Thank you for standing by, and welcome to the Tencent Holdings Limited 2018 first quarter 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.
Good evening. Welcome to our 2018 first quarter results conference call. I'm Jane Yip from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-GAAP measures, please refer to our disclosure documents on the IR section of our corporate website. Let me introduce the management team on the call tonight.
We have our chairman and CEO, Ma Huateng; 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 over value-added services and social networks. James will speak to online games and advertising, and John will discuss the financials before we take your questions. I will turn the call over to Pony now.
Okay. Thank you, Jane. Good evening, everyone. Thank you for joining us. In the first quarter of 2018, we launched several successful products and further deepened our engagement with users across our social games and media platforms. We continue investing actively in our strategic priorities areas such as video, payment, cloud, AI, and smart retail to fulfill our mission of enhancing the quality of life via internet services. For the first quarter of 2018, total revenue was RMB 33.5 billion, up 48% year-on-year, and up 11% quarter-on-quarter. Non-GAAP operating profit was RMB 25.3 billion, up 36% year-on-year, and up 16% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB 18.3 billion, up 29% year-on-year, and up 5% quarter-on-quarter. John will provide more details in the financial section. Moving on to our key platforms.
Combined MAU of Weixin and WeChat increased 11% year-on-year to 1.04 billion, as mini-programs continue to gain wider adoption among users and developers. Total MAU for QQ was 805 million. Smart devices MAU was 694 million, up 2% year-on-year. Our news feed service, Kandian, within QQ continued to grow user traffic and time spent. Our social network services, Qzone, smart devices MAU was 550 million. In games, we maintained our leadership in mobile and PC. In particular, on mobile, QQ Speed Mobile became one of the top three grossing smartphone games in China soon after its launch in last December. Our in-house developed tactical tournament games achieved great popularity both in China and internationally. We also expanded the number and variety of mini games within Weixin. For our media business, we maintained our leadership in online video, news, music services, and literature.
To cater to users' short session entertainment desire, our standalone mini-video app, Weishi, will feature its content in our other news feed type of product. In FinTech, our mobile payment service continued to lead by MAU and DAU and sustained rapid growth in offline commercial transactions. In mobile utilities, we maintained our leading positions in China, in mobile security, mobile browser, and Android app store. Martin and James will discuss further in business review.
Thank you, Pony, good evening, good morning to everybody. In the first quarter of 2018, our revenue grew 48% year-on-year. Of which the VAS segment represented 64% of total revenue, of which online games contributed 39% and social networks 25%. Online advertising was 14% of total revenue. Others segment account for 22% of total revenue. In the others segment, FinTech delivered triple digit year-on-year revenue growth, mainly driven by fast-growing offline commercial transaction fees collected from merchants, as well as cash withdrawable fees collected from consumers to cover bank handling charges. Cloud services revenue more than doubled year-on-year as we expanded our cloud services market share in the games and video industries, and rolled out customized solutions catering to financial and municipal services clients.
We're also attracting an increasing number of smart retailers, such as supermarkets, chain stores, and leading fashion retailers to adopt our cloud solutions as they transition businesses to internet and mobile. Diving into the value-added services. Segment revenue was RMB 46.9 billion in the first quarter, up 34% year-on-year or 17% quarter-on-quarter. Social networks revenue was RMB 18.1 billion, up 47% year-on-year and up 16% quarter-on-quarter. The year-on-year revenue growth was primarily driven by the rapid uptake of video subscriptions, benefiting from our exclusive video content, increased paying penetration in music, live broadcast services, and more item sales in smartphone games. Within the quarter, video subscription revenue grew 85% year-on-year. Sequentially, the increases in game-related item sales, video subscriptions, and monetization of WeSing were the main contributors to growth.
As of quarter end, our total VAS subscriptions increased by 24% year-over-year to 147 million, with the growth primarily coming from our content subscription services. Online games revenue was RMB 28.8 billion, up 26% year-over-year and up 18% quarter-over-quarter. Year-over-year revenue growth was driven by smartphone games, including Honor of Kings and QQ Speed Mobile. PC games revenue was broadly stable, reflecting players' time shifting to mobile. Sequentially, new smartphone games such as QQ Speed Mobile and MU Awakening contributed to revenue growth. Leading PC titles benefited from seasonal promotion activities as well during the quarter. With 4 highly popular tactical tournament games in our portfolio, we have built global leadership in this competitive genre, which we'll talk about more on a later slide.
In social networks, on the Weixin front, the launch of mini games has achieved significant success, hence has benefited the overall mini program ecosystem as a whole, with smart retail mini programs as 1 example. Mini games have enjoyed rapid expansion in the 1st quarter after opening up their platform for game developers. Currently, we have over 500 mini games on the platform. We believe mini games are meaningfully expanding our game audience, with over one-third of mini games players not being previous players of Tencent mobile game apps. They facilitate new players to discover game apps. Some users start by playing mini game version of app-based game and then progress to downloading the game app. Mini games also serve as an entry point for users to learn and extend their usage of other mini programs.
We have started light monetization of mini games via advertisement and some virtual item sales. Leveraging on growing consumer adoption of mini programs, we introduced our scan to buy solution. The solution integrates mini programs with Weixin Pay, allowing customers to pay for their goods on smartphones, increasing checkout efficiency. Supermarket chains such as Walmart and Yonghui are among early adopters of the solution. Our DAU and daily transaction volume for the retailer category of mini programs increased 50% quarter-over-quarter. We believe mini program is synergistic with the overall app ecosystem because it encouraged many otherwise non-app developers to embrace the mobile internet, and some of these developers will eventually come on to develop native apps. Turning to QQ, which has been quite successful in building its content ecosystem in recent years.
Its news feed service, Kandian, is benefiting from the significant synergies between a social platform and a content platform. In the 1st quarter of this year, Kandian achieved over 80 million DAU and grew its video views three times year-over-year. Monetization is still at an early stage, and we see upside potential given the strong advertiser demand for feeds ad inventory. During the quarter, we have also relaunched our mini video app, Weishi. Weishi offers users a wide range of high-quality professional user-generated content or PUGC from the market, as well as from our licensed digital content libraries such as music, games, sports, and variety shows.
In addition to broadcasting the content in the app itself, Weishi also distributes content to our feed verticals such as Kandian and mobile QQ browser. We believe Weishi will be able to leverage our access to proprietary content distribution capability via our platform apps, as well as linkage to user social graph over time. I would like to turn to James to talk about games.
Thank you, Martin. Tactical tournament games have become phenomenally popular, both internationally and in China, across PC, console and mobile devices. I'll talk a little bit about how we've capitalized on this new opportunity by utilizing our in-house game development skills, our relationships with IP owners, our investee company portfolio, and our publishing platform. Our in-house game studios in China have developed two titles based on the well-known PUBG IP, one reflecting the original PC gameplay and one featuring a design for mobile experience. The two games achieved breakout popularity in China, with combined DAU exceeding 50 million users. Outside China, combined DAU can reach over 10 million users, and we've just started monetization. We expect these games to negatively impact our financials in the short term, as we are not yet monetizing the games in the China market, but we are incurring marketing and operating expenses.
We believe they represent a substantial revenue opportunity once we commence domestic monetization. Our investee studio, Epic Games, based in North Carolina, has developed and operates Fortnite, which has become a global success. Fortnite has over 40 million monthly active users and is the most-watched game currently on Twitch. It's already achieving healthy monetization via the sales of seasonal battle passes, which unlock skins and decorative items. Fortnite's iOS mobile version ranked as the top grossing game in the U.S. iOS chart in April. During the second quarter, we've started pre-registration for Fortnite's PC version in China. Our license for PUBG Corporation has enjoyed global success on PC and Xbox with its PlayerUnknown's Battlegrounds game, which has sold over 45 million copies globally in the past 12 months. We're also working toward publishing a localized China PC version of PlayerUnknown's Battlegrounds.
Moving on to smartphone games as a category, revenue was RMB 21.7 billion, up 68% year-on-year and up 28% quarter-on-quarter. Within the quarter, key titles grew strongly year-to-year in DAUs, paying user, and ARPU, as competitive mid-core games gained players mind share and time share. Sequentially, seasonal promotions during the Chinese New Year and our new game, QQ Speed Mobile, contributed to revenue growth. During the first quarter, we operated the top two revenue-grossing titles in China, namely Honor of Kings, which grew DAUs by double digits year-on-year. Sales of special skin items drove ARPU and strong revenue growth. We're beta testing new play modes and content for Honor of Kings with the aim of growing its user base and creating educational value for younger players.
Secondly, QQ Speed Mobile, which demonstrated our ability to migrate an internally-developed franchise, QQ Speed, from PC to mobile and to expand the franchise's audience during that migration. The mobile DAU for this game is 7 times higher than the highest ever achieved PC DAU, and over 40% of the users of QQ Speed Mobile are new to the franchise, not having previously played the PC version of the game. For PC client games, revenue was RMB 14.1 billion, flat year-on-year and up 10% quarter-on-quarter. Active users declined year-on-year due to continued time shift to mobile, as smartphone games are providing an increasingly comparable experience versus PC games. However, core user engagement with our key PC titles remains firm. During the quarter, content updates and seasonal promotions during the Chinese New Year contributed to the sequential revenue growth.
Dungeon & Fighter, which will celebrate the 10th anniversary of its China launch in June, delivered a record revenue quarter, demonstrating our capability for sustaining the longevity of our key game franchises. We will continue to invest in new franchises and in genre leadership in areas including tactical tournament games, where we are going to publish Fortnite and PlayerUnknown's Battlegrounds into the China market; sports games, where we will release updates of FIFA and NBA 2K; and sandbox games, where we have three licensed titles in our pipeline. As young people are spending an increasing amount of time on live broadcast platforms discovering games and watching e-sports events, we are deepening cooperation with the market-leading streaming platforms, including DouYu and HUYA, to better promote our games. Shifting to advertising, our first quarter revenue was RMB 10.7 billion, up 55% year-on-year and down 14% quarter-on-quarter. Mobile contributed over 90% of our advertising revenue.
Our media advertising revenue was RMB 3.3 billion, up 31% year-on-year, though down 20% quarter-on-quarter. Within the media advertising revenue, our video advertising revenue was up 64% year-on-year due to more pre-roll ads benefiting from the growth in video views and also from our enhanced capability to develop creative ad formats within our original content. Our video and news revenue both decreased quarter-on-quarter due to negative seasonality. Our social and other advertising revenue was RMB 7.4 billion, up 69% year-on-year and down 10% quarter-on-quarter. Year-on-year revenue growth was due to the expanded advertising base boosting ad fill rates in Weixin Moments, plus higher CPCs from mobile ad network. The quarter-on-quarter revenue decline was due to negative seasonality, although QQ Kandian revenue increased sequentially due to traffic growth.
To cater to unmet advertiser demand, in late March, we increased the ad load in Weixin Moments to a maximum of two ads per user day, which remains extremely conservative compared to our global peers. As both our social and feed ad loads are only small fractions of those of industry benchmarks, we believe there is a long runway for continued growth in our social and other advertising category. Digging further into our video business, we believe it sustained rapid growth in operating and financial metrics, reinforcing our industry leadership in the online video market in China, whether measured by mobile DAU or subscriptions. Both daily active users and user time spent on mobile grew strongly year-on-year, and our mobile video views increased over 60% year-on-year.
To recap, total video revenue, including advertising and subscriptions, was up 75% year-on-year, in which our subscription revenue grew 85% year-on-year. Our advertising revenue grew 64% year-on-year. Our original content initiatives have enjoyed proven success across multiple verticals. To call out a few best-in-industry examples, our ongoing idol selection variety show, "Produce 101," has become the number 1 online variety show measured by average views per episode in China to date. Our original animated series, "Knights & Warriors," has set a new record for Chinese anime in terms of video views per episode. We have a rich catalog and a richer pipeline of proven IPs, including "The King's Avatar" and "Battle Through the Heavens." We actively manage the content creation and production of movie "Forever Young," which has become a box office hit. With that, I'll pass to John to go through the financials.
Thank you, James. Hello, everyone. For the first quarter of 2018, our total revenue was RMB 73.5 billion, up 48% year-on-year or 11% quarter-on-quarter. Costs increased by 51% to RMB 36.5 billion for the first quarter on a year-on-year basis. The increase primarily reflected greater channel costs, cost of payment-related services, as well as content costs. Gross profit was RMB 37 billion, up 46% year-on-year or 18% quarter-on-quarter. Net other gains were RMB 7.6 billion for the first quarter, mainly represented non-GAAP adjustment in relation to gains and losses from investees of RMB 7.8 billion, which comprises fair value gains as a result of increased valuation of certain investments in verticals such as video clip sharing, news feeds, online games, and video content creation, as well as net disposal or disposal gains arising from the capital activities from certain invested companies.
Share of losses of associates and joint ventures was RMB 319 million in the quarter versus that of RMB 120 million for the fourth quarter of 2017. On a non-GAAP basis, share of losses of associates and joint venture was RMB 98 million for the first quarter, compared to profit of RMB 495 million for the fourth quarter of 2017. Income tax expense was approximately RMB 5.7 billion, up 57% year-on-year or 84% quarter-on-quarter. The year-on-year increase was mainly due to greater withholding tax provided and higher profit before income tax. The Q-on-Q increase was primarily due to the absence of a reversal of income tax expense for certain subsidiaries in China, which were confirmed to enjoy a lower tax rate in the fourth quarter of 2017, as well as greater withholding tax. The effective tax rate in the period was 19.3%.
Net profit to shareholders was RMB 23.3 billion, up 61% year-on-year or 12% quarter-on-quarter. I will walk you through our non-GAAP financial numbers. For the first quarter and after adjustments to non-GAAP, operating profit for the quarter was RMB 25.3 billion, up 36% year-on-year or 16% quarter-on-quarter. Operating margin was 34.4%, down 3 percentage points year-on-year or up 1.5 percentage points quarter-on-quarter. Net profit to shareholders was RMB 18.3 billion, up 29% year-on-year or 5% quarter-on-quarter. Net margin was 26%, down 3 percentage points year-on-year and 1.7 percentage points quarter-on-quarter. Let's turn to segment gross margin. Gross margin for VAS was 63.3%, up 2.4 percentage points year-on-year or 4 percentage points quarter-on-quarter. The year-on-year increase was mainly driven by higher gross margin achieved for video and music subscription businesses as a result of operating leverage effect.
The quarter-on-quarter increase was mainly due to the same reason, as well as higher gross margin for platform games business as a result of higher proportion of self-developed games. Gross margin for online advertising was 31.2%, down 3.6 percentage points year-on-year or 6 percentage points quarter-on-quarter. The year-on-year decrease was mainly due to higher traffic acquisition cost of ad network. The weak seasonality in the first quarter led to a decrease in revenue, impacting the margin in the quarter. Gross margin for others was 25.4%, up 3.5 percentage points year-on-year and 2.6 percentage points sequentially. This gross margin improvement was mainly driven by the policy of charging service fee for users' credit card repayment for December 2017. Moving on to operating expenses. Selling and marketing expenses were RMB 5.6 billion, up 76% year-on-year or down 8% quarter-on-quarter.
The year-on-year increase mainly reflected greater marketing spending on products and platforms such as payment-related services, platform games, and news feed apps. This sequential decrease was mainly driven by seasonally less advertising activities in the first quarter of the year. As a percentage revenue, S&M expenses decreased to 7.6% for this quarter from 9.1% for the fourth quarter of 2017. G&A expenses, including R&D, were RMB 4.4 billion, up 30% year-on-year or up 10% quarter-on-quarter. Under G&A Research and Development expenses were RMB 5 billion, up 39% year-on-year or 5% quarter-on-quarter. Both quarter-on-quarter and year-on-year increases were mainly due to greater staff costs and R&D expenses. As a percentage of revenue, total G&A was 12.8% and R&D was 6.8%. At the end of the first quarter, we had about 46,000 employees, which represented an increase of 17% in the area of cloud and online game businesses.
Let's go through major margin ratios for the first quarter. Gross margin dipped 0.9 percentage points year-on-year to 50.4%, mainly due to increasing contribution from other segments, which carried lower margin. Gross margin was up 3 percentage points sequentially, which was driven by higher segment growth margin. Non-GAAP operating margin was 34.4%, down 3 percentage points year-on-year, primarily reflecting lower gross margin, reduced dividend income, and increasing selling and marketing expenses. Quarter-on-quarter change was up 1.5 percentage points, driven by higher gross margin, less selling and marketing spending, which were partially offset by lower dividend income. Non-GAAP net margin was 26%, down 3 percentage points year-on-year, mainly due to lower operating margin. Non-GAAP net margin was down 1.7 percentage points quarter-on-quarter, mainly due to higher income tax expense, which was partially offset by higher operating margins. Finally, let me share with you some financial metrics before wrapping up this presentation.
Total CapEx was RMB 6.3 billion, up 200% year-on-year or 27% quarter-on-quarter. Operating CapEx was RMB 3.9 billion, increased by 126% year-on-year, mainly due to the increased number of servers for expanded businesses, particularly cloud businesses. Non-operating CapEx was RMB 2.4 billion, up over five times on a yearly basis, mainly due to the recognition of spending on land use rights in Beijing in the first quarter of 2018. Free cash flow was RMB 13 billion, down 46% year-on-year and quarter-on-quarter. The sequential decrease mainly reflected decline in operating cash flow due to payments of year-end bonuses, timing of payments of certain expenditures arising from our payment-related services and tax expenses, as well as payment of land use rights. At the end of March, our net debt position was RMB 14.5 billion compared to net cash of RMB 16.3 billion at the end of 2017.
While our cash flow from operation remained solid, the change to net debt position, which resulted from higher notes payable was mainly due to increased strategic M&A investments. The fair value of our listed companies, excluding subsidiaries of course, were approximately RMB 213 billion or $33.9 billion as at the end of the quarter, compared with RMB 211 billion as at 2017 year-end. Thank you. We shall open the floor for questions.
Operator, we will take one question from each participant. Can we have the first question, please?
The first question comes from the line of Grace Chen from Morgan Stanley. Please ask a question.
Thank you. Thank you very much for taking my question. My question is about your gaming business. We know Tencent already dominates the gaming market in China, so we are interested in understanding your strategy for the overseas expansion. In terms of the game distribution overseas, would you distribute by yourself, or would you rely on overseas partners to do the distribution? How would you manage the dynamics with your overseas partners? The follow-up question is about esports. How would you capitalize on the opportunities from esports for Tencent in China and overseas markets? Especially Tencent has the top game IPs that are very suitable for esports. Thank you.
Okay. I think as, Grace, as far as publishing our games internationally, in the past, we took the view that the games we developed in China that were suitable for the China market might not be suitable for the rest of the world due to different cultures and behaviors. What we've seen in the past two years is that there's some evidence now that games created in China can enjoy global resonance. I'm thinking particularly about the success of our Stimulating Battlefield game, which has enjoyed a very strong download activity, very positive player reception since we launched it in the Western world a couple of months ago and launched it in Japan today, actually. Also, the success of our Arena of Valor game, which is a battle arena game based on Honor of Kings, which has built up a large and loyal user base in Western markets.
I think what you're seeing is that we are focusing on this opportunity more going forward. In terms of your question around whether we publish ourselves or rely on partners, the answer varies to some extent depending on geography. For example, in Southeast Asia, as you may know, our affiliate company, Sea Ltd or Garena, publishes some of our games successfully. The answer will also depend to some extent on the nature of the game. We're in the process of iterating and finding out the best solution, but we're very happy with Arena of Valor and with Stimulating Battlefield in particular, and we're very happy with some of our local publishing partners, such as Sea Ltd. With regard to esports-
You're correct to observe that some of our games, particularly League of Legends, have become very widely watched esports in their own right. Up until this point in time, our focus is still largely on utilizing the esports as a way of boosting engagement among existing users of the game, and also, to some extent, driving interest among new players of these games. We're aware that there could be, and there should be substantial monetization opportunities around esports, and we've made some experiments in that direction with League of Legends in particular. In general, our philosophy is still to use esports primarily as a way of rewarding the players of these games, re-stimulating interest among lapsed players of the games, and stimulating interest among new players of the games.
Thank you. The next question comes from the line of Alex Yao from J.P. Morgan. Please ask your question.
Hi. Good evening, management. Thank you very much for taking my question. I have a follow-up question on the gaming business. On the PC side, we understand last year first quarter base was a bit tough, and you delivered a flat PC gaming revenue this quarter. How do you think about monetization outlook for PC gaming for the rest of the year? On the mobile gaming side, while you drive gamer growth through the tactical tournament games, what's the monetization strategy before you monetize those at large DAU games? What's holding you back in monetizing the mobile survival shooting game? Thank you.
I think on the PC game, as we have repeatedly saying, there is a shift in terms of user time from PC to mobile. I think there is a seasonal boost in terms of our PC revenue in the first quarter. I think if you look into the future, I would say the shift of the user time from PC to mobile will continue, and I think that revenue will probably be under pressure because of this issue. In terms of the tactical tournament game, I think we're very happy to report that we have really nailed this genre, which is probably the biggest opportunity after the MOBA opportunity in the gaming industry in the past five years.
We have gained a lot of user base both through our self-developed mobile game in cooperation with our partner, as well as through our large strategic investment Epic. In terms of the mobile game that's operating in China, it's pending regulatory approval for monetization. There is going to be an uncertain amount of time before we can start monetizing. We do believe this is a matter of when, we're working very hard to try to get the regulatory approval. For the moment, since it's not monetizing and it's a very big DAU, the financial result will have to wait. As it comes to a tactical tournament as a genre, we believe that what Fortnite has done is a good example. Through seasonal passes and a number of different item monetization, Epic has been able to achieve quite satisfactory monetization in that game genre.
We believe when the time comes when we can actually monetize, there should be a pretty significant opportunity around monetization.
Thank you. Next question comes from the line of Karen Chan. from Jefferies. Please ask your question.
Thank you, management, for taking my question. Just a follow-up on the game, since we have already started pre-registration for Fortnite in China. Do we have any target timeline on that? My second question would be, we noticed that there has been recent rollout of new ad formats within mini game, like short video ads. Any update on monetization progress so far? How big of a monetization potential should we be expecting from mini game on both advertising and in-game item purchase? Thank you very much.
In terms of Fortnite, we have indeed started pre-registration. We're in the process of getting approval of the game for launch in China. The timing is not completely set yet, we have to wait for the next announcement to ascertain the time for the launch. With respect to monetization on mini games, we are testing the water in terms of monetizing the mini games. Over time, we do want to create an ecosystem in which the app developers, the mini game developers can actually generate revenue. That ecosystem will become prosperous.
We would more look at this as an opportunity for us to make sure that the mini games ecosystem is strong and vibrant. It is going to create some revenue for us, but a lot of the revenue opportunity, we do want to make sure that it's for the ecosystem itself. In terms of the item sales, at this point in time, it's only opened in a limited extent on Android. Again, it's more of a testing of the monetization system so that we can generate some revenue for the mini games developers.
Thank you. The next question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.
Thank you for taking my question. How should we think of the range of monetizations of the PC games we've seen, in the overall number that we saw reported for the first quarter? I mean, the range being, Dungeon & Fighter's number, versus what the rest of the universe implies. If you could just shed some color on that, it would be great. Thank you.
Piyush, could you rephrase the question perhaps, just so we're clear what you're asking?
It appears through Nexon's filings that Dungeon Fighter did well in the first quarter, if you take that revenue line out of your PC revenue reported for the quarter, it appears that the rest of the PC portfolio you have has not performed as well. How would you explain the range of performances between these two sets of games?
I think that there's a few variables to think about when you're drawing that comparison. "Dungeon & Fighter" is an incredibly important game for us, and we're very pleased with its ongoing success. One variable is that, typically the developer of a game will report revenue on a sort of a cash in that quarter basis versus we will defer the cash in that quarter over the amortization period. There may be a time lag between spikes in revenue that a developer reports versus spikes in revenue that a publisher reports. A second factor is that there are some specific PC games where we have a catalog of virtual items, and at times we put that catalog to work more aggressively, and at other times we seek to restock that catalog. For some of our PC games, we're in the restocking process this year.
Thirdly, as Martin mentioned, the PC game industry as a whole is under pressure in China because of the increasing quality of mobile games. It is very gratifying to us that "Dungeon & Fighter" is doing so well, and it's particularly gratifying to us that it's doing so well in its tenth year of life. For other games, there can be more revenue volatility because of that headwind from users playing mobile games.
Thank you. The next question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please ask your question.
Hey, guys. Good evening. I have a question on the competitive environment, about mobile news. How do you think about your positioning in the segment right now versus a year ago, given certain changes in some of the apps? How do you think about the industry structure in the future? Will it be concentrated or fragmented? Any insight would be helpful. May I just have a quick follow-up on the operating cash flow. Could you share a little bit more color about the year-on-year decline in the operating cash flow? You mentioned a couple of factors, just wondering which one would be the most important ones. Thank you.
Yeah, Eddie, I think what you meant is really the news feed industry. I would say the news feed industry had actually sort of experienced a lot of new developments in the past year. I think, broadly speaking, when we started, before the news feeds come into play, right? There's the news app, there's also official accounts, which is within WeChat and both of them, they're very vibrant and especially the official account, it actually gave rise to a large number of self-media. The news feed industry actually took and by providing machine learning capability and providing customized feeds, it's a more efficient way of providing content to users. That news feed industry started with text and photo, and that's the content format.
Now, if you look at in the past year, I think the text and photo format has really reached a peak in terms of daily users and engagement. Then there's a new format coming out, which is short video, and that has captured quite a bit of user time. Another media format actually came around, which is the mini video. Short video is a content format in which it ranges from one to five minutes, whereas a mini video is a vertical video format, which usually it's 15 to 30 seconds. That's where we stand in terms of sort of the evolution of the entire industry. Now, if you look at Tencent, I think in news itself, as a media, we continue to lead the industry with our news app, with our WeChat and QQ plugin.
Our official account continues to generate a lot of page views every day. We also recognize the importance of having a news feed which can actually provide information and all sorts of different media content to users on a customized basis. That's why we have been curating our own news feeds within our different social and media platforms. Most notably, we have done it very successfully through Kandian. As we have disclosed in the prepared remarks, our Kandian DAU is already in the 80 million DAU category and has grown very strongly from last year. In addition to the distribution platform, we're also working on the multiple media format front. We have started to provide much more short video through our newsfeed, be it in Kandian or mobile browser or in our top stories within WeChat, as well as on news apps and Kuaibao.
At the same time, we have just relaunched our mini video platform, Weishi. I think, the mission of Weishi is really to provide mini video, this format content to the different distribution platforms within our own social apps and browser apps. I think as we have said, Weishi, we believe it has the advantage of in addition to get the PUGC content in the market, we can also get access to our long video and music and sports and variety show. We have a lot of very exclusive content that can be reformatted into a mini video format. At the same time for Weishi, it's not just for its own distribution. It will be distributing across all our different news feed platforms. We'll be putting quite a bit of investment into Weishi, and we feel pretty good about its prospect over time.
In terms of the operating cash flow, if we compare year-on-year basis, the biggest impact would be the payments related type of thing, followed by the tax as well as the year-end bonuses. I'll explain a little bit here. In terms of the fees in relation to payments, the reason for having such a big amount of payment this quarter was because usually we accrued all this on a monthly basis, while the payment from time to time, it might be different. In some years, it might be end of the year, and in some years it might be first quarter. There's a bit of deferral in payment this year. That's why we see a big dip in the operating cash flow in relation to this. For the tax, of course we accrued on a monthly basis, and we paid some of the provisional tax during the year.
Usually after the closing of year, there will be a larger payment that will take place in quarter one. This impacts the operating cash flow for this quarter. Of course, for the bonus payments, as you see, we have more people this year versus last year, and the total staff cost actually increased by 29% year-on-year. It is quite natural that it will increase year-over-year.
Thank you. The next question comes from the line of Alicia Yap from Citi. Please ask the question.
Hi. Good evening, management. Congrats on the strong result. Thanks for taking my questions. I have a question related to the overall mini program ecosystem. We are increasingly hearing from various of your partners regarding helping their brands or the merchants on their assisting platform to set up a mini program or official account within the WeChat ecosystem. Should we be worried that that could be too crowded among brands and retail eventually? Are there any checks and balances that the company will be putting in place to ensure the user experience balance is well in control? For that part, in addition to payment settlement fee income, and maybe potential some advertising revenue, what could be other potential monetization opportunity from those retail official account? Thank you.
In terms of mini programs, I think the original design mission is actually for the mini programs to be very light. It's very easily discoverable by users. It can be invoked very easily, used very easily. Once the usage is done, it disappears. I think that's the design philosophy. As a result, you can see it. We have not provided a long-term position for the mini programs that you have used. We try to hide it from the user interface. In order to provide an easy access, we do have this pull-down menu for recently used mini programs. I think it should not suffer from the problem of overcrowdedness. Especially, we are trying to enable each one of the mini programs to have its own way to reach its customers.
I think the most natural way for mini program to really spread is, one, the provider has got these access paths with the users. Two is through social recommendation. We believe that it will be the most natural way for mini programs to be spread across the social network. In terms of the monetization, I think at this point in time, we're thinking less about monetizing mini programs directly. We're more thinking about how do we enable the ecosystem to grow stronger over time. We believe that if the mini program ecosystem really grows strongly, then a lot of our existing monetization models will benefit. For example, payment will benefit. For example, our advertising system will actually benefit.
As a result, we felt that's a more natural way for us to benefit our other existing businesses, and also our cloud business will also benefit as a result of mini programs proliferating. Finally, we also felt that mini program is a very good and synergistic way for us to promote apps. If you look at mini games, we believe that mini games will help to promote the discovery as well as the download of a lot of heavier native app games. In addition, as I said earlier, we believe that a lot of companies and developers who otherwise would not be developing a standalone native app will now be able to develop a very light mini program first.
If we can get enough users, then they will move on to developing the native app, which we believe is also a good way for us to enrich our overall ecosystem.
Thank you. The next question comes from the line of Wendy Huang from Macquarie. Please ask the question.
Thank you. Just a few quick questions. The first is on the payment. This quarter, payment achieved a triple-digit growth, and also the gross margin record high at 25%. With all the regulations actually effective April 1st and also the competition from Alipay heating up, how should we expect the revenue momentum or the margin trend for the others, one, i.e., the payment now? On the e-commerce front, currently, you're having lots of new retail partners. For example, in the WeChat Wallet, you're having both Mogujie and Vipshop. What's your different strategies or approach when you're dealing with the different partners in the same areas? Thank you.
I think in terms of payment, we are pretty pleased to see that there's an increased adoption of our payment solution in the offline world. We do believe that our market share has been quite substantial and sustained. Now, in terms of the competition, yes, it's a matter of fact that the competition is actually very heavy, and there have been a lot of subsidies provided in the market by our market peers. As a result, we actually have to follow suit. We are already spending quite a bit of money in terms of subsidy, and a part of it affects our overall take rate, and part of it is actually in the promotional expenses within our financials.
We do believe this level of subsidy will continue in the near-term future because it is indeed a very big opportunity, and we expect all industry participants to be investing heavily in this market. On the other hand, we also believe that the fact that there's a lot of subsidies and promotional expenses help to expand the market, which benefits everybody. And at the same time, we believe that because of our unique positioning within social payment and within convenience for users, we have a pretty distinctive advantage in the market. Now, in terms of e-commerce partners, we do offer entry points in our wallet to different e-commerce partners. I think each one of these e-commerce partners have got their pretty distinctive positioning of the merchandise they produce, as well as the way they market their products.
What we are doing is really sort of providing the entry point and be an enabler. We will help them to make their distinctive feature more distinctive. If there is a word-of-mouth effect that can be generated from their distinctive position and their merchandise, our social network helps to magnify that word-of-mouth effect.
Thank you. The next question comes from the line of Gregory Zhao from Barclays. Please ask your question.
Hi, management. Thanks for taking my question, and congratulations on the strong quarter. My question is a follow-up question about the user time spent. Just a large picture question about the industry. While we see Weishi, QQ, Honor of Kings, and some other of your flagship apps are taking a lot of user time spent, we're also seeing a variety of new functions and also competitors in areas like long video, short video, and other entertainment sections. They're also taking some user time spent. Can you help us understand, overall, the industry dynamics of the user time spending shift and such as how the increase in time spent on gaming and/or short video may affect each other and as well as the long video and other entertainment functions? Thank you.
Well, I think first of all, overall, I feel that the amount of time that people spend online have been increasing. Now with respect to specific apps, I think you're probably referring to the short video and mini video if I have to take a guess. I would say with respect to this type of apps, our observation is that number 1, it's mainly a content business, so it doesn't have much impact on our social user activity. Most of this content is actually in the category of PUGC, which straddles between PGC, professionally generated content, and UGC. As you know, we are traditionally very strong in terms of the PGC as evidenced in our leadership in news, in video, in music, and in literature and sports. I think the PGCs actually don't get affected that much.
If you look at our video platform as an example, we have mentioned that our video views actually grew by 60% year-on-year. It has been growing in terms of both the AU as well as overall average user as time spent per user. I think my guess is the short video and mini video is actually taking some time from the non-Internet time of users, one, and two, it's getting some time from the more PUGC content platforms.
Thank you.
Thank you. Time constraint, may we accept the last three questions? The next question comes from the line of Jin Yu from Mizuho. Please ask your question.
Hi, good evening, guys. Now that you've invested quite a bit into video content, including short-form video and revamped the news feed, how should we look at the trajectory of the news feed going forward in terms of potentially what you're looking in terms of revenues or ad loads or any color behind your outlook on news feed would be great. Thanks.
On news feed, it's definitely a strategic important business for us, because we know that this is an efficient way of providing content to users. Very clearly we have a distribution strategy, which is tying the news feed to our large Internet platforms, including our social platform and other content platform. We also have a content strategy, which is trying to get the best PUGC content within photo and text, within short video, and within mini video, while at the same time leveraging our unique access to some of our exclusive content tied in with our long video as well as the PUGC content ecosystem. I think it's actually a long-term strategy of pushing ahead, right? We definitely sort of feel that there's a lot of potential in this area, and we continue to make investment in this area.
Over time, this Would help us to provide better content to our users. This will help us to also generate advertising inventories. At this point in time, the ad load in our existing news feeds is actually relatively low. It's only a fraction of our industry peers. We'll definitely increase it over time. I think in line with our philosophy, whenever there's a product, we want to make sure that the user experience comes first. We will be ramping up our ad loads on a measured basis. Overall, I think we look at it as a very long-term investment, and we'll continue to make progress in this area.
Thank you. The next question comes from the line of Thomas Chong from Credit Suisse. Please ask your question.
Hi. Thanks, management, for taking my questions. My first question is about the online video landscape. Given our strong revenue growth in Q1, going forward, do we see any chance for cooperation with other peers? My second question is about the trend for the deferred revenue, which we see the growth rate is a bit soft in Q1. Just want to see if any reason on that front. My third question is about the trend for the operating expenses for this year. Finally, I just want to get a sense about.
I think that's probably enough questions, otherwise you won't have time for your colleagues to ask anything. In terms of the online video landscape, as you're probably aware, we do indeed frequently share content, swap content, co-purchase content with some of the other big online video platforms. That's particularly true for content that is monetized through advertising, and particularly true for expensive or high-profile content, such as recent movie releases. On the other hand, we are increasingly investing in proprietary content. I mentioned some of the more successful in-house content, such as "Produce 101." That content, which we normally wouldn't share, can be particularly beneficial for driving subscriptions, because then the users know that if they want to see that content, they should come to a given platform, and it develops loyalty and payment behavior and engagement with that platform. That's on the online video front.
John, on the revenue?
Yeah, in terms of the deferred revenue, I don't think it's really soft given that every quarter we still have to amortize some of the business cooperation agreement for some of the companies, just JD.com or whatever. Right now, there's an increase of about 8% quarter-over-quarter. It's quite normal, I would say.
Okay. Great.
Thank you. This is the last question. Natalie from CICC, please ask your question.
Hi, thanks for taking my question. My question regarding the online game business. Just wondering how should we think of the future performance of some of your pillar games, such as Honor of Kings, like the lifespan, monetization upside, the sustainability of the robust yearly growth, et cetera. Also, how should we compare the gross margin profile between the mobile self-developed mobile games and the licensed PC games? Thank you.
I apologize because we didn't hear all of the question completely clearly. If you need to clarify, please do. I think one part of the question was related to the lifespan of some of our big games, and the second part of the question was related to the gross profit margins of our games. Historically, as you would expect, for games where we license the game code, the software, gross margins would typically be substantially lower versus games where we create the software and IP in-house. For games where we license in the IP, but create the software in-house, the gross margins would be in between the two, but typically closer to self-developed games. For mobile games versus PC games, there's historically been less gross margin variation than there has for licensed versus self-developed games.
During 2017, the gross margins on our mobile game portfolio did experience some downward pressure because we began sharing revenue with selected app store partners in situations where the app store belongs to the handset manufacturer. That had some impact on our gross margin dynamic. In general, a self-developed mobile game would still be higher gross margin than a licensed PC game. I hope that answers the second half of your question. In terms of the first half of your question around the life cycle or lifespan of games, the mobile game industry is really too young for anyone to have an informed point of view at this point in time.
It is interesting to note that within mobile games, the top 10 mobile games in the Western world today include many titles such as "Candy Crush" and "Clash of Clans" that have been top 10 titles for several years now. If we look at the PC game industry, then as we noted in our prepared remarks, "Dungeon & Fighter" is now entering its 10th year of life in China and is one of the most successful, perhaps the most successful PC game in China by revenue. "League of Legends" has been in the market for many years, and remains highly successful. Then globally, games such as "Counter-Strike" have been evergreen and persistently successful for over a decade.
Part of why the game industry is an attractive industry is because on the one hand, you have these phenomena that really energize players, bring new players into the industry, create a great deal of popular excitement, like "Fortnite" and the tactical tournament games. On the other hand, you have games like a "Counter-Strike" or a "League of Legends" or a "Dungeon & Fighter" or a "Clash of Clans" that build up a large and stable user base over a long period of time and appear to sustain and build that user base loyalty over a very long life cycle.
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. 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 first quarter results conference call. You may all disconnect now.