Thank you for standing by. 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. If you wish to ask a question, you will need to press star one on your telephone to join the question queue. Your name will be announced when it is your turn to ask a question. If you wish to cancel your question, please press the pound or hash key. 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 second quarter and interim results conference call. I am Jane Yip from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties, and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited, non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-GAAP measures, please refer to our disclosure documents on the IR section of our website. Let me introduce the management team on the call tonight.
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.
Thank you, Jane. Good evening, everyone. Thank you for joining us. In the second quarter 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 WeChat platform, mobile games, and video platform. We have also invested heavily in our newsfeed, short video, and mini video products and have seen significant growth in them. Let me highlight the key financial numbers. Total revenue was RMB 73.7 billion, up 30% year-on-year, stable quarter-on-quarter. Non-GAAP operating profit was RMB 22.3 billion, up 11% year-on-year, or down 12% quarter-on-quarter. Non-GAAP net profits attributable to shareholders was RMB 19.7 billion, up 20% year-on-year, up 8% quarter-on-quarter. John will provide more details in the financial section. Moving to our key platforms.
Combined MAU of WeChat and Weixin increased 9.9% year-on-year to 1.06 billion, 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 803 million. Smart devices MAU was 709 million, up 7% year-on-year. Our newsfeed service, QQ KanDian, further grew its active user and time spent. Our social network services, Qzone smart devices MAU was 543 million. In games, we are 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 service deepened 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 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, Pony. Good evening and good morning to everybody. I would first start this 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. Starting from social, Weixin recorded solid growth in terms of users, time spent, and activities.
As the largest social communication platform in China, WeChat continues to add daily active users and per user messages, both delivering a double-digit growth rate year-on-year. In particular, users are spending more time in Moments as well as Mini Games within WeChat. Through increasing popularity of Mini Programs and WeChat Pay, WeChat is getting involved in more vertical use cases online and offline, 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, reality shows, and Chinese anime. For mobile, daily active user increased 24% year-on-year. Daily videos viewed up 53% year-on-year.
Total time spent up 39% year-on-year during the second quarter, 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 viewed by more than three times year-on-year. 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 WeChat, 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 WeChat Pay, advertising, and cloud capabilities, Mini Programs can provide a seamless, closed-loop experience for users. Since its launch in early 2017, we have 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 million. 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 Mini Programs expand penetration across different representative use cases, I provided four of them. Number one, in transportation sector. Our internally developed transport payment solution, called Tencent Transit QR code, enables public transport operators to achieve higher processing efficiency, reduce cost, and utilize data for service planning. We have 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-store 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 seek 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 e-loyalty 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-channels such as WeChat Game Center, search within WeChat or social referral. Given its easy-to-play and light experience, mini games help developers accumulate users and traffic and monetize via advertising and virtual item sale on Android. In the second quarter, we introduced ads in mini games and drew enthusiastic responses from advertisers. Advertising revenue was up five times quarter-on-quarter. Now with that, I will pass to James to talk about business review.
Thank you, Martin, and good morning and good evening to everybody. In the second quarter of 2018, our revenue grew 30% year-on-year. VAS represented 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 segment accounted for 24% of our total revenue. Within the others segment, where revenue is 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 will 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 with 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 RMB 42.1 billion, up 14% year-on-year, though down 10% quarter-on-quarter. Our social network revenue was RMB 16.9 billion, up 30% year-on-year, but down 7% quarter-on-quarter. Total VAS subscriptions grew 30% year-on-year to 154 million 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 25.2 billion. Revenue decelerated to 6% 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-on-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-term 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 million 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 280% 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. In Hong Kong, we launched a local wallet authorized by the HKMA. Shifting to Weishi, which is our aggregation platform providing mini videos conveniently to our users, both via existing services as well as via our Weishi branded mobile app. During the quarter, Weishi aggregated appealing content, including clips from our self-commissioned variety show, Produce 101, and added innovative features such as artificial intelligence-based beautification tools and online voting functionality. Thanks to our content library and new features, we saw robust growth in daily mini video views, particularly on QQ KanDian and in Qzone, as well as in the Weishi branded app itself. We more than doubled our long-form video subscription base year-on-year to 74 million subscribers as of the end of June.
We also continue to lead peers by mobile DAU and daily video views, solidifying our position as the number 1 online video platform in China. Among non-game apps, Tencent Video ranks 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. In drama, Legend of Fuyao, a historical romance created out of a China Literature IP, generated about 14 billion video views in total and was the most popular exclusive drama series in the first half of the year. The online variety shows, our self-commissioned talent program, Produce 101, achieved over 5 billion video views, a new record for an online variety show in China.
In Chinese anime, we've built up experience producing IP-based anime series which attract a large audience of loyal fans. As a result, we more than doubled our anime traffic year-on-year. For example, The Land of Warriors has accumulated over 3.5 billion 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 friends. We're extending the distribution of our video subscriptions through cross-promotions with partners. For smartphone games, revenue was RMB 17.6 billion, up 19% year-on-year, due primarily to action games and Honor of Kings. Revenue declined 19% quarter-on-quarter as first, users shifted time to non-monetized tactical tournament games. Second, we launched five out of the seven new games late in the quarter.
Third, during the pre-examination season, we prioritized user retention and engagement with several of our big existing titles. However, thanks largely to the 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 users and time spent. Looking ahead, we're working on multiple fronts to reinvigorate our revenue growth, including first, expanding overseas. Arena of Valor, a battle arena game developed by our TiMi studio, has over 13 million daily active users outside China, with particular popularity in Southeast Asia, and it achieved over $200 million in user spend in the first half of the year.
PUBG Mobile, a tactical tournament game developed by our Quantum Studio, has over 14 million DAU outside China, with particular popularity in Western markets as well as in India, and it's achieved about RMB 20 million user spending per month in recent months, benefiting from seasonal passes. Second, 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 bases and intense player activity. 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. Third, launching new games in hierarchy categories.
For example, "MT4," a role-playing game based on a well-known IP, was consistently ranked top three in iOS China top grossing charts since we launched it in July. Our in-house developed RPG, "Saint Seiya," has ranked top five in iOS China top grossing charts since we launched it in August. Moving to PC client games, revenue was RMB 12.9 billion, down 5% 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 bases as well as e-sports and other offline events. For example, "Dungeon & 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 gala offline, driving up revenue and paying user counts. "League of Legends" held its mid-season invitational e-sports event in May, in which a Chinese team, RNG, won, benefiting DAUs in China. "League of Legends" DAUs were up quarter-on-quarter in China and flat quarter-on-quarter globally, despite adverse summer seasonality. We look forward to publishing several innovative titles in coming months and quarters. For example, we've accumulated over 10 million pre-registrations in China for "Fortnite," the tactical tournament game developed by our investee, Epic Games. Moving on to our online advertising business, revenue in the second quarter was RMB 14.1 billion, up 39% year-on-year and up 32% quarter-on-quarter. Our media advertising revenue was RMB 4.7 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. Following the completion of our ad system revamp, we resumed news feed ad placement within our news services in the second quarter, which along with positive seasonality, contributed to a strong quarter-on-quarter rebound. Our social and others advertising revenue was RMB 9.4 billion, up 55% year-on-year, mainly due to three factors. First, in Weixin, we added a second feed ad per user day in Moments, as well as new inventories in Mini Programs. Second, we saw robust growth in impressions in and advertiser demand for our mobile ad networks.
Third, we generated more news feed traffic in QQ Kan Dian, driving up impressions volume. Sequentially, social and others advertising revenue grew 27% quarter-on-quarter, benefiting from positive seasonality as well as the factors above. With that, I'll pass on to John to go through the financials.
Thank you, James. Hello, everyone. For the second quarter of 2018, our total revenue was RMB 73.7 billion, up 30% year-on-year or stable quarter-on-quarter. Gross profit was RMB 34.4 billion, up 22% year-on-year or down 7% quarter-on-quarter. Net other gains was RMB 2.5 billion for the second 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 of profit of associates and joint venture was RMB 1.5 billion in the quarter, versus share of losses of RMB 319 million last quarter. The Q1Q change was mainly due to increase in profit contribution from Epic due to the success of Fortnite in overseas markets. On a non-GAAP basis, share of profit of associates and joint venture was RMB 2.8 billion for the second quarter.
Income tax expense was approximately RMB 3.6 billion, down 9% year-on-year or down 37% quarter-on-quarter, primarily due to lower withholding tax. Effective tax rate for the quarter was 16.2%. Net profit attributable to shareholders was RMB 17.9 billion, down 2% year-on-year or down 23% quarter-on-quarter. I will walk you through our non-GAAP financial numbers. For the second quarter and other adjustments to non-GAAP, operating profit for the quarter was RMB 22.3 billion, up 11% year-on-year or down 12% quarter-on-quarter. Operating margin was 30.2%, down 5.2 percentage points year-on-year or down 4.2 percentage points quarter-on-quarter. Net profit to shareholders was RMB 19.7 billion, up 20% year-on-year or up 8% quarter-on-quarter. Net margin was 27.8%, 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 decreases mainly reflected the revenue mix shift from games to lower margin digital content subscriptions and live broadcast 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%, 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 micro-loan 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 third-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 second quarter, 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 second 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 microloans 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 RMB 6.4 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 second quarter. As a percentage of revenue, selling and marketing expenses increased to 8.6% for the second quarter. G&A expenses excluding R&D were RMB 4.1 billion, up 5% year-on-year or down 7% quarter-on-quarter. Under G&A, R&D expenses were RMB 5.7 billion, up 35% year-on-year or 14% quarter-on-quarter. Both year-on-year and quarter-on-quarter increases of G&A expense were mainly due to greater R&D expenses and staff costs. As a percentage of revenue, total G&A was 13.4% and R&D was 7.8%. At the end of second quarter, 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 second quarter.
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%, down 1.3 percentage points year-on-year or up 1.8 percentage points sequentially, which fell to a lesser extent due to the margin pickup 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 second quarter, total CapEx was RMB 7.1 billion, up 135% year-on-year or 12% quarter-on-quarter. Operating CapEx was RMB 6.6 billion, increased by 183% year-on-year as we reserved more servers to augment business growth. Non-operating CapEx was RMB 495 million.
Free cash flow was RMB 15.4 billion, down 12% year-on-year or up 18% quarter-on-quarter. At the end of the quarter, our net debt position was RMB 35.3 billion compared to a net debt of RMB 14.5 billion last quarter. We turned to net debt position in 2018, mainly due to increased strategic M&A investments amounting to $7 billion in the first quarter. We have moderated the pace of M&A activities in the second quarter, reducing to around $3 billion net payments. We will continue to review and evaluate the needs in monetizing our investments, such as Mobike and Didi which we disposed recently.
The fair value of our listed investee companies, excluding subsidiaries of course, were approximately RMB 240 billion of approximately $36.2 billion as at quarter end, up from RMB 146 billion a year ago. Thank you. We shall now open the floor for questions.
Operator, we will take one question each time. We will invite the first question now.
We will now begin the question and answer session. If you wish to ask question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. 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 wonder 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? Secondly, a quick question about your video advertising business. I remember last quarters, there was a very strong year-on-year growth, but seems like, we saw some deceleration in second quarter, even on the back of our Produce 101. Just curious if the so-called cannibalization from the subscription business is a reason, 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 more broadly, game approval process. Basically, what's happening now is that, there is a temporary suspension on the GAPP's monetization approval, so that games without that license cannot really officially start monetization. That is mainly because of a restructuring of the officiating bodies, that it is going at the senior government level. As a matter of fact, a lot of games have not been approved. What is happening is that for the games that have been approved before, they can still be launched and be monetized. As you can see, we do have a lot of games in the pipeline which have been approved for monetization.
We have been launching games with monetization, and right now, at least 15 games within our game portfolio have been approved for normal monetization. With respect to new games, the administration is also aware of the fact that because of the restructuring, it is now affecting the industry as a whole. The GAPP has set up a green approval process, which means that if you can go through that green channel, then you can actually have a one-month monetization testing. That has acted as a relief for the entire industry. 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 GAPP monetization approval process, which at this point in time, we don't have visibility on when exactly it will restart yet.
We are also aware of the fact that the GAPP is constructive in giving out this temporary monetization period, which we hope is an indication that the official approval process will start again. We will 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. That is really the situation at this point in time. We do believe it is not a matter of whether these games will be approved for monetization. It is 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, our news-related revenue was extremely weak and our video ad revenue was extremely strong. This quarter we saw a little bit 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 offered to ad agencies, 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 popular content to drive our subscription revenue or our voting 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. 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 second quarter. Our video subscription revenue, we knew grew substantially faster than the industry at over 100% year-on-year. Therefore, in aggregate, we believe that our video platform
Your 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, right? A lot of the advertising we sold was actually pre-sold. I would say some of these content we under-monetize compared to the actual result that we achieve. For Produce 101, that actually set up for much better monetization for next season.
The next question, please.
Next question comes from the line of Jin Yoon from New Street Research . Please ask the 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 and PC gaming or overall gaming in China looks like versus memberships and international business. Then my second question is, James, I think you mentioned some growth prospects for newsfeed propelling. Can you just give us some operating metrics behind 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 cash. Deferred revenue usually soften after peak season for games, especially for Q2 and Q4. For example, in quarter four 2017, the deferred revenue dropped by roughly 3.5%. Out of the 9.5% drop, I would say that about 3.5% are more seasonal in nature, as evidenced in the drop of about the same percentage in quarter four of 2017. For the remaining about 6%, included about RMB 600 million quarterly amortization for business cooperation agreement, which accounted for roughly 1.5%. The remainder, say 4.5%, was attributable to games and others. For games, PC would have a much bigger impact than mobile. Having said that, the year-on-year deferred revenue is stable.
In terms of the media feeds, in our prepared remarks, we did talk about our overall strategy. If you look at the reading activities within Weixin, which you have an entire ecosystem based on official accounts. That's something that we, for now, put aside because it is a very big ecosystem, and it generates billions of page views every day, and it has been very solid in terms of its overall performance in terms of time spent. In addition to that, we have been creating media feed products within each one of our large DAU products. For example, within QQ, it's QQ Kan Dian. Within QQ Browser, there is the newsfeed. These are, for now, the two largest newsfeed products for us. Within the media feeds, we try to put in different media formats, including newsfeed, 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 PVs on average and number of VVs on average. Now we have given you an aggregate number, which is for the two largest products, Kan Dian 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 viewed is up more than three times year-on-year. In terms of the mini video, which is now curated by Weishi, it's also distributed through these media feeds.
The first and most advanced integration is actually through QQ Kan Dian, we can see there is a very strong traction in terms of the growth of the viewership on mini video in QQ Kan Dian. Over time, we'll propagate that mini video feeds to other media feeds in our products, including QQ Browser, video, as well as Weixin.
Okay. The 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 about your advertising. We see Tencent expand more ad inventories during the quarter. 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, Toutiao. They also substantially increased their ad inventory. Can you help us understand the potential impact to the overall online ad industry, the price trend? Also a very quick follow-up on gaming side. The recent suspension of your Monster Hunter, is that a one-off issue of gaming content, or it's also a signal of more restriction from the government? Thank you.
In terms of the advertising, I would say our advertising inventories, we have been pretty much very self-restrained in terms of putting out inventories. If you look at our social product Weixin, in the moment, we now have just expanded our inventory to two advertising per day on the maximum. That's a fraction of what international competitive products or comparable products are putting out. Even within our new media feeds business, our ad inventory is actually only a fraction of our comparables. For our product, the advertising business, it's still very much inventory constrained. The reason is that, of course, we try to build our advertising business on a consistent basis. 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.
We also try to make sure that the quality of the advertisers are high. As you can see, we don't really have medical advertisers, we don't really have P2P financial advertisers. We also try to create this tightness so that we can help the advertisers to put up better quality advertising. 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 ad 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. 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.
What happened was, the content eventually delivered by the developer actually does not completely comply with the regulatory requirement. 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. We hope this is something that will improve our process going forward.
The next question, please.
Next question comes from Natalie Wu from CICC. Please ask a question.
Hi. Good evening. Thanks for taking my question. I have two here. Firstly, I saw very decent growth for the active user of your League of Legends. Just wondering what's the major constraint for the growth of its revenue? Is it mainly related with those real skin reserves in that game? If yes, when shall we expect to see a meaningful improvement for that? Secondly, can you give us some color on the current contribution for commercial payment and interest income in other revenues item? Should we assume the interest income item to finally go to zero if the centralized deposit ratio goes up to 100%? Thank you.
Yeah. I think your first question was around League of Legends. As we mentioned in 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 the esports. That's exciting for us. On the monetization side, outside China, the game's revenue was actually fractionally up year-on-year last quarter. Inside China, the game's revenue has been a little bit weaker since the fourth quarter of 2017. That reflects the phenomenon you mentioned of seeking to replenish our 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.
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 of 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 to something for which they don't need to subscribe. If you put the right content and the right concepts into the season passes, then actually, that's a very good take-up for the season passes in certain environments. That's a positive sign as well.
In terms of the deposit interest, right now, in this current quarter, it accounts for low teens percentage of our others revenue. The way to think about it 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. The schedule, as announced by PBOC, is that it will be pretty much evenly distributed for the next six months for that 58%. By January 2019, the entire deposit will be taken away. 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.
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. Given the loss of the interest, we will try to optimize the marketing plan and try to pick out the ones that are more efficient. 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, has increased very significantly. That means our payment platform is now connecting to millions of offline merchants. We believe that these are very important assets for us.
Over time, we can deliver transaction-based services to them, including financial transactions as well as advertising transactions. Those are things that we'll be doing over time. The way I look at this loss of interest income is that it's of course, a very painful event, right? We are halfway through. We'll try to mitigate part of the other half. 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. The next question, please.
Next question comes from Alicia Yap from Citigroup. Please ask the question.
Hi. Good evening, management. Thanks for taking my questions. I have a couple questions. The first one, wanted to look at when we look at the various initiatives that management put together to revive the growth for the gaming business. For short term, such as 3Q, which initiative will be the biggest driver? Will that be the enhancing monetizations of existing games, such as 'Honor of Kings' be the biggest driver, or will that be the new revenue contribution from your newly launched games? If you look back six months ago, do you think that the company or management will still go ahead to launch the two '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 Programs.
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 on to Martin for the second and third. 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 third quarter. I think that sometimes these initiatives take some period of time, and period of time could be months, could be quarters, to bear fruit. In general, we're optimistic that they will bear fruit as we move into next year.
Just drilling down 1 level, I'd also, having had some understanding of the concern that investors have about the second quarter results, I think that one aspect that may not have been 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. That's why I called out that in July and August, we've 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. As well as the much-debated monetization tactical tournament games issue, there is also some short-term volatility in terms of the cadence of the balance between higher ARPU and lower ARPU games.
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. With that, I'll pass to Martin.
With respect to the game business, I would just say, my observation is that the gaming fundamentals is actually as strong as it has been. 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. Within the past 6 months, we have taken a complete lead over that genre. 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.
At the same time, if you look at our own developed games, both AOV and PUBG Mobile has achieved more than 15 million 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. All these operating metrics are very strong. The only problem that we have is actually for one of our biggest game, PUBG Mobile. It's not monetizing. I think this is something which is a little bit out of the control. Over time, I think we will be able to solve it. With respect to Mini Programs, I think it's really a overall ecosystem in which we are trying to connect our users with many different types of offline activities. 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. 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. A lot of it is due to the retail industry. I think there's also a lot other interactions too. 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. 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, through Mini Program, in the past, they were not able to do it. Now they are able to do it. I think Mini Programs really help, one, all kinds of different services to reach their users online. Two is whenever they have a point of contact, be it offline or online, they can have an additional transaction or additional action that can be taken by the users. Thirdly, Mini Program also allows a lot of social sharing of different kind of interaction. It allows word-of-mouth to be spread for different services and brands.
The next question, please.
Next question comes from Wendy Huang from Macquarie. Please ask the question.
Thank you. My first question is about the earnings growth outlook. This quarter, the revenue growth dropped to only 30%, probably the lowest in the past three years, yet the operating profit growth was only 20%. You mentioned a lot about the launching of the higher ARPU games and also 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 the 30% level? With the temporary hiccup in the game business and with some macro headwinds, will you control the cost, such as the G&A, to assure better earnings growth? Secondly, can you give us some clarification around the Fortnite? Whether the Fortnite PC has already obtained the monetization approval, and also what's the progress of the Fortnite mobile's 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.
I think from a revenue growth perspective, the gaming sector is one key area of weakness. As we have said, a big part of it is because our biggest game is not monetizable. I think the growth will return when it is monetizable. It's an event that we are working very hard towards. Of course, in the meantime, there are a lot of things that we'll be doing in order to try to mitigate the problem. I think the biggest issue is really trying to monetize our biggest game. 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 are right now applying for the green channel approval for monetization for one month with GAPP. Before any game can be approved for formal monetization. That's still ongoing. 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, 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 can try to quantify. 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. 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 the question.
Great. Thank you very much for the chance to ask questions. I just wanted to differentiate the publishing of games in China. What goes on to WeGame and what goes on to kind of direct publishing into China, and how we should think about the evolution of our growth of WeGame going forward. 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's success. My understanding is the ranking is a bit lower, the impression is that the paying adoption rate for PUBG Mobile is lower. Just trying to understand the relativity of that context.
Let me try to answer both of those. First, with regard to what we would publish versus what we would sort of platform through the WeGame platform. I think that simplistically, in the past, one could have said that for a game of massively multiplayer characteristics, our first instinct would be to try to publish it ourselves, because there's a great deal of local expertise that's 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 all that it can be in China.
When we look back, I think a great part of the success of products like Dungeon & 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 a great product, but also the fact that we've taken on hand the publishing. That's a typical classic direct publishing experience. The games which are more single-player in nature, perhaps more narrative-driven in nature, historically, they might make more sense to put on a Steam-like platform or on a WeGame platform. That's initially what happened, that the first successful games on WeGame 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. It's a cooperative player versus environmental, player versus gigantic fire-breathing monster experience. 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 so we can provide it to our users. That's in terms of the WeGame versus direct publishing paths. 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.
My guess is that 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 packaged software per year. 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. 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 progress that Epic have made with Fortnite or for that matter, that Electronic Arts have made with the FIFA games.
Thank you. 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 the question.
Thank you very much for taking my question. 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 MT4? In other words, will that impact any new high ARPU mobile game title launch in the fourth quarter? Also on the PC front, you mentioned that we are in the process of applying for green channel for one month monetization testing on PC Fortnite. Just wondering, at earliest, do we expect some sort of monetization contribution in fourth quarter? Thank you very much.
We gave a figure for the number of mobile games in our pipeline that have already secured approval. Obviously that figure would include a mix of different kinds of games. I suppose if you want to look at it from a buffer perspective, then one can. 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. 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, historically the time lag between Ministry of Culture and GAPP approvals is relatively shorter.
Next question, please.
Next questions comes from Grace Chen from Morgan Stanley. Please ask a question.
Hello. 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 talk 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.
Yeah. In terms of the cloud business, it has been growing very fast. When we talk about the collaboration, we're more talking about building an ecosystem of system integrators as well as developers who have specific expertise so that they can develop using our cloud solution. As you can see 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 onto Tencent Cloud. That's the cooperation that we are talking about. 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. In those cases, we'll also collaborate with the international partners.
Okay. The last question, please.
The last questions comes from John Choi from Daiwa Capital Markets. Please ask a 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 big this monetization opportunity could be, given that, I think someone asked about the Battle Pass and other initiatives in overseas market has been falling a bit short. Are we quite confident that this PUBG, if the monetization goes through, that it will kind of meet internal expectation? Secondly, just quickly on the PC game growth, I know that we had a great year last year, but we clearly are seeing some slowdown for the remaining part of the year and as we go into 2019 with the new WeGame platform, what kind of growth should we be expecting? Thank you.
John, in terms of your first question on the PUBG Mobile monetization, we're pretty optimistic if we're permitted to monetize them, we'll achieve healthy monetization. That optimism is founded on first, 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 leading indicator of monetization. Thirdly, the global experience of games such as PUBG itself, but also Fortnite, in which, as you know, we're a substantial shareholder via 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 a game first outside China, I think this is probably unprecedented in our history.
You can see that it is a top 50 game by revenue ranking in many key markets, including the United States. A top two or three game by revenue ranking in some big markets, big emerging markets, including India. Overall, we're pretty happy with PUBG Mobile progress outside China. We think if we could monetize inside China, then we would do so at a decent level. Sorry, your second question was around the-
PC game Revenue growth
The PC game revenue growth in future. I think that with mobile game, we can point very clearly to certain specific headwinds that we believe can be overcome with time. Therefore, we believe that 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 industry. Therefore, we should be relatively conservative in our expectations for 2019 and beyond. What's interesting is if you look at results from other game companies, if you look at commentary from NVIDIA, then the PC game industry globally is actually not a sunset industry at all. It continues to gradually expand.
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. That innovation is ultimately what drives the game industry revenue growth year-to-year, even more than macro trends or installed base. 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. We are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website at. 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 second quarter and interim results conference call. You may all disconnect now.