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 a presentation followed by a question and answer session. At which time, if you wish to ask a question, please press star followed by one on your telephone keypad. I must advise you that this conference is being recorded today. I'll now hand the conference with your host today, Ms. Jane Yip. Thank you. Please go ahead.
Thank you. Good evening. Welcome to our 2019 first quarter 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. Second, Martin Lau will discuss strategic review. Chief Strategy Officer James Mitchell will speak to business review. Chief Financial Officer John Lo will conclude with financial review before we open the floor for questions. I will now turn the call over to Pony.
Thank you, 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 first quarter 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. Also results for the quarter, total revenue was CNY 85.5 billion, up 16% year-on-year and broadly stable quarter-on-quarter. Gross profit was CNY 39.8 billion, up 7% year-on-year and 13% quarter-on-quarter. Non-GAAP operating profit was CNY 28.5 billion, up 13% year-on-year and 27% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was CNY 20.9 billion, up 14% year-on-year and 6% quarter-on-quarter. 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 1.1 billion. Smart devices MAU of QQ increased slightly year-on-year to over 700 million, within which young users became more engaged and grew double digits year-on-year. Qzone smart devices MAU was 572 million, up 4% year-on-year. In online games, we expand total user base for our overall portfolio. Daily active user 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. 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 one, the emerging demand for digital payments, financial services, and enterprise solutions as China's economy grows rapidly. Number two, the synergies between these services with our existing online businesses. Number three, the robust scale and operational expertise in these areas accumulated through substantial organic investment for years. 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 two revenue streams in this sub-segment. Number one, payments, where merchants pay us transaction fees and consumers pay us cash withdrawal fees and credit card repayment charges. Number two, other FinTech services such as wealth management, microloan, and insurance products, where financial institution partners pay us fees and commissions for distributing their 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. Microloans 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 two revenue streams.
One, cloud, where enterprise customers pay for IaaS, PaaS, 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. Moving on to discussing milestones and outlooks for the two 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 proliferated 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 sub-segment. Now for our business services, our cloud infrastructure was already at substantial scale for meeting our internal cloud requirement before we began serving external customers. Build 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, payment, and WeChat Work, et cetera. We work with our channel partners and ISVs to develop tailored offerings, including over 200 IaaS, 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 have 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 prove 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. With that, I will pass to James to talk about our business review.
Thank you, Martin. For the first quarter of 2019, our revenue grew 16% 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% total revenue. Diving into value-added services, segment revenue was CNY 49 billion in the first 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 in 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 million due to the growth of online video and music services.
Our video subscription counts were 89 million, 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 CNY 13.8 billion, down 2% year-on-year, and total smartphone games revenue was CNY 21.2 billion, also down 2% year-on-year. We released one new mobile game in the quarter compared to eight games in the first quarter 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% Q-on-Q, and smartphone game revenue increased 11%. Moving on to our social networks initiatives.
First, social video. Users are increasingly using WeChat 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, hundreds of millions of videos are uploaded, with active users of this function posting an average of four social videos per day. Second, 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 two 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. Third, Mini Programs. We're enabling users to share interesting or practical information, products, and services from Mini Programs via WeChat groups. For example, millions of users participated in community group buy activities, enabling merchants 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. For 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 five grossing products to date. Our new 3D 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 the first quarter and because of our deferral policy, the game only contributed marginally to first quarter reported revenue.
Outside China, PUBG Mobile exhibited strong usage trends, exceeding 100 million monthly active users in February. We introduced a new Royale Pass in PUBG Mobile in March to celebrate its first anniversary, contributing to higher monetization. Looking forward, we're pursuing multiple initiatives to revitalize growth. First, 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. Second, we're introducing season passes in several key games in China to stimulate user engagement and retention with opportunities to incrementally increase monetization and pay rates too. 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 Fighter, we raised the game level caps in 95 in the January content update, enhancing user engagement, and the Chinese New Year promotional packages contributed to sequential growth for DNF's paying users and ARPU. Shifting to online advertising, segment revenue of CNY 13.4 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 CNY 3.5 billion, up 5% year-on-year and down 33% quarter-on-quarter. In-feed ads grew substantially year-on-year and quarter-on-quarter.
We did not air certain top-tier drama series that we intended to broadcast during the first quarter, reducing our video pre-roll ad inventory and negatively impacting our overall media advertising revenue. Social and other advertising revenue was CNY 9.9 billion, up 34% year-on-year and down 16% quarter-on-quarter. Higher ad fill rates and increased ad loads across our inventories, including Weixin Moments, Weixin Mini Programs, and QQ Kandian, contributed to the year-on-year revenue growth. Bidding intensity generally reduced in the first quarter versus the e-commerce high season of the fourth 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 CNY 21.8 billion, up 44% year-on-year due to robust growth in commercial payment, other FinTech services such as WeiLiDai, 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, by 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 IaaS and PaaS offerings contributed to growth in new customers and in spending per existing customer. With that, I'll pass to John to discuss the financial review.
Hello, everyone. For the first quarter of 2019, total revenue was CNY 85.5 billion, up 16% year-on-year or 1% quarter-on-quarter. Gross profit was CNY 39.8 billion, up 7% year-on-year or 13% quarter-on-quarter. We have net other gains of CNY 11.1 billion in contrast to net other losses of CNY 2.1 billion last quarter. The change mainly due to increases in net fair value gains and dim disposal gain relating to our invested companies, which are both non-GAAP adjustments. During the quarter, we donated CNY 700 million to Tencent Charity Foundation. Operating profit was CNY 36.7 billion, up 20% year-on-year or 113% quarter-on-quarter. Share of loss of associates and joint ventures was approximately CNY 3 billion compared to share of profit of CNY 16 million last quarter.
On a non-GAAP basis, share of losses of associate and joint venture was CNY 518 million compared to share profits of CNY 1.9 billion last quarter. Income tax expense was CNY 4.8 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 fourth quarter. Effective tax rate for the quarter was 14.7%. GAAP net profit attributable to shareholders was CNY 27.2 billion, up 17% year-on-year or 91% quarter-on-quarter. GAAP diluted EPS was CNY 2.844, up 17% year-on-year and 91% quarter-on-quarter. Let me walk you through the non-GAAP financial numbers. Operating profit was CNY 28.5 billion, 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 6.9 percentage points quarter-on-quarter. Net profit attributable to shareholders was CNY 20.9 billion, up 14% year-on-year or 6% quarter-on-quarter. Non-GAAP diluted EPS was CNY 2.187, up 14% 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%, down 5.7 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 gains and lower video content costs due to rescheduling of top-tier dramas contributed to margin improvement.
Gross margin for online advertising was 41.9%, up 10.7 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%, up 2.4 percentage points year-on-year and 4 percentage points quarter-on-quarter.
Margin 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 pulling 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 films 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 its small revenue base will have an insignificant impact on our branded gross margin. On operating expenses, selling and marketing expenses were CNY 4.2 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&A expenses were CNY 11.3 billion, up 20% year-on-year or broadly stable quarter-on-quarter. The year-on-year increase reflected higher R&D expenses and staff costs under G&A. R&D expenses were CNY 6.5 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&A was 13.3% and R&D was 7.6%, compared to G&A at 13.4% and R&D at 7% last quarter. At quarter end, we had approximately 54,600 permanent employees, up 18.6% year-on-year and broadly 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 your 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 net 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 first quarter. Total CapEx was CNY 4.5 billion, down 29% year-on-year or 1% quarter-on-quarter. Of which operating CapEx was broadly stable at CNY 3.9 billion and non-operating CapEx dropped 74% year-on-year to CNY 636 million. Free cash flow was CNY 23.9 billion, up 72% year-on-year or down 20% quarter-on-quarter. In line with historical trends, 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 CNY 9.6 billion. The fair value of our shareholdings in unlisted investee companies, excluding subsidiaries, was approximately CNY 310.7 billion or $46.1 billion, compared to CNY 238 billion or $34.7 billion at the end of 2018. Thank you. We'll now open the floor for questions.
Operator, we will take one question from each broker or participant. Should we invite the first question now?
Yes. Our first question comes in 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 seasonality issue you mentioned above, did you see any competition issue coming from other parties? How should we see the sector growth in the rest of this year, given that you just lifted your ads inventory in several key products like Moments, like Kandian? Should we expect some re-acceleration later this year for advertising business revenue? Thank you.
Thank you for the question, Natalie. 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 expected to broadcast in the first quarter and were not broadcast in the first quarter, which had a negative impact on our media advertising revenue since those drama series can carry substantial advertising loads. You also asked about the competitive landscape, clearly it is a competitive market. We think we have a very differentiated proposition. Within our overall advertising revenue mix, there are some products which have more direct competition and some products have less direct competition. In terms of the growth rate looking forward, there's a number of puts and takes. The macro environment will be whatever it will be. We are adding advertising inventories over time at a steady pace.
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. Grace Chen, your line is now open.
Thank you for taking my question. Also thank you for the additional disclosure of the FinTech and Business Services 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 PBOC and there will be a loss of interest due to a few reasons. Number 1 is in terms of the face-to-face retail payment platforms. Beforehand, we have been giving out subsidies or exemptions on cash withdrawal fees to those mom-and-pops merchants. Now we have adjusted the program a little bit by offering loyalty programs, points rather than free withdrawal quotas. 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.
Also, I think in terms of the LingQianTong, beforehand we haven't grew up this wallet alternative, now it has powered up a little bit and there are interests generated from this account. All in all, there has been improvement 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 it's operating margin. From time to time, we'll look at the competitive landscape and we'll dial up or down promotion costs and subsidies when appropriate.
Thank you. The next question, please.
Thank you. Our next question comes from 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. Since you did the restructure last year, which particular industry, for example, you had mentioned the healthcare cloud and retail cloud, et cetera, which particular industry have made clear progress since then? 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. As we have talked about in our prepared remarks, number one, 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. I think 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 payment, as well as our official accounts. We also added in our technology, in particular the analytics and AI, and we are providing very strong solution 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. 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 onto 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 the digitization of their tourism industry, 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. These are clear examples.
In terms of the actual number, we don't have a separate disclosure on the sub-segment, I would say the growth trends have been pretty consistent. In different quarters, sometimes there are lumpy revenue here and there, the year-on-year growth rate may go up and down a little bit, 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. That's what we can tell for now. Thanks.
Thank you. The next question, please.
Our next question comes line of John Choi from Daiwa. Please ask your question. John Choi, your line is now open.
Hello? Yes. Hi, I'm sorry for that. Thanks for taking my question. I was wondering if I could quickly get some update about the recent launch of your new game, Peacekeeper Elite. How's that trending, and what kind of monetization that management is expecting? We've also noticed that Tencent has launched quite a bit of season passes in China, and how is that progressing as well? 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.
Yeah. In terms of Peacekeeper Elite, for a new game, it's actually a very successful launch. Part of the reason is because we have provided pretty individualized incentive package for users, which have been playing Exciting Battleground. I think that's quite successful, and we have been able to monetize the game. 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. Oh, number 1, we want to attract the gamers, and number 2, we want to retain the gamers. Then, over time, we would work more on the monetization side. 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. On the financial side, I also have to note that because we have a deferral policy, even when we are generating gross revenue, for the revenue to actually come into our P&L, it would take some time. In terms of the battle pass, James would actually talk about it.
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. Now we are starting to launch a season pass concept in China for a number of our key games, such as Honor of Kings and QQ Speed. In terms of the impact of season pass, first 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 have paid for through the season pass. Secondly, paying ratio. Typically, introduction of season passes boosts paying 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.
Third, if we look at cannibalization impact, when we introduce season passes 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 have generated later anyway. Depending on the game, what we see is that the cannibalization impact is either relatively small or it's zero. Net-net, the season passes can be quite accretive to revenue if they're targeted correctly and have the right content and activities inside them. That's on the season pass. For your question around the video content cost, there's a number of forces at work. One 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 six to nine months.
A 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. The third, 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. 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. The next question, please.
Sure. Our next question comes from 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 prevents 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? With monetization, besides all this payment, cloud service, and also the Mini Program apps that we can charge, would there be incremental solutions revenues that Tencent expects to capture down the road? Just one housekeeping question for Peacekeeper Elite, the deferred revenue schedule. Would that be a three-month, six-month, nine months, or 12 months? Thank you.
Yeah, that's actually a pretty good question. 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, 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's 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 customers on the overall mobile internet better. Now, the problem is really how to make that transformation.
It feels like if we create a big team of people and help a company, we can actually create very compelling solutions. In the case of, for example, when we dedicate a team of people to help the Yunnan province and the Guangdong province, it actually helps them to really upgrade their technology infrastructure and help them to really provide the solutions to serve the citizens. In other companies, when we dedicate resources to do it, there's a lot that we can do. The problem is that it's actually not that scalable. Every single company will need a team of tens or even hundreds of IT people to create a custom-made solution.
What we have been trying to do is really to provide these kind of development capabilities as well as solutions at scale, 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 create this capability so that they can actually create digital transformation solutions for the different industries and businesses. If you look at China, it's actually a market which has less penetration of technology solutions, SaaS solutions. That's sort of a manifestation of this problem. I think it would take some time before we create these solutions and create this awareness and capabilities in the ecosystem.
We felt that if that's done, if we look at longer term, when these solutions and resources are available, companies can really benefit from these digital transformation. The value propositions are obviously there. 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 six to nine months, whereas for games just like League of Legends, it might be up to close to one and a half years.
Thank you. The next question, please.
Sure. Our next question comes in of Gregory Zhao from Barclays. Please ask the question.
Hi, management. Thanks for taking my question. My question is also about your FinTech business. Assuming your cloud business is breakeven or maybe some little loss-making, can we see the gross margin of your FinTech business currently is above 30%? Can you help us understand the margin profile of each of the FinTech segment, like payment, like wealth management and financial businesses? What are your current take rate, annualized take rate, and the margin profile? If we look at the payment business alone, although we know the take rate is much lower than your U.S. peers, but given the business scale, how shall we think about the margin profile of your payment business? Thank you.
Well, as we have disclosed, the FinTech business is actually much bigger than the business services. I think that would be the way, if you try to allocate the margin, which we don't disclose, that is one factor that you need to consider. Now, in terms of the FinTech businesses, 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 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 withdrawal as well. That's actually really an offset against a very high banking charge that we pay to banks when consumers transfer money from their bank into our payment system. That's firstly.
Secondly is actually the commercial payments, which we said generates a modest margin. 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. Finally, it's the financial FinTech services charge that we charge on different products when we distribute these wealth management products or microloans or insurance products to our user base. On that, we charge a net fee, the margin is actually quite good. I think that's the margin profile of this business. Now, in terms of the take rate that we have vis-a-vis global peers, I think you are absolutely right in the observation that it's actually much lower than global peers.
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. As a result, it's somewhat reflective of a lower cost. If you think about the credit card charges that were determined, it was actually a long time ago in which you pay a much higher IT cost, you may pay much higher communication cost. Today, the efficiency of the entire system is actually higher. To some extent, I felt that the Chinese credit card charge is actually a good benchmark of what the cost is today.
What we are trying to provide is actually a competitive solution that allow the extension of payment solution, and penetration of the solution into a wider penetration into China. That's why it's somewhat even lower than the credit card charge, which I think is actually quite reasonable.
Thank you very much.
The next question, please.
Thank you. Our next question comes line of Kevin Chen from Jefferies. Please ask your question.
Thank you for taking my question. Just a follow-on question on your new mobile game, Peacekeeper Elite. How does the margin of that compare to other self-developed titles? 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 clearer view on the margin.
In terms of the payment side, I think that in the first quarter, it has moderated a bit. I think, if you look at the historical trend, it's actually quite fluctuating from quarter to quarter. It really depends on the promotion activities of the different players in the market. I would not say this is a trend that the subsidy is actually moving towards a lower end. I think it's a historical phenomena in the first quarter.
Thank you. We will take the last three questions from the floor.
Our next question comes in of Tammy Wong from HSBC. Please ask your question.
Hi, thank you management for taking my question. Tammy 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's also macro uncertainties. How does that change our growth outlook? 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. Then I guess onto industry level, it seems that competition remain 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 third ad load in Moment? Thank you.
Thank you for the question, Tammy. In terms of the macro impact on our advertising business, there clearly is some flow-through from both the weak economy and also the volatile stock market to advertising activity. That's particularly evident in sectors such as automobile, real estate, and internet services. 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. 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. In general, we think that we have a very keen pricing and, where we don't, we'll optimize by improving our technology, driving up the click-through rates, and delivering a better return to advertisers. We really add inventory based on when we believe that our platforms and technologies and tools are ready to ingest more inventory, and to serve the right, appropriate advertising into the incremental inventory, rather than based on the macro environment. The inventory deployment plan is more a function of our internal development rather than the external macro situation.
Thank you so much.
Thank you. The next question, please.
The next question comes from the line of Yi-Ting Liang 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 this business initiative? 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 kind of diverting the internal resources to focus on certain projects? If it's more about the tangible part, could you give us some color whether we would be seeing, for example, the CapEx or head count growing more significantly in this year? Thank you.
It is true that we have to make investments in pretty much the areas that you talked about. Firstly, it is the capital expenditure. We have to invest in servers, particularly ahead of the demand so that we can actually serve our customers. That would be in the form of fixed investment. In addition, we need to add our head count, 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. 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.
As a result, we actually have to dedicate a pretty large team of development people just to provide the showcases. At the same time, I would say that would, to some extent, divert some resources, but the resources are actually quite different people. If you think about product managers and then engineers and developers who are actually developing solutions that can serve hundreds of millions of people in our internet platform, versus creating more enterprise-like solutions to customers, it's actually somewhat different. We also leverage quite a bit of our internal technology team. When somebody in our overall internet platform creates, let's say, a machine learning algorithm, we can actually provide it as a solution to our enterprise customers. To some extent, there are some synergies that we can actually leverage.
I would say, from an operating perspective, this business is still in investment mode. In addition to the capital expenditure, we are also generating some operating losses. That's another area of investment. Finally, I would say around industrial internet, we are also seeing investment opportunities. There are companies which are developing interesting solutions. There are partners who can actually help us to build our business faster. There are ecosystem partners in which they can actually develop a specific solution for an industry that has strategic synergies with us, and these are companies which we'll invest in. I think investments actually come into play in these areas.
Understood. Thank you.
Thank you. We will have the last question.
Sure. Our last question comes from the line of Hanjoon Kim 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 million. 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 we think about scaling this? Thank you.
If you look at our game revenue, then non-China contributes a high single-digit percentage of our 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, or 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 the shift to the free-to-play games. It's also a convergence in terms of the genres of games that people like, meaning that, for example, first-person shooter games, which historically were less popular in China, have now become more popular in China. 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.
Importantly, we've built up a degree of global publishing infrastructure for PUBG Mobile. 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. Over the medium to long term, then we hope to derive more value out of that infrastructure by publishing more appropriate games through that infrastructure globally.
Thank you, operator. 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.tencent.com. The replay of this webcast will also be available soon. Thank you. See you next quarter.
Thank you. Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.