Earnings Call: Q2 2018

Aug 15, 2018

Thank you for standing by, and welcome to the Tencent Holdings Limited 2018 Second Quarter and Interim Results Conference Call. At this time, all participants are in listen only mode. There will be a presentation followed by the question and answer session. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Jane Yip from Tencent. Please go ahead, Ms. Yip. Thank you. Good evening. Welcome to our 2018 Q2 and interim results conference call. I'm Jane Yu 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 is 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, Tony Ma President, Martin Lau Chief Strategy Officer, James Mitchell and Chief Financial Officer, John Mo. Tony will kick off with a short overview. Marty 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. Thank you, Jane. Good evening, everyone. Thank you for joining us. In the Q2 of 2018, we continued to deepen user engagement across our social, games and media platforms with solid year on year growth in daily active users and time spent in our vision platform, mobile games and video platform. We have also invested heavily in our news feed, short video and mini video products and have seen significant growth in them. Let me highlight the key financial numbers. Total revenue was RMB73.7 billion, up 30% year on year and stable quarter on quarter. Non GAAP operating profit was RMB22.3 billion up 11% year on year or down 12% quarter on quarter. Non GAAP net profit attributable to shareholders was RMB19.7 billion up 20% year on year and up 8% quarter on quarter. John will provide more details in the financial section. Moving to our key platforms, combined MAU of Weixin and WeChat increased 9.9% year on year to 1,060,000,000 as we are building a vibrant mini programs ecosystem with higher developer and user adoption, further strengthening the user engagement of the platform. Total MAU for QQ was 8 3,000,000. Smart devices MAU was 709,000,000, up 7% year on year. Our news feed service QQ KanDian further grew its active user and time spent. Our social network services QZHON Smart Devices MAU was 543,000,000. In games, we're strengthening our leadership in mobile and PC. We increased our smartphone games market share in terms of DAU. User time spent and engagement increased in key genres including tactical tournaments, action, shooter and mobile. We also expand our user base globally benefiting from the success of AOV and PUBG Mobile. For Media Business, we maintained our leadership in online video, news, music services and literature. We solidified our leadership in long form video platform with a higher mobile DAU, user engagement and also larger subscriber base. In FinTech, our mobile payment system service deepening penetration in verticals such as faster food chains and supermarkets. We continue to be the market leader in terms of DAU driven by rapid growth of offline commercial transactions. In Mobile Utilities, we remained an industry leader in mobile security, mobile browser and Android app store in China. With that, I will pass to Martin to discuss strategic highlights. Thank you, Tony, and good evening and good morning to everybody. I would first start the section by addressing a very popular question, which is the trend of user engagement in our core platforms, especially given the popularity of short videos and mini videos recently in the market. The quick answer is that we have seen increasing engagement in our social platform, games platform, video platform as well as strong growth in our media feeds. Now starting from social, Weixin recorded solid growth in terms of users, time spent and activities. As the largest social communication platform in China, Weixin continues to add daily active users and per user messages both delivering double digit growth rates year on year. In particular users are spending more time in Moments as well as Mini games within Weixin. Through increasing popularity of mini programs and Weixin Pay, Weixin is getting involved in more vertical use cases online and off line, enabling us to increase the value of our engagement that is not entirely dependent on time spent. I will elaborate more on Mini Programs in the next two slides. In the area of video, user consumption of long form video content continues to ramp up driven by IP based original content in drama, variety shows and Chinese anime. For mobile, daily active user increased 24% year on year, daily videos viewed up 53% year on year and total time spent up 39% year on year during the Q2, solidifying our position as the leading video platform in China. In terms of media feeds, our recommended feeds are getting higher hits due to better algorithm and enhanced content offering. These media feeds are strategically placed in our large DAU products so as to provide more convenient access to users. Currently QQ KanDian and Mobile QQ Browser host our largest feeds products and in aggregate they increase daily page views by 55% and daily short videos view by more than 3 times year on year. Now moving on to the next two slides, I will discuss the rapid adoption of Mini Programs and how it is enabling our payment business and enriching our O2O ecosystem. Mini Program is an innovative platform built into Asian facilitating discovery and consumption of services. For developers Mini Program offers an open platform with powerful features to make programming easier and more efficient. These programs will run immediately upon scanning a unique mini program QR code connecting offline services to online engagement. Supported by Weixin Pay, advertising and cloud capabilities, Mini Programs can provide a seamless closed loop experience for users. Teams is launched in early 2017. We've done a lot to educate developers and users about the potential capabilities of Mini Programs including partnering with colleges to host coding classes for students and developers. Rapid adoption took off early this year with a growing number of developers creating Mini Programs for their own companies as well as system integrators developing Mini Programs for their clients. Benefiting from the expanding categories of mini programs which include various services such as mini games, tools and offline services we grew daily active users of mini programs to more than 200,000,000. Sharing in our social network facilitated user acquisition while highly popular mini games further accelerated adoption and engagement. Mini programs are great for discovery and quick actions and are complementary to full function native apps by increasing download and traffic to them. In terms of some examples on how many programs expand penetration across different representative use cases, I provided 4 of them. Number 1, in transportation sector, our internally developed transport payment solution called Tencent Smart Transit QR Code enables public transport operators to achieve higher processing efficiency, reduce cost and utilize data for service planning. We've rolled out our payment solution in over 90 cities across the country. Some operators simply adopted our payment QR code while others developed their own mini programs with additional functionalities as well as advertising to broaden their revenue streams. In the area of smart retail, Mini Programs help merchants shorten in stores checkout time, facilitate order for home delivery and provide targeted product promotions via embedded links to official accounts. Many retailers find these capabilities extremely useful as they stick to digitize their businesses and engage with customers online. Our scan to buy function is increasingly adopted in shopping malls, supermarkets and convenience stores. In the restaurant sector pre ordering Mini Programs help operators increase efficiency and sales by cutting queuing time, reduce labor cost as customers switch to ordering online. They can also reward customers with integrated eLoyalty program. Mini programs are widely adopted in fast food chains, cafes and casual eateries across China. In the mini game sector developers can expand user reach and acquire users via multi channel such as Weixin Game Center, Search Within Weixin or Social Referral. Given its easy to play and light experience, mini games help developers to accumulate users and traffic and monetize via advertising and virtual items sell on Android. In the Q2 we introduced ads in mini games and drew enthusiastic responses from advertisers. Advertising revenue was up 5 times quarter on quarter. Now with that, I'll pass to James to talk about business review. Thank you, Martin, and good morning and good evening to everybody. In the Q2 of 2018, our revenue grew 30% year on year. BAS represents 57% of our revenue within which online games contributed 34% and social networks 23%. Online advertising was 19% of our total revenue and the other segments accounted for 24% of our total revenue. Within the other segment, where revenue was up 81% year on year, our payment related businesses sustained strong growth as we rapidly expanded our offline commercial payment volume and related services and despite a quarter on quarter reduction in interest income from restricted custodian deposits. Under PBOC's guidelines, we expect that by January next year, we'll no longer generate interest income from restricted custodian deposits. And John will discuss the details in the financial section. Our cloud services revenue doubled year on year as our paying client base increased significantly. We deepened penetration in key sectors including finance, smart retail and municipal services. We also invested in and formed strategic partnerships with certain systems integrators to offer customized cloud services and broaden our penetration offline. For value added services, segment revenue was RMB42.1 billion, up 14% year on year, but down 10% quarter on quarter. Our social network revenue was RMB16.9 billion, up 30% year on year, but down 7% quarter on quarter. Total VAS subscriptions grew 30% year on year to 154,000,000 subscribers as our video subscription count more than doubled. Our revenue grew strongly year on year driven by video subscriptions and the increased monetization of music live broadcast services. However, sequentially game related item sales reduced sharply following our reported smartphone game revenue reduction, which offset growth in digital content revenue and resulted in the net quarter on quarter revenue decline. Our online games revenue was RMB 25,200,000,000. Revenue decelerated to 6 percent year on year growth and declined 12% quarter on quarter. Non monetization of popular tactical tournament games in China was the main reason behind the year on year quarter deteriorations. However, during the quarter we grew our smartphone game DAU in China by a double digit percentage year on year, expanding the foundation for our smartphone game business' long growth and creating future monetization opportunities. In overseas markets, our games Arena of Valor and PUBG Mobile expanded their user base and monetization. In social networks, we continue to grow our mobile payment activities leveraging our social platforms. At the end of June, we surpassed 800,000,000 mobile payment MAUs. Our average daily transaction volume increased over 40% year on year and benefiting from the expansion of use cases, our offline commercial payment volume increased 2 80% year on year. Commercial payment volume exceeded half of total transaction volume for the first time. In overseas markets, we prioritize use cases of Chinese outbound travelers such as duty free shopping and tax refunds. And in Hong Kong, we launched a local wallet authorized by the HKMA. Shifting to Weixiao, which is our aggregation platform providing mini videos conveniently to our users, both via existing services as well as via our Weisha branded mobile app. During the quarter, Weixia aggregated appealing content including clips from our self commissioned variety show Produce 101 and added innovative features such as particularly on Kandyan and Qzone as well as in the Weixia branded app for particularly on Kandy and Qzone as well as in the Weixa branded app itself. We more than doubled our long form video subscription base year on year to 74,000,000 subscribers as of the end of June. We also continue to lead players by mobile DAU and daily video views, solidifying our position as the number one online video platform in China. Among non game apps, Tencent Video ranked number 1 in the China iOS top grossing chart and number 2 in the global iOS top grossing chart during the period. Our growth benefited from exclusive content in key verticals including drama series, online variety shows and Chinese anime. And drama Legend of FU Yao, a historical romance created out of the China literature IP generated about 14,000,000,000 video views in total and was the most popular exclusive drama series in the first half of the year. The online variety shows are self commissioned talent program Produce 101 achieved over 5,000,000,000 video views, a new record for an online variety show in China. And in Chinese anime, we've built up experience producing IP based anime series which attract a large audience of loyal fans and as a result we more than doubled our anime traffic year on year. For example, Land of Warriors has accumulated over 3,500,000,000 video views and is the most popular of its kind since its debut in January. On the product operations front, we're increasing the appeal of our video subscriptions through initiatives such as allowing users to give subscriptions to our brands and we're extending the distribution of our video subscriptions through cross promotions with partners. For smartphone games, revenue was RMB17.6 billion, up 19% year on year due primarily to action games in Honor of Kings. But revenue declined 19% quarter on quarter as first users shifted time to non monetized tactical tournament games. 2nd, we launched 5 out of the 7 new games late in the quarter. And 3rd, during the pre examination season, we prioritized user retention and engagement for several of our big existing titles. However, thanks largely to breakout popularity of our tactical tournament games, we believe our China mobile game market share increased year on year and increased quarter on quarter in terms of daily active uses and time spent. Looking ahead, we're working on multiple fronts to reinvigorate our revenue growth, including first, expanding overseas. Arena of Battle, a battle arena game developed by Artemu Studio has over 13,000,000 daily active users outside China with particular popularity in Southeast Asia and it achieved over US200 $1,000,000 in user spend in the first half of the year. PUBG MOBILE, a tactical tournament game developed by our Quantum studio has over $14,000,000 DAU outside China with particular popularity in Western markets as well as in India and it's achieved about US20 $1,000,000 user spending per month in recent months benefiting from seasonal passes. 2nd, boosting our existing game performance and monetization. In particular, we're seeking the approvals required for monetizing tactical tournament games in order to realize the revenue potential of these games, which we believe will be substantial given their large player basis and intense player activity and we're also finding ways to deepen user activity in existing hit titles such as Honor of Kings which remain China's top game in terms of users and revenue. 3rd, launching new games in high ARPU categories. For example, MT4, a role playing game based on a well known IP was consistently ranked top 3 in iOS China top grossing chart since we launched it in July. And our in house developed RPG, Saint Seiya, is ranked top 5 in iOS China top grossing chart since we launched it in August. Moving to PC client games, revenue was RMB12.9 billion down 5 percent year on year and down 8% quarter on quarter. The year on year decline reflected the ongoing trend of users shifting time to mobile games. On a quarterly basis, revenue was impacted by the same trend as well as weak seasonality. However, our leading titles performance showed resilience supported by loyal user base as well as esports and other offline events. For example, Dungeon and Fighter celebrated its 10th anniversary in June, demonstrating our ability to sustain and grow a game franchise over a decade. We engaged users via in game marketing activities and during the Labor Day holiday and an anniversary celebration Garda offline, driving up revenue and paying user accounts. League of Legends held its mid season invitational Esports event in May in which a Chinese team RNG won, benefiting DAUs in China. League of Legends DAUs up quarter on quarter in China and flat quarter on quarter globally despite adverse season somewhat seasonality. We look forward to publishing several innovative titles in coming months quarters. For example, we've accumulated over 10,000,000 pre registrations in China for Fortnite, the tactical tournament game provided by our Investe Epic Games. Moving on to our online advertising business, revenue in the Q2 was RMB14.1 billion, up 39% year on year and up 32 percent quarter on quarter. Our media advertising revenue was RMB4.7 billion up 16% year on year and up 43% quarter on quarter. Video advertising revenue continues to grow as we generated more sponsorship revenue from popular programs. When we self commission content, we can target the most appropriate advertisers and develop attractive ad formats early in the production process. Our news advertising revenue declined by a high single digit percentage year on year from the high base points last year, but following the completion of our ad system revamp, we resumed news feed ad placement within our news services in the Q2, which along with positive seasonality contributed to a strong quarter on quarter rebound. Our social and others advertising revenue was RMB9.4 billion, up 55% year on year mainly due to 3 factors. First, in Weixin, we added a second feed ad per user day enrollments as well as new inventories in mini programs. 2nd, we saw robust growth in impressions in and advertiser demand for our mobile ad network. And third, we generated more newsfeed traffic in Q2Candian, driving up impressions volume. Sequentially, social and others advertising revenue grew 27 percent quarter on quarter benefiting from positive seasonality as well as the factors above. And with that, I'll pass on to John to go through the financials. Thank you, James. Hello everyone. For the Q2 of 2018, our total revenue was RMB73.7 billion up 30% year on year or stable quarter on quarter. Gross profit was RMB34.4 billion, up 22% year on year or down 7% quarter on quarter. Net other gains was RMB2.5 billion for the 2nd quarter. On a year on year basis it mainly reflected decline in net gains from investee companies and higher impairment provision for certain investments. These two outcomes however are all non GAAP adjustments. Share profit of associates and joint venture was RMB 1.5 1,000,000,000 in the quarter versus share of losses of RMB 319 million last quarter. The Q on Q change was mainly due to increase in profit contribution from EPIC due to the success of Fortnite in overseas market. On a non GAAP basis share of profit of associates and joint venture was RMB2.8 billion for the 2nd quarter. Income tax expense was approximately RMB3.6 billion down 9% year on year or down 37 percent quarter on quarter primarily due to lower withholding tax. Effective tax rate for the quarter was 16.2%. Net profit attributable to shareholders was RMB17.9 billion down 2% year on year or down 23% quarter on quarter. I will walk you through our non GAAP financial numbers. For the Q2 and other adjustments to non GAAP, operating profit for the quarter was RMB22.3 billion, up 11% year on year or down 12% quarter on quarter. Operating margin was 30.2 percent down 5.2 percentage points year on year or down 4.2 percentage points quarter on quarter. Net profit to shareholders was RMB 19,700,000,000 up 20% year on year or up 8% quarter on quarter. Net margin was 27.8 percent down 1.3 percentage points year on year or up 1.8 percentage points quarter on quarter. Let's turn to segment gross margin. Gross margin for value added services was 59% down 1.6 percentage points year on year or 4.3 percentage points quarter on quarter. The decrease is mainly reflected the revenue mix shift from games to lower margin digital content subscriptions and live podcast services as well as the rising content cost of such businesses. Gross margin for online advertising was 37.4% stable on year on year basis or up 6.2 percentage points quarter on quarter. The quarter on quarter increase was mainly driven by increased advertising revenue due to positive seasonality. Gross margin for others was 24.9 percent up 2.5 percentage points year on year or stable quarter on quarter. The year on year increase was mainly due to growth in revenues from microloan business, interest income related to restricted custodian deposits and fees charged from credit card repayments. PBOC has gradually stepped up the centralized deposit ratio requirement for 3rd party online payment services providers just like ourselves, where we are required to move restricted custodian deposits to non interest bearing accounts. The ratio was increased from 32% in March to 42% for the Q2 and finally up to 100% by January 2019. As such, interest income recognized under other segment has dropped to low teens percentage of other segment revenue for the 2nd quarter and will continue to impact on segment revenues and margins. We are seeking to mitigate the impact through various monetization initiatives in our payment and related businesses. These including growing our Internet finance revenue such as micro loans and wealth management products which carry higher margins than payment business as well as managing marketing expenses. Moving on to operating expenses, selling and marketing expenses were RMB6.4 billion up 74% year on year or 14% quarter on quarter. The year on year increase mainly reflected greater marketing spending in our products and platforms such as online games, online media, payment related services and mobile utilities. The sequential increase was driven by seasonally more advertising and promotional activities in the Q2. As a percentage of revenue, selling and marketing expenses increased to 8.6% for the Q2. G and A expenses excluding RMB 4.1 1,000,000,000 up 5% year on year or down 7% quarter on quarter. On the G and A, R and D expenses were RMB5.7 billion up 35% year on year or 14% quarter on quarter. Both year on year and quarter on quarter increases of G and A expense were mainly due to greater R and D expenses and staff force. As a percentage of revenue, total G and A was 13.4% and R and D was 7.8%. At the end of the Q2 we had over 48,600 employees. The year on year increase of 20% was mainly due to our expanded business scope in particular online games and cloud businesses. Let's go through margin ratios for the Q2. Gross margin was 46.8%, down 3.2 percentage points year on year or 3.6 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 30.2%, down 5.2 percentage points year on year or 4.2 percentage points quarter on quarter due to lower gross margin and higher marketing spend. Non GAAP net margin was 27.8 percent down 1.3 percentage points year on year or up 1.8 percentage point sequentially which fell to a lesser extent due to the margin pick up from share of profit of associates and income tax expense as mentioned earlier. Let me share some key financial metrics with you before rounding up this presentation. For the Q2, total CapEx was RMB7.1 billion up 135% year on year or 12% quarter on quarter. Operating CapEx was RMB6.6 billion increased by 183% year on year as we reserved more servers to augment business growth. Non operating CapEx was RMB495 1,000,000. Free cash flow was RMB15.4 billion down 12% year on year or up 18% quarter on quarter. At the end of the quarter, our net debt position was RMB35.3 billion compared to net debt of RMB14.5 billion turned to net debt position in 2018 mainly due to increased strategic M and A investments amounting to US7 $1,000,000,000 in the Q1. We have moderated pace of M and A activities in the Q2 relating to around US3 $1,000,000,000 net payments. We will continue to review and evaluate the needs in monetizing our investments such as mobile and early amount which we disposed recently. The fair value of our listed investing companies excluding subsidiaries of course were approximately RMB248 1,000,000,000 or approximately US36.2 billion dollars as at quarter end, up from RMB146 1,000,000,000 a year ago. Thank you. We shall now open the floor for questions. Operator, we will take one question each time. The first question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please ask your question. Good evening. Thank you for taking my questions. I guess the first one is about the current situation of the mobile game approval process in China. Just wondering if you guys could help us to understand if the current situation has affected you? And what are some of the measures that we are implementing to handle the situation? And then secondly, a quick question about your video advertising pieces. I remember last quarters, there was a fairly strong year on year growth. It seems like we saw some deceleration in the second quarter, even on the back of produce 101. So just curious if the so called like cannibalization from the subscription basis is a recent and would this be the norm going forward, namely we will be seeing strong subscription growth, but perhaps a slowdown in video advertising? Thank you. Okay, Eddie, thank you very much for your questions. Let me first address your first question regarding mobile game and most broadly game approval process. Basically what's happening now is that there's a temporary suspension on the JPB's monetization approval, so that games without that license cannot really officially start monetization. And that's mainly because of restructuring of the officiating bodies that it's going at the senior government level. So as a matter of fact, a lot of games have not been approved. Now what's happening is that for the games that have been approved before, they can still be launched and be monetized. And as you can see, we do have a lot of games in the pipeline which have been approved for monetization. So we have been launching games with monetization and right now at least 15 games within our game portfolio have been approved for normal monetization. Now with respect to new games, the administration is also aware of the fact that because of the restructuring it's now affecting the industry as a whole. So the GPP has set up a green approval process which means that if you can go through that green channel, then you can actually have 1 month monetization testing and that's acted as a relief for the entire industry. Now unfortunately given the fact that our PUBG mobile games have already been launched and has reached a very significant size, we do actually need to go through the official JAPP monetization approval process, which at this point in time we don't have visibility on when exactly it will restart yet, but we are also aware of the fact that the GAP is constructive in giving out this temporary monetization period which we hope is an indication that the official approval process will start again. Now we'll be working very diligently to work with the government in order to get the approval of PUBG Mobile when the monetization formal approval process restarts. So that's really the situation at this point in time. We do believe it's not a matter of whether these games will be approved for monetization, it's a matter of when exactly we can actually do that. Eddie, on your second question about video advertising revenue decelerating, yes, your inference is correct actually after a long period where within our media revenue, news related revenue was extremely weak and our video ad revenue was extremely strong. This quarter, we saw a little bit of kind of reconvergence on both sides. Our video ad revenue decelerated for a few reasons. One is that we took the opportunity this quarter to really work on reducing the discounts of the 2 ad auction fees. And that actually had some meaningful impact, which helped our video advertising gross margin by percentage points, but didn't help our video advertising revenue. A second is that some of the big content you alluded to, such as Produce 101, while there's certainly advertising sponsorship around it, we also took the opportunity to use that bucket of content to drive our subscription revenue or our boating activities, which we're quite proud of because historically, as you know, variety shows and so forth don't really lend themselves to the subscription business model. But we think we've made some progress on that front, which is important for the future. Big picture and stepping back, we believe that our overall video advertising revenue grew probably similar to the industry growth rate in the Q2. But our video subscription revenue, we knew grew substantially faster than the industry at over 100% year on year. And so therefore, in aggregate, we believe that our video platform grew revenue faster than the video industry year on year. Well, last point I want to add is the produce 101 and content such as Fuyao have exceeded really the initial expectation and a lot of the advertising we sold was actually pre sold. So I would say some of these content we under monetize compared to the actual result that we achieve. But for Produce 1 100 and 1 that actually set up for much better monetization for next season. Next question comes from the line of Jim Yoon from New Street Research. Please ask your question. Hi, good evening guys. I think on the gaming side or overall deferred revenues were down about 10% sequentially. If you could just kind of help us segregate that between what gaming and PC deferred revenues in PC gaming or overall gaming in China looks like versus memberships and international business? And then my second question is, James, I think you mentioned some growth prospects for newsfeed propelling. Can you just give us some operating metrics beyond that perhaps MAU, DAUs or even ad loads? Thanks guys. In terms of deferred revenue, you are right that there are many moving parts inside that including the prepaid advertising, prepaid money subscriptions, the business cooperation agreement with monthly amortization of course and prepaid tokens and cards. Different revenue usually soften up this big season for games especially for Q2 and Q4. For example in quarter 4, 2017 the deferred revenue dropped by roughly 3.5%. And out of the 9.5% drop, I would say that about 3.5% more seasonal in nature as evidenced in the drop of about the same percentage in quarter 4 of 2017. For the remaining about 6% included about 600,000,000 quarterly amortization for business cooperation agreement which accounted for roughly 1.5%. The remainder say 4.5% was attributable to games and others and for games PC would have a much bigger impact than mobile. Having said that, the year on year deferred revenue is stable. So in terms of the media feeds, in our prepared remarks we did talk about our overall strategy. If you look at the reading activities, right, within Weixin which you have an entire ecosystem based on official accounts and that's something that we for now put aside because it is a very big ecosystem and it generates billions of page views everyday and it has been very solid in terms of its overall performance in terms of time spent. But in addition to that, we have been creating media feed products within each one of our large DAU products. So for example within QQ it's QQ KanDian, within QQ Browser there is a news feed. These are for now the 2 largest news feed products for us and within the media feed, we try to put in different media formats including news feed, including short videos and over time mini videos. For now the metrics that we look at is that usually what happens with these media feeds integrated into our large DAU products is that they tend to have a pretty large DAU, but usually the users would read fewer number of PBs on average and number of VVs on average. Now we have given you an aggregate number which is for the 2 largest products, KanDian and QQ Browser. The total daily page views through these media feeds is up 55% year on year and the total number of short videos view is up more than 3 times year on year. And in terms of the mini video which is now curated by Weixu, it's also distributed through these media feeds. The first and most advanced integration is actually through QQ KanDian and we can see there is a very strong traction in terms the growth of the viewership on mini video in QQ KanDian and overtime we'll propagate that mini video feeds to other media feeds in our products including QQ Browser, Video as well as Weixin. Okay. And then next question please? Next question comes from Gregory Zhao from Barclays. Please ask the question. Hi, management. Thanks for taking my question. The first question is still about your advertising. So we see Tensei expand more ad inventories during the quarter. So can you help us understand how would that affect the pricing of your advertising going forward? At the same time, we also noted some other short video, social and news apps such as Douyin, Weibo, Total, they also substantially increased their ad inventory. So can you help us understand the potential impact to the overall online ad industry, the price trend? And also a very quick follow-up on gaming side. So the recent suspension of your Monster Hunter, is that a one off issue of gaming content or is also a signal of more restriction from the government? Thank you. Well in terms of the advertising I would say our advertising inventories we have been pretty much very self restraint in terms of put out inventories. I think if you look at our social product weixin in the moment, we now have just expanded our inventory to 2 advertising per day on the maximum and that's a fraction of what international competitive products or comparable products are putting out and even within our new media feeds business, our ad inventory is actually only a fraction of our comparables. So I think for our product, the advertising business is still very much inventory constrained and the reason is that of course we try to build our advertising business on a consistent basis and with that we want to make sure that we make the most and optimal trade off between user experience and also pricing and positioning of the advertising. And we also try to make sure that the quality of the advertisers are high. So as you can see we don't really have medical advertisers, we don't really have P2P Financial Advertisers and we also try to create this tightness so that we can help the advertisers to put up better quality advertising. So I think our entire advertising business is actually growing according to our own pace and it's less affected by what's happening in the overall performance ads industry. That was the case when there was search advertising, when there was all kinds of different advertising and that's still the case at this point in time. Now in terms of Monster Hunter, I would say it is really a one off event. The key reason is that we have gotten the approval actually to launch Monster Hunter with monetization and what happened was the content eventually delivered by the developer who was actually not completely comply with the regulatory requirement and as a result we have to suspend the sales of the content and we need to adjust the content alongside with the developer in order to prepare it for approval in the future. Through this process we have established a tighter communication with the relevant government officials and regulatory body and we hope this is something that will improve our process going forward. Next question please. Next question comes from Natalie Wu from CICC. Please ask your question. Hi, good evening. Thanks for taking my question. I have 2 here. Firstly, I saw very decent growth for the active user of your League of Legends. Just wondering what's the major concerns for the growth of its revenue? Is it mainly related with those rail skin reserves in that game? If yes, so when should we expect to see a meaningful improvement for that? And secondly, can you give us some color on the current contribution for commercial payment and interest income in other revenues item? And should we assume the interest income item to finally go to 0 if the centralized deposit ratio goes up to 100%? Thank you. Yes. So with the I think your first question was around League of Legends. And we've seen some as we mentioned in the prepared remarks, we've seen a nice upsurge in interest in the last couple of months for League of Legends, especially in China, which may reflect a degree of patriotism around a Chinese team winning a global event in their eSports. So that's exciting for us. On the monetization side, outside China, the games revenue was actually a fractionally up year on year last quarter. But inside China, the games revenue has been a little bit weaker since the Q4 of 2017. And that reflects the phenomenon you mentioned of seeking to replenish our breast skin reserves and so forth. In terms of how quickly we will reverse that phenomenon, obviously, it's a work in progress. Obviously, the comps get a little bit easier toward the end of this year. But I would also say that as we look at the success of other free to play PC games globally, such as Fortnite, that we've really been positively surprised by the willingness of players with these free to play games to participate in voluntary monthly subscription services. I know it sounds a little bit of a contradiction in terms that someone would choose to subscribe for something for which they don't need to subscribe. But if you put the right content and the right concepts into the season passes, then actually that's very good take up for the season and Parsons in certain environments. So that's a positive sign as well. Yes, in terms of the deposit interest, right now in this current quarter it accounts for low teens percentage of our others revenue. And the way to think about is that we have already had 42% of the deposit taken away, the interest is already taken away and we have another 58% to go. And the schedule as announced by PBOC is that it will be pretty much evenly distributed for the next 6 months for that 58%. So by January of 2019, the entire deposit will be taken away. Now as John has talked about in the prepared remarks, we would try to mitigate some of these impact by more efficiently managing some of the marketing costs that we have because we are spending actually a lot of money on marketing our payment platform and as you can see there's a very strong growth in our payment platform especially with respect to offline commercial transactions partly because of the strength of the platform itself but also partly because of the marketing program and given the loss of the interest that we'll try to optimize the marketing plan and try to pick up the ones that are more efficient. And at the same time, we feel that we can also over time deliver more financial services to some of the merchants that are connected by our payment platform. As you can see from the prepared remarks, our commercial transactions especially on the offline side had increased very significantly and that means our payment platform is now connecting to millions of offline merchants and we believe that these are very, very important assets for us. Over time we can deliver transaction based services to them including financial transactions as well as advertising transactions. So those are things that we'll be doing over time. Now the way I look at this loss of interest income is that it's of course very painful event right and we're halfway through, we'll try to mitigate part of the other half and once it's all done then basically it becomes a one time event and it will not affect the trend line of the growth of our payment business. Thank you, Andy. Next question please. Next question comes from Alicia Yap from Citigroup. Please ask your question. Hi, good evening management. Thanks for taking my questions. I have a couple of questions. The first one, wanted to look at when we look at the various initiatives that management put together on the prepared remarks to revise the growth for the gaming business for short term such as like 3Q, which initiative will be the biggest driver? Would that be the enhancing monetization of existing games such as Honors of King be the biggest driver or would that be the new revenue contribution from your newly launched games? And if you look back 6 months ago, do you think that the company or management will still go ahead to launch the 2 PUBG mobile games knowing that monetization may come later or will you actually consider waiting the launch for PUBG till the later stage? For second question, on the advertising opportunity related to mini games, could you help us sorry, mini program, could you help us understand a bit among the different industry vertical, is that fair to say most of the incremental advertising revenue would come from the traditional retail and the local services brands and merchants? If not, any major vertical that you could highlight? And could you help us frame the market size for that? Thank you. Perhaps I'll try to tackle the first question and pass it on to Martin for the second and third. So I think the first question was around, which of the initiatives that we're now undertaking in our mobile game business to reinvigorate growth will bear fruit in the Q3. And I think that sometimes these initiatives take some period of time and period of time could be months, it could be quarters to bear fruit. But in general, we're optimistic that they will bear fruit as we move into next year. Just running down one level, I'd also having had some understanding of the concern that investors have about the 2nd quarter results, I think that one aspect that may not be as well understood as it might is that really during the first half of this year for whatever reason we didn't release as many successful high ARPU games as we had in previous periods. And that's why I called out that in July August, we released a number of high ARPU games in categories like role playing games, card games. And those games at least initially appears to be off to a relatively healthy start. So as well as the much debated monetization, capital, tournament gains issue, there is also some short term volatility in terms of the cadence the balance between higher ARPU and lower ARPU games. And as Martin said, we have over a dozen mobile games that have already secured monetization approval. And some of those will be in these higher ARPU categories. And with that, I'll pass to Martin. Yes. With respect to the game business, right now, I would just say, my observation is that the gaming fundamentals is actually as strong as it has been because if you look at our DAU in China it has a very solid growth compared to last year. We have really become the category leader in tactical tournament which 6 months ago it was not very apparent, it was a very big segment with another game which has taken the lead, but within the past 6 months we have taken a complete lead over that genre and it doesn't really stop in China. If you look around the world, we have also expanded our presence outside of China, Part of it is through Epic which has become the biggest category winner in this tactical tournament genre in the western world and at the same time if you look at our own developed games both AOV and PUBG Mobile has achieved more than 15,000,000 DAU outside of China which is a very significant achievement. It also marks a significant step for us to expand our gaming business outside of China. So all these operating metrics are very strong. The only problem that we have is actually for one of our biggest game, Park G Mobile is not monetizing. And I think this is something which is a little bit out of the control, but over time I think we'll be able to solve it. Now with respect to Mini Programs, I think it's really an overall ecosystem in which we are trying to connect our users with many different types of offline activities and a lot of these are transaction based, a lot of these would not even get the chance of getting the online engagement, if there's no mini program, because if you really need to download an app, most of the users will be gone. But because of the availability of mini programs, many of these connections are made. Yes, a lot of the connection is actually between offline and online and a lot of it is due to the retail industry. But I think there's also a lot other interactions too, right. For example, through retail, we are also going to touch upon brands. We find that a lot of brands are looking at Mini Program as a way for them to engage with their users and even though they are not directly having a retail relationship in store, the brands want to touch a point their customers, they want to understand who are their customers and through Mini program in the past they were not able to do it, now they are able to do it. So I think Mini Programs really help 1, all kinds of different services to reach their users online and 2 is whenever they have a point of contact to be it offline or online, they can have an additional transaction or additional action that can be taken by the users. And thirdly, Mini Program also allows a lot of social sharing of different kind of interaction. So it allows word-of-mouth to be spread for different services and brands. Next question please. Next question comes from Wendy Huang from Macquarie. Please ask your question. Thank you. My first question is about the earnings growth outlook. So this quarter, the revenue growth dropped to only 30%, probably the lowest in the past 3 years, and yet operating profit growth was only 20%. So you mentioned a lot about the launching of the high ARPU games and it was a mini program to be a structural driver in the future. I just wonder when should we expect those things to really bring the earnings growth back to above 30% level? Or with a temporary pickup in the game business and with some macro headwinds where you control the cost such as the G and A to ensure better earnings growth? And secondly, can you give us some clarification around the Fortnite? So whether the Fortnite PC has already obtained the monetization approval? And also, what's the progress of the Fortnite mobile development? If the Fortnite mobile is to be launched in the future, does it require separate approval from the PC version or not? Thank you. Okay. Well I think from a revenue growth perspective, the gaming sector is one key area of weakness and as we have said, a big part of it is because our biggest game is not monetizable. And I think the growth will return when it is monetizable. So it's an event that we're working very hard towards. And of course in the meantime there are a lot of things that we'll be doing in order to try to mitigate the problem. But I think the biggest issue is really trying to monetize our biggest game And at the same time when we talk about higher ARPU games and when we talk about expanding our presence outside of China and trying to monetize better there, I think there's a number of different measures that we can try to grow our business as well. In terms of, I would say, what's the next question, Fortnite, right. For Fortnite the current situation is that the PC version of Fortnite has already received the Ministry of Culture and Tourism approval, so we can launch the game. We're not right now applying for the green channel approval for monetization for 1 month with GAPP before any game can be approved for formal monetization that's still ongoing. And if and when we get that approval then we can start monetizing. So far I think when we look at Fortnite's pre registration and also in the beta testing the rate of people's response is actually pretty good. Now with respect to the mobile game, we do need to have a separate approval process for the mobile game which will follow after we have launched the PC version of Fortnite. Just to supplement Martin on the first question and specifically around the relatively slower earnings growth. As Martin had mentioned earlier, there's a couple of substantial factors which are temporarily impacting our earnings growth, which one we try to quantify. And one is the non monetization of the tactical tournament games, which we believe could be very substantial based on what we already see internationally and based on industry logic. And then the second one is the fact that we're halfway through this process of losing the interest income on the deposits, which again, we're halfway through that process. We think we'll find some offsets as we work through the second half of that process and that's a finite one time process. Next question please. Next question comes from Han Joon Kim from Deutsche Bank. Please ask your question. Great. Thank you very much for the chance to ask questions. I just wanted to differentiate the publishing of games in China. So what goes on to Wii games and what goes on to kind of direct publishing into China and how we should think about the evolution of our growth of Wii games going forward? And the second question is, I think we've introduced the Battle Pass to our PUBG global version. And just kind of wanted to get your impression on how you see the evolution and adoption of that Battle Pass relative to Fortnite success. So my understanding is the ranking is a bit lower. So the impression is that the paying adoption rate for PUBG Mobile is lower. So just trying to understand the relativity of that context. Yes. So let me try to answer both of those. So first with regards to what we would publish versus what we would platform through the We Get In platform. I think that simplistically in the past one could have said that for a game of a massively multiplayer characteristics, then our first instinct would be to try to publish it ourselves because there's a great deal of local expertise that required local optimization that's required and local customization that means simply copy pasting, translating and tweaking it is not sufficient to make the game be what it can be in China. And when we look back, I think the great part of the success of products like Dungeon and Fighter, which is multiplayer, League of Legends, which is multiplayer, Crossfire, which is multiplayer, all imported games, all games that we publish ourselves in China have gone on to great success due to the fact that they're great product, but also the fact that we've taken on hand the publishing. So that's a typical classic direct publishing experience. Now the games which are more single player in nature, perhaps more narratively driven in nature, then historically they might make more sense to put on a Steam like platform or on a Wii game platform. And that's initially the pattern that the first successful games on Wii game were products like Don't Starve, which were relatively simpler in nature, required relatively less local optimization. Monster Hunter World is a really interesting hybrid in that it does have a relatively strong narrative. But at the same time, it's a game that people generally play on a cooperative basis. So it's a cooperative player versus environmental, player versus gigantic 5 breathing monster experience. And as such, the interest that our users had in it was extremely encouraging for the future. It's just unfortunate that now we need to tweak the product a little more to service and provide to our users. So that's in terms of the WeGain versus direct publishing parts. In terms of the battle pass monetization for PUBG MOBILE, we're pretty happy. It's early days. I would say that PUBG MOBILE, as the name suggests, is a mobile game versus Fortnite is console PC and mobile. And my guess is that because console is because Fortnite is console plus PC, it's tapping into some younger users who historically might have had a habit of buying X number of package software per year. And now that they're willing to redirect some of that money into the monthly subscription service versus because PUBG Mobile is only mobile, then the users are generally comparing it with Clash of Clans or Candy Crush, where they don't historically have a habit of buying a dozen packaged software each year. So in that sense, I think that we will see, we are seeing and we should expect to see a slower build of the monthly pass, Battle Pass revenue in a product like PUBG versus the really excellent outstanding process progress that Epic have made with Fortnite or for that matter that Electronic Arts have made with the FIFA games. Thank you. And due to the time constraint, we will take the last three questions from the floor. The last three questions comes from the line of Karen Chan from Jefferies. Please ask your question. Thank you very much for taking my question. So my first question is, how much of a pipeline buffer do we have until we get more visibility on resumption of new license approval? Does the 15 games in the pipeline that we have already secured license, does that include recently launched titles like MP4? In other words, will that impact any new high ARPU mobile game title launch in Q4? And also on the PC front, you mentioned that we are in the process of applying for green channel for a 1 month monetization testing on PC Fortnite. Just wondering earlier, do we expect some sort of monetization contribution in the Q4? Thank you very much. Yes, I think, Peter, when we gave a figure for the number of mobile games in our pipeline that have already secured approval. And obviously, that figure would include a mix of different kinds of games. And so I suppose if you want to look at it from a buffer perspective that then one can. I think that in terms of Fortnite PC, the green channel, the point we were alluding to is that the approval process for Fortnite PC is different from and to some extent more in line with historic norms than the approval process for the PUBG games. And so therefore, while it's hard to forecast exact approval process, given some of the changes in the regulatory environment, at the same time, we think that's an approval process that should be more consistent with historical norms, particularly as Martin said, since we have the Ministry of Culture approval already and historically the time lag between Ministry of Culture and GAPP approvals is relatively shorter. Next question please. Next question comes from Grace Chen from Morgan Stanley. Please ask your question. Hello. Hi. Hi. Thank you for taking my question. My question, let me switch the gear to your cloud business, which has been growing very fast. In the press release, you talked about Tencent will continue to grow the cloud business through organic growth as well as collaboration and investment opportunities. Can you elaborate about your plan for collaboration, especially we've been seeing some news about your collaboration with some international players such as Google? Thank you. Yes, in terms of cloud business it has been growing very fast and when we talk about the collaboration we're more talking about building ecosystem of system integrators as well as developers who have specific expertise so that they can develop using our cloud solution. So as you can see in in some of the announcements, we actually have invested in a number of different system integrators within different vertical industries, so that when they design in their solution for their customers, they can actually leverage Tencent Cloud and they can convert some of their existing customers from using packaged software into a SaaS solution and then move them on to Tencent Cloud. So that's the cooperation that we are talking about and I think overall it has been going quite smoothly. Now of course with some international partners there also exists such opportunities right. There are companies who have customers who need exposure to China and we could provide a solution that can help them. So in those cases, we'll also collaborate with the international partners. Okay. And then last question please. The last question comes from John Choi from Daiwa Capital Markets. Please ask your question. Thanks for taking my question. I just have a quick question on your PUBG MOBILE. Assuming the approval goes through, do you guys have any sense how like how big this monetization opportunity could be given that I think someone asked that the Battle Pass and other initiatives in overseas market has been falling a bit short. So are we quite confident that this PUBG, if the monetization go through, that it will kind of meet internal expectation? And secondly, just quickly on the PC game growth, I know that we had a great year last year, but you're clearly seeing some slowdown for the remaining part of the year. And as we go into 2019 with the new Wii game platform, what kind of growth should we be expecting? Thank you. So John, in terms of your first question on the PUBG mobile monetization, we're pretty optimistic if we're permitted to monetize and would achieve healthy monetization. That optimism is founded on first, in the very large DAU base and the very high engagement per DAU. Secondly, the intense sort of competition, but also cooperation within the game, which historically is a good indicator of monetization. And thirdly, the global experience of games such as PUBG itself, but also Fortnite, which is where we're a substantial shareholder by Epic. I didn't quite understand your comment about PUBG Mobile international revenue, underperforming. We're actually quite pleased with the early ramp and given the fact that it's very unusual for us to monetize the game first outside China. I think this is a problem this is sort of unprecedented in our history. And you can see that it is top 50 gain by revenue ranking in many key markets, including the United States and a top 2 or 3 gain by revenue ranking in some big markets, big emerging markets, including India. So overall, we're pretty happy with PUBG Mobile progress outside China. We think if we could monetize inside China, then we wouldn't do so at a decent level. And then sorry, your second question was around the PC game revenue growth in the future. I think that with mobile game, we can point very clearly to certain specific headwinds that we believe can be overcome with time. And therefore, we believe our 19% sequential deceleration in mobile game revenue should not be representative of the long term forward trend for our mobile game business. I think for PC game business, that is a fundamentally more mature therefore, we should be relatively conservative in our expectations for 2019 and beyond. But what's interesting is if you look at results from other game companies, if you look at the commentary from NVIDIA, then the PC game industry globally is actually not a sunset industry at all. It continues to gradually expand. And I think the difference between China and the rest of the world is that in China, the innovation in games is very much focused on mobile games versus in the rest of the world. There continues to be a decent amount of innovation around console and PC. And that innovation is ultimately what drives the game industry revenue growth year to year even more than macro trends or installed base. And so the fact that our Wegame platform is bringing some of these innovative products to China, the fact that consumers are willing to pay RMB 200 or RMB 300 upfront for these innovative products, I think speaks well for a stable rather than permanently declining PC game industry in the long, long term. Thank you. And we are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website. And the replay of this webcast will also be available soon. Thank you and see you next quarter. That does conclude our conference for today. Thank you for participating Tencent Holdings Limited 2018 Q2 and interim results conference call. You may all disconnect now.