Thank you for standing by, welcome to the Tencent Holdings Limited 2012 second quarter and interim 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 followed by one on your telephone to join the question queue. Your name will be announced when it is your turn to ask a question. If you wish to cancel your question, please press the pound or hash key. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chan.
Thank you, operator. Good evening, welcome to join our second quarter results conference call. I'm Catherine Chan from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties 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 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 Chairman and CEO, Pony Ma, President Martin Lau, Chief Strategy Officer James Mitchell, and CFO John Lo. Pony will kick off with a short overview of the financial performance and key platforms update. Martin will present the company's strategic highlights, while James will walk you through the business review and outlook. John will discuss the financials, and then we'll open the floor for questions. Now let me turn the call over to Pony.
Thank you, Catherine. Good evening. Thank you for joining us. Despite a more challenging macro environment, Tencent continued to grow at a healthy pace during the second quarter of 2012. We built out our key platforms, launched new products, and deepened our engagement with users. While our games and mobile ads businesses sustained solid revenue growth rate, initiatives such as open platform and performance advertising expand our revenue base. This revenue growth support us to step up investment in key areas such as the mobile internet and e-commerce while delivering earnings growth. Now let me highlight a few numbers for our second quarter results. Total revenue was 10.5 billion RMB, up 56% year-on-year or 9% quarter-on-quarter. IVAS revenue was 7.8 billion RMB, up 45% year-on-year or 5% quarter-on-quarter.
IVAS revenue was 929 million RMB, up 17% year-on-year or 2% quarter-on-quarter.
Online advertising revenue was RMB 880 million, up 72% year-on-year or 63% quarter-on-quarter. E-commerce transactions revenue was RMB 858 million, up 14% quarter-on-quarter. Non-GAAP operating profit was RMB 4.2 billion, up 32% year-on-year or 4% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB 3.4 billion, up 26% year-on-year or 3% quarter-on-quarter. Moving to an update on our key platforms. In the second quarter, our communication platforms grew broadly in line with that of China's internet user base. QQ IM monthly active user accounts increased 12% year-on-year to 784 million, and PCU increased 22% year-on-year to 167 million. Weixin continue to see faster user adoption as smartphones became more popular. For our social networks, Qzone monthly active user accounts grew 11% year-on-year to 598 million, and Pengyou MAUs grew 31% year-on-year to 248 million. Social media service, Tencent MicroBlog, achieved 82 million daily active users in the second quarter.
qq.com continued to lead other internet portals in China in terms of page view and unique visitors. In July, we redesigned qq.com front page and incorporate video and microblog content to deepen personalization, socialization, and integration across our media platforms. In the last few weeks, we have used our portal, microblog, online video, and social platforms to deliver a historic listing coverage of the Olympic Games to our users. QQ game platform recorded 8.8 million PCUs, up 17% year-on-year. Our wireless portal, 3g.qq.com, saw continued growth in user engagement and page views. I will invite Martin to give you an update on open platforms, as well as our web game and social game activities.
Thank you, Pony, good evening. Good morning, everyone. First of all, I would like to give one strategic highlight in relation to our open platform We view our open platform as critical to our overall evolution. I would like to highlight our efforts in providing differentiating capabilities to application developers in the building of what we believe to be China's largest open platform. First of all, our open platform provides developers with access to our substantial QQ user base. This user base has a locked-in relationship, and in many cases, a billing relationship with Tencent, which means that consumers can participate in the apps, share the apps, and spend money in the apps without the need to create new accounts or payment relationships. Second, developers can tap into our users' social graphs and attract new users virally through word of mouth. Third, developers can deploy their apps across multiple product platforms, including our SNS Qzone and Pengyou, our social media, Tencent Microblog, QPlus, as well as QQ Games. Fourth, our analytics can help developers identify their target consumers. Our system also delivers targeted advertising solutions to these developers. Fifth, our large and sophisticated cloud-based infrastructure provides developers operational support in data storage, security, testing, consumer service, and payment. Finally, our open API can facilitate user interaction across PC and mobile devices for the right applications. As a result, our open platform and cloud-based solution are designed to ease the pains of operations for startup developers, which enable them to focus on the creativity and user experience of those applications. All in all, developers are most likely to achieve success with us. As a result, to date, we have helped developers generate revenue of over a billion RMB for themselves.
Third, developers can deploy their apps across multiple product platforms, including our SNS Qzone and Pengyou, our social media, Tencent Weibo, Q+, as well as QQ Games. Fourth, our analytics can help developers identify their target consumers, and our system also delivers targeted advertising solutions to these developers. Fifth, our large and sophisticated cloud-based infrastructure provides developers operational support in data storage, security, testing, consumer service, and payment. Finally, our open API can facilitate user interaction across PC and mobile devices for the right applications. As a result, our open platform and cloud-based solution are designed to ease the pains of operations for startup developers, which enable them to focus on the creativity and user experience of those applications. All in all, developers are most likely to achieve success with us. As a result, to date, we have helped developers generate revenue of over RMB 1 billion for themselves.
At the same time, our open platform also contributes to our own financial growth, representing over 25% of our community and open platform revenue in the second quarter of 2012. The second strategic highlight I would like to give is actually in a fast-growing segment of the gaming market, which is web games and social games. Now, we are very interested in the emergence of web games and social games because they lie at the intersection between our substantial client game business and our popular social networks. We believe the elements of social games and web games will blend well together, leading to a more unified gaming experience. According to Analysys, web and social games combined are forecasted to reach RMB 9.9 billion in revenue in 2012, representing a year-on-year growth of 44%.
Leveraging our communities and open platforms, we believe we are the leading social and web game publisher and operator in China today, with over 30% market share. Numerous local and global web and social game developers publish on our platform, including domestic companies such as Kingnet, Hulai Games, and international companies such as Zynga and PopCap. As of June, over 10 games on our open platform generated over RMB 10 million on a monthly basis. Several of our in-house web and social games have also achieved notable success. For example, Roco Kingdom, a popular web game for children in China, is one of the most popular web games in China at this point in time. I would like to pass on to James to walk you through the business review and the outlook of our business.
Thank you, Martin. Good evening and good morning. Despite the challenging macro environment, each of our business lines sustained healthy year-on-year revenue growth rates during the second quarter. Our overall revenue growth rate was 56% year-on-year, and excluding e-commerce transactions, it was 43% year-on-year. While games remain our largest single revenue line, advertising actually contributed the most to our 9% quarter-on-quarter revenue growth rate, reflecting positive seasonality as well as our advertising initiatives. For Internet value-added services, segment revenue was RMB 7.8 billion, up 45% year-on-year and 5% quarter-on-quarter. Online game revenue was RMB 5.6 billion, up 53% year-on-year and 5% quarter-on-quarter. More users remained the chief driver of the portfolio's year-on-year growth. Our China game revenue grew modestly quarter-on-quarter, reflecting the base effect and student examinations during the quarter. Our international game revenue grew more swiftly off a small base.
The China game industry is seasonally strong in the first quarter due to New Year holidays and then may slower than in 2Q, the game industry outside China exhibits less seasonality from the first quarter to the second quarter of the year. Community and open platforms revenue was RMB 2.2 billion, up 27% year-on-year and 8% quarter-on-quarter. Item sales within apps on our open platforms supported both the year-on-year and the sequential revenue growth rates. During the quarter, our monthly subscription count reduced as we cleaned up some free riders who sign up for monthly packages through mobile channels without actually paying us. Given those free riders are not paying users, the cleanup did not materially impact our revenue. Digging into community and open platforms further, Qzone's monthly active user base grew steadily as we focused on increasing user engagement and interaction.
During the quarter, users uploaded an average of 196 million photos per day, illustrating that they are sharing their real-world activities with real-world friends on Qzone. Our real-name social network, Pengyou, remained the largest of its kind by MAU. Tencent Weibo's daily active user base increased 89% year-on-year and 22% quarter-on-quarter, while average daily posts increased 38% quarter-on-quarter to 110 million. We have redesigned the QQ portal front page to better incorporate microblog content in more prominent locations. On our open platform, Martin has discussed the popularity and the financial contributions of our game applications. We are also encouraging more non-game applications to join our open platform, and we are helping them to monetize through in-app advertising solutions. Digging into each category under online games, on the QQ game platform, we operate 157 games, including 42 web games. Combined PCU and ACU were stable sequentially at 8.8 million and 4.3 million, respectively.
In advanced casual games, combined PCU and ACU rose to 12.2 million and 3.8 million, respectively. QQ Speed, QQ Dance, and League of Legends led the PCU growth. Looking at our future game slate, our co-developed sports title, NBA 2K Online, entered advanced stage closed beta testing in June. In early July, we announced a partnership with Activision Blizzard to bring their FPS title, Call of Duty Online, to China. Massively multiplayer games combined PCU and ACU increased to 4.7 million and 1.7 million, respectively. DNF reported a new PCU record due to new content and improved graphics. Looking at our pipeline, self-developed title, Legend of Yulong, received positive feedback from its unlimited closed beta test in June and achieved over 400,000 PCUs in the quarter. We are in the early stages of localizing NCSoft's Blade & Soul for the China market.
Revenue from mobile value-added services was RMB 929 million, up 17% year-on-year and 2% quarter-on-quarter. 2G revenue grew 13% year-on-year and 2% quarter-on-quarter due to adoption of our SMS subscription packages. 2.5G and 3G revenue increased 26% year-on-year and 2% quarter-on-quarter, mainly due to mobile games. The mobile VAS industry is experiencing structural changes due to the shift to smartphones and also due to carrier regulatory measures, which can have substantial impact on quarterly revenue generation. Our primary focus is on positioning for the mobile internet future with products such as Wireless QQ, Weixin, and our mobile browser. Moving on to online advertising, our segment revenue was RMB 880 million, up 72% year-on-year and 63% quarter-on-quarter. While China's overall advertising environment deteriorated, we benefited from contributions from our new ad platforms, such as targeted advertising and video advertising, and from our portal continuing to gain advertising market share.
We believe we have historically under-monetized our traffic relative to peers, and we are pleased to see that better targeting technology and sales processes on our side, together with a tighter focus on return on investment on the advertiser side, are allowing us to make headway in this difficult environment. New ad platforms together with market share gains on the portal sustained our year-on-year revenue growth, while new platforms and positive seasonality drove our sequential revenue growth. Display ad revenue was RMB 778 million, up 64% both year-on-year and quarter-on-quarter, while search revenue was RMB 102 million, up 163% year-on-year and 57% quarter-on-quarter. In brand display, our top five advertiser categories were food and beverage, automobiles, online services, personal care, and apparel.
Our portal benefited in terms of traffic from integration with our microblog and in terms of advertising from advertisers in categories such as automobiles and fast-moving consumer goods, recognizing that our young, energetic user base is also becoming their core target audience. Our video service benefited from robust growth in unique visitors and video views both on and off our v.qq.com and from advertisers responding favorably to our attractive pricing. Consequently, our video advertising revenue more than doubled quarter-on-quarter. In performance display, targeted advertising on our social networks benefited from higher impression volume and improved click-through rates. E-commerce companies, e-commerce merchants on our marketplace, and web game developers are among our largest advertiser categories, while they were also gradually making the service available to other advertisers.
Our near-term revenue growth rate will depend on how much more inventory we inject into the system and how far our targeting refinements can increase click-through rates. In search, increased traffic and better monetization contributed to revenue growth off a low base. However, our primary focus remains on improving the quality of web search results and on enhancing our mobile search experience rather than on monetization per se. E-commerce transaction revenue was RMB 858 million, up 14% sequentially. The primary driver of revenue growth was our principal business, where we modestly increased volume of units sold quarter-on-quarter despite a highly competitive external environment. Our agency business has also started contributing to e-commerce revenue via fees we charge from merchants and commissions we charge on transactions on our marketplace. Leveraging our large user base, we'll continue to strengthen our marketplaces through building strategic partnerships in key commerce categories.
With that, I'll invite John to discuss the financials.
Thanks, James. Hello, everyone. For the second quarter of 2012, our total revenue was RMB 10.53 billion, up 56% year-on-year or 9% quarter-on-quarter. Operating profit was RMB 3.94 billion, up 41% year-on-year or 7% quarter-on-quarter. We recorded net other losses of RMB 3 million versus RMB 64 million last quarter. The difference mainly reflected the donation of RMB 60 million to Tencent Charity Foundation last quarter. Net finance cost was RMB 115 million compared to net finance income of RMB 2 million for second quarter last year. The year-on-year change mainly reflected an increase in interest-bearing debts and the recognition of exchange losses on our foreign currency denominated debts. The 65% quarter-on-quarter increase mainly reflected the recognition of exchange losses on our foreign currency denominated debts. Effective tax rate for the quarter was 18.5%. Net profit attributable to shareholders was RMB 3.1 billion, up 32% year-on-year or 5% quarter-on-quarter.
On non-GAAP basis, operating profit was RMB 4.22 billion, up 32% year-over-year or 4% quarter-over-quarter. Net profit attributable to shareholders was RMB 3.39 billion, up 26% year-over-year or 3% quarter-over-quarter. Operating margin was about 40.1%, down 2.1 percentage points from last quarter, and net margin was about 32.4%, down 1.9 percentage points from last quarter. Total cost was RMB 4.31 billion for the second quarter, up 12% quarter-over-quarter or 85% year-over-year. This mainly reflected increase in sharing cost of merchandise sold for our e-commerce principal transactions, staff cost, and bandwidth and server custody fees. As a percentage of revenues, total cost was 41% this quarter and 40% last quarter. IVAS gross margin dipped one percentage point sequentially to 66% in the second quarter due to an increase in sharing costs relating to revenue growth of certain licensed games.
MVAS gross margin decreased two percentage points to 61%, mainly reflecting higher staff costs and bandwidth and server custody fees. Gross margin for online advertising increased 11 percentage points to 52% this quarter, mainly reflecting positive seasonality and revenue contribution from new advertising platforms. The year-over-year drop was mainly due to the allocation of a significant portion of cost related to online video platform from IVAS to online advertising segment since quarter four last year. Gross margin for e-commerce transaction was stable at 3%. Moving on to operating expenses. Selling and marketing expenses was RMB 610 million, up 30% quarter-over-quarter or 65% year-over-year. The sequential increase reflected higher promotion and advertising expenses relating to our online games, PC and mobile security products, as well as increased staff costs. Selling and marketing expenses represented 6% of quarterly revenue. G&A expenses total RMB 1.86 billion, up 6% quarter-over-quarter or 37% year-over-year.
The sequential increase reflected higher R&D expenses and increased staff costs as a result of annual salary review, which was partly offset by a decrease in intangible asset amortization relating to acquisitions. G&A represented 18% of quarterly revenue. Under G&A, R&D expenses was RMB 1.04 billion, up 11% quarter-over-quarter or 55% year-over-year. It represented 56% of G&A or 10% of total revenue. As at end of June, we had 20,000 employees, up 4.5% quarter-over-quarter or 55% year-over-year. Let's look at the margin ratios for the second quarter. Gross margin was 59%, down from 60.2% last quarter. Excluding e-commerce, gross margin would have been 64.1% for the quarter after we took our e-commerce revenue and related costs. Non-GAAP operating margin was 40.1%, down from 42.2% last quarter. Excluding e-commerce gross profit, it would have been 44.7%. Non-GAAP net margin was 32.4%, down from 34.3% last quarter.
Excluding e-commerce gross profit, it would have been 36.3%.
During the second quarter, we bought back a small number of shares. The total number of shares outstanding was 1.844 billion. Basic EPS was RMB 1.698 on GAAP basis and RMB 1.854 on non-GAAP basis. Diluted EPS was RMB 1.665 on GAAP basis and RMB 1.819 on non-GAAP basis. Total CapEx was RMB 915 million, down 3% year-on-year or up 38% quarter-on-quarter. Of which operating CapEx was RMB 697 million, down 15% year-on-year or up 64% quarter-on-quarter. Non-operating CapEx was RMB 219 million, up 83% year-on-year or down 8% quarter-on-quarter. At quarter end, free cash flow reached RMB 2.86 billion, up 158% year-on-year. The sequential decrease reflected the seasonal fluctuation of operating cash flow. Net cash was RMB 19.6 billion, down 6% quarter-on-quarter due to payment for a number of acquisitions and the annual dividend. Year-on-year, it went up by 25%. This concludes our presentation. Thank you.
Thank you, John. Operator, we shall open the floor for questions. I would like to remind everyone to ask a maximum of two questions in their turn. We shall open the floor now.
Great. Thank you. 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 your request, please press the pound or hash key. Your first question comes from Dick Wei of JPMorgan. Please go ahead.
Hi. Thank you very much for taking my questions. Congratulations on the good quarter result. First question is, can you share your latest thoughts in terms of e-commerce investment in both principal business and agency business? Thanks.
Yeah, Dick. In terms of e-commerce, it is a relatively small part of our current business. We view e-commerce as a longer-term investment for us. We are right now having both Paipai, which is our agency business, which we have actually been operating for quite a number of years. We also have our principal business primarily right now geographically located in Shanghai. The main category is consumer electronics. At the same time, we are also expanding the geographic coverage of that business gradually to other parts of China. At the same time, we are also rolling out our QQ Buy platform, which actually integrates both our principal business and our agency business. We are also sort of having this open platform inviting larger B2C specialty e-commerce companies to join us. I think this is still a work in progress.
We are glad to see that in both our agency business and our principal business, we are seeing organic growth. The more important thing I think for us is really be able to, over time, integrate these elements into a holistic e-commerce solution for our users. As you know, we actually sort of have a lot of users who come into our network on a logged-in basis, on a day-to-day basis. We would like to create an e-commerce solution that can actually cater to their needs, delivering value to them, delivering convenience and good pricing to them. This is something which will be built out over time.
Great. Maybe if I can have a quick follow-up that any kind of numbers you can share with us in terms of investment amount, or what are some of the near-term KPI that you will be looking at? Would that be kind of a GMV or profitability or I guess in terms of kind of the product coverage, maybe you can share around that area would be helpful. Thanks.
Yeah. Sometimes we have sort of talk about the intention to invest $1 billion US dollars into the e-commerce business over time. It will be actually over a relatively long period of time. At the same time, I think the investment philosophy is really sort of for the long term, and at the same time, in a prudent way. We do not believe that our e-commerce business is a sprint, and we do not believe that we have to sprint to a certain KPI at this point in time. It is much more important for us to build the infrastructure, be it the user experience, be it sort of the network of suppliers, be it the ability to deliver the products both From a third-party basis and from a third-party basis to the users. As I said, we look at it as a long-term investment.
It's very much important for us to invest in these key long-term fundamental elements instead of just sprinting to a certain GMV or revenue number.
Got it. Maybe if I have a second question related to IM-
Dick, maybe we can actually pass the mic to somebody else, and then sort of we can put you back if that's okay. Yeah, thanks.
Thank you. Your next question comes from the line of Jin Yoon from Nomura. Please go ahead.
Hey, good evening, guys. Just a couple of questions. On the ad revenues came in obviously much better than expected. Is any of the ad revenues actually coming from e-commerce, or is e-commerce being recognized as advertising revenues, maybe on the agency side? The second question I have is on the deferred revenues growth on a quarter-over-quarter basis, it grew at the slowest rate since second quarter 2010. Is that really a function of a high base in 1Q, or is there anything more that we should read upon? Thanks. I'll stop there. Thanks, guys.
Sure. With regard to our advertising revenue, if our own kind of subsidiaries advertise on us, that obviously doesn't appear as revenue. Revenue is all kind of externally generated revenue. We disclosed some of our biggest advertiser categories. E-commerce is an important category for us, and that includes both big external e-commerce companies, some of which are listed, and also some smaller merchants who advertise their wares on our various marketplaces. That advertising activity by big e-commerce companies and by small e-commerce merchants is booked under our advertising revenue line, and it's one component of the advertising revenue line. When the small merchants on our marketplaces pay commissions or membership fees, that's booked under our e-commerce transactions line.
In terms of the deferred revenue, I think you're right that we have got a much larger base than before. At the same time, due to seasonal fluctuations, for example, during low season, the buildup of deferred revenue will be slower than during peak season, which has been the case for many quarters.
Great. It's just a seasonal factor and a high base issue. There's nothing more than that then?
Number one, high bases, and number two is due to seasonal factors. During peak season, more deferred revenue will be built up. Yeah.
Great. Okay, thanks, guys.
Yeah, next question, please.
Thank you. Your next question comes from the line of Cynthia Meng from Jefferies. Please go ahead.
Thank you. Congratulations for a good quarter. I have two questions. To follow up on the advertising revenue side, can management give more details on your top verticals for display advertisement? Can management give some more color about your social advertisement, whether there's any new development there? The second question is on games. Games growth was very strong. Can management talk about the top-performing games? Recently, there was a lot of investor concern about negative comments coming from Nexon and also from Neowiz. If management can give some more color on your top-performing games and also pipeline for the rest of the year, that would be great. Thank you very much.
Cynthia, sure. With regards to our biggest advertiser categories in brand advertising, those would be food and beverage, automobiles, online services, personal care, and apparel. Within that, there are some categories that are more kind of economically sensitive and others that are less economically sensitive. There's some categories where we've always been strong, like food and beverage. There's other categories like automobile, where we feel we've become much stronger in the past couple of years, as we've really been able to demonstrate to the car companies that the people coming to our various properties, be it portal, be it microblog, be it video, be it social network, are the people who are the right age and the right income groups to be buying automobiles today. We're very pleased with that diversification in our advertiser category mix.
With regards to our game business, we operate a portfolio of titles, and different quarters, different titles will behave in different ways. We tend not to give too much information on a quarter-by-quarter basis about individual titles, although we're happy to talk further offline if you have a very detailed question. In terms of our slate of future titles, we have what we think is a pretty broad and deep slate that encompasses MMORPG, encompasses first-person shooter games, encompasses sports games. We named a couple of higher profile external titles, such as Call of Duty Online, Blade & Soul, NBA 2K in our prepared remarks. There's also quite a large number of internally developed titles that we're obviously interested in, but are less apparent to the outside world.
Great. Thank you.
Thank you. Next question.
Great. Thank you. Our next question comes from the line of Chi Tsang from HSBC. Please go ahead.
Good evening. Thanks for taking my question. Congratulations on a solid quarter. I had just a couple of questions on online gaming. Can you help us understand what percentage of online gaming is international? I'm wondering how those margins compare versus domestic gaming. I have a second question.
Well, at this point in time, we actually sort of do not give specific numbers as to how much is actually sort of licensed, if you want to call it, and how much is self-developed. The larger portion is actually licensed. That's sort of something which we have. Now, in relation to sort of the licensed versus the self-developed margin, typically, what we have is, if you're talking about sort of licensed title, then the margin would be the self-developed minus sort of the revenue share. Generally, what we give out as part of the guidance is actually that in terms of the self-developed, we could be running an operating margin in the 60%-70% range. Whereas, if you're talking about sort of a licensed title, then it will be quite a bit less than that.
It could be running in the range of 30%-40% range. That's sort of the broad range, but a lot of the games would actually sort of depends on the exact commercial arrangement.
Great. Thanks for that. Actually, I was referring to international. You mentioned in your press release that 2Q revenues and online gaming were supported by growth in international, I'm wondering sort of what composition that is of net total online gaming for the second quarter.
International right now is a small proportion of our total revenue, it's a small number, it actually sort of grew quite a bit in the past few quarters.
My second question is, I wanted to sort of get a better understanding of what you think the potential is of some of your new MMO games. Do you expect them to take share from your competitors, attract new users into the category, sort of what is the risk of cannibalization of your existing games? Thank you.
Well, I think in terms of MMOGs, we actually sort of have a relatively small percentage of market share of the overall MMOG market right now. I don't think there's going to be sort of too much of a cannibalization problem if our MMORPGs actually do well. Having said that, I think MMORPG market is actually sort of a very intensively competitive market. There are a lot of very significant titles, and as a category, as a whole, it actually sort of has not been growing as fast as some of the other categories like advanced casual, like web games. I think, we obviously sort of have been developing these titles for quite some time, and I think we try to deliver high-quality games into the market.
At the same time, I think we also need to be, in terms of expectation, we need to some extent manage the overall expectation of these titles because of the fact that it's very competitive and the overall market has not been growing that fast.
Great. Thank you. Your next question comes from the line of Alex Yao from Deutsche Bank. Please go ahead.
Hi, good evening and good morning, everyone, thank you very much for taking my questions. I have two questions. Number one, I would like to follow up with Martin's prepared remarks. Obviously, you guys have achieved a great success in online gaming business in the past few years. However, the market dynamics of China's online gaming market is changing quickly. On one hand, the overall market growth has been slowing down as the internet population growth is slowing down. On the other hand, user growth is quickly shifting towards web game and mobile game from client-based games. Given such market dynamics, how do you think about these trends will impact your new game launch? How do you think about Tencent's growth opportunity in China's online gaming market in the next two to three years? My second question is about amortization. Why did amortization increase sequentially in second quarter?
Can you talk about how this account will trend in 3Q and the 4Q? Thank you.
Well, I think in terms of sort of the gaming industry, we obviously has one of the broadest portfolio of games in the market. As a result, we felt that we are actually sort of exposing ourself to sort of various growth pockets within the gaming industry. If you look at sort of, for example, in terms of our advanced casual games in the past few years, we were actually the company that introduced some of the new genres into the market and actually sort of achieve a lot of success.
If you look at sort of new pockets of growth around web games and social games, as I talked about in my prepared remarks, we have actually sort of achieved a pretty good initial result, and we continue to leverage our own traffic platform and our expertise in gaming industry to continue to grow ourselves into this larger, higher growth market. At the same time, we also believe that the gaming industry itself, a lot of times are actually driven by whether you actually can come up with good titles. It's an industry that everybody is just rushing into the same genre, and the market actually doesn't grow as much. If you can actually start to unleash a new genre that are attractive for users, then that itself actually drove the growth in the market.
An example is actually in the category of League of Legends, for example. It's a completely new category, and actually created demand for the market rather than basically just take market from other people. I think that's what we believe in. We believe in creating great new games with high quality and trying to target the demand that are unfilled within the market. At the same time, what we are also starting to work on, this is the first time that we talk about international revenue, and I think this is one of the areas that we will also start to devote more resources to in trying to develop a bigger market outside of China. Yep.
Great.
I'll pass to John to talk about the amortization.
Actually, the amortization decreased significantly from quarter one to quarter two due to the fact that some of the identifiable assets that we booked into accounts a year ago in relation to Riot Games just expired in quarter one. Basically, there's no effect coming out of the amortization of identifiable assets in relation to the Riot Games acquisitions.
Great. Thank you. Your next question comes from the line of Eugene from CICC. Please go ahead.
Good evening, thank you to taking my question. First, let me congratulate the strong results. I have a question regarding to mobile internet. Currently, I think inside the internet industry, there are some disputes over the trend of the mobile internet. Some believe web applications will become more and more popular, while others believe that native applications will resume their dominance. My question is, can the management share some of your insight over this trend? What's your view over this? Highly appreciate if the management also can share some of the Tencent strategy to deal with this kind of trend. Thank you.
Yeah. I think the mobile internet industry over time will, to some extent, evolve to a situation somewhat similar to the PC internet, in the sense that the large applications would be native client-based, because these are used by a lot of people. It makes sense for you to keep on evolving your applications, and it's application that actually requires a lot of built-in features for users to use. At the same time, for a lot of the smaller applications or for those applications or content that are not used by the users on a daily basis, access to a web browser or HTML5 could be the more efficient way through which users access those applications or those contents. The market will exist for both native applications as well as browser-based applications, web pages, and content.
What we try to do is actually to position ourselves in both areas. If you look at on the native application side, we have obviously a whole range of applications which are very popular already on smartphones. That includes Mobile QQ, that include Weixin, that include Mobile Qzone, a Weibo client, a news client, a whole host of these clients, which will be used by the users on a daily basis, and these are native clients. At the same time, we also have a browser, which actually allows us to capture the demand for content and application that are on the long tail, so that through the new mobile browser, the users can actually get access to a whole host of information that they might not be using that frequently. At the same time, as an aggregator, will be forming a big part of their usage.
Yeah.
Okay. Thank you. Next question, please. Great. Thank you. Your next question comes from the line of Richard Ji from Morgan Stanley. Please go ahead.
Good morning, Martin, James, and John, thanks for my call. Congrats on a good quarter. Let me start with the first question regarding e-commerce. Especially as we understand the competition in the sector has been intensifying recently, especially some of the peers have been launching very aggressive price war. Just wondering what kind of margin impact would you see going forward and so far, and what is your plan, and to build out your logistics? Yeah.
Well, I think in e-commerce, as I said, we look at e-commerce as a long-term business initiative. We'll continue to build on the key elements of success in the e-commerce space, which would include being able to offer very attractive prices to the users, being able to deliver, being able to have great user experience, and being able to provide a great selection of products through our supplier network. In terms of the overall, if you look at the pricing, if you're just concerned about the pricing, we believe it's just one element of the key success factors. At this point in time, if you look at our principal business, our consumer electronics products are actually consistently priced actually at the lower end of the overall e-commerce market already. We already have been using this low price approach in our existing principal business.
We believe there could be a lot of price wars launched here and there, if you really look at the price comparison, in reality, I think the prices actually didn't drop as much as it's advertised in a lot of the media. It's more of, I think, companies trying to promote their company rather than really lowering price such that they are losing a lot of money on the transactions.
Yeah. Thanks, Martin. A second question is regarding the launch schedule of your heavily anticipated new titles, such as Call of Duty as well as Blade & Soul. Can you also shed us some light on the current revenue sharing structure with the fast-growing third-party games on your open platform? Thank you.
Well, in terms of Call of Duty and Blade & Soul, I think in the prepared remarks, we already shared where it is then, right? One, on Call of Duty Online, we signed the contract, the team at Activision is actually sort of working day and night to develop the game. On Blade & Soul, the game has already been launched in Korea. We are working on localization for the China market. Our philosophy has always been to wait until the game is really ready before we launch the game. I think we don't set ourselves for a definitive deadline, and we have to launch the game by then. We set ourselves for a quality target before the game is launched. I think we just have to look at the quality of the games before we launch them.
In terms of the open platform revenue sharing scheme, we do share a pretty significant portion of the revenue with the developers. That's why you can see in the past 12 months, we have already shared RMB 1 billion of revenue to the third parties. We typically have a stepped sharing scheme, and we also build in certain encouragement functions or bonus for companies who are generating a high level of daily active usage, that we look at both revenue generation and user engagement as benchmarks in terms of sharing revenue with the developers. I think that's the overall guideline on the revenue sharing side.
Thank you. Your next question comes from the line of Alicia Yap from Barclays. Please go ahead.
Hi. Good evening, everyone. Congratulations on the solid results. My question is on advertising. Can management share with us what are the major differences Tencent is experiencing or seeing in the overall advertising demand environment versus other peers have experienced, so as many of your internet peers are guiding relatively soft outlook? On top of that, could you also share with us how much of your display advertising revenue currently still come from the CPT, the time-based, versus the more performance-based on the CPM or the CPA basis? Thank you.
I think on the advertising business, the overall macro environment is indeed a bit weak. On the other hand, we have always believed that our traffic was actually under-monetized, and to some extent, we are catching up with the volume of our traffic In these few quarters. The main reason is really because of the fact that, number 1, we have new advertising solutions for the advertisers. For example, our online video platform has also seen significant growth in terms of traffic. Gradually, as we build the traffic, we are building the monetization into the overall platform, and that actually help us to win quite a bit of advertisers who either increase their budget with us or who have not been advertising on our platform before, on our portal before, and now they are advertising on our video platform.
The performance-based side is also an important driver. This is actually catering to another set of clientele, which are sort of the application developers, the long-tail e-commerce companies. That's different, actually, from the video business, which has sort of catered to the large brand owners. At the same time, I think our overall media business has always been having a lot of traffic, but the overall pricing has not been high and sort of utilization has not been high. Over time, as we continue to season our media and increase our media influence and also couple that with our Tencent Microblog, which sort of further enhances the media influence, we're able to get better pricing and get sort of bigger sell-through in our portal as well. All these sort of new factors combined together help us to generate higher revenue growth than the overall market.
Thank you. Your next question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.
Hi, good evening. Thank you for taking my questions. I'm just curious on the clean-up of your IVAS subscribers. Could you elaborate more on what happened in the quarter, and how should we think about the trend going forward? Secondly, just for housekeeping purposes, could you also share with us the ARPU of your different types of games and then the ranking of your various community IVAS business in terms of quarter-over-quarter growth? Thank you very much.
Yeah. In terms of the sort of IVAS subscriptions, it does warrant a little bit sort of more explanation. In terms of our subscriptions, the subscriptions are mostly actually prepaid, which means that when users actually subscribe to our subscription on the IVAS side, they actually sort of paid either through QQ Coin or sort of their bank accounts. There's actually also a portion of our subscription which the users actually subscribe to through telco operators. For those subscriptions, they are actually postpaid, which means that they first subscribe to it, and then sort of the telco operators have to collect on behalf of us and then settle these subscriptions with us. It happens that some of these postpaid subscriptions eventually were not settled with Tencent because the telco operators could not collect the payment from the subscribers. Maybe the prepaid card has actually run out of credit.
That's why, in the middle of the month, the user actually subscribed, and it's quoted as a subscription. A month or two months later, when the telco operators actually settle with us, they would tell us some of the subscribers actually didn't pay because they were not able to deduct their subscription. That has been the case. What we have done was actually sort of over time, as we build up more data, we have built a predictive model so that we can actually identify at the time of subscription or shortly after subscription, who are the users which may default. As a result, we have been purging these accounts using this predictive model, and as a result, it leads to a drop-off in terms of some of the accounts which eventually will not pay.
What we have done is really knocking out those free riders, and it does sort of reduce the overall subscription number, but it improves the quality of our subscriber base and knock out the free riders. Net net, this sort of action's revenue impact to us is actually minimal. We would say this is a quarter in which we actually sort of apply the predictive model in a more aggressive way because we have fine-tuned it to a level that we feel comfortable with it. There's more of a drop-off for the quarter.
The ARPU for ACG was RMB 55-RMB 100, and for MMOG, RMB 100-RMB 140. In relation to community and open platform revenue, open platform revenue was definitely a growth driver, both in terms of absolute amount and growth rate. For the other community products, they are basically slightly up or down by a few percentage.
All right. Thank you. Your next question comes from the line of Wendy Huang from CIMB. Please go ahead.
Thanks for taking my question. First question is regarding your comments on the web games, social games. You provided the market data for these two types of games in 2010, 2011, as well as 2012. Can you also share the Tencent revenue from these two game categories so that we can have a better idea about Tencent market share evolution over the past few years? Thank you.
It was actually relatively small in 2010. In 2011, it was primarily Qi Xiong Zheng Ba. It's really sort of in 2012 that the revenue proliferated into a large number of different games. Primarily, these games were third-party games, which are leveraging our open platform to get their traffic and get the revenue. By now, as I talked about in the prepared remarks, we have more than 30% of the total market at this point in time.
When you book your web game revenue, do you book the net revenue or gross revenue?
Net revenue.
My second question is a follow-up on your e-commerce strategy. I understand that you are trying to build a strategic partnership with selective leading B2C operators. What are your key selling point to those leading vertical operators to attract them to your platform? I understand they are probably putting their merchandise on different type of platforms, and they don't have to actually build an exclusive relationship with Tencent, right?
Yeah. To some extent, it's a little bit like what we talked about in the open platform. Which is, we have traffic, we have users, we have a lot of new users who have billing relationship with us. We have a social graph, which actually allows us to promote products virally. We also have a lot of analytics. We know a lot about the users, such that we can actually merchandise these products in a targeted way to the users. I think, a lot of those sort of unique capabilities hold true for e-commerce as well. It just takes time for us to develop that and customize it for the e-commerce companies and e-commerce products. In the same way as we built up our open platform, in the very beginning, we were not able to leverage a lot of these unique capabilities.
Over time, gradually, as we build the systems, as we find the right way to do it, then these powers start to get unleashed, and we start to pick up market share in the open platform. I think for e-commerce, we'll go through a similar exercise. Although, as I said, it may take a longer time because everything has to be built from scratch. I think a lot of these basic qualities are already present in our overall network, and those are sort of attractive points for the e-commerce partners.
Thank you for your question. Operator, in the interest of time, shall we take the last two questions, please?
Certainly. Thank you. The second last question comes from the line of Wallace Cheung from Credit Suisse. Please go ahead.
Hi. Thanks for taking my questions. Just a couple of balance sheet type of questions. Can you try to explain why the fixed asset jumped quite strongly, and also on the investment in associates on sequential basis, accounts payable. Finally, in cash flow, I think it's one of few quarters, I mean, on a net cash basis, actually coming down on sequential basis. It seems like the investment cash flow has increased substantially on Q on Q basis, CapEx as well, but there's a big gap between the two. Can you explain it as well? Thank you.
Okay. I think in terms of the fixed assets, it's basically adding off extra operating CapEx. As you understand, this quarter, as a percentage of revenue, operating CapEx represented about 67%. Also, the other question was the increase in interest
Okay
in associates. During the period, we have investments in associates, such as the Cao Cao, which is pretty significant in terms of absolute amount, so it increased. The other question was
Account payable
the net cash, right? Yeah. As you can see, we have got about RMB 2.8 billion net cash, free cash flow coming in. However, we have spent some on MMAs, including some prepayments for the M&A activities. Also, we have got payout of dividend of RMB 1.1 billion. That's why all in all, net cash slightly decreased during the quarter versus quarter one.
Great. Thank you. Your last question comes from the line of Ravi Sarathy from Citi. Please go ahead.
Congratulations on a great quarter, and thank you very much for taking my question. Obviously, you guys have done a lot of work and are very well-positioned around the inflection of mobile traffic, around the increasing penetration of smartphones. I was wondering if you could give us a little bit more color on the share of traffic for perhaps some of your properties that are a focal area that's now coming from mobile.
Share of traffic from desktop to mobile.
Well, in terms of communication and social network, we definitely have purely mobile application like Weixin. Weixin is 100% smartphone based. In addition to that, if you look at applications like QQ, our flagship IM platform, you're really talking about close to 50% of the traffic actually coming from mobile.
Right.
50% coming from PC. I think that's around the kind of split. Of course, for QQ, not all the traffic is actually coming from smartphones. There's still a split between smartphone versus non-smartphone.
Thanks. That's very helpful indeed.
Thank you very much for your questions, and thank you, operator. We're going to round up the conference call now. If you wish to check our press release and our financial information, please visit our IR website at 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 in Tencent Holdings Limited 2012 second quarter and interim results announcement conference call. You may all disconnect now.