Ladies and gentlemen, thank you for standing by and welcome to the Tencent Holdings Limited 2012 fourth 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 session. If you wish to ask a question, you need to press star one on your telephone to join the question queue. Your name will be announced when it is your turn to ask a question. If you wish to cancel your question, please press the pound or hash key. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chan.
Thank you, operator. Good evening. Welcome to our annual results conference call for 2012. I'm Catherine Chan from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and on non-GAAP measures, please refer to our disclosure documents downloadable on www.tencent.com/ir. Having said that, let me introduce the management team today on the call.
They are our Chairman and CEO, Pony Ma, President Martin Lau, Chief Strategy Officer James Mitchell, and CFO John Lo. Pony will kick off with a short overview of the financials and platforms update. Martin will discuss our mobile Internet strategy. James will review our business performance, and John will go through the financials. Then we'll open the floor for questions. Now let me turn the call over to Pony.
Thank you, Catherine. Good evening, everyone. Thank you for joining us. We are pleased to report another year of solid growth in revenues and earnings. Let me quickly run through these numbers for you. For the fourth quarter of 2012, total revenue was RMB 12.2 billion, up 53% year-on-year and 5% quarter-on-quarter. IVAS revenue was RMB 8.5 billion, up 32% year-on-year and 1% quarter-on-quarter. MVAS revenue was RMB 934 million, up 9% year-on-year or down 1% quarter-on-quarter. Online advertising revenue was RMB 947 million, up 58% year-on-year or down 7% quarter-on-quarter. E-commerce transactions revenue was RMB 1.7 billion, up 48% quarter-on-quarter. Non-GAAP operating profit was RMB 4.3 billion, up 23% year-on-year or down 3% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB 4.1 billion, up 40% year-on-year and 15% quarter-on-quarter. For the full year of 2012, total revenue was RMB 43.9 billion, up 54% from 2011. IVAS revenue was RMB 32.0 billion, up 39% year-on-year.
MVAS revenue was CNY 3.7 billion, up 14% year-over-year. Online advertising revenue was CNY 3.4 billion, up 70% year-over-year. E-commerce transactions revenue was CNY 4.4 billion. Non-GAAP operating profit was CNY 17.1 billion, up 29% year-over-year. Non-GAAP profit attributable to shareholders was CNY 14.3 billion, up 31% year-over-year. During 2012, we made substantial achievement in five key areas that cemented our existing leadership and enhanced our competitive position in the evolving Internet space. First, we reinforced our social leadership via wireless QQ and Weixin. We built a vibrant ecosystem through our open platforms, bringing value to consumers and developers. Our WeChat app has begun to expand internationally in key Asian markets. Second, we expanded our market leadership from client games to browser web games. We believe our game publishing platform makes us the privileged partner for domestic and international developers. Our game user base is growing internationally.
Third, we emerged as the largest display advertising platform in China by revenue. Two new engines contributing to our above-industry growth, namely targeted ads on our social networks and display ads on our video platform. Fourth, we grew e-commerce transaction volume and revenue substantially as we expanded coverage from eastern to southern China. Fifth, we made significant investments in technology and infrastructure. Our mobile security software, Tencent Mobile Manager, registered over 140 million activated users on smartphones. We developed a sophisticated cloud computing infrastructure which supports our open platform partners. 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, QQ IM monthly active user accounts increased 11% year-over-year to 798 million, and PCU increased 16% year-over-year to 176 million.
Our smartphone-based social communication service, Weixin, achieved 300 million registered user accounts with 190 million MAUs globally. For social networks, Qzone monthly active user accounts grew 9% year-over-year to 603 million, and Pengyou MAU grew 22% year-over-year to 247 million. Looking at our media portfolio, QQ.com further gained media influence and maintained its 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 two in China, outpacing our peers in terms of growth in MUV video views. Tencent Weibo registered 87 million DAU at year-end. On QQ Games platform, PCU grew 5% year-over-year to 8.8 million. On wireless, our mobile security and browser products achieved significant scale during the year. 2012 was a year of challenge and 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 replicate our existing leadership on PC, which will better position us to capture the emerging business opportunities. I will now invite Martin to give an update on our mobile Internet strategy.
Thank you, Pony, good morning, good evening, everybody. I'm going to give 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 would like to share, on this chart, three insights we observed from our own operations, which were also reflected in market data. First, instant messaging is the most popular online activity among mobile internet users in China, and that's followed by search. Second, while consumption of digital content such as games and videos is growing on mobile platform, penetration rates are still lower than IM and search, as quite a number of consumers may 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. In this context, I would like to introduce our application portfolio, we believe it's actually well-positioned for the future. First, we believe that most smartphone users interact most often with communications and social apps. Our communications apps, Mobile QQ and Weixin, are our most pervasive apps, also, we believe the most pervasive apps in the entire market, each with daily active users in the neighborhood of 100 million. Our social network app, Qzone, has over 50 million daily active users. Second, in China, many smartphone users install utility tools to customize and enhance the performance of their mobile devices. Our mobile browser app and our online security app, Mobile Manager, each exceed 20 million in terms of daily active users.
Thirdly, in addition to communications and utility needs, smartphone users also consume content. As different consumers have different content requirements, any single content app tends to have less of the reach of a social or a utility app. Nonetheless, we're very pleased to operate several popular vertical specific applications such as our QQ Music, QQ Games, Tencent Weibo, and Tencent News, each with multi-million of daily active users. Because of the popularity of our mobile apps, we see mobile internet as providing Tencent with a number of opportunities over time. First, mobile apps expand our communications platform reach. Mobile QQ caters to the same China user base whom QQ 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 of QQ chat service in the past.
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 our social leadership to provide users with enhanced experience in adjacent areas such as games, membership subscriptions, news, music, and video content on the smartphone platform. Thirdly, apps allowed us to 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. 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 brings several challenges to both the industry at large and to Tencent specifically. 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. Second, intense competition in the market. The mobile Internet landscape is fragmented and evolving. Apps which can fulfill the evolving needs of users will be able to break out. We need to be on our toes. Thirdly, high marketing costs needs to be incurred during the land grab phase. 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 observe, are spending increasing amount of time on smartphones, and as we are excited about the opportunities over the long run, as we have described earlier in this section. With that, I will pass to James to talk about business review and outlook.
Thank you, Martin, and good evening. In 2012, our total revenue grew 54% year-on-year, as we sustained growth from games, open platform applications, and advertising, while broadening our revenue base to include e-commerce. For the fourth quarter, our total revenue grew 53% year-on-year, with games representing just under half our revenue, community and open platforms 20%, e-commerce 14%, and MVAS and online advertising 8% each. Excluding the new e-commerce segment, our quarterly revenue grew 32% year-on-year. I'll now talk you through some of the major business segments. Starting with IVAS, segment revenue was CNY 8.5 billion, up 32% year-on-year, and 1% quarter-on-quarter. Within which, online game revenue was CNY 6 billion, up 34% year-on-year and stable quarter-on-quarter. New games, better monetization of existing titles, 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 product and future expansion packs. Community and open platform revenue was CNY 2.5 billion, up 27% year-on-year and 3% quarter-on-quarter. In-app item sales on our open platform and QQ memberships subscriptions contributed to both the year-on-year and the quarter-on-quarter growth. 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 Pengyou's increased 22%. In December, we relaunched our mobile Qzone app for smartphones, and it's rapidly exceeded 50 million DAUs. Weixin has achieved 300 million user accounts globally, with over 190 million MAUs.
We believe the product's popularity increases mobile users' propensity to consume 3G data, and therefore to subscribe to the carrier's monthly data plans, creating a win-win for the industry. In December, we launched a BlackBerry version of Weixin. Our microblog DAUs increased 27% 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 integrate Tencent microblog and Weixin in order to enhance user interaction across both platforms. Our open platform is the largest in China, and it's generated gross revenue of over CNY 2 billion for third-party developers since its launch. Third-party apps MAUs exceeded 200 million in 2012, 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 inventory in our Guangdian Tong performance ad system. Digging into each category under online games.
On the QQ game platform, we're preparing to 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, dipped 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 million 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. During the quarter, combined ACU increased 31% year-on-year and 5% quarter-on-quarter as new title contribution offset negative seasonality.
Moving on to mVAS. Segment revenue was CNY 934 million, 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 was mainly due to our clean up of the inactive bundled SMS subscriptions offsetting growth in mobile games. For the full year, the segment revenue grew 14%. Martin has discussed our mobile Internet investments. For certain key services, including QQ, Qzone, and Games, we historically managed the mobile versions of these products separately from the 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 reclassify mobile VAS revenue into the appropriate categories starting the first quarter of 2013.
In practice, this means we'll be moving our mobile games revenue into online games and our mobile subscriptions revenue into community value-added services. Our mobile advertising and mobile eCommerce revenue are already reported in the online advertising and eCommerce categories respectively. We believe these changes better reflect the reality that mobile is increasingly embedded in all of our business lines. For our online advertising business, segment revenue was CNY 947 million in the quarter, up 58% year-on-year, down 7% quarter-on-quarter. Display advertising was CNY 823 million, up 54% year-on-year, down 10% quarter-on-quarter. Search revenue was CNY 124 million, up 92% year-on-year and up 20% quarter-on-quarter. For the full year, advertising revenue grew 70%. 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 third quarter results. Video ad revenue grew significantly year-on-year on increased traffic and higher inventory utilization. Our top five brand display ad categories were automobiles, online services, food and beverage, personal care, and real estate. The growth of our regional city portals has helped our presence in the real estate category, where we are historically weaker. In performance display, we saw continued quarter-on-quarter revenue growth for pretty much the same reasons as in previous quarters. Increased click-through rates due to both advertisers and Tencent continually optimizing audience targeting mechanisms. In search, revenue increased year-on-year and quarter-on-quarter due to increased ad spend from eCommerce advertisers and to early contributions from mobile search.
Turning finally to eCommerce transactions, segment revenue was CNY 1.7 billion, 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. With that, I'll hand over to John.
Thank you, James. Good evening. For the fourth quarter of 2012, total revenue was CNY 12.15 billion, up 53% year-on-year or 5% quarter-on-quarter. Operating profit was CNY 3.73 billion, up 21% year-on-year or down 10% quarter-on-quarter. Net profit was CNY 3.47 billion, up 36% year-on-year or 7% quarter-on-quarter. We recorded net other losses of CNY 202 million versus CNY 15 million last quarter. This mainly represented an impairment provision of CNY 251 million made for selected investee companies in the fourth quarter. Income tax expense decreased to CNY 151 million, mainly due to a reversal of income tax expense for a subsidiary in China, which qualified 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 CNY 3.467, up 37% year-on-year or 8% quarter-on-quarter. For the full year of 2012, total revenue was CNY 43.89 billion, an increase of 54% from 2011. Operating profit was CNY 15.48 billion, an increase of 26% year-on-year. Profit attributable to shareholders was CNY 12.73 billion, an increase of 25% year-on-year. On non-GAAP basis, operating profit for Q4 was CNY 4.32 billion, up 23% year-on-year or down 3% quarter-on-quarter. Operating margin dipped 2 percentage points to 36%. Net profit attributable to shareholders was CNY 4.07 billion, up 40% year-on-year or 15% quarter-on-quarter. For the full year of 2012, non-GAAP operating profit was CNY 17.05 billion, up 29% year-on-year.
Non-GAAP operating margin was 39%, down seven percentage points from last year. Non-GAAP profit attributable to shareholders was CNY 14.29 billion, up 31% year-over-year. Total cost was CNY 5.27 billion for the fourth quarter, up 10% quarter-over-quarter. The sequential trend primarily reflected an increased cost of merchandise sold, higher bandwidth and server facility fees, partially offset by lower sharing and content costs. As a percentage of revenues, total costs increased by 2 percentage points to 43%. IVAS gross margin and MVAS gross margin were broadly stable at 67% and 59%, respectively. Gross margin for online advertising decreased one percentage point to 49%, mainly due to lower revenue generated during weak seasons and increase in bandwidth and server facility fees, partially offset by the absence of Olympics-related content costs.
Gross margin for [e-commerce concessions] increased five 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 IVAS was stable at 67%, mVAS dipped one percentage point to 61%. Online advertising declined from 60% to 49% due to the reclassification of a significant portion of video content costs from IVAS to online advertising since fourth quarter 2011. Operating expenses for the fourth quarter. Selling and marketing expenses was CNY 1.09 billion, up 34% quarter-over-quarter. This mainly reflected seasonal e-commerce promotional activities, online games marketing, as well as marketing to promote WeChat in Asian markets, partly offset by reducing marketing expense for our online media platform post-Olympics. It represented 9% of quarterly revenue, compared to 7% last quarter.
G&A expenses was CNY 2.12 billion, up 5% quarter-over-quarter. This primarily reflected increase in staff costs and administrative expenses with business expansion. It represented 17% of quarterly revenue, compared to 18% last quarter. Under G&A, R&D expenses was CNY 1.08 billion, down 4% quarter-over-quarter as we true up employees' year-end bonus. It represented 51% of G&A or 9% of quarterly revenue. On a full year basis, selling and marketing cost was CNY 2.99 billion, up 56% over 2011 and represented 7% of annual revenue. G&A was CNY 7.77 billion, up 47% year-over-year and represented 18% of annual revenue. R&D expenses was CNY 4.18 billion, up 56% over 2011 and represented 10% of annual revenue. As at quarter end, we had over 24,000 employees, up 3% quarter-over-quarter or 38% over 2011. Margin ratios for quarter four.
Gross margin decreased two percentage points to 56.6%. Excluding e-commerce revenue and costs, gross margin was 64.3%. Non-GAAP operating margin was 35.5%, down from 38.4% last quarter. Excluding e-commerce revenue and costs, it would be 39.9%. Non-GAAP net margin was 33.7%, up from 31% last quarter. Excluding e-commerce revenue and costs, it would be 37.7%. During fourth quarter, we did not buy back any shares. For the full year, we repurchased about 150,000 shares for approximately HKD 25 million. The total number of shares outstanding at year-end was 1.85 billion. For 2012, basic EPS was CNY 6.965 and diluted EPS was CNY 6.833, both increased roughly 24% from last year. Non-GAAP basic EPS was CNY 7.816 and diluted EPS was CNY 7.667, both increased by 30% from last year.
Subject to the approval of shareholders at the annual general meeting to be held on 15th of May, we are proposing an annual dividend of HKD 1 per share, which is 33% higher than last year. The final dividend will be payable on 30th of May 2013. We will provide you a few key financial numbers for your reference. Total CapEx for the quarter was CNY 1.78 billion, up 58% quarter-over-quarter. Operating CapEx was CNY 590 million, down 40% quarter-over-quarter as we purchased fewer servers in the quarter. Non-operating CapEx was CNY 1.19 billion, up significantly from last quarter as we acquired new office spaces and land use right to support future business needs. Share-based compensation for the quarter was CNY 303 million, about 2% of revenue. Free cash flow for the quarter amounted to CNY 4.35 billion, up 42% from 2011.
Free cash flow for the year amounted to CNY 15.2 billion, up 67% year-over-year. Our net cash position at year-end remains strong at CNY 27.4 billion, up 55% from 2011. Total debt to adjusted EBITDA for 2012 was 0.58 times compared to 0.84 times for 2011. This concludes our presentation. Thank you.
Operator, shall we open the floor for questions?
Sure. Thank you very much. We will now begin the question-and-answer session.
Okay.
If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from Dick Wei from JPMorgan. 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 larger games such as DNF and CrossFire, the pipeline for this year, and also maybe some of the casual game impact from 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 League of Legends a very successful game in the advanced casual game category, while CrossFire, as a very large FPS platform, continues to register growth in terms of revenue. And on the MMOG side to DNF, that is quite strong. But at the same time, we also have been able to complement that with our self-developed game, Yu Long, The Legend of Yu Long, as well as The Legend of Xuan Yuan. These are two in-house developed games which have achieved quite good results.
We continue to say in the gaming sector, and especially sort of in this PC gaming sector, we are actually well-positioned. We have been able to build a very diversified portfolio that consists of ACG, MMOG, casual games, as well as web games. Looking into the future, we felt the important thing is actually for us to be able to capture the emergence of new genres in this market. I think that's why we have been quite active in terms of signing up big titles, and very clearly you can see Blade & Soul, Call of Duty Online, these are in our portfolio. We are also going to introduce our self-developed MMOGs in the course of the next two years. I think 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 everywhere, that's actually sort of a good opportunity for us to get onto. Of course, I think this market takes time to emerge, and 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 on the license model. There's a lot of work to be done. 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 output for the various segment, that would be helpful. Thank you.
Okay. John will actually give you the output.
I think in terms of online games for MMOG, it will fall within CNY 120-CNY 175 per quarter. For advanced casual game, it would be CNY 60-CNY 125 per quarter. In relation to other subscription-based services, just like QQ Show, just like membership, just like QQ Music VIP, they're all basically CNY 10 per month.
Great. Thank you very much.
Thank you very much. Your next question comes from Jin Yoon of Nomura. Please ask your question.
Hey, good evening, everyone. Just a couple questions. First of all, just a big picture, structural kind of question that I have is that we're seeing kind of slowdown in the gaming side, yet at the same time, we're on the PCUs for a lot of the metrics on the PC side, and yet WeChat is growing very significantly over the last few quarters. You talk about the paradigm shift going from PC to mobile, but is that also kind of taking away the timeshare where people are using less applications on the PC because they're spending more time on mobile, hence that the mix is going towards a much more lower margin business? Or do you just blame the recent slowdown in 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.
Just the pure online gaming business, I think exited the year at 35% year-over-year growth. Is there any reason to believe that 35% could re-accelerate next year, or should we expect to see a slowdown from that 35%, which will probably bring down margins a little bit more given the fact that it's a higher margin business? I'll stop there. Thanks, guys.
With regard to the activity on desktop and smartphone, we think for certain behaviors are related to perhaps communications and search, as Martin mentioned in his introductory remarks, that the rate of growth on smartphone of communications activity and search activity likely means that there is some incremental contribution, but also some substitution. With regard to games, we think that there's 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 processor, and we haven't seen first-person shooter games, as an example, or battle arena games like "League of Legends" take off on the mobile phone at this stage.
I think that's sort of reflected in the facts that, if you look at our game metrics, then "League of Legends" is now at 5 million peak concurrent users globally, which is a big number for a PC game. That's with regard to the time spent. With regard to the revenue outlook, as you know, we really don't give guidance for revenue. The one thing I'd say is that I think the game revenue you quoted was our game revenue within the segment we historically disclosed as games, and that's primarily desktop client games. We are also, we think, China's biggest web game publisher through our open platform, and that's reflected in community and open platforms. We also think we're China's biggest mobile game publisher by revenue share, and that's historically been reflected in our mobile games.
There's different segments of games, and if desktop client games are growing slower, we think that they're still growing, and meanwhile, the mobile games and the web games that are feeding in are to some extent incremental to that desktop client growth.
Yeah. I also wanted to emphasize that we tend to look at our business from a longer-term perspective. In terms of sort of the interim period where there are hurdles in terms of monetization, there are sort of hurdles in terms of payment, and sort of the platforms are not built yet, and sort of the popular games have not really emerged yet on mobile platform. I think these are things which are sort of problems in the interim. Even sort of on the PC side, if there's a period where there are no blockbusters, then the entire industry will suffer. 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.
If we look at sort of the entertainment industry at large, online game is still the type of entertainment that actually has the lowest cost per unit time of entertainment. 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. 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 your question.
Hi. Good evening. Thanks very much for taking my question. My question actually related to e-commerce. Firstly, with the e-commerce sales continuing to grow strongly, would you expect the scale benefits become more apparent and the operating loss of the segment to narrow this year? Secondly, how would your total CapEx this year look like compared to last year as you have announced to strengthen your logistics capabilities in the e-commerce side? Thank you.
Yeah. I think on e-commerce, yes, we are encouraged by the fact that 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. We try to sort of add that caveat. I think as a general trend, the business is actually growing. 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. I don't think we have reached the kind of scale that we are happy with yet. There's still going to be a lot of work to build this business. For example, right now, a few quarters back, this business was mainly sort of Eastern China where we entered in.
In the past two quarters, we have actually built a presence, expanding presence in the southern part of China. Over time, we will still have quite a bit of geographic expansion to do. Also sort of right now, most of the volume is actually on first-party business. 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. There's still a long way to go. We are in a very early stage of developing our e-commerce business. We'll do it step by step. I think it's too early to talk about sort of profitability at this point in time. We're very focused on building the business at this point in time. Now, in terms of the e-commerce CapEx, right?
I think, as you can see from our approach, we actually sort of use a pretty systematic way in terms of approaching geographic expansion. I don't think we would just pluck in a very big amount of money and say, we're going to build warehouses around the country. At the same time, I think, the actual cost associated with e-commerce is really sort of in the delivery, in terms of being able to manage the efficiency of that part of the business, rather than you put in a very big capital expenditure on warehouses. I think, it's a long way of saying, we'll be relatively prudent in terms of putting in e-commerce CapEx.
Thank you.
Thank you very much. Your next question comes from Chi Tsang of HSBC. Please ask your question.
Good evening. Thank you very much for taking my question. Just a couple of questions. First, in terms of online gaming, League of Legends is obviously doing very well. Can you give us a sense of sort of the contribution from League of Legends and maybe 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 number or those percentages. I apologize for that.
Okay. Let me ask you something else. Just in terms of WeChat, thanks for giving us sort of the strategic update in terms of the real potential for WeChat Weixin. I'm wondering what else needs to sort of happen near term before we can actually see monetization from that platform. Also if we should start expecting some monetization to begin some time this year. Thank you.
Well, I think, in terms of the philosophy around monetization, we're not in a rush to monetize. I think, the key thing that we want to see is, one, we continue to build out the WeChat platform and basically make sure that the entire communication and social experience is actually well-honed. That's actually sort of our 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. That 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. Having said that, I think we still view user experience as the number one priority.
As Pony has said recently, we are in the process of designing a game platform for innovation, and it will be entering into sort of a testing mode in the next few months. 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. That would take some time.
Thank you.
Thank you very much. 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 fourth 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 from your marketplace revenue growing up? Secondly, just a housekeeping question on your IVAS subscription business. I understand that from third quarter, you tightened up the policies for telecommunications subscriptions. Just wondering how long the transitions could take. Thanks.
In relation to the gross margins 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 is somewhere like 9% this quarter. Without this type of promotion, it would become normalized, which would be pretty much similar with last quarter.
Yeah. On IVAS, we have actually sort of tightened up the cleanup, and that will continue, right? Basically, we took a hit, and Newly adds or in terms of the continued elimination of certain accounts which are non-paying and which are not coming in through the right channel, I think we will continue to do.
Got that. Thank you very much.
Sure.
Thank you very much. Your next question comes from Cynthia Meng of Jefferies. Please ask your question.
Thank you very much for taking my questions. I have two questions. One is on Tencent's online video strategy. Can management give some color on your plan to invest in content and how to compete with [TE] and also Youku and Toutiao? Second question is a follow-up on e-commerce. Recently there was a lot 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 to be competitive in buying content. I think the good news there is that during 2012, when several of our competitors really slowed down their content acquisition, we actually fairly drastically accelerated our content acquisition. Much of the content we kind of locked in during 2012 actually has begun coming on air or will come on air during 2013. We feel that as we enter 2013, our content portfolio on January the 1st is much, much stronger than it was on January the 1st, 2012. We feel we'll continue to invest aggressively in content, but we're starting from a relatively good place in 2013 versus our library entering prior years.
The longest term strategy for competing in video is we feel that because of our logged in relationship with hundreds 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 users' social graph, we're in really a unique position to figure out what is the content that's most appropriate to our users, what is the videos the most suitable for a specific user, and then target that content through them. This is something that we've begun to implement in other areas of Tencent. If you look at Guangdiantong on the advertising side, that's an example of us really bringing our targeting technology to bear in a way that's sort of unique to Tencent.
We think that we have scope to do the same thing with video targeting over the longer term. In the short term, it's really about buying the right content.
In terms of e-commerce, I think we look at the principal business and the platform business as complementary to each other. In order to have a long-term sustainable e-commerce business, I think we actually need to have both. Traditionally, we actually had the marketplace platform-oriented business first, it has sort of grown consistently for the many years that we have been operating it. 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. Over time, we're going to complement that principal business with our open platform, which has been built for a long time, that would actually contribute one selection to the principal business and two, it's actually sort of more profitable to be running the platform business.
With the two running together, we would have a more complete e-commerce business that has scale, that has sort of unique positioning and also 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 and 2012, the effective tax rate were about 15%. I would estimate that in 2013, without the effect of deferred tax, the effective tax rate would be from 15%-20%.
Okay. Thank you.
Thank you very much. Your next question comes from Alex Yao of Deutsche Bank. Please ask your question.
Hi, good morning and good evening, everyone, and thank you very much for taking my questions. This quarter, the gaming revenue was flattish over the previous quarter. We have seen other larger online gaming companies report flattish gaming revenue growth because of a legacy game aging and a decline in revenue. Can you guys comment on the life cycle of Dungeon Fighter and CrossFire? How do you think about the organic growth of these two games in 2013? If we look at the entire portfolio, obviously you guys have relatively new games such as League of Legends and 御龙在天, 轩辕传奇 gaining a lot of momentum. How should we think about the growth in 2013? Thank you.
Yeah, I think for the particular gaming business in the sector, I think we actually have explained in our prepared remarks that it was a quarter in which, one, it's seasonally low, and two, a lot of our expansion packs were in the preparation mode. It's kind of a flat quarter. As we look at the gaming business, I think we very much look at it as an entire portfolio. We continue to operate some of these long-standing games. We believe these games have got a pretty loyal following of users. Over time, these games, while in the fifth year of operation, would definitely leave the stage of very high user growth. Over time, some of these games can actually generate slightly higher ARPU over time. That's the state of the existing games.
If we can have good expansion packs, that would bring some of the users back. I think that's the dynamics around the existing games. I think at the same time as we operate these existing games and try to bring new excitements to the existing users, we also actually try to come up with new titles, which expand the user base, which can attract new users. That's the reason why we have been signing up potential large titles, as well as we have been developing our own games in-house. We are also very sensitive to the new trends within the gaming business. As you can see, in the past two years, when web game actually became popular, we were able to capture it using our open platform strategy.
As we have established a pretty good first stage fundamentals on the mobile platform, we are also turning our eyes to the mobile gaming business and try to see whether we can actually capitalize on the growth within the industry. I think that's how we look at the gaming business as an overall portfolio.
Got it. The second question is on the sales margin efficiency in 2013. I believe the WeChat global expansion is part of the priority in this year. How should we think about the margin 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 stand-alone product from a leveraging perspective. In terms of League of Legends, it's actually operated pretty separately by the founders of the company. I don't think a chat service and an exciting mobile game actually has got a lot of synergies between the two. Okay.
Got it. Thank you very much.
Thank you so much.
Thank you very much. Your next question comes from Catherine Leung 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 some of the dynamics of promoting other businesses. Secondly, if you could comment on the e-commerce principal transaction business growth, which I assume is driven by user growth. Is the user growth driven by traffic within the Tencent platform, or are you spending to acquire the traffic externally? Thank you.
Yeah. Well, in terms of desktop QQ users, one trend is actually they're using the Mobile QQ more. A lot of people are having their smartphones, and they are using desktop QQ while they are in the office or while they are at home, and then they are using the Mobile QQ when they are out of home. That's a clear dynamic. When they're using it on the PC, I don't think there's a lot of change in terms of behavior. To some extent, we actually tend to be able to reach these users more because, in the past, when they're not on the PC, they're not using QQ service, but now they are using QQ service.
Now, on Weixin, there's actually a pretty big overlap of users between QQ and Weixin. A lot of these users will be using desktop QQ, Mobile QQ, and Weixin. That's a very large proportion of our users. As I mentioned, in the overall social platform, Weixin does help us to address those users who have not been using QQ traditionally. That's a net add to our total social infrastructure. In terms of the e-commerce business, the growth has been both from a growth in terms of users, but also driven by converting more users into our principal business, but also geographic expansion. When we were only available in the eastern part of China, the addressable market is only the eastern part of China.
In that market, we can actually gradually bring up the number of users, both through user acquisition through our network, as well as retaining those users and getting them to come back. The real kick actually comes in when we actually start to expand it to Southern China, suddenly the addressable market size actually increased. At this point in time, we are primarily just using our own network because 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 the right service level, the products, and the right type of timing that we can actually get to these users and promote our e-commerce service to them, and that's something which we are still working on.
Okay. Thank you.
Operator, in the interest of time, we will take the last three questions, please.
Sure. Thank you very much. Your next question comes from Wendy Huang of CIMB. Please ask your question.
Thank you. First, can you maybe clarify one comment you made regarding the game business? Did you just mention that you are already the biggest publisher in both mobile game and web game in China?
I think in terms of web games, yes. It's not the traditional publishing model, but we very much use the open platform model. We invite game developers to put their games on our platform, and then we generate revenue. From a revenue generation perspective, we believe we're the largest web game platform in China. In terms of mobile games, I think it's a very new market, relatively emerging. I think we have been doing this mobile game for quite a while, and we have a pretty big size within the market. I think whether we are number one or not is not that relevant, because what we see is, over time, this market's going to grow.
I think the more important thing is actually being able to build the platform and build the partnerships so that we're able to 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? Also, for WeChat, besides mobile game, is there any other business models you are exploring to monetize from the Weixin, say, advertising or maybe e-commerce?
In terms of the revenue share, I think this is something which we will come up with at the time when we actually have the platform. I prefer not to talk about it at this point in time. In terms of additional business models, we believe, over time, we do want to 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. Frankly, Mobile QQ over time, right? Both of them have got a lot of users using them on a daily basis. The same business model can actually apply to both.
I think advertising is actually more trickier for the reasons I talked about, which is, you have a very small screen, and the advertising, when it comes up, it actually consume bandwidth, which, in most cases, the users are actually paying for. I think that would take a longer time to develop, and I think we would be testing out the gaming platform first, but we'll also explore the O2O and location-based e-commerce type of model over time.
Oh, I see. Last thing, maybe to get more color on your e-commerce business. You repeatedly mentioned that you're going to expand geographic coverage, and also to do some investment in the logistics and the fulfillment infrastructure. Can you give us some color, what kind of price are you willing to pay for those efforts? Also, compared to other big players in the market, you seem to be a late mover in those fronts. How are you going to maybe differentiate yourself from those existing big players in the market? 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&L cash flow and balance sheet for 2012 and reflected in the numbers you've seen for 2012. If we now expand from Southern China into Northern China, you should be looking at a sort of continuation of the gradient of investment we've seen in previous quarters. The whole point was, we're not talking about dramatic changes above and beyond the pace of change that we've already experienced. We've been continually growing the business through the course of 2012. We'll continue to continually grow the business, we're not talking about a sudden transformation. With regards to competitive position, we feel that we're enormous traffic aggregator. Once again, our traffic is somewhat unusual traffic in that it's logged-in traffic.
It's traffic we can track around the net, where we have the ability to help users based on their social graph. 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 our unsold ad inventory, our excess resources within our own platform and using those to support our e-commerce business. We believe that we have a competitive advantage on the marketing side. We believe that the team who are running our principal e-commerce business are an extremely sharp, extremely talented team who have done very well despite a late start, first of all, in Eastern China, subsequently in Southern China. We hope that they can continue to execute well in the future.
Yeah. 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. In those areas, when you have a first-mover advantage, you really have that advantage. That's part of the reason why, despite the fact that we have been growing our Paipai business for a long time, it grow consistently but not sort of exponentially. 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 effect. 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.
I think that's less of a first-mover advantage business.
Next question.
Thank you very much. The next question comes from Alicia Yap of Barclays. Please ask your question.
Hi. Good evening, everyone. Thanks for taking my questions. My first question is regarding to follow up on the WeChat. Just now, Martin mentioned about the location-based and O2O business. We actually understand that we have been testing with some local vendors over the past few months. 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 started to charge some of these vendors?
I think we have to disappoint you in the sense that we take a very long-term view on O2O opportunity. I think it's actually sort of a big opportunity, but at 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, the lack of standardization of the products and services, and the physical limitation on sort of you actually have to be there in order to enjoy the service. I would say sort of it's something of an experiment that we're taking a lot of interest in. It would 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.
Based on some very initial feedback of the merchants 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. I think that's sort of based on the feedback of a set of the first sort of adopters of merchants. 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. I think it's way too early to talk about revenue opportunities at this point in time.
Thank you very much. The last question comes from Elinor Leung from CLSA. Please ask your question.
Hi. Thanks for the call. My question is regarding your marketing expenses. You do highlight that this year you will continue to spend a lot of marketing in terms of promoting your new mobile products. Can you give us what will be the marketing trend this year? WeChat is expanding into the U.S., and just wondering how you think you can grab market share there and how much expenses you're going to invest in that market.
I think in terms of marketing, we do see mobile products as an important portfolio for us going forward. I think we would be spending actually quite a bit in terms of marketing. Exactly how much it is, I think it would depend on a lot of analysis around what's effective and what will be the competitive spending in different segments that we operate. I think it's hard to give you a quantitative number. All I have to say is, we would want to spend enough in order to win in those markets. I think for WeChat, at this point of time, it's still mainly addressing the Asian market. I think we would be testing the markets out in developed markets such as the U.S. and Europe.
Again, these are markets that we are not very familiar with, so we'll have to take time to figure out what's the approach. I don't think it's a matter of just throwing a lot of marketing resources in and try to see whether it works or not. We need to have, I would say, a more sophisticated plan than that. It's 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. Chan, you may begin your closing remarks. 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 the www.tencent.com/ir. We'll also post a replay of this webcast on the site shortly. Thank you and see you next quarter.
Thank you very much. That does conclude our conference for today. Thank you for participating. Tencent Holdings Limited 2012 fourth quarter annual results announcement conference call. You may all disconnect now.