Ladies and gentlemen, thank you for standing by and welcome to the Tencent Holdings Limited 2011 Fourth Quarter and Annual Results Announcement Conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question- and- answer session. If you wish to ask a question, you will need to press star one on your telephone to join the questions queue. Your name will be announced when it is your turn to ask a question. If you wish to cancel your request, 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. Thank you. Please go ahead, Ms. Chan.
Thank you, operator. Good evening. Welcome to our Annual Results Conference call for 2011. I'm Catherine Chan from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Besides, information about general market conditions is coming from a variety of sources outside of Tencent. For a detailed discussion of risk factors that may affect our businesses and operations, 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 WCFO John Lo. Pony will kick off with a short overview of operational and financial performance.
Martin will present the company's strategic highlights, while James will walk you through the business review and overview. John will discuss the financials and then will open the floor for questions. Now, let me turn the call over to Pony.
Good evening, everyone. During 2011, we have made significant progress in a number of strategic initiatives that are fundamental to the long-term competitiveness of the company. Let me briefly highlight them. First, we deepened our social infrastructure to enhance user connectivity and interaction. We introduced a social communication program for smartphones, Weixin, and we built up an open platform supporting a range of third-party applications, which increased user engagement. Second, we have strengthened our position as a top destination for online entertainment in China. We expanded leadership in online games through new genres: mobile games and web games. We built up our video presence by offering premium content and better user experience. Third, we have launched a sophisticated performance-based advertising platform to help us capture the secular opportunities in performance ads and long-tail ads.
Finally, on new businesses, we have reinforced our foundations for rapid development in e-commerce and search, and upgraded our cloud-based security and antivirus solutions to provide a safe online environment for our users. Accompanying this strategic progress, we saw healthy financial progress during the year. For the fourth quarter of 2011, total revenue was RMB 7.9 billion, up 43% year-on-year, or 6% quarter-on-quarter. IVAS revenue was RMB 6.4 billion, up 46% year-on-year, or 7% quarter-on-quarter. MVAS revenue was RMB 854 million, up 17% year-on-year, or 1% quarter-on-quarter. Online advertising revenue was RMB 598 million, up 54% year-on-year, or flat quarter-on-quarter. Non-GAAP operating profit was RMB 3.5 billion, up 25% year-on-year, or 4% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB 2.9 billion, up 23% year-on-year, or 5% quarter-on-quarter. For the full year of 2011, total revenue was RMB 28.5 billion, up 45% year-on-year.
Non-GAAP operating profit was RMB 13.2 billion, and non-GAAP profit attributable to shareholders was RMB 10.9 billion. Both went up 27% year-on-year. Looking forward to 2012, we will continue to manage our resources in the dynamic China Internet market to deliver long-term value to our users and our shareholders. Finally, let me share with you the latest metrics for our key online platforms. On our core IM platform, active user counts grew 11% year-on-year to RMB 721 million. PCU increased 20% year-on-year to RMB 153 million. While IM user growth decelerated due to high penetration, user engagement grew as the value of IM was enhanced by the proliferation of mobile internet and integration with our social platforms. For Social Networking Services, active user counts of QZone grew 8% year-on-year to RMB 552 million. User activity levels benefit from the growing number of apps on QZone's open platform.
Our real-time-based SNS, PengYou, achieved 83% year-on-year growth in active user counts. qq.com consolidated its position as the most visited portal in China, supported by strong growth in key verticals such as news, entertainment, women, autos, and finance. Our social media service, Tencent Microblog, grew its registered user base almost four times in 2011, with daily active user counts reaching RMB 68 million at year-end as we deepened the integration between qq.com and Tencent Microblog. On our mini-casual games portal, PCU increased 24% year-on-year to RMB 8.4 million, helped by marketing and extensions to web and mobile platforms. While our wireless portal, 3g.qq.com, saw continued growth in traffic and user engagement, during the year, we invested significant resources to refine the user experience for our cloud-based mobile browser and mobile search services. I will now pass on to Martin to share with you the company's strategic highlights for 2011.
Thank you, Pony, and hello, everybody. I'll share with you our progress during 2011 in several strategic areas, namely social infrastructure, open platform, online games, mobile internet, online advertising, and online security. First, we have deepened our social infrastructure by expanding, integrating, and mobilizing our social platforms. We have broadened our social infrastructure to offer a diversified range of products, ranging from QQ IM to QQ Mail in the communication area, QZone and PengYou in the social networking area, and Tencent Microblog in the social media area. During the year, we also added smartphone-based social communication product, Weixin, to the overall social infrastructure. With one login ID, our users can share their own social graph and synchronize comments across these integrated social platforms based on their needs.
Depending on their need for expression or privacy, for a fun chat, for serious discussion, users can choose to chat one-on-one on QQ IM, can pursue group chat, can share photos on QZone, or can broadcast a message over Tencent Microblog. Next, we are implementing open platforms to contribute to a healthy ecosystem for the industry, as well as a richer experience for our users. To date, over 40,000 third-party applications have been registered on open.qq.com, which can be deployed over a number of our open platforms, including QZone, PengYou, Tencent Microblog, and Q+. More than 10 third-party applications have achieved over 10 million monthly active users, and the more successful apps generate revenue to the developers of over RMB 15 million per month. 2011 was also a landmark year for our online games business.
We expanded our market leadership in this highly competitive segment, and our major titles commanded number-one positions in their respective genres in China. In advanced casual games, we have four titles passing the 1 million PCU, peak concurrent user milestone, in the genres of shooting, music, car racing, and battle arena. Three of these four IPs are self-owned. In massive multiplayer online games, Dungeon & Fighter was the most popular action-style game in China, with 2.6 million peak concurrent users. In mini-casual games, our self-developed QQ Games portal is the largest mini-game platform in China, with 8.4 million peak concurrent users. In web games, Qu Xiong Zeng Ba broke 800,000 peak concurrent users, and Roco Kingdom, a game targeted at children, achieved 600,000 peak concurrent users during the year, making them the leaders in this fast-emerging category.
For the wireless business, 2011 experienced increasing adoption of smartphones and the emergence of a variety of compelling mobile internet applications. Mobile internet users already represented 69% of the total internet user base as of the end of 2011. To capture these mobile internet opportunities, we are leveraging our PC-based community leadership to strengthen our presence in social communication, mobile games, mobile browser, and mobile search. Regarding social communication, three of our applications, namely Wireless QQ, Weixin, and Mobile QZone, are ranked the number one, number two, and number four social apps in the iOS China App Store. On mobile games, we have launched an open platform in the fourth quarter to host standalone games and online games, including casual, social, and MMOGs.
Regarding our mobile browser, according to analyses, we have 40% market share by active users in China, while our mobile search engine achieved 23% market share by query volume. We consider mobile browser and mobile search important gateways to complement our strong social leadership. Moving on to online advertising, we believe we enjoy three major competitive advantages in our vast platform. Number one, substantial organic traffic across different properties. Number two, locked-in relationship with our users. Number three, access to our users' social graph. We are now developing technologies and platforms to leverage these advantages. Specifically, we have launched a sophisticated ad system called Tencent Target Ad Platform to deliver search ads, targeted display ads, and targeted social ads on our various online platforms. We have also retooled our pay search advertising engine to increase its effectiveness and efficiency.
We have also built up our video advertising platform by investing in our video platform. As a result, we believe we are well placed to capitalize on the increasing online ad budget to be allocated by advertisers and also on the trend toward more performance-oriented advertising. Finally, on online security, we made substantial progress during the year to provide our users a secure and nuisance-free online experience. PC Manager, our self-developed online security solution, has expanded market acceptance. Launched in May 2010, its market share has steadily increased to 19%, according to iResearch. Meanwhile, we have also deepened cooperation with our affiliate, Kingsoft Security, and its product, Kingsoft Internet Security, which has also attained a 19% market share. We will continue to invest in technologies and partnerships with trustworthy service providers to fight hacking, virus, and children attacks, and to better protect our users. Now, I would like to pass on James to talk about business review and outlook.
Good evening or good morning. Starting with the internet VAS business, segment revenue was RMB 6.4 billion in the fourth quarter, up 46% year-on-year and 7% quarter-on-quarter. Within that, community VAS revenue was RMB 1.9 billion, up 22% year-on-year and 5% sequentially. The quarter-on-quarter growth flowed primarily from QZone's third-party apps and QQ membership subscriptions. Online game revenue was RMB 4.5 billion, up 60% year-on-year and 7% quarter-on-quarter. Despite weaker seasonality every fourth quarter, increased user activity and spending on products such as D&F , League of Legends, and QQ Games contributed to the sequential growth. For the full year, IVAS revenue reached RMB 23 billion, up 49%. Digging further into our community value-added services, QZone remained the number one social network in China. QZone's revenue base is rapidly broadening out because users are now spending more each day on applications than they are on subscriptions.
As a result, QZone is diversifying its sources of revenue and better balancing its long-term business model. Our real-name social network, PengYou, remained the leading real-name-based social network in the country, and during the quarter, we upgraded the technical platform to facilitate expansion of users' social graph. Tencent Microblog almost quadrupled its registered user base during the year, ending it with 68 million daily active users. We're investing in content and marketing to foster user interaction, and we're experimenting with performance-based advertising and e-commerce solutions to likely monetize the user experience. Among our community VAS subscription products, QQ membership and also QQ Music sustained robust user and revenue growth during the period.
For online games, our portfolio generated healthy sequential revenue growth despite adverse seasonality, and the mini-casual game category combined peak and average concurrent users increased to 8.4 million and 4.1 million, respectively, helped by marketing and addition of web games and mobile online games onto the QQ Games platform. Advanced casual games combined peak and average concurrent users experienced seasonal declines to 8.9 million and 2.6 million, respectively, due primarily to school examinations. Crossfire achieved a historical high PCU thanks to a new content release during the quarter. League of Legends reported 11.5 million monthly active users and 1.3 million peak concurrent users globally last November, with broad-based traction in the United States, Europe, Korea, Taiwan, and China. Massively multiplayer games combined PCU dipped to 3.2 million due to exams, while combined ACU was stable at 1.6 million. Dungeon & Fighter activity levels and revenue increased on content enhancements.
Roco Kingdom, with 600,000 PCUs, remains the most popular web game for children in China. We believe we possess an exceptionally broad and deep pipeline of new titles, broad in terms of the range of genres we're targeting and deep in terms of the quality of the games we're developing or licensing within those genres. We look forward to our pipeline of new game titles supplementing the user and revenue growth from our existing titles. Moving on to mobile, revenue from our mobile segment was RMB 854 million, up 17% year-on-year and 1% quarter-on-quarter. Revenue from 3G services such as mobile games and mobile books increased on-greedy usage and enhanced propensity to spend. Revenue from 2G services declined sequentially as our usage increased, but our realization rates, or the percentage of the end user spend that we actually receive and book as revenue, declined.
For the full year, segment revenue grew 20% to RMB 3.3 billion. The mobile VAS industry has historically proven vulnerable to regulatory changes, and 2012 may continue that pattern. First, the cancellation before verification rule allows free riding consumers to cancel their subscriptions before payment is due, which could inflict volatility on industry-wide 2G revenue. Second, China Mobile is transitioning its MDO platform to a new cooperation model, which could inflict volatility on industry-wide 2.5G revenue. Our mobile VAS business has experienced similar challenges in the past, and we've emerged as the industry leader by focusing on providing long-term value to consumers. On that front, we're actively tapping into the opportunities brought by the mobile internet. First, we're adding location-based services as a core feature across our wireless product, which enhances our user experience and in the future will facilitate mobile advertising.
Second, we continue to grow our mobile communications franchise via wireless QQ and Weixin. Third, we're investing in technology to enhance our market share in mobile browser and mobile security products. For our advertising business, segment revenue was RMB 598 million in the fourth quarter, an increase of 54% year-on-year. Revenue was flat sequentially in what's seasonally a weak quarter for our display business, as we experienced strong offsetting growth in video and search advertising. Our IM client advertising revenue was RMB 220 million, up 32% year-on-year but down 11% quarter-on-quarter because of seasonal declines from categories such as food and beverage that advertise more during the summer than the winter. Portal and other advertising revenue was RMB 303 million, up 53% year-on-year, essentially flat quarter-on-quarter. Search revenue of RMB 75 million was up 225% year-on-year and up 41% quarter-on-quarter.
For the full year, segment revenue grew 45% to just under RMB 2 billion. As you can see, our new initiatives allowed us to accelerate advertising revenue growth from the first half of the year into the second half. Digging deeper, during the fourth quarter, our top five advertiser categories were online services, automobiles, food and beverage, consumer electronics, and apparel. Year-on-year, the fastest growing categories included online services, consumer electronics, and finance. Our online video service gained mind-sharing traffic and was ranked the second most popular video site in China by number of videos viewed during the quarter, according to Comscore Video Metrics. Our video advertising revenue grew 70% quarter-on-quarter due to traffic growth and better inventory utilization.
We believe our competitive attributes in the highly competitive online video business include our substantial organic traffic, our industry-leading distribution infrastructure in terms of service and bandwidth, and our close relationships with major content providers. Our search business improved monetization during the quarter, assisted by an enhanced targeted ad platform, which facilitates paid keyword sales and placement. We intend to release a major algorithmic results upgrade for our search engine this year, which should further enhance the quality of our natural search results. Finally, we'll soon launch an enhanced system for optimally placing performance-based advertising right across all of our social platforms. With that, I'll pass to John to discuss the financials.
Thanks, James, and hello, everyone. For the fourth quarter of 2011, our consolidated total revenue was RMB 7.92 billion, up 43% year-on-year or 6% quarter-on-quarter. Operating profit was RMB 3.09 billion, up 17% year-on-year or 3% quarter-on-quarter.
Net profit was RMB 2.55 billion, up 15% year-on-year or 4% quarter-on-quarter. Profit attributable to shareholders was RMB 2.54 billion, up 15% year-on-year or 4% quarter-on-quarter. For the full year of 2011, total revenue was RMB 28.5 billion, an increase of 45% from 2010. Operating profit was RMB 12.25 billion, an increase of 25% year-on-year. Profit attributable to shareholders was RMB 10.2 billion, an increase of 27% year-on-year. On a non-GAAP basis, operating profit for the fourth quarter was RMB 3.52 billion, up 25% year-on-year or 4% quarter-on-quarter. Operating margin decreased one percentage point to 44% from last quarter. Net profit attributable to shareholders was RMB 2.9 billion, up 23% year-on-year or 5% quarter-on-quarter.
In addition to recurring items such as stock-based compensation and amortization of intangible assets, we included a disposal gain of RMB 249 million relating to our step-up investment in GameGuru, the developer of web game Qu Xiong Zeng Ba. A provision of RMB 243 million was also made for impairment charges on selected investee companies. For the full year of 2011, non-GAAP operating profit was RMB 13.21 billion, up 27% year-on-year. Non-GAAP operating margin was 46%, down seven percentage points from last year. Non-GAAP net profit attributable to shareholders was RMB 10.94 billion, up 27% year-on-year. Looking at the revenue breakdown, online games contributed 56% of total revenue in the fourth quarter. Community value-added services accounted for 25%, mobile value-added services 11%, and online advertising 8% of total revenue. Total cost was RMB 2.74 billion for the fourth quarter, an increase of 3% quarter-on-quarter or 50% year-on-year.
As a percentage of revenues, total cost decreased one percentage point to 35%. IVAS gross margin increased two percentage points to 68% in the fourth quarter, mainly as a result of the allocation of a significant portion of online video-related costs to our advertising segment. Before adjustment, IVAS gross margin would have been stable at 66%. MVAS gross margin increased seven percentage points to 66%. This was due to assignment of a higher proportion of staff costs to R&D expenses, reflecting our increased investments in strategic platforms and technologies. Before adjustment, MVAS gross margin would have been stable at 59%. Gross margin for online advertising decreased 17 percentage points to 49% this quarter, mainly as a result of the corresponding allocation of online video-related costs from IVAS.
This increased the content costs that were amortized using accelerated methods since this quarter and was true for shortfalls from previous quarters, higher bandwidth and server custody fees. Bottom-based commission fees for our search network also increased significantly during the quarter. Before the overall adjustment relating to our video business, gross margin for online advertising would have decreased three percentage points to 63%. On a full-year basis, total cost was RMB 9.93 billion in 2011, an increase of 57% from RMB 6.32 billion in 2010. IVAS gross margin decreased two percentage points to 67%. MVAS gross margin decreased one percentage point to 61%. Gross margin for online advertising decreased eight percentage points to 60%. Moving on to operating expenses for the fourth quarter, selling and marketing expenses were RMB 744 million, up 47% quarter-on-quarter. This mainly reflected a seasonal end-of-year increase in promotion advertising expenses for various products.
It represented 9% of quarterly revenue. G&A expenses were RMB 1.55 billion, up 6% quarter-on-quarter. This primarily reflected an increase in staff costs, R&D expenses, and administrative expenses to support the growth of our businesses. It represented 20% of quarterly revenue. Excluding the impact of Riot Games, G&A for the fourth quarter would have increased 6% quarter-on-quarter or 47% year-on-year. Under G&A, R&D expenses were RMB 763 million, up 3% quarter-on-quarter. It represented 49% of G&A or 10% of total revenue. On a full-year basis, selling and marketing expenses were RMB 1.92 billion, up 103% over 2010. G&A was RMB 5.28 billion, up 86% over 2010. Excluding the impact of Riot Games, G&A would have increased by 50% over 2010. R&D expenses were RMB 2.69 billion, up 59% over 2010.
By proportion of full-year revenue, S&M was 7% of total revenue, G&A represented 19%, and R&D at 9% of total revenue. Let's look at the margin ratios for the fourth quarter. Gross margin increased 0.9 percentage points to 65.4%. Operating margin decreased 0.9 percentage points to 39%. Net margin decreased 0.4 percentage points to 32.2%. On a non-GAAP basis, operating margin decreased 0.7 percentage points to 44.4%. Net margin decreased 0.1% to 37%. During the fourth quarter, we repurchased 1.7 million shares for approximately HKD 244 million. For the full year of 2011, we spent around HKD 1.27 billion to buy back a total of 7.6 million shares. The total number of shares outstanding at year-end was 1.84 billion. For 2011, basic EPS was RMB 5.609 and diluted EPS was RMB 5.49. Non-GAAP basic EPS was RMB 6.015 and diluted EPS was RMB 5.886.
The year-on-year growth rates were about 27% and 28% respectively. We are proposing an annual dividend of HKD 0.75 per share, which is 36% higher than last year. Subject to the approval of shareholders at the next general AGM to be held on 16th of May , 2012, the final dividend will be payable on 30th of May , 2012. To finish, we'll provide you a few key financial information for reference. Total CapEx was RMB 892 million, down 21% quarter-on-quarter. Share-based compensation was RMB 220 million or about 3% of quarterly revenue. Free cash flow for the quarter amounted to RMB 3.06 billion, up 38% quarter-on-quarter, mainly due to the increase in operating cash flow benefiting from year-end settlement of payables. Our net cash position at year-end remains strong at RMB 17.7 billion, and our total debt to adjusted EBITDA for 2011 was 0.84x . This concludes our presentation. Thank you.
Operator, shall we take the first question, please?
Okay. Ladies and gentlemen, 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 the line of Eddie Leung from Merrill Lynch. Please ask your question now.
Good evening. Thank you for taking my questions. I have two questions. The first one is about mobile internet. Could you share your thoughts with us on the potential impact on revenues of a migration of user traffic from PC to mobile? What do you guys find it more difficult to monetize mobile traffic in this stage of development, and any measures to handle it? Secondly, could you also provide us the ARPU of your various types of games as well as the ranking of your converted IVAS by growth rates? Thank you.
Hey, Eddie. I'll take your first question, and John will take your second question. In terms of mobile internet, we felt that mobile internet is, number one, still in a very early stage of development from both a usage perspective as well as from a monetization perspective. We do believe that mobile internet will actually account for a large amount of usage for users over time. A lot of that will be incremental usage, i.e., when people actually did not have the chance of accessing internet, now they can actually sort of access the internet through mobile. We also believe that over time there will be monetization mechanisms developed for mobile internet, maybe in a different format than it is today. In terms of looking at the revenue impact, we felt that we have a lot of our revenue in online games, which is PC-based, and that will not change.
In terms of our value-added services, we believe that as we provide services that extend our reach of the users from PC to mobile internet, we actually can increase the loyalty of the users. We can increase the engagement with the users. Overall, we believe that we could actually hold on to the users and monetize, maintain our monetization. With respect to a standalone mobile internet product, I think at this point in time, it is indeed quite difficult to monetize. I think for us, our approach is to make sure that we continue to grow the user base. We continue to extend our franchise from PC to mobile. We believe that over time, mobile internet, when that meets with local business, when that meets with e-commerce, then there will be monetization mechanisms. We will keep on investing in mobile internet in order to get users, increase our engagement, and at the same time develop for longer-term monetization mechanisms.
For the quarterly ARPU on advanced casual game, it was ¥50- ¥90, whereas for MMOG, it was ¥90- ¥130. In terms of the community VAS, both the growth rate and absolute amount in descending order would be QZone and premium membership, while QQ Show experienced a decline.
That's very helpful. Thank you, guys.
Thank you for your questions. Your next question comes from the line of Alex Yao from Deutsche Bank. Please ask your question now.
Hi. Good evening, everyone, and thank you very much for taking my question. My first question is on the video strategy in 2012. Specifically, how do you think the merger of the major competitors in the online video space will change the competitive landscape? How will you adjust your video strategy accordingly? The second question is on the cost side. Why did the total remuneration cost decrease slightly in 4Q compared to 3Q despite a 1,400 headcount increase? Also, can you talk about the headcount expansion plan for 2012? Thank you.
I think in terms of the video landscape, we're very excited about our video product. Our web-based video was only released in early 2011, but it's been remarkably successful. As I mentioned, the video advertising revenue grew 70% quarter-on-quarter in the fourth quarter, and that's compounding off very rapid growth rates in prior quarters. We believe that different participants bring different competitive advantages to bear in the online video space, and there's room for many of them to flourish. Our particular competitive attributes would include, first of all, the enormous organic traffic we enjoy, which certainly plays to our favor in other categories like games. Secondly, the fact that we have, by some distance, the largest infrastructure in the industry in terms of service centers, broadband usage, and so forth. Thirdly, our relationship with content suppliers. That's how we see our online video business. I'll pass it on to John for the question on remuneration.
Righty. We experienced a slight decline in staff costs in quarter four, about 4%, due to the fact that we normally accrue bonus based on our best estimation. At year-end, we will true up those bonus payments that we expect to pay after Chinese New Year.
In terms of staff number, in the year of 2011, we did see a very large growth rate in our staff number. I think part of the reason is because of the fact that we have invested in a number of new areas. Part of it is because of consolidation of certain affiliates who actually added to our headcount. As we look into 2012, I think, number one, we will continue to invest in the areas that we think are very important. Number two is we are not likely to see sort of the step function that we saw in some of the startups of the businesses that we experienced in the year of 2011. Of course, we can't anticipate what will be the business that may be consolidated during the year.
Short of if we cut that out from the consideration, then I think the above two factors would drive our thinking around 2012. At the same time, I think we also intend to make sure that we unleash a lot of the potential and the efficiency of the people that we hired in 2011 in order for them to perform for the business.
That's very helpful. Thank you very much.
Thank you. Your next question comes from the line of Gary Yang from UBS . Please ask your question now.
Good evening, everyone. Thanks for taking my question. I have a couple of questions. Firstly, on the microblog, it seems that your daily active user, as a percentag of registered users, is way ahead of your competitor. I just want to understand how should I read it? It seems like the perception is that your competitor is pretty active, but the numbers are saying something else. What do you think that investors generally are missing? The second question is relating to the Weixin migration and its impact on potentially the Super QQ, that kind of mobile subscription services. Have we already seen some impact on the mobile subscription revenues because of migration to Weixin? Going forward, how much of impact do you expect? Finally, just a financial-related question. On the online advertising subsegment, it seems that there's no amortization charges according to your release. Just wondering, how do you account for the content cost amortization? How should I read it? Also, just want to get some clarification on the reclassification of the gross margins. That's about it. Thanks.
Yeah, I think in terms of microblog, I think the high daily active user base, that represents the fast growth of Tencent Microblog in the past year. We had actually made a lot of progress in this product, including signing up users, including signing up a lot of celebrities, as well as government officials, organizations in various local provinces. I think overall, the service itself has actually made a lot of progress. Secondly, we believe this is a reflection of the platform advantage of Tencent because Tencent Microblog is actually integrated into various platforms of Tencent's products. That's not limited to just the web page, but also includes integration with our instant messaging, integration with our QZone. That provides for a very convenient way through which users can access the microblog service.
Of course, we felt that since we have already gotten to a very large user base, the importance for us is to continue to focus on increasing the quality of the messages and the media nature of our Tencent Microblog. We want to continue to increase the average amount of time that people spend on the Tencent Microblog platform. We see a big potential around that. In terms of wireless, as James actually talked about the wireless business, the wireless business sort of saw some challenges, mainly because of realization rates, not really cannibalization of various products. I'll pass to John to talk about the financial.
Yeah, actually, the amortization of video costs has been included under costs, under sharing or content costs. We have adopted an accelerated approach to amortize the video costs, and most of the costs will be amortized in the first year of putting into our library.
Thanks. I just want to follow up on the last question. In terms of the reclassification for gross margins, I understand how the mobile actually goes down because you allocate it to R&D. For the advertising part, what does that mean by 63% versus 49%? Could you just go over it again for me?
All right. Basically, beforehand, most of the costs associated with our online video service are included under IVAS because at that time, it's more of a platform sort of services rather than some service that can generate advertising revenue. As we can see, the revenue more than coming in, we have reclassified the costs associated with those video operations, including bandwidth, including some of the staff costs, and including video costs to online advertising segments.
I see. Thank you very much.
For your questions, your next question comes from the line of Catherine Leung from Goldman Sachs . Please ask your question now.
Hi. My first question is whether you can comment on the ARPU and paying user conversion you're seeing for the open apps relative to the QZone memberships. Secondly, can you also comment on whether you expect your new game launches this year to be able to contribute to accelerate overall game revenue growth or mainly support the revenues from any of the smaller titles maturing? Thank you.
Hi, Catherine. In terms of the applications that people are accessing through QZone, they mentioned in the introductory remarks the user spending on those applications now exceeds the user spending on the traditional subscription products. In that sense, QZone is starting to more closely resemble social networks in the West, although, of course, we still have a lot of room to grow in advertising around social networks. The user activity around those apps is more a function of the nature of the app and whether they're on the open platform or whether they're published directly by Tencent. There are certain categories of games that appeal to hardcore gamers that might have higher conversion to paying users and higher ARPUs. Those who exhibit the same characteristics, whether they're client games or whether they're on the open platform.
Conversely, there are certain games that appeal to younger users, lower conversion rate, lower ARPU. That would be true regardless of whether they're client games or open platform titles. I think that covers the open platform contribution, which we're very excited about as a growth engine. In terms of game launches for subsequent periods, as I mentioned, we have a pretty heavy game pipeline. We have relationships with some of the biggest and best game developers in the world. We are also increasingly excited about our own internal studio product. We'll release games when we think it's the right time to release them and when they're ready to be released. We tend to monetize new games fairly lightly at first. You should expect the contribution to revenue from new games to feed in over multiple quarters rather than worrying too much about whether title X or Y will be released in June or July.
Okay, great. Thank you.
Thank you for your questions. Your next question comes from the line of Varun Ahuja from JPMorgan. Please ask your question.
Good evening. Thank you for having my questions. I just have three quick questions, more on financials. The first is, could you give a CapEx guidance for 2012 and how would you be looking to fund that? The second question is regarding your growth strategy. Which geographies or segments would you be looking to grow? If they are outside China, would you be looking to fund those through the recently issued bonds? The last question is, if you could throw some light on what the secured debt, what typically is it used for, and also, the current proportion of secured debt to total debt, is that ratio going to be maintained going forward? Thank you.
In relation to CapEx, back in 2010, as a percentage of revenue, the operating CapEx represented 7% of the total revenue. In 2011, it represented about 11% of the total revenue due to the fact that we had invested in 2010 in a few strategic initiatives, including open platform. We expect that in 2012, as a percentage of revenue, it will stabilize unless there are new initiatives coming out. In relation to your second question, I suppose you're talking about what are we going to do with the bond money that we raised back in December? Actually, it's mainly treasury operations to balance our onshore and offshore cash, as well as our short-term and long-term loan financing profile because we can get a better type of balanced financing.
You can see that by balancing the onshore and offshore financing and cash, actually, there's a positive interest differential because if we place a revenue BT positive for five years, it will yield 5.5%, which is higher than our bond interest rate.
Yeah. In terms of growth strategy, I would say our current revenue stream constitutes games, IVAS, subscription-based revenue, as well as advertising. We strive to continue to grow these revenues. In terms of games, we believe that we'll continue to launch new genres and cater to the new flavors of the users. At the same time, we'll try to explore opportunities outside of China. In terms of the IVAS revenue, we have been able to sort of monetize through subscriptions quite successfully. Over time, we'll continue to try to increase our engagement with the users, increase the value-addedness of our services to the users. At the same time, we also try to leverage our open platform to generate platform-related revenue. That could actually, to some extent, interchange with the subscription revenue that we receive from the users.
Finally, on ads, as James talked about in our advertising business, we have actually very substantial assets within the China internet space in terms of our internet platform. As a result, we believe that there are multiple ways through which we can grow our advertising revenue through continued better performance in our display ads, through our recent launch of our targeted advertising system, which would try to target the users who we have a lot of profiles on our social platform and also through our video platform. In terms of even longer- term, as you know, we are investing quite heavily on e-commerce as well as search. We believe that over time, if we're successful in those initiatives, then we will be able to generate revenue from those two areas too.
I do want to emphasize, since you sort of focus quite a bit on our debt, I do want to emphasize, number one, despite the debt, we are now in a pretty substantial net cash position. We also have a very strong cash flow generation capability from our own operations. That will serve as the basis for our expansion.
Right. Just to follow up, I understand your CapEx revenues, you expect it to be pretty much stable in 2012 as well, except unless there are some new initiatives. Overall, is it safe to assume, or could you comment whether you're confident of maintaining your CapEx, I mean, funding your CapEx pretty much from internal cash flows?
We'll definitely be able to do that. That has been a given for the past many years, and that will be the case.
Next question, please.
Thank you. Next question comes from the line of Cynthia Meng from Jefferies LLC. Please ask your question now.
Good evening. I have two questions. First of all, can management give us some guidance or more color on the revenue outlook, especially on the advertisement and outlook for games in terms of the growth outlook for 2012 for online advertisement, given this is the year 2012, the year of two major advertising events in Europe? What should we look for when we are expecting the portal and online video advertisements? I have a follow-up question.
Yeah. In terms of revenue, I think on gaming, as I said, we would continue to, one, develop or continue to operate our existing titles, which are very large franchises in the China market. We will try to sign up more users, and we'll try to monetize the users as appropriate in order to sustain our revenue. We will also launch and develop new titles in order for us to cater to new pockets of demand within the online gamer space in China. Plus, we are also exploring revenue opportunities outside of China. In terms of advertising, we believe that there are secular trends, and there are also sort of new events during the year. In terms of secular trends, we believe we have very substantial advertising assets which have not been fully utilized yet.
As a result, we are developing a number of different initiatives to try to monetize these platforms, including better targeting of display ads, including using targeted and performance-based ads to tap into the long-tail advertising and performance advertising pocket of not just the large advertisers, but also small and medium advertisers, and also developing our video platform to tap into the video advertising. At the same time, we do look toward an Olympic event in order to increase our branded advertising revenue.
Thank you. In terms of revenue contribution from advertisement, do you have a target? Will advertisement as a percent of total revenue go up to a certain percentage?
We try to grow all our streams of revenue, right? I don't think it's easy for us to sort of talk about the percentage because that will not be giving you the full picture. We do see over the long run, right, there should be substantial opportunity with our online advertising business because if you look at Facebook, 90% of their revenue is actually from advertising. Right now, 90% of our revenue is actually from user paid, right? We felt there is actually quite a bit of potential in our social network, which actually we can use to generate advertising revenue. I have to mind you, right, this is a long-term initiative. We will keep trying and keep developing our technologies and our distribution network in order to achieve this.
Thank you. Last question is on cost. Last year, I remember management said it was a year of investment. Will this year continue to be another year of investment? Also, the amortization of intangibles, should we expect that the amortization of intangibles should be lower in the first quarter and then going forward compared to the fourth quarter last year? Thank you.
Yeah. I think our opening philosophy is actually investing into the future because we do believe that the online industry, despite the fact that already we have a lot of users, is still at a very nascent stage of development in terms of the level of engagement and the business activities that are within the online sector. That's why we will continue to be in the investment mode because we believe that's actually the best way for us to deploy our capital, and it would actually yield a very attractive return in the future. There was a step increase last year, I would say, because we did start from zero in some products to a full gear. I think while we're saying in this year we'll continue to invest, some of those step functions you will not be seeing in this year.
Thank you. Your next question is from the line of Alicia Yap from Barclays Capital. Please ask your question now.
Good evening. Thanks for taking my questions. My first question is, I wanted to follow up on the video questions post the merger event this week. Does Tencent think that there is a need to also acquire or partner with another player, or you will continue to build a video business yourself?
I think you can probably guess the answer from the previous answer. I mean, if you look at the online game space, we entered that relatively late. We felt we had certain competitive attributes in the online game space, and we built largely organically with some small kind of tuck-in acquisitions. That has been our standard kind of operating procedure in the past, and it's served us relatively well in the past. That does not mean that that will be our course in every situation in the future. I think I'd let past be prelude when you're thinking about our M&A activity.
Okay.
I think you'll run into trouble if the default route is actually you have to merge with somebody, right? I think our default route of development is organic growth because we do believe that there are quite a large number of distinctive advantages that we have.
Sure. My second question is, what is the management view of Tencent's opportunity in e-commerce?
I do believe e-commerce is actually a very large opportunity, and we are still at the very beginning of that opportunity. One of the key advantages of the internet is actually it does increase the efficiency of information flow as well as product information flow. It lowers the cost in terms of transactions. We believe this advantage is going to be applied to multiple segments within the physical economy. That's why we believe e-commerce is a very, very big opportunity for the future. As a result, we will continue to invest in this segment. As you know, starting from 2005, we have already launched PayPay as our marketplace platform. We have launched a payment platform. Over the past few years, we have seen significant growth in each one of these platforms in both trading volume and in terms of transaction volume. We'll continue to invest in these platforms.
At the same time, in the last year, we have launched our buy.qq.com platform, which aims to bring in not only small merchants, but also partner with large B2C merchants so that we can actually provide a one-stop shop for our consumers. This platform is still in the process of being built. We believe that because we have a lot of users, we know a lot of the profiles of these users, and we can actually do targeted marketing to these users. We'll continue to invest in our e-commerce initiative and build up our buy.qq.com platform as well as our PayPay platform. We have also invested in quite a number of leading B2C vertical companies. We also look toward over time integrating these verticals into our overall shopping platform for the users.
I see. Very helpful. Lastly, just very quickly, how are you recording the revenues of League of Legends from other countries? Are they included in the online games line as well? Thank you.
Yes, they are included under online games lines, yeah.
Do you plan to split out that if in the future it becomes bigger?
Not at this point in time, but if you look at the accounts, there are some geographical segments type of details in there, and some of which will belong to ours. Over to you.
Okay. Great. Thank you so much.
Thank you, operator. Before we take the next question, I would like to remind our friends that we should limit two questions for each analyst so that we can run through the question list that we already locked in the system. Thank you.
The next question comes from the line of Yu Jin from CICC. Please ask your question now.
Good evening, everyone, and thank you for taking my call. I have a following question on the open platform. It's encouraging to see that we have over 40,000 third-party applications. I have two structural questions related to the platform. First, how to balance between the first-party and the third-party applications, especially when those applications share some similar features? How to ensure the neutrality of the open platform from the strategic level? That's the first question. I have a follow-on question. Thank you.
I think, predominantly, the platform is actually hosted with third-party applications. That's one answer to your question. The second one is that the users eventually choose what applications they favor because we have a set of rules which allow applications the equal opportunity to get in touch with the users. As the users actually choose or as the application providers choose to invest in advertising or choose to invest in viral marketing, the successful ones would have a better chance of signing up more users, and that would actually help them to be more popular on the platform.
Do we have any transparent mechanism to tell all those third-party applications and developers if they do certain kind of things, they will get the resources to promote their applications?
We actually try to provide as much help to the third-party developers as possible. We actually provide the entire hosting platform for them so that they can actually be relieved of a lot of the mundane duties, but really focus on how to make their application better and how to actually attract the users. We also have teams of people who help them or help them to understand more about our platform, all the viral mechanisms, so that they actually can build these mechanisms into their applications and to increase the ability for them to attract users and hold onto users. I think ultimately what we actually want to do is to make the platform truly best suited for the people who actually put in the most of their attention, put in the best quality, and we want to make sure that these guys will thrive on our platform.
Thank you. Next question comes from the line of Wendy Huang from RBS . Please ask your question.
Operator, before we, Wendy asked a question, shall I announce that in the interest of time, we would like to take the last three questions from the queue.
Okay.
Thank you.
Thanks, Catherine. I have two questions, one on the investments, the other one on the advertising business. Regarding the investments, it seems that you made over $5 billion R&D investments in 2011. If I recall correctly, you mentioned earlier that the total investment budget for this round is about $10 billion. Does that imply that the investment cycle will last for just another one more year? I also noticed, can you maybe give more color on two investments you made in 2011? One is $380 million R&D investments for a 20% stake in a securities investment analysis software company. What's the rationale behind that investment? You also made about $100 million U.S. dollar investments into e-commerce companies. Could you give more color on those two investments as well? Thank you.
For investment amount, we do not set hard limits. When we announced the fact that we have a $5 billion R&D collaboration fund, we actually invested the full amount relatively quickly. We increased it to $10 billion R&D. We would look at the opportunities, and if we actually use up the fund and we still continue to see a lot of opportunities in the industry, then we'll continue to increase our commitment to investing, because we do feel that there are a lot of opportunities within the internet space, and there are a lot of good companies that we can partner with. We are willing to, as part of the partnership, commit both capital as well as our platform resource to help them to succeed, and at the same time, we can profit from their success. There is no upper limit in terms of our investment fund. That's it.
Second one, we don't generally comment specifically one-on-one on our investment company. The one that you mentioned probably is related to Kingsoft Internet Security. As I mentioned in our presentation, Kingsoft Internet Security is a very good partner of ours in our online security solution strategy. After we invested in the company and after we actually collaborated with the company, it has seen very significant growth, and the market share has reached around 19% in the online security market in China. In e-commerce, generally, what we see is we did see a very large e-commerce opportunity that's ahead of us. We have got some initial success in terms of our e-commerce platforms. We actually want to commit more resources to further build out our overall asset base within the e-commerce ecosystem in order for us to be a significant e-commerce player in the future.
Thank you. Your next question comes from the line of Ming Zhao from SIG. Please ask your question.
All right. Good evening. Thank you for taking my question. Just one question on the targeted advertising system. Maybe you could give us some more color. Is this system across all of your platforms, or is this specifically for, you know, QZone, this kind of social media? Is this self-service, self-serve system? Is it targeting SMEs or big advertisers? Any color would be helpful. Thank you.
Yeah. I think it's still an early stage of the deployment of the system. We have been developing the system for the past year, and we have just made an announcement in Beijing regarding the launch of this system. I have to say we are early days in terms of testing it out. To give you a little bit more color on the system, it is a system that actually can cover across our different platforms. It will cover the social platforms, but it can also cover our client platform and our web platform. It's not just a system that's based upon our social network. Initially, as we rolled out the service, we probably rolled it out in our social network first. It is a system which is largely self-serve, and the target is to serve a large number of advertisers with pretty standardized advertising materials.
Of course, we do serve both large and small advertisers. There are going to be large advertisers who are going to be interested in this system as well. We very much welcome them, and we have a very sophisticated sales force who can help them with that. At the same time, if there are small and medium advertisers, we would want them to participate as well. At this point of time, we are still limiting the category of advertisers that can participate because we want to make sure that the quality of the advertisers are actually up to standard at this initial phase. Right now, we are mostly testing it out with application providers as well as our e-commerce merchant partners at this point in time.
Thank you. Your last question comes from the line of Richard Ji from Morgan Stanley. Please ask your question now.
Sure. Thanks for taking my call. Can you comment on your international expansion strategy? How should we look at the growth profile as well as the margin potential?
Richard, I think in terms of international strategy, you know, we outlined international as an area for expansion about a year ago. We've made two fairly substantial international investments. One of them was the stake in Mail.ru in Russia. The value of that stake has approximately doubled since we made our investment. More importantly, the business is performing at or above our expectations in terms of both franchise and financials. That's an example of a situation where it would be relatively difficult for Tencent to build a social network and a content platform in Russia, and being a minority shareholder seems like the best approach. As you know, we've also purchased what we think is a best-in-class game development studio in California, Riot Games. We think that their game is very popular with users, and we're very happy with their progress.
Thank you. Thank you, everybody, for joining the call. If you wish to check our press release and other financial information, please visit our IR website at www.tencent.com/ir. We will post a replay of this webcast on our site shortly. Thank you very much, and see you next quarter.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating in Tencent Holdings Limited 2011 Fourth Quarter and Annual Results Announcement Conference Call. You may all disconnect now.