Ladies and gentlemen, thank you for standing by, and welcome to the Tencent Holdings Limited 2020 first quarter results announcement call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. I will pass the call to Wendy Huang from Tencent IR team. Thank you. Please go ahead.
Good evening. Welcome to our 2020 first quarter results conference call. 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 it may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-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 on the IR section of our website. Let me introduce the management team on the call tonight.
Our Chairman and CEO, Pony Ma, will kick off with a short overview. President Martin Lau and Chief Strategy Officer James Mitchell will provide a business review. Chief Financial Officer John Lo will conclude with financial review before we open the floor for questions. I will now turn the call over to Pony.
Thank you, Wendy. Thank you for joining our call at this unusual time. As the world tackles COVID-19, our thoughts and heart go out to all the people who are suffering from the pandemic. During this difficult period, we seek to provide online services that keep people connected, informed, productive, and entertained. Far, our businesses have proved resilient and cash flow generative, enabling us to increase our investment to fulfill our mission of tech for good. We are allocating time and resources, including over CNY 2 billion of donations to contribute to COVID-19 relief initiatives in China and globally. Now, I will highlight the result we achieved in the first quarter of 2020. Total revenue was CNY 108 billion, up 26% year-on-year, and 2% quarter-on-quarter. Gross profit was CNY 53 billion, up 33% year-on-year and 15% quarter-on-quarter.
Our non-IFRS operating profit was CNY 36 billion, up 25% year-on-year and 17% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was CNY 27 billion, up 39% year-on-year and 6% quarter-on-quarter. Our platforms and products have never been more needed and relevant as users stay at home. We believe this experience will also lead to acceleration of digitalization going forward. In social, users heavily relied on our social platforms to stay connected. Combined MAU of Weixin and WeChat increased 8% year-on-year to over 1.2 billion. In games, more players spend more time online, further strengthening our number one position in China. Our games also continue to grow internationally. In media, video views and subscriptions continue to expand as we release the top-tier content. Music subscriptions increased, driven by effective content paywall strategy.
In fintech, we operate the largest mobile payment platform in China by DAU and number of transactions, increasing efficiency and supporting small business. In cloud, we are number 2 public cloud services provider in China, steadily picking up market share amid intense competition. 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 business review.
Thank you, Pony, good evening and good morning to everybody. For the first quarter of 2020, our total revenue grew 26% year-on-year. VAS represented 58% of our total revenue, within which online games was 35% and social networks was 23%. Fintech and business services represented 25% of total revenue, online advertising represented 16% of total revenue. For value-added services, segment revenue was CNY 62.4 billion in the first quarter, up 27% year-on-year and 19% quarter-on-quarter. In social networks, revenue grew both year-on-year and quarter-on-quarter, mainly driven by item sales in smartphone games. Total VAS subscriptions increased 19% year-on-year to 197 million, reflecting robust growth in video and music subscriptions. As users spend more time online, our video subscriptions increased 26% year-on-year to 112 million due to popular self-commissioned drama and Chinese anime series such as Three Lives Three Worlds, The Pillow Book and The Land of Warriors, season three.
Our music services and expanding paid music library contributed to subscriptions growth of 50% year-on-year to 43 million. Online games revenue grew 31% year-on-year and 23% quarter-on-quarter, driven by more active users and higher paying ratio during the stay-at-home period. Consumption will normalize as users return to work. Total smartphone games revenue increased 64% year-on-year to CNY 34.8 billion, driven by key titles including "Honor of Kings," "Peacekeeper Elite," and "PUBG Mobile," as well as consolidation of Supercell. Sequentially, revenue grew 33% due to more playing time during the Chinese New Year and stay-at-home period. PC client games revenue decreased 15% year-on-year to CNY 11.8 billion due to temporary closure of internet cafes and soft DNF performance. Revenue increased quarter-on-quarter on favorable seasonality. Turning to social networks.
We are highly motivated by our roles and responsibilities in creating and helping people to stay in touch with their friends and families, and in connecting people to necessary services during this critical period. User engagement on Weixin and QQ increased, with daily messages and time spent on each service up double digits year-on-year. We strengthened several functionalities on Weixin and QQ platforms to better serve specific use cases. For example, for e-learning, teachers can now customize QQ group toolbar with relevant Mini Programs such as online exams and homework collection tools to better manage online classes. Students can experience communal study time via virtual study rooms. For healthcare services, we connected Weixin users with medical professionals in private or group chats initiated via Tencent Health Mini Program or access point embedded in Weixin Pay.
To support remote presentation, we extended QQ's screen sharing function in video calls from PC to mobile devices. On daily services, we increased penetration in offline use cases, contributing to Weixin Mini Programs exceeding 400 million DAU. We helped accelerate digital distribution or omni-channel consumption for offline services, especially grocery shopping and municipal services. We assisted local governments and businesses to disseminate e-vouchers, expediting the recovery in offline consumption after the lockdown is over, especially for retailers and restaurants. Let's move on to online games. During the stay-at-home period, users spent more time on our games for entertainment and social interactions. Leveraging our best-in-class game content and large in-game social communities, we captured incremental entertainment demand. Our smartphone games DAU recorded strong growth year-on-year and quarter-on-quarter.
Among our leading mobile titles in China, we upgraded Honor of Kings' game engine last year, which allowed us to enhance audio and visual experiences of the game, enabling more attractive content such as the Five Mountains theme skins we released during the Chinese New Year. We also introduced the location-based team play system, which encouraged more interactions among players in the same city. Peacekeeper Elite collaborated with Rocket Girls 101, an idol girl group managed by Tencent, which emerged from our popular TV variety show. This drove user engagement to a new high, demonstrating the success of our cross IP synergy. Internationally, PUBG Mobile celebrated its second anniversary with multiple in-game events while we tailored our operations regionally to increase user reach and engagement.
For "League of Legends," we launched Teamfight Tactics mobile app as well as new content contributing to higher user retention and time spent for this longstanding franchise. For "Brawl Stars," the high cadence content updates kept user engaged and optimized player matching mechanism further enhanced user experience. We do have a substantial new game pipeline. In China, we'll launch more titles across different genres by June. Internationally licensed mobile RPG, "Code: D-Blood," achieved initial success by downloads as well as growth in Japan. Riot's new PC tactical shooter, "Valorant," drew enthusiastic responses from players during closed beta testing and was the most viewed title on Twitch in its first month. Looking forward, we expect in-game consumption activities to dip back toward more normal levels as players go back to work and time spent in games normalizes. With that, I'll now pass on to James.
Thank you, Martin. Turning to online advertising, revenue was CNY 17.7 billion in the first quarter. The above-trend year-on-year growth rate of 32% reflected, A, increased consumer time spent on our apps during the stay-at-home period, which we expect to normalize in future quarters. B, our platform's ability to deliver attractive returns on investment to advertisers. Sequentially, advertising revenue decreased due to seasonality. By industry, games, internet services, and online education ad spend rose year-on-year as these categories increased spending in reaction to more traffic and consumption for their services during the stay-at-home period. Fast-moving consumer goods and travel-related ad spend declined. Looking forward, we expect the overall China online advertising industry to experience industry-wide headwinds, including, first, consumers normalizing down their time spent online. Second, online services advertisers adjusting their customer acquisition budgets as they reflect revised customer lifetime value assumptions.
Third, multinational brands reducing their spending significantly as they face the pandemic in their home markets. For social and others advertising, revenue grew 47% year-on-year, driven by increased ad impressions, particularly on Moments. Our mobile ad network revenue also expanded sharply on more traffic and higher ECPMs, with video ads now representing over one-third of our ad network ad impressions. We expect our social advertising revenue to revert to what its prior trend growth rate from the second quarter as ad impressions normalize somewhat and as some advertising categories review their customer acquisition budgets. For media advertising, revenue was CNY 3.1 billion for the first quarter, down 10% year-on-year, within which sponsorship ad revenue declined year-on-year as well as quarter-on-quarter due to budget cuts, delays in producing and airing certain variety shows, and suspension of NBA basketball games.
In-feed advertising revenue grew year-on-year and quarter-on-quarter due to the popularity of several top-tier drama series and demand for reliable news and information during the pandemic. We expect media advertising revenue trends will be more challenging in the second quarter as multinationals reduce their brand budgets. Looking at Fintech and business services, segment revenue was CNY 26.5 billion, up 22% year-on-year and down 12% quarter-on-quarter. Within Fintech, revenue decreased sequentially as commercial payments, especially offline payment activities and cash withdrawals, reduced during the Chinese New Year and stay-at-home periods. Fintech margins were, however, stable sequentially as the higher margin revenue streams such as wealth management and lending continued to grow, as we managed our marketing and subsidy costs. Looking forward, we've seen a healthy rebound in payments activities across offline and online, and QR code as well as point-of-sale transactions.
For example, during the last week of April, our average daily commercial transactions value had recovered to late 2019 levels. Our wealth management business grew at a stable rate in the first quarter as aggregated customer assets increased year-on-year and quarter-on-quarter. Our Weilidai loan book remained healthy, reflecting WeBank's prudent risk management policies. Within business services, the pandemic delayed project deployments and new account acquisition, resulting in a sequential revenue decline. Our Tencent Meeting software achieved breakout success and became the leading video conference app in China. We strengthened its security measures and introduced new functions to facilitate discussion and conference call management. In late March, we launched an international version of Tencent Meeting called VooV Meeting. For WeChat Work, we enhanced industry solutions and deepened integration with Weixin, helping us to sign more key accounts, especially in the retail, education, and public sectors.
Consequently, WeChat Work DAU has grown significantly during the period. Looking forward, we expect business services to remain challenging in the short term due to disrupted sales cycles. We'll continue increasing our investment, especially in enterprise software and cloud services, as we believe the experience of remote working will ultimately prompt offline industries and the public sector to accelerate their digitization. And with that, I'll pass to John to speak to financials.
Thank you, James. Hello, everybody. For the first quarter of 2020, total revenue was CNY 108.1 billion, up 26% year-on-year or 2% quarter-on-quarter. Gross profit was CNY 52.8 billion, up 33% year-on-year or 15% quarter-on-quarter. Net other gains was CNY 4 billion, down 64% year-on-year or up 11% quarter-on-quarter. This item mainly comprised of non-IFRS adjustment items, including net gains on disposal of certain investee companies, as well as net fair value gains on investee companies. It was partially offset by CNY 2.6 billion donations, primarily to combat the COVID-19 pandemic globally. Operating profit was CNY 37.3 billion, up 1% year-on-year or 30% quarter-on-quarter. Net finance costs were CNY 1.7 billion, up 51% year-on-year or down 39% quarter-on-quarter. The year-on-year increase was mainly driven by greater interest expense resulted from higher amount of indebtedness.
The quarter-on-quarter decrease was due to the recognition of Forex gains for Q1 2020, while we recorded a Forex loss a quarter ago. Share of losses of associates and joint ventures was CNY 281 million, down 90% year-on-year or 79% quarter-on-quarter, mainly due to changes in non-IFRS adjustment items of certain associates. On a non-IFRS basis, we recorded share profit of CNY 164 million for the first quarter of 2020, comparing to share of losses of CNY 518 million a year ago. The change mainly reflected improved performance of certain investee companies. Income tax expense were CNY 5.9 billion, CNY 2.1 billion, and CNY 4.8 billion for quarter one 2020, quarter four 2019, and quarter one 2019 respectively. Effective tax rate for the quarter was 16.7%. IFRS net profit attributable to equity holders was CNY 28.9 billion, up 6% year-on-year or 34% quarter-on-quarter.
Diluted EPS was CNY 2.999, up 5% year-on-year and 33% quarter-on-quarter. Let me walk you through our non-IFRS financial numbers. For the first quarter, operating profit was CNY 35.6 billion, up 25% year-on-year or 17% quarter-on-quarter. Net profit after NCI was CNY 27.1 billion, up 29% year-on-year or 6% quarter-on-quarter. Diluted EPS was CNY 2.817, up 29% year-on-year and 7% quarter-on-quarter. Turning to segment gross margin. Gross margin for VAS was 59%, up 1.4 percentage points year-on-year and 8.9 percentage points quarter-on-quarter. The year-on-year growth was mainly due to improved margin for both PC and smartphone games, resulting from improved revenue mix towards high-margin in-house games.
The sequential increase was benefited from revenue mix shift towards high margin in-house smartphone games, increase in margin of video subscription business as a result of higher subscription revenue and lower content cost due to the pandemic, and the absence of major e-sport events, therefore lower content cost quarter-on-quarter. Gross margin for online advertising was 49.2%, up 7.3 percentage points year-on-year or down 5.1 percentage points quarter-on-quarter. The year-on-year increase reflected lower content cost for video advertising and improved efficiency. Sequential decline mainly reflected revenue decrease due to negative seasonality. Gross margin for Fintech and business services was 27.9%, broadly stable year-on-year and quarter-on-quarter. On operating expenses, selling and marketing expenses were CNY 7 billion, up 66% year-on-year or 5% quarter-on-quarter. Marketing spending increased year-on-year, particularly in content platforms, including Weishi's marketing campaigns during the Chinese New Year.
As a percentage of revenue, selling and marketing expense increased from 5% in the first quarter of 2019 to 6.5% this quarter. G&A expenses were CNY 14.2 billion, up 25% year-on-year or down 12% quarter-on-quarter. The year-on-year increase mainly reflected greater R&D expenses and staff costs as we invested in talents and technology to support business development. The Q-on-Q decrease reflected reduced outsourcing activities for R&D projects and reduced traveling entertainment expenses due to the pandemic. As a percentage of revenue, G&A and R&D represented 13.1% and 7.4% respectively. As at quarter end, we had approximately 64,000 employees, up 18% year-on-year or 2% quarter-on-quarter. Let's take a look at the margin ratios. For the first quarter 2020, gross margin was 48.9%, up 2.3 percentage points year-on-year or 5.3 percentage points quarter-on-quarter.
The year-on-year increase mainly reflected segment gross margin ratios improved and flow through to our blended gross margin, especially for VAS and online advertising segments. Sequentially, the margin increase was mainly due to revenue mix shift to VAS, which carry a higher margin. Non-IFRS operating margin was 32.9%, broadly stable year-on-year or up 4.2 percentage points quarter-on-quarter. Non-IFRS net margin was 25.9%, largely stable both year-on-year and quarter-on-quarter. Finally, I'll share with you some key financial metrics for the quarter. Total CapEx was 6.2 billion RMB, an increase of 37% year-on-year or decrease of 64% quarter-on-quarter, within which operating CapEx grew 41% year-on-year to 5.5 billion RMB, mainly due to more spending on servers to support operation of Tencent Cloud business such as Tencent Meeting. Non-operating CapEx increased 7% year-on-year to 682 million RMB. At quarter end, free cash flow was 39.2 billion RMB, up 133% year-on-year or 25% quarter-on-quarter.
Starting from 2020, we adjusted our free cash flow parameters according to the latest market practice by subtracting payments for media content and lease liabilities, in addition to subtracting payments for capital expenditure from the operating cash flow. Comparative figures have been restated accordingly. Net debt position was CNY 5.7 billion, improved sequentially due to stronger operating cash flow, partially offset by payments for M&A initiatives. The fair value of our shareholdings in listed investee companies, excluding subsidiaries, was approximately CNY 410 billion. That is about $58 billion. Thank you.
Thanks, John. We shall now open up the floor for questions. Operator, we will take one main question and one follow-up question each time. Please be lined for first question. Operator?
Thank you. Your first question comes from Gregory Zhao from Barclays. Please ask your question.
Hi, management. Thanks for taking my question and congratulations on the very strong quarter. First, I have one big-picture question. We know COVID-19 is gradually passing in China. From your point of view, what kind of structural changes COVID-19 brought to the industry and to Tencent? Also, how shall we think about the changes to the user behaviors and your business strategies? Also a quick one about your overseas gaming business in Q2. We saw Activision Blizzard and some other gaming companies give very strong guidance for Q2, and we know the corona is still ongoing in the overseas market in Q2. Shall we expect Tencent to deliver stronger overseas gaming performance in Q2? Thank you.
Yeah, thanks for your question. I think, in terms of structural changes, the biggest structural change is really for businesses and organizations to realize that there needs to be an online presence. When everything is actually shut down physically and offline, then it's actually very important for your businesses and organizations to be able to have online access to their consumers and to their users via internet. I think that's a big realization, right? I think everybody feel that it's coming, having experienced the COVID-19 lockdown means that it's real and it's existential. I think that will translate into many different trends. For example, on retail, there will be more investments by the retail shops and brands to establish direct linkage with the consumers. I think our Mini Programs is really one key infrastructure for them to be able to do that.
I think different government and municipal government and services would need to bring themselves online, and that would increase the overall investment in technology infrastructure and cloud investments on a longer-term basis. In terms of specific segments, obviously, there will be companies who need to build up a remote working infrastructure, and I think that would benefit tools that enable remote working. Obviously, Tencent Meeting has grown its user significantly during this pandemic period. In terms of verticals, I think online education is one area that would definitely benefit going forward because I think a lot of students have experienced online education, and the parents have also experienced that, and that would drive the adoption of such a mode of education going forward.
Online healthcare will be another area in which a lot of users would like to have access to more health-related information, and they are getting used to having their disease diagnosed online, both through AI or even connection with medical professionals. The awareness for health would be much stronger going forward. I think online healthcare would be one area that would grow significantly in the future. I think these are all the structural changes that COVID-19 brings to the overall society as well as the mindset of businesses. I think a lot of the consumers' mindset is already very much on mobile internet. Businesses, there's some sort of inertia for them to make changes. Having experienced COVID-19, I think the impetus for change will be much stronger.
Rest assured that there are a lot of investments that we have made in the past, and we will be making even more for the future, which help us to take advantage and facilitate and even lead these structural changes. On the gaming part, I'll ask James to answer.
Thank you for the question on the overseas game market, Gregory. We believe that the game markets outside China are indeed following a somewhat similar path to the market inside China. There's obviously a roughly two-month time lag, given the later start of the stay-at-home periods in the rest of the world. The extent may not be as pronounced as in China, first of all, because in some regions, the lockdowns, the stay-at-home periods, are less pronounced than in China. Secondly, because there may be some consumers who are concerned about unemployment risk, which may mitigate their in-game spending. Overall, there is an uplift in user time spent on games. Going one degree more granular, the games that are seeing the biggest uplift are generally those that have longer session lengths because people now have more time to play the longer session length games.
Also the games that are somewhat team-based in nature, which I think reflects people realizing that, perhaps surprisingly, they actually miss their work colleagues. They want to socialize with them, and one way of doing that is through games, through team-based games. Looking forward, of course, we expect and hope that the situation will normalize in the rest of the world as it has done in China. Taking a more longer-term view, it's also worth observing that we're in the fortunate position of continuing to launch games globally during this period. Martin mentioned Code: D-Blood, an RPG that we launched in Japan. Riot has launched its Legends of Runeterra card game on mobile and PC in the last few days. Then as Martin also mentioned, Riot has launched Valorant, which has had an extremely positive reception from hardcore gamers on PC in the last month.
Thank you. Your next question comes from Piyush Mubayi from Goldman Sachs. Please ask your question.
Thank you for taking my question. Congratulations on your numbers. Hearing your commentary about how strong the quarter was and how you think the second quarter could see a reversal of that, could you just go through that factor about how much traffic is coming off and how quickly that's slowing down to the extent possible in the months of April and May? Just diving further into that question, if you look at advertising, how would advertising, for example, change or slow down from the pace that we've seen in the first quarter? If you go back and look at the ad load increase that came through, that wasn't a full quarter increase, if I'm not wrong about it. Surely the second quarter and hereafter, you should see substantial strength in the first quarter play through into Q2 and the rest of the year.
Is there something we're missing here?
Piyush, sorry. On the first question, which business were you alluding to specifically?
I'm alluding to the overall business, the strength that you've seen in the first quarter on both advertising and gaming, and your commentary that you're likely to see this reverse into Q2. Your guidance sounds a little bit.
Yeah
conservative.
Whatever benefit that came through in the first quarter because people stayed at home more and thus had more time on the screen and spent more time on games and video and internet services, we are seeing that normalizing basically by March, in April. It started to normalize in March, but pretty much normalized in April and all normalized after May 1st holidays. I think that's sort of the extent that you should think about. In terms of advertising, I think James would probably give you some color. Yeah. This may be reiterating what we said in the prepared remarks, in which case, I apologize. We'll try to go a little bit deeper or a little bit clearer in case it wasn't clear. The three factors that we think will act as headwinds for the industry as we look forward beyond the first quarter.
The first is that in the first quarter, because of people staying at home, they spent more time online, and more time results in more impressions, and particularly for the direct response advertisers, if there's more impressions, then all else equal, they'll mechanically buy more and spend more money with the industry as a whole. Our assumption is that going into the second quarter as people return to work and to school, the quantity of saleable impressions will normalize. A second factor is that if you look at how the direct response advertisers operate, then they have a certain customer lifetime value assumption based on historic offer, based on historic churn rates and so forth. They will bid up the eCPM or eCPC that they're willing to pay to a customer acquisition cost that is derived from that customer lifetime value assumption.
In the very short term, if there's a sudden shock, which was the case with the COVID-19, they may not have time to fully update their customer lifetime value assumptions. Over the months, as the situation stabilizes, they may decide to review their customer lifetime value assumptions due to different assumptions about churn rate or different assumptions about retention rates, or they may not. We don't know, but it's a risk. What we do know is a third factor, which is that for certain online advertising properties in China, such as online video, historically close to half of the advertising revenue in that industry came from multinationals. What we've seen in the last few weeks is that the half of the revenue that comes from local China-based companies has been fairly resilient.
The half of the revenue for long-form video that comes from multinationals has experienced a substantial step down. Our hypothesis is this reflects the fact that these multinationals have a global perspective, and to some extent, what they're seeing in the rest of the world affects how willing they are to spend money in every country, including in China. Those are all headwinds that we think will affect the industry and may affect us, and that you should bear in mind. I think that it's important not to forget that in the past, there's always been in this sort of discussion around whether our advertising revenue growth was constrained by a lack of advertiser demand because of the ROIs or audience we were attracting, or limited supply.
I think that what you can see from these results is that when there is a surge in supply, even if it's a surge in supply for reasons outside our control and beyond our expectations, then our revenue experiences a corresponding uplift, because fundamentally, our advertising delivers high returns. Thank you.
Your next question comes from Han Joon Kim on Macquarie. Please ask your question.
Great. Thank you for the chance to ask a question. I think you've mentioned about the structural changes that have been happening for the industry. I wanted to kind of follow up on that and wanted to see how you guys are thinking about your business plan as well. I suspect you guys started the year with a certain frame in mind, but the world has changed. To the extent of things like CapEx to things about your business mix between consumer-facing and enterprise-facing, how do you think the contour of your business changes? How does your investment plans and your financial kind of expectations change alongside that? Thank you.
Well, I would say we have anticipated the structural change, and I think I have explained it right. The structural change was something that everybody sort of anticipated. I think there's an inertia, especially from the side of established businesses to say, "Oh, how much investment I'm going to be making in order to make the change? And if I want to make the change, it requires money, it requires people, it requires a change in my organization and an overhaul of my supply chain." There's a lot that needs to be changed. There's an inertia. I think going through this COVID-19 process, then everybody feels that they have to make the change, even though it's painful, it's costly, and it's going to be challenging. I think that's the structural change point.
As a result, we have not been experiencing any structural change in our framework of investment because the framework of the investment was already there. We were first to reorg our organization in the year of 2018 to establish our CSIG, Cloud and Industrial Internet Service group. That basically set us up to embrace this challenge. It's actually because of that, we were able to have Tencent Meeting launched right in the midst of COVID-19 and be able to establish itself to be the by and far number 1 standalone video conferencing tool in China. From that perspective, there's no structural change in our investment framework. We're excited that we'll be putting more investments into both the consumer internet as well as the industrial internet in order to drive and embrace the expedited change.
Your next question comes from Jerry Liu from UBS. Please ask your question.
Hi. Thanks, guys. First, just to follow up on gaming. I appreciate the idea that as people return to work, then they're spending less time in these games. At the same time, we also heard comments about how we're excited about some upcoming games. How do we reconcile those two things? Could some of these new games bring some upside to grossing this year? Are some of these big games the kind where will take time to build that user base, so maybe we should have some patience with monetization? The second, just a question on cloud. Appreciate also that with cloud, as people were at home, a lot of the projects were delayed. As people go back to work now, I'm still hearing comments about some challenges from management.
I'm just wondering if this is just as people need some time to put these big projects together, or do we see maybe some of the enterprises being a little bit cautious with CapEx or just some of these bigger budgets? Thanks.
I think on the game question, you summarized the puts and takes very well. There's not a lot I would add to it. If you're looking for a synthesis of the two forces and where it nets out at, the reality is that we don't have a crystal ball. Time will tell. We wanted to be clear that on the one hand, we did have this unanticipated surge in user time spent and to some extent in consumption within some of our existing games. We'll need to sort of digest and stabilize after that for a little while.
On the other hand, I think that we're very pleased that just as we had the Tencent Meeting app launch just before the coronavirus broke out. On the games side, we have some big, interesting, exciting games that have already been released or are about to be released. We think, to your point, those games may or may not take some time to feed through into monetization. It's already clear that the critical reception to those games and the reception of the most demanding players within the card game genre or the competitive first-person shooter genre has already been extremely positive, which are positive leading indicators for the future, no matter how quickly the monetization flows through.
In terms of the cloud business, I think you have also pointed out the right points, which is, number one, as people return to work, then a lot of these projects which have been put into a halt would be restarted, and it would actually take some time for maybe the bidding process, maybe the negotiation of the contract, maybe sort of the implementation in order for that to enter into production and revenue-generating phase. Two is, I think from the enterprise's perspective, I think there is a little bit of, I would say, coming back to the drawing board and revisiting the business plan for some of the businesses which saw their business impacted during the COVID-19. I think the good thing is, I think the Chinese economic activities have rebounded quite nicely, right?
When that happens, when these businesses start to see their business recover, we feel that they would then be able to normalize their business plan. At the same time, because they have gone through the COVID-19 shutdown, their plan for the future in terms of digitization will probably be speeding up. I think there will be a period where everybody needs to restart, and there will be a period of hesitation. We hope, and we believe that over time, the future digitization wave will start to take off.
Your next question comes from John Choi from Daiwa Capital Markets. Please ask your question.
Good evening. Thanks for taking my question. Question is on the Fintech services. It seems like you guys have done a pretty good job in terms of stabilizing the margins. Going forward, how should we think about the profitability, given that are we going to continue to be aggressive in your marketing? With the COVID-19 situation, how should we think about the cost control and how this will offset with the further diversified revenue stream? Just a quick follow-up on the Mini Programs. Management did mention 400 million daily active users. How has this really kind of reinforced our other parts of the ecosystem like cloud payments or advertising during this period of time? Thank you.
Yeah. In terms of Fintech services, if you look at the changes through the lockdown. During the lockdown, offline transaction volume pretty much nosedived. It didn't really hurt our profitability. One is the offline services were low margin. At the same time, there are a lot of marketing that's related to getting the footprint out on the offline side. When you have a lower transaction volume, we also didn't have as much marketing expenses, and that pretty much balanced out each other. I think when the business returned to normal, then they will have pretty much the payment volume returning to the same level as last year's December level. At the same time, I would say we will be starting to conduct more marketing activities, too. That would be washing out each other pretty much.
This pretty much reinforces our pretty consistent message, which is especially on the offline payment side it's helping us to build payment as an overall infrastructure. We're not too much in a rush to create a profit out of it. Instead, it's important for us to build market share and to build user behavior as well as coverage of the merchants. In terms of the Mini Programs, I would say if you look at Mini Programs it is a very basic infrastructure for our ecosystem. The Mini Programs actually help us to establish relationship with a lot of service providers, and it also helps the service providers to establish relationship with a lot of customers. I think the ecosystem just gets stronger and stronger as we continue to build out the Mini Program infrastructure, and it was actually somewhat expedited during the COVID-19 pandemic as well.
We would see over time, it would actually help our payment. It would also help our advertising business. It's not going to be immediate direct impact. Very clearly, when businesses are running more of their services and getting more of their revenue and serving more of their customers on Mini Programs, then they will be more incentivized to run ads on our overall platform in order to drive more traffic into the Mini Programs. I think over time, it also help us to build stronger relationship with these businesses so that we can get the cloud business better, and we also provide SaaS services to them, be it the data analytics, or be it helping them to acquire traffic, and be it helping them to establish closer link with their customers.
Your next question comes from Alicia Yap from Citigroup. Please ask your question.
Hi. Good evening, management. Thanks for taking my questions, and also congrats on the strong set of results. Also, a follow-up on the advertising. I think with retailers leveraging the Mini Programs, should we actually see over time the increase in the demand for online ad opportunity within the Mini Program or official account to help mitigate some of the headwinds that we see from the multinational that you mentioned? Also, the in-feed ads you mentioned experiencing some recovering growth for the media ads. Is that implying media ads to also come out from the declining trend, especially with the easier year-over-year comp as we head into the second half? Quickly, any last thought on the rationale and synergies on the recent investment in Afterpay and the Century Huatong? Thank you.
Well, the first part is, I think, related to the question before, which is Mini Programs' benefit for advertising, and I'll take that question, which is, I think it would definitely benefit advertising, but it will be more like over the longer term rather than shorter term, because it's a little like an infrastructure that you would have the retailers first spending a lot of effort in terms of building their expertise on Mini Programs. It's not just the Mini Program part, but also finding ways through which they can drive traffic to the Mini Programs, right? In the past, a lot of them rely on offline stores and then having people to add to the official account and then basically leave it at that.
During the COVID-19 lockdown, it looks like a lot of the direct sales effort by their shopkeepers, by leveraging the social network, was actually very effective. They also started to leverage live broadcast as a way to acquire customers. A lot of these new ways through which they can acquire traffic and attract users, be it new users or existing users, have been developed, and they need to start building these capabilities. Once these are built, then they could dedicate a portion of their corporate resources to start bringing people into a transaction through Mini Programs, which is something that they own themselves, which is very attractive for them when they think about the overall omni-channel mix.
When that happens, then I think they would start thinking about, oh, we actually need to put in more advertising so that we can drive incremental traffic to Mini Programs. I think it will take some time before we see the impact, but the structural migration towards Mini Program would definitely help our advertising going forward.
Alicia, on your question about media advertising then, I think you're asking about the second half of the year. We're already somewhat swimming against the tide by talking about current quarter conditions at a time when many companies are sort of not guiding at all. I'll restrict myself to just talking about the second quarter because the second half is still some way away. As far as the second quarter is concerned for media advertising, then technically we still have a fairly difficult comparison period year-on-year. More importantly, fundamentally, if you look at our video advertising revenue mix, while the in-feed is growing quickly and is an increasing proportion of the total, historically, the preponderance of our video advertising was the sponsorships and the 15-second spot ads.
As I mentioned in reply to an earlier question, a big double-digit chunk of that advertising comes from multinational brand advertisers who unfortunately are reviewing or reducing their spending globally. Therefore, you should expect the media advertising revenue to be under pressure in the second quarter of the year. Thanks.
Your next question comes from Alex Yao from JPMorgan. Please ask your question.
Thank you, management, for taking my question and congrats on a strong quarter. First question is regarding your broader digital entertainment strategy. Based on our observation, there seems to be a change in your broader digital entertainment strategy, evidenced by the recent management change in China Literature. Can you share with us your latest thoughts on Tencent's broader digital entertainment strategy? Secondly, I believe you guys in the past have discussed strategy to increase the payment monetization. Do you still plan to do such monetization increase given the COVID-19 outbreak? Thank you.
Well, in terms of the digital entertainment strategy, I think we have always been pretty consistent. We feel that digital entertainment is a very important part of our overall business, and we have a number of different platforms. If you look at the broad strategy, we have always been focused on high quality, high fidelity, IP-oriented content. If you look at the digital entertainment strategy, I think the key change over the past two years was actually sort of the endorsement of short and mini videos. That's not really related to China Literature. I think, in the case of China Literature, it's really consistent with our overall strategy. The management change there is really because of the fact that the founding team of China Literature have really started the entire literature platform business long time ago.
They have been acquired, and then they left, and then they started again, and then they reacquired the business that they sold. It had been a long time. Ultimately, they basically decided that they want to take a rest, and that's why they passed on the baton to people at Tencent. That's why when we pick it up, there's a transition, and it's a very smooth transition. What we wanted to do is actually to continue to drive the core value of China Literature going forward. One is to enhance the value of the writers' work. We want to make sure that the value of the writers' work are respected, and they would receive the monetization.
Part of it is actually fighting piracy, part of it is actually helping them to get more users, and also helping the head IPs to get monetization through monetizing the IPs and extending IPs into ancillary areas such as animes or videos or games. At the same time, we would want to explore free reading model, but that would be only under the writer's consent. I think this model will be appealing to some writers, will not be appealing to some other writers, especially for the up-and-coming writers. I think the free model supported by ads would be an attractive model for them to get the initial audience and get their writing skills up.
We actually support As you can see, a lot of the business that we run, be it the video and music and games, we always have a free model to attract a lot of users, but then there will be a paid model. I think for China Literature, it's a little bit the reverse. We only have the paid model. If we have the free model ad-supported, plus the paid model, I think it would actually be creating even more value for the writers. We feel we can also have a much tighter integration between China Literature and our traffic platforms and our video platform and our games business. That will be overall positive for the core value proposition of China Literature, and that will create a lot of value for both the writers as well as the consumers.
I think on the second question about FinTech monetization, as you can see from this quarter's results, we have a number of different financial services within our ecosystem including the core payments, including the wealth management business, including the lending business, including other emerging businesses. Those various business lines have different margin profiles and we are taking a long-term approach of progressively layering on incremental profit streams over time, rather than feeling the need to do everything at once. Which means that when conditions are extremely benign, we're not going to grow at a hyper-growth rate. On the other hand, when conditions are challenging, as they were in the first quarter, we can actually sustain what we view as a decent growth rate, and also sustain what we view as attractive margins.
Operator, in the interest of time, we will take three more questions.
Your next question comes from Eddie Leung from Bank of America. Please ask your question.
Hey, good evening, guys. Have a questions related somewhat to Mini Programs, but perhaps in a bigger scope about Weixin as a whole. We have been seeing development of features within Weixin, kind of like supportive to e-commerce transactions, right? Live broadcasting, Qie Ping, et cetera. I'm just curious on your thought of the potential of Weixin becoming more prevalent in the e-commerce industry chain going forward. How would that potentially affect the positioning of Weixin versus some of your e-commerce partners? Thank you.
I think the Mini Programs, as I said before, is an infrastructural tool and it actually helps all kinds of different services to connect themselves with consumers. Obviously, a big part of economic activity is actually in the form of retail and selling of products, right? That's why Mini Programs does have an affinity for serving these retailers and brands. Now, if we look at e-commerce in the U.S., for example, you can see e-commerce platforms account for a certain % of total e-commerce. More than 50% of the e-commerce activities actually happen with the brands going directly to the consumers. That's very low in China. We felt that it's a combination of the fact that a lot of brands in China are nascent brands, so it takes time for them to build up their brand franchise.
Also there is a big part of it, which is the lack of capabilities to move online. To some extent, it's also harder in China to do that because in the U.S. most of the sales, a lot of the sales, is actually through websites which are probably more traditional and easier to manage. If you are actually doing it on mobile phones, it's probably more difficult, especially if you want to develop a mobile app which sells a particular brand. It's going to be very difficult to get the consumer recognition and even remembrance. That's where Mini Programs come into play. We actually want to help a lot of the brands and retailers to establish an online presence which they own, they control, and they can actually get directly connected to their users. They can also use to acquire new users online.
I think that's the reason why we are actually building up a lot of tools to facilitate that. In terms of how we feel about a lot of the investee companies which are also engaged in e-commerce platforms, we think that what we do here by building a stronger e-commerce ecosystem within WeChat is actually going to be synergistic to them, right? If there are more users who are more used to buying products and services on WeChat, then the spillover effect will be bigger and people would also be buying from the e-commerce platform. If they're buying from a particular brand, they will be going to the Mini Programs. If they say, "Oh, I want to go take a look at a category," then they would be going to the platforms that are working with us, right?
If the consumer habit is actually coming to WeChat and look for products, that would be good for everyone.
Your next question comes from Binnie Wong from HSBC. Please ask your question.
Good evening, management. I would like to seek your thoughts here on payment and the overall margin. As Tencent competes more in the higher-margin revenue streams like wealth management and lending, where our close competitor has the first-mover advantage and also committed to also grow these streams revenue, what is our competitive edge here to gain share? Presumably, as there's savings in overseas marketing spend maybe this year, is it realistic to say the fintech margins should improve this year overall? If we think about on a group level, I think management highlighted near-term challenges in advertising and cloud, we'll keep on investment into cloud content, maybe mix shift to oversee gains of lower margin. Yet there are some positive drivers in margins, say, expansion into higher-margin payment revenue streams, along with probably robust games revenue. Do you see the margins-
Hi.
The positive driver of-
Hi, Wendy. Thanks for your question. We will address this question first. Thank you.
I think we don't think in terms of a blended margin. That's a very difficult question to answer because that's not the way we think about our business, right? Our business is always thinking from business by business, product by product. How do we expand the product itself, and if the product actually can generate incremental users and value, and then over time, there will be a monetization, and then there will be a margin. Each business line as well as the company overall is actually aggregation of such drivers. To some extent, we can answer the question that you asked, but I will try to answer your question in relation to Fintech, and you probably can get a sense of how we think about it. In terms of the Fintech, I think there are a number of different business components in there.
The first one is actually the payment platform. Even within the payment platform, there is a component which is online, there's a component which is offline. I talked about the offline part being a relatively infrastructure type of business, right? It doesn't really generate a lot. It's not run to generate profit per se because we have very thin margin there to start out with. The monetization is thin, and at the same time, we actually put in a lot of marketing and promotional costs. That helps us to build the use case and get a lot of users, and that would help us to monetize the online traffic, and it also sustains a very strong wallet presence, right? That it help us to build our other Fintech businesses in which you talk about, which is wealth management and lending.
Within wealth management and lending right now, I think the way that we think about these businesses are not that, oh, we want to grab market share. We want to build the scale. This is not the way we think about it. The way we think about it is actually we want to build the best in class in terms of product capability, in terms of consumer value, in terms of risk management. For example, in wealth management, right? It's very easy to say, oh, I just want to build scale, and as a result, I want to sell as many wealth management products as possible. Believe it or not, right? Usually, the wealth management products that sells the best is actually the most toxic. If you go down that track, right? We will not be fulfilling our promise to our users, right?
That's why I think the way we think about wealth management is like, how do we create a system in which we have a lot of user education, we have the best product, to our best knowledge, the product selection process. We don't offer all the products. We only offer the products that we felt are high quality. Then we provide a lot of risk explanation to the users. As a result, hopefully over time, right, the users are not going to be all users in the world, but the users who are willing to learn, the users who want to understand the risk that they're buying. Eventually they can grow with the platform. These are the people that we want to serve. Ultimately, it's a great wealth management platform. Likewise, on lending, you can actually always lend a lot of money outside, right?
Whether you can collect is a very big question mark. You can also say, oh, we just want to charge more interest so that we can cover all the costs. This is not the way we think about it. We actually want to be exposed to high-quality risk and the high-quality credit. As a result, we may not be expanding as much in scale, but we definitely have got the best credit in the market. I think, as we see in COVID-19, right, it's actually stress-testing our Fintech services. I think we have passed the stress test. That's how we think about these businesses. It's a long-winded answer to your question, but I hope that you get a taste on how we think about our businesses.
Your last question comes from William Packer from Exane BNP. Please ask your question.
Hi there. Thanks so much for taking my question, and congrats on the strong results. Firstly, you talked about video games consumption normalizing as people return to work, but you also talked about structurally expanding the long-term audience. Is there any color or KPIs you could help us on gaming engagement post-lockdown for a better feel of those long-term changes? Just a quick one on the advertising side. The color you've offered is helpful. Is there any underlying competitive shifts in the digital ad market share, which we should be thinking about? Thank you.
Well, why don't I start with both of them, and Martin or someone else may supplement. I think on the video games question and specifically the comment about the structural opportunity for video games, there are various entertainment formats including radio, television, magazines, and so forth. There's interactive entertainment, which is what we call video games. We have an interactive entertainment group within Tencent. The reason why it's called interactive entertainment is because to some extent, what we think of as video games are actually sort of a superset rather than a subset of entertainment activities. There's all sorts of entertainment activities that were traditionally passive and linear in nature, which we think can be enriched as they become interactive and immersive in nature. The earliest video games were effectively moving activities like solitaire or chess online.
Over time, you see more team-based competitive social activities moving online. I think that during this period, you see more and more people engaging with interactive entertainment on a broader palette, meaning that, for example people who historically watched physical sports events are now watching Formula One or basketball or other sports played in an e-sports format, often by the Formula One drivers or the basketball professional players, alongside watching games like League of Legends that have become powerful sports in their own right in the past couple of years. That represents a structural expansion in the market. Another example would be that historically, there's a gigantic live entertainment business around music concerts, and unfortunately, those are not occurring at the moment.
What is happening, if you play Fortnite, is fairly regular now music concerts within Fortnite, with Travis Scott, with Diplo, with a number of other stars recently, and those are attracting gigantic audiences. To some extent, the time people are spending in the music concerts in Fortnite or the time they're spending watching racing car drivers playing a Formula One video game, is not replacing the time they were previously spending playing World of Warcraft. It is sort of supplementing that and expanding the breadth of the interactive entertainment into newer, broader entertainment categories. That's an example of structural expansion in a qualitative sense. In a quantitative sense, we have seen that for some of our games, particularly for the more team-based competitive games, the audience now is structurally larger than it was going into this situation.
The time spent per user is normalizing downward because people are getting busier in China in particular. The number of people who have found these attractive forms of entertainment is broader than it was in the past. That's on the video game question. With regards to the advertising question and the competitive landscape, then I think our view is that we've always been highly competitive within the China online advertising industry by virtue of our traffic, by virtue of the premium nature of some of our content. What's changed in the last year or so is really that we've enhanced our technology, and I think one of the best proof points for that is the very rapid growth, the more than doubling in revenue year-on-year in our ad network business. As you know, the ad network business, it's other people's inventory.
It's not directly tied to whether WeChat has a white collar user base or whether we're running three or four ads per day in WeChat. It's tied to how competitive on a real-time basis our ad serving, our ad targeting is versus the other companies providing ad networks in the market. The fact that our ad network business was actually the biggest contributor to our ad revenue growth in recent months I think speaks to the reality that our ad tech capabilities are now more competitive than they've ever been.
Thanks, James. We are now closing the call. If you wish to check out 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 be available soon. Thank you, and see you next quarter.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect your line.