Thank you for standing by and welcome to the Tencent Holdings Limited 2011 First Quarter Results Announcement conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press star one on your telephone to join the question queue. Your name will be announced when it is your turn to ask a question. If you wish to cancel your question, please press the pound or hash key. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chan.
Thank you, Operator. Good evening, ladies and gentlemen. Welcome to our conference call for the first quarter of 2011. Before we start the presentation, we would like to remind you that we include forward-looking statements, which are underlined by a number of risks and uncertainties that may not be realized in the future for various reasons. Besides, information about general market conditions is coming from a variety of sources inside of Tencent. For a detailed discussion of the 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 CEO Pony Ma, President Martin Lau, and WCFO John Lo. Let me brief you on the key highlights. Martin will go through the business review and outlook, while John will walk you through the financials.
Then we will move on to Q&A. Now, let me turn the call over to Pony.
Good evening. We report another record quarter for the first quarter of 2011. Benefiting from the positive reality around Chinese New Year and winter break for students, our iVAS business, in particular online games, registered strong growth. While advertising activities typically slow down in the first quarter, our online advertising business recorded a sequential decline in line with historical seasonality. Let me run through the headline numbers for you for the first quarter of 2011. Total revenue was RMB 6.3 billion, an increase of 15% quarter-on-quarter or 15% year-on-year. Cost was RMB 5.3 billion, an increase of 20% quarter-on-quarter or 55% year-on-year. MVAS revenue was RMB 778 million, an increase of 7% quarter-on-quarter or 26% year-on-year. Online advertising revenue was RMB 281 million, a decrease of 28% quarter-on-quarter, or an increase of 37% year-on-year. Gross profit was RMB 4.1 billion, an increase of 12% quarter-on-quarter or 43% year-on-year.
Gross margin decreased slightly to 65% for the quarter. Operating profit was RMB 3.4 billion, an increase of 28% quarter-on-quarter or an increase of 58% year-on-year. Operating margin increased to 53% for the quarter. Net profit attributable to shareholders was RMB 2.9 billion, an increase of 30% quarter-on-quarter or 61% year-on-year. To take away the impact of acquisition-related items and to provide you with an additional perspective to assess the operation, the operating performance of our core operations, we are going to provide a few non-GAAP numbers for your reference from this quarter onwards. John will explain the non-GAAP adjustment later. After the adjustment, non-GAAP operating profit would be RMB 3.1 billion, an increase of 11% quarter-on-quarter or 38% year-on-year. Non-GAAP operating margin decreased to 49% from 51% last quarter. Non-GAAP net profit would be RMB 2.6 billion, an increase of 10% quarter-on-quarter or 36% year-on-year.
Non-GAAP net margin decreased to 41% from 43% last quarter. Non-GAAP net profit attributable to shareholders would be RMB 2.6 billion, an increase of 10% quarter-on-quarter or 37% year-on-year. Now, I will give you an update on our operating platform. On our core IM platform, active user accounts grew 4% quarter-on-quarter to 674 million. TCU reached 137 million, an increase of 8% quarter-on-quarter. The overall growth of active user accounts for IM and Qz one platforms has slowed down in the first quarter due to a reduced number of users maintaining multiple accounts to play QQ Farm and QQ Ranch when these social games became more mature. For our social networking services, active user accounts of Qz one grew 3% quarter-on-quarter to 505 million, while Pengyou grew 20% to 101 million. They were respectively ranked number one and number two largest SNS in China.
QQ.com continued to record growth in both TV and UV. PCU of QQ Game Portal increased by 13% quarter-on-quarter to 7.7 million due to holiday promotions. Our wireless WAP portal continues to register strong growth in traffic. That's all for me for the moment. I will hand over to Martin to talk about the business review and outlook.
Thank you, Pony, and hello, everyone. Let's first talk about our iVAS business, which made up 83% of total revenue for the first quarter. Benefiting from the positive seasonality of Chinese New Year and winter holidays for students, user activity and monetization increased, in particular for our online games business, which carried out a range of promotional activities during the season. While our community VAS grew in overall subscriber base, Qz one monthly subscriptions were affected by the maturity of QQ Farm and QQ Ranch. Segment revenue was RMB 5 billion, an increase of 20% quarter-on-quarter or 55% year-on-year. In terms of revenue breakdown, community VAS contributed RMB 1.68 billion or 32% to iVAS revenue. Quarter-on-quarter, community VAS revenue grew 5% as revenue from QQ membership monthly subscriptions and item sales related to Qz one third-party applications increased. On a year-on-year basis, revenue grew 23%.
Online games contributed RMB 3.57 billion or 68% to iVAS revenue. Quarter-on-quarter, online games revenue increased 28%, mainly due to increased monetization from CrossFire and DNF , as well as recently launched MMOGs during the Chinese New Year holidays. On a year-on-year basis, revenue grew 77%. Now, going through the major community products, active user accounts of Qzone grew 3% quarter-on-quarter to 505 million. Has the usage of multiple accounts among users decreased when the popularity of QQ Farm and Q Ranch faded? At the peak of these social games, quite a number of users established multiple accounts to speed up their growth within the games. Now, monthly subscription was flat for the quarter, also as a result of the maturity of these social games, whereas item sales related to third-party applications increased as we introduced more applications through open platform.
By quarter end, we had 31 applications on Qzone. Going forward, we expect the growth of monthly subscriptions would continue to slow while contributions from item sales will increase. Secondly, our real-name-based SNS, Pengyou, grew 20% quarter-on-quarter to 101 million active user accounts. Pengyou has maintained its number one position among university students and white-collar segments and continued to gain market share. In terms of open platform rollout, we now have 259 applications by quarter end on Pengyou. Thirdly, on our microblog service, registered user accounts exceeded 160 million in April. We'll continue to invest heavily in this platform and unleash the synergies with our other social networking products. To continue to grow user base and increase user activeness, we will introduce more celebrity microblogs and premium content supported by high-profile marketing activities to promote the product.
For QQ membership, monthly subscriptions increased as we continued to grow user loyalty through enhancement of functionalities and privileges, as well as cross-promotions with other QQ products. For QQ Show, we ran special promotions during Chinese New Year, and monthly subscriptions were broadly stable compared to last quarter. Moving on to online games, let's first start with casual games. On the mini-casual game front, we added one new game during the quarter, bringing the total number of games to 107. The combined PCU and ACU were 7.7 million and 3.5 million, respectively, compared to 6.8 million and 3.2 million last quarter. The growth in PCU and monetization was mainly driven by holiday promotions and in-game competitions.
In view of the increasing popularity of SNS games, we've also extended the mini-casual game platform onto the Qzone platform, while at the same time, we try to manage the cannibalizing impact of the social games on the mini-casual game platform. Now, for advanced casual games, we're now operating six titles on our platform. The combined PCU and ACU were 5.6 million and 2 million, respectively, compared to 5 million and 1.7 million during the last quarter. Usage and monetization across titles increased due to new content and holiday promotions. In particular, CrossFire benefited from a new play mode and broke a new PCU record of 2.7 million. League of Legends, a session-based real-time strategy game developed by Riot Games, will delay its open beta testing to mid-year in order to finalize the customization for the China market.
Now, for client-based MMOG, we are now operating nine titles on our platform. The combined PCU and ACU were 2.9 million and 1.2 million, respectively, compared to 2.8 million and 1.2 million during the last quarter. Usage increased slightly due to positive seasonality and new content. For DNF, we launched new content and in-game promotions to increase active usage and monetization during the holiday season. We have renewed the licensing contract with our Korean publisher and will continue to focus on user activeness and stickiness to extend the longevity of this popular title. In March, we open beta launched World of West, a licensed 3D hardcore fantasy MMOG based on the famous Chinese novel Journey to the West. Its performance has been in line with our expectation. We'll focus on building user base and further improving the game experience at this early stage.
As for web games, we continued to grow user base for Qi Xiong Zhen Ba and monetization increased during Chinese New Year. Another web game, Roco Kingdom, became the number one ranked children game by PCU, with PCU reaching 400,000. Now, moving on to our wireless business, the segment revenue for the first quarter was RMB 778 million, an increase of 7% quarter-on-quarter or 26% year-on-year. The quarter-on-quarter growth was a net result of the growth of bundled SMS subscription packages, as well as 2.5G-based mobile SMS and mobile gaming, offset by the negative effect of double confirmation plus reminder and related cancellation before verification rules. We remain cautious on the near-term revenue trends, as we believe the negative impact of such rules will persist for the next few quarters. At the same time, other regulatory changes can occur in the meantime.
In terms of revenue breakdown, SMS revenue was RMB 531 million, an increase of 3% quarter-on-quarter or 13% year-on-year. 2.5G related revenue was RMB 238 million, an increase of 17% quarter-on-quarter or 75% year-on-year. Mobile voice VAS revenue was RMB 9 million, which is almost negligible at this point in time. Meanwhile, we continued to position ourselves to capture the wireless internet market opportunities through extending current PC-based services to wireless platforms and customizing these services for a larger variety of terminal devices, such as Android and iPhone. We also focused a lot on cementing our strategic relationships with industry players such as handset manufacturers and operators. Finally, an update on our advertising business.
Segment revenue was RMB 281 million, a decrease of 28% quarter-on-quarter, as the first quarter was typically a slow season for the advertising business, and the decrease was in line with the kind of seasonality that we've seen in the previous years. Compared to one year ago, segment revenue grew 37% on a year-on-year basis. Our top five advertiser categories were online services, autos, food and beverage, apparels, and consumer electronics. In terms of revenue breakdown, IM-based advertising was RMB 128 million, an increase of 34% year-on-year. Portal advertising was RMB 131 million, an increase of 31% year-on-year. Search-based advertising was RMB 22 million, an increase of 145% year-on-year. For display advertising, revenue grew 33% year-on-year as a whole, as we continued to invest in the content and bandwidth to enhance our user experience on QQ.com and its verticals.
Our video platform, QQ Live, recorded peak concurrent user of 4.5 million, an increase of 22% over the last quarter. In March, we have also launched a web-based version of QQ Live to offer a more convenient interface for users to access our video content. For search advertising, revenue increased 145% year-on-year due to the small base of last year. While we continued to focus on improving our search engine and advertising technology, we expect search and revenue to remain volatile for the coming quarters. With our significant traffic on multiple platforms, we believe our investments in building our content, branding, technology, and advertising team will benefit our advertising business over the long run. That summarizes the business review and outlook, and I'll pass to John to talk about the financials.
Thank you, Martin, and hello, everyone. For the first quarter of 2011, our unaudited consolidated total revenue was about RMB 6.34 billion, an increase of 50% over the same period last year or 15% quarter-on-quarter. Our trading profit was RMB 3.39 billion, an increase of 58% year-on-year or 28% quarter-on-quarter. Net profit was RMB 2.88 billion, an increase of 60% year-on-year or 30% quarter-on-quarter. Profit attributable to shareholders was RMB 2.87 billion, an increase of 61% year-on-year or 30% quarter-on-quarter. Basic earnings per share for the quarter was RMB 1.575. Diluted earnings per share was RMB 1.54. I will explain in the next slide how we figure the non-GAAP figures. As Pony shared with you earlier, we are going to provide a few non-GAAP numbers for your reference from this quarter onwards.
These figures should be considered in addition to and not as a substitute for the numbers we prepared in accordance with IFRS. In a nutshell, our non-GAAP adjustments will take away the financial impact due to acquisitions and the impact of share-based compensation. The financial impact due to acquisitions will include gain on disposal of previously held interest in investee companies. In the first quarter, it is mainly related to Riot Games. Amortization of intangible assets resulting from acquisitions net of related deferred tax. Put options given to investee company shareholders to buy the stock at a later time but for accounting purpose, this has to be recorded as cost. We also got share-based compensation, which includes non-cash type of benefits that we give out to Tencent's employees as well as investee companies' employees.
After this adjustment, non-GAAP operating profit would be RMB 3.1 billion, an increase of 11% quarter-on-quarter or 38% year-on-year. Non-GAAP operating margin decreased to 49% from 51% last quarter. Non-GAAP net profit would be RMB 2.6 billion, an increase of 10% quarter-on-quarter or 36% year-on-year. Non-GAAP net margin decreased to 41% from 43% last quarter. Non-GAAP net profit attributable to shareholders would be RMB 2.6 billion, an increase of 10% quarter-on-quarter, 37% year-on-year. Non-GAAP earnings per share would be RMB 1.418, and non-GAAP diluted earnings per share would be RMB 1.387. I will now go through the selected items for the first quarter of 2011. Share-based compensation expense was flat at RMB 144 million and represented 2% of total revenue. We recorded net other gains of RMB 339 million in comparison to a net gain of RMB 23 million last quarter.
This primarily reflected the recognition of a one-time gain of RMB 459 million on the disposal of previously held equity interest in Riot Games, which is offset by a donation of RMB 100 million to Tencent Charity Fund. Income tax expense was RMB 532 million in comparison to RMB 480 million last quarter. This mainly reflected higher profit before tax and the non-recurrence of income tax expense reversal for a subsidiary that happened in quarter four, which were partly offset by a decrease in deferred tax liabilities recognized in relation to withholding tax applicable on unremitted retained earnings to be paid by our PRC subsidiaries to overseas parent companies. Looking at the revenue breakdown, i VAS continues to be the biggest revenue contributor, representing 83% of total revenue in the first quarter. MVAS accounted for 12% and online advertising 4% of total revenue.
In dollar terms, iVAS's revenue was RMB 5.25 billion, an increase of 20% quarter-on-quarter or 55% year-on-year. MVAS's revenue was RMB 778 million, an increase of 7% quarter-on-quarter or 26% year-on-year. Online advertising revenue was RMB 281 million, a decrease of 28% quarter-on-quarter or an increase of 37% year-on-year. Total cost was RMB 2.19 billion for the first quarter, an increase of 20% quarter-on-quarter. As a percentage of revenues, total cost was 35% compared to 33% last quarter, going one level down to the segment. iVAS's gross margin decreased 1 percentage point to 67%. MVAS's gross margin was flat at 62%. Gross margin for online advertising decreased 6 percentage points to 58% as a result of lower revenue generated during the weak seasonality in the first quarter. Moving on to operating expenses for the first quarter, selling and marketing expenses were more or less flat at RMB 300 million.
During the quarter, we released a new TV commercial to promote the QQ.com brand and spent significant marketing expenses to promote our microblogging service. This was offset by lower staff costs as a result of lower commissions generated in the weak advertising season. Selling and marketing expenses represented 5% of total quarterly revenue. G&A expenses were RMB 897 million, an increase of 7% quarter-on-quarter. This mainly reflected increased expenses due to amortization of intangible assets resulting from the acquisition of Riot Games during the quarter, as well as the expansion of our in-house R&D team to support long-term growth. G&A represented 40% of total quarterly revenue. R&D expenses were RMB 513 million, an increase of 8% quarter-on-quarter. It represented 57% of G&A or 8% of quarterly revenue. As of quarter end, we had about 11,400 permanent staff and over 3,000 outsourcing staff.
Let's look at the margin ratios for the first quarter. Gross margin dipped 1.64 percentage points to 65.4%. Operating margin increased 5.4 percentage points to 53.4%. Net margin increased 5.4 percentage points to 45.5%. On a non-GAAP basis, operating margin decreased 1.7 percentage points to 49.2%. Net margin decreased 1.9 percentage points to 41%. Now, I will provide a few key financial figures for your reference. CapEx was RMB 721 million for the quarter, an increase of 50% quarter-on-quarter. By breakdown, operating CapEx was RMB 642 million in comparison to RMB 331 million last quarter. Non-operating CapEx was RMB 79 million in comparison to RMB 130 million last quarter. We repurchased 400,000 shares for about HKD 76 million in the first quarter. During April, we bought 211,000 shares for about HKD 40 million. As of quarter end, our net cash position increased to RMB 18.1 billion.
The total number of shares in Q2 was 1.837 billion. This is all about financial.
Yes, thank you. Operator , we have the first question, please.
Certainly. Your first question comes from the line of Jin Yoon of Nomura. Please ask your question.
Hi. Good evening, everyone. Just a couple of questions. Let me just start off with Pengyouo . I think when you mentioned that there's about 100 million active user base that's utilizing Pengyou as we speak today, how do you measure, I guess, the active user base? Is this the same way that you measure activity on QQ, Insta, Messenger, or is there a different measurement that you use to count what an active user is? What is the incremental revenues that are generated from Pengyou , if any, compared to Qzone? I have one other follow-up question for that.
Okay. The first question, in terms of Pengyou , the measurement is actually on a monthly active basis. This is for people who have actually had an activity on Pengyou platform at least once during the month, without actually counting the first registration as an activity. Because of the fact that we understand it's actually quite easy for people to sort of click into Pengyou by clicking through QQ and Qzone, we actually increase the definition or the stringency for the definition of activist, which means that the activity is measured on actually carrying out an active action on Pengyou platform. For the people who just click into it and view pages without doing any action, it's not counted as an active user. This user has to do something, including writing a comment, posting a picture, or engaging in certain application-related activity.
We count it as one incident of activist. That's how we count the 101 million active user accounts on Pengyou . The second question is on.
Sorry, go ahead. Yeah, go ahead.
Yeah, go ahead. For the second question, yeah.
Second question is on revenue. Is that?
Yeah, the revenue contributions, if you're seeing any material revenue impact from users spending money on Pengyou.
Right now, I think Pengyou is actually not contributing much revenue because if you look at Qzone, there are two sources of revenue. One is our subscription, which sort of privileges are mainly on Qzone. We have not actually sort of added any privileges on Pengyou to be included in a separate subscription or to be included in the Qzone subscription yet. Secondly, for Qzone, there's the application revenue. On that front, because Pengyou's traffic is still a fraction of Qzone's traffic, the majority of the application-related revenue is actually generated on Qzone. However, Pengyou is now being treated as really sort of a gateway for application to be tested out and included in Qzone.
The bulk of the applications have to actually, first of all, go through Pengyou, and if they can actually prove the attractiveness and the scalability and the quality of the application, then we'll move it on to Qzone. It's acting as almost like a future for valuable applications from Qzone.
Got it. Is it safe to assume that a majority, if not all, the Pengyou users are Qzone users that are signing up for both networks, or are you seeing any material incremental user base on Pengyou that you've never seen before on Qzone?
I think there are incremental users that are actually signing up to Pengyou , but because of the large user base on Qzone and QQ, it's safe to assume that the vast majority of the users on Pengyou are actually sort of having accounts on Qzone.
Got it.
Over time, there are anecdotes and there are incidents in which people who are not active users on Qzone also sign up because some of their friends are on Pengyou.
Great. Hey, Martin, thanks for taking my questions off the filter. Thanks.
Yep.
Thank you. Your next question comes from the line of Richard Xu of Morgan Stanley. Please ask your question.
Thank you, Pony, Martin, and congrats on a good quarter. I have two questions. Let me start with the first one regarding your QQ, Pengyou , as well as your mini-blog service. Given the rising competition, especially from peers such as Sina Weibo as well as Renren, what is your current plan to differentiate your new services from these peers, and particularly how will you plan to increase the activity level?
Okay. First of all, on Pengyou , I think the way we look at Pengyou is that, first of all, we actually want to serve the users who are already on Qzone and QQ. As they actually enter into a stage of expanding their social graph, i.e., when they enter into college, for example, they want to maintain a relationship with their existing friends, but they sort of also get into an environment in which they want to get to know new friends. For people who are leaving college and entering into the workspace, they have an expanded social graph based on work relationship.
I think, first of all, we want to cater to these people and say, when you actually have the need to expand your social graph and your real name is a pretty compelling way of doing it, then we actually offer you that product so that when you go into this environment, you can actually, through this platform, Pengyou platform, you can do both things. You can maintain your relationship with your existing friends through QQ and Qzone, and at the same time, you can expand your social graph through Pengyou . With this, what we want to do is actually build a network effect so that you can actually also influence the people who are not currently on Qzone and attract them to sign up to Pengyou . I think from the scale of this product, the strategy at least is working according to our expectation.
There are still a lot of things that we can do, frankly, on Pengyou , a lot of applications that we can actually add in to cater to the needs of these people, college students and white-collar workers. I think from the way it has been growing and from the amount of traffic that we're seeing, I think the strategy is working as we planned it. Now, in terms of microblog, I think the strategy that we use is actually to look at our entire suite of social products. This social platform, if you want to call it, the bigger social platform actually includes a component on communication, which is QQ and QQ Mail, a component in social network, which includes Qzone and Pengyou , and a component in social media, which is our microblog.
What we want to do is actually have an integration among these platforms so that the content that's generated on microblog can be used to generate additional traffic for our other social platforms. At the same time, the user activity and the traffic in other social platforms and the social graph we have in those platforms can be used to feed into the activity of microblog. I think that's number one, which is a clear differentiation. Number two is, of course, we are also working quite a bit on, one, signing up additional celebrities. I think with significant traffic that we have, with a significant user base that we have on the microblog platform, with the registered users exceeding 160 million, we actually have seen more and more celebrities actually signing up to our microblog platform.
Thirdly, we are also creating premium content that actually can be distributed over our microblog. That is in line with what we have been doing all along the way with our portal. We have a very large editing staff who can actually sort of create content, which can be used to increase the amount of content as well as the level of activity on our microblog platform. Finally, I think we're spending quite aggressively on promotions of the microblog product, including offline promotions as well as advertising campaigns. I think so far, the number of users and the amount of traffic that's on our microblog platform has been growing quite nicely.
Very helpful, Martin. Second question is regarding your QQ seasonality. Can you shed a little more light on what areas would be impacted most by the negative seasonality in QQ, and to what extent other services such as online advertising as well as mobile services may help mitigate such negative seasonalities with our internet-about business?
I think gaming will be sort of the one segment that gets affected the most, right? Because if you look at the financials of performance of these different segments, gaming actually benefited the most from the seasonality in the first quarter, which means that when the seasonality reverses, it will be hurt the most. Because of the fact that gaming is actually a pretty large component of our overall revenue, the seasonality impact for this year will be more profound than the seasonality impact of the previous years. Yeah, I think that's essentially what it is.
Yep, thank you, Martin.
I think finally, I just want to emphasize, right, when you congratulate us on our great results, I want to make sure that sort of in terms of bottom line number, the investment community actually focused quite a bit on our non-GAAP numbers because included in our GAAP numbers, there is a very significant number that's related to our Riot Games acquisition. Because we owned some stake in Riot Games, an acquisition at a higher price actually, from an accounting basis, actually created a deemed gain. That's why we wanted to make sure that we take it away in our non-GAAP financials.
I think one more number that I want to share with you is that if you actually just take away the impact of Riot Games without taking away the share-based compensation, then the net profit attributable to shareholders would be RMB 2.46 billion, which I think is actually the basis on which most people have actually forecasted on your financials. I just want to give out that number to make the reference more convenient.
Great. Thank you. Your next question comes from the line of Alex Yao of Deutsche Bank. Please ask your question.
Hey, good evening, everyone, and congratulations on the quarter. Firstly, I have a follow-up question on Pengyou because a lot of the social products are actually integrated into each other. For example, in one quarter, a user posts a message on Qzone. If he chooses to synchronize that message to his Pengyou account as well, would that user also be counted as an active Pengyou user during that quarter?
Yes.
Okay. Got it. Thank you very much. Secondly, is on the.
I just wanted to say there's actually a very passive user interface to make sure that users are aware of the fact that it's actually synchronized, and there's no automatic synchronization in that process.
Yeah. Got it. Okay. Our second question is about the ARPU trend on the community business side. This quarter, the subscription number increased by 10% while the ARPU declined by 4% or 5%. Why is the ARPU declined in this quarter, and how should we think about the future ARPU trend given that more and more social third-party applications and games will be launched on Qzone in the next several quarters?
I think if you're talking about the monthly subscription number of iVAS , basically, it's the number at that quarter end, whereas the recovery from the security attacks that we have mentioned before recovered slowly. At the same time, we also got some cannibalization from some of the item-based services. Perhaps during the quarter, there might be someone who might have subscribed for the services but finally decided not to subscribe for it. In short, what I want to say is that because the curve is picking up gradually, if you just look at the final quarter-end numbers, that might not be the correct message to break out the average ARPU.
How should we think about the ARPU trend for the rest of the year?
If you're talking about monthly subscription services, it will always be RMB 10 minus the channel cost associated with it, and it won't be any big change. At the same time, if you look at what I've just mentioned, as part of open platform strategy, there are a lot of applications that will be on our Qzone. As such, people have got a choice of whether they would like to spend it on an all-item basis or alternatively, they would like to spend on a monthly subscription basis with some privileges on some of the apps. Predominantly, the privileges will be related to self-developed apps versus the third-party apps. Yeah.
I think on Qzone, it's fair to say that the subscriber base number would actually slow, whereas the ARPU can increase a little bit because there's going to be more application-based and item-based revenue.
Okay. Got it. Got it. Lastly, if I may, I just want to quickly touch base upon the financial profile of Riot Games. What could be the financial impact from the consolidation of this business?
What are you most focused on, revenue or your most focused on?
Revenue as well as margin impact.
At this point in time, Riot Games' revenue is still a relatively small portion of the total revenue, so we don't sort of talk about it separately. The game is not even sort of launched in China yet, right? The game itself, although it has achieved quite a good result from a user-based perspective in Europe and America, is still very early in terms of monetization cycle.
Okay, got it. Thank you very much.
Great. Thank you. Your next question comes from the line of James Mitchell of Goldman Sachs. Please ask your question.
Great. Thank you for taking my question. Congratulations on your non-GAAP earnings disclosure, and if you don't want to be congratulated on your actual earnings. Two questions. First of all, not to make this the Pengyou earnings call, but you mentioned that Qzone paid subs only increased slightly quarter-on-quarter because of the maturity of QQ Farm. Can you tell if Qzone activity is also being hurt by user time shifting away from Qzone and toward Pengyou ? Secondly, on the game front, you mentioned that you renewed the Dungeon & Fighter license. Was there any substantial change in terms of license payments on the license fee side? Thank you.
Yeah. In terms of Pengyou , in Chinese, it's actually called friends, right? It's a very friendly service. We welcome any questions. Now, on Pengyou and its relationship with Qzone, I think Pengyou is actually quite integrated with Qzone from a user interface perspective, and we try to provide for Qzone users a convenient way of moving on to Pengyou . To some extent, I think there's less of cannibalization but more of synergies. When people want to engage in real-name, social activities, if the alternative is for them to be using another service, now they can actually access it and use it on Pengyou , and from Pengyou , they can take care of their Qzone social graph. I think there's actually going to be more synergies in between the two services than cannibalization.
In terms of the Dungeon & Fighter contracts, I would say the economics are broadly in line compared to the previous contract term. Not much change.
Great. Thank you.
Sure.
Great. Thank you. Your next question comes from the line of Dick Wei of JP Morgan. Please ask your question.
Hi. Thanks for taking my question. I have a question on Qzone. I wonder how much of the revenue is coming from the third-party applications. If you can have a rough sense, it would be great. Thanks.
At this point in time, it's between 10%- 15%, but it has been growing quite quickly.
All right. Got it. Maybe if I can follow up on the questions on the games outgroup for various metrics, that would be great. Thank you.
Yeah. For the MMOG, it's between RMB 90-RMB 130, whereas for advanced casual game, it's from RMB 45-RMB 80 per quarter.
Okay, great. Thank you.
Thank you. Your next question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question.
Hey, good evening, everyone. Thanks for taking my questions. Could you share with us the ranking of your community services in terms of sequential growth? Could you also give us an update on how you manage two social network teams internally? How do you balance the incentive of two teams? One is growing much faster than the other, while one is being monetized, but the other is not. Finally, could you also talk a little bit about have you seen any impact from the Japanese earthquake on your advertising revenues in the second quarter? Thanks.
In terms of the community growth, community advanced growth rate in descending order, it would be premium membership, Qzone, and QQ Show is basically flat. In terms of absolute growth amount, it would be Qzone, premium membership. As I've mentioned before, QQ Show is flat.
In terms of the management question, the two networks actually are managed by the same large team of people. There's a lot of teamwork that happened between the two subteams. I think that's number one. Number two is I think if you're talking about sort of monetization versus non-monetization, I think Tencent has always been a company that focuses on both building platforms, which don't necessarily generate any revenue, and at the same time, monetization teams, which actually sort of generate revenue. We have had that kind of management structure as well as the incentive scheme put in place already.
For example, the QQ platform doesn't generate any revenue, but we have a very strong team of people who are dedicated to driving it forward. That essentially is the same mechanism through which we manage one service, which is generating revenue, and the other one, which is not generating revenue. Okay, Eddie?
Got it. Hey, Martin, could you also talk a little bit about whether you have seen any impact from the Japanese earthquake on, for example, your auto advertisers in the second quarter?
I think for auto segments, we are really starting to ramp up revenue, right? In the past, we really sort of didn't have that much of an exposure to auto, but it's only in the past two or three quarters that we have been building our market share in the auto segment. From that perspective, we are not sort of really seeing any change in terms of the slowdown or the exposure to the broader segments. I think we are building market share on our own. On the other hand, if you look at the kind of advertisers that we have exposure to, we also have slightly more exposure to the local car brands. That's why we are less effective in this whole thing. Yeah.
That's very helpful. Thank you.
Next question, please.
Thank you. Our next question comes from the line of Wallace Cheung of Credit Suisse. Please ask your question.
Hi. Thanks for taking my question and congratulations on a very good quarter. Two questions. Number one, on the web g ames impact to your game revenue, it seems like Qi Xiong Zhen Ba and Roco Kingdom have been doing pretty well. Can you comment on the web g ames as a percetage of total game revenue? Also, how's the web g ames game cycle and volatility impact on the future game business going forward? Second question on the online video business, as you're upgrading the QQ Live on the web- base, it seems like in the last couple of days, there's some news source saying Tencent is going to invest in the Huayi Brothers. Can you give us an update on your online video business in terms of costs like on content and bandwidth, as well as the future revenue potential? Thank you.
Okay. In terms of web g ames, if you look at Qi Xiong Zhen Ba, it is generating revenue, but it's just one game out of many games that we have on our platform. We don't actually separately disclose the revenue of a particular game. At the same time, if you look at Roco Kingdom, I think we really target the Roco Kingdom at the children segment. The philosophy that we have on Roco Kingdom is we want to monetize very, very lightly because we want to make this product a genuine product of enjoyment for kids. We want to make sure that this product will become a very attractive introductory product for them into the internet. That's why Roco Kingdom is actually generating very, very little revenue at this point in time.
Now, in terms of web g ames, the lifecycle, I think it's true that web g ames has got a shorter lifecycle, tends to have a shorter lifecycle. We also try to prolong the longevity of the product through more content, through various operational mechanisms that we have developed over the years in managing client games. We also try to manage monetization in a more measured way so that it doesn't exhaust the lifecycle of a game that quickly. On the other hand, what we also try to do is actually to come up with a portfolio strategy. We will be launching more web g ames so that there is a continuous pipeline, and we try to prolong web g ames as a category in terms of its longevity.
Now, in terms of our online video platform, it's fair to say we are just starting to ramp up the platform and increasing the investment in the platform through two angles, right? One is through the introduction of a web-based platform. In the past, what we had was a client-based platform, which actually allows a lot of peer-to-peer technology to be run through the platform, which means that the bandwidth cost is actually very, very low. As we launch the web-based platform, the bandwidth costs will actually go up quite significantly. As we have more traffic, and especially a web-based platform is actually a better platform to acquire new users, that would actually increase our bandwidth cost quite substantially. Two is, in the past, we have been quite cautious in terms of investing in video content. In the past, the video content cost was actually lower than it is today.
With the pretty viable monetization mechanism, the video content cost has been escalating quite quickly. At the same time, we also need to buy more content. We are also in a very fast ramping mode in terms of our overall content cost investment. At this point in time, giving you the figures probably may not be that representative of what exactly we'll be spending in the next few quarters, but the cost here is actually going up quite quickly. That's what we can tell you. We have actually built a pretty robust video platform and also a robust video operation team through the running of QQ Live in previous years. Given there is a very large and increasing monetization market through advertising, we'll be ramping up the investment. Once we actually can build more traffic into our platform, then we'll be able to sell the advertising in a better position.
I think the sequence is actually for us to ramp the platform first, and then the revenue would actually follow at a later time. That's the sequence. At this point in time, the cost is actually going up quite quickly, and the revenue actually has not really come in yet. We have some revenue, but I think we'll be seeing more revenue when the traffic has built up to a certain scale.
Thank you, Martin. Just a quick follow-up. Firstly, on web ga mes, correct me if I'm wrong, I think web g ames are mostly targeting white-collar, like working-class people. Will it be possible the cycle, like seasonality of web g ames, will be somewhat different from the existing online games of Tencent? The second point is that on the online video front, it seems some news source is saying that Tencent also set up some fund to invest into movie productions, as well as maybe Tencent is interested in developing movies based on Roco Kingdom characters as well. Can you tell me more on that? Thank you.
Yeah. In terms of seasonality, I think web g ames, it's true that it tends to be sort of more office worker-focused, and we are seeing a higher percentage of office workers in the web g ames, Qi Xiong Zhen Ba, compared to our other games. I think for Tencent, a strong characteristic of our platform is that it does help to broaden the user base of any type of games. That's why when Qi Xiong Zhen Ba was actually launched on Tencent's platform, we also extended the game to cover users which are otherwise not the typical users of web g ames. I think the answer is yes, they are more office workers, but two, it's not as much as other games because our user base is much broader in general. Also, for these web g ames, that's the same case.
Now, in terms of our video acquisition strategy, I think we have to admit this is early days for us to move into this space, and there are a lot of things that we have to learn. Acquiring content is something that we will, I think, build up in terms of our expertise over time. We felt that we do want to have multiple means through which we can have cooperation with the content generators in the industry. That's why we are actually borrowing some of the experience that we have in the online gaming industry and say, yes, we want to work with content providers, and there are multiple ways through which we can actually get access to the content. One is you just buy it among others.
Two is you may actually be able to buy it on an exclusive basis, or you get involved in the production of the content early on so that you can actually get access to better content. There are many, many different ways through which you can actually manage this process, and I think we are starting to learn. What we are saying in establishing this fund and also investing in Huayi Brothers is that we are very eager to learn, and we are quite flexible in terms of how we go about securing good content for our video platform.
Great answer. Thank you very much.
Thank you. Operator, in the interest of time, shall we take the last three questions, please?
Certainly. Thank you. Your next question comes from the line of Wendy Huang of Royal Bank of Scotland. Please ask your question.
Thank you. My first question is regarding your SNS products. You disclosed in your presentation that your Qzone has 31 apps and Pengyou has 259 apps. I just wonder, what has caused the discrepancy between the number of apps on these two SNS products? Also, could you disclose the number of apps on your microblog products? Will you kind of synchronize the apps across the three different products?
In terms of the difference between Pengyou and Qzone, as I explained. Yeah,
There's actually, you know, two differences. One is the fact that Pengyou is actually really the gateway for applications to be added to our SNS platform. Basically, you know, when the application developer approaches, you know, we have very light verification. If its product passed a certain task, then, you know, it will be placed on Pengyou. Once they're on Pengyou, they are put to much more stringent evaluation. Only the ones that actually sort of can demonstrate their ability to operate, the quality of the products, and sort of the ability to scale, that will actually be admitted to Qzone because, you know, Qzone affects many, many more people. That's why we want to be more cautious in terms of admitting applications. That's number one. That's why, you know, there's a natural difference, which means that, you know, there are more applications that are on Pengyou.
The second one is that, you know, we also have integrated some of the applications from Tenpay onto Pengyou. These are sort of, you know, lifestyle-related applications that we'll place on the Pengyou platform. That accounts for another part of the discrepancy or difference.
How many apps do you have on the microblog?
Yeah, right now, I think we have roughly 50 applications on a microblogging platform, but there are actually many more to be added. It's just a matter of time and the number of people that we have to evaluate these applications before they are admitted. In terms of the differences, I think for microblogging, it tends to be sort of tool-based and light, social-based type of application. Whereas on Qzone and Pengyou, the social component is much higher, and there are also many more games that are on the social network compared to microblogging.
Okay. You earlier mentioned microblog already has 160 million registered user accounts. How many active user accounts do you have for microblog?
There are quite a lot. I think, on a monthly basis, we have more than 90 million active users on the microblogging platform.
Okay. My second question is about your costs. I just wonder, you mentioned that you were a step of the investment in 2011, but in Q1, we didn't see too much sequential increase in the cost. For the rest of the year, which cost line do you expect to see a big jump? Are we going to see a cross-linked increase among the cost of sales, sales, marketing, and SG&A? Thank you.
Yeah, if we disappoint you in terms of cost increase, then we promise you we're not going to disappoint you in the next quarters. I think that the key thing is really that a lot of the key cost items are ramping in the process of ramping. If you look at some of the key components, one, for example, people's cost, right? The staff costs will actually increase, starting from the second quarter because that's the time when we actually put through the salary increase across the board for our employees. Number two, as I said, in the video content, for example, the content cost, bandwidth cost, just starting to ramp. As we get more traffic, and as we acquire more content, the escalation will actually be quite big.
Number three is, again, on microblog, a lot of the promotions as well as the creation process of premium content are just starting. As we move into the second quarter and third quarter, the ramp will be quite steep.
Okay, sounds like.
Fourthly, on the new games, there will be quite a lot of promotions associated with it. I think the cost items, really, the ramp hasn't started until after Chinese New Year, and it will continue to ramp through the rest of the year.
When you recognize revenue share with the third-party application developers, do you recognize those revenue as net revenue, or do you recognize the revenue share to the third party as a cost of sales?
Right now, as we look at Qzone as a platform, we have a platform charge. At this point in time, we are actually recognizing the platform charge as revenue, i.e., it's actually net revenue that we are registering for the Qzone. That's starting from Q1 because things are actually quite different from licensed games in which we actually manage the entire exclusive content and the entire operations of the game, and then we share part of the revenue as content cost with the developer. In this case, Qzone is really a platform that's open to various applications. We believe booking the platform charge as opposed to booking the entire revenue is probably more appropriate, at least for now.
In other words, increasing revenue from the third-party applications will not really impact your margins negatively, right?
Yeah, from an accounting basis, that's correct.
Okay. I have a final question. It's more a broad question. I think Tencent started your networking business with a non-real network. Last year, you upgraded Qzone to Pengyou and launched your first real-name-based SNS. I just wonder whether this kind of product change reflects kind of the internet user's demographic change in China. Now in China, people are more willing to register with their real name ID. How do you think this kind of usage change or the internet user demographic change will reshape the whole internet world in the future? Thank you.
Yeah, I think it's actually not as drastic as it sounds, right? I think we're not talking about a regime change, because people tend to feel that, okay, well, on QQ and Qzone, people are anonymous, i.e., sort of people don't know each other. I think that's actually wrong. What happens is, if you analyze the social graph on QQ and Qzone, people know each other, and people may even have more intimate relationships than people on Pengyou. If you look at the range of activities that people engage in on Qzone, it's about sharing what they have been doing in their lives. It's about writing blogs or writing status updates, and it's about uploading pictures. For example, the daily number of picture uploads can be more than 200 million pictures a day.
These are not characteristics of a social network that's sort of pure, where people don't know each other. People actually know each other. What happens is, on Pengyou, it's actually allowing a lot of these same people to put down their real name so that they can be discovered more easily by their expanding social circle, particularly people who are in college and who just entered their workspace. I think the whole regime theory between sort of anonymous and real name, I think it's not as drastic as what a lot of people think.
I see. Thank you for addressing my long question. Thank you.
Sure.
Thank you.
I'll go to the next question, please.
Certainly. Your next question comes from the line of Zhong Xiao of Macquarie. Please ask your question.
Thank you very much for taking my questions. I have a clarification first. In the Q1 revenue for gaming, is there anything at all from the right? Some, a little bit, you know, because we consolidate the revenue for about a month, a little bit more than a month, yeah. Okay. Are you able to give a number, around that? Not at this point in time because we don't disclose numbers around individual games. Okay. My question is on guidance. Earlier, I think you mentioned that the Q2 seasonality will be a little bit more pronounced than in the past. I look at your past sequential revenue for the games. I think it still grew quarter over quarter for the last few years from Q1 to Q2.
I just want to make sure when you say it's pronounced, should we expect a still smaller growth or do you think we should be, you know, prepare ourselves for a potential sort of potential decline?
To be more accurate, I said more pronounced, not a little bit pronounced.
Okay.
The truth is, I think, in the past, there's a combination of we have new games launched during the quarter, or we have games which are younger in their life cycle. Right. When you add that, then the natural ramp in terms of user base and revenue would actually counteract the seasonality. If you look at our game portfolio for this time around, there aren't sort of new games launched in the second quarter. The later versions have been actually pushed out to mid-year. At the same time, a lot of the games are actually quite mature now.
Most of our large games, with the exception of Qi Xiong Zhen Ba , are already in their third year of operations. Especially if you look at the way they actually generate a lot of revenue in the holiday season, that actually makes it a much harder comparison when we enter into the second quarter.
Okay. Thank you very much.
Thank you. Your last question comes from the line of Eric Nguyen of Mirae Asset. Please ask your question.
Thanks very much for taking my question. Thanks to management for staying on and answering so many questions. I actually have only two questions. First question is, I look at your content cost and agency fees. I noticed that previous quarter, it's hovering around RMB 700 million, RMB 800 million. In the first quarter, this number increased to RMB 1.1 billion. Can you comment if this huge increase of RMB 300 million is related to your video business? It does sound very big to me. Thanks.
Yeah. John, you want to talk about?
I think it really depends on the amount of revenue generated from self-generated products versus licensed products. Since we have got more revenue generated from licensed products, that means the overall sharing will be higher when compared with the other quarter.
John, you mean that this RMB 300 million also has to do with some game revenue share?
You're talking about the overall sharing costs, right?
Right. It's in your breakdown in cost, and the content cost and agency fees.
All right. If you're talking about the content cost and agency fees, there are two components, of course, right? The content cost would be a licensing, you know, sort of charges, and for the agency fees, I would say that, you know, for some of the rates, it would be higher due to the fact that, you know, we give out, you know, more commissions to some of the advertisers. On top, you know, we're talking about some of the sharing costs for people, you know, diverting in respect of our search business.
Yeah, but the largest part is licensing fees, right? I think you can attribute most of the increase to this.
Okay, thanks. My second question is, I wonder if you can give us some update on NBA 2K and Punch Monster. I think these two games you licensed a while ago and it's co-developing with Take-Two. Is there any updates on the launch timeline at this point? Yeah, they're still being made right now. I think it would take some time before they would be launching to the market. Okay, thanks. My third question is, it looks like Tencent is getting into a lot of new businesses. They talk about video this time and also microblog. Are you still putting the same focus into search, or is search into a relatively lower priority going forward? Thanks. That's my last question.
We are very focused on search as well, but the dynamics are a little bit different, right? Because on search, it takes a long time to actually sort of keep on improving the technology. I think it's a continuous effort that's ongoing. At the same time, if you look at the revenue, we have made some progress in terms of our search advertising platform so that we can actually generate the increase in revenue. At the same time, if you look at sort of our search on the wireless side, it's actually ramping quite nicely. I don't think we are lowering our focus on search, but it's more a function of the market being much more focused on the other segments rather than search. Search is actually a long-term initiative that requires actually a continuous investment. Thank you very much.
Okay, thank you for your question. Thank you, operator. We're going to round up the conference call now. If you wish to check out press release and other financial information, please visit our IR website under www.tencent.com/ir. We'll also post a replay of the call on the site shortly. Thank you and see you next quarter.
Thank you. This does conclude our conference for today. Thank you for participating. Tencent Holdings Limited, Tuesday 11, first quarter results, announcement conference call. You may all disconnect now.