Earnings Call: Q3 2019

Nov 13, 2019

Thank you for standing by, and welcome to the Tencent Holdings Limited 2019 Third Quarter Results Announcement Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by the question and answer session. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Jane Yip from Tencent. Please go ahead, Ms. Yip. Thank you. Good evening. Welcome to our 2019 Q3 conference call. I'm Jane Di from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward looking payments, which are underlined by a number of risks and uncertainties and 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, formerly referred as non GAAP measures, are intended to reflect our core earnings by excluding certain one time and non cash items. For a detailed discussion of risk factors and non IFRS measures, please refer to our disclosure documents on the IR section 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, will discuss the strategy review. Chief Strategy Officer, James Mitchell, will speak about the business review and Chief Financial Officer, John Mo, will conclude with financial review before we open the floor for questions. I will now turn the call over to Tony. Okay. Thank you, Jane. Good evening, everyone. Thank you for joining us. During the Q3, we experienced sustained healthy growth rate in our operating and financial metrics. Notably, our FinTech and Business Services and Advertising segment revenues each increased at double digit percentage rate from the Q2, thanks to rising user activities and improved advertising technology. These growth demonstrates the strength of our new business and our diversified business metrics. Our non IFRS operating and net profit grew at a faster year on year rate versus the prior quarter. Looking forward, we will continue investing in our products, technology and services as we seek to provide value to our users and to do good for society. I will now share a few highlight numbers from the Q3. Total revenue was RMB97.2 billion, up 21% year on year and 9% quarter on quarter. Gross profit was RMB42.5 billion, up 20% year on year and 9% quarter on quarter. Our non IFRS operating profit was RMB28.5 billion, up 27% year on year and 5% quarter on quarter. Non IFRS net profit attributable to equity holders was RMB24.4 billion, up 24% year on year and 4% quarter on quarter. Moving to platform update. In social, combined MAU of Weixin and WeChat increased 6% year on year to 1,150,000,000. Smart device MAU of QQ declined 6% year on year to RMB653 1,000,000 as we proactively clean up spending and spot accounts. In games, we solidified our number one position in China with Peacekeeper Elite Popularities and expand our international success with Call of Duty, mobile and team fight tactics. In FinTech, we operate the largest mobile payment platform in China by DAU and payment volumes, which increasing user engagement. In media, daily video views within Tencent Video app increased both year on year and quarter on quarter despite a challenging content approval environment. Live streaming services and music subscriptions also grew strongly. In cloud, we continue to outgrow peers and has achieved significant scale in our business. In utilities, our app store and mobile browser app remains category leader in China. I will invite Martin to discuss strategic review. Thank you, Tony, and good evening and good morning to everybody. This quarter marked the first anniversary of our strategic organization upgrade, which strengthens our franchise in consumer Internet and extends our footprint to industrial Internet. While we believe that the upgrade will generate its desired results over the next few years, we're pleased to share some initial achievements both quantitatively and qualitatively. From quantitative perspective, our non IFRS earnings growth has accelerated from 19% in the 2nd quarter to 24% in the 3rd quarter. This growth is driven by 1st, FinTech Services and 2nd, Social Ads and 3rd, International Games, which are all relatively new business areas and each one of them have large growth potential in our view. Over the past year, as a result, we have improved the quality, diversity and headroom of our growth profile in these tangible business areas, while at the same time pursuing emerging growth in enterprise businesses and short content industry. From a qualitative perspective, first, we have consolidated our enterprise facing activities into the Cloud and Smart Industries Business Group to assist various industries in reaping the benefits of digitization. 2nd, we established the platforms and content business group to execute a more focused content strategy, leveraging our strengths in high DAU platforms and premium content. 3rd, we have proliferated our mini programs ecosystem, enabling service providers to efficiently connect with their customers. 4th, we have made encouraging progress toward globalizing our business, particularly for online games where we created, published and operated some of the most popular mobile games outside of China. Fin, we have streamlined our operations to be more agile. For example, we merged our ad sales teams and simplified our inventory format. We set up a technology committee to drive the use of the common software code base and we are more efficiently prioritizing our sales and marketing activities. In the same spirit of continuing innovation, we upgraded our corporate mission and vision to value for users, tech for good. Now diving into the progress we've made in serving enterprises with CSIG. We have rapidly expanded our client base and locked in key contracts, driving fast growth in our cloud revenue and more importantly achieving substantial scale. We have integrated our proprietary technologies in areas such as security software, streaming, AI and big data analytics into smart industry solutions. For example, our security software facilitates anti fraud identity authentication and data protection and is increasingly adopted by Internet Financial and municipal services customers. Operationally, we have optimized our supply chain for hardware such as service and networking equipment, enabling us to offer more cost competitive products and services. And we have also unified our enterprise sales teams to increase customer acquisition efficiency. During the year, we've built several industry leading cases and made great progress in different sectors. For example, our digital Guangdong project is regarded as the benchmark for digitizing municipal services in China and we're leveraging that success by implementing We City solution in other cities such as Changsha and Chongqing. Our Travel Yunnan on Mobile project pioneered digitizing tourism, facilitating tourist access to scenic spots, transportation and public facilities, while supporting businesses and administrators to increase touch points and overall efficiency. Insight and streamline processes. We've rolled out initiatives to facilitate merchant onboarding process and are penetrating more subsectors. Moving on to our content business and the progress in PCG, we're increasing the interaction between our content apps, traffic apps and social platforms so as to understand our users better, identify users' trends earlier and provide the right content to a broader audience in a more timely manner. In premium content, we're reinforcing our content creation capabilities in areas such as drama series, variety shows, anime and literature. We're also benefiting from synergies between different content formats. For example, we're developing popular online literature IPs into drama and anime series and success examples such as The Untamed and The King's Avatar emerged. We are using variety shows to identify new artists who then contribute content and talent to our music platform. RISE, a band selected from participants in the Tencent Video Variety Show sold almost 1,500,000 copies of its first digital album on the debut of its release on Tencent Music Platform. In the area of short form content, we have built strong presence in news feeds via QQ KanDian, QQ Browser, Kuaibao and Weixin Top Stories and are now increasing our advertising revenue from services. We believe the newsfeed's competitive landscape has largely stabilized with our products holding a significant market share. In short, in mini video, which emerged more recently, we already have over 10,000,000,000 video views per day and we are building out our content curation and distribution system focused on our WayStream application. We believe the short and mini video market will eventually settle down around several successful apps similar to the case in the news feed market. In terms of Mini Programs, Mini Programs in our view present a vibrant ecosystem that facilitates service and transaction delivery, offline and online integration, and benefits our performance apps and payments business. We are the global pioneer for Mini Programs and a clear China market leader with Mini Programs having over 300,000,000 DAU and the number of mid to long tail Mini Programs grew 60% year on year in the 3rd quarter. To further our ability to serve vertical industries through smart solutions, we are now pilot testing vertical mini programs via 3 new gateways in our Weixin Pay main interface. 1st, healthcare. Our healthcare gateway integrates services such as medical content from Tencent Media for information, direct connections to hospitals for registration and consultations and electronic Social Security card for efficient payment. 2nd, mobility. Our mobility gateway allows users to check bus schedules, plan routes ahead, pay for public transportation, and pay for traffic signs and parking if they are car owners. Thirdly, smart retail. Our smart retail gateway is a decentralized marketplace for retailers. Users can browse to recommend the products from nearby franchise stores, brands and also communicate with sales representatives. In terms of globalization, we have made good progress to increase our global presence and we believe we're making particularly a breakthrough in our games business. As a first step, if you remember, we have invested in and partnered with many of the best game companies in the world with business cooperation or equity investment in 8 out of the 10 game companies worldwide. More recently, we have proven that we can ourselves develop games that achieve global success. For example, PUBG MOVE has become the top game in terms of DAU globally excluding China according to App Annie. In the most recent quarter, the Court of Duty Mobile, which we co developed with Activision Blizzard, gained over 4,000,005 star reviews on Google Play and a 4.9 rating on iOS following its October launch which has become one of the most successful mobile game launch in the past couple of years. International markets now contribute a teens percentage of our games revenue. Looking forward, we'll focus on strengthening our capabilities in serving international markets by firstly, incubating our own IPs that are suitable for global audiences and broadening our partnership with international IP owners secondly, pioneering new types of game plays that can resonate worldwide and thirdly, localizing our game publishing and operational capabilities for multiple regional markets. We believe we have tailwind on our back because A, gamers globally are increasingly active on smartphones and B, gamers globally are increasingly excited about multiplayer action games, both of which are areas of strength for Tencent. Finally, I want to close this section by talking about something that's very important for us long term. This week on the 21st anniversary of Tencent, we upgraded our corporate culture and announced our new corporate mission and vision, which is value for users, tech for good. Throughout our history, users and responsibilities have always been at the heart of everything we do. Whenever we face challenges at Crossroads, we abide by the user oriented approach as our guiding principle. The 99 Giving Day program, the implementation of our parental guidance platform and our use of AI technology in healthcare are few examples illustrating our conviction and commitment to the cause of tech for good. In order to fulfill our commitments, we'll continue to prioritize the needs of our users and to incorporate social responsibilities into our products and services. We support various industries to upgrade digitally and we will seek to promote the sustainable development of society. We'd like to have all of you, our investors and friends, to keep giving us suggestions to help us achieve this mission. With that, I'll pass to James to talk about our business review. Thank you, Martin, and hello, everyone. For the Q3 of 2019, our total revenue grew 21% year on year. BAS remained our largest revenue segment, representing 52% of revenue, within which online games were 29% and social networks 23%. FinTech and Business Services represented 28 percent of our revenue and online advertising was 19%. For value added services, segment revenue was RMB 50.6 1,000,000,000 in the quarter, up 15% year on year and up 5% quarter on quarter. Social Networks revenue was RMB 22,000,000,000, up 21% year on year and up 6% quarter on quarter. Year on year growth benefited particularly from live streaming and in game item sales, while quarter on quarter growth benefited from the same factors as well as more streaming music subscriptions. Our total VAS subscription counts increased 11 percent year on year to 171,000,000 due to the growth of online video and music streaming services. Video subscriptions reached 100,000,000, up 22% year on year, while music subscriptions reached 35,000,000 up 42% year on year. Our online games revenue grew 11% year on year and 5 percent quarter on quarter to RMB28.6 billion. Total smartphone game revenue increased 25% year on year to RMB24.3 billion due to key game performance in China and increasing contributions from international markets. New role playing and strategy games contributed to the quarter on quarter growth along with Peacekeeper Elite although there was a substantial gap between Peacekeeper Elite's cash receipts versus its reported revenues due to that game's long revenue amortization cycle. PCKindergarten revenue decreased 7% year on year and 2% quarter on quarter to RMB11.5 million due to fewer paying use in Super Dungeon and Fighter. Moving to social networks, in Weixin, we introduced initiatives to advance our partners' development skills and help them participate in our mini programs ecosystem. The systems integrators, our growth program provides training and development tools to help them better assist mini program owners. For mini program owners seeking to enhance the performance of their mini programs, we launched Industry Assistant, a dashboard providing analytical insights such as comparing their customer acquisition and monetization capabilities against industry benchmarks. In QQ, we added functionalities that enrich users' social and entertainment experience. We released a feature providing ice breaking topics in 5 minute chat rooms to inspire conversations. We enabled users to dedicate songs to their friends and we allowed users to listen to synchronized music streams together. During the quarter, our game business accelerated year on year revenue growth and more importantly improved its underlying vitality and longevity. We're increasingly developing games that can become global hits such as PUBG Mobile and Call of Duty Mobile, establishing leadership in the most competitive genres globally such as first person action games and operating high DAU games that can themselves become platforms for new modes, such as League of Legends with team fight tactics. As a result, we and our majority owned subsidiaries operated 6 of the top 10 smartphone games by monthly active users globally during the Q3. For smartphone games in China, Peacekeeper Elite released a summer content update which enhanced user engagement. We introduced a map editor Honor of Kings that encourages user generated content and users are increasingly buying season passes in Honor of Kings. With smartphone games internationally, PUBG Mobile doubled its monthly active user base year on year and released successful Royale passes in July September. Call of Duty mobile exceeded 100,000,000 downloads in a month after its launch, linking this game as the highest impact mobile game launches in recent history. For PC games in China, DNF revenues decreased sharply year on year as its 11th anniversary expansion pack in June underperformed last year's 10th anniversary expansion pack and we're focused on enhancing D and F's user engagement. For PC games internationally, League of Legends Teamfight Tactics Mode has established global leadership in the emerging auto chess genre with over 30,000,000 monthly users and is starting to contribute to revenue by the Little Legends. Last week, China's government announced a regulatory policy limiting game play time for children and teenage players. We have already implemented a healthy game play system in our games with similar or stricter limits to those now being announced. And consequently, we expect very limited additional impact from this regulation on our game business. Moving to online advertising, we grew our advertising revenue by 13% year on year and 12% quarter on quarter to RMB18.4 billion in the 3rd quarter. We saw strong advertising demand from the games education and e commerce verticals offsetting weakness from the automobile sector. We believe our advertising business enjoys a long runway advertisements to our uniquely large user base across our broad range of social media and affiliate properties. Our media advertising revenue was RMB3.7 billion, down 28% year on year and down 17% quarter on quarter. Our mobile video DAU was stable year on year, but the uncertain video content schedule materially reduced our video sponsorship advertising revenue. However, we believe the worst of this trend now appears to be behind us. Our social and other advertising revenue increased 30 percent year on year and 23% quarter on quarter to RMB14.7 billion. Key drivers of the accelerated growth rate included first, more inventory and more impressions in Weixin Moments, which remains the premium wide reach online advertising venue in China, providing advertisers with multiple times more DAU than they can access through competing properties. 2nd, streamlined ad formats and new video ad formats in our ad network, resulting in our ad network revenue growing twice as fast year on year as our overall social and other advertising revenue. We believe the success of our ad network which competes head to head with our biggest peers for advertiser budgets in real time, speaks to our increasingly competitive ad tech product following our 9:30 ad tech unification. And 3rd, increased DAU and new interstition and pre roll video ads within our mini programs, which we view as key properties future advertising revenue growth given the increasingly high volume of consumer transactions taking place within mini programs. Looking at FinTech and Business Services, segment revenue was RMB26.8 billion, up 36 deeply in consumer and merchant engagement. Our commercial payment deeply in consumer and merchant engagement. Our commercial payment revenues grew robustly year on year and quarter on quarter benefiting from increased daily act consumers and per consumer transactions as Weixin Pay becomes more widely available especially among high transaction value merchants. Our wealth management platform more than doubled its active customer base year on year, contributing to rapid growth in aggregated assets under Weixin balance from LinktianTong accounts. This trend hurts our revenue in the short term by reducing our withdrawal fees, but helps our margins as we don't incur funding costs on transactions funded from Wei Xunpay and Lingxian Tong balances and speaks to deepening consumer confidence in our payment services. Our FinTech business generated a double digit operating profit margin in the Q3, benefiting from increased commercial payment volumes as well as fees associated with lending and asset management activities. We believe our FinTech business also enjoys the long runway for profitable growth given the value our mobile payment service contributes to the economy and to society, together with the convenience and innovation of our lending and asset management services. Within business services, our cloud service revenue grew 80% year on year to RMB4.7 billion as we expanded our customer base in the education, financial, municipal services and retail sectors as well as increasing revenue from existing customers. We're enhancing the operating efficiency of our cloud services as we expand our business scale and optimize our supply chain. For example, we're shifting from OEM to ODM procurement, which enables us to provide more tailored services and pass lower costs on to our customers. And with that, I'll pass to John to discuss the financial review. Thanks, James. Hello, everyone. For the Q1 of 2019, total revenue was RMB97.2 billion, up 21% year on year or 9% quarter on quarter. Gross profit was RMB42.5 billion, up 20% year on year or 9% quarter on quarter. Net other gains were RMB932 million, down 89% year on year or 77% quarter on quarter. The year on year decrease was primarily due to non IFRS items, including net gain from Meituan, Dimping upon its IPO in the same quarter last year, partially offset by greater impairment provision against investments. Sequentially, the decrease was mainly due to the decrease in net fair value gains of certain investors, which are also non IFRS adjustments. Operating profit was RMB25.8 billion, down 7% year on year or 6% quarter on quarter. Net finance costs were RMB1.7 billion, up 17% year on year or down 12% quarter on quarter. The year on year increase was primarily due to greater interest expense resulting from the increase in indebtedness, partially offset by the recognition of foreign exchange gains. Associates and joint ventures was down 90% quarter on quarter to approximately RMB234 1,000,000, mainly reflecting certain associates booking non cash fair value changes of their investment portfolios. On a non IFRS basis, share of profit of associates and joint ventures decreased by 14% quarter on quarter. Income tax expense was RMB3.3 billion, up 3% year on year or 4% quarter on quarter, mainly reflecting higher taxable income. The effective tax rate for the quarter was 13.7%. Net profit attributable to equity holders was RMB20.4 billion and diluted EPS was RMB2.127, both down 15% year on year and 16% quarter on quarter. The year on year decrease was mainly due to a high base last year as a result of recognition of fair value gains from Meituan Dimping IPO. The Q on Q decrease was mainly due to a decrease in fair value gains from investments as mentioned earlier. On a non IFRS basis, net profit attributable to equity holders was RMB24.4 billion and diluted EPS was RMB2.548, both up 24% year on year and 4% quarter on quarter. Let me walk you through our non IFRS financial numbers. Operating profit was RMB28.5 billion, up 27% year on year or 5% quarter on quarter. Operating margin was 29.4%, up 1.4 percentage points year on year or down 1.3 percentage points quarter on quarter. Net profit attributable to equity holders was RMB24.4 billion, up 24% year on year and 4% quarter on quarter. Turning to segment gross margin. Gross margin for value added services was 51.8 percent, down 4.7 percentage points year on year or 0.8 percentage points quarter on quarter. The year on year decrease was primarily due to revenue mix shift from higher margin products such as PC client games to digital content services, including music, video streaming subscriptions and live streaming services, as well as higher content costs for smartphone games. Sequentially, margin was broadly stable. Gross margin for online advertising was 48.8%, up 12.1 percentage points year on year or 0.2 percentage points quarter on quarter. The year on year increased primarily reflected revenue mix shift from media advertising to social and other advertising, which has a higher margin. Sequentially, margin was broadly stable. Gross margin for FinTech and Business Services was 27.7%, up 2.6 percentage points year on year and 3.7 percentage points quarter on quarter. The year on year increase reflected growth in merchant payment transaction volume and increased service fee income of various payment related services and lending business. In addition, the increase in margin also resulted from fixed revenue contribution from cloud services and improved cost efficiency from economies of scale. The Q on Q increase reflected higher merchant payment, transaction volume as well as contributions from higher margin activities within business services. On operating expenses, selling and marketing expenses were RMB5.7 billion, down 13% year on year or up 21% quarter on quarter. The year on year decrease reflected our prudent cost management initiatives. Sequentially, selling and marketing expenses increased due to seasonally higher marketing spending on digital content, FinTech services and smartphone games. Selling and marketing expense represented 5.9% of the quarterly revenue. G and A expenses were RMB13.5 billion, up 24% year on year and 8% quarter on quarter, primarily driven by increase in R and D expenses and staff force. Within G and A, R and D expenses were RMB7.9 billion, up 27% year on year and 11% quarter on quarter. As a percentage of quarterly revenue, G and A was 13.9% and R and D was 8.1%. At quarter end, we had approximately 60,000 employees, up 16% year on year or 8% quarter on quarter. Let's take a look at the margin ratios. Gross margin was 43.7%, down 0.3 percentage points year on year and 0.4 percentage points quarter on quarter. Non IFRS operating margin was 29.4%, up 1.4 percentage points year on year or down 1.3 percentage points quarter on quarter. Non IFRS net margin was 25.8%, up 0.5 percentage points year on year or down 1.4 percentage points quarter on quarter. Before I close my remarks, I will share several key financial metrics for the Q3. Total CapEx was RMB6.6 billion, up 11% year on year and 52% quarter on quarter, of which operating CapEx increased 12% year on year to RMB5.8 billion. The increase mainly reflected more spending on servers to support expansion of our cloud business. Non operating CapEx increased 3% year on year to RMB804 1,000,000. Free cash flow was RMB37.7 billion, up 36% year on year or 82% quarter on quarter. This was the result of net cash flow generated from operating activities of RMB44.2 billion, offset by payments for capital expenditure of RMB6.5 billion. Net debt position was RMB7.2 billion, which has improved 75% compared to last year. The sequential decrease mainly reflects strong free cash flow generation, partially offset by payments from M and A initiatives and media content. The fair value of our shareholdings and listed investee companies, excluding subsidiaries, was approximately US49.9 billion dollars compared to US47.9 billion dollars last quarter. During the period from 28 August to 11 October 2019, we repurchased 3,500,000 shares with an aggregate cost of approximately US148 million dollars Thank you. We shall now open the floor for questions. Operator, we will take one main question and we will follow-up question each time. Please shall we invite the third question now? The first question comes from the line of Alicia Yap from Citigroup. Please ask your question. Hi. Good evening, management. Thanks for taking my questions. I have a question related to games developments and game publishing opportunity. With the success of Call of Duty Mobile, it seems that Tencent has further stepped up the development capability to win more well known console IP to help global studio to transform their games into mobile gameplay. In selecting the titles or partners, what are the criteria that you will be looking when you decide to license for the IP? And on domestic publishing, since there has been some noises about a new competitor maybe eyeing on games distribution and publishing. Will these affect Tencent Publishing market share in the coming future? Thank you. Yes, in terms of game development and game completion, I think the fact that our game development capability is now well recognized in the global market by consumers through the success of 5 gs Mobile and more recently the Closet Beauty Mobile. I think it's a very big breakthrough for us and we're very pleased to see that. Now I think we have established ourselves as the preeminent mobile game developer for not only China but also mobile market. And when you add that to the fact that over the past many years we have actually already established a very strong relationship through strong partnership as well as equity investment relationship with many top game companies in the world. I think when you add those together, it's actually opening up a significant opportunity for us. And of course when we choose the titles, I think consumers and gamers' needs is the most important criteria that we look at. If the game title has got a very large followership and consumers and gamers are expecting to see an exciting title and we can develop that and deliver that for the users. I think that's the most important criteria and I think that philosophy also resonates with a lot of our partners. When we develop these games, it's not only games that open up commercial market, but also it retains the original creativity for the game developers and our partners, which is very important too. In terms of domestic publishing, I think we feel very good about our position and the fact that we have strong operational as well as development capability as well as very strong relationship around the world with the IP and game owners and at the same time the fact that we have very strong leverage over our social platforms, I think give us a preeminent position in the industry, which I think it's very difficult to shake up. Thanks. Next question please. Thank you. The next question comes from the line of Eddie Leung from Bank of America. Please ask the question. Hi, guys. Good evening. Thank you for taking my questions. Starting with short and mini video strategy, you mentioned about strong growth of video views within some of your large user platforms, while you also run several independent short and mini video apps. So just wondering, is there any priority when you think about allocation of resources, for example, marketing resources to grow the content consumption of video? And related to that, if we have the traffic spread across different channels and platforms, would that affect the budget allocation from some of the advertisers? Thank you. Yes, I think the way we look at the short and mini video landscape is very similar to the way we look at newsfeed with one additional tweak. If you look at short and mini video, I think the overall portfolio that we have created is 1, in our social platform, we continue to curate social short and mini video, which is not counted in the 10,000,000,000 video views right now, but that is really a video short video and mini video that are sent among the different users. We think that's actually part of social network and that we have a very, very strong lead in. That's number 1. Number 2, in terms of the media side of the mini videos and short videos, I. E. When people watch the video for content purpose, then it's actually very similar in our view to the newsfeed market in which you have people who just want to watch it for a light experience within the traffic platforms and we offer that within our social platform, within our browser and within even our news feed. But at the same time, when you look at a very dedicated short and mini video experience, then the flagship product that we have is actually Weishi. And a lot of marketing dollars and content dollars will be dedicated to that application. And in terms of advertising, I think as long as the video format is actually quite similar, then the ad format will be very similar. And as a result, the pool of ad dollars that are in the pool for competitive pricing will be actually quite The next question please. Thank you. The next question please. Thank you. The next question comes from the line of Han Joon Kim from Macquarie. Please ask your question. Great. Thank you for the chance to ask a question. I wanted to get management's perspective on how you look at blended consolidated margin trajectory between all the puts and takes? I feel like we've started to see some slowdown in the second derivative of that. So just some perspective from your end would be great. Thank you. Hi, Han Joon. Thank you for the question. I'm not sure that I completely understood the slowdown you're alluding to. I think in general though, one broad the the very large majority was driven by, 1st of all, FinTech and Business Services segment, and secondly, our advertising segment. And in fact, each of those grew their gross profit dollars roughly 50% year on year, which we think speaks to the fact that our business is actually diversifying and incubating new growth drivers quite quickly. And obviously, there has been times in the early days of those new growth drivers when they generated low or negative margins. But you can see now, if you look at both our advertising and our Fintech and Business Services, that the gross profits are growing very substantially, and that's translating into improved operating profitability as well for both of those segments. Did you have a second question? No, no, that was it. Thank you for that. That answered the question. Thank you. And the next question please. Thank you. The next question comes from the line of John Choi from Daiwa. Please ask your question. Good evening and thank you for taking my question. I have kind of a follow-up question from after Alicia. On your recent success on PUBG Mobile and Call of Duty Mobile, it seems that Tencent has been really positioned as a global powerhouse in game development, particularly in mobile. But now if we think of it like in a longer perspective, where does the management think that Tencent has to further invest or strengthen its capability? Is there like is there any area where such as infrastructure is in place or any new areas that Tencent has to really consider to become more of a true global player? And second, just quickly on the media ads, I know Q3 is very challenging. Any color to the Q4 2020 will be very helpful. Thank you. Thank you for the questions, John. So on the media advertising, while we generally don't give detailed forward looking guidance, we do believe that the worst is behind us now and our media advertising trends will improve. In terms of the question about where we need to enhance our capabilities to further strengthen our game globalization strategy, then there's a few areas where we believe we have more work to do and room to further improve. One is incubating, nurturing, and developing our own intellectual properties. That's something that I think we've achieved quite successfully within the China market and we would like to extend that IP management capability globally. A second area of focus is extending into more genres of games. So to date, we have been most successful in the biggest, most competitive genre, which is 1st person action games. And the fact that we can be successful in the biggest, most competitive genre, it gives us some confidence that we if we put our minds to it, we ought to be successful in some other genres. But clearly, that requires more further effort. And then thirdly, on the game operations, when we began our globalization, we largely operated the games from China. Subsequently, we've discussed that there's enormous value to actually having an international game operation platform. But if you look at the success of some of our peers, such as, for example, Garena with Free Fire, then above and beyond the global platform, there's also increasing the value in having regional live operations and regional publishing capabilities, particularly in some of the emerging markets around the world that historically monetized very poorly for mobile games, but are now starting to monetize more substantially. So those are a few of the areas where we believe there's further a route for us to improve as we globalize our game business. The next question comes from the line of Rachel Chen from Morgan Stanley. Please ask your question. Thank you. Thank you for taking my question. My question is about the gross margin. We can see Tencent making really good progress to extend game business overseas. I'm wondering how the rising revenue mix from overseas gaming business will affect the VAS margin trend going forward? Is there any difference in terms of margin profile? A follow-up question is about 5 gs. It would be great if the management can share your view about the opportunities trying to take off 5 gs in China in your business, like which segments in your business will benefit more from 5 gs and how? Thank you. I think in terms of the over seas games, it will carry normally a lower margin due to the fact that some of the games have been operated by other partners. And so as a result, it will be lower than that of those in China. Well, on the other hand, if you look at it depends on the different models too, right. If in some cases, we co developed the game and the game is actually operated by our partner, then we book the development revenue, which is higher margin in itself. So either it drives higher revenue growth, but then the margin will be lower or the revenue growth is not as much, but it's higher margin. So it depends on the model. Now in terms of 5 gs, I think obviously we are at an early stage of the development of 5 gs, right, and we feel that when speed increases, it's going to be enabling for the bandwidth consuming services. So video I think would definitely sort of be quite an interesting opportunity. And at the same time, I think it would allow a lot of new applications that can be delivered over the network instantaneously. So one area that we have been looking into is cloud gaming. And if you look at the current version of the cloud gaming, the most successful cloud gaming is actually our mini games within WeChat. And by and large, it's actually a relatively narrowband type of game, very simple. But in the future, if very large amounts of data can be transmitted within a very short period of time then the game experience of these cloud gaming models could be very, very interesting and different. And in addition, I would also say that if you look at Mini Programs, Mini Programs is essentially an application that trades flexibility for bandwidth, right. So when you have almost unlimited bandwidth at flash speed, then mini programs will become very, very exciting. There will be a lot of other opportunities that will be opened up by many programs. So these are the kind of things which I think it will be very tangible for us. Thank you. And the next question please. The next question comes the line of Gregory Zhao from Barclays. Please ask the question. Hi, management. Thanks for taking my question. So my question is about your FinTech business. So just want to understand a bit more about the overall the industry, the TPV, the growth trend and your market share gain. So given your dominant market position, shall we expect some initiatives to expand the payment take rate in the next couple of years? And also, if you can share some commercial payment TPV and the revenue growth trend will be very helpful. And a quick follow-up on the Mini program. So in the press release, you mentioned the Mini program, the MAU exceeded RMB300 1,000,000 and expanding into some vertical areas like healthcare and the smart retail. So just want to understand a bit more about the monetization progress, especially in healthcare and the smart retail and what's the contribution to your social advertising revenue? Thank you. And just as FinTech, I would say number 1, it is the PPV is actually growing quite rapidly because of both the number of merchants adopting the solution and the increasing payment habits created by the users and also the increase in average ticket size. And secondly, I think if you look at the overall industry, there has been an improving economics and that's mainly driven by one, there are actually less subsidies offered by our peer and as a result it actually improved the overall industry dynamics and 2, we actually cross sell FinTech solutions, FinTech services such as loan products and money market and wealth management products. I think in terms of the overall payment itself, it's still infrastructure type of business. There are monetization and in margin related to commercial payments and I think the mobile payment solutions companies, including ourselves, are still adopting an approach that we are not making a lot of profit from the payment itself, but trying to expand the use case and expand the market share of mobile payment visavisotherforms of payment. Now in terms of mini programs, I would say at this point of time, number 1, what we've disclosed is actually DAU. So there's a huge difference between DAU and MAU. So I think that's number 1 in our view. Number 2 is there's a big difference between whether the mini programs are used for mid tail and long tail type of mini programs or they are actually just changing our functionality into a mini program and as a result that's called a mini program. So we focus much more on the mid to long tail ecosystem and I think that's actually growing very vibrantly and that's definitely by far industry leading in China. And in terms of Mini Programs monetization, I think we actually said Mini Programs actually helped to increase the ecosystem of transactions within our WeChat ecosystem. And as a result, it helps on performance ads and it helps on our payment business. Now it's a little bit hard to quantify this because the fact is our advertisers would advertise on our performance ad and sometimes they get exposure on their services and sometimes they actually try to bring the transaction onto their mini programs. So it's hard to quantify that, but I think mini programs is definitely a very important part of the value chain when we try to monetize through advertising when there's traffic and then when the brands and the content the merchants actually try to advertise, right, new media programs actually help them to execute the transactions faster. And so is our WeChat payment, right. So the 2 added together actually helps transactions flow and as a result it helps more and more advertisers to advertise. So when people look at WeChat performance ad solution, they look at, oh, there's a lot of traffic, they also look at the ease of transaction which is facilitated by many programs. So I think it's actually helping the entire social ads business. And the next question please. Thank you. The next question comes from the line of Binnie Wong from HSBC. Please ask the question. Hey, good evening management. A quick follow-up on the Mini program given the high frequency DAU that we saw. And considering that many of our key strategic investments like Meituan, Lingoduo, those guys are also spending quite aggressively on user acquisition. What is our to incentivize more of these transactions also got shifted to our meeting program and also maybe within the retail ecosystem? And then second question is that on the media advertising. I think management made a comment that the worst is likely behind us. I just want to better understand that is that more coming from the news feed or is it from the video properties we have? And also how do we see the advertising inflection point? Are we there already? And then how should we see the outlook? Thank you. Binnie, thank you for the two questions. On the first question, we may need you to ask that again a different way as we didn't really catch the meaning behind it, unfortunately. On the second question about advertising, the macro environment will be whatever it will be, and we don't aspire to control that. But what we can control is our competitive position. And we believe that since the ninethirty reorganization and the combination of our ad sales and ad tech in the combined advertising and marketing services group that we have sharply improved our competitive position. And I think that's manifest already in the acceleration you're seeing in our social and other advertising revenue. It's particularly apparent in, for example, the ad network business where we're competing head to head with the other big online advertising companies in China, but we have experienced very strong growth as we undertake measures like standardizing and unifying the different ad formats, which makes it a much larger, more liquid pool in which the media buying trading desks find it easier and more efficient to transact than was the case before. So we believe that we've become sharply more competitive in the social and other advertising as a result. And we're also seeking to extend that competitiveness to the media advertising business, which we believe is well underway. And once again, when you're looking at a business like advertising, because of the intricacies of net versus gross, it's important to really focus on the gross profit growth as well as the revenue growth and our advertising gross profit grew at what we think is a very rapid rate year on year, reflecting the benefits of the technology changes we're putting in place. Now if you could just ask the first question again. Okay. Sorry. My first question is that on the mini program side, given that it's a high frequent DAU app and then DAU that you see the frequency there. So how are you thinking that because we have a lot of investments and then say like Meituan, Tindou Dou, these guys are also spending a lot in user acquisition, right? And then also in your cloud conference, you also hear that some of the merchants say Unigloo, I think they're talking about the improving conversion that on Mini Programs is actually better than the other app. So these improving conversion rate in e commerce, is that something that we can actually see that is a major driver to get more and more of the mini program adoption, the rising adoption? And what are the other things that we will management is expecting to see to drive the adoption in mini program from here? Because I think it's the increase the DAU is high. And then I guess the next step is that what the next step is in terms of going into monetization through this? Thank you. I think you touched upon a lot of different points. So I would try to say number 1, Mini Programs is actually adopted by a lot of different merchants and it's driven by the fact that it is a high frequency usage scenario and at the same time it facilitates offline and online interactions, so a lot of offline players now they can actually establish an online presence through Mini Programs and it also benefits from the fact that there's a better ecosystem around Mini Programs, including the performance ads ecosystem, including the payment. And as Mini Programs providers actually get better in terms of their programming capability and operational capability, it actually helps Mini Programs to be more conversional, as you have identified in some of the offline merchants, right, the conversion rates have been improving continuously because they are leveraging our tools to make their mini programs better and better in serving its customers. So all these are drivers, right, which would benefit the Mini program owners and as a result benefit our ecosystem. And I think then what comes will be quite naturally, right, there will be more traffic being created by the Mini Programs and the mini program owners will be spending more time into curating their mini programs. So that would actually create a virtuous cycle and when that happens, it will benefit our performance ads business, it will benefit our payments business and it will create actually a stronger transactional culture within our social platform and that will actually benefit the entire media program ecosystem further. So I hope that answers your question. Yes, got it. Thank you. Very helpful. Thank you. Thank you. And due to the time constraint, we will take the last three questions. Shall we have the next question, please? Thank you. The next question comes from the line of James Lee from Mizuho Securities. Please ask your question. Thanks for taking my questions. My question regarding advertising, it seems like when we talk to advertising agencies in general, it seems like social advertising in general is gravitating towards influencer and KOL advertising. It's moving pretty quick to top tier influencer. I was wondering and I was thinking for e commerce as well. I was thinking how you guys responding to that specifically. And also secondly on the NBA content, just curious what's the status on that? Is that still suspended indefinitely? Thanks. Well, I think to be honest, what you identified is probably the talk of the tongue, but frankly what we have seen is that by and large the ad dollars are still in the programmatic side. People who would actually advertise with standardized content or standardized ad format and through AI and through data crunching and targeting trying to find the right audience and eventually resulting in action and click as well as eventually transaction. I think that's still by and large the way through which performance ads work. Now there is a pretty visible trend toward KOLs, but I think in terms of total ad dollars it's still relatively small. In terms of NBA, I would say we have built a very strong relationship with NBA over the years and we actually have a lot of users who are very positive on NBA content. I think what has happened in the market should not really be prohibiting the engagement between the users who like the NBA content and NBA as a franchise. So what we are trying to do is actually to work through this difficult period and to maintain the positive engagement of sports between the users and the sports franchise and over time hope the problem will solve itself. Thank you. And next question please. Yes, sure. Please go ahead. James, do you have another question? Yes. Oh, yes, yes, yes. I was going to ask revenue contribution from Supercell in 4Q? Thanks. We'll report the Q4 when we report the Q4 results. But I think that Zugcell has filed financials historically in Finland. So I guess you can use the basis for modeling purposes. Okay. Thanks. Thank you. And the next question please. The next question comes from the line of Alex Yao from JPMorgan. Please ask your question. Hi. Thank you, management, for taking the question. First question is regarding the international mobile gaming opportunity. How do you think about the size of the TAM addressable market for international gaming relative to the domestic gaming market? And secondly, I'd like to follow-up on the FinTech and the business segment gross margin trend. It seems to me the gross margin has improved pretty meaningfully quarter over quarter and also year over year in this quarter. Can you elaborate the driver behind the margin improvement and help us understand to what extent can we extrapolate the margin improvement trend into the future quarters? Thank you. So the question on the international versus domestic game TAM, I mean, quantitatively, the game software market globally is about $100,000,000,000 of which China is about 30% and other countries are about 70%. So from that very top down perspective, then the TAM is a little bit more than twice as big outside China as it is inside China. That's roughly true as well for the mobile game market, which is, I think, that we have most competitive advantage at this point in time. But obviously, there's total addressable market and then there's actually addressable market and the actually addressable the market depends on some of the initiatives I talked about earlier in terms of us extending our footprint from action games to what other popular genres of mobile games in terms of us further regionalizing our publishing and live operation skills and also in terms of our ability to nurture and cultivate intellectual property. On the second question around the FBS gross margin, then there's a number of factors that contribute to the gross margin. One is the extent to which we aggregate financial services around the core payment platform. And as you're aware, on the asset management side, we've been growing quickly the number of users of our asset management service. It's more than doubled year on year. On the lending side, our weighted guide loan product has enjoyed rapid growth. It's extremely convenient and popular with users due partly to its convenience. In the most recent quarter, we've also begun to see some contributions from insurance. So that's on the Fintech. On the payments itself, then there's margin tailwind, first of all, from the increasing propensity of consumers to fund with or Weixin Pay accounts, and that impacts the cost side of the equation. And then secondly, on the revenue side of the equation, to the extent that the commercial payment volume outgrows the remittance volume, then the commercial payment volume generates a much discount rate for us. And then thirdly, on the business services component of FBS, the original infrastructure as a service tends to be lower margin. But as we deliver solutions such as the smart retail solution, then we're aggregating in software as a service on top of the infrastructure as a service and the software as a service generates higher margins. So those are some of the structural tailwinds. Now in addition, in any given financial period, there can be tailwinds or headwinds based on factors such as competitive intensity, particularly the subsidies around merchant adoption. And as Martin mentioned, now that many merchants do accept mobile payments already, some of that merchant acquisition subsidy activity has decelerated, which has contributed to the improvement in margins that we have seen. Thank you. And the next question please. Thank you. The last question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question. Thank you for taking my question. May I this is quick. I just wanted to understand the weakness in the media advertising revenue line for the quarter, which seems to be pretty sharp. And there is any color you can give us or provide how quickly this could bounce back? Thank you. Well, we've already provided color that we believe it is bouncing back. And by our standards, that's much more forward looking commentary than we would normally give. So unfortunately, we're not going to provide further sort of details as to exact timing and obviously, to some extent, it's a function of macroenvironment factors as well. But in terms of the sharp pace of decline in the Q3, then one of the key factors is really the uncertainty as to when we would be able to air certain key drama series. Now in the end, we did air many of the drama series that we hoped to air during the quarter, but I think there was uncertainty as to the timing. It mentioned it was more difficult to sell sponsorships than it would normally be. And for those Big Lots of Drama series, the sponsorships historically contributed a very substantial double digit percentage of the total revenue. And so even if we add the drama series, even if the drama series achieves the exact number of audience we were hoping it would achieve, if we lose that sponsorship opportunity because the timing of the airing of the drama series is volatile, then that has a meaningful negative impact on our media advertising revenue. But again, I want to emphasize that there are many drivers in our business and media advertising revenue, important as it is, it's now less than a third of our advertising revenue, which in turn is smaller than our Fintech and Businesses Services revenue. So it's important keep in mind, we have a broad portfolio. And when we have a broad portfolio, it's almost inevitable that at any point in time, there will be activities that are underperforming and there'll be other activities that are overperforming. But I think we're pleased that this quarter our FinTech and Business Services, our social advertising and our mobile games globally, which we view as key drivers for the future, overall performing very well. Thank you, James. Thank you. And we are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website. A replay of this website will also be available on Zoom. Thank you and see you next quarter. That does conclude our conference for today. Thank you for participating Tencent Holdings Limited 2019 Q3 results announcement conference call. You may all disconnect.