Earnings Call: Q2 2013

Aug 14, 2013

Thank you for standing by, and welcome to the Tencent Holdings Limited 20 13 Second Quarter and Conference Call. You. 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. Kathy Chen from Tencent. Thank you. Please go ahead, Ms. Chen. Thank you, operator. Good evening. Welcome to our Analyst Conference Call for the Second Quarter of 2036. I'm Catherine Chen from BIO team of consent. Before we start the presentation, we'd 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 unaudited non GAAP financial measures that should be considered in to pull measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and unknown GAAP financial measures, please to our disclosure documents, downloadable on www.tencent.com/ir. Having said that, let me introduce management to you on the call tonight. They are our Chairman and CEO, Billing Ma, President Martin Lau, Chief Strategy Officer, James Mitchell, and CFO Zhong Lo. Turning with kick off with a short overview of our financials and key platforms. Marty will discuss our strategic highlights James will speak to business review and John will go through the financials. 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 percent 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. Dollars, up 37% year on year and 6% quarter on quarter. Value added services revenue was 10.75 dollars, up 23% year on year and 1 percent quarter on quarter. Online advertising revenue was 1 point 30,000,000,000, up 47% year on year and 53% quarter on quarter. E Commerce transactions revenue was RMB2.20 billion, up 150 percent year on year and 15% quarter on quarter. Non GAAP operating profit was RMB5.05 billion, up 20% year on year and flat quarter on quarter. Non GAAP net profit attributable to shareholders was RMB 4,150,000,000, up 23% year on year and up 3% quarter on quarter. Moving on to our online platform. For our core communications platform, QQIN enjoyed a significant year on year growth in platform user base as mobile internet growth privilege further. MAU and TCU growth decelerate as a smaller proportion of mobile users were using multiple accounts compared to PC users. MAU reached 818,000,000 at quarter end, up 4% year on year. PCU increased 4% year on year to 173 $1,000,000. Combined MAU of PC and WeChat reached $236,000,000, up 177 percent year on year. We think in joint rapid growth, user growth due to its emotivate features and compelling user students and has become the leading smartphone only community in China. For our social network platform, Qzone MAU grew 5% year on year to 626,000,000 as users respond favorably to the enhanced features for photo and video sharing. Our online games platform continued 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 5 client games, each exceeding 1,000,000 PCU. Our media platforms, q2.com, Tencent microblog and Tencent Video continue to deliver a new content experience to our users and enhanced user experiences on mobile. For our utility services, we continue to build our built our presence through our mobile security solution and mobile browsers. 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 invite section, highlights 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 and what made strategic investments to increase mobile engagement on our social platform that include mobile QQ, mobile Q zone and Weixin WeChat. For mobile QQ, as you can see on this page, we have completely redesigned this leading and longer serving mobile communication service for the expanding smartphone user base. During the last two quarters, we have 1, build a tighter relationship between mobile QQ and mobile Q zone 2, enable users to add contacts from their phone book to their QQ budget list. And 3, we've added fun elements through games, skins, stakers 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 user As at the second quarter end, smartphone based MAU jumped 2 30% year on year to 4 $78,000,000 and 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're gradually exploring monetization opportunities on Mobile QQ through membership privileges stickers and overtime games. For Mobile Qzone, we decided to refocus the product on our core proposition of sharing everyday experiences with closed friends for our users. With particular seamless experience for mobile QQ users. As such, QQ users can communicate via mobile QQ and to share with the bigger community on mobile Q zone. We also emphasized photo sharing as the most popular activity We have revamped Qzone's photo experience for smartphones. As a result of these the daily photo uploads jumped five times year on year through smartphones, driving growth, in user engagement and social interactions. Recent upgrades in Technology And User also enabled smartphone users to share not only text and photos, but also voice, video and location with their friends. Asset quarter end smartphone MAU for Mobile Q zone reached $357,000,000, representing 57% total Q zone MAU. Together, mobile Q zone and mobile QQ help extend our social leadership from PC to mobile. Now moving on to Weixin and 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. 10 days ago, we released a new version for Weixin in China designed to deepen user experience and engagement as well as for us to experiment some monetization. The key features of this 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 Weixin and its sister product WeChat are expanding rapidly its footprint in key markets. According to Global Web Index, a 3rd party Weixin and WeChat together ranked the 5th most used smartphone app globally by MAU. In July, we launched a global TV ad campaign in fifteen 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 EMR marketing expenses of $100,000,000 to $200,000,000 for the entire of 2003. We're also very pleased to report that WeChat has achieved 100,000,000 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 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 and services segment, social network revenue was rmb 3,160,000,000, 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 content functionalities in order to grow our user base before we unlock monetization. Online Game Rep was rmb 7,590,000,000, up 31% year on year and 2% quarter on quarter. More game users in key star proof of our major titles and new games drove the game revenue growth. Taking a closer look at social networks, our community products increasingly mobile first. And as Martin has just discussed, we have redesigned mobile versions of our community service with the smartphone front and center. On the monetization front, we recently launched a new Super VIP subscription service priced at 20 rand MB per month, which bundles PC and smartphone privileges together with new smartphone specific features. We test launched this subscription package to see that will keep you membership subscribers rather recently and we've received very positive feedback. Our open platforms, the large of their kind in China, incubating more than 1,000,000 third party developers to date. 26 apps have achieved monthly revenue of over RMB 10,000,000 and the most success for that has achieved monthly revenue of over RMB30 1,000,000. In aggregate, we expect to distribute over RMB3 billion to 3rd party developers during strategy from PC to smartphone, starting with games. Developers can link their games to our platforms such as mobile, Q2, mobile Q zone in Weixin, integrate with our open ID 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 four games, so year on year decreases of 5.4% in PCU and ACU, reflecting a user shift open platform games into smartphone game app. For advanced casual games, we operate 9 titles year on year that combined PCU grew 37 percent to $16,800,000 and that combined ACU 52% to $5,800,000. 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 first quarter title by PCU in China shortly after its open beta launch in mid May. The massively multiplayer online games, we now operate 15 title year on year combined PCU increased 23 percent to 5,800,000 and combined ACU increased 25 percent to 2,100,000. DNF continued to see healthy PCU growth as we added new content and higher experience levels, new game blade and soul began close play testing in China during May. 2 weeks ago, we launched our first mobile game that's integrated with Weixin and mobile QQ. Called Timmy Match every day. We're pleased to see a very enthusiastic response from our users. This game has achieved over 50,000,000 registered users in the last ten days and has exceeded 25,000,000 daily active users, making it by some distance the most popular mobile game in China. At this point, we're primarily focused you building out the user base from a mobile game platform. Our online advertising say revenue was rmb 1,300,000,000, up 47% year on year and up 53% sequentially. Display advertising was rmb 1,200,000,000, up 52% year on year and 57% sequentially. We achieved broad based growth across brand display especially performance display ads. Better brand recognition also enabled us to gain access to a larger advertising base and achieved higher sell through rates across our range of media properties. Our search advertising revenue was 113,000,000 up 11% year on year and up 18% quarter on quarter. Improved revenue per 1000 impressions contributed to year on year growth, but volume from our network alliance reduced has been 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 for food and beverage, automobiles, online services, consumer electronics and real estate. We believe we have gained share particularly in online services consumer electronics categories. Our online video advertising revenue approximately doubled year on year due to ad inventory expansion and higher sell through mix. In performance display, e commerce advertisers contributed significantly to our revenue growth. During the second quarter, we have extended our Guangdian Tong advertising solution onto mobile through a mobile app network. Our SNS win targeted advertising 10cent microblog has attracted some early advertisers from the Education E Commerce Automobile Industries, and we'll be test launching promoted feeds inside the microblop during the third quarter. Turning to E commerce transactions. Segment revenue was 2 $2,000,000,000, up 157 percent year on year and 15% quarter on quarter, driven by seasonal marketing activities, regional expansion and category expansion. In our principal business, more users, an increase to average order value delivered robust year on year revenue growth Home Appliances, a product category we entered relatively recently, contributed heavily to the sequential revenue our 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 the marketplace, which contributed to higher conversion. Our current focus is on improving the overall user experience our results. And with that, I'll hand over to John to discuss the financials. Hello everyone. For the second quarter of 2013, our total revenue was rmb 14,380,000,000, up 37% year on year, 6% quarter on quarter. Operating profit was rmb 4.57000000000, up 16% year on year or 10% quarter on quarter. We recorded net other gains of RMB 82,000,000. Net other gains in the 1st quarter was higher at 3 RMB151 1,000,000, mainly due to a special dividend from meldar Rou. Net finance income was RMB14 1,000,000 RMB as compared to net finance costs of RMB 82,000,000 in the first quarter. The change primarily reflected higher Rx gain on our foreign currency denominated apps. Share of profit of associates joint venture was RMB31 1,000,000 compared to RMB120 1,000,000 in the first quarter. Of associates the States and euro. Income tax expenses was RMB926 million, down 10% from the 1st quarter and mainly reflected a decrease in withholding tax. Net profit attributable to shareholders was RMB3.68 billion, up nine 18% year on year or down 9% quarter on quarter. On a non GAAP basis, operating profit for the second quarter was RMB5.05 billion, up 20% year on year and stable sequentially. Net profit attributable to shareholders was rmb 4,150,000,000, up 23% year on year and 3% quarter quarter. Operating margin was down to 35%, which was 5 percentage points lower than that of last year, and 2 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 1 percentage point quarter on quarter. Let's turn to segment gross margin. Gross margin for VAS was 64%, down two percentage points year on year and quarter on quarter. This sequential decrease at higher operating costs relating to games operating overseas and modernization lagging usage growth of our mobile social networking services. Gross margin for online advertising was 64%, up two percentage points year on year and 30 percentage points quarter on quarter. Gross margin for e commerce transaction was 6%, up 3 percentage points year on year or down 1 percentage point quarter on quarter. Moving on to operating expenses Selling and marketing expenses was RMB1.24 billion, up 102% year on year and 28% sequentially. Year on year, we have stepped up marketing activities relating to reach out 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 2nd quarter year. G and A expenses was rmb 2,400,000,000, 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 and A decreased to 17% from 18% for the 2nd quarter last year. Included under G And A, R and D expenses was RMB1.24 billion, up 19% year on year and 3% sequentially. R and D represented 52% of G And 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 their headcount decreases, both year on year and quarter on quarter. Now, 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 including e commerce transaction revenue and tops, it would be 40.4%. Non GAAP net margin was 29.1 percent, down from 30.2 percent last quarter, excluding e commerce transaction revenue and cost, it would be 33.3%. During the second quarter, we repurchased 4,590,000 shares for approximately RMB1.13 billion. For year 2013 to date, we repurchased 6,640,000 shares for an aggregate of CNY1.63 billion. The total number of shares outstanding at the end of the quarter was 852,000,000,000. Basic EPS was RMB2.009 on GAAP basis and RMB2.267 on a non GAAP basis. Diluted EPS was RMB1.976 RMB on GAAP basis and RMB2.229 on a non GAAP basis. Total CapEx for the quarter was RMB1.46 billion, up 60% year on year and 42 percent quarter on quarter. Operating CapEx was RMB729 1,000,000, up 5% year on year or down 11% quarter on quarter. Non operating CapEx was rmb 735,000,000, a 236 percent year on year and 2 42 percent quarter on quarter. The increase was mainly due to the purchase of a new office space. Free cash flow reached RMB4 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 RMB33.6 billion, up 71% year on year and Thank you. Questions. You. 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 100,000,000 international users, what are the key countries coverage? And also for what you have budgeted in expanding this year, what are kind of the population or countries coverage? Is that quite limited? Meaning that the future years, you will have to spend more than that amount to get more of the global coverage. And maybe lastly, just overall spending on the, some of the WeChat infrastructure expenses globally? Thank you. In terms of the key markets for, I'll reach Ed. You would we'll be able to guess, 1st of all, it's Asia and the biggest countries include India, Indonesia, Malaysia and Singapore as group, India as a group, sort of Southeast Asia as a group, outside of mainland China, Greater China, sort of Hong Kong, Taiwan, Macau as a group. And 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. So that actually we have a pretty broad base user base actually around the world. And in terms of the spending, I would say, at this point in time, we view, you know, the 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. So that's why, we view the spending at this stage as being more of, jump stocks, pending and over time, the spending will definitely go down. And we're covering actually, so if you look at the kind of market that we're hitting with the messy ever and campaign, we already cover 15 markets. And these markets are essentially the largest population market in the So 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. Thank you very much. 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 subscription of mobile games on reset and QQ mobile platform launched last week. I am 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 ARPU trend compared to your PC games. Yeah. Well, I think you and James have already talked about some of the key numbers, right? Number 1, the first game that we launched is actually launched across, the mobile QQ and, the Weixin platform. And, the total registered users within 10 days is 40,000,000. And, the daily active users is 25,000,000. So, I think this is the number that's way above any other mobile that has been launched in China and by actually quite a far margin. And, I think, you know, especially in, the DAU to register user number out of 40,000,000 who registered users, 25,000,000 updated uses, meaning, I think there's a very high conversion rates into active users. This is still very early days, right? It has March only for 10 days. So I think it's hard to sort of start talking about monetization and, you know, long term, retention. I think, you know, on monetization, what comment we can make is, you know, at this point of time, you the importance that would place on the most high end priorities actually expanding the user base. And also developing the habit for users to be, playing games, leveraging the communication platform we have we have and the game center that we actually put on both mobile QQ and VATION. So I think that will be our primary focus this point in time, although we have seen some monetization and I would say sort of we have the initial, we read this is encouraging. Now in terms of the long term retention yield, 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 lifecycle, 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. My second question is would you be able to talk more about some of the non game new features on racing 5.0, such as the barcode scanning, that is related ecommerce. How should we think about these business models going forward? Little bit too early to talk about the business model around these. So this is, I think, a lot of these features are actually very innovative and we think could provide a lot of user value. For example, sort of the scanning of street view can actually allows you to, see the street. It's an integration to our map, you know, and it actually allows people to see, what's around you, right? What's the street we run around you? It carries a lot of user value. If people want to use it. Over time, can it actually be tied into, older, older type of applications? I think we're it's up for experimentation. The scaling of barcodes, I think it's a convenient, tool for users to 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 with place? And I think a lot of the products that we features that we add to Weixin at this point in time is purely from a user experience perspective. But we also feel that these features can actually link people with the objects, with the environment and with the businesses that are around them. And over time, there may be some kind of a real business case for them, but I don't know. It's too early to tell about right now, we try to make institutions very good so that it creates using value. Your next question comes from the line of Alicia Yap from Barclays. My question is there's a server part of it. So I apologize in advance if it's a number of that. But my question is related to Qzone and VChat. I think in your release, you noted the smartphone MAU for QSON is 57% of the total MAU. And then your QQ smartphone MAU also reached like 4478,000,000. So I just wanted to get a sense comparing to your WeChat Weixin MAU of the 235,000,000. Wanted to get some color on how many of all these smartphone MAU are over having? And in addition to that, do you have some statistics to share based on, let's say, the same phone number? Do you know how many of the user we have all 3 QQ, Qzone and Weixin on the same phone? And do you know how just spending time spent pattern of all three? And then 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 of 1st tier cities user to Weixin while keeping the lower end cities user on QQ and Qzone. So any comment on this strategic plan will be appreciated. Thank you. Well, I think indeed there's a lot of questions. I try to answer as much as I as possible. In terms of, the way to look at the products, I would say, you said that you're looking at Q2 and Qsy as this new product suite, which provides for communication and social networking and they are closely linked with each other. And then looking at Weixin and within that, the French circle as a communication plus social product. I don't know if that's sort of 2 sets of products that you you can look at. So if you look from that perspective, right? Then QQ and Q zone, so that you have very, very high open right? You know, especially on the smartphone part. And in terms of the overlap, between QQ and WeChat, I would say there is actually quite a lot of overlap, but what happens is, WeChat Weixin actually help us to address a segment of the users who are not sort of the QQ users And these are normally, right? Your high end users who actually or more mature users who are living in sort of 1st Tier cities. But that is sort of there's a very big overlap of users who have been using QQ and now also using Weixin at the same time. And they actually maybe contacting the same group of friends or maybe sort of newly in contacting different group of friends using 2 different applications. And then The third part is Q2 has a group of users who are PC users and also sort of there are younger generation users and sort of these are the people who have not really started to weixin or they believe that actually weixin and QQ's functionality actually sufficient for them and their user base as well as their friends are all sort of real around QQ. So I think that's sort of the current situation right now. And I think if you look at the two products, right, it definitely sort of you have overlap the also sort of cover different, user segments. And, specific functionalities, especially sort of the PC and mobile sort of experience cross platform experience that Ovation doesn't offer. So I think over time, these two products will have comedy features, but also they would have different fee which cater to their own user base. And 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, right, people in different markets, also using multiple applications for chatting and maintaining contact with their different group of friends. And I think that in China. It's particularly true because we have 2 flagship products, which we both have achieved a very significant franchise within the country. Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question. We'd like to switch the focus back to some of your PC based pieces, such as online games and subscription. They do not seem to be very strong on the sequential basis in the same quarter. So could you help us to understand a bit more about the trend how much of that you think could be more seasonally related more in the year term and how much of that could be more structural and how Tencent would address perhaps the transition of your piece based business? Thank you. I think that, Eddie, with regards to the PC games, as you're probably aware, the 2nd quarter is seasonally slower quarter in China for due to the examination season for students. So that's something that's been sort of true about business year on year out. The second quarter is eventually 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 in as much as, as we discussed, we are going through a transitional period where we had really build our subscription privileges, primarily around a PC and to a lesser extent, much lesser extent a feature for an environment. But now, as Martin highlighted, over half of the users of QQ, over half of the of Qzone in any given month are interacting with those on smartphone as well as or instead of PC. So there, the challenge is not really a 1 quarter challenge. It's a more prolonged issue. And 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 but I think that that will be a sort of a longer term transition that we're working through as our users transition from a smartphone driven. Got that. Thank you. Thank you. Your next question comes from the line of Cheezin from HSBC. Please ask your question. I just had a couple of things I wanted to ask. In terms of your, your monthly active users, what percentage of that figure is actually domestic versus international. And I'm wondering if you can give us a little bit more color in terms of just average. Wait a minute. Can you repeat the question? And we we can hear it very clearly. Yeah. I'm sorry. So in terms of your monthly active monthly average 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. We have given that number is actually a combined number. And separately, we have also made an announcement of, Internationally, we have reached $100,000,000 in terms of registered users. So these are the two numbers that we have given our we haven't provided a breakdown of sort of the monthly active users into China versus International. And I'm wondering if you could give maybe a little bit of interest in terms of usage? What are some of the how much time do the mathematically active users spend on the application sort of on a daily basis? That'd be helpful. Thank you. Well, I think it's actually, we the activity, right, is actually, quite significant. And, we we actually typically actually look at the for internal assessment perspective, we actually sort of need to look at the daily active use as a new figure for us to gauge the activity. And, you know, I would say sort of the daily active user number is actually quite high, for Weixin and WeChat and definitely sort of in line with international, new competitors. Great. Can I just ask one more questions, just the changing gears on E Commerce then, please? You mentioned in the press release, something about in competition. So I was wondering if you could give a little bit color in terms of the competitive intensity in e commerce space for the second quarter? Thanks a lot. Sort of tends to, ebb and flow, a little bit with regard to seasons, because as you may be aware, in China, this sort of trend to what e commerce company is making a big fuss on the 5th day of 5th month or 11th day of 11th month or what have you. So I think if we look back at our very short life history and e commerce and seasonal trend would be that in the 4th quarter there's a number 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 So 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. It has been brutally competitive now, but for a couple of years. And we'll probably remain somewhat competitive sometimes 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. And this, as James mentioned, some time ago, it has doubled for 2nd quarter. Should we see that as an indicative trend for the rest of the year? And when would we expect our what would it take before investment in sales and marketing will scale back? And that's 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 now 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. Yes. In terms of sales marketing, right? I think it's definitely a year of investment for us. The sales and marketing. And as we highlighted, 1, in terms of WeChat, we actually sort of embarking on other aggressive marketing program outside of China. Weixin doesn't really sort of need any marketing actually. So in China once we have reached that kind of franchise situation. But 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. And if you actually look at some of the other industry players, right? People are actually putting 1,000,000,000 of dollars to actually acquire mobile platform companies. So instead of acquiring companies, what we're doing is actually new spending much less in terms of your marketing in order to market the mobile platforms that we have, especially sort of the mobile platforms that are the browser products, and certain of the other sort of media clients. So that's something that we have to do in this pretty defining stage of the mobile internet age. You know, and and, 30, we also sort of have, a range of new games to be launched. Some of them are self titles and some of them are actually sort of new on the mobile platform. So with all these would actually sort of new add up to the sales and marketing expenses. So I think this is definitely a year of investment for us, but we definitely believe that over time, these investments will bear fruit? With regards to e commerce and categories, I we mentioned in the script that we've seen 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. So we'll continue to expand our degree range in a measured fashion over time. I mean, 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 as appropriate. With regard to mobile e commerce, that's something that's still at a relatively early stage of evolution in China I think many e commerce companies are now seeing a substantial single digit percentage of their revenue being generated through mobile device and that percentage will presumably increase over time. And we'll obviously do what we can leveraging our unique mobile apps us to try and sharing that ourselves, but also to help other independent, merchants, retailers to reach out to our consumers through mobile as well. Your next question comes from the line Jonxiao from Macquarie. Please ask your question. Thank you very much for taking my questions. I have two questions. First is on gaming. 2nd is on Weixin. A year ago, I think you mentioned the open platform games about 25% of your gaming business. I was hoping you can give us an update where it is now. And then would you be able to share with us in terms of the EOV growth rate for the open platform games, mobile games and the traditional sort of PC games? And my second question is on Wixin. I was wondering when you think we can expect Wixin to become a platform for third party, gains, and apps. And and the secondarily, as you know, do recently in fact today announced its intention to acquire a 91 wireless. I was wondering whether Tencent has any plan to have a separate independent app store, outside of Wixin or QQ mobile or mobile QQ rather. Thank you. Okay. I'll answer the second part of the question first. And then Sean would actually come on with the gaming. Now 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 situation and mobile keytruda. So we will have 2 flagship products in this game platform. And this game platform would actually sort of take a lot of the learnings that we have actually achieved through the open game platform on Kyzyl and on the PC side. So, as I said, we have a portfolio of games that are already lined up and some of them are self developed, but even a larger number of them will be actually sourced from their party. So that would actually sort of be coming online in the next few months. And at the same time, we also offer other of our platforms, for 3rd party games, including, the app store that we have, you know, you know, our app stores the 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 sort of come to play, you know, to constitute traffic volume for, third party games So over time, we'll actually sort of be an open, platform on our mobile platform in, similar way to what we had built on the PC. And as James has said, on the PC side, our own platform, how actually achieved the great results. And this is something that will take to the mobile side. Now we do want to So it's looking at the data that we have right now. The power of our social form is actually, we believe, is more valuable than just in App Store, because your foreign app store, number 1, when you channel a user to download basically sort of measure goes to that application and you essentially sort of you don't have that that relationship on an ongoing basis anymore. But on our social platform, we you said, and you tried to maintain links, of the different games and different applications through the bucket list and through a social graph so that as you can see from the numbers that we have, our 40,000,000 registered users, we actually can achieve 25,000,000 daily active users. So the conversion from that is being active is very high because of our social graph. And 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 get their applications a very high active rate. And at the same time, it also helped us to maintain a continued relationship the applications that we promote. But then in an App Store situation, you promote, the user to an application, the user basically just we'll see even if we're making the application. So good. Okay. In relation to the percentage of community, sorry, sorry, in relation to the open platform, you were talking about the proportion of the community bus, right? Basically last year, we did provide a figure of 25 and now that figure is higher than before. That's what we can provide. And in terms of the ranking of different type of games. ACG is highest in terms of revenue followed by MMOG and mini casual games. So sorry, Sean. I was asking for the growth rate, which which segment of your game has a high growth rate, Ryan, not the mix. In terms of growth rates, then we don't disclose, but generally speaking, open platform has seen a rapid growth PC client game in our game in the second quarter had more sort of comparable growth rates with each other. Thank you. Your next question comes from the line of John Choi from Daiwa. Please ask your question. I have a couple of questions. First of all, I would like to have some housekeeping questions on the Poo on the online gaming business. It seems like the ACG was very strong for the PCU and also the ACU. It would be great if you could have more color. Second question is I've seen on the last slide, it seems like there's 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 app for the quarter was $65,000,000 to $155,000,000. And for MMOG,000,000 to $240,000,000. In relation to mobile games, we think this is a long time 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. We actually were preparing for those game launches earlier in the year. We launched those games and we focused first on user base, maximization rather than revenue maximization. So the mobile games that we had, were really sort of, I would say, in the 1st generation of mobile games and they include some single download games some WAP games and, to a limited extent, sort of, you know, smartphone based games, but very few of them. So what we actually launched, I think the first game that we have in the new mobile game era is really sort of new team that you match every day. And that's I would say that 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, for the smartphone, which is mainly from waste. More relevant for third quarter and onwards? As we said, the gains will be actually tied to both ways in and mobile QTL. And, it's it's the power of the 2 platforms, right, together, that that's provided that will be powering this mobile game business. Now we are quite optimistic about sort of this business over the long run, but as we said earlier, the short term focus will definitely be building user base and building usually habit of, we're playing games from these game centers. So we'll be, less focused on monetization at this point in time. Your next question comes from the line of Thomas Chung from BLC International. Hi, good evening. Thanks for taking my questions. I have two questions. My first question is regarding the mono potential between WeChat and Mobile QQ. Which application do you see has better monetization potential. Do you think VChat has more Tier 1 users? It would be more easier to monetize the mobile QQ? Thanks. I think it's hard to say, right? You know, both of them has got sort of very significant, user and, mobile compute actually has gotten more smartphone users than Weixin at this point in time. And from a historical basis, the paying habit has been more developed over the QT users. I think it really will depend on sort of what kind of applications will be offered. I think it carried and I think in terms of the privileges, right? We actually, are offering the mobile smartphone based privileges on mobile QQ first. So I would say both of them have got very significant user base. And if we actually so that you can develop, applications and functionalities that are valuable to them than the users would have an incentive to pay for these functionalities. I see. Am I second question, just relating to WeChat, LINE and Cakaal Talk, 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. So in terms of the monetization potential for WeChat compared to this over SIP payers. How should we look at the revenue potential for WeChat compared to these 2 overseas payers? Thanks. That's a somewhat macroeconomic question, but I think at a high level up, you would see that the greater 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 desktop game business in China, it's about $10,000,000,000 a year in revenue versus half that and a little less than half that in the 2 other countries you mentioned. So So, we're primarily focused on that long term opportunity, rather than worrying too much about the near term term destination. Thanks. Thank you. Your next question comes from the line of Piyush Mubayi from Please ask your question. Thank you. How would you compare the opportunity for WeChat in international markets, which are much more competitive versus Weixin back at home. Well, I think they're actually quite different in right? Weixin has got already a very significant presence in China. So I think the important thing is actually for us to explore what we could do actually in here to extend the platform, whereas I think in the international markets, 1, we still need to establish the critical mass in different key markets so that a network effect can be built as a communication tool. So it's actually much more much more, necessary for us to actually to build scale. And the second is, in terms of monetization. I think in international, the WeChat, we have a much longer track to for us to achieve monetization, whereas sort of in China, we are already experimenting with it right now. Thank you so much. Your next question comes from the line of Marisitzka from Piper Jaffray. Please ask your question in? Yes. I have a couple of questions and thanks for taking them. First on the e commerce business. I was wondering if you could disaggregate the performance of the principal versus the agent business for us? And how should we think about the pace of transition to agency? And then 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? Should will it be kind of late this year or should we be looking into next year? In terms of the e commerce business, right? The principal business is actually sort of growing faster than the agency business because we actually sort of had put in much more marketing resources to support the principal business. And the principal business also benefited from the fact that we want category expansion as well as geographic expansion At the same time, I think for the agency business, the focus for us right now is actually to be able to tie the agents business, tightly open platform business with the principal business because To now, by and launch, the 2 sets of businesses are still sort of being quite unlinked with each other. But over time, we actually said that you would want to, make the agency business the open platform business connected with the print business so that when the user come into our shopping mall, basically, they can buy products with with electronics and sort of new appliances and selected products from our principal business, but they have they can also have a much wider selection our products in our agency business so that they can actually see other products that they can also buy. And, I think we are in that regard, we are actually sort of working very hard to make sure that the backend system actually has integrated, the SKU database is actually integrated. And at the same time, 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. So over time, what we wanna do is actually, to have the principal business be, you know, the, user contact find that, at the same time, the agency business can also benefit from the growth of the principal business. And your second question is about, again, later. So, okay. Yeah, I think later, so you know, we we we have said, you know, 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 and I think there's actually a lot of user excitement about the game. And we are in the process of fine tuning in the game. So, in the next through the 6 months, I think we will move into a larger scale of testing. And if that actually achieve good result, then that will actually give us more, you know, go ahead to, you know, signal to actually move it into open data. Great. Thank you. Thank you, operator. The last second last question comes from the line of Jin Yoon from Nomura. Please ask your question. For taking my questions. Just a question on your advertising side. The numbers came in, obviously, the last couple of quarters much better than, what we've anticipated wondering if you could kind of break out for us kind of what the real strength is coming from. Is it really coming from a portal side GDP 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 and reach out. Thanks. Yes. In terms of the advertising revenue growth, I think the UC adjective broad based in the statutory remarks, which I think is an accurate characterization. We've seen particularly strong growth terms of Guangdian Tong, but we've also seen, as we mentioned, an approximate doubling of revenue in online video advertising year on year during the quarter. And then our traditional portal business actually continues to grow at a slower rate than be 47% year on year that we report. And under that, it's a fairly healthy rate relative to the overall brand display industry. So it brought a base probably you're right, Frank, to sum it up. In terms of bundling and so forth, we do offer some bundles, but generally thinking, we try and target certain advertising formats, the advertisers who are most appropriate to those formats of Langhi and Tong. It would be 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. And just a a follow-up question on WeChat. You know, I know a lot of us are anticipating monetization to kick in in the second half of the year and as we go into next year. Just kind of, if you look at just the China modernization versus outside of China, international and modernization, 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, or 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 environment? Well, as I said earlier, with the, for the international market, right? The priorities actually sort of build user base and particularly for some of the selected market 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, right, then the monetization will actually sort of become easier. So I think right now, that would be the dealer user base would be sort of the primary focus. And so we're not going to sort of really be thinking about monetization at this point in time However, I think, you know, if you look at, on the long term, right, you know, gaming is actually quite a common theme across different markets. So every market so every market, so that people like to be able to play games, the game types may be a little bit different from market to market, but I think that that consumption of entertainment is actually a common need across different markets. Overall, when we actually establish a particular the presence within different markets, we'll have teams, local forward and 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 base perspective. As well as in the longer term sort of new building as a tangible business model for those markets. So it will come in that order. Great. Thanks, guys. Thank you. Your last question comes from Wendy Huang from Standard Chart. Please ask your question. For taking my questions. First question is regarding the conversation 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 2 and because the mobile game is tracking the casual gamers and they're playing the game during the fragmented time frame. But from your earlier comment, it seems to me that you were seeing mobile game to, is affecting your traditional PC game in a meaningful way. So 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. So those would be games like marginal or card games that people were playing on the PC but which deliver a similar or arguably superior experience on the smartphone, but that would be a single digit proportion of our PC game revenue. So for the large majority of our PC game revenue, the advanced casual games and Latin female to payer online games, we're not seeing cannibalizing 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 equipment shooting game experience at the moment on the touch screen because your finger is too fat to shoot properly, again, like league of legends, you couldn't replicate on on a smartphone at the moment because of the game session being 65 minutes. And that's true in China, but it's also true in markets that are further along like like Korea and Japan, but what's happening in the mobile game market in those countries so far has been largely freedom to what's happening in end of the desktop game business in those countries. I see. Sanofi, can you give some update on the WeChat effort on the e commerce and advertising front, especially given the background that Taobao Alibaba recently blocked the Taobao merchant access to WeChat from the back end? Thank you. Well, I think it's right now, it's like 2 early days, right? You talked about e commerce and advertising. I think advertising is definitely something that we see on a communication process like WeChat it will be the last, that we've actually explored because it does get into the way of the user experience. So I think we want to sort of put it to the real back burner for now. Now in terms of your e commerce, I think the market and some sort of industry observers might be sort of dramatizing this these events. But what we see is, at this point in time, what we want to be able to pro right within, Weixin and also within Mobile QQ is actually an infrastructure that would allow different users to actually be able to let's say if, a particular news media have good content and they have actually accumulated 1,000,000 users out of that maybe sort of new 5% of people who want to pay for some exclusive content. Then we want to be able to both slide to sort of do that, that customer management tool through our communication tool as well as some of the ability for these merchants, right, to get their customers to pay. So that's why we also had the payment system embedded in our communication platform. And, 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. Now over time, how that may evolve and how that may bring up a new business opportunities. I think we're happy to see and keep exploring. But at this point of telling you, it's really coming from the pure angle of serving the customers better. And I agree there's no point of overdramatizing the sequence of events. Okay. Thank you very much. We're rounding up the call now. Wish to check out our press release and other financial information, please visit our website at www.engren.com/ir. Welcome us to replay of this webcast on the flight shortly. Thank you. And thank you. That does conclude the conference for today. Thank you participating Tencent Holdings Limited Twenty announcement conference call. You may all disconnect now.