Earnings Call: Q1 2013

May 15, 2013

Thank you for standing by, and welcome to the Tencent Holdings Limited 2 1013rd Quarter Results Announcement Conference Call. There'll be a presentation followed by a question and answer session. You. I must advise you that this conference is being recorded today. I would now like to hand the conference over to today, Ms. Petrin Chan from Tencent. Please go ahead. Thank you, operator. Good evening. Welcome to our analyst conference call for the first quarter of 2013. Name. I'm Kathleen Chen from the RR team of Tencent. Before we start the presentation, we would like to remind you that in forward looking statements, which are underlined by a number of risks and uncertainties that 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 contains some unaudited non GAAP financial measures that should be considered in addition to financial substitute for matches of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and our non GAAP measures, please refer to our disclosure documents, downloadable on www. Consent.com. That's all. Having said that, let me introduce the management team on the call tonight, they are our Chairman and CEO, Bulleiman, President Martin Lau, Chief Strategy Officer, James Pietro and CFO, John Lowe. Let me kick off with a shorter video for financials and tough ones. Martin, we'll discuss our value added services segment. James will speak to you on advertising and e commerce transaction segment, and John will go through the financials before we open the floor for Now let me invite Bernie to begin. Thank you, Catherine. Good evening, everyone. Thank you for joining us In the first quarter of 2013, our community advantages, platform strength and execution capability has helped to further expand our market leadership and deliver broad base 40% year on year growth in revenues. Our strong business model has enabled us to invest in e Commerce, WeChat International, Marketing, Mobile Initiative and video content, while delivering a healthy 23% year on year non GAAP earnings growth and 57% year on year growth in net cash. Now let me highlight the financial numbers for you. Total revenue was rmb 13,500,000,000, up 40% year on year, 11% quarter on quarter. Hourly defined value added services segment revenue, which combines both the previous IVAS and NVOS segments. Was rmb 10,700,000,000, up 29% year on year and 14% quarter on quarter. We reported 2 subsegments undervalued ad services, namely social networks and online games Social Networks revenue was RMB3.2 billion, up 16% year on year and 2% quarter on quarter. Online games revenue was rmb 7,500,000,000, up 35% year on year and 19% quarter on quarter. Online advertising revenue was rmb 850,000,000, up 57% year on year or down 10% quarter on quarter. E Commerce transactions revenue was rmb 1,900,000,000, up 154 percent year on year 14% quarter on quarter. Non GAAP operating profit was RMB5.1 billion, up 24% year on year and 17% quarter on quarter. Non GAAP net profit attributable to shareholders was RMB4.00 billion, up 23% year on year or down 1 percent quarteronquarter. Moving on to our online platform. For our core communication platform, QQIA monthly active user accounts grew steadily at 10% year on year to RMB825 1,000,000 PCU increased 3% year on year to RMB 173,000,000. During the quarter, continue to see users shifting access channels from PC only to both PC and mobile. Our smartphone bases the social communication service, we see further expanded user base in China. Its international version, WeChat recently grew to 40,000,000 user accounts in overseas markets. Us at quarter end, the combined MAU for Weixin and WeChat was 194,000,000, up 228 percent year on percent year on year to RMB611 1,000,000. About 70% of the MAU now assess the service from mobile only for a combination of PC and mobile. For our online games platform, PCU of QQ game platform grew 5% year on year to $9,200,000. We are transforming QQ game platform into an open platform that can be accessed through both PC or mobile platforms. Our media platforms achieved a solid growth in traffic and deepening our differentiation through integration of our portal, MacBookBot and video platforms. Qq.com continue to lead Chinese peers in terms of page views and unique visitors. 10% microblog had 81,000,000 daily active user accounts at quarterend. Our video service enjoyed significant growth in users and traffic with enriched content and enhanced user experience For our utilities platform, we are rapidly expanding penetration in mobile internet through our mobile solution and mobile browser. That's all for me and I will invite Martin James to review our business segments. Thank you, Pony. Good evening and good morning. During the first quarter of 2013, we further broadened our revenue base and achieved overall revenue growth of 40% year on year. Excluding the e commerce transactions, our quarterly revenue would have grown 31% year on year. From a mix perspective, contribution from online games was 55% in the 1st quarter compared to 57% a year ago. Social networks contributed to 24% of total revenue compared to 29% for the same period last year, online advertising was stable at 6% of total revenue and e commerce transactions was 14% of total revenue compared to 8% when we stepped the scale of investment in our principal operations early last year. Now starting from this quarter, we have combined, as you can see, the former IVAS and NVAS revenue segments into a new segment called value added services. The change is mainly as a result of the increasing integration between PC and mobile platforms. And also because of the unification of many of our PC and mobile product teams. Within this VAS segment, we have 2 subsegments, namely social networks and online games. Under social networks, we had RMB2.55 billion of community and open platforms revenue previously under IVAS and we added RMB643 1,000,000 of mobile non game revenue previously under MBS. Under online games, we had $7,140,000,000 of online games revenue previously under IVAS and we have added $337,000,000 of mobile games revenue previously under IVAS. The new VAS revenue increased 29% over the first quarter of 2012. If we look VAS revenue, it grew 31% year on year and the former MVAS revenue grew 7% year on year. Diving into the new VAS segment, social networks revenue was 3 point $2,000,000,000, up 16% year on year and 2% quarter on quarter. Item sales on open platforms grew as we converted more users to paying users and as we increased the average revenue per user. On both year on year quarter and quarter basis, The increase in open platform item sales has more than offset the decrease in subscription revenue. Online games, the revenue was rmb 7.47000000000, up 35% year on year and 19% quarter on quarter. New in house games, including legend of Yulong and legend of Shen Yuan, more users and also increased ARPU from existing popular titles drove year on year revenue growth. Revenue grew sequentially due to new games and expansion packs for certain major games as well as positive seasonality and marketing activities associated with Taking a closer look at social networks, our users are increasingly accessing our community and communication services on mobile devices. For example, we have now 550,000,000 MAU for wireless QQ 194000000 MAU for Weixin and WeChat combined and also 70% of the 611,000,000 MAU for Qzone are using some degree of mobile to access the service. For the time being our VIP privileges offered on smartphones are not as well developed because we are preoccupied with improving the basic features first and building the platform. As a result, the proportion of users who subscribed monthly packages dipped. We're now addressing this issue by integrating our PC and mobile product teams, unifying product experiences for these services and also developing new VIP monthly subscription packages both PC and mobile usage. Over the longer term, we believe our users will show similar propensity to pay for privileges on smartphones as they did on PC as we have seen in Super QQ, which is already enjoying pretty healthy subscription rates on smartphones. On the open platform side, we continue to strengthen our leadership position We have internally developed and operated our cloud infrastructure, which provides operational scalability to developers and online security to users. During the last 12 months, the number of applications generating revenue on our open platform increased 180%. To broaden the mix on our open platforms, we also encouraged developers to launch non gaming applications, and we have provided them with marketing support And we're also in the preparation stage to extend the current PC based open platform to the mobile devices. Moving to online games. On QQ game platform, we now operate 178 games in total. The combined due to seasonal in game marketing activities. The combined ACU decreased 5% year on year as users spend more time on open platform games that are operated on our social network. For ACG, we offer you 7 titles, The combined PCU grew 73 percent year on year to $15,600,000 and combined ACU grew 50% year on year to expansion textbook crossfire, new play modes for QQ Speed as well as technical upgrade to enable more users per server cluster for lead of legends. In house titles contributed materially to year on year revenue growth in the quarter. In terms of new games, we're releasing NBA 2K online, a joint development title and Board of Zombie, a licensed FPS title for Open Beta in May. For MMOG, we're now operating 14 titles. The combined PCU increased 30% year on year to 4 point due to new in house games, legend of Yilong and legend of Shenyang as well as expansion packs for DNF. The sequential revenue growth benefited from the 1st full quarter monetization of the legend of Shenzhen. Now we also like to give an update on our online games pipeline. As you can see on this page, we have assembled a rich pipeline for our game platform business. Our portfolio represents a good balance between in house and licensed games and a broad mix of designers ranging from dancing games to shooting games to action and fighting Currently, you have 6 games under closed beta, including assault fire, QQ Dancer 2 and Warface under the ACG category, as well as Azure, QQ Fairy And Blade And So under the MMOG category. Given our unyielding focus on quality of the games, we'll release these titles only after we're satisfied with the overall game experience. Rather than adhering to a rigid timetable. Now I would like to, pass to James to talk about the online advertising and e commerce businesses. James? Thank you, Martin. Online advertising segment revenue was RMB 850,000,000, up 57% year on year and down 10% quarter on quarter. Within that, display advertising revenue was RMB754 1,000,000, up 59% year on year and down 8% quarter on quarter. The year on year growth was due to performance display advertising, in video advertising, and new inventory from our regional portals. The sequential decline was due to Chinese New Year holidays and in line with historic seasonality. Our search advertising revenue was rmb96 million, up 48% year on year and down 23% quarter on quarter. The search landscape as a whole has become more challenging due to new composition and to users shift to mobile devices where they may generate fewer paid click We remain focused on improving our search experience, especially on mobile and on upgrading our infrastructure to improve search results quality. Digging deeper into display advertising, our top 5 advertiser categories for brand display with food and beverage, automobiles, online services, consumer electronics and personal care. Our video advertising revenue more than doubled year on year, an increase of substantial quarter on quarter due to significant traffic growth and improved sell through rates in core First Tier Cities. Year on year, we increased our regional portals from 7 to providing more inventory for local advertisers. For performance display, we've expanded our targeted ad system from our social networks to now cover some of our other properties such as the QQ Messenger chat box. We've also made the targeted ad system available to developers of Application on our open platform, whereas proven particularly popular with the non game app developers. And we recently launched SNS win, a new cost per click targeted Edge solution for small and medium enterprises to buy advertising on Tencent microblog, starting with banner ads and later extending to promoted feeds. Turning to e commerce transactions. Segment revenue was rmb 1,900,000,000, up 154 percent year on year and up 14% quarter on quarter despite the e commerce industry being seasonally weaker in the first quarter of each year. For our principal business, Organic growth from our operation in Eastern China, plus contributions from our newer operations in Southern And Northern China, drove both the year on year and the quarter on quarter increases In addition, we have expanded business, revenue grew rapidly off a small base year on year due to increased merchant fees, but deemed quarter on quarter due to adverse seasonality. During the quarter, we've begun the process of selecting premium merchants from our existing marketplaces to join our B2C Open platform. That concludes the business review and I'll hand over to John to discuss the financials. Thank you, James. Hello, everyone. For the first quarter of 2013, our total revenue was rmb 13,550,000,000, up 40% year on year and 10, 11% quarter on quarter. Operating profit was 5 point 6,000,000,000, up 37% year on year and 36% quarter on quarter. We reported net other gains of RMB351 1,000,000 versus net other losses of RMB202 1,000,000 last quarter. The change mainly reflected the recognition of a special dividend income of RMB438 1,000,000 before Maldot root, partially offset by the donation of RMB120 1,000,000 to Tencent Credit Fund. We did not book any impairment provision for investment this quarter. Mel Dot Wu has distributed special dividends twice, contributing to a total of US131 $1,000,000, or R829 million dollars renminbi to our P and L. This represented a return of 44% on our middle U. S. Dollars investment in Mail Dot route, excluding the fair value gain on our equity holding. Share our progress of associates and John Wen was RMB120 million compared to losses of RMB41 1,000,000 last quarter. The change mainly reflected contribution from EBITDA gains relating to the launch of a new console game in the U. S. And European markets during the quarter. Income tax expenses were RMB1.03 billion and the effective tax rate for the quarter was 20.2 percent, This has returned to a normalized travel compared to income tax expense of RMB151 1,000,000 and effective tax rate of percent last quarter as a result of income tax expense reversal. Net profit attributable to shareholders was RMB4.04 billion, up 37% year on year and 17% quarter on quarter. On non GAAP basis, operating profit for the first quarter of 2013 was RMB5.06 per 1000000, up 24% year on year and 7 percent quarter on quarter. Net profit attributable to shareholders was rmb 4,004,000,000, up 23% year on year or down 1% quarter on quarter. Operating margin was about 37%, down 5 percentage points year on year or up 1 percentage points from last quarter. Net margin was about 30%, down 4 percentage points year on year and quarter on quarter. During the first quarter, gross margin was 56%, down 4 percentage points year on year and broadly stable quarter on quarter. Bus gross margin were broadly stable at 66% both year on year end quarter on quarter. Gross margin for online advertising was 41% roughly stable year on year. Sequentially, gross margin decreased 8 percentage points due to weak seasonality in the first quarter. Gross margin for e commerce transaction was 7%, up 4 percentage points year on year, or down two percentage points quarter on quarter. Moving on to operating expenses for the first quarter. Selling and marketing expenses were rmb 962,000,000, up 105% year on year or down 12% for and quarter. The year to year jump mainly reflected increased marketing activities to promote our gains and mobile products, including WeChat. Sequentially, The seasonal reduction of advertising expenses in China was partially offset by increased expenses relating to our annual brand advertising campaign in China and advertising campaigns from which had in Asian markets. Sunair and marketing expenses represented 7% of quarterly revenue compared to 9% in 4th quarter last year. G and A expenses was rmb 2,200,000,000, up 25% year on year and 3% quarter on quarter This mainly reflected increases in share based compensation and other staff costs. G And A represented 16% of quarterly revenue compared to 17% in the fourth quarter of last year. Included under G And A, research and development expenses was rmb 1,200,000,000, up 28% year on year and 11% quarter on quarter. It represents a 55% of G and A or percent of quarterly revenue. As at quarter end, we had over 24600 employees, up 29% year on year and 2% quarter on quarter. Our e commerce business accounted for approximately half of the year to year increase. Let's look at the margin ratios for the first quarter. Gross margin was 56.1%, down 0.5 percentage point from last quarter, excluding e commerce transactions, revenue and costs, gross margin was 64.1%. Non GAAP operating margin was 37.4 percent, up from 35.5 percent last quarter, excluding e commerce transactions revenue and costs would have been 42.4%. Non GAAP net margin was 30.2 percent, down from 33.7 percent last quarter. Excluding e commerce transactions, revenue and costs, you would have been 34%. During the first quarter, we bought back 2,06,000,000 shares for approximately RMB509 1,000,000. For year 2013 to date, we repurchased 6 bond64,000,000 shares for an aggregate gained amount of 1.63 visit Hong Kong dollars. The total number of shares outstanding reduced by $4,800,000 to 1.84 9,000,000,000 now. Basic EPS was RMB 2.204 on a GAAP basis and RMB 2.2 on a non GAAP basis. Diluted EPS was $2,166,000 on GAAP basis and $2,160,000 on a GAAP basis. Total CapEx for the quarter was rmb 1,040,000,000, up 56% year on year or down 42% quarter on quarter. Operating CapEx was RMB 820 million, up 93% year on year, up 39% quarter on quarter as we purchased more service to support business growth. Non operating CapEx was RMB215 1,000,000, down 10% year on year and 82% quarter on quarter. The sequential decline was against the purchase of new office spaces and land lease rent last quarter. Free cash flow reached RMB5.9 billion up 49% year on year and 37 percent quarter on quarter. Our net cash at quarter end remained strong at RMB52.7 billion, up 57% year on year and 20% quarter on quarter. This concludes our presentation. Thank you. Thank you. Operator, shall we take the first question, please? Your first question is from the line Your first question from the line comes from Eddie Long from Merrill Lynch. Please ask a question. Hey, good evening guys. Thank you for taking my questions. My first question is about mobile games. Could you share some color the development of your mobile game open platform, your standard key milestone, to, watch for. And then related to that, just want to get your thoughts on how important, you think, the social elements in the smartphone mobile game platform versus some of the app stores right now, in the, space where users just can download 1000 of applications pretty quickly, would, would like to get a thought? Thanks. On mobile games, we, I have to say that we are continuing with our development of that platform. And On one hand, we want to make sure that we have the right infrastructure to link the games with our various sort of large DAU applications which would include the mobile QQ and Weixin as well as our Qzone. And at the same time, we are also working, very aggressively on building the portfolio, the pipeline for the games. So we want to make sure that we have a number of high quality games to be launched when this infrastructure is ready. So we're continuing to push in the right direction and, it will be launched in the next few months. When everything is ready. Now in terms of the social element, I think what we bring to the table is actually sort of more than just the social element. What we clearly have demonstrated within our open platform on the social network, on the PC side is that social infrastructure is 1, that's very important. But 2, we also bring in the locked in accounts of all the users that we have on our in platform, we bring in the payment infrastructure, which allows users to pay for the games very easily. And then suddenly, we have the infrastructure that allows the games to promote themselves within the social network. So I think you and at the same time, we also sort of have a very strong cloud infrastructure that would allow games to be deployed on our platform very quickly and scaled very quickly. And at the same time, cloud infrastructure also would help to ensure security and peace of mind for the users. So I think that it's a whole host of advantages that we are actually bringing to the developers. And we hope that would actually be much more appealing than just an app store, leaving a whole bunch of games for people to choose from. And of course, I think bringing to bear is actually our very strong expertise in choosing games and defining the high quality games to be put onto the platform so that the users will not be lost in the myriad of games, but really would be able to enjoy the games, a very high quality games along with their friends. Got it. That's very helpful. And then just a quick follow-up on the performance fees advertising side. Could you talk a little bit about the contribution of this segment to your overall advertising revenues? And then have you opened up the inventory to more industries recently? Yes. So in terms of contribution, we're gratified that advertisers like the products. And as a result of the advertiser demand, it's the biggest contributor to the year on year growth for our overall online advertising business. Now in terms of expanding over time, we've been progressively making it available to more advertiser categories. But at the same time, and probably more important in the last several months, We've also been taking what was originally a product that was, serving ads on Qzone and Pungo, our social properties and now also enabling it to server ads across the broad range of our other properties. And what we discover is as long as the users are logged in, which in most cases on platform they are logged in most of the time, then the Guangdian Tong targeted advertising solution can target and deliver ads very effective for the advertisers. Your next question comes from Alicia Yap from Barclays. Please ask question. Questions. My first question is also related to mobile games. So when you comment that your mobile games is 50% year over year growth. I wanted to get some clarity on this. What is the main revenue source? Is this come from the per download fees or the item buying within the certain games? And where are the main channels that gamers get the game? And how should we think about the growth trend for the mobile games once you bring in the social games into like the VChat platform? Yeah. Well, this, set of mobile games, I would say, is really the But if you want to call it is that the first run of our mobile game offerings. And these are sort of some of them are quite vintage oriented. So there's a mixture of download games and WAP games as well as some client games. But by and large, these are not sort of new These are not the connected online client oriented games. So what we are building for the online game platform, that's what mobile platform is really sort of new focused on the smartphones. If you look at the existing mobile game, some of them actually are not run on smartphones and some of them sort of run on the feature phones. So I would say sort of this is a little bit more sort of the vintage mobile games revenue. And what we're trying to roll out is actually one that's suited for the new smartphone based era. Very helpful. And then my second question is on your new advertising platform for the Tencent micro block. So can you elaborate a little bit further? Because any specific category of the advertiser that you plan to target in the beginning? And then related to that, what are some of the reasons that trigger the company to decide to start introducing the advertising into microblog? Because I think if I remember correctly, I believe from previously management comment that you guys are actually thinking about integrating the micro brook service to JET and may not have any plans for monetizing? Thank you. [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Alicia, I'd say we're still in a relatively, experiment early stage in terms of advertising on microblog, you know, it's much smaller for us than advertising on social networks and we think you'll would be smaller in the long run as well because we feel the social networks are a more powerful advertising medium for our advertisers, but it's something that we felt that we could make available to advertisers with which if we control it properly, won't negatively impact our use But at this point, we'll respond to advertising demand and we'll build it at a 30 kind of measured conservative pace. I see. All right. Great. Thank you. Your next question comes from Catherine Ng from Eurey. Please ask the question. Hi. Just a follow-up, but I guess on the previous question in terms of the smartphone focus mobile game platform. Can you comment on how we expect duration users versus, say, through the mobile QQ versus the mobile Q zone users? To access your mobile games? Do you expect sort of different dynamics and sort of have different games that are targeted at these different demographics 6? Thank you. I think from a gaming perspective, there should be sort of relatively similar, but I think new, different people have different social circles they want to play games with. So I think that's primarily the the difference. And we're going to make the games available on all the platforms. And I think over time, we would tell whether some games are more suited for some platforms. But I think it doesn't prevent us from making the games actually available to all the platforms, at this stage. And I guess maybe another follow-up to this. I mean, globally, we've clearly seen sort of very successful mobile gains that are sort of generating revenue run rates of about $1,000,000,000. Do you feel that for such a game to exist in the Chinese market? Is are there sort of clear titles or clear templates of what types of games could succeed? Or you think this is probably more of sort of a natural evolution as game players become more sophisticated? Yeah, I think it's really early stage in terms of, the development of the mobile game industry. Obviously, there are very successful mobile games, but these are sort of some of the games are a little bit like sort of very successful single download or console games, right? They're not sort of even played socially. And there and then sort of, there are very successful social games. And then there are also very successful or becoming quite successful, more sophisticated and heavy experience type of online mobile games. So I think over time, the mobile game industry would actually go through a similar evolution as sort of the entire gaming industry, but maybe sort of within a more compressed time spent. Means that you have console game, single player game and then sort of you have social game then you start to have sort of the more professional and more heavier experience type of games and then sort of new all of them, so that we have a certain part of the market. But I think what we see that the mobile games is actually sort of an addition to the existing gaming industry, which now, it's a very heavy experience, a lot of entertainment value, a lot of production value on PCs and mobile games actually sort of allow people to play games and get entertained in fragmented time on their cell phones. I think that's one. 2 is we do feel excited when you have everybody sort of carrying a game machine in their pocket, right? That creates quite a bit of potential And I think that's sort of where we see it right now. Your next question comes from Cynthia Meng from Jefferies. Please ask the question. Thank you management. I have two questions. One is on the e commerce side. Assuming economy of scale, a benefit to continue. Can management give some more color on what the optimal gross margin we should be looking for in the future? And, in light of Alibaba's deal with SINA, they're getting access to Weibo's user data. What is the strategy, at $0.10 to get a bigger piece of the, the e commerce market? That's my first question. Well, in terms of gross margin, I think, there are a number of different determinates, right? One is sort of in your product mix, what exactly are you selling? We're clearly seeing consumer electronics is actually sort of one of the lowest margin in the entire industry. But over time, if we can add sort of more appliances and white goods that actually sort of can increase the margin over time, if we sort of add other products, they would carry different types of margins. So it's driven a little bit by sort of product mix, but more likely, some of the new categories that we add, we carry slightly higher gross margin than sort of new consumer electronics are commanding right now. 2 is actually, it depends on the open platform, the scale of the open platform because the open platform is really sort of an agent model in the sense that you don't actually both the merchandise GMV revenue, right? So basically, it's close to 100% gross margin business. And the higher open platform GMV that we can generate over time, I'm not saying sort of new, it's soon. But over time, if we have more users and we can actually connect our Yixin plan form with our pipeline open platform, then we'll have more open platform type of revenue and that would actually increase gross margin. Okay, thank you. My second question is on the video side. We see increasing consolidation on the online video market with by those recent acquisition of PPS, how would Tencent be positioning itself in that business would Tencent be also considering to buy, consolidation or will you consider to continue the existing sales build strategy in OIB deal? We've seen very rapid traffic growth by building organically and that in turn is fed to relatively rapid revenue growth. I mentioned our revenue slightly more than doubled year on year in first quarter from online video. I think that when we look at the assets we bring to bear in terms of our traffic in terms of our relationship with our use in terms of our backend infrastructure, then, we feel that the platform we have today is a sufficient platform to get us to where we want to be in the industry. As you mentioned, there have been some transactions in the industry recently. And I think specifically there's a situation where a web based service acquired a client based service. We think that's extremely sensible. We've has been of the view that running the web based service and the client based service together is optimal because the web based service maximizes reach the client based service maximized user loyalty and the client based service has lower costs for certain types of content distribution. So we ourselves already have both web solution and a client solution within our QQ video business. And so we already have both those assets organically. Thank you, James. One last question on the global expansion strategy. How many users of WeChat do we have overseas? We read something like 40,000,000. I just want to confirm with management that this is the case. And given that line and some other social networks has been posting impressive growth globally, but we want to just want to get some more color from management. Do you have any insights into taking WeChat into a global expense global offer. And also when you are ready to launch mobile game with the this aspect be a part of the mobile game, growth? We confirm, we have said, we have than 40,000,000 users outside of China. And it has grown quite rapidly, and we'll continue to build on that user base. And at this point in time, the focus is really user base, when models are actually sort of fully tested out in China, we may actually bring it to the WeChat platform. But that's the next stage. Thank you. Thank you. Next question. Your next question comes from Chi Singh from HSBC. Please ask the question. Evening. Thanks for taking my question. I had a couple of questions regarding WeChat. I was wondering if you can give us an update on where you are regarding the commercial negotiations with the carriers as it relates to WeChat. And if you can help us understand what might be a win win situation between you and the carriers? What there, I don't think there is so to speak a commercial negotiation. I think what we, what we see with WeChat is actually to WeChat, as Weixin for China, right, as well as other internet services are actually sort of your the same boat, which is the availability of these services actually allow carriers to build out their data business, which has been sort of going very nicely. And we felt that over time, for operators, the win win situation at the very least is that the availability of internet services would drive a much wider uptick of data packages as well as sort of upgrade of data packages into higher ARPU type of situations. If you look at sort of China Unicom, their 2T ARPU is actually in the 30s, whereas their 3G ARPU is actually in the 80s. So very clearly when you actually sort of can do many more things with your handset with your smartphones, users are willing to pay for a higher access charge. And I think that's sort of fundamentally a win win situation. We are also looking at additional commercial cooperation with carriers, but that's sort of more, usual thing that we have been doing ever since we have our MVAS services. And on a particular technical issue in the sense that the internet services maybe using up the signaling capacity of of mobile networks, particularly with respect to 2G and 2.5G networks, we have actually established dedicated task force to work with the operators to try to optimize on that from a technical perspective. Great. And my my second question is, I'm looking at sort of the stock buyback. You folks have been very aggressive. I mean, last year, you only repurchased $25,000,000 in stock. And I was wondering if you're seeing this as a strategic decision to return more cash to shareholders? Are you seeing this as more sort of opportunistic? Thank you. Well, the way we look at it is actually our fundamental business is actually sort of new, quite cash generative. And at the same time of the years, we have actually built out a pretty sizable cash war chest. So I think fundamentally, right? We would be more inclined to to do share buyback as the time and opportunity arise to to act as a way to return cash to the shareholders. We do pay a very consistently growing dividend in addition to that. And then we would be also using share buyback as a way to return our cash to the shareholders. The next question comes from from Morgan Stanley. Please ask the question. Hi, thank you very much for taking my questions. I have two questions in my name. The first question is on E Commerce. Some of your competitors are now stepping up in terms of logistics. For example, offering up to 4 deliveries per day in Beijing. Is this something that you're going to match? If so, how should we think about the impact on your margin? Yes, I think we have been sort of the market leader in terms of providing need deliveries. And we will continue to do that. Now whether it's 3 or 4 or 5 I think at some point in time, so that there is a marginal diminishing marginal return. And what we want to make sure is actually sort of near have the infrastructure and sort of the logistics expertise to make sure that when we make a promise to our consumers that we actually sort of can deliver and at the same time, it's actually delivered in a high quality way. So, we would continue to improve our logistics infrastructure to try to deliver the best in class services to our users. I think that's our commitment, but I don't think it's unique it's one dimension in the sense of how many deliveries you are making on a day and especially sort of just on an advertising basis. Great. Thank you. My second question is on the WeChat overseas expansion. I'm just curious, what do you see the difference between the overseas uses and Chinese uses on Macy's or WeChat on the, like, sample demographics or user behavior, would you say, demonetization for WeChat overseas going forward with very similar to be said in China? Thank you. I would say, the fundamental usage is actually sort of quite the same, right? Because essentially you have a very rich communication experience with multimedia oriented, you can engage in group discussion. And within WeChat, we also that you have a number of pretty fun, and, social oriented functions. Like look around, like new moments. So I think your fundamental is that new people are using the same features and it's resolving, it's addressing sort of the same user needs. But in terms of each market, I think the the cultural aspect is actually quite different. In some countries, it's actually sort of new people are more using sort of the push to talk function in some cases, people sort of like to look around more. In some cases, people actually like to share pictures through the moment. So, we actually sort of need to cater to each one these markets when we do marketing, when we do sort of feature promotions. And when we talk to the U. Right? In some cases, the people are using mostly, Android. In some cases, actually, so the people are mostly Blackberry as the accessing device. So each market is different and we try to be as local as possible when we actually go to these international markets. That's very helpful. Next question please. The next question comes from Piyush Mubayi from Goldman Sachs. Please ask questions. Thank you. I have two questions. First, could you talk through your quarter to date performance of blade and soul in closed beta? And the second is with regards to WeChat when you go abroad. You've talked about 40,000,000 subs. Is there any color you could give us in which markets you're present first? And second, What is the scale requirement for operating in certain of these markets? Well, for Bladen, so I think we're continuing, the process of the closed beta. And I think they're just like, what we do in any closed beta and we try to keep on improving on the user experience. And we're not going to launch the game until we feel that new user brings up to a certain standard, especially for blade and so which is a very important title within our game pipe line. So it's progressing in that direction. In terms of WeChat, we at this point in time, it's fair to say we are quite strong in South Asian countries. So if you look at New Indonesia, Malaysia, Singapore, and those places, there are a lot of such users Obviously, from China extending to sort of Greater China, we have quite a large number of users Hong Kong and Taiwan. So I think that's sort of the areas. And then sort of around the world, we actually sort of have pockets of users in different countries. I think you can actually check up on the App Store even on UAE, for example, we are pretty high in terms of the App Store ranking. And related to Weixin, could you give us your last a registered number, please, in China. I realize that's less relevant than you mentioned. Well, I think we have move to a more relevant number, which is sort of the monthly active users. I think that's probably more relevant from determining sort of how many people are an active perspective. All right. In that case, could I you for related to the 14,000,000 registered users outside China. What is the MAU? We don't separately disclose that. We have combined number at this point in time, which is 194,000,000. The next question comes from bhongsha from Macquarie. Please ask the question. Hello. Can you hear me okay? Yes. We can. Okay. Hi. Good evening. Thank you so much for taking my questions. First question, I want to follow-up on your e commerce business. The e commerce gross margins have been somewhat volatile last couple quarters. I was wondering in the most recent quarter, was there any kind of one time item in it? Was sort of mid single digit is a sustainable level going forward. And also, I think Martin earlier mentioned, at a certain stage, you're going to expand on your open platform sort of, segment within the e commerce. I was wondering, do you have, your mind or timing your mind when you really push hard in the platform segment or the business in addition to the principle base So that's my first question on e commerce. Yes. I think in terms of the gross margin of e commerce, it grew initially from 3% to 4% to about 9% last quarter. As we have won in the last quarter, I think conference call that it was due to some sort of high margin, low tier type of items being promoted during that period. And we also said that that 9% would decrease over medium term or perhaps, you know, we'll even go down within 1 or 2 quarters. And this quarter, we also have some sort of special items in there. But just as you understand, the in terms of e commerce, the 1st quarter should be considered to be a less strong season. So, that the impact of those items are less than what we had, you know, in quarter 4. Yes. In terms of open platform, I think, Neil, we would gradually sort of ramp it up, I think there are a couple of things that needs to be done. One is from system integration perspective, we need to integrate the open platform system with the B2C system so that users can actually navigate through the 2 systems very smoothly. Secondly, we want to cultivate grades. We want to select the right, merchants from our existing open platform sort of near and bring onto our open platform that's sort of more tied in with the B2C because we want to make sure that the usage experience and the service level of these merchants up to a certain standard so that it will continue our very good product review of our existing B2C business. So that will be a gradual process. But if if we can find more, very qualified merchants, that process can run faster, if our system integration goes more smoothly process can go more to go faster. My second question is, Rita, just a clarification on your on a mobile platform earlier. Lots of questions have been asked on your mobile platform. I would just want to clarify when you meant a mobile platform, you have different games and third party games and apps. Do you will you have the same apps in both, for example, QQ Mobile and for Wixin or the the the Google QQ will have slightly different set of apps and games from the sets on Wixin. So if you can clarify that, that would be great. I think initially, we would have, very similar games. Over time, if the platforms very demonstrate sort of very different user, inclination and behavior, maybe sort of there could be different games. But at the present time, they will have very similar gains to start out with. And gentlemen, due to time constraint, we will be taking the line 3 questions. Your next question comes from Thomas Chong from BLCI. Please ask the question. Hi, good evening, everyone. I have two questions about the online games business. The first one is, do you guys see the online games will have the same a good seasonality in second quarter? Or should we expect there are some sort of offsetting effects like expansion packs? My second question is regarding the ARPU for the PC games. Can management give us some color about the ARPU range for MMO as well as, advanced casual games? Thank you. In terms of seasonality, as you know, our game business does some seasonality. We tend to launch more expansion with that to do more marketing activity and to have more user activity as during the first quarter. So that's just a historic pattern if you look back at years past. In terms of ARPU John. Yeah. Up to quarterly ARPU for ACG ranges from 65 to 130 RMB And for MMOG, 145 to 220. I see. Thanks. So, helpful. I will get back to the queue. Thank you. Next question, please. The next question comes from Alex Yao from Deutsche Bank. Please ask the question. Hi, good evening, everyone, and thank you very much for taking my question. My question is on the WeChat gaming strategy. Martin, you mentioned that you believe Chinese mobile gaming market will, experience kind of the similar evolution as the online PC gaming market assuming for your WeChat gaming strategy, you will, you will focus on the more strong monetization revenue oriented hard core gains, initially and then gradually roll out the social connection oriented, you know, social games in the later stage or, be because that that's the trend we have been weakness on the PC gaming market? Thank you. I think we would you try to source good games in all of these categories. If you look at our PC gaming portfolio, we have the largest collection of games within our game platform. And we have meaning casual games and sort of advanced casual games and very heavy sort of MMOGs, right? Yes, I think on the mobile side, we'll try to sort of assemble a broad collection of games. But in terms of the availability, at this point in time, I would say it will be sort of new social games, plus some heavier games. But over time, I think there will be actually sort of more and more heavier experience gains that would come out. Thank you. Your last question comes from Evan Joe from JP Morgan. Please ask the question. Hi, good evening. Thank you for giving my questions. My question is about your online, web game business, because we've seen some recent is on, I think, what being part of the team is, some major studios and distributors platforms called acquired, and some, many web games developers turning to more game. So, we also want to be a major platform hosting a good bunch of web games. So I'd like to see that, did you guys see a growth of the web game segment to kind of slow down compared to previous quarters or, which could you maybe share some of the cars on the trend of ARPU and user numbers on the web page? That would be very helpful. Thank you. I think on the web games, right? It's fair to say, it has experienced 2 years of very rapid growth. And I think as part of it's definitely sort of new slowing down, right? Part of it is just new the law of large numbers and part of it is actually sort of new. The market starts to set you when you have so many web games. And we Indeed, a lot of developers are now sort of branching off to do mobile games as well. So I think Over time, the web game industry, would become, more, I would say, high quality game, oriented at the time when you said that people just slapped together a game within a few months and then loan it out and try to certainly get users for a few months and get pretty high revenue. I think that those days will be sort of gradually gone we would see more and more high quality web games being launched, and I think what we try to position ourselves is actually sort of the open platform that actually can embrace all these high quality games. And I think we'll try to use that same strategy for the mobile game platform as well. We have now reached the end of the question and the session. Ms. Tunc, please begin your closing remarks. Thank you, operator. We're running on the call now. If you wish to check our press release and our financials to session. Please visit our website at www.content.com/ir. We also posted a replay of this webcast on shortly. Thank you and see you next quarter. That does conclude our conference for today. Thank you for participating Tencent Holdings Limited. 20 Trenton First Quarter Results Announcement Conference Call. You may all disconnect now.