a single-digit proportion of our PC game revenue. For the large majority of our PC game revenue, the advanced casual games, the massively multiplayer online games, we're not seeing cannibalization. We don't expect to see cannibalization in the immediate future because the kind of games people are playing, a shooting game, you cannot enjoy an equivalent shooting game experience at the moment on a touch screen because your finger is too fat to shoot properly.
A game like League of Legends, you couldn't replicate on a smartphone at the moment because of the game session being 65 minutes. That's true in China, but it's also true in markets that are further along the curve, like Korea and Japan, that what's happening in the mobile game market in those countries so far has been largely accretive to what's happening in the desktop game business in those countries.
I see. Secondly, can you give some update on the WeChat effort on the e-commerce and advertising front, especially given the background that Alibaba recently blocked the Taobao merchant access to WeChat from the back end? Thank you.
Well, I think right now it's too early days, right, to talk about e-commerce and advertising. Advertising is definitely something that we see on a communication platform like WeChat. It will be the last that we'd actually explore because it does get into the way of the user experience. We want to sort of put it to the real back burner for now. In terms of e-commerce, I think the market and some sort of industry observers might be sort of dramatizing these events. What we see is at this point in time, what we want to be able to provide within Weixin and also within Mobile QQ, is actually an infrastructure that would allow different users to actually be able to serve their own customers, right?
Let's say if a particular news media have good content, and they have actually accumulated 1 million users, out of that maybe sort of 5% of the people who want to pay for some exclusive content, then we want to be able to both provide that customer management tool through our communication tool, as well as the ability for these merchants, right, to get their customers to pay. That's why we have also had the payment system embedded in our communication platform. We want these features to be, again, sort of enhancing both the user value for the consumers as well as the merchants who are serving their consumers using these platforms. I think that's really the first step of our approach. Over time, how that may evolve and how that may bring up new business opportunities, I think we're happy to see and keep exploring.
At this point in time, I think it's really coming from the pure angle of serving the customers better. I think there's no point of over-dramatizing the sequence of events.
Thank you. That's very helpful.
Okay. Thank you very much. We're rounding up the call now. If you wish to check our press release and other 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 does conclude the conference for today. Thank you for participating in Tencent Holdings Limited 2013 second quarter and interim results announcement conference call. You may all disconnect now.