Earnings Call: Q2 2012

Aug 15, 2012

Thank you for standing by, and welcome to the Tencent Holdings Limited 2012 Second Quarter And Interim Results Announcement Conference Call. Questions. I would now like to hand the over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chan. Thank you, operator. Good evening, and welcome to, John. Any 2nd quarter results conference call, and I'm Catherine Chen from Dara, Jim of Tencent. Before we start the presentation, we would like to remind you that include 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 coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non GAAP financial measures that should be due to in addition to, but not as a substitute for Maersco's after company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and our non GAAP matches, please refer to our disclosure documents downloadable on www.sunset.com/RL. 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, to Mitchell and CFO John Lowe. Bernie will kick off with a short overview of the financial performance and key platforms update. But represent 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 Puneet. 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 our key platforms, launched new products and deepening our engagement with use while our games and mobile device businesses sustain solid revenue growth rate. Initiatives such as Open Platform and performance advertising expand our revenue pace. This revenue growth supports us to step up investment in key areas such as mobile internet and e commerce while delivering earnings growth. Now, let me highlight a few numbers for our second quarter results. Total revenue was rmb 10,500,000,000, up 56% year on year or 9% quarter on quarter. IMR's revenue was rmb 7,800,000,000, up 45% year on year or 5% quarter on quarter. AirVAS revenue was RMB929 1,000,000, up 17% year on year or 2 percent quarter on quarter. Online advertising revenue was RMB880 1,000,000, up 72% year on year or 63% quarter on quarter. E Commerce transactions revenue was RMB858 1,000,000, up 14% quarter on quarter. Non GAAP operating profit was rmb 4,200,000,000, up 32% year on year or 4% quarter on quarter. Non GAAP net profit attributable to shareholders was RMB3.4 billion, up 26% year on year or 3 percent quarter on quarter. Moving to an update on our key platforms in the second quarter, our communication platforms broadly in line with that of China's internet user base. QQIM monthly active user counts increased 12% year on year to RMB784 1,000,000 and PCU increased 22 percent year on year to RMB167 1,000,000. We still continue to see faster user adoption as smartphones become became more popular. For our social network, Qs or monthly active user accounts grew 11% year on year to to RMB598 1,000,000 and Pangyo MAUs grew 31% year on year to RMB248 1,000,000. Social media service Tencent microblock achieved 82,000,000 daily active users in the 2nd quarter. Qq.com continue 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 in the a few weeks, we have used our portal, microbob, online video and social platforms to deliver a historic holistic coverage of the Olympics games to our users. QQ cam platform recorded 8,800,000 PCUs, up 17% year on year. Our wireless portal, 3gdocument.com, will continue both in user engagement and page views. Now 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, and good evening. Good morning, everyone. First of all, I would like to give one strategic highlight relation in relation to our open platform. We view our open platform as critical to our overall evolution, and I would like to highlight our efforts in providing differentiating capabilities to application developers in the building of what we believe to be the China's largest open platform. Now first of all, our open platform provides developers with access to our substantial QT 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 relationships. 2nd, developers can tap into our users' social graph and attract new users 3rd, developers can deploy their apps across multiple product platforms, including our SMS Qzone and Panyo, our social media Tencent microblock, Q Plus as well as QQ Games. 4th, analytics can help developers identify their target consumers and our system also delivers target advertising solutions to these developers. 5th, our large and sophisticated cloud based infrastructure provides developers operational support in data storage, security, testing, consumer service and payment. Finally, Our opened API can facilitate user interaction across PC and mobile devices and for the right to replicate 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. Of over RMB1 billion for themselves. And 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 set of the gaming market, which is web games and social games. We are very interested in the emergence of web games action between our substantial client game business and our popular social networks. We believe the elements of social games and web games were blend well together, leading to a more unified gaming experience. According to analyses, web and social games combined are forecasted to reach RMB 9,900,000,000 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. Nearest local and global web and social game developers published on our platform, including domestic companies such as King Net Hulai Games, and international companies such as Binga and Popcat. As of June, over 10 games on our open platform generated over 10,000,000 RMB on a monthly basis. Several of our in house web and social games have also achieved notebook success For example, the Roku Kingdom, a popular web game for children in China, is one of the most popular web games, in China. At this point, time. Now I would like to pass on to James to walk you through the business review and the outlook of our business. Thank you, Mike, and good evening. Good morning. This by 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 percent quarter on quarter revenue growth rate, reflecting positive seasonality as well as RMB, up 45% year on year and 5% quarter on quarter. Online game revenue was rmb 5,600,000,000, 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 exam conditions during the quarter. Our international game revenue grew more swiftly off a small base, whereas the China game industry is seasonally strong in the first quarter due to new year holidays and then make slower than it in 2Q, the game industry outside China exhibits less seasonality from the first quarter to second quarter of the year. Community and open platforms revenue was rmb 2,200,000,000, 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 196,000,000 photos per day, illustrating that they're sharing their real world activities and real the largest to its kind by MAU. Tencent Microdog's daily active user base increased 89% year on year and 22% quarter on quarter, while average daily posts increased 38 percent quarter on quarter to $110,000,000. We have redesigned the Q2 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're also encouraging more non game applications to join our open plan form, and we're helping them to monetize through in app advertising solutions. Digging into each category under online games, From the QQ game platform, we operate 157 games, including 42 web games. Combined PCU and ACU were stable sequentially at 1,000,000 and 1,000,000, respectively. In advanced casual games, combined PCU and ACU rose to 1,000,003.8 1,000,000, respectively. QQ speed, QQ Dancer and league of legends led the PCU growth. Looking at our future games, slate, our developed sports title NBA 2k online and set an advanced stage closed beta testing in June. And in early July, we announced a partnership with Activision Blizzard, to bring their FPS title Court of Duty online to China. Matrively multiplayer games combined PC UNA increased to $4,700,000 $1,700,000, respectively. VNS reported a new PCU record due to new content in proved graphics. Looking at our pipeline, self developed title legend of Yulong received positive feedback from its unlimited close beta testing in June and a achieved over 400,000 PCUs in the quarter. We're in the early stages of localizing and CSofts blade and sold for the China market. Revenue from mobile value added services was rmb 929,000,000, up 17 percent 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 and 2% quarter on quarter, mainly due to mobile gains. The mobile VAS industry is experiencing structural changes due to the shift to smartphone 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 rmb880 1,000,000, 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 ad advertising and video advertising and from our portal continuing to gain advertising market share. We believe we have historically under monetize our traffic relative to peers, and we're pleased to see the better targeting technology and sales processes on our side together with a tighter focus on return on investment on the advertiser side appointment. New ad platforms together with market share gains on the portal sustained our year on year revenue growth, but our new platforms and positive seasonality drove our sequential revenue growth. Display ad revenue was RMB778 1,000,000, up 64% both year on year quarter on quarter Our search revenue was R102 million dollars, up 163% year on year and 57% quarter In brand display, our top 5 advertiser categories for food and beverage, automobiles, online services, personal care, and apparel. Our portal benefited in terms of traffic from integration with our microblog 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 scrutiny growth and unique visitors and video views, both on and off our B. QQ website and from advertisers responding favorably to our attractive pricing. Consequently, our video advertising in 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, but they were also gradually making the service available to other advertisers. Our near term revenue growth rate 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 search results and on enhancing our mobile search experience rather than on monetization per se. E commerce transaction revenue was 8 1,000,000, 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 marketplaces. Leveraging our large user base We'll continue to strengthen our marketplaces through building strategic partnerships in key commerce categories. And with that, I'll invite Sean's discuss the financials. Thanks, Jay. Hello, everyone. For the second quarter of 2012, our total revenue was rmb 10,530,000,000, up 56% year on year or 9% quarter on quarter. Operating profit was rmb 3,940,000,000, up 41% year on year or 7% quarter on quarter. We recorded new net, sorry, net other losses of RMB3 million versus RMB64 million last quarter. The difference mainly reflected the donation of RMB60 million to Tencent charity fund last quarter. Net finance cost was rmb 115,000,000 compared to net finance income of RMB2 million for second quarter last year. The year on year change mainly reflected an increase in interest bearing debt and the recognition 5% quarter on quarter increased mainly reflected the recognition of exchange losses on our foreign currency denominated debts. The effective tax rate for the quarter was 18.5 percent. Net profit attributable to shareholders was RMB3.1 billion, up 32% year on year or 5% quarter on quarter. On a non GAAP basis, operating profit was rmb 4,220,000,000, up 32% year on year or 4% core 1st quarter. Net profit attributable to shareholders was rmb 3,390,000,000, up 26% year on year, or 3% quarter on 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 4,310,000,000 for the second quarter, up 12% quarter on quarter or 85 percent year on year. This mainly reflected increase in sharing costs, cost of merchandise sold for our e commerce principal transactions, staff costs, and bandwidth and service custody fees. As a percentage of revenues, total cost was 41% this quarter and 40% last quarter. IVAS gross margin dipped 1 percentage points sequentially to 66% in the 2nd quarter due to an increase in sharing costs relating to revenue growth of certain license gains. And Platts gross margin decreased 2 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 percent this quarter, mainly reflecting positive seasonality and revenue contribution from new tizing platforms. The year on year drop was mainly due to the allocation of a significant portion of costs related to online video platform, from IVAS to online advertising segment since quarter 4 last year. Gross margin for e commerce transaction was stable at 3%. Moving this was RMB610 1,000,000, up 30% quarter on quarter or 65% year on year. This 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 and A expenses totaled rmb 1,860,000,000, up 6% quarter on quarter or 37% year on year. The sequential increase reflected higher R and D expenses and increased debt costs as a result of annual salary bill which was partly offset by a decrease in intangible asset amortization relating to acquisitions. G and A represented 18% of quarterly revenue. Under G And A, R and D expenses was rmb 1,040,000,000, up 11% quarter on quarter or 55% year on year. It represented 56% of G And A or 10% of total revenue. At the end of June, we had 20,000 employees, up 4.5percentquarterandquarterof55percentyearonyear Let's look at the margin ratios for down from 60.2% last quarter. Excluding e commerce, gross margin would have been 64.1% for the quarter, after we took out e commerce revenue and related costs. Non GAAP operating margin was 40.1%, down from 40 2.2% last quarter. Excluding e commerce gross profit, it would have been 44.7%. Non GAAP net margin was 32.4 percent, down from 34.3% last quarter's Excluding e commerce gross profit, you would have been 36.3%. During the second quarter, we bought back a small number of shares. The total number of shares outstanding was basic EPS was RMB1.698 million on GAAP basis and RMB1.85 for renminbi on non GAAP basis. Diluted EPS was RMB1.665 on GAAP basis, and RMB1.8 RMB9 on a non GAAP basis. Total CapEx was RMB915 1,000,000, down 3% year on year or up 38 percent quarter on quarter, of which operating CapEx was RMB 697000000000, down 15% year on year or up 64% quarter on quarter. Non operating CapEx was RMB 2 19,000,000, up 83% year on year or down 8% quarter on quarter. At quarter end, free cash flow 2.86 per RMB up 158 percent year on year. The sequential decrease reflected the seasonal fluctuation of operating cash flow. Net cash was 19 point rmb6 billion, down 6% quarter on quarter due to payment for a number of acquisitions and the annual dividend. Year on year, 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, to ask a maximum of 2 Genes in the turn, and we shall open the floor now. Questions. Your first question comes from Dick Wei of JP Morgan. Please go ahead. Hi, thank you very much for taking my questions and 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. In terms of e Commerce, it's a relatively small part of our current business. We view e Commerce as longer term investments for us. And we are right now having both type high in 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 high, the main category is consumer electronics. But at the same time, we are also expanding the geographic coverage of that business gradually to other parts of China. And at the same time, we are also rolling out our buy, our QQ buy platform, which actually integrates both our principal business and our agency business. And we are also sort of having this open platform inviting larger B2C specialty e commerce companies to join us. So I think this is still a work in progress. We are glad to see that in both of our agency business and our principal business, we are seeing organic growth But the more important thing I think for us is really be able to over time integrate the elements into a holistic e commerce solution for our use And as you know, we actually sort of have a lot of users who come into our network on a locked in basis on a very on a day to day basis. So, 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. But this is something which will be build out over time. Great. Great. Maybe if I can have a quick follow-up that, any kind of numbers you can share with us in terms of expense amount or, what are some of the, near term KPI that you're looking at? Would that be kind of a GMV or profitability or or I guess, in terms of kind of, product coverage, maybe you can share, around the area if you'd helpful. Thanks. Yes. Sometimes that we have sort of talk about the intention to invest $1,000,000,000 into the e commerce business over time. It will be actually over a relatively long period of time. And at the same time, I think the investment philosophy is really sort of new, for the long term and the 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 spring to a certain KPI at this point in time. I knew it's 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 ability to deliver the products both from a third party basis and from a third party basis. To the users. And as I said, we look at it as a long term investment. So it's very much important for us to best in these key long term fundamental elements instead of just sprinting to a certain GMV or revenue number. Got it. Maybe if I have my second questions, we did it to, maybe we can actually pass the mic to somebody else and then so that we can put you back if that's okay. Thanks. Thank you. And your next question comes from the line of Jean Yoon from Nomura. Please go ahead. Hey, good evening guys. Just a couple of questions on 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 recognize as e as advertising revenues, maybe on the agency side. And the second question I have is, on the deferred revenues growth, on a quarter over quarter basis, it grew at the slowest rates in 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 regards to our advertising revenue, you know, if our own, have subsidiaries advertised on us, that obviously doesn't appear as revenue. So revenue is all kind of externally generated revenue. We disclosed some of our biggest advertising 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 awareness 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 ad advertising revenue line. When the small merchants on our marketplace is pay commissions or or membership fees, then that's booked under our e commerce transactions line. In terms of the deferred remedy, I think you're right that we have got a much larger base than before. But at the same time, due to seasonal fluctuations, for example, during low season, the buildup of the variable revenue would be slower than during peak season. Which has been the case for many quarters. Great. So there's it's just a seasonal factor and a high base issue. There's nothing more than that. Number 1, high basis and number 2 is due to seasonal factors. During peak season, more deferred revenue will be built Yeah. Great. Okay. Thanks guys. Yeah. Next question, please. Thank you. And 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 And also can management give some more color about your social, advertisement, whether there's anything, any new development there. And the second question is on games. Games growth was very strong. Can management talk about the top performing games? And recently there was a lot of, investment, investor concern about, negative comments coming from Nexon and also from, newest So 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. You know, within that, there are some categories that and more economically sensitive and other sort of less economically sensitive. There are some categories where we've always been strong, like food and beverage. And there's other categories like automobile we feel we've become much stronger in the past couple of years is we've really been able to demonstrate to the car companies that the people come of our various properties, be it portal, be it microblog, be it video, be it social network, the people who are the right age and the right income groups to be buying automobile. Today. So we're very pleased with that diversification in our advertiser category mix. With regard to our game business, We operate a portfolio of titles and different quarters, different titles will behave in different ways. And we tend not to give too much information on a quarter by quarter basis about individual titles. So they'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 MMO RPG encompasses first person shooter game is Encompassive Sports game. We named a couple of higher profile external titles, such as, Court of Duty online blade and sold NBA 2k in our prepared remarks. And then there's also a number of, 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. Great. Thank you. And our next question comes from the line of Zhu Shen from HSBC. Please go Good evening. Thanks for taking my question. Congratulations on a solid quarter. I had a couple of questions on online gaming. Can you help us understand what percentage of online gaming is international? And I'm wondering how those margins compare versus domestic gaming? And then I have a second question. Well, at this point of time, we actually sort of do not give specific numbers as to, how much is actually sort of license, if you want to call it, and how much it's self developed. The, yes, well, the larger portion is actually licensed and larger portions actually, that's sort of something which we have. Now, in relation to sort of the license versus as a self developed margin. Typically, what we have is if you are talking about sort of licensed title, then the margin would be the self developed minus sort of the revenue share. And 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% to 70 end 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. So 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, and I'm wondering sort of what composition that is you know, total online gaming for the 2nd quarter? Well, international right now is a small proportion of our total revenue. So, you know, it's, it's a small number, but it actually sort of grew quite a bit in the past few quarters. And my second question is I wanted to sort of get a better understanding of what you think the potential is of some of you new MMO games. You expect them to take share from your competitors, attract new users into the category, and 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, relatively small percentage of market share of the overall MMOG market right now. So I don't think there's going to be sort of near too much of a cannibalization problem. You know, if our MMORPG is actually do well, Now having said that, I think, MMORPG market is actually sort of a very, very intensively competitive it. There are a lot of very significant titles. And as a category, as a whole actually sort of has not been growing as fast as some of the other categories like advanced casual, like web games. So I think you know, we obviously sort of have been developing these titles for quite some time. And think we try to deliver high quality games into the market. But at the same time, I think we also need to be in terms of expectation, we need to, 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. And your next question comes from the line of Alex Yao from Deutsche Bank. Please go ahead. Taking my questions. I have 2 questions. Number 1, I would like to follow-up with Martin's prepared remarks. Obviously, you guys have achieved 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, the user growth is quickly shifting towards web game and the mobile game from client based games. Given such market dynamics, how do you about these trends will impact your new game launch? And how do you think about Tencent's growth opportunity in China's online gaming market in the next 2 to 3 years. My second question is about amortization. Why did the amortization increase the sequentially in second quarter. Can you talk about how this account will trend in 3Q and 4Q? Thank you. Well, I think in terms of sort of the gaming industry, right? We obviously has one of the broadest portfolio of games, in the market. And as a result, we felt that we are actually sort of new exposing ourselves to sort of new barriers growth pockets within the gaming industry. So if you look at sort of, for example, right, in terms of our events casual games in the past few years, we were actually, the company that to do is some of the, new genres into the market and actually sort of achieve a lot of success. 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 And at the same time, we also believe that the gaming industry itself, a lot of times, are actually driven by whether you actually sort of can come up with good titles. So if it's an industry that sort of knew everybody was just rushing into the same genre and you can actually grow it, not as much. But if you can actually sort of start to unleash a new genre that sort of new that are attractive for users, then that itself, as drove the growth in the market. So an example is actually, in the category of lead legends for example, right? It's a completely new category and actually sort of created demand for the market rather than basically just take markets from other people. So I think that's sort of what we believe in. We believe in to creating great games with high quality and trying to sort of target the demand that's unfilled within the market. At the same time, what we are also sort of starting to work on, right? The first time, this is the first time that we talk about new revenue. And I think this is one of the areas that we will also start to devote more resources to and trying to develop a bigger market outside of China. Yes. Now I'll pass to John to talk about sort of the amortization Yes, actually the amortization decreased significantly from quarter 1 to quarter 2 due to the fact that some of the identifiable as that we bought into accounts a year ago in relation to write games just expired in quarter 1. So basically, there's no effect coming out of the, amortization of Identivariable assets in relation to the Riotgame acquisitions. Great, thank you. And your next question comes from the line of Yijing from CI Please go ahead. First let me congratulate, the strong results. I have a question regarding to mobile, you know, So, currently, I think in the inside the Internet industry, there are some disputes over the trends of the mobile Internet. Someone believes web applications will become more and more popular, but others believe that native applications will re will resume their dominance. So my question is, can the management share some of your insight over this trend? What's your view over this? And I highly appreciate it. Management also can share, some of the 10th and the strategy that we deal with this kind of trend. And thank you. Yeah. I think the mobile internet industry over time, will, to some extent, evolve to a situation somewhat similar to sort of 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 sort of keep on evolving your applications and it's application that sort of requires a lot of building features for users to use. But at the same time, right, 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, right, or HTML5 could be sort of the more efficient way to which to access those users access those applications or those content. So the market will exist for both native applications as well as browser based new applications, web pages and content. And what we try to do is actually to position ourselves in both areas So if you look at sort of on the native application side, we have obviously sort of a whole range of applications which are very popular already on smartphones. That includes mobile QQ, that include Weixin, that include mobile Q zone, our Weibo client, our newest client, a whole host of these clients, which will be used by users on a daily basis and these are native clients. And at the same time, we also have a browser, which actually allows us to capture the demand for content and application better on the long tail. So that through the Internet through the new mobile browser, the users can actually get access to a whole host of information that they might not be sort of using that frequently, but at the same time, as an aggregator will be forming a big part of their usage. Yep. Okay. Thank you. Next question please. Right. Thank you. And your next question comes from the line of Richard Gee from Morgan Stanley. Please go ahead. So, pointy Martin, James and John, and I'll see my call. And congrats on a good quarter. Let me start with the first question, Rick, regarding e commerce, especially, as we understand, the competition in the sector has been intensifying recently, especially some of the PSM had been launching very aggressive price war. And then just wondering what kind of margin impact that what do you see going forward and so far and what is your plan and the computer over build out your logistics. Yep. Well, in e commerce, right? As I said, we look at e commerce as a long term business initiative. So we'll continue to build on sort of the key element new obsessions in the e commerce space, which would include sort of being able to offer a very attractive prices to the users, being able to deliver, being able to have great user experience and being able to provided great selection of products through our supplier network. In terms of the overall, if you look at sort of the pricing, even sort of just concerned about the pricing, we believe it's just one element of the key success factors. And at this point in time, if you look at sort of principal business, our consumer electronics products are actually consistently priced actually at the lower end of the overall e commerce market already So we already have been sort of new using this low price approach in our existing principal business. We believe there could be a lot of price was launched here and there, but if you really look at the price comparison, in reality, I think the prices actually didn't drop much as sort of it's advertised in a lot of the media. It's more of, I think, companies trying to promote their company rather than really sort of lowering price such that they are losing a lot of money on the transactions. Yeah. Thanks, Martin. And, a second question is regarding the launch schedule of your, heavily anticipated new titles, such as Call of Duty as well as Blade the Soul. And can you also shed a sunlight on, the current revenue sharing structure with the fast growing, 3rd party games on your open platform. Thank you. Well, in terms of port duty and, blade and so I think in the prepared remarks, right? We already shared sort of where did it stand, right? 1 uncoated duty online, we signed the contract and the team had activision is actually sort of working very nice to develop the game and on Blade. And so the game has already been launched in Korea and, we are working on sort of localization for the China market. Our philosophy has always been to wait until the game is really ready before we launch the game. So I think we don't have we don't set ourselves for a definitive deadline and we have the the game, but then we set ourselves for a quality target before the game is launched. So I think we just have to at the quality of the games before we will launch them. Now in terms of sort of new open platform revenue sharing scheme, we do share a pretty significant portion of the revenue with the, developers, right? And so that's why you can see in the past 12 months, we have already shared RMB1 billion of revenue to their parties. And it would typically have, 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. So that we look at both sort of revenue generation and user engagement as benchmarks in terms of sharing revenue with with the developers. So I think that's sort of the overall guideline on the revenue sharing side. Thank you. And your next question comes from the line of Alicia Yap from Barclays. Please go ahead. Everyone. Congratulations on solid results. My question is on advertising. So can management share with us what are the major for example, we're going to be able to peers have experienced. So as many of your internet peers are guiding relatively soft outlook, and 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 base versus the more performance based on the CPM or the CTA basis? Thank you. Yes, I think on the advertising business, right? The overall macro environment, is indeed sort of new, a bit weak. But on the other hand, we have always sort of new believed that our traffic was actually under monetized and sort of new. To some extent, we are catching up with sort of the volume of our traffic in these few quarters. And the main reason is really because of the fact that, number 1, we have a new advertising solutions for the advertisers for our online video platform has also sort of seen significant growth in terms of traffic and gradually as build the traffic, we are, we're building the monetization into the overall platform. And that actually help us to win, quite a 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. And this is actually catering to another set of clients that, which are so that the application developers, the long tail e commerce companies. So that's different actually from the video business, which are sort of relocated to the large brand owners. And at the same time, our overall media business has always been having a lot of traffic, but the overall pricing has not been high. And so utilization has not been high. But over time, as we continue to season our media and increase our immediate influence and also couple that with our Tencent microblock, which sort of further enhances the we're able to get better pricing and get sort of new, bigger sell through in our portal as well. So all these sort of new factors combined together help us to generate higher revenue growth than the overall market. And 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 freeing up of your, eyeglass subscribers. Could you elaborate more on what happened in the quarter? And how should we think about the going forward? And then secondly, just for housekeeping purposes, could you also share with us the ARPU of your different types of things? And then the ranking of your various community advice pieces in terms of quarter over quarter growth. Thank you very much. Yes, in terms of the sort of new IVAS subscriptions, right, new, yes, it does warrant a little bit sort of more explanation In terms of our subscriptions, right? The subscriptions that mostly actually post prepaid, which means that when users subscribe to our subscription on the IVAS side. They actually sort of need a paid either through, Q coin or sort of their bank account. But there's actually also a portion of our subscription, which, the users actually subscribe to through telco operators. And 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 you 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 subscriber maybe sort of the prepaid card has actually run out of credit. So that's why in the middle of the month, the user actually subscribed, and it's code as a subscription. A month or 2 months later when the telco operators actually settled with us, they would tell us some of the subscribers actually didn't pay because they were not deduct their subscription. So that has been the case. What we have done was actually 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 tuition who are the users, which may be fought. So as a result, we have been purging these accounts using this predicted model. And as a result, it leads to a drop off in terms of some of the accounts, which eventually will not pay. So what we have done is really knocking out those free riders, and that's it does reduce the overall subscription number, but it improves the quality of our subscriber base and, knock out the free riders. And net net this sort of actions revenue impact to us is actually minimal. And we would say, right? This is a quarter in which we actually sort of apply the predicted model in a more aggressive way because we have fine tune to a level that we feel comfortable with it. So there's more of a drop off for the quarter. The ARPU for ACG was 55 to 100 and for MMOG 100 to 140. In relation to community and open platform revenue, open platform revenue was definitely growth driver both in terms of absolute amount and growth rates. For the other community products, they are basically slightly up or down by a few percentage. And your next question comes from the line of Dee Huang from CIMB. Please go ahead. Thanks for taking my questions. First question is regarding your comments on the WACON social games. So provided the market data for these 2 types of games in 2010, 2011, as well as 2012. So can also share the Tencent revenue from this 2 game categories so that we can have a better idea about Tencent market share evolution over the past few years? Well, it was actually relatively small in 2010. And in 2011, it was primarily, it's really sort of new in 2012 that it the revenue proliferated in to a large number of different games, primarily sort of these games with third party games, which are leveraging our open platform to get that traffic and sort of you get the revenue. So by now, we we, as I talked about in the prepared remarks, we have more than 30% of the total market, at this point in time. So when you book your webcam revenue, do you book the net revenue or gross revenue? Net revenue. Okay. 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. So what are your key selling point to those leading vertical operators to attract them to your platform? And they are probably putting their, merchandise on different type of platforms. And, they don't have to attribute the exclusive relationship with Tencent, right? Yes. Well, to some extent, right? It's a little bit like sort of what we talked about in the open platform, right, which is sort of traffic, where users, relationship with us. We have a social graph, which actually allows user allows us to, promote sort of new products, biorally, we also have a lot of analytics. We know a lot about the uses such that we can actually, merge size, 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, but it just takes time for us to develop that and sort of customize it for the e commerce companies and e commerce products, in the same way as certainly we build up our platform. In the very beginning, we were not able to sort of leverage a lot of these unique capabilities. But over time, gradually, so as we build the systems, as we find the right way to do it, then these power stop to get unleashed and we start to pick up sort of market share in the open platform. I think for e commerce, we'll go through a similar exercise. Although, as I said, right, it may sort of take a longer time because everything has to be built from scratch. But I think a lot of these basic qualities are already present in our overall network and those are sort of attractive points for, 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. And the second last question comes from the line of Wallace Cho 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 aspect in the associate on sequential basis, account payable. And finally, in Castro, it's kind of like I think, one of the few quarters, I mean, on on a that cash basis is actually coming down on sequential basis. It seems like the in that cash flow has increased substantially on q and q basis. CapEx as well, but there's a big gap between the two. Can you explain as well? Thank you. Okay. I think in terms of the fixed assets, it's basically adding of extra operating CapEx. As you understand, you know, this quarter, as a percentage of revenue operating CapEx represented about, 6% to 7%. Also, the other question was, you know, the increase in interest in associates. During the period, we have, investments, you know, in associates, you know, such as, you know, cow count, yeah, which is pretty significant in terms of up to the amount. So it increased And, the other question was that cash, right? Yes. The net as you can see, we've got about BRL 2,800,000,000 net cash, adding it, sorry, free cash flow coming in. However, we have spent some on MMA, including some prepayments for the M and A activities. And also we have got a payout of dividend of 1,100,000,000. That's why all in all, you know, net cash slightly decreased during the quarter versus quarter 1. Great. Thank you. And your last question comes from the line of Ravi Sarazi from Citi. Please go ahead. Congratulations. A great quarter. And thank you very much for taking my question. Obviously, you guys have done a lot of work and are very, 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. Yeah. Well, in terms of communication and, social network, right? If it's sort of our purely we definitely sort of purely your mobile application like Weixin, like Weixin is sort of 100% smartphone In addition to that, if you look at sort of your applications like QQ, our flagship I am a new platform and sort of you're really sort of talking about 50% of the traffic actually coming from mobile, right? 50% coming from PC. So I think that's sort of around the kind of split. Of course, for QQ and not all the traffic is actually coming from smartphones, right? If there's still especially between smartphones and non smartphone. That's very helpful, indeed. Okay. Thank you so much for your questions. And thank you, operator. Welcome to round up a conference call now. If you wish to check our press release on our financial information, please visit our IR website at attentsw ww.tencent.com/ir, also hope to 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. Holdings Limited 2012 Second Quarter And Interim Results Announcement Conference Call. You may all disconnect now.