Thank you for standing by, and welcome to the Tencent Holdings Limited 2012 third quarter 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 will need to press star one on your telephone to join the questions 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 turn the conference over to your host today, Ms. Catherine Chen from Tencent. Please go ahead, Ms. Chen.
Thank you, operator. Good evening. Welcome to our annual results conference call for the third quarter of 2012. I am Catherine Chen 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 outlined by a number of risks and uncertainties that may not be realized in future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation 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 our non-GAAP financial measures, please refer to our disclosure documents downloadable on www.tencent.com/ir. Having said that, let me introduce the management team on the call tonight.
They are our Chairman and CEO, Ma Huateng, President Martin Lau, Chief Strategy Officer James Mitchell, and CFO John Lo. Pony will kick off with a short review of financials and platform updates. Martin and James will review our business performance. John will discuss the financials, and then we will open the floor for questions. Now let me turn the call over to Pony.
Thank you, Catherine. Good evening. Thank you for joining us. In the third quarter of 2012, we achieved solid year-on-year growth in revenues and earnings. Our diversified game portfolio and open platform strategy anchored robust year-on-year growth in our IVAS business. Our investment in qq.com video business and advertising platforms in the last few years are also paying off, contributing to a strong year-on-year growth in display advertising revenues. Our e-commerce business, despite the recent price war, has held firm. On the mobile front, we are reinforcing our presence at mobile gateways and extending our community leadership from PC to mobile. We believe a unified product experience for our services on the Internet is crucial to build user loyalties, whether they are engaged via PC at home or mobile on the go. Increased mobile usages as a result will enhance the overall time spent on our services.
Let me highlight a few numbers from our third quarter results. Total revenue was CNY 11.6 billion, up 54% year-on-year or 10% quarter-on-quarter. IVAS revenue was CNY 8.4 billion, up 39% year-on-year or 8% quarter-on-quarter. MVAS revenue was CNY 946 million, up 12% year-on-year or 2% quarter-on-quarter. Online advertising revenue was CNY 1.0 billion, up 69% year-on-year or 15% quarter-on-quarter. E-commerce transaction revenue was CNY 1.1 billion, up 32% quarter-on-quarter. Non-GAAP operating profit was CNY 4.4 billion, up 32% year-on-year or 5% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was CNY 3.6 billion, up 28% year-on-year or 5% quarter-on-quarter. Moving on to an update on our key platforms. In the third quarter, QQ monthly active user accounts increased 10% year-on-year to 784 million, and PCU increased 15% year-on-year to 167 million. Our smartphone-based social communication products Weixin registered over 200 million user accounts in September.
For our social networks, Qzone monthly active user accounts grew 8% year-on-year to 593 million, and Pengyou MAUs grew 27% year-on-year to 259 million. Looking at our media portfolio, QQ.com continued to lead peers in terms of overall page views and unique visitors, while our Olympics coverage achieved the biggest sports audience among China portals. Our video platform climbed to number two ranking in China by both MUV and video views, according to iResearch and comScore. Social media service Tencent Weibo grew daily active user accounts to 94 million. QQ Games platform records 9.4 million PCUs, up 18% year-on-year. Our wireless portal delivery continued growth in user engagement and page views. I will now pass on to Martin to discuss our IVAS and MVAS businesses. James will take you through online advertising and e-commerce.
Thank you, Pony. Good evening. In the third quarter, our total revenue grew 54% year-on-year as a result of new game titles and new revenue streams brought by our open platform initiatives and new advertising formats.
Excluding e-commerce transactions, our total revenue actually grew 39% year-on-year. On this page, which shows the breakdown by business segment, online games remained our largest revenue contributor, accounting for 52% of total revenue. Benefiting from Olympics and better seasonality in the third quarter, online advertising weighted up to 9% of total revenue. E-commerce transactions was 10%, and MVAS was 8% of total revenue. For IVAS, the segment revenue was CNY 8.4 billion, up 39% year-on-year and 8% quarter-on-quarter. Online games revenue was CNY 6 billion, up 44% year-on-year and 7% quarter-on-quarter. New games added to our diversified portfolio and higher ARPU from popular titles drove year-on-year growth. In-house titles were the primary contributors to our sequential growth. Community and open platforms revenue was CNY 2.4 billion, up 29% year-on-year and 8% quarter-on-quarter. The open platform revenue grew quarter-on-quarter due to the popularity of our apps, mostly third-party apps.
Monthly subscription revenue increased quarter-on-quarter, but at a reduced pace due to our cleanup of fraudulent subscriptions built through mobile channels. Looking forward, we believe the shift to mobile internet will also impact the growth of our subscription packages, as we are currently building mobile user base faster than we are developing privileges for them for the moment. Taking a closer look into community and open platforms, our social networks remained the leading social sharing platform for internet users in China. Qzone's monthly active user accounts grew 8% year-on-year, and Pengyou's MAU grew 27% year-on-year. During the week-long National Day holidays in early October, Qzone users uploaded 1.9 billion photos on Qzone, positioning it firmly as the leading photo-sharing platform in China. While overall Qzone traffic still come mainly from PC, the proportion for mobile is increasing at a relatively fast pace.
Weixin, our mobile social communication product, registered over 200 million user accounts. We are now testing open platform on Weixin as part of our overall corporate strategy. Our near-term focus is continue to grow the user base before monetization. Tencent Weibo's daily active user accounts increased 70% year-on-year. Average daily posts doubled year-on-year to 105 million in the quarter, as user activity and sharing increased due to the Olympics. On our open platform, we have built a healthy ecosystem that helps generating tier revenue for established third-party developers while nurturing at the same time a broad range of startup developers. We have two goals in the next stage. One is to extend the current open platform architecture from Qzone to other product platforms and enabling developers to reach both game-oriented as well as social users.
The other is to expand open platform initiatives to mobile through OpenID cooperation with third-party mobile applications. Digging into each category under online games. On QQ Games platform, we operate 119 mini casual games and 53 web games. Combined peak concurrent user increased to 9.4 million due to anniversary promotions and new web game releases. Combined ACU dipped slightly to 4.2 million, as some players diversify their time from the QQ Games platform to web games on Qzone. During the quarter, we began to bundle web game items in the monthly subscription package. In advanced casual games, combined PCU and ACU rose to 14.5 million and 4.5 million respectively. In October, League of Legends expanded its registered user base to 17 million globally. With DAU at 12 million and peak concurrent user at three million, LOL is now positioned among the most successful online games in the world.
Both CrossFire and QQ Speed broke new PCU records and increased monetization during the seasonally strong third quarter. In terms of massively multiplayer games, the combined PCU and ACU increased to 4.8 million and two million respectively. Dungeon & Fighter increased monetization due to releases of new character, play mode, and game items. In-house title, Yulong Zaitian , recorded 500,000 PCU since its open beta launch in September, while Legend of Xuan Yuan entered open beta on November 3rd, following closed beta testing in the quarter. Moving on to our MVAS business. Revenue from mobile value-added services was CNY 946 million, up 12% year-on-year and 2% quarter-on-quarter.
2G revenues increased 7% year-on-year, but decreased 2% quarter-on-quarter. The sequential decrease was mainly due to our cleanup of inactive user accounts of bundled SMS subscription packages. 2.5G/3G revenues increased 23% year-on-year and 9% quarter-on-quarter. The sequential growth was due to additions to our mobile games portfolio. Before I wrap up on MVAS, I would like to share with you that our mobile security manager has expanded its total activated user base to over 100 million in September, and has received a top industry accreditation for outstanding performance. Now, in conclusion, I will let James discuss the online advertising and e-commerce business with you. James?
Thank you, Martin. For our online advertising business, segment revenue exceeded CNY 1 billion, up 69% year-on-year and 15% quarter-on-quarter. Performance advertising and brand display advertising on our video platform were the major drivers for the year-on-year revenue growth. While income from new ad platforms and advertising activities related to the London Olympics boosted our sequential growth. By revenue type, display ad revenues reached CNY 912 million, up 66% year-on-year and 17% quarter-on-quarter. Search ad revenues were CNY 103 million, up 101% year-on-year and flat quarter-on-quarter. During the Olympics, we won exclusive online advertising contracts with several international consumer brands, including Procter & Gamble, Nike, Adidas, Intel, and Acer, and also with numerous domestic sports apparel brands. In terms of traffic, our customized and in-depth coverage of the Olympics events generated buzz and social sharing across our portal video and microblog platforms, cementing our sports audience leadership.
Within brand display, our top five advertiser categories are food and beverage, automobiles, online services, apparel, and personal care. Additional budget allocations from fast-moving consumer goods industries related to the Olympics boosted our portal revenue growth, while for macro reasons, advertising spending from the automobile and e-commerce industries are experiencing pressure. Our online video advertising revenue more than tripled year-on-year off a small base. Within performance display, targeted advertising on our social networks benefited from increased impressions volume on Qzone and Pengyou. Overall click-through rates improved as we further refined user profiling and optimized our algorithms. Web game developers, e-commerce companies, and now education service providers, are the largest advertiser categories for performance advertising on social networks. Within search, revenue was stable sequentially, and our focus is on innovating the search experience on mobile and refining the quality of our search results.
Moving to e-commerce transactions, segment revenue was CNY 1.1 billion, up 32% sequentially. Principal revenue increased quarter-on-quarter on more units sold due to promotions and also due to publicity around price wars. This publicity prompted consumers to look for lowest prices, which benefited our service because we're already an everyday low price leader. Hence, our gross margin was fairly stable sequentially. Agency revenue grew off a small base on higher transaction volumes and on service fees collected from merchants. We're building out our marketplace with B2C vertical players and SME merchants, and we've recruited over 13,000 merchants to date. We're in the process of migrating larger merchants on Paipai to our B2C marketplace by retaining Paipai's focus on C2C and small medium enterprise transactions. With that, I'll pass to John to discuss the financials.
Thank you, James. Hello, everyone. For the third quarter of 2012, total revenue was CNY 11.57 billion, up 54% year-on-year or 10% quarter-on-quarter. Operating profit was CNY 4.12 billion, up 38% year-on-year or 5% quarter-on-quarter. We recorded net other losses of CNY 15 million versus CNY 3 million last quarter. In the third quarter, we recognized an impairment provision of CNY 448 million on selected invested companies and donation of CNY 60 million to Tencent Charity Foundation. Against a special dividend of CNY 390 million from Mail.ru, and subsidies and tax rebates of CNY 136 million. Net finance cost was CNY 99 million versus CNY 115 million last quarter. This mainly reflected lower exchange losses on our foreign currency denominated debts, partially offset by higher interest expense relating to our bond issues. Effective tax rate for the quarter was 18.9%.
Net profit attributable to shareholders was CNY 3.22 billion, up 32% year-on-year or 4% quarter-on-quarter. On non-GAAP basis, operating profit was CNY 4.44 billion, up 32% year-on-year or 5% quarter-on-quarter. Net profit attributable to shareholders was CNY 3.55 billion, up 28% year-on-year or 5% quarter-on-quarter. Operating margin was 38.4%, down 1.7 percentage points from last quarter. Net margin was about 31%, down 1.4 percentage points from last quarter. Total cost was CNY 4.79 billion for the third quarter, up 11% quarter-on-quarter or 80% year-on-year. This primarily reflected an increase in cost of merchandise sold, sharing costs and staff costs. As a percentage of revenues, total costs were stable at 41% this quarter. Comparing to last quarter, IVAS gross margin increased one percentage point to 67% due to increased contribution from in-house games.
MVAS gross margin decreased two percentage points to 59%, reflecting higher sharing costs due to growth in third-party mobile games and staff costs. Gross margin for online advertising decreased two percentage points to 50%, mainly due to Olympics related content costs, increased bandwidth and server custody fees, as well as more commission paid to agencies. Gross margin for e-commerce transaction increased one percentage point to 4%. Moving on to operating expenses. Selling and marketing expenses was CNY 820 million, up 34% quarter-on-quarter or 62% year-on-year. The sequential increase reflected higher promotion and advertising expenses relating to Olympics, mobile products and online games. Selling and marketing expenses represented 7% of quarterly revenue. G&A expenses totaled CNY 2.03 billion, up 9% quarter-on-quarter or 38% year-on-year. The sequential increase reflected higher R&D expenses and increased staff costs as our business scale grew.
G&A represented 18% of quarterly revenue. Included under G&A, R&D expenses was CNY 1.12 billion, up 7% quarter-on-quarter or 51% year-on-year. It represented 55% of G&A or 10% of quarterly revenue. As at quarter end, we had over 23,500 employees, up 18% quarter-on-quarter or 47% year-on-year. Excluding acquired e-commerce business, headcount increased by about 10% quarter-on-quarter or about 30% year-on-year. Let's look at the margin ratios for the third quarter. Gross margin was 58.6%, down from 59% last quarter. Excluding e-commerce revenue and costs, gross margin was 64.5% for the quarter. Non-GAAP operating margin was 38.4%, down from 40.1% last quarter. Excluding e-commerce gross profit, it would have been 42.1%. Non-GAAP net margin was 31%, down from 32.4% last quarter. Excluding e-commerce gross profit, it would have been 33.9%.
During the third quarter, we did not buy back any shares. The total number of shares outstanding was CNY 1.846 billion. Basic EPS was CNY 1.759 on GAAP basis and CNY 1.941 on non-GAAP basis. Diluted EPS was CNY 1.727 on GAAP basis and CNY 1.906 on non-GAAP basis. Total CapEx was CNY 1.13 billion, stable year-on-year or up 24% Q-on-Q, of which operating CapEx was CNY 978 million, up 2% year-on-year or 40% quarter-on-quarter. Non-operating CapEx was CNY 154 million, down 12% year-on-year or 29% quarter-on-quarter. Free cash flow reached CNY 4.04 billion for the quarter, up 82% year-on-year or 41% quarter-on-quarter. Our net cash position was CNY 23.49 billion, up 50% year-on-year or 20% quarter-on-quarter. This concludes our presentation. Thank you. Operator, can we take the first question, please?
Sure. We will now begin the question and answer session. 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 a request, please press the pound or hash key. Your first question comes from the line of Alex Yao from Deutsche Bank. Please ask your question.
Hi. Good evening, everyone, and thank you very much for taking my question. I have two questions. Number 1 is, when I look at the sequential growth of the IM related operating metrics, the usage seems to have plateaued. Are these metrics not reflective of overall platform usage anymore because of the growing mobile usage? Can you help us understand how is mobile affecting the overall platform usage and the user demographics? Number 2 question is on the open QQ account login initiative on mobile internet. What can you guys get out of this initiative, and how can third party benefit from this? Thank you.
Yeah. In terms of the IM metrics, the key metrics has slowed a bit. We have given the reason that there was a National Day holiday, typically a few days ahead of that the user metrics actually tends to be lower. Undeniably, I think there is a tapering off in terms of the total growth rate, even if you look at the year-on-year growth rate. I would say one is it's because of the scale effect. As the user base keep on growing, then sort of the
The growth rate actually decreases. Secondly, there is actually certain number of users who have been using WeChat or Weixin at the same time as QQ. We have not included the users on the Weixin and added the number to this overall number. If you look at our company's communication platform as a whole, which would include QQ and Weixin, and if you just take out the duplicating people, if you look at that number, that number actually has been growing quite nicely. Thirdly, if you look at the peak concurrent users, it's a relatively flat quarter in the third quarter, but as we step into the fourth quarter, we have seen the peak concurrent users just actually broke new record at around 176 million. I would say the user trend is still healthy.
Thank you for your questions. Next question comes from the line of Dick Wei from JPMorgan. Please ask your question.
Hi. Thank you for taking my questions. I guess my first question is follow-up on Alex's questions, is that you mentioned about QQ as a communication tool. I think Qzone as a social network also seeing some flattish growth. I wonder if you can also discuss how does Weixin play into the dynamics as far as maybe the social network activities goes as well. Maybe second question I put in is that for e-commerce, we see a pretty good margin picked up during the third quarter. Wonder, can you discuss the dynamics between the transaction volume and the margin changes between the principal and agency businesses? Thank you.
Okay. Well, in terms of Qzone, I would say a similar answer to the QQ platform also sort of applies to Qzone, which is Qzone is actually very closely tied with QQ. It's a social network that shares the same social graph as QQ. If you look at the overall internet user growth, it's really in the very low teen of % growth. If you look at the PC side, it's actually much lower than that. Qzone as a social platform does have sort of got impacted by the scale effect. It also has got some impact from cannibalization on the smartphone side, when you actually on the smartphone side, you have Mobile QQ being very strong, you have Weixin being very strong, and to some extent, our micro blog is also actually quite strong, too.
With all these added together, the impact is actually slightly higher for Qzone than for QQ as a whole. If you look at the year-on-year growth trend, it's still demonstrating a growth slightly lower than the overall internet user growth, but higher than the PC internet user growth.
Dick, with regards to e-commerce gross margins, on the principal side, we would say the same thing if gross margins had moved a little bit in the other direction, which is that you shouldn't read too much into quarter-by-quarter fluctuations. The gross margins for the principal business are oscillating around a stable mean, and I wouldn't over interpret quarter-by-quarter oscillations in one direction or the other. On the agency side, we're seeing good growth, but that's from a very tiny base. That's not yet having a particularly substantial impact on the e-commerce business group as a whole.
Great. Thank you.
Thank you for your questions. Next question comes from the line of Gene Yoon from Nomura. Please ask your question.
Hi, good evening. A couple of questions on the advertising side. How much of your ad revenues is generated from Tencent subsidiaries or affiliated companies or companies you partner with? The follow-up to that is, in the quarter, you mentioned that a significant portion of your ad revenues came from one-time special events like Olympics. Can you quantify that and give us any kind of guidance in terms of any of that is reoccurring for next quarter? Thanks.
Sure. With regards to the first question, as you're probably aware, if it's a subsidiary of Tencent and advertises on our site, it wouldn't appear in our revenue line. You can safely ignore that. I guess, hypothetically, it's possible there are affiliates of Tencent that advertise, and we would collect revenue from them. Certainly in my experience, that's not a meaningful number in the grand scheme of things. The overwhelming majority of the advertising revenue would be from unrelated third parties and primarily big brands whose names you would recognize. With regards to the Olympics question, every four years there are Olympics.
I think four years ago, people made a great deal of noise about the Olympics impact on advertising, and we just wanted to signal that for this just completed third quarter, for the industry as a whole, of which we're a part, the Olympics played some role. That's something that we assume benefited third quarter advertising revenue, both for the advertising industry as a whole in China and for Tencent in particular. We won't quantify it, partly because we generally don't, and partly also because it's hard to tell how much of Olympics-related advertising is kind of truly incremental and how much would have appeared somewhere else in our advertising revenue if there had been no Olympics. Great. Thank you.
Thank you for your questions. Next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.
Good evening. Thank you for taking my questions. Mainly two questions. The first one is about the mobile open platform strategy that you mentioned it. Just wondering what type of applications would that apply to, and how Weixin would fit in the bigger picture. My second question is more housekeeping. Could you give us some guidance on your game ARPU in the quarter, as well as the increase in the share of associated losses? Thank you.
In terms of the mobile open platform, right now it's still at a very early stage of construction. We have constructed the open platform. We have gained a lot of experience from basically our PC open platform, and we are starting to migrate it to our mobile platform. There are some specific examples. A number of our platforms are actually going to be involved. In terms of Weixin, for example, we have already started to open up our ID to allow certain applications to use that as a login. We have allowed certain applications to have official accounts on our Weixin platform, and we have allowed certain accounts to actually push information to the users. We have allowed different applications to share their contents onto our Weixin platform. That's one stream of activities that's going on. The other one is really around Qzone and QQ.
Our plan is to say, look, because all these users are already connected with their QQ account, right? There are applications on the PC side who also have got a mobile service component. Over time, we would like to allow these applications to actually extend their service through QQ and Qzone onto the mobile platform. Right? Because we have the same user account with the same payment mechanism, there are going to be ways through which we, over time, allow application developers to extend their services onto the mobile side. These are certain blueprints for our future architecture, and it's gradually being implemented, although I have to say we're still at an early stage of the overall implementation.
With regard to ARPU, for MMOG, typically it falls in the range of CNY 100-160 per quarter. For advanced casual game, it would be in the range of CNY 55-150. With regard to the second question for the share of loss of associates, as you understand, we have got a big portfolio of associate companies, and now it's having carrying amount of over CNY 7 billion. The net loss figure is a mixture of a lot of different companies in there. It is very hard to describe it quantitatively as to which companies contributed to the loss.
Understood. Thank you.
Thank you for your questions. Next questions comes from the line of Richard Ji from Morgan Stanley. Please ask your question.
Oh, hi. Pony, Martin, John, and James, thanks for taking my call. I have two questions, and the first starting with e-commerce. Can you give us a little more color, what other investment may be required in order to ramp up your e-commerce activity, especially on the logistics side and the warehousing side? What are the plans over there?
Richard, with regard to e-commerce, we already have a leased warehouse capacity in some key cities in China where we think that we can deliver very fast, efficient e-commerce service. We'll expand that incrementally as we've been doing all year. We're not planning to put warehouses in every town and village in China, where we won't be able to drive an economic return or provide the level of service we want to provide.
Yeah. Thank you, James. My next question is regarding your Open Platform initiative. Can you give us some color on the number of applications and on the platform and also what are the thoughts for revenue contribution and potentially margin profile should be looking at? Also given the rising competition in the industry from other social media leader in the Open Platform space, are we seeing any change in terms of the so-called the revenue sharing with the third-party app developers?
Well, Richard, I think in terms of the Open Platform build-out, I think we are actually sort of gaining market share as a whole. I would say we are going actually from strength to strength. If you look at sort of the Open Platform construction, we first of all opened up QZone, and we have built a very vibrant ecosystem of app developers, and these are real app developers who are generating significant revenue. They have been able to keep on growing their own business. At the same time, we are now extending this Open Platform to our game portal. By now we have more than 50 web games hosted on our game platform. Because these are the users who have a high propensity to actually play games.
These new apps actually are generating good revenue as well, and we're now extending the Open Platform now to other of our social platforms, including Q+, including our microblog. As the next step, we are looking, as I said, to extend the Open Platform to cover our mobile platform as well. I would say, from this perspective, both in terms of the number of app developers as well as in terms of the economic value that we are generating for them, we are actually sort of continuing to increase that value add. In terms of, I think, the next step, as we said, we would like to extend it to the mobile platform.
We are also increasingly focused on building those applications that are more game oriented, so that we can have even richer ecosystem of different applications to cover the various needs of the users.
All right. Thank you. Very helpful.
Thank you for your questions. Next questions comes from the line of Qi Sun from HSBC. Please ask your question.
Good evening. Thank you for taking my questions. I have two questions. The first question is regards to headcount. Your headcount is up, as you said, about 47% year-on-year. How should we think about headcount growth for 2013?
Well, in terms of headcount, that 47% actually really includes a very big contribution of the consolidation of Yixun.
Okay.
If you count that out, it's essentially around 30%. As you know, in terms of the employee composition of Yixun , quite a large number of them are actually logistics related. In terms of what we're looking at next year, I would say we'll continue to apply a pretty high standard in terms of our headcount increments. We'll definitely increase our employee counts in the strategic businesses. At the same time, given the company is actually in a relatively large size, and given that we have already gone through a reorganization in the early part of this year, I would say the growth rate of our employee counts would actually be lower than this year.
Okay, great. My second question relates to just sort of overall profitability. Clearly, you folks have a tremendous amount of opportunity to invest in mobile, e-commerce, advertising. I'm wondering when you think that we should expect operating margins to actually stabilize?
I think it's a good question, but we don't really manage our business by looking at the operating margin line. I think it's actually quite important from a strategic perspective, for us to keep developing our platform so that our platform continue to be more and more relevant and valuable to the users. The users actually sort of spend more and more time on our platform. I think our experience tells us that if we can actually go where the user and usage are going, then basically over time, there will be ways through which we can actually monetize such a value add to the users. Over time, as the revenue actually grows, then it actually almost takes care of most of the issues with operating margin.
On the technical side, I think we have to look at our financials a little bit more carefully because this year we have added the line of e-commerce transaction, which by nature carries a much, much lower margin than our business, which are virtual items and online advertising, which are much more Internet of service oriented. I think you actually sort of have to almost take the e-commerce business out of the financials, then when you look at the margins. I think, for example, these few quarters, our margin has been holding steady. I think, if you look at IVAS, for example, the gross margin actually increased in the third quarter compared to the second quarter.
Okay. Thank you.
Thank you. Your next question comes from the line of Alicia Yap from Barclays. Please ask your question.
Hi. Good evening, everyone, and thanks for taking my questions. My question is related on Weixin WeChat. We recently saw some consistent advertising campaign on WeChat from, for example, McDonald's Hong Kong. Just wondering if this is still under some trial and testing period, or have you started to sign up actual agreement with the advertiser? For the overseas market, do you also plan to treat Weixin more as an advertising platform, or will you consider to expand it into a mobile gaming platform as well?
Well, I think, a bit of clarification here. The McDonald's Hong Kong promotion is actually a joint promotion rather than an advertising deal. Actually, net-net, we obtain some cash rather than we're getting cash from that transaction. In terms of your question about the, I would say, the evolution of the monetization mechanism for WeChat, I think as I said during the call, we are right now much more focused on building user base rather than monetization. It's not as if we have not thought about monetization. Over time, we felt that monetization from WeChat can come in a very similar way as PC Internet, right? You can have certain elements of entertainment, you can have certain elements of advertising, and you can have certain elements of transactions.
Because of the mobile nature, the transaction part can be even more interesting because you could actually involve the O2O component in the overall transactions stream. These are areas which, over time, we would actually sort of put some trials on. At this point in time, as I said, we are actually very focused on building user base.
Sure. My second question is on your video business. Can you update us on your video strategies, and do you think Tencent Video can become the leader in the industry? I think we saw some news reporting saying, I think on the VP level, you guys mentioned maybe for the video business will be breakeven for next year. Can you comment on that? Thank you.
With regards to our online video strategies, I don't think anyone has a particularly kind of unique online video strategy. At this stage, we're all in the business of purchasing appealing content and then distributing, merchandising that widely to users. Last in this, monetizing that through advertising revenue. We bring certain advantages to bear in terms of our natural traffic, in terms of our login relationship with users that enables us to merchandise the content in a very targeted way, and in terms of our distribution infrastructure. We're one of several leaders in the online video space at the moment. I think if you look at the offline video space globally, there's normally several leaders that survive and thrive, and we look forward to being one of those leaders and helping shape the evolution of the industry moving forward.
With regards to profitability, to some extent, that's a function of industry trends. You're probably aware that online video content costs escalated extremely rapidly in 2011, consolidated to some extent in the first six months of 2012, and are now increasing quite rapidly again. That's something that is an industry phenomenon rather than a Tencent specific phenomenon.
Okay.
Thank you for your questions. Next question comes from the line of Jin Yu from CICC. Please ask your question.
Good evening, and thank you for taking my question. My question is on mobile Internet. It reported by certain media that management discussed the concerns over the cannibalization effect from mobile Internet over our current PC base, and even the cannibalization between our own services such as Weixin and QQ. Meanwhile, if we look at the earnings for the third quarter, we see the PC-based services are growing much faster than the mobile-based services. My question is, so from the management perspective, how imminent we see the cannibalization pressure is? Or it only remains as a long-term threat rather than a short-term threat? I will stop here. Thank you.
Well, I think mobile Internet is actually an industry-wide phenomenon, right? The situation is that mobile Internet, because of its convenience and because of sort of the availability of very good bandwidth and very good handsets, it's actually taking more and more of the user time. If we look at the overall usage, mobile Internet plus PC Internet together actually allows users to spend more time on the Internet, which we believe from a user engagement perspective is actually net positive for the industry. Now, however, what happens is because the entire ecosystem of monetization is actually not available on the mobile side, and because of some of the limitations in terms of smaller screen on mobile devices, right now it's more difficult for the industry as a whole to monetize on the mobile Internet side.
I would say over time, some of these issues will be resolved, mobile Internet monetization will go up as time goes by. It may actually even open up new revenue opportunities, such as the O2O aspect. I think this is what is happening right now. Now, in terms of specific to our own business, we are embracing mobile Internet in a big way. As a matter of fact, in the past few years, a lot of our existing PC-oriented services have already gotten very significant exposure to mobile Internet. For example, if you look at Mobile QQ, its mobile usage is actually very big. By daily active users, I think Mobile QQ is still the largest mobile smartphone application in China.
We look at Weixin and Mobile QQ as complementary because Weixin allow us to reach a certain audience, which in the past have not even gotten into touch with QQ at all. While at the same time, a lot of the users, I would say the vast majority of the users, are using Weixin and QQ at the same time for different purposes with different people, with different of their friends. As a whole, the two services actually added together increase our presence both on the internet as a whole as well as on the mobile internet.
Next question, please.
Okay. Thank you. Next question comes from the line of Cynthia Meng from Jefferies. Please ask your question.
Thank you for taking my questions. I have two questions. One is on games. Tencent online games users, we noticed some third-party research recently that the number of players in recent months has declined. I just wonder whether this is the trend that management is seeing from what you can see in the statistics, and what might be the reason behind that?
Sorry, before we go further, we don't know where the source of your information is, and that's absolutely not true.
Okay. Great.
Yeah.
And then-
We appreciate you more now.
That's great to hear. Thank you. The next question is on mobile. Can management just give some more details on the process of O2O trial services leveraging the user base of WeChat? We also noticed that recently Tencent integrated Tenpay into WeChat. Just wonder whether you can elaborate some more with that initiative. Thank you.
Right now, we are at a very early stage of trying out integrating our mobile platform with offline commerce. One of the trial is allowing traditional merchants to actually build up official accounts and allow them to actually establish a relationship with their own customers in WeChat or Weixin. That is actually an initiative that's going on, and we have actually seen a pretty good response from the merchants who are using this platform. I think it's way too early to talk about how we can evolve this platform because we have a lot of ideas. On the other hand, there's not as if there's a very clear precedent of success. We are really the trailblazer right now.
I think as we continue to advance the trials, there will be things that we do that work, there will be things that we do that did not work, and we learn from that process. Over time, I think we'll probably have a more solid model to share with our investors. Right now, I think it's just way too early to talk about that initiative.
Okay, thank you.
Thank you. Operator, in the interest of time, shall we take questions from the last three analysts, please?
Certainly. The next question comes from the line of Shao Jiang from Macquarie. Please ask your question. Shao Jiang, your line is open. Please ask your question.
Yes, sorry, I was on mute. Can you hear me now?
Yes, we can.
Hi. Thank you so much for taking my questions. I have three and a couple of questions as well. Firstly, on the online ad market, obviously you have grown very fast for your advertising business. The overall macro has been pretty challenging. I was wondering, could you please provide a bit more color on your outlook for your online advertising business for the next, say, two to four quarters? How you think that's going to trend, and when you feel like the bulk of the market share gain for you may start to taper off? That's my first question.
I think with regards to outlook, this is an industry where two to four months of visibility is heroic. Two to four quarters would be an exercise in imagination. In general, there are certain sectors of the economy that are very healthy, and there are certain sectors that, for whatever reason, are less healthy. As a result, the overall ad market is mixed. Frankly, that's probably the normal state of affairs. There have been a couple of years in the past when the overall ad market was very strong in 2010, and I think that's kind of abnormal. Now we're in a more normal situation going forward. With regards to our ability to sustain market share gains, time will tell.
I think if you look at our share of internet usage, which would be on the order of one-fifth of total internet usage in China, and then compare it with our share of online advertising, which would be on the order of 5%, then that sort of simple comparison would suggest that there's no immediate ceiling on how far we can continue to increase our share of the industry. obviously, our growth will be a function of the industry's broader growth, as I mentioned, is choppier now than it was 12 months ago and could remain choppy for some time.
Cool. Thanks for that, James. My second question is on your open platform. My apologies if I missed the number. Could you share with us the mix of revenue as % of your total or as % of your segment revenue from your open platform?
We don't disclose that number on a regular basis. I think we mentioned last quarter that it was over a quarter of our community and open platform revenue came from open platform.
Okay, what is this quarter?
Sorry. We don't disclose that every quarter.
Sorry. Okay. All right. Okay. Thanks, guys.
Thank you. Your next question comes from the line of Wendy Huang from CIMB. Please ask your question.
Thank you. First of all, I want to understand how do you book your mobile internet game and also mobile advertising revenue. For mobile advertising revenue, are you including that in the advertising part of the MVAS business? Also, for the mobile internet game revenue, because I know that your Java game revenue is included in the MVAS, but how will you book the mobile internet game revenue, whether that will be the MVAS or the online game revenue? Thank you.
All right. In this respect of the online game revenue, it's booked under MVAS. For most of the revenue, they are booked under a net basis, whereas for some of the games, just like standalone games, normally, we book based on gross basis with sharing paid to the developers. In relation to mobile advertising, all the revenue are booked under online advertising.
Okay. Sidney, is there any data point that you can share about your progress on the mobile search and also mobile operating system? Also, I understand that foreign operators such as App Store and Google Play can actually not accept the payment in China. It seems that Chinese companies are in a very big advantage to get a revenue share from the third-party application developers going forward. How will Tencent take advantage of this and also maybe integrate your payment system with your mobile operating system going forward? Thank you.
We actually don't have a mobile operating system. I think we continue to believe that our application-driven approach, which is providing applications that has user loyalty and user facility, that works with all kinds of different devices, that works on all kinds of mobile operating system, is actually sort of the way to go for us. In terms of the billing side of mobile applications, I think we're still at a relatively early stage of exploring that market. We felt that in a very open platform like Android, for example, it's actually going to be very difficult if you want to apply the iOS model, which is payment by download.
What we would envision in the future is that if there are applications which endorses in-app payment, for example, games that allows users to freely download, but pay within the application, then our mobile payment solution and our very large user base, and our billing relationship would actually sort of help quite a bit in terms of capitalizing that growth. As a result, we are actually building our mobile gaming platform strategy around that. In terms of mobile search, I think we are still at a sort of relatively early stage of exploring that market. We believe that, one, we have a higher market share on mobile platform as compared to the PC platform. Two, we actually do have quite a large number of mobile internet applications that can be brought to bear in the future as we continue to develop the mobile search solution.
Thirdly, we believe that there are more scope for innovation from a user perspective.
Experience perspective on the mobile platform, which we are currently experimenting. We are actually sort of quite eager to continue to develop our search solution around the mobile platform.
Lastly, I just want to clarify your previous comment on the advertising outlook. You said the advertising growth is going to decelerate. Are you talking about deceleration on a year-over-year basis or Q-on-Q basis?
I don't think we actually said that. We just mentioned that the advertising environment this year has been choppy, particularly in certain sectors like e-commerce, for example. We assume it will remain choppy.
Actually, in your press release, it says that the absence of the Olympics and decelerating economic growth in China may slow the revenue growth rates for the online advertising industry, including our own online advertising business.
Yeah. They may. Indeed, they may. That's the announcement. Obviously, we would think to grow as fast as they can, there's some markets we create ourselves, and there's others where we're a participant in the industry, and we're somewhat subject to industry trends. We're highlighting that there are certain industry trends in the advertising industry in China that are less positive, and there are certain that are more positive. A couple of the less positive ones would be weakness in specific ad categories and the fact that a once every four-year sports event has just moved behind us.
Okay.
Thank you. The last question comes from the line of Ravi Sarathy from Citi. Please ask your question.
Good evening, thank you very much for taking my questions. Two questions, if I may. The first one is around your targeted advertising platform. I was wondering if you could give us any more color on some of the progress you've made on evolving that platform, and the targeting capabilities for it. Also, clearly you're one of the key drivers as part of the broad move in China and elsewhere to advertisers moving from time-based advertising toward performance-based. I was wondering if you had any color around that, % of ad dollars moving from CPT to more performance-oriented metrics or % of advertising dollars. Final point of housekeeping, any update on the timeframe for Call of Duty and Blade & Soul around localization, the beta, and ultimately launch?
With regards to the targeting capabilities, it's a continual incremental process. We aggregate more data about our users, and then the algorithms get to putting the appropriate weightings on the right data sets to drive the highest return. That's something that's happening day in, day out on our side. It's also something which the advertisers themselves are continually optimizing for. In general, the more time that an advertiser spends using our targeted advertising solutions, the higher the return on investment, the higher the click-through rate they can drive, and the better for them and the better for us. In general, as I mentioned, we've been progressively opening the targeted advertising up to more categories of advertisers. Starting with e-commerce companies, we moved into game companies. More recently, we've moved into education service provider companies.
With regards to your question on the shift of advertising from a cost per time to a cost per click or cost per action model, that's something that's happened globally. China historically has been a little bit behind the curve for a number of local reasons. Now we're seeing that shift happening at an accelerating pace, which is helpful for performance advertising in general. With regards to timetable for new game releases, we generally wouldn't comment, but we'd urge you to just watch how the games move through their various beta stages.
Thank you very much. A quick follow-up on your advertising call. That's very helpful. Thank you very much. I know you mentioned in Q1 and Q2, James, that the focus on advertising had the additional leverage, that you had a lot of inventory that was available for you to leverage with that targeted advertising platform. I was wondering if you had any color around that. Was one of the key drivers of this extraordinary growth is inventory that you had available to utilize? Can we expect the end in sight to that one of several growth drivers?
I think that right now a great deal of the targeted advertising is on Qzone and Pengyou on desktop. There's a number of services we operate that aggregate a large amount of traffic on the desktop where we haven't rolled out targeted advertising. Our early impression is that advertising on mobile devices, when it takes off, will tend to be of the targeted performance format by and large. How quickly we add the inventory to the system remains to be seen, we may choose to do it at a faster pace, or we may choose to do it at a more measured pace for whatever reason. In general, we're not at a place where we feel that inventory constraint is a major problem for us.
That's fantastic. Thank you very much.
Thank you. I'd now like to hand the call back to Miss Chen for closing remarks.
Thank you, operator. We're rounding up the call now. If you wish to check our press release and other financial information, please visit our IR website on the www.tencent.com/ir. We'll also post a replay of this webcast on site shortly. Thank you, and see you next quarter.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. Tencent Holdings Limited 2012 third quarter results announcements conference call. You may all disconnect.