Earnings Call: Q3 2018

Nov 14, 2018

Ladies and gentlemen, thank you for standing by and welcome to the Tencent Holdings Limited 2018 Third Quarter Results Announcement 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. I must advise you that this conference is being recorded today. And I'll now turn the conference over to your first speaker, Ms. Jane Yip. Thank you. Please go ahead. Thank you. Good evening. Welcome to our 2018 Q3 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 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. We have our Chairman and CEO, Pony Ma President, Martin Lau Chief Strategy Officer, James Mitchell and Chief Financial Officer, John Lo. Pony will kick off with a short overview. Martin will discuss strategic highlights, James will speak to business overview and John will go through the financials before we take your questions. I will now turn the call over to Pony. Okay. Thank you, Jane. Good evening, everyone. Thank you for joining us. During the Q3 of 2018, we registered strong operating results in our businesses and maintained healthy financial metrics. Our advertising, digital content, payment and cloud services sustained robust activity and revenue growth and now account for the majority of our revenue. For our games business, we implement stringent self imposed limitations on game playing by minors, which we believe industry on a healthy and more solid foundation for future development. At the end of the quarter, we upgrade our organization to help enterprises and value us industry to benefit from the new change of industrial Internet through digitalization and technology innovation and to provide consumers with better integrated entertainment and social experiences as well as to unify our advertising sales platforms. We believe the strategic organizational upgrade will position us well for future long term growth. And Martin will discuss in details in the strategic highlights section. Now let me highlight the key financial numbers and defer the discussion to John's financial section. Total revenue was RMB80.6 billion up 24% year on year and up 9% quarter on quarter. Non GAAP net profit attributable to shareholders was RMB 19,700,000,000 up 15% year on year and flat quarter on quarter. Moving on to our key platforms, combined MAU of Weixin and WeChat increased 10.5% year on year to RMB1.08 billion benefiting from the increasing use case offered by Mini Programs and Weixin Pay. Smart device MAU for QQ was 698,000,000 up 6.9% year on year. We strengthened entertainment driven features and video content which appear to young users increasing their time spent on smart devices. In particular, DAU of QQ KanDian, our news feed services exceeds 100,000,000 For games, we further increased our smartphone game market share by users and time spent. We launched several new games increasing our paying user base and contributing to revenue growth. Our AOV and 5 gs mobile games in joint global popularity. For media business, we maintained our leadership in video, news, music and literature and saw rapid uptake of short and mini videos across our platforms. For FinTech, we continue to be the leader in mobile payment by active users. We are now expanding our FinTech services offering leveraging our large scale payment platform and core technologies. For mobile utilities, we maintained our industry leadership in mobile security, mobile browser and Android app store in China. With that, I will pass to Martin to discuss strategic highlights. Thank you, Pony, and good evening and good morning to everybody. I will first start by elaborating on a key aspect of our recently announced strategic organizational upgrade, especially on our strategy to extend from consumer internet into industrial internet and the creation of our Cloud and Smart Industries Group, CSIG. We see this initiative as a natural extension of our connection strategy from connecting people with people to later on connecting people with content and services and now as a next step to connecting industries with consumers, supply chains and resources. We view partners in different industries are poised to benefit from the trends of mobile Internet ubiquity, insights from big data and the event of artificial intelligence technology. And we want to position ourselves as a digital assistant to help our partners to really take advantage of these benefits while respecting their independence. We believe we are uniquely positioned to help businesses to embrace the industrial Internet because firstly we host over a 1,000,000,000 users across our social and other high traffic platforms and are now connecting these users to industries. Secondly, our enterprise services such as Mini Programs, Official Accounts, WeChat Work and Weixin Pay facilitate communications between consumers and industries and the completion of transactions. Thirdly, using our advanced technologies in cloud computing, AI, security, LBS, etcetera, we help industries to aggregate their data and unlock the value in their data. Last but not least, together with our strategic partners, we have cultivated a thriving Internet ecosystem, which provides broad industry knowledge, insights, deep consumer understanding as well as enabling powerful consumer specific solutions. Now within this strategic initiative, our Cloud Services business is the foundation for our Industrial Internet Solutions and for our Cloud and Smart Industries Business Group. Our Cloud business is rapidly growing in terms of revenue, clients and capabilities. From the Q1 to Q3 of 2018, our cloud services revenue exceeded RMB6 1,000,000,000 more than doubling year on year and gaining market share. We reinforced our already strong position in customer verticals such as games, video and Internet services, while advancing into finance, government, smart retail and industrial verticals. We grew our paying customers at a triple digit rate year on year, allowing us to establish an increasingly diversified customer base. At the same time, we're implementing several initiatives to sustain future growth of this business, including on the technology front, we're integrating our own capabilities such as security, location based services and face recognition to name a few into our external cloud based solutions, enabling our customers to benefit from our proprietary technology. From a product perspective, we have an expanding portfolio of products, offering over 200 cloud products as well as over 70 industry solutions. From a cost perspective, we are combining the procurement scale for our in house services and our cloud business and we are pursuing relentless cost optimization measures in order to provide cost competitive solutions to our customers. In terms of customer acquisition, we are working with over 4,000 channel partners including ISVs and strategic partners to build customer specific solutions. We are also unifying our sales teams to increase efficiency in acquiring key accounts and we are leveraging the popularity of our services such as mini programs to attract SMEs and entrepreneurial customers. Turning to the next page, I will use smart healthcare and smart transportation as two examples of how we are helping industry to upgrade and in doing so create business opportunities for ourselves. Let's start with smart healthcare. The healthcare industry in China faces numerous challenges, in particular under resourced healthcare providers such as hospitals, patients lacking objective information to enable them to select amongst providers and poor and frequent communications between providers and patients. We believe we can provide solutions to address some of these challenges. These include our AI diagnostic capabilities, our ability to help patients find the right experts and our platform for connecting patients and medical care providers. In helping the industry solve these problems, we can extend our cloud services to healthcare providers, we can drive new payment use cases and we can also offer value added services to patients. How do we do that? Specifically we provide products to patients such as mini programs that allow patients to register for appointments with hospitals or conduct video appointments with specialists online. Weixin Pay settlement for medical treatment expenses. Tencent Medypedia which is an online medical resource that offers patients preliminary understanding of over 1,000 symptoms online via VASION, QQ and Mobile QQ Browser. We also provide services to the medical industry such as Tencent AMIS which applies AI to assist doctors in screening and diagnostic St. Paul Lips. AMIS has read over 100,000,000 images and served over a 1000000 patients. In addition, our security, cloud computing and AI capabilities can help hospitals manage internal staff and external patient relationships more efficiently. Let's now move to smart transportation. The transportation industry similarly faces some important trends and challenges including drivers demand for in car connectivity, the rise of electric vehicles, the future of autonomous driving, OEMs desire to connect more closely with their customers and transport as a service via ride hailing solutions. We believe Tencent can help the industry meet these challenges via our in car software capabilities, our cloud and data services as well as CRM for OEMs and payment solutions for mass transit services. By helping the industry, we create opportunities for Tencent in areas such as cloud services, the in car digital content market and acting as a marketing platform for auto sales, auto after sales services, auto loans and auto insurance. Specifically, we provide services to drivers and passengers including integrating Weixin and our digital content services into vehicles' smart systems enhancing the in car experience. Transit QR codes based on mini programs which have served over 50,000,000 passengers in 120 cities and we provide services to the transportation industry including Tencent LBS which receive over 60,000,000,000 location requests per day and powering car navigation, Tencent Auto Intelligence System on which we have cooperated with 15 OEMs and over 300 third party partners who are delivering our cloud based solutions and CRM solutions and autonomous driving related services including high definition map simulation, cloud computing and security. Now I will pass on to James to go over the business review section. Thank you, Martin. Good morning and good evening, everyone. In the Q3 of 2018, our revenue grew 24% year on year. VAS represents 55 percent of our revenue, of which online games contributed 32% and social networks 23%. Online advertising was 20% of our total revenue and the other segments accounted to 25 percent of total revenue. As Tony mentioned, advertising, digital content, payments and cloud generated the majority of our revenue this quarter. For value added services, segment revenue was RMB44 1,000,000,000 in the 3rd quarter, up 5% year on year and up 5% quarter on quarter. Social network revenue was RMB18.2 billion, up 19% year on year and up 8% quarter on quarter. Sales of virtual gifts on our live broadcast services and significant uptake of video subscriptions drove the year on year and quarter on quarter growth. More game related item sales also contribute to the sequential revenue growth. Our VAS subscriptions increased by 23% year on year to $154,000,000 with the growth primarily driven by Our video subscription count grew 79% year on year, benefiting from exclusive drama and anime content. Online games revenue of RMB25.8 billion. Revenue decreased 4% year on year due to fewer paying users in our PC games and slower smartphone game revenue growth as popular tactical tournament games in China are not being monetized. Sequentially, our online game revenue increased by 2% as higher contributions from smartphone games more than offset lower revenue from PC games. Starting with social networks, the emergent trend of short and mini videos is contributing substantially to user activity growth within QQ and Weixin. For content videos, we've grown to over 7,000,000,000 daily short and mini content video views across Tencent platforms. Content video is particularly popular in QQ Candian driven by 1st, a new shortcut to video feeds, which facilitates discovery and consumption 2nd, an enhanced recommendation algorithm targeting relevant content to users. 3rd, we're broadening our breadth of content, including more professionally generated professional user generated and user generated content. And 4th, we're expanding video formats beyond our already established position in short videos to quickly expand in mini videos, which are typically less than 20 seconds in length. The social video, which is primarily created, uploaded and shared by 1 social connections, 100 of millions of social videos are now uploaded to Weixin each day. We believe the huge volume of video uploads is a good indicator of our industry leadership in social video. Users who watch social videos do so primarily inside Weixin group chats and in Weixin moments, where we recently extended the maximum social video duration from 10 to 15 seconds. Users who wish to create social videos can use our standalone app, Weixue, which provides video shooting and editing tools such as dynamic props, background music and AI powered beautification. For long form video, we remain number 1 in the China industry in terms of DAU, time spent and revenue, benefiting from leadership across a wide range of content including drama, Chinese anime, variety shows and documentaries. At quarter end, we had 82,000,000 video subscribers, up 79% year on year and our video subscription revenue similarly rose 79% year on year. Subscriber growth benefited from hit content such as our fantasy drama series Legend of Fui Yao, which achieved over 14,000,000,000 video views and our historical drama series Rui's Live in the Palace, which generated over 16,000,000,000 video views. Our video advertising revenue increased 34% year on year, Redfiniti from increased traffic and sponsorships. Integration with our performance ad platform expanded our advertiser base and increased in feed revenue. As well as commercial success, our video content has also achieved critical acclaim. For example, our anime series The Land of Warriors won the Best Anime Award in the Chinese Comics and Games Expo. And our food documentary Once Upon the Fights scored a 9.3 rating on the review cycle map. For smartphone games, total revenue was RMB19.5 billion, up 7% year on year due to contributions from new action and RPG titles. Revenue grew 11% quarter on quarter, primarily due to new games released at the end of the second quarter and during the third quarter. In China, Honor of Kings remains the top title in terms of active users and revenue. We released new avatar personalization items and dancing motions in the quarter, which increased paying users and revenue sequentially. Our tactical tournament games grew active users quarter on quarter, but remained unmonetized. And we launched several role playing games associated with popular intellectual properties, among which Free Fantasy Online, MT4 and Saint Seiya ranked within the top 10 in China's iOS grossing chart during the quarter. We have 15 games with monetization improvement in our China pipeline, including many role playing and games associated with established intellectual properties. For international markets, according to App Annie, our PUBG mobile game has the 2nd highest ex China monthly active use account of any smartphone game globally and its revenue tripled quarter on quarter reflecting a full quarter of monetization and increasing subscriptions Valla ran a widely watched World Cup Final Esports event, driving its global DAU to a record high. For PC client games, revenue was RMB12.4 billion, down 15% year on year and down 4% quarter on quarter. The year on year revenue decline reflects the ongoing trend of users shifting time to smartphone games. While our reported revenue decline quarter on quarter, our cash sales before deferrals increased benefiting from positive seasonality and the resilience of our leading titles. In China, Crossfire and DNF released successful updates in the quarter and in November, our esports audience reached a record high in China, when Invictus Gaming became the 1st mainland China team to win the League of Legends World Championships. Internationally, we launched a tactical tournament game, Ring of Elysium on Steam, which ranked among the platform's top 10 games by peak concurrent users following its launch. We're implementing several initiatives to foster healthy game In September, we upgraded our healthy gameplay system to protect players aged 12 years old and below from spending excessive time on games. We identify these players by real ID verification confirmed with facial recognition technology and we oppose a 1 hour game timing per day and prevent logins between 9 p. M. And 8 a. M. For these users. We implemented the upgraded system in honor of Kings on a city by city basis and are expanding the system nationwide and across our other games. Via our parental guidance platform, we're providing parents with tools to engage with their children and track their in game activities. And we're developing functional games intended to assist learning or improve dexterity. 2 months since the implementation of our healthy gameplay system, we believe some children are indeed significantly reducing their gaming time and we've seen millions of parents sign up for the parental guidance We believe these initiatives should position the industry for sustainable and healthy long term growth. Shifting to advertising, our online advertising revenue was RMB16.2 billion, up 47% year on year and up 15% quarter on quarter. Our media advertising revenue was RMB5.1 billion, up 23% year on year and up 8% quarter on quarter, within which our video ad revenue was up 34% year on year and up 13% quarter on quarter. Our news ad revenue increased year on year as we expanded the advertiser base following the completion of our ad system revamp, but declined quarter on quarter due to the end of the NBA season. Our social and others advertising revenue was RMB 11,100,000,000, up 61% year on year and up 19% quarter on quarter. Increased traffic and inventory in Weixin Moments, Mini Programs and QQ Candian and more impressions in our mobile ad network drove the year on year growth. Increased impressions and click through for Mini Program and for Weixin Moments contribute most to the quarter on quarter growth. We've expanded our long term advertiser base for Weixin Moments through cooperation with local ad agencies and through converting Weixin Pay merchants into advertisers on our platforms. Moving to our payments and fintech services, we maintained our leadership in China's mobile payment market measured by MAU and DAU. Our average daily transaction volume increased over 50% year on year, within which our offline daily commercial payment transactions grew 200% year on year. We're adding new payment services such as cross border mobile payments, allowing WeChat Pay Hong Kong users to conduct renminbi denominated transactions in Mainland China. Our payment processing and settlement are smoothly transiting to the NetsUnion centralized clearing system. We're also expanding our fintech services in areas such as wealth management, micro loans and insurance. The Xaitong's aggregated customer assets surpassed RMB 500,000,000,000 at quarter Bbank originated weighted eye loan balances grew rapidly and sustained industry leading healthy non performing loan rates. WeSure, our insurance service within Weixin, partnered with insurance companies such as Taikang and MetLife to customize products for Weixin users. And with that, I'll pass to John to go through the financials. Hi, everyone. For the Q1 of 2018, our total revenue was RMB80.6 RMB80.6 billion, up 24% year on year or 9% quarter on quarter. Cost of revenues increased by 35% year on year to RMB45.1 100,000,000. The increased primary reflected greater cost of payment related services, higher content and channel costs. Gross profit was RMB35.5 billion, up 12% year on year or 3% quarter on quarter. Net other gains were RMB8.8 billion for the Q1 of 2018. It represented increases in valuations of certain investee companies including a fair value gain from Meichuan Dingping upon its IPO. We made impairment provisions for certain investee companies in verticals such as online games, entertainment and e commerce. Share of profit of associates and JV was rmb264 1,000,000 in the quarter versus that of rmb1.5 billion for the Q2 of 2018. So quarter on quarter decrease was mainly due to one off share based compensation expense of an associate. On a non GAAP basis, share profit of associates and JV was RMB2.8 billion for the 3rd quarter, which is pretty much at the same level as the 2nd quarter. Income tax expense was approximately RMB3.2 billion down 35% year on year or 10% quarter on quarter. The year on year decrease was mainly due to lower taxable income and withholding tax. The effective tax rate in the period was 12.1%. Net profit to shareholders was RMB23.3 billion, up 30% year on year or 31% quarter on quarter. I'll walk you through our non GAAP financial numbers. For the Q1 and after adjustments to non GAAP, operating profit for the quarter was RMB22.6 billion, up 4% year on year or 1% quarter on quarter. Operating margin was 28%, down 5.1 percentage points year on year or 2.2 percentage points quarter on quarter. Net profit to shareholders was RMB 19,700,000,000, up 15% year on year or flat quarter on quarter. Net margin was 25.3 percent down 1 percentage point year on year or 2.5 percentage points quarter on quarter. Let's turn to segment gross margin. Gross margin for value added services was 56 0.5%, down 3.4 percentage points year on year or 2.5 percentage points quarter on quarter. This decrease is mainly reflected mix shift towards lower margin smartphone games, higher proportion of revenues from licensed titles within PC games and higher content cost of video streaming subscriptions. Gross margin for online advertising was 36.7% broadly stable year on year and quarter on quarter. Gross margin for others was 22.8%, up 2.5 percentage points year on year or down 2.1 percentage points quarter on quarter. The year on year increase was mainly due to growth in fees charged from credit card repayment, revenues from microloan business and interest income related to restricted custodian deposits. On the other hand, the quarter on quarter decrease was mainly due to higher proportion of revenue from our lower margin products. Moving on to operating expenses. Selling and marketing expenses were RMB6.6 billion, up 37% year on year or 3% quarter on quarter. The year on year increase mainly reflected greatest marketing spend on our products and platforms such as payment related services, online video and smartphone gains. The sequential increase was driven by high marketing spend on online video business and payment related services. As a percentage of revenue, selling and marketing expenses was 8.2% for the Q3. G and A expenses excluding R and D were RMB4.6 billion up 10% year on year or 12% quarter on quarter. Under G and A, R and D expenses were RMB6.3 billion, up 30% year on year or 9% quarter on quarter. Both year on year and quarter on quarter increase of G and A expenses were mainly due to greater R and D expenses at Saphors. As a percentage of revenue, total G and A was 13.5% and R and D was 7.8%. At the end of quarter 3, we had over 52,600 employees. The year on year increase of 21% was mainly due to our expanded business growth in particular payment related services. Let's go through margin ratios for the Q3. Gross margin was 44%, down 4.6 percentage points year on year or 2.8 percentage points quarter on quarter, mainly reflecting the revenue mix changes among segments and reduced gross margin of VAS as mentioned previously. Non GAAP operating margin was 28%, down 5.1 percentage points year on year or 2.2 percentage points quarter on quarter, primarily due to lower gross margin. Non GAAP net margin was 25.3%, down 1 percentage point year on year or 2.5 percentage points sequentially. The year on year decrease was mainly due to lower operating margin, partially offset by the margin picked up from share profit of associates and income tax expense. Finally, let me share with you some key financial metrics before running up this presentation. For the Q1, the total CapEx was RMB6 1,000,000,000, up 71% year on year or down 16% quarter on quarter. Operating CapEx was RMB5.2 billion down 21% quarter on quarter mainly reflecting less spending on service for cloud businesses following pre stocking in previous quarter. Non operating CapEx was RMB782 1,000,000. Free cash flow was RMB 26,400,000,000, down 4% year on year or up 71% quarter on quarter. The quarter on quarter increase was driven by growth in grossing of online games as a result of positive seasonality in Q3. At the end of September, our net debt position was RMB 29,200,000,000 compared to net debt of RMB35 1,000,000,000 last quarter. The sequential decrease in net indebtedness was mainly due to free cash flow generation and proceeds from disposal of certain investee companies, particularly which was partially offset by payments for media content and L and A initiatives. Percent market value of our listed investee companies, excluding subsidiaries of course were approximately RMB273 1,000,000,000 or US39.7 billion dollars at quarter end, up from RMB171 1,000,000,000 a year ago. During the period from 7th September to 12th October 2018, we repurchased 2,800,000 shares with an aggregate cost of about US113 million dollars This concludes our presentation. Thank you. And we shall now open the floor for questions. Operator, we will take one question each time. So we'll evaluate the first question now. Thank you. Our first question comes from the line of Wendy Huang from Macquarie. Please ask your question. Thank you, management. Congratulations on the solid results. I just have two quick questions. First, you mentioned that you still have 15 titles in the pipeline with the game approval. But as you recall, the last quarter, you also mentioned that you had 15 titles. However, in between the two quarters, you actually launched several new titles. I just wonder what was actually how did you actually get approval for the new games that you did between the 2 quarters and so that we can make up this mess? And certainly on the mini programs, can you give us update on the competition and ecosystem as well as the monetization plan? We noticed that several other companies also launched a similar type of live program or the quick app, etcetera. And also, you mentioned in your prepared remarks earlier that you already started to generate the advertising revenue from the employee. So if you can share some color on those things, that would be great. Thank you. So to start with the question about the games in the pipeline, there are several moving parts that impact the number of games we have with monetization approval in our pipeline at any point in time. 1, obviously, is that as we publish games, then there's fewer games left in the pipeline. On the other hand, there are ways that we can add games to the pipeline. For example, there might be an independent studio that was working on creating a game 12 months ago and secured their BanHau approval, their monetization approval 12 months ago. And in the most recent quarter, we were able to persuade them to allow Tencent to be the publisher of that game. So then that game would become a Tencent pipeline game with monetization approval. And I'll pass to Martin for the question about Mini Programs. Yes. In terms of Mini Programs, I think it's an innovative programming framework for usage within the WeChat ecosystem And we have invented this framework and we're actually very happy to see that this framework has been adopted by many different other players in the market which means that this framework is actually very, very valuable. Now we do believe that the fact that there are more people endorsing this new programming framework means that there will be more developers coming into the market which is good. And at the same time, I think we do have unique advantages within our own ecosystem and that includes we have a very large DAU app, which is supporting our own mini program framework. We have very frequent usage among our users of the app, I. E. WeChat. We have social recommendation, which is a very important way through which mini programs are spread across different users. We have a pretty complete ecosystem including WeChat Payment which helps the Mini Programs to get paid and at the same time we also have developed this QR code which allows offline merchants and offline operators to promote their Mini Programs using our application and our framework. So all in all, I think by having a lot of people coming in, that's great for helping to cultivate a large developer base and among all the different offer of mini programs I think we have a very strong value proposition. Overall, I think we have seen pretty quick adoption of Mini Programs. The monetization right now is still pretty much associated with mini games, which is a branch within mini programs. But at the same time, we also see growth of very diversified applications within Mini Programs, in particular with a lot of retailers. They are quite eager to develop mini programs so that they can have their own channel of selling products to their customers and also serve their customers. So we are actually quite excited about the future prospect of Mini Programs. Thank you. And the next question please. Our next question comes from the line of Alicia Yap from Citigroup. Please ask the question. Hi. Can you hear me? Good evening, management. I have questions regarding the more stringent implementations of the playing times for the miners and also enforcing the real ID verifications on Honors of Kings and also other games. Has this process affecting the user time spent, not the minus, but what I mean is the user that is 8 higher than 18 years old, were their time spent and engagement activities actually also being impacted? And should we also worry if there's any impact on the revenue growth? Any color there will be great. And then second, regarding the Tencent latest initiative of moving into this industrial Internet, Understand it is still in the very early process of this transformation. Does that mean there will be more investment spend in the coming years? And ultimately, will this industrial Internet opportunity be perceived as strong recurring revenue stream, but at a lower margin profile than the consumer Internet that we enjoyed in the past? Thank you. Good evening, Elisha. In terms of the healthy gameplay system, and as we mentioned in the prepared remarks, the system is impacting the amount of time spent by miners playing our games, which is the intention. We don't expect it to impact the time spent by Ulta users, but we'd obviously need track the progress. And then shifting from time spent to revenue, currently miners contribute an insignificant portion of revenue for our mobile games. Now obviously, depending on how efficiently we execute this, there could be some bit of an impact to non miner spending, but again that's not the intention. And if we can focus it on miners, then that shouldn't have a substantial impact on our business because the vast majority of our game revenue comes from older users. Okay. In terms of the industrial Internet, I think the initial revenue opportunity is around the cloud business. As you can see, we have a fast growing cloud business and also has been gaining market share. The nature of the cloud business is that it does require quite a bit of capital expenditure because we need to build the IDC as well as to buy the service. And over time earn recurring revenue on the cloud service fees. Now, this business at the same time is low margin, because it's only staying at the infrastructure level. But we the way we look at it is that we look at it as a long term investment for the future. And we felt that over time, new business opportunities can actually come out of our cloud and associated industrial Internet opportunities. And that would include when we move from ICE infrastructure to PaaS, Platform as a Service and SaaS, right, then we can actually start generating higher margin revenue. At the same time, we also believe that we could have new business model and value added services built from our connection with the industry. For example, when we talk about the transportation industry, right, if we could actually establish a CRM for OEMs to reach customers, then there will be associated marketing revenue, there will be associated value added services revenue including referral fees on auto insurance, auto loans. So those will be new business models which will be of higher margin. And at the same time, we believe that by engaging in the industrial Internet, we can actually bring benefits to our ancillary businesses, for example, our payment business as well as our advertising business. So, we look at it in a holistic approach and just like how we approach consumer Internet, right? In the very, very beginning, nobody really generate any revenue from consumer Internet. We start with providing a product which we know that would generate value for the users. And over time, we start to develop different kinds of business model from that valuable service. And I think for industrial internet, it's the same philosophy, right? If we see that, we can actually add value to a particular industry and to the partners that we sign up. And we know that by bringing technology, by bringing data insights and by bringing connection for them to connect with users, we can actually create value for the users, we can create value for these industrial partners and we can actually facilitate the upgrade of the industry, then we know that we will be creating tremendous value and we will be pretty confident that over time we will generate business opportunities and revenue from that value add. Thank you. And then next question please. Our next question comes from the line of Thomas Chong from Credit Suisse. Please ask your question. Hi, good morning. Thanks management for taking my questions. I have a question on the online gaming business. Can management provide the quarterly ARPU for MMO, advanced casual and smartphone games? And my follow-up question is about the PC games. How should we think about the trend in Q4 or 2019? And my quick follow-up is about the trend in terms of the operating expenses. Can management give us some color about how we should think about the trend going forward? Should we expect we need to incur higher OpEx for new initiative? Thank you. Hi, Thomas. We'll keep you two questions so that other people have room to ask questions about operating margins or whatever the topic is as well. So just focusing on your two questions, John will speak to the ARPU, but with regard to the PC game business, it's obviously a challenging segment of the industry given the ongoing user time shift migration from PC games to smartphone games. We are aggressively looking for new PC games to publish in China, particularly new PC games that can create new market segments, which didn't previously exist in the China market, but might have existed in overseas markets. And to the extent we're successful in doing that, then we can improve the trends for our PC game business. I would also say that the comparisons for our PC game business in the current and recent quarters are particularly difficult. But overall, the PC game outlook is a fairly conservative outlook given the megatrend of users shifting time to smartphone games. In terms of the ARPU, the Animoji, it's 530 to 730 and ATG is 160 to 670 and platform games is from 180 to 190. Thank you. And next question please. Our next question comes from the line of Binnie Wong from HSBC. Please ask your question. Thank you, management, for taking my questions. My first one is on the impact of the macro headwinds. We saw that in the press release, we talked about the increase in advertising revenue were mainly reflected by more advertising inventories in Weixin Moments and also the new advertising form such as the mini programs. So just want to see the reasons and also the rationale behind that we are still able to increase the advertising inventories mid macro headwinds? Thank you. Yes. So, we believe that we deliver above industry return on investment from our advertising and historically to a great extent, our advertising has been supply constrained rather than demand constrained. So as we grow our traffic and as we add new inventory within our traffic, for example, in the last two quarters, we've made inventory available in mini programs, which was the biggest contributor to the quarter on quarter ad revenue growth this quarter. And I think it's natural that we see a flow through into stronger advertising revenue. On the flip side, there are certain advertiser categories in China that have been hit hard by regulatory measures. And generally speaking, our advertising business is underway in those categories due to conscious decisions on our part. Looking forward then if the macro environment deteriorates sharply that will naturally have a negative impact on our advertising revenue growth rates. But we believe given our superior performance that we should continue to outperform the industry based on the better than industry returns on investment we deliver to our advertisers. Thank you. And the next question please. Our next question comes from line of John Choi from Daiwa Capital. Please ask your question. Thank you. I have a question about your margin trend. I could see this quarter, operating margin is at 28% constantly coming down. Obviously, game growth, which has a high margin. And as you guys earlier mentioned, advertising, digital content, payment and cloud are now the majority of the business. So going forward in the future, should we be expecting this is going to be the new norm or should we be expecting our margins to stabilize or even expand? Secondly, just clearly on the game, I just want to follow-up how in terms of assuming that the regulatory situation normalizes, where do you see the upside potential on the smartphone game growth? Is it going to be further ARPU expansion or any types of any growth drivers that you guys see? Thank you. In terms of margin, I think we should probably not take overly simplistic view of an overall margin, but instead look at the different businesses because we our revenue is a collection of businesses of very different natures. For example, gaming, obviously, it has a higher margin, but there's also a big difference between self developed games and licensed games. And then if you look at some of the new businesses, right, advertising has got a very high margin. But if you look at video, obviously, it has a low margin. And we when you look at payment, which is a pretty large business segment for us, we run it as an infrastructure service. So it has a relatively low margin. And cloud business at this point in time is also of very low margin. So I think we should probably look at each one of the segment and analyze the margin accordingly. And the overall margin of the company would be essentially weighted average of all the margins of the respective segments. So, if there is more gaming revenue in the future, I think the margin will probably go up more. But I think even for some of the advertising for example, if it grows more than it would have a positive impact on the overall margin of the company. For the businesses which are right now in investment mode and generates very low margin, I think some of them will probably stay like that for a while. But over a longer period of time, we think as we can actually generate some value added services out of those revenue streams, then we may be able to get to a higher margin over a longer term. In terms of the opportunities to enhance our smartphone games revenue, then and I think one can look at it along 3 dimensions, the ARPU, the paying user ratio and the total number of users. And our ARPU has substantial upside relative to the industry. And part of the reason why we're able to eke out a little bit of growth for our smartphone game revenue in the Q3 was because we released some relatively high ARPU role playing games, which demonstrated that effect. Our paying user ratio also has substantial upside relative to the industry, But it's to some extent been frozen by the regulatory measures, particularly as you know, some of our new games have very substantial user bases currently have a 0% paying user ratio. And then our overall game user base, smartphone game user base is already at a very substantial number. But on the other hand, the success of the mini games within Weixin illustrates that there's still a substantial audience of new players, particularly female players, who historically were not actively playing smartphone games, but are now beginning to do so. So we think that in a more benign regulatory environment, there's upside to all three metrics, the ARPU, the paying user ratio and the total number of game players. Thank you. And the next question please? Our next question comes from the line of Han Joon Kim from Deutsche Bank. Please ask the question. Great. Thank you for the chance to ask the question. For your advertising business, I noticed that we've seen an acceleration of year over year growth. And I recognize that it's part of the ad inventory that we've talked about. But how should we think about the possibility of maybe continuing this acceleration, particularly as we redefine the business with the advertising and marketing services unit and trying to integrate the various components of AZOMO2 together to maybe create better better ROAS? Thank you. Well, I would say we run the advertising business on consistent and long term basis, right. So, I think what we have seen today is actually the result of pretty long data and consistent effort improving our ad system. And we have always been very disciplined in terms of making sure that our advertising quality is high. We have been running at below industry level of ad load because we want to have the right balance between user experience and advertising. And in order to keep on delivering higher ROI to the advertisers and also to make the advertising experience better for the users. We have been investing heavily into building app system with targeted technology. And I think what we have seen today is just a result of all these efforts in the past. And going forward, we continue these philosophies, right. And we believe over time, we'll continue to generate more and more revenue from the advertising business. But at the same time, I think we do not want to hurry ourselves and we do not want to do things that generate revenue for the short term, but harm the U. S. Experience or harm the advertisers over the longer term. I think in terms of the AMS, it is a good development obviously and it helps us to now face the advertisers with a single voice and it would help us to serve these advertisers better. And I think it would be a positive development overall for our service level for advertisers. Thank you. And the next question please. Our next question comes from the line of Grace Chan from Morgan Stanley. Please ask the question. Hi. Thank you. Thank you for taking my question. Can you share with us your view about the 2019 outlook by the difference at the different business segments such as gaming, social network, online marketing, payment and cloud business? Apart from the 2B initiatives, what are the other key strategic differences in 2019 versus this year? I remember this year we talked about heightened investments this year. So if you can share your strategic focus next year that would be great. Also can you update us with the latest development of the government's gaming approval process? Thank you. I think in terms of 2019, we have already done a very big strategic organizational upgrade, which is indicative of our focus for the future, right. And obviously our existing businesses will continue to put a lot of effort in and at the same time in 2 particular areas in the form of Cloud and Smart Industries Group and in our Platform and Content Group, we will have redoubling effort in those areas to build better products and better services to serve our users and our customers. So, I think for Tencent, we have always been very consistent in terms of pushing ahead with our execution. So as you can see from our organization, we'll continue to push along those lines of businesses. And in terms of regulatory approval, I think at this point in time, there's not a lot of update. We're waiting for the government to start the approval process for games and when that's announced, we'll have the update for the market. Thank you. And the next question please. Our next question comes from the line of Natalie Wu from CICC. Please ask your question. Hi, good evening. Thanks for taking my question. Just curious, is there any change regarding the revenue sharing ratio with Weizhou Bank recently, for example, the micro loan business of Weizhou quantify the impact from the PBOC's regulation on your interest income in the last quarter? Just wondering how should we see the future trend of the GT margin for the other revenue line? Thank you. Yes, for the first one I don't think we would comment on specific commercial transactions. On the second part of your question, I think it's more important to look at what is still in there because as we previously communicated by the beginning of next year, all the interest will be gone. So I think what we can speak to that is that there is a high single digit number of our current others revenue, which is interest from which is interest from the deposit and that would basically disappear by the Q1 next year. And the next question please? Our next question comes from the line of Alex Yao from JPMorgan. Please ask your question. Hi, good evening everyone. Thank you for I have a question on the mobile gaming monetization strategy side. Given the uncertainty around new game monetization approval, would you consider change the existing game monetization or operation strategy? For example, would you consider to increase the existing game title lifecycle by temporarily lowering their monetization? And then in terms of the key initiatives and future development directions such as the cloud, industrial, etcetera, etcetera, given the uncertainty around gaming monetization, would you consider to tweak the investment strategy in terms of the budget spend next year on the back of uncertainties around new game monetization? Thank you. Alex, so on the first question, we believe the way that we monetize our games is entirely compatible and commensurate with great longevity. And I think the fact that a game like Dungeon and Fighter is arguably the highest revenue China PC game now after 10 years in our operation. The fact that League of Legends is arguably the most popular PC game in China after many years of our operation speak to the fact that we're able to speak to the reality that we're able to both monetize games appropriately and also maximize their life cycles. So no, I think the concept of us reducing the revenue for our existing games because of some kind of expect to trade off with game longevity, wouldn't make a lot of sense to us because we think our existing monetization levels are very healthy and long term sustainable. Yes. In terms of the investment for the industrial Internet businesses as well as some of the longer term projects. I think our philosophy has never been short term financial number driven. Our philosophy has always been long term value driven, right? If we can actually create value for the long run, we will do the right things by making investment and we will not be swayed by short term financial considerations. Thank you. And the next question please. Operator, may we take the last question? The next question comes from the line of Jim Min from New Breach Research. Please ask the question. Good evening, guys. Just a quick follow-up on kind of advertising in general. You guys talked about how advertising was especially on the SMS side driven by kind of new ad loads and new inventory. But can you just also talk about kind of CPC, CPM pricing trends among the bigger SNS advertising businesses? And perhaps can you kind of rank them in order in terms of revenue contribution? Thanks. So in terms of revenue contribution, we don't go into great detail, but Weixin Moments is the single largest contributor. And then Weixin Official Accounts, Weixin mini programs are also substantial contributors. But then outside Weixin, mobile ad network has become a very substantial revenue contributor and mobile browser is also a meaningful contributor. And we're in the process of ramping up our new speeds revenue, which is an area where we believe we have traffic equal to or superior than most of our peers, but our revenue is still much lower than our peers and we're in the process of rectifying that discrepancy. In terms of CPC and CPM, there's an almost variation by property. So for example, Weixin Moments commands a premium CPM relative to almost every other medium in China because it is uniquely effective at targeting a nationwide white collar audience in an attractive and engaging and low cloud away. And as we've been increasing the ad vote on Weixin moments, the focus is more around preserving the CPM within a same city basis rather than seeking to drive to grow the premium further. Then a property like a video property would be a medium CPM that's increasing over time due to growing advertiser demand at a moderate rate. And then something like our mobile ad network was historically at a very low CPM, but as we apply more technology and as advertisers get more comfortable with our systems and the quality of the clicks we deliver, then the CPM and CPC for our mobile ad network would be increasing particularly quickly. 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 company website. A replay of the webcast will also be available soon. Thank you and see you next quarter.