Earnings Call: Q3 2012

Nov 14, 2012

Thank you for standing by, and welcome to the Tencent Holdings Limited 20 12 Third Quarter Results Announcements 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 you. 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 Chan from Tencent. Please go ahead, Ms. Chen. Thank you, operator. Good evening. Welcome to our annual results conference for the third quarter of 2012. I'm Catherine Chang from the IR team of Tencent. Before we start, 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 exceeded in addition to, but not as a substitute for matches of the company's financial performance prepared in accordance with IFRS. For our detailed discussion of the risk factors and our non GAAP financial measures, please refer to our disclosure documents downloadable on www.transcend.com/ir. Having said that, let me introduce the management team on the call tonight. They are our Chairman and CEO, Pony Ma, President Martin Lau, Chief Strategy Officer, James Mitchell, and CFO Joao. Kearning will kick off with a short review of financials and platform support. Martin and James will review our business performance. John will discuss the financials and then we'll open the floor for questions. Now let me turn the call over to Billy. 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 gain portfolio and open platform strategy anchored robust year on year growth in our IVAS business. Our investments in qq.com video business and advertising platforms in the last few years are also paying off contributing to strong year on year growth in display advertising revenues. Our e commerce business, despite the recent price work 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 and unified product experience for our services on the internet is crucial to build user loyalty, whether they are engaged via PC at home or mobile on the go. Increased the mobile usage as a result will enhance the overall time spent on our services. Now let me highlight a few numbers from our third quarter results. Total revenue was rmb 11,600,000,000, up 54% year on year or 10% quarter on quarter. IVR's revenue was RMB 8,400,000,000, up 39% year on year or 8% quarter on quarter. NMR's revenue was R946 $1,000,000, up 12% year on year or 2 percent quarter on quarter. Online advertising revenue was rmb 1,000,000,000, up 69% year on year or 15% quarter on quarter. E commerce transition revenue was rmb 1,100,000,000, up 32% year over quarter on quarter. Non GAAP operating profit was rmb 4,400,000,000, up 32% year on year or 5% quarter on quarter. Non GAAP net profit attributable to shareholders was RMB3.6 billion, up 28% year on year or 5% quarter on quarter Moving onto an update on our key platforms. In the third quarter, QQIA monthly active user accounts increased 10% year on year to RMB784,000,000 and PCU increased 15% year on year to RMB 167,000,000. Our smartphone basis, social communication products, We think registered over 200,000,000 user accounts in September. For our social networks, Qzone monthly active user accounts grew 8% year on year to RMB 593,000,000 and Pangzhou MAUs growth 27% quarter year on year to RMB 259,000,000. Looking at our media portfolio, qq.com continue to lead peers in terms of overall page views and unique visitors. While our Atlantic coverage achieved biggest sports audience among China portals. Our video platform clamped to number 2 ranking in China by both MuV and video views according to irisearch and comscore. Social media service, Tencent MicroBot grew daily active user accounts to 94,000,000. QQ scan platform recorded 9,400,000 PCUs, up 18% year on year. Our wireless portal delivered continued growth in user engagement and page views. I will now pass on to Martin to the our IBAS and NVAS businesses. James will take 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 at 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, owner advertising weighted up to 9% of total revenue. E commerce transactions was 10% and Mbas was 8% of total revenue. Now for IVAS, segment revenue was rmb 8,400,000,000, up 39% year on year and 8% quarter on quarter. Online games revenue was rmb 6,000,000,000, 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 Platform's revenue was RMB2.4 million, 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 fraudulence solutions 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. Now taking a closer look into community and open platforms. Our social networks remained the leading social shared sharing platform for Internet users in China. Qzone's monthly active user accounts grew 8% year on year, and Tuniu's MAU grew 27% year on year. During the week long national day holidays in early October, Q zone users uploaded 1,900,000,000 photos on Q zone, 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 200,000,000 user accounts. We're now testing open platform Ovation as part of our overall corporate strategy. However, our near term focus is continued to grow the user base before monetization. Now Tencent microblogs daily active user accounts increased 78% year on year. Average daily posts doubled year on year to 105,000,000 in the quarter as user activity and sharing increased due to the Olympics. On our open platform, we're building 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. 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 through open ID cooperation with 3rd party mobile applications. Now thinking into each category and their online games, on 2Q game platform, we operate 119 mini casual games and 53 web games. Combined peak concurrent user increased to 9,400,000 due to anniversary promotions and new game new web game releases. Combined ACU did to slightly to $4,200,000, as some players diversified their time from the Q2K platform to web games on Q3. 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 $14,500,000 $4,500,000, respectively. In October, Leadle Legends expanded its registered user base to $17,000,000 globally, with DAU at $12,000,000 and peak concurrent user at $3,000,000. LOL is now positioned to amount the most successful online games in the world. Both crossfire and TQ Speed broke new PCU record and increased monetization during the seasonally strong third quarter. In terms of massively multiplayer games, the combined PCU and ACU increased to $4,800,000 $2,000,000, respectively. Benjamin Fighter increased the monetization due to releases of new character, play mode and game items. In house title, Lee had mentioned a leader for YUGO recorded 500,000 PCU since its open beta launching. In September, while legend of Shenzhen entered Open Beta on November 3rd, following closed beta testing in the quarter. Now moving on to our AmbaaS business. Revenue from mobile value added services was RMB946 1,000,000, 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. 2.5g3grevenuesincreased 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 MBS, I would like to share with you that our mobile security manager has expanded its total activated user base to over $100,000,000 in September and has received a top industry accreditation 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 RMB 1,000,000,000, up 69% year on year and 15% quarter on quarter. Performance advertising and brand display advertising on our video platform with the major drivers for the year on year revenue growth, while the income from new ad platforms and advertising activities related to the London Olympics boosted us sequential growth. Higher revenue type display ad revenues reached rmb 912,000,000, up 66% year on year and 17 percent quarter on quarter. Search ad revenues were rmb 103,000,000, 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 And 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 5 advertiser categories for 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 for experiencing pressure. Our online video advertising revenue more than tripled year on year of a small base. Within performance display, targeted advertising on our social networks benefited from increased impressions volume on Qzone and Pangyo. Our overall click through rates improved as we further find user profiling and optimized our algorithms. Web game developers, e commerce companies and now education service providers of 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 rmb 1,100,000,000, 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, electric and merchant. We're building out our marketplace for B2C vertical players in SME Merchants, and we've recruited over 13,000 merchants to date. We're in the process of migrating larger merchants on PIPI to our B2C marketplace by retaining PIPI's focus on CCC and small medium enterprise transactions. With that, I'll pass to John to discuss the financials. Thank you, James. Hello, everyone. Everyone. For the third quarter of 2012, total revenue was RMB11.57 billion, up 54% year on year, or 10% quarter on quarter. Operating profit was rmb 4,120,000,000, up 38% year on year or 5% quarter on quarter. We recorded net other losses of RMB50 1,000,000 versus RMB3 1,000,000 last quarter. In the first quarter, we recognized an impairment provision of RMB448 1,000,000 on selected Investy Companies and donation of 6 1,000,000 to Tencentura Tifan, against a special dividend of RMB 390,000,000 for MELDA Group, and subsidies and has rebates of RMB136 million. Net finance cost was RMB99 1,000,000 versus RMB115 1,000,000 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 percent. Net profit attributable to shareholders was rmb 3,220,000,000, up 32% year on year or 4 percent quarter on quarter. On a non GAAP basis, operating profit was RMB4.44 billion, up 32% year on year or 5% quarter on quarter. Net profit attributable to shareholders was rmb 3,550,000,000, up 28% year on year or 5% quarter on quarter. Operating margin was 38.4 percent down 1.7 percentage points from last quarter. Now margin was about 31%, down 1.4 percentage points from last quarter. Total costs were RMB4.79 billion for the first 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 force as a percentage of revenues. Total cost was stable at 41 percent this quarter. Comparing to last quarter, gross margin increased 1 percentage point to 67% due to increased contribution from in house gains. End Glass gross margin decreased two percentage points to 59%, reflecting client sharing cost due to growth in third party mobile games and staff force. 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 commissions paid to agencies. Gross margin for e commerce transaction increased 1 percentage point to 4%. Moving on to operating expenses. Selling and marketing expenses was rmb 820 1,000,000, up 34% quarter on quarter or 62% year on year. This 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 and A expenses totaled rmb2.03 billion, up 9% quarter on quarter or 38% year on year. This sequential increase reflected higher R and D expense and increased staff force as our business scale grew. G and A represented 18% of total revenue. Included under G And A, R and D expenses was rmb 1,120,000,000, up 7% quarter on quarter, or 51% year on year, Deep represented 55% of G And 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. Including 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 percent, down from 59% last quarter. Excluding e commerce revenue and comps, gross margin was 64.5% for the quarter. Non GAAP operating margin was 38.4 percent down from 40.1 Percent 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 eCommerce gross profit, you would have been 33.9%. During the third quarter, we didn't buyback any shares The total number of shares outstanding was 1,846,000,000. Basic EPS was 1,759,000,000 on GAAP basis, and RMB 1.941 on non GAAP basis. Diluted EPS was RMB 1.727 on GAAP basis, rmb1.906 on non GAAP basis. Total CapEx was $1,130,000,000 in RMB stable year on year or up 24% Q on Q, of which operating CapEx was rmb 978 1,000,000, up 2% year on year or 40% quarter on quarter. Non operating CapEx was RMB154 million, down 12% year on year or 29% quarter on quarter. Free cash flow reached RMB4.04 billion for the quarter, up 82% year on year or 41% quarter on quarter. Our net cash position was rmb 23,490,000,000, up 50% year on year or 20% quarter on quarter. This concludes our presentation. Thank you. You. Question comes from the line of Alex Yao from Deutsche Bank. Please ask your question. I have two questions. Number 1 is, when I look at the sequential growth of the I'm 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? And can you help us understand how is that mobile affecting the overall platform usage the user demographics? And number two questions is on the open QQ account log in initiatives on mobile internet What can you guys get out of this initiative and how can 3rd party benefit from these? Thank you. Yes. In terms of the I'm mattresses, right. Key metrics has slowed a bit. We have given the reason that they're was a national day holiday and typically sort of a few days ahead of that, the user metrics is actually tends to be lower. But undeniably, I think there is a tapering off in terms of the total growth rate even look at the year on year growth rate, I would say one is it's because of the scale effect as sort of the user base and keep on growing, then sort of the growth rate actually decreases. Secondly, there is actually certain number of users who have been using WeChat Ovation, at the same time as QQ. Now, we have not included the users on the Weixin and added the number to this overall number. So from a 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. Now thirdly, if you look at the peak and train users, right? It's a relatively flat quarter in the third quarter, but as we step into the fourth quarter, we have seen the peak and train users just actually book new record at around $176,000,000,000. So I would say that if the user trend is still healthy, Thank you for your questions. Next question comes from the line of Big Woo from JP Morgan. 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 Q song as a social network also seeing some flattish growth I wonder if you can also discuss like how does Weixin play into the dynamics as far as maybe the social network activities goes as well? And maybe second question I put in is that for e commerce, we see a pretty good margin picked up during the third quarter. I wonder can you discuss the dynamic between the transaction volume and the margin changes between the principal and agency businesses? Thank you. Okay. Well, in terms of Qzone, right, I would say the, a similar answer, right, to the QQ platform also sort of applied to Qzone, which is Qzone is actually a very closely tied with QQ. It's a social network that shares the same social graph as QQ. And if you look at the overall Internet user growth, it's really, in the very low teen of percentage growth. And if you look at sort of new, if you look at the PC side, it's actually much lower than that. So, your Q zone as a social platform does have sort of the scale got impacted by the scale effect it also has got some impact from cannibalization on the smartphone side, when you actually sort of on the smartphone side, you have mobile QQ being very strong. You have weixin being very strong and to some extent, our micro block is also actually quite strong too. So with all these added together, the impact is actually slightly higher for Qzone than for QQ as a whole. But if you look at the year on year growth trend, right, it's still demonstrating a growth slightly lower than the overall internet user growth. Higher than the PC internet user growth? I'd say, with regards to e commerce, gross margins, on the principle 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 fluctuation. In a gross margins for the principal business are oscillating around a stable mean. And now 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, very, very tiny base. So that's not yet having a particularly substantial impact on the e commerce business as a whole. Great. Thank you. Thank you for your questions. Question comes from the line of Jin Yoon from Nomura. Please ask your question. Hi, good evening. 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? And the follow-up to that is, in the quarter, you mentioned that much of the or a significant portion of your ad revenues came from one time events like Olympics. Can you quantify that and give us any kind of guidance in terms of any of that as we are occurring for next quarter? Thanks. Sure. With regard to the first question, yes, as you're probably aware, if it's a subsidiary of $0.10 in advertisers on our site, it wouldn't appear in our our revenue line. So you can safely ignore that. I guess hypothetically it's possible there are affiliates of $0.10 that advertise and we would collect revenue from them. But I 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 unrated third parties and unit primarily, big brands, whose names you would recognize. With regards to the Olympics, question. Every 4 years, there are Olympics, I think 4 years ago, you've made a great deal of noise about the Olympics impact on advertising. Engineering. We just wanted to signal that for this just completed third quarter, the industry as a whole, of which we're a part in the Olympics played played some role. And so that's something that we assume benefited, 3rd quarter advertising revenue both for the advertising industry as a whole of putting in China around for Tencent in particular. We were quantified a party because we generally don't have party also because it's hard to sell how much of Olympics related advertising is kind of truly incremental and how much would have appeared somewhere else in our advertising revenue being now 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. Maybe two questions. The first one is about the mobile open platform strategy that you mentioned it. I'm just wondering what type of applications would that apply to? And, how Wei Qing would fit in the bigger picture? And then my second question is more housekeeping. Could you give us some guidance on your team ARPU in the quarter as well as the increase in the share of our associated losses. Thank you. In terms of the mobile home phone platform, right now, it's still at a very early stage of construction. But we have, constructed the open platform. We have gained a lot of experience from basically our, our PC open platform. And we are starting to, migrate it to our mobile platform. And 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 log in, 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 content onto our Weixin platform. So that's one stream of activities that's being 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 the QQ account, right? So there are applications on the PC side who also have got a mobile service component. So over time, we would like to allow these applications to actually extend their service through QQ and Q zone onto the mobile platform. Right? So we because we have, the same user account with the same payment mechanism there, are going to be ways to which we, over time, allow application developers to extend their services onto the mobile side. So 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 regards to ARPU, for AMOG, typically, it falls in the range of 100 to 160. Per quarter. And for Advanced Casual gain, it would be the range of $35,000,000 to $115,000,000. With regards to the second question for the share of lots of associates. As you understand, we have got a big portfolio of associate companies and now it's having a caring amount of over $7,000,000,000. So it is the net loss of goods is a mixture of a lot of different companies in there. So 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 question comes from the line of Richard Gee from Morgan Stanley. Please ask your question. Oh, hi, pony, Martin, Jen, and James. Thanks for taking my call. I have two questions. And first, starting with e commerce, And 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 on the warehousing side, what are the plans over there? Richard, with regard to e commerce, we already have, in 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 in a way we won't be able to drive an economic return or provide the level of service we want to provide. Yes. Thank you, James. My next question is regarding your open platform initiative. Can you give us some color on the number of applications on the platform and also what is called for revenue contribution and potentially margin profile should be looking at and also given the rising competition in the industry from other social media and leader in the open platform space. And are we seeing any change in terms of the so called the revenue sharing with the 3rd 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. And 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 Qzone and we've built a very vibrant ecosystem of app developers and these are real developers who are generating significant revenue. And they have been able to keep on growing their own business. And 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. And because these are the users who are very have the high propensity to actually play games. So these new apps actually are generating good revenue as well. And we are now extending the open platform now to other of our social platforms, including Q Plus, including our Michael Block. And as the next step, we are looking, as I said, to extend the open platform to cover our mobile platform as well. So 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 is we said, we would like to extend it to the mobile platform. We are also increasingly focused on building those applications that are non game oriented so that we can have even richer ecosystem of different applications to cover the various needs of the users. Thank you. Very helpful. Thank you for your questions. Next question comes from the line of Chisong 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. So your headcount is up, as you said, about 47% year on year. How should we think about headcount grades for 2013? Well, in terms of headcount, right? That 47% actually really includes a very big contribution of the consolidation of issue. And, so if you count that out, it's essentially around 30%. And as you know, right, the in terms of the employee composition of what I see some quite a number, a large number of them are actually, yeah, logistics related. Now, in terms of what we're looking next year, I think we would have a I would say we'll continue to apply a pretty high standard in terms of our headcount increment. We'll definitely increase our employee accounts in the strategic businesses. At the same time, given the company is actually in a relatively large and given that we have already gone through a reorganization in the early part of this year I would say the growth rate of the, of our employee accounts would actually be lower than this year. Okay. Great. And my second question relates to just sort of overall profitability. Now clearly, you folks have a tremendous amount of opportunity to invest in a mobile e commerce advertising. I'm wondering when you think, that we should expect operating margins to actually stabilize? Well, 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, right, for us to keep on 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 user and usage going, then basically over time, there will be ways through which we can actually monetize such a value add to the users. And over time, as the revenue actually grows, then it actually almost takes care of most of the issues with operating margin. Now on the technical side, right, 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. So I think you actually sort of have to almost tick the e commerce business out of the financials then when you look at the margins, right? I think for, for example, right, these few quarters, our margin has been holding steady. And I think if you look at IVAS, for example, right, 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 So we recently saw some consistent advertising campaign on WeChat from for example like MacDon or Hong Kong. So just wondering if this is still under some trial and testing period or have we started to sign up actual agreement with the advertiser? And for the overseas market, do you also plan to 3 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 Madonna's Hong Kong promotion is actually a joint promotion rather than an advertising deal. And actually, net net, we are paying some cash rather than we're getting cash from that transaction. Now 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 core, we are, right now, much more focused on dealing user base rather than monetization. But it's not as if we're not, we have not thought about, want to say over time, we felt that new monetization from WeChat can come in a very similar way as PC internet, right, which is you can't have certain elements of entertainment. You can have certain elements of advertising. And you can have certain elements of transactions. And 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, new stream. So these are areas which over time, we would actually sort of put some trials on But at this point in time, as I said, we are actually very focused on building user base. On your video business. So can you update us on your video strategies? And do you think Tencent video can become the leader in the industry. And I think we saw some news reporting saying, I think on the VP levered, 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 strategy, I don't think anyone has a particularly unique online video strategy. At this stage, we're rolling the business of purchasing opeding content and then distributing merchandising that wide BT users. And I think lastly, monetizing that through sizing revenue. We bring certain advantages to bear in terms of our natural traffic in terms of our logging relation ship users. It enables us to merchandise the content in a very targeted way and in terms of our distribution infrastructure. But 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 are escalated extremely rapidly in 2011. Consolidated to some extent in the 1st 6 months of 2012 and now increasing quite rapidly again. So that that's something that, it's an industry phenomenon rather than a sense of specific phenomenon. Thank you for your questions. Next question comes from the line of Yujun from CICC. Please ask your question. Yeah. Thank you for taking my questions. So my question is, mobile internet. It reported by certain media that the management discussed the concerns over the cannibalization effect from mobile internet over our current PC business. And even, you know, the cannibalization between our own services, so that we see 92Q. So meanwhile, if we do have the earnings, for the third quarter, we see that PT base is limited, outgoing, much faster than the mobile base of this. So my question is, so from the money money perspective, how imminent the we see the cannibalization pressure is, how is it only remains either a long term flight rather than the short term flight. So I will stop here. Thank you. One of your mobile internet is actually a industry wide phenomenon, right? The situation is that mobile Internet because of its convenience and because of some 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, right, mobile internet plus PC Internet actually together actually allows the users to spend more time on the Internet, which we believe from a user engagement perspective is actually net positive for the industry. But however, what happens is because the entire ecosystem system 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 and your mobile internet monetization will go up as time goes by. And it may actually even open up new revenue opportunities such as sort of new, the O2O aspect, right? So I think sort of what is happening right now. Now in terms of specific to our own business, right? We are embracing into 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 a very significant exposure to mobile internet. For example, right? If you look at mobile QQ, it's, mobile usage is actually very big. And by daily active users, I think mobile QQ is still the largest mobile smartphone application in China. And we 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 sort of gotten into touch with a QQ at all. While at the same time, a lot of the users, obviously, at 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. And 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. 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. 1 is on games. Tencent's online games, users, we noticed some third party research recently that the user number of players in recent months have 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, right? We don't know where the source of your information is, and that's absolutely not true. So Okay. Great. And then That's great to hear. Thank you. And then the next question is on mobile. Can I just want to give some work details on the process of O2O trial services leveraging the user base of WeChat? We also noticed that recently, Tencent integrated a Tempe into WeChat. Just wonder whether you can elaborate some more with that initiative? Thank you. Yeah. Right now, we are at a very early stage of you're trying out, you're integrating our mobile platform with offline commerce. And 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 Ovation. So that is actually an initiative that's going on we have actually seen a pretty good response from the merchants who are using this platform. But I think it's 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, this is not such the there's not as if there's a very clear precedence of success. We are really the trailblazer right now. So 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. And 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. Comes from the line of John Shao from Macquarie. Jonshan, 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 was reading a couple of questions as well. Firstly, on the online ad market, obviously you have grown very fast for your advertising business. However, sort of 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, 2 to 4 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 2 to 4 months of visibility is heroic So two to four quarters would be, an exercise in imagination. But in general, there are certain sectors of the economy that, you know, are very healthy and there are certain sectors, for whatever reason, that's healthy. And 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. The overall ad market is very strong in 2010. And I think that's kind of abnormal and now we're in a more normal situation going forward. With regard to our ability to sustain market share gains in a time would help. But I think if you look at our share of internet usage, which will be on the order of 1 5th 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 how far we can continue to increase our share of the industry. But obviously, our growth will be a function of the industry's broader growth as well as the industry's broader growth as I mentioned, it's choppy now than it was 12 months ago and could remain choppy for some time. 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 percentage of your total or as percentage of your segment revenue from your open platform? We haven't disclosed that number on a rate basis. I think we mentioned last quarter that it was over a quarter of our community and open platform revenue came from open platform. Please. Okay. And what is this quarter? Sorry. We don't disclose that in this quarter. 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 NVAS business and also for the mobile internet game because I know that your Java game revenue is included in the Atlas, but how will you book the mobile internet game, whether that will be the and buzz or the online game revenue? Thank you. All right. In this respect of the online game, game revenue, is booked under Ambash and for most of the revenue, their book under a net basis, whereas for some of the game chips by stand alone normally, we book based on a gross basis with sharing paid to the developers. In relation to advertising, mobile advertising or the revenue both on the advertising. Okay. And secondly, is there any data point that you can share about your progress the mobile search and also, mobile operating system. And also, I understand that following operators such as App Store and Google's Google Play can now can actually not accept the payment in China. So it seems that Chinese companies are in a very big you to get a revenue share from the 3rd party application developers going forward. So how will your Tencent take advantage of the and also maybe integrate your payment system with your mobile operating system going forward. Thank you. Yep. 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 utility that works with all kinds of different devices that works on all kinds of mobile operating system is actually sort of new, the way to go for us. Now in terms of, the billing side of mobile applications. I think we're still at a relatively early stage of exploring that market. And we felt that in a very open platform like Android, for example, it's actually going to be very, 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, and endorses in app payments, for example, games that allows users to freely download but pay within the application, then our mobile play payment solution and a very large user base and our billing relationship would actually sort of help quite a bit in terms of, capitalizing that growth. And as a result, we are actually building our mobile platform, 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. 2, we actually do have quite a large number of mobile internet applications that can be brought into bear in the future. As we continue to develop the mobile search solution. And thirdly, we believe that there are more scope for innovation from a user experience perspective on the mobile platform, which we are currently experimenting. So we are actually, sort of, you know, quite eager to continue to develop our search solution around the mobile platform. Okay. And 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, in advertising environment, this year has been choppy Sicki in certain sectors like e Commerce, for example, and we assume it will remain choppy. But in your actually, in your press release, it says that the absence of the Olympics and decelerating economic growth in China may slow the revenue growth rate for the online advertising industry, including, our own online advertising business? Now that they may, indeed they may. That's the answer. Obviously, we'll stick to gravity as fast as they can, but that there's some markets we create else and there's others where we're a participant in the industry and we're somewhat subject to industry trends. So we're highlighting certainly there are certain industry trends in the advertising industry in China that you know, that's positive and there are certain that are more positive. But a couple of the, you know, less positive ones would be in a weakness since we're the categories. And, the fact that a once every 4 year sports events just moved behind us. Okay. Thank you. The last question comes from the line of Robbie Sarati from Citi. Please ask your question. Good evening, and thank you very much for taking my questions. 2 questions, if I may. The first one is around your targeted advertising platform. 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. And also, clearly, you're one of the key drivers, as part of the broad move in China and elsewhere to emphasize is new from time based advertising toward performance basis. I was wondering if you have any color around that, you know, percentage of that dollars moving from CPT to more performance oriented metrics, or percent of, percent of amortized or percent of amortizing dollars. And finally, of housekeeping any update on the time frame for Call of Duty and players in Seoul, around localization, but Peter and ultimately launch. Yes, I mean, with regards to the targeting capabilities, to continue incremental process, We aggregate more data about our users and then the algorithms gets to work putting the appropriate weightings on the right datasets to drive the highest return. And that's something that's from a happening day in, day out on our side. It's also something which deadvertisers themselves to continually optimizing for. And so in general, the more time that an advertising spend using our targeted advertising solutions, the higher the return on investment, the higher sector 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 app up to more categories of advertisers. And so starting with e commerce companies, we moved into, game companies more recently. We've moved into education provider companies. With regards to your question on, the shift of advertising from a cost per time to cost per click or cost per action model. And that's something that's happened globally in a China historically has been a little bit behind the curve a number of local reasons. And now we're seeing that shift happening at an accelerating pace, which is helpful for 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 at various stages. Thank you very much. And 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. No, I was wondering if you had any color around that. Was one of the key drivers of extraordinary growth is an inventory that you have available to utilize. Can we expect the end in sight to that one of several growth trends? I mean, I think that right now, a great hit of the targeted advertising is on Q zone in Pumio on desktop. So there's a number of services we operate that aggregated 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 tend to be the targeted performance format by and large. So how quickly we add the inventory to the system remains to be seen and 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. But 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 Ms. Chen for closing remarks. Thank you, operator. We'll round up the call now. If you wish to check our press release and other financial information, please visit our IR website under www.tencent.com/ir. We'll also be able to replay updates webcast on such shortly. Thank you indeed. Next quarter. Ladies and gentlemen, that does conclude our conference for today. You for participating. Tencent Holdings Limited 2012 10th quarter results announcements conference call. You may all disconnect.