Earnings Call: Q4 2012

Mar 20, 2013

Ladies and gentlemen, thank you for standing by, and welcome to the Tencent Holdings Limited 2012 4th Quarter and Annual Results Announcement Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer questions. Or hash key. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chang. Thank you, operator. Good evening. Welcome to our annual results conference call for 2012. I'm Catherine Chang from the IRO team of President. Before we start presentation, we would like to remind you that it includes forward looking statements, which are underlined by a number of risks and uncertainties and may not be realized in future for various reasons. Information about general market conditions is coming from a variety of sources outside of Sunfarms. This presentation also contains some unaudited non GAAP financial measures, that should be considered in addition to, but not as a 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 and available on www.comtincen.com/ well. Having said that, let me introduce the management team today on the call. They are our Chairman and CEO, Punemal, President Martin Lau, Chief Strategy Officer, James Mitchell and CFO, John Lowe. Tony will kick off of a short overview of the financials and platforms update. Martin will discuss our mobile Internet strategy. James will review our business performance and John Wiggles through the financials. We'll open the floor for questions. Now, let me turn the call over to Pony. Thank you, Catherine. Good evening, everyone. You for joining us. We are pleased to report another year of solid growth in revenues and earnings. And let me quickly run through these numbers for you. For the fourth quarter of 2012, total revenue was RMB0.2 billion RMB up 53% year on year and 5% quarter on quarter. IVR's revenue was RMB8.5 billion, up 32% year on year and 1% quarter on quarter. AMVAS revenue was RMB934 million, up 9% year on year or down 1% quarter on quarter. Online advertising revenue was RMB947 1,000,000 in the up 58% year on year or down 7% quarter on quarter. E commerce transactions revenue was rmb 1,700,000,000, up 48% year on year, quarter on quarter. Non GAAP operating profit was RMB4.3 billion, up 23 year on year or down 3 percent quarter on quarter. Non GAAP net profit attributable to shareholders was RMB4.1 billion, up 40% year on year and 15% quarter on quarter. For the full year of 2012, total revenue was rmb 43,900,000,000, up 54% from 2011. IVR's revenue was RMB32.00 billion, up 39% year on year. AmbAS revenue was RMB3.7 billion, up 14% year on year. Online advertising revenue was RMB3.4 billion, up 70% year on year. E commerce transactions revenue RMB4.4 billion. Non GAAP operating profit was RMB17.1 1,000,000,000, up 29% year on year. Non GAAP profit attributable to shareholders was RMB14.3 billion, up 31% year on year. During 2012, we made the essential achievement in 5 key areas that cemented our existing leadership and enhanced our competitive position in the evolving internet space. First, we reinforces our social leader shipped via wireless QQ and Wixin. We built a vibrant ecosystem through our open platform. Bringing value to consumers and developers. And our WeChat app has begun to expand internationally in key Asian markets. 2nd, we expanded our market leadership from client games to browser web games. We believe our game publishing platform, makes us the preferred partner for domestic and international developers. And our game user base is growing internationally. 3rd, we emerged as the largest display advertising platform in China by revenue. 2 new engines contributing to our above industry growth, namely targeted ads on our social networks, and display ads on our video platform. 4th, we grew e commerce transaction volume and revenues substantially as we expanded coverage from Eastern to Southern China. 5th, we made significant investments in technology and infrastructure. Our mobile security saw software, mobile manager, registered over 140,000,000 activate users on smartphones. We developed a sophisticated called computing infrastructure, which supports our open platform partners. And we pioneered China's first street view mapping service, which we will integrate with the other location based services. I will now give you an update on our platforms, which underpinned the strong performance of our operations and financials. For communications, QQIA monthly active user increased 11% year on year to RMB798 1,000,000 and PCU increased 16% year on year to RMB176 1,000,000. Our smartphone basis, social communication service, we think achieved 300,000,000 registered user accounts with 119,000,000 MAUs globally. For social networks, Qzone monthly active user accounts grew 9% year on year to 603 1,000,000 and Changyou MAU grew 22% year on year to RMB247 1,000,000. Looking at our media portfolio, QQPA can further gain media in June and enhance its a lead position as the most popular portal in China. We expanded our vertical channels such as news and finance to smartphone apps. Our video platform ranked number 2 in China, outpacing our peers in terms of growth in MU video deals. Tens and microblog registered 87,000,000 DAU at year end. On Q2 campaign platform, PCU grew 5% year on year to 8,800,000. On wireless, our mobile security and browser products achieved significant scale during the year. 2012 was a year of challenging and a change, during which Tencent sharpened its focus on mobile internet experiences. We made significant investments in products and marketing to build our mobile user base and to rapidly at our existing leadership on PC, which will better position us to capture the emerging business opportunities. I will now invite Martin to give you an update on our mobile internet strategy. Thank you, Paul here, and good morning, good evening, everybody. I'm going to get our a bit more on our mobile internet positioning as part of this strategic highlight As we all know, the mobile internet is really transforming our industry, but the pace of change actually varies by the different segments within the industry I'd like to share on this chart three insights we observed from our own operations, which were also reflected in market data. First of all, Instant messaging is the most popular online activity among mobile internet users in China, and that's followed by search. 2nd, while consumption of digital content such as games and videos is growing on mobile platform, penetration rates are still lower than I am in search as quite a number of consumers. We still prefer a larger screen and more immersive experience for media consumption. Thirdly, e commerce is growing rapidly on mobile from a very low base, which represents opportunities for the longer term future. Now in this context, I would like to introduce our application portfolio and, we believe it's actually well positioned for the future. First of all, we believe that most smartphone users interact most often with communications and social apps. Our communications apps, wireless, QQ and Weixin are most pervasive apps and also we believe the most pervasive apps in the entire market, each with daily active users in the neighborhood of 100,000,000. Our social network app mobile Qzone has over 50,000,000 daily active users. 2nd, in China, many smartphone users installed utility tools to customize and hand performance of the mobile devices. Our mobile browser app and our online security app, mobile manager, each exceed 20,000,000 in terms of daily active users. Thirdly, in addition to communications and utility needs, smartphone users also consume content and different consumers have different content requirements, any single content that tends to have less of the reach of a social or utility ad. Nonetheless, we're very pleased to operate several popular vertical specific applications such as our Kiki Music, Kiki Games, Tenson microblock and Tencent news, each with multimillion of daily active users. Because of the popularity of our mobile apps, we see mobile internet as providing $0.10 with a number of opportunities over time. Now first of all, mobile apps expand our communications platform reach. Wireless QQ caters to the same China user base, HomeQQ served on the desktop as they moved onto the mobile platform, whereas Weixin brings us high end smartphone users in China who might not have been frequent users QQ chat service in the past. And WeChat is starting to reach users outside of mainland China. Secondly, apps enable us to build a mobile ecosystem around digital content, just as on the desktop, we're in the early stages of leveraging social leadership to provide users with an enhanced experience in adjacent areas such as games, membership subscriptions, news, music, and video content on the smartphone platform. Thirdly, apps allowed us extend our presence to utility tools. Tencent was a latecomer in online security and browser services on PC. But a much stronger player now in mobile security and browser. And finally, we can use apps over the longer term to explore mobile specific user experiences such as offline to online services as well as location based services. Having talked about the opportunities, we also need to recognize that mobile internet is also highly disruptive and also bring several challenges to both the industry at large and to Tencent specifically. Now first of all, limited advertising monetization for the moment on, mobile platform right now. On the small mobile screen, we need to balance creating advertiser inventory versus protecting user experience and also the bandwidth actually cost something to the users. 2nd, intense competition in the market the mobile internet landscape is fragmented and evolving. Apps, which can fulfill the evolving needs of users, we'll be able to break out. So we need to be on our toes. Thirdly, high marketing costs, needs to be incurred during the land grab phase. But despite the disruptions and challenges, we are committed to invest aggressively in products and marketing to build our user base on the smartphone platform. As users as we serve, are spending increasing amount of time on smartphones. And as we are excited about the opportunities over the us to James to talk about a business review and outlook. Thank you, Martin, and good evening. In 2012, our total revenue grew 54% year on year as we sustain growth from games, open platform applications and advertising while broadening our revenue base to enhance commerce. For the fourth quarter, our total revenue grew 63% year on year with gains representing just under half high revenue, community and open platforms 20% e commerce 14% and mobile apps and online advertising 8% each. Excluding the new e commerce segment, our quarterly revenue grew 32 percent year on year. I'll now talk you through some of the Matrix business segments. Starting with the IVAS segment revenue RMB8.5 billion, up 32% year on year, 1% quarter on quarter. Within which online game revenue was 1,000,000,000, up 34% year on year and stable quarter on quarter. New games, better monetization of existing tie sales and revenue from international markets drove the year on year growth. The stable quarter on quarter performance reflected growth from international markets and new game contributions offset by weak seasonality in China and by several of our major game teams focusing on enhancing the core products and future expansion packs. Community And Open Platform revenue was rmb 2,500,000,000, up 27% year on year and 3% quarter on quarter. In app item sales on our open platform and QQ membership subscriptions contributed to both the year on year in the quarter on quarter growth. And for the full year, IVAS revenue increased 39%. Taking a closer look at community and open platforms, Qzone MAUs grew 9 year on year, and Pangyo's increased 22%. In December, we relaunched our mobile Qzone app for smartphones and its rapidly exceeded 50,000,000 DAUs. Weixin has achieved 300,000,000 user accounts globally with over 190,000,000 MAUs. We believe the product's popularity increases mobile users propensity to consume 3gdata and, therefore, to subscribe to the carrier's monthly data plans. Creating 7% year on year and daily posts increased 54% year on year. As we expect user activity growth to decelerate, we're exploring ways to better grade Tencent microbulk and Weixin in order to enhance user interaction across both platforms. Our open platform is the largest in China generated gross revenue of over RMB 2,000,000,000 for 3rd party developers since its launch. 3rd party apps MAUs exceeded 1012 as we added more non game apps and as the variety of games broadened out. To help non game app developers monetize better, we're starting to include their ad in in our Guangdian Tongue performance ad system. Digging into each category under online games. On the QQ game platform, we're preparing integrate the desktop game open platform with our mobile game platform in order to provide a unified product experience. Combined PCU increased 5% year on year and decreased 6% quarter on quarter due to seasonality. Combined ACU was stable year on year to 2% quarter on quarter. In advanced casual games, combined PCU and ACU grew over 40% year on year, primarily due to our in house titles. League of Legends expanded its global franchise recently exceeding 5,000,000 peak concurrent users. Quarter to quarter, ACU and PCU dipped due to seasonality and due to some of our internal teams refocusing on future expansion packs and content rather than on near term monetization. ARPU within each game generally increased year on year. For MMOs, we launched 4 new games during the year, then during the quarter, combined ACU increased 31% year on year contribution offset negative seasonality. Moving on to MVAS. Segment revenue was rmb 934,000,000 up 9% year on year, down 1% sequentially. The year on year growth was driven by mobile games and bundled subscription packages the quarter on quarter drop grew 14%. Martin has discussed our mobile internet investments. For certain key services, including QQ, Qzone and games, we did directly managed to the mobile versions of these products separately from PC versions. We're now realigning product development and management of these services so as to deliver a unified user experience across both PC and smartphone platforms. In addition, for financial reporting purposes. We're going to recast by mobile vast revenue into the appropriate category starting the first quarter of 2013, practice, this means we'll be moving our mobile games revenue into online games and our mobile subscriptions for revenue into community value added services. Our mobile advertising and mobile e commerce revenue are already reported in the online advertising and e commerce categories, respectively. We believe these changes business segment revenue was rmb 947,000,000 in the quarter, up 58% year on year, down 7% quarter on quarter. Display advertising was R823 million dollars, up 54% year on year, down 10% quarter on quarter, and Search revenue was rmb 124,000,000, up 92% year on year and up 20% quarter on quarter. For the full year, advertising revenue grew 17 Within brand display, we delivered healthy year on year growth despite the challenging macro environment. Revenue declined quarter on quarter due to negative seasonality and also to the absence of Olympics related advertising, which boosted our 3rd quarter results. Video out revenue grew significantly year on year on increased traffic and higher inventory utilization. Our top 5 brand display ad categories for automobiles, online services, food and beverage, personal care, and real estate. The growth of our regional city portals has helped our presence in State category that we have historically weaker. And performance display, we saw continued quarter on quarter revenue growth for pretty much the same reasons as in previous quarters, basically increased click through rates due to both advertisers and Tencent continually optimizing audience targeting mechanisms. In search, revenue increased year on year quarter on quarter due to increased ad spend from e commerce advertisers and to early contributions from mobile search. Turning finally to e commerce transactions. Segment revenue was rmb 1,700,000,000, up 48% quarter on quarter. Principal revenue increased due to seasonal year end promotions and to new contributions from our recent expansion in Southern China. Agency revenue grew off a small base on higher transaction volumes and on collecting commission fees from more merchants. Given our team's successful progress first in Shanghai and more recently in Southern China, We're now in the process of expanding our principal business footprint further into Beijing and Northern China. And with that, I'll hand over to John. You, James. Good evening. For the fourth quarter of 2012, total revenue was rmb 12,150,000,000, up 53% year on year or 5 percent quarter on quarter. Operating profit was rmb 3,730,000,000, 21% year on year or down 10% quarter on quarter. Net profit was rmb 3,470,000,000 up 36% year on year or 7 percent quarter on quarter. Versus R15 $1,000,000 last quarter. This mainly represented an impairment provision of 250 1,000,000 renminbi made for selected investing companies in the 4th quarter. Income tax expense decreased RMB151 1,000,000 mainly due to a reversal of income tax expense for a subsidiary in China, which for lower corporate income tax rate this quarter, partially offset by higher deferred tax liabilities relating to withholding tax. The effective tax rate for the quarter was 4.2% compared to 18.9% in the last quarter, Profit attributable to shareholders was RMB3.46 million, up 37% year on year or 8% quarter on quarter. For the full year of 2012, total revenue was RMB43.89 billion, an increase of 54 percent from 2011. Operating profit was rmb 15,480,000,000, an increase of 26% year on year. Profit attributable to shareholders was RMB12.73 billion, an increase of 25% year on year. On a non GAAP basis. Operating profit for quarter 4 was rmb 4.32 up 23% year on year or down 3 percent quarter on quarter. Operating margin dipped 2% point to 36%. Net profit attributable to shareholders was RMB 4,070,000,000, up 40% year on year or 15% quarter on quarter. For the full year of 2012, non GAAP operating profit was 17 0.05000000000, up 29% year on year. Non GAAP operating margin was 39% down 7 percentage points from last year. Non GAAP profit attributable to shareholders was 14 point RMB29 1,000,000,000, up 31% year on year. Total cost was RMB5.27 billion for the 4th up 10% quarter on quarter. The sequential trend primarily reflected an increased cost of merchant leasehold, higher bandwidth and server capacity fee, partially offset by lower sharing and content costs as a percentage of revenues. Total cups increased by 2 percentage points to 43%. IVAS gross margin and MVAS gross margin were bodies stable at 67% 59% respectively. Gross margin for I advertising decreased 1 percentage point to 49%, mainly due to lower revenue generated during which season and increase in bandwidth and service custody fees, partially offset by the absence of Olympics related content costs. Gross margin for e commerce increased 5 percentage points to 9%, mainly due to contribution from certain seasonal high margin products. Otherwise, gross margin would be around last quarter's levels. For the full year of 2012, gross margin ratios for IBAS was stable at 67% and by 1 percentage point to 61% online advertising big line from 60% to 49% due to the reclassification of a significant portion of video content costs from IVAS to owner advertising since fourth quarter 2011. Moving on to operating expenses for the fourth quarter. Selling and marketing expenses was rmb 1,090,000,000, up 34% quarter on quarter. Just mainly reflected seasonal e commerce promotional activities, online gains, marketing as well as marketing to promote WeChat in Asian markets. Partly offset by reducing marketing expense for our online medium platform post logistics. It represents 9% of quarterly revenue compared to 7% last quarter. G and A expenses was rmb2.12 billion, up 5% quarter on quarter. This primarily reflected increase in staff force and administrative expenses with business mentioned, it represented 17 percent of quarterly revenue compared to 'eighteen last quarter. Under G And A, research and development expenses was RMB1.08 billion, down 4% quarter on quarter as we true up employee's year end bonus. It represented 51% of G And A or 9% of quarterly revenue. On a full year basis, Selling and marketing costs was RMB2.99 billion, up 56% over 2011 and represented 7% of annual revenue. G and A was RMB 7,770,000,000, up 47% year on year and represented 18% of annual revenue and the expenses was rmb 4,180,000,000, up 56% over 20 11 and represents a 10% of annual revenue. As at quarter end, we had over 24,000 employees, up 3% quarter on quarter or 38% over 2011. Let's look at margin ratios for quarter 4. Gross margin decreased 2 percentage points to 56.6 percent excluding e commerce revenue and comps gross margin was 64.3%. Non GAAP operating margin was 35.5 percent, down from 38.4 percent last quarter. Excluding e commerce revenue and comps, it would be 39.9%. Non GAAP net margin was 33.7 percent, up from 31% last quarter, excluding e commerce revenue and comps, it would be 0.7%. During the 4th quarter, we did not buy back any shares for the full year we repurchased about 150,000 shares for approximately HKD 25,000,000. The total number of shares out ending at year end was RMB1.85 billion. For 2012, basic EPS was RMB6.965 billion, and diluted EPS was 6.833, both increased roughly 24% from last year. Non GAAP basic EPS was 7.816 RMB and diluted EPS was 7.667 RMB both increased by 30% from last year, subject to the approval of shareholders at the annual general meeting to be held on 15th May, we are proposing an annual dividend of 1 Hong Kong dollar per share, which is 33% higher than last year. The final dividend will be payable on 30th May 2013. We will provide you a few key financial numbers for your reference. Total CapEx for the quarter was RMB1.78 billion, up 58% quarter on quarter. Operating CapEx was RMB590 1,000,000, down 40% quarter on quarter as we purchased fewer service in the quarter. Non operating CapEx was rmb 1,190,000,000, a slight jump from last quarter as we acquired new office spaces managed rights to support future business things. Share based compensation for the quarter was RMB303 1,000,000 2% of revenue. Free cash flow for the quarter amounted to RMB4.35 billion, up 42% from 2011 and free cash flow for the year amounted to RMB15.2 billion, up six fee 7% year on year. Our net cash position at year end remained strong at RMB27.4 billion, up 55% from 2011. Total debt to adjusted EBITDA for 2012 was 0.58x compared to 0.84x for 20 11. This concludes our presentation. Thank you. We will now begin the question and answer session. Session. Your first question comes from Digweh from JP Morgan. Please ask your question. Hi, thank you very much for taking my questions. I have a question on the games. Side of the business. Can you give more color on the dynamics for the game revenue for 2013? Maybe some of the current trend for the games such as DNF and cost fire, the pipeline for this year and also maybe some of the casual game impact for mobile transition? Thank you. Well, it's a very broad question, Dick. I think if you look at the games that we have, we actually have a pretty healthy portfolio of games. I would say. In the sense that we have a very strong casual game platform which sort of has diversified into a web game platform. And that has been quite successful. We have been able to make lead of legends a very successful game in the Advanced Casual game category, while crossfire as a very large FPS platform continues to graduate growth in terms of revenue. And, on the MMOG side, the DNS definitely is quite strong, but at the same time, we also have been able to complement that with our self developed game Elon the legend of Yilong as well as the legend of Sheerli Yang. So these are 2 in house developed games, which have achieved quite good results. So we continue to say in the gaming sector, I mean, especially sort of new in this PC gaming sector, we are actually well positioned. We have been able to builds a very diversified portfolio that consists of ACGM MoG cash flow games as well as web games. And looking into the future, we felt the important thing is actually for us to be able to capture the new emergent some new genres in this, in this market. And I think we that's why we have been quite active in terms of signing big titles. And you know, very clearly, you can see a blade and so, quarter duty online Visa. In our portfolio. And we are also going to introduce our self developed MMOGs in the course of the next 2 years. So I think that's that's sort of on the client game side. Now in terms of mobile gaming, I think, this is an area of opportunity. I think as we look into the future, as everybody is going to basically carry a smartphone that's, to some extent, equivalent to a game console alongside with them. Walking anywhere. That's actually sort of a good opportunity for us to get onto. Now of course, I think this market takes time to emerge. And so we need to actually build both the platform as well as develop the capability to develop games. As well as build an ecosystem of game developer partners who will work with us both on the open platform as well as a licensed model. So there's a lot of work to be done, but I think as we look into the mobile gaming as a new opportunity, we feel that there are opportunities that we ought to be getting on Great. Thanks Martin. Maybe if you can also share just the ARPU for the various segment? That would be helpful. Thank you. Okay, John. I should give you the outlook. I think in terms of online games for NMOG, it was within 120 to 175 per quarter. And for advanced casual game, it would be to $125 per quarter. In relation to other subscription data, this is just like could you show just slight membership, just like, you know, to soon VIP there or, you know, basically $10.10 per month. Your next question comes from Jin Yoon of Nomura. Please ask your question. Hey, good evening, everyone. Just a couple of questions. First of all, just the big picture structural kind of question that I have is that we're seeing kind of slowdown in the gaming side at the same time or on the PCUs for a lot of the metrics on the PC side. And yet, WeChat is very significantly over the last few quarters. Now you're talking about the paradigm shift going from PC to mobile, but is that also kind of taking away the times share where people are using less applications on the PC because they're spending more time on mobile. Hence, that the is going towards a much, much more lower margin business. Or do you just blame the the recent slowdown the last couple of quarters just on the base effect alone? That's the first question. The second question is just on the gaming side. So just the pure online gaming business, I think, exited the year at 35% year over year growth. Is there any reason to believe that that 35% could reaccelerate next year or should we expect to see a slowdown from that $35,000,000, which will probably bring down margins a little bit more given the fact that's a higher margin I'll stop there. Thanks guys. With regard to the activity on desktop and smart phone. We think for certain behaviors are related, perhaps communications and search, as Martin mentioned in his introductory remarks, that the rate of growth on smartphone of communications activity of search activity, it likely means that there is some incremental contribution, but also some substitution. With regard to games, we think that there's a relatively more incremental and relatively less substitution If an internet user enjoys going online and playing a shooting game against their friends, he generally enjoys doing it on a big screen in an immersive environment with a very powerful process. And we haven't seen a first person shooter games as an example or a battle arena games like urgent take off on the mobile phone at this stage. And I think that's sort of reflected in the fact that, if you look at our game metrics, then Lead of Legends is now 5,000,000 concurrent users globally, which is a big number for a PC game. So that's with regards to the time spent. With regards to the revenue outlook, as you know, we really don't give guidance for for revenue. The one thing I'd say is that I think the game revenue you quoted was our game revenue within the segment, but historically disclosed this game. And that's primarily desktop client games. We also, we think China's biggest web game publisher through our open platform, and that's reflected in community and open platforms. And we also think we're China's biggest mobile game publisher by revenue share and that historically being reflected in our mobile games. So there's different segments of games. And if desktop client games are growing slower, we think that that they're still growing And meanwhile, that the mobile games and the web games that are feeding in, and to some extent, incrementals for that desktop client growth. Yes, I also wanted to emphasize that we tend to look at our business from a longer term perspective. And, in terms of sort of the interim period where as their hurdles in terms of monetization, their sort of hurdles in terms of payment and sort of the platforms are not yet and sort of near the games. The popular games have not really emerged yet on mobile platform. I think these are things which are of the interim. And even sort of on the PC side, right? If there's a period where there are no blockbusters, then the entire industry is will suffer it. But I think our job is actually to be able to sort of find the right games so that people would enjoy and that would actually sort of help to expand the industry as a whole. And if we look at sort of the entertainment industry at large, right, online game is still the type of entertainment that actually has the lowest, cost per unit time of entertainment. So that so that we look at it as a positive for the entire industry. In the interim, a lot of that industry growth will be determined by whether there is a hit or not. So hopefully that can address your question. Great. Thank you. Thank you very much. Your next question comes from Timothy Chan of Morgan Stanley. Please ask Hi, good evening. Thanks very much for taking my questions. My question actually related to e commerce, firstly, with the e customer sales continue to grow strongly. Would you expect the scale benefits become more apparent and the operating loss of the segment to narrow this year? And secondly, how would your total CapEx this year look like compared to last year as you have announced to strengthen your logistics abilities, capabilities and in the e commerce side. Yes, I think on e commerce, right? Yes, we are encouraged by the fact that the the business volume has actually increased quite significantly. Bear in mind that the fourth quarter is actually a peak season in terms of sort of e commerce promotion. So I think that we try to sort of at that sort of caveat. But I think as a general trend, the business is actually growing. But I think we just have to also recognize that e commerce is such a big market and there is still a big distance between us and some of the bigger players in the market. So I think we I don't think we have reached the kind of scale that we are happy with yet. So, there's still going to be a lot of work to build this business example right now, a few quarters back, this business was mainly sort of Eastern China reentered in the past two quarters, and we have actually built a presence, expanding presence in the Southern part of China. And over time, we still have a bit of an ex a geographic expansion to do. And also sort of right now, most of the volume is actually on the first party business. And over time, we actually need to, enrich our collection merchandise by opening up the platform and invite more third party merchants to provide their products on our platform. So there's still a long way to go. So we are in the very early stage of developing our ecommerce business, but we'll do it step by step. So I think it's too early to talk about sort of profitability see at this point in time, we are very focused on building the business at this point in time. Now in terms of the e commerce capex, right? I think we, as you can see, sort of, from our approach, we actually sort of use a pretty systematic way in terms of approaching geographic expansion. So I don't think we would just pluck in a very big amount of money and say, we're going to be able to warehouses around the country. And at the same time, I think you the actual cost associated with e commerce is really sort of in the delivery in terms of sort of being able to manage the efficiency of that part of the business rather than sort of you put in a very capital expenditure on warehouses. So I think you, it's a long way of saying sort of will be relatively prudent in terms of putting in, e commerce CapEx. Thank you. From Chi Zhang of HSBC. Please ask your question. Good evening. Thank you very much for taking my question. Just a couple of questions. First on in terms of online gaming, you know, League of Legends is obviously doing very well. Can you give us a sense of sort of the contribution from League of Legends and what may be sort of a way to think about it is a percentage of your online gaming revenue that's coming from international, please? Yeah. Unfortunately, we haven't historically disclosed that that number or those percentages, so I apologize for that. Okay. And let me ask you something else then. Just in terms of, you know, WeChat, thanks for giving us sort of the strategic update in terms of throughout the 10 for, you know, WeChat. But I'm wondering what else needs to sort of happen near term before we can actually see a monetization from that platform? And also if we should start expecting some monetization to begin sometime this year. Thank you. Well, I think in terms of the philosophy around monetization, we're not in a rush to monetize So, I think the key thing that we want to see is, 1, we continue to build out which had, platform and basically make sure that the, entire communication and social experience is actually well honed that's actually sort of new offer very high priority on our list. Now in terms of, the trials around monetization, We do believe that if we actually sort of have a very strong Weixin platform, we would be able to monetize over the longer run. Is something that we've learned through our entire QQ experience. And also sort of we have seen other players in other markets who have been able to do that. But having said that, I think we still view user experience as the number one priority. And, as Tony has said recently, we are in the process of designing and game platform for, Weixin and it will be entering into sort of a testing mode in the next few months. But exactly, when we're going to launch it in a full scale commercially, I think that really depends on whether we can achieve the kind of experience that we feel is good for the users. So that will take some time. Thank you. Your next question comes from Eddie Leung of Merrill Lynch. Please ask your question. Good evening. Thank you for taking my questions. Just a couple of quick questions. The first one is about your e commerce gross margins. It increased a bit quarter over quarter in the fall quarter. Could you share more colors on the reasons behind it? Was it because of certain product mix shift or was it mainly because of the proportion your marketplace of revenue are growing up? And then secondly, just a housekeeping question on your IVAS of basis. I understand that from 3rd quarter, you tightened up to the policies for telecommunication subscriptions. So just wondering how long the transitions could take? Thanks. In relation the gross margin for e commerce, they increased significantly in this quarter as a result of seasonal promotional activities for some of the low end products. You can see that the gross margin somewhat like 9% this quarter without just type of promotion, it will become normal with ice, which will be pretty much similar with last quarter. And, yeah, on IVAS, we have actually sort of tightened up the cleanup and that would that will continue, right? So basically, so we take a hit and in terms of, newly ads or in terms of sort of the continued sort of elimination of, certain accounts, which are sort of nonpaying and, which are new, not coming in sort of through the right channel. I think we will continue to do. Thank you very much. Your next question comes from Cynthia Main of Jefferies. Please ask your question. Thank you very much for taking my questions. I have two questions. 1 is on Tencent's online video strategy. Can management give some color on your plan to, invest in content and to how to compete with Tea and also YooQu and Tudo? 2nd question is a follow-up on e commerce. Recently, there was of domestic news reporting on Tencent Management talking about e Commerce. Is it true that management will focus more on principal business, or the platform and marketplace business. Thank you. For the online video, I think there's a short term answer and a longer term answer. The short term answer is we need be competitive in buying content. And I think the good news there is that, during 2012, when several of competitors ready to slow down their content acquisition, we actually, fairly drastically accelerated our content acquisition. So much of the content we kind of locked in during 2012 actually has begun coming on air or will come on air during 2013. So we feel that as we enter 13, our content portfolio on January 1st is much, much stronger than it was on January 1 2012. And we feel we'll continue to invest aggressively in content, but we're starting from a relatively good place in 2013 versus our library entry prior years. The longest term strategy for competing NVIDIA areas, we feel that because of our log in relationship with 100 of millions of users, because of our access to what those users are doing around the web, what they're reading, what music they're listening to, what news they're consuming. And because of our access to our user social graph, we're in really a unique position to figure out what is the content that's most appropriate to our user what is the video is the most suitable for a specific user and then target that content to them. And this is something that we've begun to begun to implement in other areas of $0.10, if you look at Guandi and Tongue on the advertising side, that's an example of us really bringing our targeting technology bear in a way that's sort of unique to Tencent. And we think that we have scope to do the same thing with Video targeting for the longer term. But in the short term, it's really about buying the right content. Yes. In terms of e commerce, right? I think we look at the principal business and the platform business as a complementary to each in order to have a long term sustainable e commerce business, we actually need to have both. Traditionally, we actually sort of had the marketplace platform oriented business first. And it has sort of grown consistently for the many years that we have been operating it. But it never broke out in terms of, user recognition. I think what we are trying to do now is actually using the principal business to create a very distinctive value proposition to the users. And then over time, we're going to compliment that principal business with our open platform, which has been built for a long time. And that would actually contribute one selection to the principal business and 2, it's actually sort of more profitable to be running the platform business. So with the 2, running together, we will have a more complete e commerce business that has scale that has sort of unique positioning and also sort of that can generate a more sustainable financial return. Thank you, Martin. One last question is on the tax rate. Should we still continue to model tax rate at about 15%, 18% or is the blended tax rate going to be much lower this year? For both 2011 2012, the effective tax rate were about 15%. I would estimate that in 2013 without the effect of for a tax, if that gives tax rate would be from 15% to 20%. Okay. Thank you. Thanks, very much. Your next question comes from Alex Yao of Deutsche Bank. Please ask your question. And thank you very much for taking my questions. So this quarter, the gaming revenue was flat to over the previous quarter, we have seen other larger online gaming companies report flattish gaming revenue growth because Lexi game aging and a decline in revenue. So can you guys comment on the life cycle of Dungeon fighter and of course how do you think about the organic growth of these two games in 2013? If we look at entire portfolio, obviously, you guys have a relatively new games such as BigoF Legend and you don't see Tianxin and Changxi gaining a lot of momentum how to how should we think about the, the growth in 2013? Thank you. Yes, I think, you know, for the particular gaming business the sector. I think we actually sort of have explained in our prepared remarks that it was a quarter in which one is seasonally low and 2 is a lot of our expansion packs were in the preparation mode. So it's kind of a flat quarter. Now, as we look at sort of the gaming business, I think we very much look at it as as an entire portfolio. And we, continue to operate some of these long standing games, we believe that these games has got a pretty loyal following of users, and over time, these games, while in the sort of mid-fifty of operation, we'll definitely sort of deepen a stage of very high user growth, right? But over time, some of these games can actually generate slightly higher ARPU over time. So that's the state of the existing games. And if we can sort of have good expansion packs, then that will bring some of the users back. I think that's the dynamics around the existing games. But I think at the same time as we operate these new existing games, and try to bring new excitements to the existing users. We also actually try to come up with new titles, which sort of expand the user base, which can attract new users, right? So that's the reason why we have been signing up potential large titles as well as we have been sort of re developing our own games in the house. And we are also very sensitive to the new trends within the gaming business. And as you can see, sort of, in the past few years, when web game actually sort of became popular, we were able to sort of capture it using our open platform strategy and, as we said, and you'll have established a pretty good, 1st stage fundamentals platform, we are also sort of turning our eyes to the mobile gaming business and try to see whether we can actually capitalize on the growth within the industry. So I think that's sort of how we look at the gaming business as an overall portfolio. Got it. The second question is on the sales and marketing efficiency in 2013. I believe, the WeChat global expansion is part of the priority in this year. So how should we think about the market efficiency? Will you be able to leverage League of Legends global gamer base at all? Or would there be hardly any Tencent asset to leverage in the global market? Yeah. I think, WeChat would be a pretty steady, product, right, from a leveraging perspective. And sort of in terms of levered engines, it's actually sort of operated, a pretty step by the founders of the company. And I don't think a chat service and an exciting mobile game, actually has got a lot of synergies between the 2. Okay. Thank you very much. Thank you. Your next question comes from Kettering Loom of Arete Research. Please ask your question. Hi, good evening. Firstly, I was wondering if you could discuss, any changes in desktop QQ Instant Messaging usage behavior for those QQ users that have started to use Weixin or mobile QQ on smartphones and whether this could affect the dynamics of promoting other businesses. Secondly, if you could comment on the e commerce principal transactions business growth, which I assume is driven by user growth, is the user growth driven by sort of traffic within the Tencent platform? Or are you spending to acquire profit externally. Thank you. Yes. Well, from in terms of desktop QQ users, right? One trend is actually sort of they are using mobile keeps you more. And, you know, a lot of people, you know, having their smartphones and, you know, they, they are using, you know, stop QQ while they are in the office or while they're at home. And then they're using sort of, you know, the mobile queue when they are out of home. So, that's sort of clear dynamics. When they're using it on the PC, then I don't think there's a lot of change in terms of behavior. But to some extent, we actually tends to be able to reach these users more because in the past when they're not in the PC, they're not using QQ service, but now they are using QQ service. Now on Weixin, there's actually a pretty stable overlap of users between information and sort of a lot of these users would be using desktop QQ, mobile QQ and inflation that's a very large proportion of our users. But as I mentioned in the overall social platform. Weixin does help us to address those users who have not been using QQ traditionally. So that's a net add to our total social infrastructure. In terms of the e commerce business, the growth has been sort of both from a growth in terms of users, but also sort of driven by one is sort of just converting more users into or our principal business, but also geographic expansion revenue. When we were only available in the Eastern part of China, then sort of near the address market is only used in part of China. And in that market, we can actually gradually bring up the number of users both through sort of user acquisition through our network as well as sort of retaining those users and getting them to come back. But the real kick actually comes in when we actually sort of start to expand it to South in China then sort of suddenly the addressable market size actually increased. And at this point of time, we are primarily just using our own network as well. We do have a lot of users using our services, on a daily basis, spending a lot of time there. I think the important thing is actually whether we have right service level and the right, type of, timing that, you know, we can actually sort of get to these users and promote our service to them. And and that's something which we are still working on and, you know, for ongoing. Operator, in the interest of time, will we take the last three questions, please? Sure. Your next question comes from Wendy Huang of CIMB. Please ask your question. First, can you maybe clarify one comment you made regarding the game business? Did you just mention that you already biggest, publisher in both mobile game and web games in China. Well, I think in terms of, web games, yes. And it's not the traditional publishing model, but we very much sort of use the open platform, model and sort of invite game developers to put their games on our platform. And then sort of would generate revenue. And from a revenue generated perspective, we believe if we had the largest web game platform in China, Now in terms of mobile games, I think it's a very, new markets relative to sort of emerging. So I I think we have been doing this mobile game for quite a while and we have a pretty big size within the market. But I think whether we are number 1 or not sort of is not that relevant because what we see is over time this market accrual I think the more important thing is actually being able to, be with the platform and do the partnerships so that we can actually we're able to sort of get the new opportunities. That's actually the more important thing. What kind of revenue share are you getting from the mobile game right now? Is it very similar to the global peers? And also, for WeChat, besides mobile game, is there any other business models you're exploring to monetize from the Weixin say advertising or maybe e commerce? Yes. In terms of the revenue share, I think this is something with which, we will, come up with at the time when we actually sort of have the platform. So I prefer not to sort of talk about this point of time, in terms of additional business models, we believe over time, we do want to, you know, explore O2O, offline to online, type of business model, location based, type of services. As well as, location based e commerce, that can actually leverage the unique mobile features of Weixin, and frankly, mobile QQ over time, right? Both of them sort of has got a lot of users using them on a daily basis. So, the same business model can actually apply to both. I think advertising is actually more trickiest for the reasons I talk about it, which is you have a very small screen and advertising when it comes up, you actually sort of consume bandwidth, which in most cases, the users are actually paying for. So I think that would take a longer time to develop and I think we would be, testing out the gaming platform first, but we also sort of need to explore the OTO and location based e commerce type of model, over time. I see. Lastly, maybe, to get more color on your e commerce business, you repeated and mentioned that you're going expand geographic coverage and also to do some investment in the logistic and the fulfillment infrastructure. So can you give us some color, what kind of price are you waiting to pay for those efforts? And also, compared to, other big players in the market, it seems to late mover in those fronts. So how are you going to maybe differentiate yourself from those existing big players in the market it? Thank you. I think with regard to expansion, we put it in the context that we already expanded from Eastern China to Southern China. That's reflected in our P and L cash flow and balance sheet for 2012 and reflected in the seen for 2012. And if we now expand from Southern China into Northern China, then you should be at the sort of continuation of the gradient of investment we've seen in previous quarters. So the whole point was we're not talking about a dramatic changes above and beyond pace of change that we've already experienced. And we've been continually growing the business through the course of 2012. We'll continue continue to grow the business, but we're not talking about sudden transformation. With regards to competitive position, we feel that where, enormous traffic aggregator, I mean, once again, our traffic into somewhat unusual traffic and that it's locked in traffic, it's traffic we can track around net where we have our ability to help users based on their social graph. And a big part of the reason why our e commerce business has grown as quickly as it has during 2012 without substantial external marketing is that as Martin's mentioned, we've been putting to use old ad inventory, our excess resources within our own platform and using those to support our e commerce business. So we believe that we have competitive advantage on the marketing side. We believe that the team who are running our Prince for E Commerce business are an extremely sharp, extremely talented team been done very well, despite a late start. 1st of all, in Eastern China, subsequently in Southern China, and we hope that they can continue to execute well in the future. Yes. I think the other thing is that unlike the marketplace, especially this small business marketplace type of business, which has a very big network effect, right? So in those areas, when you have a first move advantage, you really have that advantage. And that's part of the reason why the fact that we have been growing our pipeline business for a long time, it grow consistently, but not sort of exponentially. But I think if you look at the principal business, there's not as much of a first mover advantage. There's not that much of a network back. So it really depends on how good you are, as you continue to build up the operations and how efficient you are in terms of marketing, how efficient you are, in terms of sourcing and sort of delivering and making sure that sort of your merchandising is great. So I think that's less of a 1st move advantage business. Next question, ask your question. Hi, good evening, everyone. Thanks for taking my questions. My first question is regarding to follow-up on the VChat. Just now Martin mentioned about the location base and O2O business. So we actually understand that we have been testing with some local vendors over the past few months. So can management provide some feedback or traction so far from both the user experience and the vendors and any visibility on when we can actually start to charge some of these vendors. Yes, I think we have to disappoint you in the sense that we take a very long term view on the old opportunity. It's actually sort of a big opportunity the same time, there are a lot of existing hurdles to pass, in terms of the level of IT sophistication of a lot of vendors and lack of standardization of the products and services And the physical limitation on sort of you actually have to be there order to enjoy the service. So I would say sort of it's something of an experiment that we are taking a lot of interest in but it will take quite a long time before we can report back on sort of what are the insights and what exactly needs to be done in order for a business model to be built around it. But based on some very initial feedback of the merchants, right, who are using some of these services, they think it's an interesting way to sort of help them to build a more lasting relationship with their customers, So I think that's sort of based on the feedback of a set of the first sort of adopters of merchant but in order to sort of continue to develop it, we need to sort of build in a lot of new systems and new functionalities within WeChat to do it. And I think it's way too early to talk about revenue opportunities at this point in time. Thank you very much. Hi, thanks for the call. My question is regarding your marketing expenses. You do highlight that this year, you continue to spend a lot of marketing in terms of promoting your new mobile products. Can you give us what would be the marketing trend this year? And also VICHA is expanding into the U. S. And just wondering how you think you can grant market share there and much expenses you're going to invest in that market. Yes, I think in terms of marketing, right? We do see, the mobile products as an important portfolio for us going forward. So I think we would be spending actually quite a bit in terms of fitting. Now exactly how much it is, I think it would depend on a lot of analysis around what's effective and what will be sort of the active at this spending in different segments that we operate. So I think it's hard to give you a quantitative number. But all I have to say is we would want to spend enough in order to to win in those markets. Now, I think for Weichai, at this point of time, it's still mainly addressing sort of the Asian markets. And I think that we would be testing the markets out in developed markets such as the U. S. And Europe. But again, these are markets that we are not very familiar with. So we'll have to take time to figure out. So what's the approach? I don't think it's a matter of sort of just doing a lot of marketing resources and try to see whether it works or not. We need to sort of have I would say more sophisticated plan than that. And it's sort of right now being made. Thank you. I think that's the last question operator, right? Yes, that's right. That's the last question. Ms. Chang, you may begin your very much. Thank you. Thank you very much for joining us on the call. If you wish to check our press release and other financial information, please visit our website on www. Dotcom/aioff. We also build a replay of this webcast on the site shortly. Thank you and see you next quarter. Thank you very much. That does conclude our conference for today. Thank you for participating Tencent Holdings Limited 2012 4th quarter annual results announcement conference call. You may all disconnect now.