Earnings Call: Q4 2018

Mar 21, 2019

Thank you for standing by, and welcome to the Tencent Holdings Limited 2018 4th Quarter and Annual Results Presentation. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Jane Yip from Tencent. Please go ahead, Ms. Yip. Thank you. Good evening. Welcome to our 2018 Q4 and annual 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 highlights Chief Strategy Officer, James Mitchell, will speak to business overview and Chief Financial Officer, John Lo, will go through the financials followed by a Q and A session. I will now turn the call over to Pomi. Okay. Thank you, Jane. Good evening, everyone. Thank you for joining us. 2018 marked the 20th anniversary of the founding of Tencent. Throughout our history we embrace changes to stay at the forefront of the industry. Recently we launched a strategic organizational upgrade to extend our strength in the consumer internet and to embrace the opportunities of the industrial internet. We will share key milestones with you in the future. During the year we strengthened our market leadership in key areas and built deeper connection with our users, advertisers, merchants and enterprise partners. In social Weixin becomes the way of life in China aided by Weixin Pay and Mini Programs penetrating more use cases. The sharing of mini videos within chat also drove rapid growth in user activities. Mobile QQ continued to focus on young user engagement via social video sharing and news feed. Benefiting from increased user traffic and advertiser demand, social and other advertising revenue rose 55% year on year. E online games we are the world's largest game platform by users revenues with the technical capabilities to operate multiple blockbusters simultaneously. By MAU League of Legends continue to be the biggest PC game and PUBG MOBILE becomes the most popular smartphone games globally. In China we sustained market leadership and also implement the healthy gameplay system in our most popular mobile titles to encourage balanced game time for young users. In media and content we grew digital content subscriptions 50% year on year to over 100,000,000 thanks to our popular self commissioned productions. News Feed, short video and mini video views increased rapidly across our media platforms QQ Browser and Weixi. We grouped our content businesses to form a new platforms and content group we call PCG enabling us to focus resources on systematic content creation and management as well as algorithm enhancement. In ecosystem, our payment service expand users and merchants adoption enabling us to grow commercial transactions rapidly and upsell FinTech products. We stepped up investment in Tencent Cloud integrating AI and Big Data into the offering to drive organic growth of our own cloud business and assist the digital transformation of various industries. Our customized solutions for smart industries are equipped with tools leveraging our social and technical capabilities. Now let me go through the headline number and John will provide more detailed discussion in the financial section. For the Q4 of 2018 total revenue was RMB84.9 billion up 28% year on year and 5% quarter on quarter. Total games revenue which includes platform revenue share book under social networks was 36% of total revenues compared to 45% for the Q4 of 2017. Non GAAP operating profit was RMB 22,400,000,000 up 2% year on year or down 1% quarter on quarter. Non GAAP net profit attributable to shareholders was RMB19.7 billion up 13% year on year and stable sequentially. For the full year of 2018 total revenue was RMB 312.7 billion up 32% year on year. Non GAAP operating profit was RMB92.5 billion up 13% year on year. Non GAAP net profit attributable to shareholders was RMB 77,500,000,000 up 19% year on year. For our key platforms in social combined MAU of Weixin and WeChat increased 11% and yet to 1,100,000,000 driven by user communication needs as well as adoption of Mini Programs and Weixin Pay. Total MAU for QQ was over $807,000,000 Smart devices MAU increased 2% year on year to 700,000,000. For Q1 smart devices MAU was 532,000,000 down 4% year on year. In online games we expand total user base benefiting from the popularity of tactical tournament games and action games on mobile. In PC, we released several niche challenge games and received intelligent feedback from players. In media Tencent Video expand market share in China in terms of mobile DAUs and paying subscriptions. We also use short and midi video to boost time spent in our media feeds business across Tencent News, QQ KanDian, QQ Browser and other news properties. In payment we further broadened use cases and grew total commercial payment volume rapidly despite intense market competition. We're now operating the largest mobile payment platform in China measured by active users and the number of transactions. In utilities QQ Browser and our Android App Store, Yin Yong Bao maintain market leading positions. Our online security team expand their research to cover a range of new use cases such as automobile security. With that I will pass to Mark team to discuss strategic highlights. Thank you, Bonnie and good evening and good morning to everybody. In this section, I would discuss some of our strategic initiatives that have firstly contributed to the growth of our social platforms as well as our core businesses in payment, advertising and cloud and secondly have formed our key proposition to help our enterprise partners to embark on their digital transformation. Now starting with this page on Mini Programs, the platform has become very popular among users. It benefit from a number of key drivers. Firstly, for users given the ubiquity of Weixin Mini Programs enables to further enhance user providing easy access to a broad range of daily life services. Total active users of Mini Programs grew more than 2 50% year on year and daily visits per user also increased 54% year on year in the Q4. For service providers, they can connect with consumers via Mini Programs and drive transactions leveraging mobile payment, social sharing, data analytics and targeted advertising. Our Mini Programs are distinguished partly by the benefits they bring to long tail service providers. Daily visit to long tail Mini Program increased from 13% as of the end of 2017 to 43% as of the end of 2018. For developers our Mini Programs are designed to facilitate cross platform development and instantaneous deployment, a unique advantage that increase development efficiency. On top of that, we also provide cloud based development kits to make the development process even easier. As an emerging platform, we are helping to develop the talent pool in the developers. On that front, we partner with more than 100 universities to include Mini Programs in their curriculum and students now make up 24% of Mini Programs developers in China. Now turning to the next page is Weixin Pay. That platform has grown from strength to strength. By the end of 2018, tens of millions of mom and pop stores can now accept mobile payment via our easy to deploy QR code solutions which does not require expensive point of sales equipment. In total the number of merchants actively transacting via Weixin Pay increased 80% year on year in the Q4 of 2018. We also made significant progress in the food and retail categories with a well executed strategy that leveraged Mini Programs, Scan2Pay, customized management tools and partnership with investee companies such as Meituan, Jianping. Merchants using Weixin Pay typically see fast customer adoption. Average daily commercial transactions on Weixin Pay more than doubled year on year in 2018 as did the accompanying merchant tick rate revenue to Tencent. On a daily basis there are over 1,000,000,000 transactions in Weixin Pay, the majority being commercial transactions. We believe Weixin Pay is the clear mobile payment leader in China in terms of daily users and the number of total as well as commercial transactions. Built upon our extensive user reach and deep user engagement, we're able to upsell FinTech products to consumers at low acquisition cost. Our wealth management platform, LiTaitong accumulated over RMB600 1,000,000,000 of customer assets as of year end. We also helped WeBank distribute micro loan products WeiliDai to individual consumers which loan balance has been growing very rapidly. We also launched a new product called Wei Yaredai to serve small and micro businesses alongside with WeBank. Now moving on to our advertising business, in our recent strategic organization upgrade we have merged our ad sales teams to enable them to sell both brand advertising as well as performance advertising. Key advertising accounts now benefit from coordinated sales coverage and the ability to buy efficiently across all our ad inventories. SME advertisers benefit from the ability to bid and place ads in a more timely and efficient fashion. We've also centralized our advertising data analysis platform greatly enhancing our ad targeting capabilities. And now we can optimize traffic value by dynamically allocating our partner, our own inventories to the most suitable pricing models including CPC, CPM and optimized CTA. We continue to support our partners in achieving sales growth with our rich content partnership, smart retail solution as well as technology support. We have a broad portfolio of inventories attracting a healthy mix of advertisers across industries and budget ranges. We continue to focus on enhancing ROI to deliver value to advertisers and this is particularly important amid headwinds in the current macroeconomic environment. Add loads on our properties are generally lower than most peers in the market and we'll continue to manage it conservatively to produce sustainable growth over the long term. For our cloud business, we made good progress in 2018. For the full year, cloud revenues more than doubled to RMB9.1 billion. In the Q4, cloud paying customers also more than doubled year on year. Tencent Cloud has become a clear market leader catering to online games and video customers leveraging our infrastructure and operational expertise. In Internet Services by leveraging our strategic partnership in key verticals we have quickly expanded customer base in categories including e commerce, social media and community, handset manufacturers and smart transportation. In financial, we are the partner of choice for top banks and that provides showcases of small and medium sized financial institutions. In Retail, we assist retailers to execute their digital transformation. We help them strengthen customer engagement via CRM and data analytics, enhance their marketing ROI using customer targeting and anti fraud technologies and also help them to upgrade their internal operations via smart solutions integrating AI, LBS and big data technologies. We will continue to invest aggressively to enhance our cloud capabilities and offerings. Finally, talking about our ecosystem, which continued to expand during the year partly driven by our strategic investments. Making strategic investments bring benefits to our core business by leveraging best of breed category leaders to tap into new opportunities allow us to focus our own attention and resources on our core platforms. Also through up stream investments we have enriched our IP portfolio in games and our digital content. In addition to that, partnership with investee companies also enable us to capture emerging opportunities and help us to expand our offerings to meet evolving user needs, usually in different verticals where our investee companies have unique and domain expertise. It also helped to accelerate the adoption of our enterprise facing services such as payment, advertising and cloud. As a strategic investor, we're committed to creating value for investee companies by offering access to a large user base as well as supporting the business growth by providing them with infrastructure, technology and capital. During the past decade, we have built a handpicked portfolio covering games, digital content, O2O FinTech and emerging tech areas to over 700 investee companies. More than 100 investee companies were valued over US1 $1,000,000,000 each and over 60 are publicly listed already. Going forward, we'll continue to make strategic investments to strengthen our ecosystem and in the process bringing benefits to our users, our partner companies as well as ourselves. And with that, I'll pass to James to talk about our business review. Thank you, Martin. Good evening or afternoon or morning, everyone. For the Q4 of 2018, our total revenue grew 28% year on year. As a percentage of revenues, VAS represents 51%, online advertising was 20% and the other segments accounted for 29%. Starting with our VAS business, segment revenue was RMB43.7 billion in the 4th quarter, up 9% year on year, though down 1% sequentially. Social network revenue was up 25% year on year and up 7% quarter on quarter with growth flowing from live streaming services and video subscriptions. Our total VAS subscriptions increased by 19% year on year to 160,000,000 as our video and music subscriber basis grew rapidly due to self commissioned video content and our music content library. Online game revenue in the quarter was down 1% year on year and down 6% quarter on quarter. In our social networks, video interaction and consumption contributed substantially to our activity growth in both QQ and Weixin. For mobile QQ, AI enhanced filming capabilities help young users create imaginative and fun content to share with friends, boosting short and mini video uploads by over 50% year on year. In QQ Candian, we added new video categories and enhanced recommendation algorithms, introducing users to more relevant and interesting content and so significantly increasing daily video views. We also added bullet chatting within videos as a tool for viewers to interact. The Weixin, a new function allows users to film and share instant videos that are available for 24 hours and Weixin is providing background music matching the context of these user created videos. Our enterprise app WeChat Work is gaining popularity, especially among large enterprise WeChat Work can assist productivity in several ways. 1st, through integration with Weixin and Mini Programs, WeChat Work helps enterprises deepen their customer engagements and strengthen their post sales interactions. 2nd, WeChat Work supports customer database management, allowing enterprises to more powerfully analyze their data. And 3rd, WeChat Work facilitates office administration via plug ins for capabilities such as expense claim approvals. For smartphone games, total revenue for the quarter was RMB 19,000,000,000 up 12% year on year due to new action and RPG titles, but down 2% quarter on quarter as we generally prioritize user engagements and other measures over monetization initiatives in a seasonally slow period. We released 9 new games in the quarter. As many of you know, monetization approval for new games resumed in December. So far 7 new smartphone games which we have publishing rights have received such approvals. These include titles in the role playing, strategy, casual and functional genres. Given the backlog game releases both for ourselves and the industry as a whole, likely to initially be slower than in previous years. At our own initiative, we launched a pilot project to introduce our healthy gameplay system, promoting balanced gameplay for under 18 year olds. Starting with Honor of Kings, the system is now implemented in 39 of our smartphone games, covering a large majority of young players. As a result, playtime for minors reduced significantly, while adult players activity and consumption were not materially impacted. Within China, our action games such as QQ Speed Mobile and Crossfire Mobile grew users by a seasonal initiative in the introduction of season passes. We released several role playing games based on popular IPs, including Battle Through the Heavens. Our mobile MOBA game Honor of Kings held its flagship Esports event in December, attracting over 75,000,000 unique viewers, an industry record for smartphone games. And we released an expansion pack for Honor of Kings in late January, which has been well received. In international markets, App Annie has ranked PUBG MOBILE the most popular game globally by MAU for iOS and Android since last November. Google Play named PUBG MOBILE its best game in 2018, citing its competitive and immersive game experience. Following the release of its Royale Pass in January, we believe PUBG MOBILE became the highest grossing game developed and published by a Chinese company in international markets. Several of our investees' mobile games also attained notable success. Supercell's new mobile game Brawl Stars is the most downloaded game in 50 markets. Epic's Fortnite ranked number 1 in the U. S. IOS grossing chart in the 4th quarter. And Free Fire, Garena's 1st self developed game was the 4th most downloaded game globally in 2018. Our investee success benefits us financially, but also operationally in terms of shared insights into industry trends and user behavior, enabling us and our partners to influence the development of a healthy game industry globally. For PC client games, revenue for the quarter was RMB 11,200,000,000, down 13% year on year due to users shifting to mobile and down 10% sequentially due to seasonal unfavorability. For League of Legends, user engagement trends have improved globally due to new game content and improved specifically in China with the additional benefit of a China team winning the world recently released NBA 2 ks online 2 game has Our recently released NBA 2 ks Online 2 game has significantly expanded NBA 2 ks franchise user base with a more powerful game engine, superior graphics and better balanced gameplay. And we launched 2 new PC games, Iris Fall and Bladed Fury to better serve niche audiences. Moving to online advertising, 4th quarter revenue was RMB17 1,000,000,000, up 38% year on year and up 5% quarter on quarter. Media advertising revenue was RMB 5,200,000,000, up 26% year on year and up 2% quarter on quarter. Within media, video advertising increased year on year, helped by a variety in documentary shows, but rescheduling several highly anticipated drama series out of the Q4 2018 and into later in 2019 led to a sequential revenue decline. Our news advertising revenue on the other hand increased year on year as we added inventory following the revamp of our news feed ad system and increased quarter on quarter benefiting from sports events and news feed. Media revenue generated from feed ads grew over 10x year on year, benefiting from traffic growth, the completion of our system revamp and rising fill rates. Our social and other advertising revenue was RMB11.8 billion, up 44% year on year and up 6% quarter on quarter. Advertiser demand and increased ad inventory, especially in Weixin Moments, Mini Programs and QQ Kandyan drove the year on year revenue growth. Impressions growth in Mini Programs and positive e commerce seasonality boosted revenues quarter on quarter, albeit to a lesser extent than in 4Q 2017, because the growth of Mini Programs advertising revenue in 3Q 2018 created an unusually high base for quarterly comparison. During the quarter, we showed a 2nd ad unit in Weixin Moments to approximately 50% of Moments DAUs. Click through rates remained high for both the 1st and second ad units. Focusing on our Tencent Video business, we continue to lead the China online video market in terms of DAU, time spent and revenue. Driven by premium content, we had 89,000,000 video subscriptions at quarter end, up 58% year on year. Revenue from subscriptions increased 65% year on year. User engagement trends were healthy as video views per DAU increased over 40% year on year and contributed to advertising revenue growth of 21% year on year. Our operating losses remained lower than those of industry peers. We released sequels to several popular IPs, including season 3 of our adventure drama, Candle in the Tomb and season 2 of our animated series The Land of Warriors. In December, we upgraded our video VIP loyalty program, enabling subscribers to access tiered benefits, including e commerce and travel privileges. We're the leading destination for viewing sports online in China with the richest portfolio of major sports rights. For example, we've helped expand the NBA's audience in the country, leveraging our user base, communities, content curation and video streaming capabilities. Average unique visitors per live streamed NBA game in China have almost tripled over the past 3 years. Moving on to our payments and fintech services. Revenue sustained rapid growth powered by 3 engines. 1st, merchants paying us transaction fees for use of our payment services. Second, users, particularly heavy users, paying us cash withdrawal fees and credit card repayment charges and third, financial institutions, including our affiliate WeBank, paying us service fees for making available wealth management and micro loan products. The regulatory front, we completed the full transition of our payment rails to central clearing and settlement systems and we moved all custodian cash to PBOC accounts in January this year. On the product front, Weixin Pay saw continued growth in users and per user transaction volume. We added new consumer features such as virtual cards for dependents and we enhanced account management tools for enterprises. Our Liqai Tong Wealth Management platform has accumulated 100,000,000 users to money market funds paid by their bank cards. In parallel, our new LingQianTong service allows users to invest cash balance in their Weixin Pay accounts directly into money market funds. And with that, I'll pass to John to talk to the financials. Hello, everyone. For quarter 4, 2018, our total revenue was RMB84.9 billion, up 28% Y on Y and 5% Q on Q. Gross profit was RMB 35,200,000,000 up 12% year on year or down 1% quarter on quarter. Net other losses were RMB 2,100,000,000 which mainly consists of one off expenses relating to ordinary share issuance to strategic partners of TME and the impairment provisions for certain investees. Share profit of associates and joint ventures was RMB16 1,000,000 compared to share of loss of RMB120 1,000,000 for the Q4 of 2017. On a non GAAP basis share of profit of associates and joint venture was RMB1.9 billion versus RMB495 1,000,000 for quarter 4, 2017. Income tax expense was approximately RMB1.9 billion down 39% year on year or 41% Q on Q. The year on year decrease was mainly due to preferential tax benefit entitlements. The sequential decrease mainly reflected the reversals relating to the entitlements of preferential tax benefits partially offset by higher withholding tax. The effective tax rate for the Q4 was 12%. GAAP net profit attributable to shareholders was RMB 14,200,000,000 down 32% Y on Y and 39% Q on Q. The Y on Y decrease in GAAP profit was greatly affected by non cash expenses relating to capital raising as mentioned above, coupled with substantial disposal gains relation to the capital activities of certain investing companies such as the IPOs of Yixin, Si and Sogou in Q4, 2017. Let me walk you through the non GAAP numbers. For the Q4 operating profit was RMB22.4 billion, up 2% Y on Y or down 1% Q on Q. Operating margin was 26.4 percent down 6.5 percentage points Y on Y or 1.6 percentage points Q on Q. Net profit to shareholders was RMB 19,700,000,000 up 13% Y on Y or broadly stable Q on Q. Net margin was 23.8 percent down 3.9 percentage points Y on Y or 1.5 percentage points Q on Q. Turning to gross margin, gross margin for value added services was 53.4% down 5.9 percentage points Y on Y or 3.1 percentage points Q on Q. The Y on Y decrease was mainly due to higher content costs for video and music services and lower revenue contribution of higher margin PC client games. The quarter on quarter decrease was mainly due to lower proportion of revenues from our PC games, lower revenue contribution from self developed smartphone games and increased content cost for our live broadcast and music services. Gross margin for online advertising was 36.6% broadly stable 1 on 1 and Q on Q. Gross margin for others was 23.1% again broadly stable 1 on 1 and Q on Q. On operating expenses, selling and marketing expenses was RMB5.7 billion down 5% Y on Y or 13 percent Q on Q. The year on year and quarter on quarter decrease were mainly driven by the reduction of advertising and promotion expenses due to cost control initiatives. Total G and A expenses was RMB11.4 billion up 29% Y on Y or 4% Q on Q. On the G and A, R and D expenses were RMB6 1,000,000,000 up 24% year on year or down 5% Q on Q. The year on year increase of total G and A mainly reflected greater R and D and staff force. The quarter on quarter increase was mainly reflecting greater spending on staff fringe benefits and conference calls at At quarter end our employee counts increased to approximately 54,300, year on year increase of 21% reflecting expansion of our business growth. Let's go through margin ratios for quarter 4. Gross margin was 41.4 percent down 6 percentage points Y on Y or 2.6 percentage points Q on Q. Last margin contraction and revenue mix shift to other segments which carry a lower margin are the main reasons. Non GAAP operating margin was 26.4percent, that's 6.5 percentage points year on year or 1.6 percentage points Q on Q. Non GAAP net margin was 23.8 percent down 3.9 percentage points Y on Y and 1.5 percentage points Q on Q for 2018. On GAAP basis basic EPS was RMB8.336 and diluted was RMB8.228. Non GAAP basis basic EPS was RMB8.203 and diluted EPS was RMB8.097. Subject to shareholders approval at the AGM to be held on 15 May, 2019, we are proposing an annual dividend of HK1 dollars per share payable on 31 May, 2019. Before I close my remarks, I'll share a few key financial metrics. For Q4, total CapEx was RMB4.6 billion down 8% year on year or 24% Q on Q. Operating CapEx was RMB3.7 billion down 29% Q on Q. Non operating CapEx was RMB893,000,000. As at quarter end free cash flow was RMB 28 point 1,000,000,000 up 18% Y on Y or 9% Q on Q. For 2018 free cash flow was RMB 83.4 billion down 11% year on year. Our net debt position improved by 58% to RMB12.2 billion quarter on quarter. Healthy operating cash flow plus the disposal of our shares in certain investing companies and capital raising from TME more than offset M and A cash outflows in the 4th quarter. The fair value of our shareholdings in the listed investee companies excluding subsidiaries was approximately RMB238 1,000,000,000 or roughly US34.7 billion dollars at year end. I would like to let you know that following our strategy, strategic upgrade from the consumer internet to the industrial internet, we will add a new revenue segment to better reflect our evolving business mix in this quarter. Thank you. Thank you, John. We shall now open to the floor for questions. First question comes from the line of Thomas Sheng from Credit Suisse. Please go ahead. Good evening. Thanks, management, for taking my questions. I have a question related to advertising. Can management comments about the macro headwinds to our advertising including social and others as well as media? And how should we think about the growth trend in Moments as well as Mini Programs? Should we expect we do increase the ad loads in Moments in coming quarters? Thank you. Thomas, thank you for your question. In terms of macro headwinds, it does appear that the uncertainty late last year may have resulted in slower advertising spending, particularly in some high ticket price categories such as automobiles, reflecting a deceleration in sales of automobiles. So I suppose that's not desirable, but it's fairly natural. As far as Tencent was concerned, we believe we continue to grow substantially faster than the market in the Q4. And in turn, we think that reflects the quality of the inventory that we bring, the targeting technology we provide around the inventory and the attractive prices that we charge. Looking forward then, you can see from our latest quarterly results that we still have ample room to increase ad load over time at a measured pace in some of our key inventories such as Weixin Moments, where we're currently running 1 to 2 ad units per day versus global peers running around 10 ad units per day. And we're also starting to bring online newsfeed inventory, where we've been focused on really increasing traffic first. And now that we're in a position where the traffic is growing nicely, you can see that in the Q4, the revenue began to pick up as well on the newsfeed side. So that's how we see the advertising environment. Thank you. May I have a quick follow-up regarding the online video advertising? Given the fact that we see some delay in terms of the launch of some of the drama programs, how should we think about the trend in Q1 2019? Thank you. Well, as you observed, there are some delays across the industry to launch certain categories of content in online video, for example, costume drama series. And costume drama series are relatively important in terms of their ability, both to drive advertising and also subscription revenue. So obviously, the subscription revenue reacts with a longer time lag to changes in the content, but the advertising revenue reacts relatively immediately. So yes, there may be some pressure for the overall online video industry's advertising revenue in coming months as the industry waits to bring on stream some of the content. Certainly. Next question is from the line of Wendy Huang from MacRiley. Please ask your question. Thank you. First, can you give us an update on the games in the pipeline with approval considering that you launched the new titles in Q4, but additionally you get 7 titles with approval? And also, can you clarify whether the 7 titles you mentioned you get approval that actually include the licensed titles, which is actually developed by other companies? And also a very quick follow-up on the advertising questions Thomas asked earlier. So how should we think about advertising margin trend going forward? It seems actually it's stabilized a little bit this quarter. And also related to that, what will be the content cost in 2019? Thank you. So in terms of the new games, just to clarify, 7 new smartphone games have been approved since the banhowl resumed, the issuance of banhowl resumed, but we've also had 1 PC game approved. So in total, 8 games approved since resumption of banhav. And that includes licensed games. We have several dozen more games in the approval pipeline awaiting approval. As we commented in the opening remarks, the fact that there is this backlog for approval will likely have some impact on the industry growth and our growth within the industry in the next few months. But we're pleased that the situation is clearer now and that the backlog is being worked through at a fairly rapid pace. In terms of the margins for our advertising segment, as you know, historically, those depend to a great extent on the mix of different products. And so for example, when we grow the advertising within Weixin Moments, that's a relatively high margin stream. If we grow the advertising around video entertainment content, that's a relatively low margin stream and then inventory where we share advertising with partners such as official accounts for some are in the middle. In the near term, the flip side of not being able to show some of the video content one might otherwise show is the video content costs may not be as heavy as they would otherwise be for the industry and for us within the industry. Thank you. The next question comes from the line of Han Joon Kim from Deutsche Bank. Please ask your question. Great. Thank you for the chance to ask question. I have a question on the margins. And if I'm reading this correctly, it seems like WeChat Pay gross margins improved sequentially. And we talked to a few factors that drove it. But as we think about 2019, could you walk us through some of the puts and takes and how much operating leverage we can kind of see here in terms of gross margins? Well, I think for WeChat Pay, the gross margin, number 1, I think is going to be driven by a number of different factors, which are actually quite dynamic, because we actually take in the revenue from the merchants as well as from consumers. But at the same time, we actually have to pay a very big chunk of that to the banks to spend charges. And at the same time, nowadays, we actually sort of have lost the interest income from the reserve cash. But we are now trying to compensate partly for that through cross selling of our FinTech products. So it will be a pretty dynamic situation in the course of the year of 2019. A big swing factor would be the bank charges, another swing factor is actually competitive dynamics and also our ability to cross sell more financial products. And at the same time, what you see is the gross margin, but below the gross margin, there's actually a marketing cost, which is actually also very high because despite the fact that we have positive gross margin on the growth side, we are actually engaged in a lot of marketing activities, including consumer subsidies, including some merchant rebates in order for us to continue to build market share and also make our payment mechanism I mean our payment platform more popular with merchants. So that actually is another cost, which is quite dynamic as well. So I think all in all, what I want to say is, it's a dynamic situation. We run our payment platform more as an infrastructure business for now. And over time, I think if we can achieve more success in cross selling the financial products, then it may generate more revenue and more margin. But again, it's a long term vision for our business. For the near term, I think we're very focused on making sure that we can continue to make WeChat payment even more popular among the users and merchants. Got it. Understood. And if I just have a quick follow-up question. I noticed a pretty spike in content costs and the cost breakdown. So I just wanted to understand the nature of that and if that happens to be more one off in nature or something that's going to be recurring? Thank you. Sorry, can you just repeat about question for the content cost? Yes. The cost breakdown actually shows a fairly sharp increase in the content cost in the Q4 relative to prior trends. So I just wanted to see if there was any particular one offs included in there or if this is something that's going to be recurring? I think it's something to be recurring due to the fact that there are a lot things that are included under content cost such as in the active flight video, if we have more revenue then there would be more sharing. And also there has been more content cost in respective of music being paid for. So we have more content costs. And on top of that, online games mix and things like that would affect the content cost we need to share with the developers. Thank you. And the next question please. Sorry. Next question comes from the line of Alicia Yap from Citigroup. Please ask your question. Hi, good evening management. Thanks for taking my question. I have a question on the online games. Given Perfect World just launched and the initial ranking was very strong, from the past record, usually the MMO tends to spike in the 1st couple of months and then drop out very quickly after that. Do you think ProfitWell will be the similar case or do you think it will be different this time? And could you share with us the reasons that boost the strong games performance? Is that because of the game quality or is it because of the Tencent successful promotional effort? And the follow-up questions I have related to advertising. So just wondering because of the mini program advertising, if I remember correctly, was actually introduced late 2Q, so it actually benefited the 3Q. And just wonder how we reconcile 4Q that we didn't get much of that benefit. Is it really because of the macro or is that we were too optimistic about the ramp of app opportunity within the Mini program? Thank you. Hi, Alicia. So first of all on the Perfect World game, it has been commendably successful and we obviously hope it remains so. I think in terms of the factors that contributed to its success, the game quality is obviously 1, the long history of the intellectual property is another. Our ability to target the games the right audience is a 3rd. And then I think our publishing skills in general are a 4th. You made a comment that MMORPG games sometimes have a big bang and then diminish quickly. I think if you actually look at our game portfolio, then you'll see that we have many MMORPG games that have been successful and revenue generated and profitable for many years. And that would include TLBB or the MT4 game or Mew or a number of games. And while it's true that compared to a game like Honor of Kings that starts monetization at a low level as it's building audience and then gradually matures into higher and higher monetization over time. Role playing games, you often see a burst of activity and spending in the 1st month and then it consolidates down to a lower level. A, that's something that's true across the industry and B, the lower level to which the revenue consolidates down to can still be a very attractive level in absolute terms. So that's on the role playing game side. On the advertising side, we've said in the past and we'll say again, you shouldn't read too much into changes in the rate of growth year on year from 1 quarter to the next. If you look back at the last 5 quarters, I think every quarter we've either accelerated or decelerated and then accelerated and then decelerated. And it's important not to overreact to those. As you observe, we did begin to put advertising to the Mini Programs from the middle of the year and that resulted in a very strong advertising result for us in the Q3 and the Mini Program ad revenue continued to increase at a double digit rate from Q3 to Q4. But relative to previous years, I think that, A, we didn't have as much benefit on the video side because of the deferral of certain key content out of Q4 into the following year. And then the there may have been some ticket price advertising as well. Okay. Thank you. Thank you for the questions. Next question comes from the line of John Choi from Daiwa Capital Markets. Please go ahead. Thank you. I have a question on cloud. I think this quarter, you guys also have done a pretty good job, I think RMB 9,000,000,000 for the full year, I think Q4 roughly about RMB 3,000,000,000. Could management give us more color apart from games and video? I know that Internet service, financial retail have been also stated. I think Martin kind of emphasized these verticals. But could you kind of give us more color on the contribution of these verticals in terms of paying customers or revenue? That would be great. And how what will be the growth drivers going forward? And if I have a follow-up quickly on advertising, given that short form video continues to be a pretty big success right now, are you seeing any behavior changes from our advertisers that has impacting our advertising business? Thank you. Well, in terms of cloud, I would say, we have actually provided quite a bit of color around the cloud business right now. And it's a combination of we have more paying customers and as we continue to serve the existing customers, right, they will actually increase the spending with us over time. So I think these are the drivers. And at the same time, we have been increasing our product portfolio from just the infrastructure to also pass. For example, we have been launching our online security cloud service, which has been a pretty distinctive advantage for us because we have been engaged in the online security industry for a long time. And then when we package these technologies and capability into a product into the past for our users, right, they adopt it. So I think it's a combination of more paying customers, higher spend with existing customers and also enriching portfolio of products. In terms of the growth for 19, I think we'll continue to work on the areas in terms of signing more customers in terms of serving the existing customers better, so that we can increase their spend. Some of these customers have multiple cloud providers including also their own IDC operation. So over time we want to prove that we have cost competitive net as well as our service level and the product portfolio so that we can move more of their data center usage into our cloud. And at the same time, we'll continue to improve our product offerings so that we can get into more revenue sources as well as higher margin areas. And finally, we want to build up our relationship with partners both in terms of distribution as well as in terms of SaaS partners, right, so that we actually distribute a larger portfolio of SaaS services, which are in nature of higher margin to our customers. On the question around short form video, it's certainly true to observe that services like Kuaishou and Douyin have grown their traffic very quickly in the last course of 2018 and growing their advertising revenue fairly here as well. I would observe that there is some advertiser overlap, but it's not complete advertiser overlap relative to Weixin Moments, for example, which attracts more brand conscious advertisers. The short video sites tend to attract more purely performance oriented advertisers. Also, if you look at the identities of the top 2 or 3 biggest advertisers on those platforms, they would generally be companies that don't advertise on Tencent inventory for competitive reasons anyway. And I think the bigger picture is that the China advertising market would always have multiple companies growing share. There's never been a point in time and there probably will never be a point in time when we're the only company growing share. So what's important to us is not who are the other companies growing share at any point in time, but are we actually outgrowing the market. And I think that if you look at the data reported across the industry, there are some successful companies growing advertising revenue in the mid-twenty percent year on year and there are others whose advertising revenue is growing in teens or flat or even down year on year. And we grew our advertising revenue at over 30% year on year, 38% year on year in a season in a macroeconomically difficult quarter. So we feel that we're clearly outperforming the market and we look forward to attempting to continue to do so given that the tailwinds we enjoy in terms of substantial traffic, substantial traffic growth, information about our users and ability to target the right ads to them and the technologies that we're increasingly bringing to bear around advertising. Thank you. And the next question please. Next question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please ask your question. Hey, good evening. Thank you for taking my question. I have a question on industrial Internet strategy. Enterprise services seem to have longer education and sales processes. So just curious on how you guys internally prioritize resource allocation among various, let's say, industry verticals and use cases. I suppose at this early stage, it might be a bit difficult to use concrete ROI analysis or am I wrong? And then just a follow-up question, again, on industrial Internet strategy. For the upcoming quarter, you mentioned that there will be a separate segment. So should we assume most of that revenues at the moment, are both under the others segment? Thank you. In terms of industrial internet, I think, Andy, you're right in saying that the sales cycle is typically long and it varies across different industries, right. So I think what we do is actually taking a longer term approach, which means that as we identify the industries that has potential then we will put our resources to target those industries and knowing that it may take some time in order to break into the industry. And but this is not something that you can actually avoid, right? If you never allocate resources, then you will never break into the vertical. So that's why what we try to do is we dedicate the resources. We actually create also the product, right, in order for us to demonstrate our technology as well as capability. And over time, once we can win certain showcase deals within the industry, right, then we can actually start to make much better sales within the company within the sector. So, to give an example, we know that in the financial sector there is actually a big need for cloud services, right, but then the requirement of security, the requirement for service is actually very high, right. So in breaking into the financial sector, what we do is, 1, we have a showcase around WeBank, which is very clear from ground up build up through our Tencent cloud. And the other one is actually breaking into some of the very key banks such as Construction Bank, such as Bank of China. And so once we have been able to break into these very large accounts, right, then a lot of the other financial institutions that would take that as a point of comfort and then they would come into using our services. So I think that's how we do it. What was the second question? The new segment being carved out from other Yes, that's yes, I think that's true. Your understanding is true. The new segment will be coming out from others to provide more information around that. Thank you. And next question please. Next question comes from Grace Chen from Morgan Stanley. I just have a quick question about the gaming business, in particular Cloud Gaming. It will be great if the management can share with us your view about the market potential of cloud gaming in China and how Tencent position itself to capitalize on cloud gaming? Thank you. Well, we think that over the medium term, the potential for cloud gaming is quite interesting because it will allow people to play more sophisticated, graphically immersive games on low end devices, whether those be low end PCs or TV screens or low end smartphones. And I think that that's true globally. It may be to some extent disproportionately true in China, given China has an unusual combination of actually very good bandwidth, but relatively low end PC and smartphone mix compared to some developed markets. In terms of whether this is an appropriate opportunity for Tencent, and I think it's actually a very appropriate opportunity for Tencent for a few reasons. One is that we are a fairly capable game company, and this is a natural evolution of games. The second is that we're a company that has increasingly substantial cloud resources. And one of the critical success factors for providing cloud stream games, particularly cloud stream interactive games is actually having servers in relatively close physical proximity to the use of this. Because if you're trying to enable people to play a competitive cloud stream game, a central server on the other side of the world or the other side of the country, then no matter how good the bandwidth is, the physical latency means that for fast paced games involving bullets, it's actually impossible to provide an experience equivalent to what you would get from a client processed game. So we have that distributed server infrastructure across China. We have the game expertise. It's something that we're naturally very excited about, both from an evolution of games perspective, but also from a deepening of our cloud services perspective. And so it's something that we're looking into closely. But it's also something that I think will take a few years to fully materialize. And in the initial stage, it may be more about supporting single player games where the latency is less of an issue and then gradually upgrade to multiplayer games, which is obviously the bigger revenue opportunity over the course of a number of years. Thank you. Thank you. The next question comes from Richard Kramer from Arete Research. Please ask your question. Thanks very much. A couple of things. First of all, you mentioned in the release about more accurate targeting of advertising and having merged your platforms to allow for multiple charging modes. Can you comment a bit more specifically about how much of the Weixin data will be available to advertisers for targeting purposes, maybe beyond products like WeChat Moments and how closely integrated Weichin will be with the rest of the content ads? And maybe my second question, if I'm looking across your portfolio of services, whether it's music, video, gaming content and others, what sort of prospects do you see for bundling those services into a sort of all encompassing content bundle where when someone is taking multiple services, they might be less prone to the churn that you very commonly see in China content services? Thanks. Yes. In terms of targeting, right, well, it's very important to note that we don't provide any data to outside parties. Within the targeting basically it's a process in which the advertiser will specify what they're looking for. And then we will within our own rules figure out who are the people to target for them within our own network. So there's absolutely no sharing or providing of data outside of our own service, not to advertisers, not to the other traffic partners. So I think that's very important to know, but because we have our mining algorithm that runs within our own firewall, right. So then we can actually provide the kind of advertising targeting and keep on iterating to make it better. So that's how we do it. And at the same time, as we have pointed out quite a few times, we do not subscribe to the notion that you need to have a sharing of data among all our different platforms, because I think as a company we actually put our user privacy at the forefront of our concern. So that's why we felt if you look at the ability for us to target, a lot of the benefit would actually come from the fact that we keep on improving our own technology. When we pool together our technical expertise, it's actually focused on improving our targeting and data analytics technology, so that we can make every single platform better in terms of targeting the new users. But it's not going to be a blindly sharing of the different data across different platforms even internally. On the portfolio bundling question, it's an interesting topic and it's certainly something that we think about. You linked it to churn reduction and actually I'd say that on the churn reduction side, the industry and Tencent within the industry are making good progress anyway. And that's partly because we have more regular, better content now. So, instead of someone subscribing to watch a single Hollywood movie and then churning once they've watched that movie, increasingly it's built around drama series, TV series that are more recurring episodic in nature and people tend naturally to stay for longer. Also as increasingly providing the subscription billing through our mobile payment solution, then that tends to result in more convenience of payment, therefore higher stickiness, therefore lower churn. So when we look at the portfolio bundling opportunity, we're looking at it less from a churn reduction perspective and more from a sort of value enhancement perspective, both to Tencent as the recipient of the consumers' payments, but also to the consumer in terms of whether they're actually getting appropriate value and making full use of the content that's available. And I think that's something that is the jury has stood out globally. Amazon Prime is doing great bundling in video and music, but then Netflix and Spotify are also doing great providing video and music individually. In a China context, we have 160,000,000 subscriptions now. The majority of them are digital content subscriptions. On the one hand, that's a gigantic number. It's bigger than the entire pay television industry in the United States in terms of subscriptions. But on the other hand, it's a small number because it's still only teens percentage of the population. So for the immediate future, while we're doing some interesting experiments around bundling, the primary focus is on making each individual product, be it our video subscription service, our music subscription service, our literature services, be as strong as they can be and as fully satisfy their user bases as possible within their vertical domain rather than trying to provide a full horizontal solution at a higher price. Thank you. And may we accept the last two questions? Certainly. The next question comes from the line of Natalie Wu from CICC. Please ask your question. Hi, good evening. Thanks for taking my question. I have two questions. First one is related with your mobile game. Just wondering for the strong performance of HOK during Chinese New Year, how much is related with the seasonality and how much is related with the Battle Pass? Should we expect the part of the I mean a part of the strength to continue throughout this year, if it was to some extent related with the Battle Pass system? And my second question is related with the e commerce endeavor within WeChat ecosystem. For example, the function of shopping within WeChat based on friends' recommendation, which is called Hawo Chen that has just been launched. What kind of the strategic resources you are planning to promote this function and how big can that kind of function grow? Thank you. In terms of the Honor King's side, I think we're actually quite happy to see the fact that this game has been actually able to not only sustain its user base, it has actually been able to attract a lot of users who have been paying less and to come back to the game during the Chinese New Year period. And that's actually mostly due to the fact that we have done a very large upgrade which improved the entire graphics to a new level and at the same time we have improved the matching mechanism, we have improved the tech behind it. So I think it's actually a testimony to the fact that when you have a PVP game that has been popular that has reached such a large user base, Whenever you provide a good upgrade, then a lot of people actually come back to play the game. So I think the most important thing in the pretty good uptake is actually because of this. And then there's the seasonality and then the Battle Pass I think is really a new trial. I don't think it has provided a lot of benefit yet. Over time hopefully the Battle Pass can become a more another addition to our continued revenue generation. In terms of the e commerce, I think we are doing a lot of different trials within our platform. I think at this point in time it's too early to tell, but if at the time when we have seen more insights then we can provide an update to our investors. Thank you. And the last question please. This is the last question. It comes from the line of Gregory Zhao from Barclays. Please ask your question. Hi, management. Thanks for taking my question. So my question is about the sales and marketing expense. So the press release mentioned that you decreased some advertising and promotion expenses and reduced some less effective marketing campaign. So just want to have a better understanding that in which business category and what kind of marketing campaigns you call your advertising budgets? And one quick follow-up on the content cost. So your industry peers like Iqiyi, so mentioned on their conference call, they expect the overall online advertising for online video content market to be more rational in 2019. So given the control of the celebrities' income by the government, So just want to check what the implication to Tencent's video services especially on cost and margin? Thank you. All right. In terms of selling and marketing expenses, I must say that we have done a stringent sort of cost control on a number of matters. Number 1 is since we understand that there is a latency in the publishing rights approval. So some of the games for the pre launch promotion we have cut down. And number 2 is we have reviewed a lot of different products and some of which are still under research and fine tuning. We have decided not to spend too much money at that point in time, but instead we'll look at the ROIs for some of the campaigns while we are doing it. We find out that if it is not as good as expected we will have cut it we would cut it immediately. And there are a lot of different campaigns including the offline as well as the online because selling and marketing cost is something that we can dial up or down easily according to how much we would like to spend that. So it's pretty easy for us to control. Say for instance, as Martin has mentioned earlier, in circumstances, we can if you want to invest further, we can spend more money on the payment platform side, whereas if we feel like that, it's in good shape, we can lessen it to some sort of extent. In terms of your question about content cost, then it is correct to observe that the content costs we would pay top tier drama series, for example, are a little bit lower than they have been in the past. Now, of course, there's some caveats attached to that. One is the other format costs continue to increase. The second is that while the costs we'd be paying and capitalizing today are stabilizing or dipping, they wouldn't flow through to a P and L benefit for a year or more given the relatively lanky production cycle for these top tier drama series. And I'd also refer back to comment I made earlier that to the extent that the companies in the industry aren't showing some of the high quality content that they've earlier commissioned or paid for, then they aren't expensing it either, which is good for costs, but they also aren't generating the advertising revenue they would otherwise have generated, which is not so good for revenue. So as usual with the online video industry, there's a lot of moving parts and sometimes they cancel each other out a little bit. Thank you. And we are closing the call now. If you wish to check out our press release and other financial information, please visit the IR session of our Kansan website at www.tencent.com. The replay of this webcast will also be available soon. Thank you and see you next quarter. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating in Tencent Holdings