Earnings Call: Q2 2020

Aug 12, 2020

Thank you for standing by, and welcome to the Tencent Holdings Limited 20 2nd Quarter and Internal Results Announcement Conference Call. At this time, all participants are in listen only mode. There will be a presentation followed by a question and session. I would now like to hand the conference over to your host today, Ms. Wendy Huang from Tencent. Please go ahead, Ms. Huang. Thank you. Good evening. Welcome to our 2022nd quarter and interim results conference call. I'm Wendy Huang from Tencent's IR team. 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. Information about the general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited and non IFRS financial measures that should be considered in addition to, but not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. Non IFRS measures are intended to reflect our core earnings by excluding certain one time and or non cash items. For a detailed discussion of risk factors and non IFRS measures, please refer to our disclosure documents on the IR section of our website. Let me introduce the management team on the call tonight. Our Chairman and CEO, Pauli Ma, will kick off with a short overview. President, Martin Lau and Chief Strategy Officer, James Mitchell, will provide a business overview. Chief Financial Officer, Jun Lo, will conclude with his financial review before we open the floor for questions. I will now turn the call over to Tony. Okay. Thank you, Wendy. Good evening. Thanks, everyone, for joining us today. Since the beginning of this year, the COVID-nineteen pandemic has spread the world, disrupting our daily work and life routines. During this challenging time, we utilized our platforms and technologies to help users adapt to the new normal via online tools to support enterprises in conducting digital upgrades and to broadly contribute to economic recovery. And now I will highlight the results we achieved in the Q2 of 2020. Total revenue was RMB115 1,000,000,000, up 29% year on year and 6% quarter on quarter. Gross profit was RMB53 1,000,000,000, up 36 percent year on year and 1% quarter on quarter. Our non IFRS operating profit was RMB38 1,000,000,000, up 38% year on year and 6% quarter on quarter. Non IFRS net profit attributable to equity holders was RMB30 1,000,000,000, up 28% year on year and 11% quarter on quarter. Moving to our online platform. In social, combined MAU of Weixin and WeChat increased 6% year on year to 1.2 1,000,000,000. Just for those who may not be familiar with the distinction between Weixin and WeChat, They are 2 different products. Weixin is a chat tool that serves users in the mainland of China, whereas WeChat is a sister product, which served users outside of the mainland of China. And smart devices MAU of QQ was 648,000,000. In games, we expand our leadership via expanded popularity of established franchise and success of new releases in both China and international markets. In media, video and music subscriptions increased as we released the top tier content and add songs to the pay library. In FinTech, commercial payment transaction resumes growth in our wealth management platform extend its aggregate customer assets. Leveraging our broad use user base, we assist SMEs' digital upgrades and contribute to economic recovery. In cloud, we signed up a large contract in key verticals and capture opportunities in emerging sectors. In utilities, we maintain our industry leadership in mobile security, mobile browser and Android app store in China. I will invite Martin and James to discuss the business review. Thank you, Pony, and good evening and good morning to everybody on the call. For the Q2 of 2020, our total revenue grew 29% year on year. Value added services represented 50 7% of our total revenue within which social networks was 23% and online games was 34%. Online advertising was 16% of total revenue. FinTech and Business Services represented 26% of our total revenue. Moving into more granularity for value added services. Segment revenue was RMB65 1,000,000,000 in the 2nd quarter, up 35% year on year and 4% quarter on quarter. Within value added services, social networks revenue was RMB26.7 billion, increasing 29% year on year, mainly driven by subscriptions for animated series and music as well as in game item sales. The consolidation of Huya contributed to both year on year and quarter on quarter revenue growth as well. Total VAS subscriptions increased 20% year on year to 203,000,000. Video subscriptions increased 18% year on year to 114,000,000, mainly due to the success of animated series and drama series such as The Land of Warrior Season 3 and a new season of Candle in the Tomb: The Lost Caverns. Music subscriptions rose 52% year on year to 47,000,000 as we included more songs in the paid library. Online games revenue grew 40% year on year and 3% quarter on quarter to RMB38.3 billion, driven by mainly smartphone games. Total smartphone games revenue increased 62% year on year to RMB36 1,000,000,000. The strong performance primarily flowed from our key titles in China and international markets and the release of deferred revenue generated in previous periods, including the COVID lockdown period. The growth also benefited from the low base of Peacekeeper Elite in the same quarter last year, which was launched in May 2019 and from the financial consolidation of Supercell, which happened October 2019. PC client games revenue decreased 7% year on year to RMB10.9 billion due to soft DNF and crossbuy performance offsetting increased revenue from League of Legends. Moving on to social networks, we released during the quarter updates for Weixin to enhance features and functionalities for communication content and services. On communication, users can virtually tap their friends via Tickle, which has enabled many creative expressions. The addition of live broadcast function in groups facilitates various vertical use cases such as online education. Daily messages grew both year on year and quarter on quarter. On content, we upgraded official accounts' video publishing capabilities, strengthening our recommendation algorithm and released new content aggregation tools. These initiatives enabled more efficient content delivery and revitalized content consumption in the official accounts. As a result, official accounts page views increased year on year during the first half of twenty twenty, rebounding after 3 years of consecutive declines. As for services, we launched a free and easy to use toolkit to help SMEs, especially long term merchants, build and operate mini stores and found them with functions such as order management, after sales services and live broadcast. In QQ, we enriched features for users to stay together online while they are physically apart. Users can initiate online parties and play AI empowered social games in video chat environment. To engage the expanding fan base for anime, comics, games and novel content. We rolled out customizable comic stickers within QQ Chats and strengthened content offerings through popular ACGN related mini programs. All these help us to make QQ continue to be front and center with the young users. For games, during the quarter, play activity in China normalized downwards versus the Q1 as users returned to offices. However, user time spent on smartphone games in China increased year on year suggesting that the work from home period has structurally widened the appeal of playing games. Internationally, our MAU increased significantly as many users connected with their colleagues and classmates via online games during the stay at home period. 2 new smartphone games and 1 new PC games also contributed to our international MAU growth. Our flagship titles maintained a high cadence quality content updates, including new game modes, virtual items and graphics upgrades. Specifically, Honor of the Kings motivated users to play more matches with extra rewards, which deepens user engagement during its annual GiveMe 5 festival. We also released high quality schemes for its well known 3 Kingdom Heroes. Peacekeeper Elite celebrated its 1st anniversary with new content and game modes to enhance the competitive game experience. In a crossover promotion in July, we launched appealing Tesla branded card games in the game, which gained widespread popularity. For new releases, Supercell's Brawl Stars in China was especially well received as players enjoyed its easy to learn yet competitive gameplay. It topped iOS China download chart in June, extending Broadstar's global leadership in the fast paced 3 versus 3 mobile genre. In recent years, we have achieved significant success in game development. We'll continue to strengthen several key structural factors, which are critical for developing and operating highly successful games. Firstly, our homegrown and international flagship game studios have proven track record in creating category leading games, especially on smartphones. We established 17 long standing franchises, which have each individually exceeded 10,000,000 daily active users in their operating histories. Studios develop content with a high degree of autonomy, while leveraging Tencent's publishing resources. Their capabilities in innovating attractive core gameplay, creating immersive storylines and releasing engaging updates are vital in sustaining long term success. Secondly, our studios are early adopters of cutting edge technologies. Tencent's back end infrastructure is designed to support a massive number of players concurrently. We deploy industry leading game engine and AI empowered tools to shorten development lead time and provide unique game experiences. For example, we applied our proprietary technology in honor of King's Wukong AI Challenge, which attracted over 50,000,000 players to play against the AI. We constantly upgrade our anti QI system to foster fair competition, which is crucial for gameplay and especially Esports tournaments. And we collaborate with external IP and nurture internal IPs to enrich content and enhance game longevity. We create popular narratives that tie into well known literature, anime and famous characters such as Moonlight Blade, Naruto and Pokemon Pikachu. We expand on IP influence through cross media adaptation leveraging our large media platforms. Looking forward, we're committed to investing in talents, technologies and IPs to strengthen our leadership in game development. Now I'll pass on to James. Thank you, Martin. Turning to online advertising. Overall, our ad revenue grew 13% year on year, which we believe was an above market rate to RMB 18,600,000,000. Sequentially, revenue grew 5%, a little bit slower than our normal second quarter seasonal turn because ad spent by the games and Internet services categories normalized downwards on less traffic during the second quarter after surging due to abnormally high traffic in the work from home period during the Q1. However, we diversified our advertised industry breadth as categories such as ecommerce and education increased investment for their June 18 promotional campaigns and summer courses and categories such as automobile and consumer electronics marketed more aggressively with us as consumption recovered. To reinforce our long term competitiveness, we launched a new integrated ad platform, enabling advertisers to more efficiently place ads across all of our inventories, including our mobile ad network. This new platform also increase bidding efficiency and provide smarter targeting for advertisers. For social and others advertising, Weixin Properties, Sickling Moments, saw rapid ad impressions growth, while our ad advertising network experienced higher eCPMs as video advertisements revenue contribution increased from a single digit percentage a year ago to over 40% in this quarter. We believe the Weixin ecosystem is redefining China online advertising by enabling advertisers to effectively channel online, social and offline traffic to their own private domains, such as official accounts and mini programs, with the result that our advertisers are effectively investing in long term and loyal customer relationships, not just purchasing one time transactions. For media advertising, revenue declined year on year due to weak demand from brand advertisers and the delayed production release of certain variety shows and drama series during the Q2. However, subsequent to the quarter end and helped by popular drama series Nothing But 30, Tencent Video's traffic has materially improved, which we think point point $8,000,000,000 up 30% year on year and up 13% quarter on quarter. Within Fintech Services, revenue grew year on year and quarter on quarter, mainly driven by increasing user base and business scale as consumption rebounded on people returning to their places of work. Our service ecosystem, including payment solutions and business management tools, provides offline merchants an efficient path to digitally upgrade themselves and to customers and settle transactions via mobile phones. During the quarter, merchant demand for our payment solutions stepped up, especially from categories such as retail and restaurants. As a result, our commercial payment number of average daily transactions and value per transaction each increased year on year, rebounding robustly from the COVID-nineteen impact in the Q1. For our Wealth Management business, aggregated customer assets and the number of active customers rose rapidly year on year as more customers came to appreciate the convenience of managing their cash through our secure and well curated platform. Within business services, revenue expanded both year on year and quarter on quarter as cloud services consumption by Internet companies in the public sector increased. Although offline project deployment has not fully resumed its normal pace, reflecting the lingering impact from COVID-nineteen, we have seen growing demand in industries, including financial services, the public sector, health care and education. We strengthened our back end infrastructure capabilities by adopting more custom made equipment and we're building and expanding more of our own hyperscale data centers. And I'll now pass to John. Thank you, James. For the Q2 of 2020, total revenue was rmb114.9 billion, up 29% year on year and 6% quarter on quarter. Gross profit was rmb53.2 billion, up 36% year on year or 1% quarter on quarter. Net other gains were RMB8.6 billion, more than double year on year and quarter on quarter. This mainly comprised non IFRS of just certain items, including net gain within disposal of certain investees in verticals such as e commerce, life quartile services and online gains as well as net fair value gains resulting from increased valuations of investees. Such gains were partly offset by impairment provisions for goodwill at China literature and against certain investee companies. Operating profit was RMB39.3 billion, up 43% year on year and 6% quarter on quarter. Net finance costs were RMB2 1,000,000,000 stable year on year and up 19% quarter on quarter. The quarter on quarter increase was primarily due to the recognition of foreign exchange losses for the Q2 2020 compared to a gain in the Q1, partially offset by decreased interest expense due to refinancing exercise capturing the lower interest rate environment. Share of losses of associates and general venture was RMB295 1,000,000 compared to share of profit for the same quarter last year. Sequentially, share of losses widened by 5%. The movement mainly reflected the impact of longer revenue deferral period and greater marketing spend at an associated game company. On an IFRS and non IFRS basis, we recorded share profit of RMB658 1,000,000 for the Q2 2020. Income tax expense was RMB4.6 billion for quarter 2, 2020, and the effective tax rate was 12.3% this quarter. IFRS net profit attributable to equity holders was rmb 33.1 billion, up 37% year on year and 15% quarter on quarter. Diluted EPS was RMB3.437, up 36% year on year and 15% quarter on quarter. Let me walk you through our non IFRS financial numbers. For the Q2, operating profit was RMB 37.6 billion, up 38% year on year and 6% quarter on quarter. Net profit after NCI was RMB 30,200,000,000, up 28 percent year on year or 11% quarter on quarter. Diluted EPS was rmb3.13, up 27 percent year on year and 11% quarter on quarter. Turning to segment gross margin. Gross margin for VAS was 53.7%, up 1.1 percentage point year on year or down 5.3 percentage points quarter on quarter. This sequential decrease was primarily due to number 1, greater revenue mix of lower margin digital content services, including the live podcast of hoyah and music streaming services 2, higher mix of lower margin smartphone games versus PC games. Gross margin for online advertising was 51.4 percent, up 2.8 percentage points year on year or 2.2 percentage points quarter on quarter. The industry wide removal of cultural construction fees contributed to the year on year and quarter on quarter increase. Sequentially, the improvement was also driven by a greater proportion of advertising revenue derived from higher margin Weixin Moments. Gross margin for Fintech and Business Services was 28.9%, up 4 point 9 percentage points year on year and stable quarter on quarter. The year on year increase mainly reflected improved margin contributed by Wealth Management and payment related services. On operating expenses, selling and marketing expenses were RMB7.8 billion, up 64 percent year on year or 10% quarter on quarter. Marketing spending increased year on year, particularly on online games, Weixu as well as crowd and services. As a percentage of revenues, segment marketing expenses increased to 6.8% from 5.3% in Q4 2019. Sequentially, greater marketing spend was primarily driven by online games, crowd and business services as well as the consolidation of Huya. G and A expenses was RMB 16,500,000,000, up 31 percent year on year and 17% quarter on quarter, mainly due to further investment in R and D and VanCorps. Within G and A, R and D expenses were RMB9.9 billion, up 39% year on year and 23% quarter on quarter. G and A and R and D represented 14.4% and 8.6% of revenues, respectively. As a quarter end, we had approximately 70 1,000 employees, up 26% year on year and 10% quarter on quarter. For the Q2 of 2020, gross margin was 46.3%, up 2.2 percentage points year on year or down 2.6 percentage points quarter on quarter. Year on year increase reflected improved gross margin across all 3 business segments sequentially. Margin decreased mainly reflecting lower gross margin of VAS as mentioned before. Non IFRS operating margin was 32.8%, up 2.1 percentage points year on year and largely stable quarter on quarter. Non IFRS net margin was 20 7.2% stable year on year or up 1.3 percentage points quarter on quarter. Finally, I will share with you some key financial metrics for the quarter. Total CapEx was RMB9.5 billion, an increase of 117% year on year or 54% quarter on quarter. Operating CapEx grew 120% year on year to RMB8.3 billion, mainly due to advanced procurement of servers to open business growth. Non operating CapEx decreased 96% year on year to RMB1.2 billion, primarily data center construction. At quarter end, free cash flow was rmb28.5 billion, up 100 and and 27% year on year or down 27% quarter on quarter. We recorded net cash position at RMB 7,200,000,000 comparing to net debt of RMB5.7 billion last quarter, which reflected a strong free cash flow generation and the consolidation of Huya net cash balance partially offset by payments for M and A initiatives. Fair value of our shareholding invested investing companies excluding subsidiaries was approximately RMB726 billion or US103 billion dollars as at the end of Q2. In closing my remarks, I would like to mention that we have made a statutory announcement on the white of the acceptance order relating to WeChat. WeChat and Weixin are 2 separate products with WeChat serving our international users. Based on our initial reading and subsequent press reports, the executive order is focused on WeChat in the United States and not our other businesses in the U. S. We are in the process of seeking further clarification from relevant parties in the U. S. Thank you, John. We shall now open the floor for questions. As the company is taking clarification on the executive orders, we will not be in a position to answer speculative or hypothetical questions. Let's move to the Q and A about our 2nd quarter results. Thank you for your understanding. Operator, we will take one main question and up to one follow-up question each time. Please invite the first question. We have the first question comes from the line of John Choi from Daiwa. Please go ahead. Good evening and thank you for taking my question and congratulations on a great quarter. My first question is on your mobile games. I think if you look at this quarter, management did mention that we've seen a decline sequentially in user time spent. But in terms of the revenue, it has done very well. I think the flagship titles did very well this quarter. So could you imagine maybe elaborate a bit more what has driven this? Is it more on the ARPU side or paying ratio? I guess some of the new promotion did help. And just a quick follow-up from here, like judging from this, we do have some news on the recent delay on D and F mobile. So how should we what should we expect for the second half growth for mobile games? And just quickly, if you could touch base on your overseas revenue contribution from your online game will be very helpful. Thank you. John, thank you for the questions. I'll try to catch all of them, but starting with the last one, the overseas contribution to our games revenue was actually similar to the Q4 last year. We have a number of successful new games launched overseas, but as you know, due to our relatively long amortization period, it will be a few quarters before those new games flow through from cash receipts into reported revenue. Then in terms of the growth in the mobile games business in the second quarter, we saw time spent normalizing downward to some extent versus the Q1 as people returned to work in China. However, on the positive side, we saw time spent still increasing year on year in China, as we think the audience for some of these games have structurally expanded and we can see that in the data. And we saw uplift in time spent as well as investment in our international games, which was helpful. I'd also say that while it would be hard to sort of understate the transformative impact of the COVID disruption, the game industry continues to innovate and develop and grow in ways that will continue to yield benefits long after COVID. If you look, for example, at the quality of virtual items that we're releasing now versus the quality of virtual items that were released 10 or 5 or even 2 years ago, then in the past, a virtual item might be a red pistol instead of a blue pistol. Today, if you look at the game Peacekeeper Elite, then users have the ability to actually customize their car into a Tesla, and that's proven extremely popular. And of course, when you're talking about customizing an entire car rather than just customizing a pistol, that's a different price point. Another example on the customization of guns itself is if you look the game Valorant, there's a customization option called the Elder Flame, which basically transforms your guns into dragons. The dragons eat ammunition with their jaws and then spit out bullets in the form of flames. It's amazing to look at. And I think that 5 or 10 years ago, the technology didn't really exist for people to customize their cards into Teslas and customize their guns into Dragons. And of course, these higher technology virtual items come with higher price points, and many players choose not to purchase those, but for the ones who do purchase, then they're unlocking something that is actually really cool for themselves to enjoy, really interesting for other players to see, and it helps fund the cost of continuing to make these games bigger and better going forward. Then finally, on your question about the D and F mobile delay and the impact on the second half this year. I think it's important to bear in mind that our game business growth in any period is driven by a multitude of games. So, while, for example, Peacekeeper Elite Minus Foundation has certainly helped mobile game revenue in the first half of the year. We also saw strong growth from Honor of Kings. We also saw successful new releases like Brawl Stars and so on and so forth. And as we go through the rest of the year, we'll continue to introduce more value added virtual items within our existing games that we think will enjoy more resonance and will continue to release a multitude of other games. So while we expect to bring mobile DNF to market quite quickly, we think that in reality that there's a number of growth drivers for our mobile game business beyond any single title. Thank you. Thank you. Your next question comes from the line of Han Joon Kim from Macquarie. Please go ahead. Great. Thank you for the chance to ask question. I'll ask them 1 by 1. The first one is really just a question about your M and A strategy. And perhaps I'm reading this pattern wrong, but I think in the past, we've kind of seen you guys take a minority stake and kind of take it approach it from an ecosystem approach. I think more recently, I feel like we've been seeing things that whether it's if we have a deal over the other IGE and things like that, we're trying to absorb them a little bit more. So am I reading this pattern long or has there been a difference in kind of thought process about how we should be internalizing some of these assets that might be creating more synergies if we do internalize them. So just kind of perspective on that would be great. Yes, I think our M and A strategy has always been trying to invest in up and coming companies, which have a great management, who have innovative products and at the same time, they have synergies with our existing platforms and that has served us very well in the past. And we are actually very much sticking along with this strategy. And if you look at the overall portfolio that we have, we now have more than 700 companies. And by and large, most of them, the vast majority of them are still existing in that mode, right? We are backing entrepreneurial teams to drive their companies forward and at the same time we try to figure out organic ways to work with them in a synergistic way. It just happens that when you have 700 companies, then some of the companies may actually get to a stage where the entrepreneurs, the management figure out maybe they want to seek even tighter cooperation with Tencent. In some cases, they may want to retire. In some cases, they actually want to enter into a new stage of working. In some cases, their products can actually be integrated as well as cooperating much more closely with our platforms. And that's the time when we may consider changing a different way of working with them and moving them into a more consolidated portfolio. And so this is not a change in our strategy. This is just within our strategy, there will be different life stages of the life cycle of the companies. And in some cases, there's another way for us to be working with these portfolio companies and you're just seeing some of them happening in the course of this year. Got it. Thank you. That makes sense. My second question is and I think you partially touched upon this with the official account earlier, but there's a lot going on in WeChat, whether it's Moments or the short video channel growing or whether it's mini programs. So within all the activity that's been going on within WeChat, do we see kind of any cannibalization between traffic or what kind of patterns do we see to the extent that can reach out via incapacitating all sorts of broader sets of behavior, whether it's commerce, whether it's advertising and all of that just kind of how we think through as we attach on incremental services, how that's transferring traffic and time spent across the services? Yes, I think this is a good question and the way we look at WeChat and Weixin, in particular Weixin, it's really from a user perspective, what are going to be useful for users. I think we're not trying to aggregate a lot of services just to increase the amount of user time. What we want to do is actually we want to build these services 1 by 1, right, so that they actually can add value to solve some real life problems and add utility to our users. So if you look at the history of Weixin, which has been quite long, we started off to be a communication platform, then we added Moments and then we have official accounts and then we have payment. And over time, we add one service after another. But it's actually spread across a very long period of time. And every time we introduce a new service, it's with a lot of caution and thoughts and testing so that we want to make sure that it's not a cluttered experience for the users and it actually helps to solve a particular user need in an elegant way. So I think that's the design approach and principle of Weixin and we have always been following along with that. In a lot of cases, we actually try to actually send away the users and not occupy them for too long a time. So in the case of payment, for example, we don't give them a lot of all kinds of different experiences. We actually try to get the payment done and then off they go. In a lot of search experiences, we actually try to help the users find the content right away and then send them away to the content. So a lot of these principles help us to make sure that while we actually are offering a lot of services within Weixin, the experience is not cluttering and it's not confusing and it's not self cannibalizing for the users. Thank you. The next question comes from the line of Alex Yao from JPMorgan. Please go ahead. Thank you, management, for taking my question. First question is regarding the runway of ad network business. So compared to the WeChat ads, this is a less well understood business. So can you help us understand, for example, to what extent are the media sites in China already joining the ad network? What is the typical ad load in the network, the potential for pricing increase, format transition from banner to video, etcetera, etcetera, to the extent that you can share any metrics, any direction will be helpful. And then my follow-up question is regarding the ShupingHao video account. Can you give us an update in terms of the traffic, time spent and your initial thoughts on the monetization strategy? Thank you. Thank you, Alex. So to start with the ad network question and Martin will talk about shipping out. But on ad networks, I think it's relatively easy to size the opportunity. And that if you look at Internet advertising in the rest of the world, then Google Ad Network, Facebook very substantial businesses representing a double digit percent of total online ad spend. And equally importantly, they enable a number of smaller sites and medium sized sites, which wouldn't be able to justify building out their own direct app sales force to generate revenue and fund themselves and create new content. And we think that trend is also underway in China and we see more and more of the media sites, for example, joining our ad network. So we think that's a win win. In terms of the ad loads, then it's obviously a function of the site owners decision making when ad network was predominantly a banner ad business, the typical ad pricing was correspondingly low in the mid single digits effective revenue per 1,000 impressions range. However, as we mentioned in the opening remarks, today over 40% of the revenue in ad networks is actually video format, and there the pricing is substantially higher, closer to high teens, renminbiecpms. So as a result, the blended eCPM for ad networks in China is now moving up to high single digits and low double digits, which is once again good both for us, but also more so for the underlying property owner. So, ad network is an important business to us. It's important financially. Ad network actually contributed more of our year on year advertising revenue growth than Weixin Moments, for example. And it's important as proof of our technology prowess. I think there's a perception sometimes that Ten strength as an advertising platform derived solely from the owned and operated properties and the traffic and engagements in the owned and operated properties. But in reality, while those are very important, the fact that we're extremely competitive and extremely fast growing in ad network is a proof point that our ad technology is increasingly best in class as well. Now in terms of the shift in our Weixin channels, I will make a few points. First of all, it actually flows from the Weixin design principle that talked about earlier, which is it actually comes from user insights and also the content creation community insights, right? We can see there's a need for short form video content and we know that there are a lot of content providers who actually want to leverage Weixin to provide their users, their own fans with short video content. So that's sort of the starting point of shipping Hao. And I would say logically it can be considered as an extension of the Weixin official accounts. Only in this case we're actually changing the text and photo content into video content and we're encouraging existing official accounts, content providers as well as new content providers to provide short video content and sign up fans within the Weixin ecosystem. Right now, I would say, we it's still in beta test, so it's too early to talk about any user numbers, metrics as well as even further into monetization. But I have to say, so far during the beta test, it looks like it's well received by the users as well as the content production community. Thank you. The next question comes from the line of Alicia Yap from Citigroup. Please go ahead. Hi. Good evening, management. Thanks for taking my questions and also congrats on the solid set of results. I have two quick questions. Number 1 is, with the launch of the Mini Store and also you mentioned more established integration between the mini program and also official account, is there any chance that we could further broaden our Weixin advertising ecosystem with in app pay for performance product or service search in the coming future? And the follow-up is on the cloud business. You mentioned on there's a few of the major contracts signed. So just roughly, what is the sense of your cloud revenue that is coming from the project base, the customized service versus the more general infrastructure service revenue? Thank you. In terms of the Mini Store, I think it is a good addition to the overall Weixin mini program ecosystem in support of e commerce and other retailers. I think overall, as we continue to improve our set of tools for the retailers, for the e commerce providers, then we believe that the Mini program ecosystem will become even more prevalent to retailers and the transaction ecosystem within Weixin would improve. And when that happens, then it's definitely to have a spillover effect into our advertising business, right, because then it will be much more economical and valuable for the retailers to put in advertising in our ecosystems, which should include Moments ads as well as ads in the official accounts. So all these will have a synergistic impact on each other. In terms of cloud, I would say the project base is actually a very small percentage of our total revenue, by and large, is actually the recurring revenue from the cloud service itself. Thank you. The next question comes from the line of William Packer from BNP Paribas. Please go ahead. Could you help us think about your revenue exposure to the U. S. And U. S. Companies? What percentage of video games revenue is generated in the U. S? And what percentage of online advertising revenue in China is generated from U. S. Firms? That's my first question. And just as follow-up, we're now a little bit further on from the COVID crisis. Could you share some thoughts on the longer lasting changes in consumer behavior and how they impact your business? For example, lasting shifts in gaming and online engagement, use of digital payments and cloud services. Thanks. Thank you, Will. So this is James. So to answer your first question, the U. S. Represents less than 2% of global revenue. And within that, advertising in the U. S. Would be less than 1% of total advertising revenue. Now I think you were also asking about the percentage of advertising revenue in China from U. S. Companies. And our understanding is that that's not kind of a relevant metric for the discussion at this point in time, because if you look at the executive orders from May 2019 and then more recently the executive order a couple of days ago, then they specify very clearly that they cover U. S. Jurisdiction, and consequently, we don't see an impact on companies advertising on our platform in China. Right. I'll answer your second question, but before that, just one point to add on James' answer is that there's actually a lot of other advertisers, right. So to some extent, once we have an advertising space and inventory, right, then basically there are a lot of advertisers who are bidding for such inventory ad space. So as long as the ad space is there, I think the revenue is going to be there. So that's in addition to James' answer. Now in terms of post COVID, right, I think obviously consumers have spent more time online and after that they by and large have gone back to work and gone back to school in China. In the rest of the world, it's not the same. It's a much longer period. But even within sort of that small period of time, I would say consumer behavior have changed to the extent that more online behavior has been embraced and be it online entertainment, online games, as well as online consumption, people are now more used to shopping for groceries online and they probably sort of are more accustomed to be shopping online by through many programs or by watching online broadcast. And I think working online has also become more familiarized with the users as well as for the youth, right, getting educated online is actually more familiarized for them. So these behaviors, I would say, would have implications for a number of different industries, including the online entertainment, the retail, not just e commerce, but also all retailers. They need to think about how to serve their customers online. And education companies will need to think about how to embrace online businesses are now embracing an online collaboration type of working mode. It's not to say they would be seeing all their employees working from home, right. I don't think that is actually going to happen in China, but rather there's going to be a much more conducive environment for people to be collaborating online. A lot of times, some meetings which otherwise in the past have to be done in face to face now can be conducted online, conferences can be conducted online, company and companies, inter company's meetings can be conducted online. And as a result, it would actually capitalize a move of companies and enterprises into digitization. And I think that would be the biggest takeaway from COVID, right? We all know that consumers are already online. Now they're spending more time. Yes, it's not it's a quantitative change, not qualitative change. But for businesses, right, when they now see their customers moving online, when they see their employees moving online, when they see other companies moving online, there's going to be a much higher impetus for them to be digitized and move online. And this is essentially the digitized economy future that we're embracing. And I think our services and in particular our cloud services and our SaaS services will be there to serve them in this large transition toward a digitized working mode. Thank you. The next question comes from the line of Jerry Liu from UBS. Please go ahead. Hey, thank you. Yes, I have two questions as well. And the first one is back on mobile gaming. James, you mentioned earlier that you look at some of the virtual items we have today like Tesla cars or these Dragon guns, they do really encourage more spending. I'm interested when you look at the international gamers, Do you think over time they can spend close to the level of Chinese gamers in some of your high quality mobile games? Thanks. I think that what we see over time is that the behaviors are increasingly kind of convergent rather than divergent, meaning that if you went back 10 years ago, then in the Western world, the dominant monetization model was consumers paying $50 for the software. And in China and Korea, the dominant model was consumers consuming games for free. And then for a certain sort of narrow genre of historical role playing games paying large amounts of money for magic swords and sorceress bows and arrows and things. And over the last decade, what's been happening is that in the West and in Japan, increasingly there's been innovation around deploying virtual items in sports games, in shooter games, in modern day games more generally, and at the same time in China and Korea, we've seen increasing uptake of those more kind of team based action games as well. And as games become more and more important and more and more part of the medallion consumer mind space, then you begin to see really powerful crossovers. So I mentioned the crossover between Peacekeeper, Elite and Tesla, but I think that Epic has done a phenomenal job with the cross overs with the DC and Marvel superhero characters. And once again, those are skins, but they also have game modes where the superheroes actually unlock that in movies super character superpowers. So what we see is that actually the willingness to purchase in game items and the pricing of the in game items on these modern day shooter games, sports games and so forth can catch up with or even overtake the ancient history role playing games, which pioneered the virtual item model. So that's a really big change. It's a change that I think is good for the game industry globally and it's particularly good for Tencent because we tend to be overrepresented toward team based action games. Thank you. The next question comes from the line of Binnie Wong from HSBC. Please go ahead. Good evening, management and the IR team. Congratulations on a very strong quarter. I have 2 strategy related questions. One is on the mini program. So with the recent launch of the mini stores, right, to help our long tail merchants to build and operate the digital storefront and of course all the way to after sales customer service, Can you share with us what are the key categories of merchants that you have been seeing and also been doing well? And also second is that based on your observation, how is Tencent Solutions more compelling to other e commerce platforms? And I will have a follow-up question. Thank you. Well, I would say the Mini Stores have just been launched. So we don't have a lot of figures to share yet. But this is a set of tools which are mostly helping the long tail merchants, right. So if you're thinking about how it's going to be compared to the other mini program tools companies, which are providing these tools in the past, then they're actually very different. Those companies are primarily providing tools to larger merchants, especially larger retailers. And it's intended to be this way so that we are differentiated from them. They are our good partners and we continue to work with them to help the larger retailers who want to have much more customization to get their mini programs up and running. But at the same time, we know that there are a lot of long term merchants who actually also want to have a relatively standard set of tools so that they can engage with their customers. And this is what the mini stores are intended for. Thank you. The next question comes from the line of Pheesh Mubayi from Goldman Sachs. Please ask your question. Thank you for taking my question. I have a few questions on games. The first question is when you launch or at the cusp of the launch of a game like mobile DNF, how do you strategize the allocation of marketing dollars towards that? And how do you take into account the relative success of that game versus all of the other games to maximize overall revenue? That's my first question. And second, related to the points you made earlier, Martin, about the strength of your game platform and how well it's been growing. If you look at how successful you've been internationally, it does appear that there's a lot more leg room there for how much further you can grow. Would you hazard a guess if with technology, with IP, gameplay and M and A, what sort of market shares we can expect, let's say, 3 to 5 years down the line? Would it be anywhere near where you are in China at this point of time? Thank you. Well, in terms of looking at a particular title and how much marketing budget we're going to put in, I think the way we look at it is we look at how big the addressable market is, how big the opportunity is, how big an IP and the potential user base is and then we put enough dollars to reach those customers. And of course, because we have our own platform advantage, so typically the amount of money we spend is actually less than otherwise a standalone game company will be spending, but we'll be spending enough dollars so that we can actually achieve the maximum success for a particular title. I think in your question, you also somewhat think about maybe a success of a game would actually eat into the success of another game. I think we don't look at it that way. I think each game has its own appeal to the customers and we don't think games tend to cannibalize too much with each other, right? And it's a very large market out there with a lot of different titles. So each title should be given enough marketing dollars to maximize its own success. In terms of international, I think we're definitely very focused on developing a long term strategy to capture the opportunities in an international market. And in a way, I think China is a more developed market for mobile gaming compared to other markets. And as a result, we felt that the expertise and experience we have developed in China can actually help us to capture opportunities around the world. I cannot give you a guess of the market share. We'll try to do our best. But in China, we do have Weixin and QQ as a platform. So I think the franchise that we have is actually stronger out in the world. We will not be having such a strong franchise. So I think that is a reality that we have to recognize. But at the same time, I think in the gaming industry, it's about talent, it's about game development capabilities, it's about technology and we have these core competencies to help us to develop better and better games and also work with partners around the world so that we can bring games that are exciting to the users. And hopefully through that, we can actually capture some of the opportunities in the gaming market internationally. We do not believe it's just a zero sum game, right. The market actually has got a lot of opportunities for growth as well. So we are operating in an expanding market and we're excited about that. Thank you. The next question comes from the line of Gary Yu from Morgan Stanley. Please go ahead. Thank you for the opportunity to ask Congratulations on the strong set of results. I have two related questions regarding international strategy. Given the rising geopolitical tensions, how do you think it will change our international strategy differently? Do we intend to kind of limit our overseas exposure to the less sensitive gaming market or we have more kind of ambition to tap into global opportunities? And a follow-up related question is, do we expect some of our competitors redirecting the focus and resources back to China as they also scale down kind of global exposure? And how should we tackle that? Thanks. In terms of the international markets, we do have a long term strategic goal of developing an international presence and we are actually very patient about it. We emphasize it's long term, right? And so far we have made a good progress around certain verticals such as games, but we also anticipate there will be challenges and obstacles. But we believe that all along the way, the way we develop our international strategy is by focusing on a number of principles. The first one is we focus a lot on users and user experience and products and that will include protecting the privacy as well as the security of data for our users. And second one is, we operate strictly in compliance with the laws and regulations in each one of the country that we operate. And thirdly, we actually rely on a lot of win win partners, right. A lot of cases, we actually work with local partners in each one of the countries that we have a presence in and we strive to create a win win partnership with them. We respect their entrepreneurs and we respect their independence, but at the same time we can actually bring in our expertise to help them to be more successful. And we believe these principles would actually serve us well over the long run. There may be countries which may be challenging at one time or another, but overall, we believe it's a very large international market and there are a lot of countries, a lot of companies, a lot of products that we can be successful in if we are patient and if we continue to stick to these principles. Now in terms of your second question, I think to some extent it's actually highly speculative, but what you should have some comfort is that no matter what the competitive dynamics are Tencent continues to focus a lot on improving our own capabilities as well as improving our product, user experience and value proposition for our users regardless of the competitive dynamics. So we are already working very hard and we'll continue to work very hard to focus on these factors, which I think are much more intrinsic to the long term success of the company rather than what other companies would do. Thank you. We will be taking the last question is from the line of Eddie Leung from Bank of America. Please go ahead. Good evening, guys. Two questions. The first one is about your FinTech and Business Services segment. Could you elaborate on the relative importance of the few factors behind the improving gross margin trend of the segment and what could be the outlook for that? And then secondly, regarding the integrated advertising platform for advertisers, obviously, you guys mentioned that it would help the efficiency for the advertisers. But do we expect any potential influence on their spending or budget going forward? Thank you. So on the FinTech, right, I think well, part of it, if you compare year on year is actually the fact that we actually start collecting some of the interest back from the deposit with Central Bank. And I would say the fact that marketing expenses come down into a more rational level also helps. This is as part of the competitive dynamics becoming less cutthroat. And thirdly is the fact that as we continue to develop the other non payment FinTech products, right, so be it our loan products or the wealth management products, these are products which actually generates profit and as the scale of these products go up, then the margin profile actually improves. So with the advertising, I will pass to James. Yes. With the integrated ad platform, then naturally, we would hope that with more attractive, more powerful, more simplified ad purchasing and tracking and performance solutions, then we would inherently increase our share of advertiser activity and budgets. And I think that if you look globally, there are many other Internet companies that moved from sort of lacking to leading ad tech positions. And as they did so, captured progressively larger shares of ad spends. Now of course, there should be some sort of upper limit on how much ad spend one can capture no matter how excellent one's technology is. But for us, I think that upper limit is still rather far away, because our share of time spent in China Internet is around 40%, while our share of advertising spend in China Internet is under 14%. So I think that there's a very long growth runway for us as we continue to enhance our tech through solutions like the new integrated ad platform to deliver long term but sustained market share gains. Thank you. Operator, we are closing the call now. If you wish to check out the press release and other financial information, please visit the IR section of our company website at www.tencent.com. The replay of this webcast will also be available soon. Thank you, and see you next quarter. That does conclude our conference for today. Thank you for participating