Earnings Call: Q1 2019

May 15, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the Tencent Holdings Limited 2019 First Quarter Results Conference Call. At this time, all participants are in a listen only mode. There will be presentation followed by a question and answer session. I must advise you that this conference is being recorded today. I will now hand the conference over to your host today, Ms. Jane Yip. Thank you. Please go ahead. Thank you. Good evening. Welcome to our 2019 Q1 results conference call. I'm Jane Yip from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non GAAP 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. For a detailed discussion of risk factors and non GAAP measures, please refer to our disclosure documents on the IR section of our website. Let me introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma, will kick off with a short overview. President, Martin Lau, will discuss strategic review. Chief Strategy Officer, James Mitchell, will speak to 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 Pony. Thank you, Jane. Good evening, everyone. Thank you for joining us. Our key platforms continue robust growth in users, traffic and activities, acknowledging our vibrant ecosystem and reinforcing our expansion from consumer Internet to industrial Internet. In the Q1 of 2019, we generate moderate growth in areas such as online games and our new segment, FinTech and Business Services contributed significantly to overall revenue growth year on year. We have also managed our cost effectively amidst the challenging macro and business environment. As a result for the quarter, total revenue was RMB85.5 billion up 16% year on year and broadly stable quarter on quarter. Gross profit was RMB39.8 billion up 7% year on year and 13% quarter on quarter. Non GAAP operating profit was RMB28.5 billion up 13% year on year and 27% quarter on quarter. Non GAAP net profit attributable to shareholders was RMB20.9 billion up 14% year on year and 6 percent quarter on quarter. Now let me give you a quick update on our key platforms. In social combined MAU of Weixin and WeChat increased 7% year on year to over 1,100,000,000. Smart devices MAU of QQ increased slightly year on year to over 700,000,000. We think which young users became more engaged and grew double digit year on year. TiOzone Smart Devices MAU was 572 1,000,000 and 4% year on year. In online games, we spent total user base for our overall portfolio. Daily active users benefit from content updates and in game marketing activities in several key PC and mobile titles such as Honor of Kings, LOL and DNF as well as our new game Perfect World Mobile. In media, Tencent Video average daily active users increased slightly year on year, while daily video views increased rapidly, benefiting from short videos and popular anime series. Short and mini video daily views grew strongly boosting our media feed business in Mobile QQ Browser, QQ KanDian and Tencent News. In Payment, our merchant network further expand and enable strong growth in Commercial Payment Business. We operate the largest mobile payment platform in China measured by active users and the number of transactions. In utilities, our mobile security products continue to strengthen market leadership in its strategically important segment. I will invite Martin to discuss strategic review. Thank you, Pony, and good evening and good morning. Over the years we have been incubating new businesses organically within the company. Some new businesses have reached significant scale. Starting this quarter, we have a new revenue stream, a segment called FinTech and Business Services to mark a new milestone for the evolution of our business. This revenue segment reflects: number 1, the emerging demand for digital payments, financial services and enterprise solutions as China's economy grows rapidly number 2, the synergies between these services with our existing online businesses Number 3, the robust scale and operational expertise in these areas accumulated through substantial organic investments for years. And overall, this segment demonstrates our drive to expand our company capabilities as well as to broaden our revenue base. Now let's take a closer look at FinTech Services which constitute the majority of revenues within the segment. We have 2 revenue streams in this sub segment. Number 1, payments where merchants pay us transaction fees and consumers pay us cash withdrawal fees and credit card repayment charges. Number 2, other FinTech services such as wealth management, micro loan and insurance products where financial institution partners pay us fees and commissions for distributing the products to our user base. As for the business dynamics, social payment fees cover significant costs that we pay to banks when consumers move money from their bank accounts into our payment system. On the other hand, commercial payment generates reasonable gross margin, but bears marketing costs which may dial up or dial down depending on the competitive dynamics in the market. Micro loans and wealth management products are generally higher in margin. Overall, we operate our FinTech businesses in a highly regulated environment. Under Business Services, we have 2 revenue streams, 1, cloud, where enterprise customers pay for IaaS and SaaS products as well as our tailored technology solutions. Secondly, smart industry offerings where our partners pay service fees for our industry specific solutions to assist enterprises in their industry embarking on digital transformation. In terms of business dynamics, cloud business where IaaS and PaaS products make the majority of our offerings have low margins and is capital intensive. SaaS and technology solutions which are currently subscale in China is expected to generate healthy margins over the longer run. Smart Industry Solutions are at nascent stage but carry attractive business potentials in the future. Now moving on to discussing milestones and outlooks for the 2 different sub segments. For FinTech Services, we launched Tenpay in 2005, built the technology rails for our payment service on PC and later extended into mobile. In 2013, Weixin expedited mobile transition with the launch of Weixin Pay. User adoption quickly expanded, especially during the Chinese New Year in 2014 when we used the red envelope gifting function to unleash the power of social payment and later to shape consumer habit of using Weixin Pay in commercial transactions. We increased our user stickiness by creating more and more use cases over the years. In 2016, we kicked off our merchant adoption campaign to deepen offline penetration. We signed up flagship partners in key verticals such as retail and restaurants. In addition, we proliferate our coverage of long tail merchants through channel partners as well as leveraging our investees' merchant network. For mom and pop store merchants, we provided innovative and easy to deploy turnkey solutions such as QR codes and mini programs to enable online and offline convergence. These initiatives allowed us to provide point of sale solutions to tens of millions of merchants nationwide. Executing these initiatives enables payment related revenue we generated today as well as supports the efficient distribution of financial services such as personal wealth products and micro loan products online. With a strong focus on risk management, we have grown our FinTech business at measured pace. FinTech business also allowed us to build enterprise relationships and industry expertise that are complementary to our emerging Business Services subsegment. For our Business Services, our cloud infrastructure was already Our cloud infrastructure was already at substantial scale for meeting our internal cloud requirement before we began serving external customers. Built upon our established strength, the Internet sector such as games and video, we expanded our external cloud business integrating our technological capabilities in areas such as security, AI, big data analytics and LBS. Through cloud based solutions, our customers can apply advanced technologies to their businesses, facilitating their digital upgrade. We differentiate ourselves in this business not only with advanced technology, but also by providing customers with options to connect to our vast and active user base on Weixin, QQ, official accounts, mini programs, payments and reach at work, etcetera. We work with our channel partners and ISVs to develop tailored offerings, including over 200 IS, PaaS and SaaS products and more than 90 industry specific solutions. Through data centers across 25 geographic regions worldwide, we're able to better serve our customers. In return, our scalable services allow us to pass along the benefits to customers through attractive rates or deals, maximizing value for their IT budget. Benefiting from the above initiatives and our full suite of business services, we made breakthroughs in smart industries such as finance, retail, municipal services, tourism and healthcare. As example, we've built showcases around tourism services in Yunnan Province and municipal services via digital Guangdong Initiative. To conclude this strategic review session, our decade long investment in FinTech and Business Services proved that our strategy of allocating capital to a range of organic investments can expand our capabilities, broaden our revenue base, as well as generate sustainable profitable growth for the future. Now with that, I will pass to James to talk about our business review. Thank you, Martin. For the Q1 of 2019, our revenue grew 16 percent year on year. VAS remained our largest revenue segment, representing 57% of our revenue, within which online games was 33% and social networks 24%. Online advertising represented 16% of our revenue and our new Fintech and Business Services segment contributed 25%, leaving the other segments at 2% of total revenue. Diving into value added services, segment revenue was RMB 49,000,000,000 in the 1st quarter, up 4% year on year and up 12% quarter on quarter. Social network revenue was up 13% year on year and up 5% quarter on quarter. Virtual gifts and live streaming services and video subscriptions contributed to the year on year and quarter on quarter growth rates and increased in game item sales also contributed to the sequential revenue growth. Our total VAS subscription counts increased 13% year on year to $165,000,000 due to the growth of online video and music services. Our video subscription accounts were $89,000,000 up 43% year on year, but stable quarter on quarter as the rescheduling of several top tier drama series impacted our rate of new subscriber additions. For online games, our total cash receipts were up 10% year on year, while our reported revenue dipped 1% year on year. The difference between the cash and reported revenue trends is a result of our deferral policy for virtual items sold within games. PC client games revenue was RMB 13,800,000,000, down 2% year on year and total smartphone games revenue was RMB 21,200,000,000 also down 2% year on year. We released 1 new mobile game in the quarter compared to 8 games in the Q1 of 2018. Sequentially, reported game revenue grew 18% quarter on quarter due to favorable seasonality plus content updates and key titles. PC client game revenue was up 24% year on Q and smartphone game revenue increased 11%. Moving on to our social networks initiatives. 1st, social video. Users are increasingly using Weixin and Mobile QQ's in app camera functions to record samples of their daily lives, which they share to friends and in their timelines. Each day, 100 of millions of videos are uploaded with active users of this function posting an average 4 social videos per day. 2nd, content video. Our original long form IPs are developing their own fan bases and activities within our social networks. For example, we recently released season 2 of Produce 101 for which we provided short and mini video highlight clips that our users share and vote on amplifying the user to content engagement. 3rd, mini programs were enabling users to share interesting information products and services for mini programs via Weixin Groups. For example, millions of users participated in community group buy activities, enabling merchant serving localities to effectively access their potential customers. We released our latest version of Mobile QQ in April with features for young users such as recommending new friends based on similar interests and we enabled mini programs and mini games within QQ. The smartphone games, our user base continues to grow in key genres. Honor of Kings released a substantial content update in January, which increased its active users and monetization. We introduced additional seasonal skins for limited time sales. For example, the seasonal white tiger skin was among the game's top 5 grossing products to date. Our new 3 d massively multiplayer online role playing game, Perfect World Mobile, generated an enthusiastic response from players, increasing our DAU within the role playing game genre. The game has achieved healthy cash receipts, but because we launched it late in Q1 and because of our deferral policy, the game only contributed marginally to Q1 reported revenue. Outside China, PUBG MOBILE exhibited strong usage trends exceeding 100,000,000 monthly active users in February. We introduced a new Royale Pass in PUBG MOBILE in March to celebrate its 1st anniversary, contributing to higher monetization. Looking forward, we're pursuing multiple initiatives to revitalize growth. 1st, we're resuming a more normal pace of new game launches in coming quarters. For example, we launched Peacekeeper Elite to our tactical tournament user base last week. 2nd, we're introducing season passes in several key games in China to stimulate user engagement and retention with opportunities to increment the increased monetization of pay rates too. And third, following the success of PUBG MOBILE in international markets, we'll seek to identify other China developed games suitable for international publishing over the medium term. In PC client games, core users activity levels and monetization improved quarter on quarter, benefiting from favorable seasonality and content updates. For League of Legends user engagement grew as we released several skin items which proved very popular driving cash receipts to rebound both year on year and quarter on quarter. In Dungeon and Fighter, we raised the game level cap to 95 in the January content update, enhancing user engagement. And Chinese New Year promotional packages contributed to sequential growth for DNF's paying users and ARPU. Shifting to online advertising, segment revenue of RMB13.4 billion increased 25% year on year, which we view as a reasonable growth rate given an expanded revenue base and challenging macro environment. Revenue declined 21% sequentially, hurt by seasonality and by rescheduling of top tier drama series out of the quarter. Media advertising revenue was RMB3.5 billion, up 5% year on year and down 33% quarter on quarter. In feed ads grew substantially year on year and quarter on quarter. However, we did not air certain top tier drama series that we intended to broadcast during the Q1, reducing our video pre rolled ad inventory and negatively impacting our overall media advertising revenue. Social and other advertising revenue was RMB9.9 billion, up 34% year on year and down 16% quarter on quarter. Higher ad bill rates and increased ad loads across our inventories including Weixin Moments, Mini Programs and QQ Kandyan contributed to the year on year revenue growth. Bidding intensity generally reduced in the Q1 versus the e commerce high season of the 4th quarter, pushing down our average cost per clicks quarter on quarter. We continue to grow our advertising business at a measured pace, reflecting our commitment to optimizing long term advertiser returns rather than maximizing short term revenue growth. Looking at our new revenue segment, FinTech and Business Services, for the first quarter, segment revenue was RMB21.8 billion, up 44% year on year due to robust growth in commercial payment, other fintech services such as WeiliTai and cloud services. Sequentially, segment revenue was stable as healthy growth in commercial payments and cloud services offset the absence of interest income from custodian cash accounts since January 14th of People's Bank of China guidelines. Within FinTech Services, commercial payment volume increased sharply year on year, driven by more transactions per user. Per user transactions in turn benefited from the number of monthly active merchants accepting our payment service more than doubling year on year. Within business services, Tencent Cloud sustained a rapid year on year revenue growth rate. Our enhanced and broader IAS and PaaS offerings contributed to growth in new customers and in spending per existing customer. And with that, I'll pass to John to discuss the financial review. Hello, everyone. For the Q1 of 2019 total revenue was RMB85.5 billion up 16% year on year or 1% quarter on quarter. Gross profit was RMB39.8 billion up 7% year on year or 13% quarter on quarter. We have net other gains of RMB11.1 billion in contrast to net other losses of RMB2.1 billion last quarter. The change mainly due to increases in net fair value gains and deemed disposal gains relating to our investee companies which are both non GAAP adjustments. During the quarter we donated RMB 700,000,000 to Tencent Charity Fund. Operating profit was RMB 36.7 billion up 20% year on year or 113% quarter on quarter. Share of loss of associates and joint ventures was approximately RMB3 1,000,000,000 compared to share of profit of RMB16 1,000,000 last quarter. On a non GAAP basis, share of losses of associates and joint venture was RMB518 1,000,000 compared to share profits of RMB1.9 billion last quarter. Income tax expense was RMB4.8 billion down 16% year on year as a result of lower withholding tax as well as entitlements of preferential tax treatments and benefits. The sequential increase was due to recognition of preferential tax benefit for key software enterprise in last quarter which led to a lower base in the 4th quarter. The effective tax rate for the quarter was 14.7%. GAAP net profit attributable to shareholders was RMB 27,200,000,000 up 17% year on year or 91% quarter on quarter. GAAP diluted EPS was RMB2.844 up 17% year on year and 91% quarter on quarter. Let me walk you through our non GAAP financial numbers. Operating profit was RMB28,500,000,000 up 13% year on year or 27% quarter on quarter. Operating margin was 33.3%, down 1.1 percentage points year on year or up 6 point 9 percentage points quarter on quarter. Net profit attributable to shareholders was RMB20.9 billion up 14% year on year or 6% quarter on quarter. Non GAAP diluted EPS was RMB2.187 up 14 percent year on year or 6% quarter on quarter. Net margin was 25.4% down 0.6 percentage point year on year or up 1.6 percentage points quarter on quarter. Turning to segment gross margin, Gross margin for value added services was 57.6 percent down 5.37 percentage points year on year or up 4.2 percentage points quarter on quarter. The year on year decrease primarily reflected a, revenue mix shift to lower margin digital content services and b, higher content costs as we renew and sign up more authorized music content during the year. Sequentially revenue growth from our in house games and lower video content costs due to reshuttering of top tier dramas contributed to margin improvement. Gross margin for online advertising was 41.9%, up 10 point 7 percentage points year on year or 5.3 percentage points quarter on quarter. The year on year and quarter on quarter changes primarily reflected relatively lower video content costs as discussed earlier as well as revenue mix shift to higher margin social and other advertising. Gross margin for FinTech and Business Services was 28.5 percent up 2.4 percentage points year on year and 4 percentage points quarter on quarter. Margins improved due to a) growth of high margin services such as commercial payments and B, reduced subsidies to mom and pop store merchants and small merchants in certain verticals despite the loss of interest income as a result of Puxing custodian money mentioned earlier. As we move revenues relating to FinTech and Business Services to the new segment, other segment will now comprise the financial results of investment in, production of and distribution of SIMS and television programs for third parties, copyright licensing, merchandise sales and various other activities. These initiatives generally carry a rather low and choppy margin, but a small value base will have an insignificant impact on our branded gross margin. On operating expenses, selling and marketing expenses were RMB4.2 billion down 24% year on year or 26% quarter on quarter. The reduced expenses year on year was due to fewer games released and our cost management initiatives. Selling and marketing represented 5% of quarterly revenue compared to 6.7% last quarter. G and A expenses were RMB11.3 billion up 20% year on year or broadly stable quarter on quarter. The year on year increase reflected higher R and D expenses and staff costs. Under G and A, R and D expenses were RMB6.5 billion, up 30% year on year or 9% quarter on quarter as we increased investments in people, platforms and technologies to support business expansion. As a percentage of revenue, G and A was 13.3% and R and D was 67.6% compared to G and A at 13.4% and R and D at 7% last quarter. At quarter end we had approximately 54,600 permanent employees up 18%, 16.6% year on year and 40 stable quarter on quarter. Let's go to margin ratios. Gross margin was 46.6%, down 3.8 percentage points year on year or up 5.2 percentage points quarter on quarter. The year on year decrease reflected fast margin contraction and revenue mix shift to Fintech and Business Services which carry a lower margin. Sequentially, segment gross margin ratios improved and through the blended gross margin. Non GAAP operating margin was 33.3% down 1.1 percentage point year on year or up 6.9 percentage points quarter on quarter. Non GAAP margin was 25.4% down 0.6 percentage points year on year or up 1.6 percentage points quarter on quarter. Before I close my remarks, I will share several key financial metrics for the Q1. Total CapEx was RMB4.5 billion down 29% year on year or 1% quarter on quarter of which operating CapEx was broadly stable at RMB3.9 billion and non operating CapEx dropped 74% year on year to RMB636 1,000,000. Free cash flow was RMB23.9 billion up 72% year on year or down 20% quarter on quarter. In line with historical trend, lower operating cash flow due to payments of year end bonuses reduced free cash flow sequentially. Benefiting from healthy operating cash flow and controlled investment activities we further reduced our net debt position by 21% quarter on quarter to RMB9.6 billion. The fair value of our shareholdings as enlisted investing companies excluding subsidiaries was approximately RMB310.7 billion or US46.1 billion dollars compared to US238 billion dollars or US34.7 billion dollars at the end of 2018. Thank you. We'll now open the phone for questions. Operator, we will take one question from each broker. Our first question comes from the line of Natalie Wu from CICC. Please ask your question. Hi. Thanks for taking my question. I have a question regarding the advertising business. Just wondering, apart from the macro and the seasonality issue you mentioned above, did you see any competition issue coming from other parties? And how should we see this sector growth in the rest of this year given that you just lifted your ads inventory in several key products like Moments, like Kandi. Should we expect some re acceleration later this year for advertising advertising business revenue? Thank you. Thank you for the question, Natalie. So in terms of the factors affecting advertising as well as the macro environment, we also pointed to the impact of several top tier drama series that we expect to broadcast in the Q1 and were not broadcast in the Q1, which had a negative impact on our media advertising revenues since those drama series can carry substantial advertising loads. You also asked about the competitive landscape and clearly it is a competitive market. We think we have a very differentiated proposition, but within our overall advertising revenue mix, there are some products which have more direct competition and some products have less direct competition. And then in terms of the growth rate looking forward, there's a number of puts and takes. The macro environment would be whatever it will be. We are adding advertising inventories over time at a steady pace. But as we mentioned in the introductory remarks, our focus is really on optimizing the long term returns for our advertisers as well as sustaining a very healthy user experience rather than on maximizing the short term advertising revenue results. Thank you. Our next question comes from the line of Grace Chen from Morgan Stanley. Please ask your question. Thank you for taking my question. My question is about and also thank you for the additional disclosure of the FinTech and Business Service breakdown. My question is about the margin for the segment. We're seeing sequential margin improvements even though there's negative impact on the absence of interest income generated from custodian cash balances. With enhanced monetization of FinTech, should we expect margin will continue to increase in the following quarters? Thank you. In terms of the FinTech and Business Services margin, we can see that there's quite a lot of improvement during the period despite the fact that we have ended our custodian money to be BOC and there will be a loss of interest due to a few reasons. Number 1 is in terms of the face to face receipts payment platforms, we have been beforehand we have been giving out subsidies or exemptions on cash withdrawal fees to those mom and pops merchants, but now we have adjusted the program a little bit by offering loyalty programs at points rather than free withdrawal quarters. As a result the margins improved by quite a bit. Number 2 is in terms of some sort of verticals which we have given out exemptions on rates or concession rates, take rates. We have resumed the normal take rate for those verticals such as small restaurants and things like that. And also I think in terms of the Linktiantong beforehand we haven't grown up this wallet alternative, but now it has piled up a little bit and the interest generated from this account. All in all, there will be a there has been improved in gross margin in this period. Having said that, the margin you're looking at is just the gross margin and not necessarily mean that there's operating margin. From time to time we'll look at the competitive landscape and we'll die up or down promotion causes and subsidies when appropriate. Thank you. And the next question please. Thank you. Our next question comes from the line of Wendy Huang from Macquarie. Please ask your question. Thank you, management. I just want to get more color on the cloud near term progress as well as the long term outlook. So, since you did the restructure last year, which particular industry for example, you have mentioned the healthcare cloud, the retail cloud, etcetera, which particular industry has made clear progress since then? And also, can you provide more disclosure on the cloud revenue standalone growth as well as the profitability? Thank you. In terms of the cloud business I think it's actually progressing quite nicely And as we have talked about in our prepared remarks, number 1, we have made breakthroughs in a number of different segments. In particular, I would say it's around smart retail and the financial sector as well as municipal services. So I think that those are clear examples. In smart retail we are able to really combine the strength of our cloud infrastructure and our ecosystem which include our advertising and our mini programs, our payments as well as our official accounts. And we also added in our technology in particular the analytics and AI and we are providing very strong solutions to retailers. For example, retailers can actually easily digitize their customers when their customers go to their physical stores by scanning a QR code they can pay for the services and then access the mini programs and become a digital member. And as a result of that we have built strong relationship with these retailers and subsequently help them to digitize their operations and help them to move their operations into cloud and help them to engage in efficiency improvement through data analytics. We also called out examples such as our project with the Yunnan Province in which we help them to embark on digitization of their tourism industry and also in digital Guangdong in which we help the municipal services to be digitized and be cloud based so that they can be serving the citizens of Guangdong in a big way. So these are clear examples. Now in terms of the actual number, we don't have separate disclosure on the sub segment, but I would say the growth trends have been pretty consistent. Now in different quarters sometimes there are lumpy revenue here and there. So the year on year growth rate may go up and down a little bit, but I think the growth trend has been pretty consistent for our cloud business. In terms of margin, it is still losing money on operating basis. So that's what we can tell for now. Thanks. Thank you. And next question please. Our next question comes from the line of John Choi from Daiwa. Please ask your question. I was wondering if I could quickly get some update about the recent launch of your new game, PCK Elite. How is that trending? And what kind of monetization that management is expecting? And we've also noticed that Tencent has launched quite a bit of season passes in China. And how is that progressing as well? And just a housekeeping question on the content cost on video content. In your release, it says it's relatively controlled this quarter. Should we be expecting that this is going to be a new trend or this is more of a quarterly issue? Thank you. Yes, in terms of Peacekeeper Elite for a new game, it's actually a very successful launch. And part of the reason is because we have provided pretty individualized incentive package for users, which have been playing exciting battleground. So I think that's quite successful and we have been able to monetize the game and there was initial spending that people who came into the game and then spend and over time it becomes sort of more normalized. Now I would say at the current time we are much more focused on making sure that we retain customers. Number 1, we want to attract the gamers and number 2, we want to retain the gamers and then over time we would work more on the monetization side. So at this point in time, it is still much more focused on the user experience. The retention I would say as we observed in the past week has been pretty good. But on the financial side, I also have to note that because we have a deferral policy, so even when we are generating gross revenue, for the revenue to actually come into our P and L, it would take some time. Now, in terms of the battle pass, James would actually talk about it. Yes. So as you may know, the season passes have proven very impactful for certain games such as Fortnite in the rest of the world in the past year. And now we are starting to launch the season pass concept in China for a number of key games such as Honor of Kings and QQ Speed. And in terms of the impact of season pass, 1st engagement, what we generally see is that the players who buy the season pass engage with the game more because there are more activities for them to complete in order to unlock the rewards that they've paid for through the season pass. Secondly, PANG ratio, typically introduction of season passes boosts PANG ratio because there are some users who didn't want to pay purely for the in game items, but are willing to pay for the season pass and the associated activities. And then 3rd, if we look at cannibalization impacts, then when we introduce season pass in these games, we study what's the impact on spending prior to the season pass and post the season pass and whether the season pass is bringing revenue forward that we would otherwise generated later anyway. And depending on the game, what we see is that the cannibalization impact is either relatively small or it's 0. So net net, the season passes can be quite accretive to revenue if they're targeted correctly and have the right content in the activities inside them. So that's on the season pass. And then for your question around the video content costs, there's a number of forces at work. 1 force is that I believe the biggest participants in the online video, the streaming video industry have generally become more cost conscious in the last 6 to 9 months. The second is that a number of us, including Tencent, have shifted some of our spend from licensed content to self developed content where we're in more control of our destiny. But then the 3rd, which is very important for the current period is that because there's some content that the industry intended to put on air in the first quarter and couldn't put on air, therefore, while the cash costs have already been borne, the reported expenses have not yet been expensed and will be expensed as and when that content is ultimately put on air. So some part of the reduction in video content costs that you're seeing is due to that timing impact rather than due to a real change in underlying fundamentals. Thank you. And the next question please. Sure. Our next question comes from the line of Alicia Yap from Citigroup. Please ask your question. Hi. Thank you. Good evening, management. Thanks for taking my questions. I have a question related to this industrial Internet initiative. What could be the biggest hurdle that prevent you from executing the initiative smoothly? Would that be the corporate budget constraint now that we have more intense trade war and potential weaker Chinese economy? Or would that be the talent and the readiness of the corporate, whether the enterprise are able to get enough software or IT talent to help them upgrade the process? And then with monetization beside all these payment cloud service and also the mini program apps that we can charge, would that be incremental solutions revenues that Tencent expect to capture down the road? And then just one housekeeping question for Peace Elite, the deferred revenue schedule, would that be a 3 months, 6 months, 9 months or 12 months? Thank you. Yes, that's actually a pretty good question. And I think the key challenge to industrial internet is actually the creation of the solutions that can actually help the companies in different industries to embark on this digital transformation. I think if you look at the willingness, right, more and more companies realize that at the end of the day, all their consumers are actually on the Internet, they are connected to the mobile Internet. So they need to be there. They also recognize that there is a lot of technology solutions out there, which eventually can actually help them to improve their operations and make them more efficient in their operations and help them to serve their their customers on the overall mobile Internet better. Now the problem is really how to make that transformation and it feels like if we create a big team of people and help a company, we can actually create very compelling solutions. So in the case of, for example, when we dedicate a team of people to help the Yunnan Province and the Guangdong Province, then it actually helps them to really upgrade their technology infrastructure and help them to really provide the solutions to serve the citizens. But and then in other companies, when we dedicate resources to do it then there's a lot that we can do. But the problem is that it's actually not that scalable, right. Every single company would need a team of tens or even hundreds of IT people to create custom made solution. So what we have been trying to do is really to provide these kind of development capabilities as well as solutions at scale and that would involve us creating showcases and trying to generalize these showcases into more applicable solutions throughout the entire industry. That would also involve us working with a lot of third parties such as ISVs and system integrators and help them to embark on create this capability so that they can actually create digital transformation solutions for the different industries and businesses. So if you look at China, it's actually a market which has less penetration of technology solutions, SaaS solutions. So that's sort of a manifestation of this problem. And I think it would take some time before we create these solutions and create these awareness and capabilities in the ecosystem. But we felt that if that's done, if we look at longer term when these solutions and resources available, companies can really benefit from these digital transformation. The value propositions are obviously there. So we felt that over the long run these challenges will be overcome. In relation to the PC game deferral period, for the major PC games it normally ranges from 6 to 9 months whereas for games just like League of Legends, it might be up to close to 1.5 years. Thank you. And the next question please. Sure. Our next question comes from the line of Gregory Zhao from Barclays. Please ask the question. Hi, management. Thanks for taking my question. So my question is also about your FinTech business. So assuming your cloud business is breakeven or maybe some little loss making, can we see the gross margin of your FinTech business is that could be currently is above 30%. And also can you help us understand the margin profile of each of the FinTech segment like payment, like wealth management and the financial businesses. So what are your current take rate, the annualized take rate and as a margin profile? And also if we look at the payment business alone, right, although we know the take rate is much lower than your U. S. Peers, but given the business skills, how shall we think about the margin profile of your payment business? Thank you. Well, as we have disclosed, right, the FinTech business is actually much bigger than the business services, right. So, I think that would be the way if you try to sort of allocate the margin, which we don't disclose right now that is one factor that you need to consider. Now in terms of the FinTech businesses right now, you can see we disclosed that there are a number of different revenue streams. There is a revenue stream, which is social payment in the sense that we charge users when they withdraw fees, withdraw money into their bank accounts. We also charge the users when they use our payment platform to pay for credit card charges, which is essentially a pay with Global as well. But that's actually really an offset against a very high banking charge that we pay to banks when consumers transfer money from their bank card into our payment system. So that's firstly. Secondly, it's actually the commercial payments which we said generates modest margin And as John talked about, the margin that we generate on that is actually somewhat dependent on competitive pressure. Sometimes we actually have to subsidize the charges that we charge on merchants if we want to expand our footprint. And finally, it's the financial FinTech services charge that we charge on different products when we distribute these wealth management products or micro loans or insurance products to our user base. And on that we charge net fee so the margin is actually quite good. So I think that's sort of the margin profile of this business. Now in terms of the tick rate that we have visavisglobal peers, I think you're absolutely right in the observation that's actually much lower than global peers. But at the same time, even if you look at credit card charges in China, it's actually much lower than credit card charges around the world as well. I think it's really because of the fact that the Chinese economy was actually built the payment infrastructure was actually built at a later time and as a result, it's somewhat reflective of a lower cost. If you think about the credit card charges that would determine it was actually a long time ago in which you pay a much higher IT cost, you may pay much higher communication cost. But today, the efficiency of the entire system is actually higher. So to some extent, I felt that the Chinese credit card charge is actually a good benchmark of what the cost it is today. And what we are trying to provide is actually a competitive solution that allowed the extension of payment solution and penetration of the solution into a wider penetration into China. So that's why it's somewhat even lower than the credit card charge, which I think is actually quite reasonable. Thank you very much. And the next question please. Thank you. Our next question comes from the line of Karen Chan from Jefferies. Please ask your question. Thank you for taking my questions. So just a follow-up question on your new mobile game piece, Keeper Elite. How does the margin of that compare to our other self developed titles? And also, is it fair to say that the payment competitive landscape in China is sort of easing off in a way that we can potentially scale back in merchant or user subsidy? Thank you very much. I think that the margin on Peacekeeper Elite has many factors flowing into it and let's see how the game monetization behaves and then we'll have a fair view on the margin. In terms of the payment side, I think in the Q1, it has moderated a bit, right? But I think if you look at the historical trend, it's actually quite fluctuating from quarter to quarter, right. It really depends on the promotion activities of the different players in the market. So I would not say this is a trend that the subsidy is actually moving towards a lower end. I think it's a historical phenomenon in the Q1. Thank you. We will take the last three questions from the floor. Our next question comes from the line of Tammy Wang from HSBC. Please ask the question. Hi, thank you management for taking my question. This is Ginnie here. My question is basically on the online advertising and overall in terms of on a macro level, we see the trade war tension has been heating up and there are some macro uncertainties. How does that change our growth outlook and especially coming to advertising, which is relatively more sensitive to macro here? The reason we ask is that we observe some of your competitor have been seeing some challenges. And then I guess on to industry level, it seems that competition will be intense as there's always concern about an oversupply of advertising inventory. How does that impact our pricing and also the timing of potentially launching our 3rd at low in Moments? Thank you. So thank you for the question, Binny. So in terms of the macro impact on our advertising business, then there clearly is some flow through from both the weak economy and also the volatile stock market to advertising activity. And that's particularly evident in sectors such as automobile, real estate, and then Internet service as both the big established but not yet profitable O2O companies and also some of the Internet startups have curtailed their spending. On the other hand, there are some other sectors such as consumer products, games, education, which are relatively robust. But in aggregate, it is a mixed picture because of the macro impact. From a competitive perspective, we feel that our advertising pricing is generally quite competitive already. That's not true all across the board. But in general, we think that we have a very keen pricing and where we don't then we'll optimize by improving our technology driving up particularly rates and delivering a better return to advertisers. So we really add inventory based on when we believe that our platforms and technologies are ready to ingest more inventory and to serve the right appropriate advertising into the incremental inventory rather than based on the macro environment. So the inventory deployment plan is more of our internal development rather than the external macro situation. Okay. Thank you so much. Thank you. And the next question please. The next question comes from the line of Ity Leung from Bank of America. Please ask your question. Good evening. Just a follow-up question on industrial Internet. How should we think about investment for these business initiatives in the sense that how much are we thinking about tangible investment in the form of capital expenditures, sales and marketing? And how much is more like kind of like diverting the internal resources to focus on certain projects? And if it's more about the tangible part, could you give us some color whether we would be seeing, for example, the CapEx or headcount growing more significantly in this year? Thank you. So Eddie, it is true that we have to make investments in pretty much the areas that you talked about right now. Firstly, it is the capital expenditure. I mean we have to invest in servers particularly ahead of the demand so that we can actually serve our customers and that would be in the form of fixed investment. And in addition, we need to add our headcount and that would be in the form of both sales and marketing as well as the delivery of the services. We need to add tech people so that we can build the products and solutions for our customers. And as I alluded to in the earlier answer on industrial internet, one of the key challenges is actually making sure that there are solutions available for the companies who are eagerly hoping to upgrade themselves digitally. And as a result, we actually have to dedicate a pretty large team of development people just to provide the showcases. And at the same time, I would say that would to some extent diver some resources, but the resources are actually quite different people, right. If you think about product managers who and then engineers and developers who are actually developing solutions that can serve 100 of millions of people in our Internet platform versus creating more enterprise like solutions to customers. It's actually somewhat different. And we also leverage quite a bit of our internal technology team, right. When somebody in our overall Internet platform create, let's say, machine learning algorithm, we can actually provide it as a solution to our enterprise customers. So to some extent, there are some synergies that we can actually leverage. And I would say from an operating perspective, this business is still in investment mode. So in addition to the capital expenditure, we also generated some operating losses. So that's another area of investment. And finally, I would say around industrial internet, we are also seeing investment opportunities right now. So there are companies which are developing interesting solutions, there are partners who can actually help us to build our business faster and there are ecosystem partners in which they can actually develop a specific solution for industry that has strategic synergies with us and these are companies which we will invest in. So I think investments actually come in to play in these areas. Understood. Thank you. Thank you. And we will have the last question. Sure. Our last question comes from the line of Han Joon King from Deutsche Bank. Please ask your question. Great. Thank you for the chance to ask a question. We disclosed that our PUBG global MAU is around $100,000,000 So I just wanted to get a perspective on how you guys are thinking about the globalization of your business, kind of revenue generation. Is it contributing to your mobile game revenues now and how do you think about scaling this? Thank you. So if you look at our game revenue then non China contributes a high single digit percentage of global game revenue. Looking forward, as we mentioned in the prepared remarks, we believe that there's a convergence underway between the China game market and the rest of the world, Western game markets. That's convergence in terms of the platforms on which people are playing games, meaning PC console mobile. It's convergence in terms of the game business model, meaning that the shift to the free to play games. And it's also a convergence in terms of the genres of games that people like, meaning that, for example, 1st person shooter games, which historically were less popular in China, have now become more popular in China. So given those convergence trends, we are more closely reviewing future games to assess whether they're suitable for global publishing as opposed to just China publishing. And importantly, we've built up a degree of global publishing infrastructure for PUBG Mobile, and we now have people in different geographies who are accustomed to doing in game operations, communicating with the app stores, communicating with users, enhancing and localizing content for the different geography needs. And so over the medium to long term, then we hope to drive more value out of that infrastructure by publishing in a more appropriate games through that infrastructure globally. Thank you, operator. 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 at www.tanfen.com. The replay of this webcast will also be available soon. Thank you, and see you next quarter. Thank you. Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.