Thank you for standing by, welcome to the Tencent Holdings Limited 2017 fourth quarter and annual 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 the host today, Ms. Jane Yip from Tencent. Please go ahead, Ms. Yip.
Good evening. Welcome to our fourth quarter and annual results 2017 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 official 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, Chief Financial Officer John Lo. Pony will kick off with a short overview. Martin will discuss strategic highlights. James will speak to business overview. 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 2017, we delivered a strong set of financial results. For the fourth quarter of 2017, total revenue was CNY 66.4 billion, up 51% year-on-year and 2% quarter-on-quarter. Non-GAAP operating profit was CNY 21.9 billion, up 46% year-on-year or 1% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was CNY 17.5 billion, up 42% year-on-year and 2% quarter-on-quarter. For the full year of 2017, total revenue was CNY 237.8 billion, up 56% year-on-year. Non-GAAP operating profit was CNY 82 billion, up 41% year-on-year. Non-GAAP net profit attributable to shareholders was CNY 65.1 billion, up 43% year-on-year. Our platforms also continued to gather strength. Combined MAU of Weixin and WeChat increased 11% year-on-year to 989 million in 2017, and exceeded 1 billion after the 2018 Chinese New Year. Total MAU for QQ was 783 million.
Smart devices MAU was 683 million, up 2% year-on-year. Kandian, the newsfeed within QQ, achieved higher user engagement and traffic. For social networks, Qzone smart devices MAU was flat quarter-on-quarter at 554 million. In games, we maintained our leadership in mobile and PC. On mobile, we recently launched several popular new titles, including QQ Speed Mobile and two mobile games based on the popular survival shooting game PUBG. For our media business, we strengthened our video content and capabilities, moving us to first place in China in terms of DAUs and subscriptions. In mobile payment, we continued to lead by MAU and achieved rapid growth in offline commercial transactions. In mobile utilities, we maintained our leading position in China in mobile security, mobile browser, and Android app store. With that, I will pass to Martin to discuss strategic highlights.
Thank you, Pony. Good evening, good morning to everybody. I'll first give you an overview of our annual strategic highlights for the full year of 2017. Starting from our social vertical, we grew the user base of Weixin and WeChat to a combined MAU of approximately 1 billion. Mini Programs gained popularity following the launch of enhanced features and mini games. QQ deepened engagement with teenagers through personalized newsfeed and AI-assisted photo and video features. Our social advertising business delivered strong year-on-year revenue growth as more advertisers came on board. In the gaming vertical, we expanded our smartphone games franchise and gained market share in terms of DAU, user time, and revenue. During the year, Honor of Kings achieved mass adoption in China and enjoyed initial success in Southeast Asia. We further increased market share in RPGs and established our leadership in strategy and car racing genres.
In PC client games, our operational expertise and content updates rejuvenated key titles such as DNF, despite the challenging overall market environment. We achieved late-mover success in survival shooting games through the launch of two PUBG mobile titles right before Chinese New Year and built a solid foundation for this emerging genre. Our investee company, Epic Games, also launched Fortnite, which has achieved great results in the global market. In media and content, total monthly subscriptions grew strongly year-on-year. In particular, Tencent Video became number one in China by mobile DAU, and subscriptions were faster growth rate than our industry peers. Tencent Music Entertainment Group operated China's top three music apps by DAU, including QQ Music, Kugou, and WeSing.
In the content feeds business, we upgraded Tencent Open Media Platform to centralize the content library and facilitated content curation for distribution to our matrix of apps, including our news app, browser, and our social apps. In our ecosystem, our mobile payment service grew rapidly, driven by commercial transactions. Offline daily commercial payment volume more than doubled year-on-year. Our cloud services continued its rapid growth, maintained sector leadership in games and video verticals, and expanded their customer base in finance and government sectors. We continue to increase our investment in AI and deploy the technologies in areas including medical imaging, diagnosis, and translation tools. We embraced a decentralized smart retail approach to support offline retailers with customer traffic, customer connectivity, and technology. Next, I will give you an update on a few of our newer strategic initiatives. Starting with mobile payment.
We have sustained our market leadership in an intensely competitive environment. We believe we are the largest mobile payment platform in China in terms of both monthly active users and daily active users. Social payment is a differentiating feature of our payment platform. At the beginning of the launch of the platform, we have leveraged the red envelope gifting to cultivate user habits and convert them to utilize our platform for additional services. Red envelope penetration is approaching maturity, but we have seen strong growth in users using our platform for peer-to-peer money transfer. This has become the main driving force behind the growth of our social payment. Commercial payment has been increasing rapidly. We further increased penetration and coverage to more than 30 industries, such as restaurants, transportation, convenience store, gas station, and hospitals.
By the fourth quarter of 2017, our daily offline commercial volume more than doubled compared to the previous year. We are at the same time boosting merchant adoption through self-service platforms, through our relationships with traditional merchant acquirers, as well as key channel partners such as Meituan Dianping. We're empowering small merchants and store managers with technologies such as business analytic tools to enhance their operational efficiency. We're increasingly providing financial services to our payment user base. Our wealth management platform, LiCaiTong, grew total AUM to over RMB 300 billion as of January 2018. We also helped WeBank distribute its microloan product, Weilidai, over our social platform. As at the end of 2017, Weilidai was managing an outstanding loan balance of over RMB 100 billion. I'll talk about Mini Programs, which has significantly increased users, user engagement, and use cases during the past several months.
Mini Program daily active users have reached over 170 million. As of January, we had more than 580,000 Mini Programs running on our platform. Along with expanding user base, user engagement also increased. The new feature on top of the chat screen displaying recently used Mini Programs have facilitated user revisits and grew traffic to the Mini Program ecosystem significantly. Mini Games, which attract a lot of daily active users, has also helped developing user habit to use Mini Programs on a frequent basis. Mini Programs QR codes, which are increasingly placed in offline locations, also helped drive popularity of the ecosystem. The top five use cases for Mini Programs are retail, e-commerce, local life services, municipal services, and Mini Games. There are increasingly more developers who are proficient in creating Mini Programs, and more universities and teaching institutes are offering coding classes for Mini Programs.
We view Mini Programs as a simple and innovative way to connect service providers with consumers. It's a light feature embedded in Weixin to facilitate discovery, sampling, and the download of native apps. Mini Programs are good complements to native apps, particularly in three ways. Number one, the light feature suits industries that require online and offline integration. Number two, complex and heavy apps can provide users with convenient access to selected popular functions. Number three, low-frequency services that need to increase exposure can leverage Mini Programs platform. In the next two slides, I will discuss our smart retail strategy, which has attracted quite a bit of attention. Smart retail is driven, in our view, by three major trends. Number one, increasing integration of online and offline user behavior due to the proliferation of smartphones. Number two, widespread use of mobile payment by consumers in offline premises.
Number three, the emergence of AI and big data technologies. By contributing our social traffic user ID and advanced technologies, we empower retailers in a decentralized way. What it means is that we help them to strengthen their capabilities, enabling to serve their customers better in channels that they own and control. Our smart retail solution will create value for consumers, retailers, and ourselves as a whole. To consumers, they can enjoy a seamless shopping experience spanning across online and offline premises, as well as a widening range of personalized services via retailers' official accounts and Mini Programs. To retailers, they can strengthen their brands online and offline, as well as improve their customer life cycle management and personalization. To Tencent, our payment, advertising, and cloud services can all benefit from our increased presence in the retail vertical.
In addition, adding offline data, particularly transaction data, to our online data bank enables us to be better in targeting our users, as well as in providing product recommendation. Our smart retail solution will empower retailers in three major ways. First, help them to acquire users and retain customers better. Our social platform will enable retailers to bring some of our large user base to their offline stores via a number of different tools, including LBS ads, nearby Mini Programs, official accounts, and tailored gift cards. We can help retailers strengthen their engagement with customers and extend their connection from offline to online via the Mini Program QR code or e-coupons. They can continue to engage with customers even after they have left the store, enhancing revisits and repeated purchase. Our advanced technologies enable retailers to develop personalized recommendation and marketing to target consumers and increase conversion.
Second, it enhances customer shopping experience. Our indoor maps navigation system enables shoppers to easily locate stores, our QR code allows them to quickly access product information, and Weixin Pay facilitates fast checkout. Our ecosystem partners like JD, like Meituan, can support retailers to deliver products to customers more efficiently offline, and our WeChat Work enables more effective after-sale services. Thirdly, it increases operational efficiency for the retailers. Our AI-based cloud service help to upgrade retailers' IT infrastructure. Our big data analytic tools can help retailers optimize their marketing plans and supply chain, and will also enhances retailer CRM system by leveraging our social network, unified ID system, official accounts, Mini Programs, and e-loyalty cards.
Finally, looking into 2018, I would say 2017 was a stellar year for Tencent, and I would say many of the achievements achieved in 2017 are results from investments that we have been making years ago. This demonstrates the importance of forward-looking investment for Tencent. Therefore, for the year of 2018, we're planning to step up further our investment in a number of key areas. For video, we're stepping up our investment in long-form and short-form content to sustain and expand our industry leadership. For payment, we're providing subsidies to merchants and sustain market growth, as well as to users to increase mind share. For cloud services, we're investing in infrastructure and also in people to enable us to better serve vertical industries. For AI, we're strengthening our talent pool in fundamental research as well as applications.
For smart retail, we're building up teams to drive cooperation with key retail industry partners, in some cases, investing in certain partners to facilitate their digital transformation. We believe these investments will probably negatively impact our near-term profitability, but will generate long-term value and new growth opportunities for the future. With that, I will pass to James to talk about business review.
Thank you, Martin. Good morning or afternoon or evening, as the case may be. In the fourth quarter of 2017, our revenue grew 51% year-on-year. VAS represented 60% of our revenue, within which online games contributed 37% and social networks 23%. Online advertising was 19% of our revenue. The other segment accounts for 21% of our revenue, within which payment-related services delivered triple-digit year-on-year revenue growth. For value-added services, segment revenue was CNY 39.9 billion in the fourth quarter, up 37% year-on-year, though down 5% quarter-on-quarter. Social networks revenue was CNY 15.6 billion, up 45% year-on-year and up 2% quarter-on-quarter, with the growth mainly driven by video subscription and live broadcast services. Our total VAS subscriptions increased by 22% year-on-year to 135 million subscriptions, benefiting particularly from the video product. Our online games revenue was CNY 24.3 billion, up 32% year-on-year and down 9% quarter-on-quarter.
On a year-on-year basis, revenue growth was mainly driven by mobile games. Sequentially, our PC game revenue declined due to negative seasonality and the longer-term trend of users migrating to mobile. Our mobile game revenue also declined sequentially due to lower monetization from role-playing and shooting games and from the timing of new game launches. For Weixin, we enhanced the ePass function that enables users to store their verified electronic identities, such as Social Security cards, student campus cards, and driver's license, for the convenient handling of administration on their smartphones. For example, a user who has bound his Social Security number to his ePass can then use his smartphone to book an appointment with the local hospital and to pay the medical fee online. Our upgraded Bookkeeper service, which facilitates tracking and analysis of in-store sales, has become one of our most used Mini Programs, especially for small businesses.
For QQ, we deployed machine learning to upgrade the tools, allowing our users to create amusing photo, audio, and video-based messages. These features were particularly popular among teenagers, contributing to increased MAU. Our news feed service, Kandian, continues to enhance its recommendation algorithm, boosting user time spent in video views. Looking at PC client games, for the fourth quarter, revenue grew 13% year-on-year, dropped 13% quarter-on-quarter to CNY 12.8 billion. Active users of PC client games declined quarter-on-quarter due to increasing time spent on mobile games. Revenue dipped due to fewer users, also to negative seasonality. We operated fewer marketing activities during the fourth and third quarter. Looking forward, our revenue from PC games is likely to be under continued pressure due to the PC-to-mobile shift. Within this challenging environment, we seek to further strengthen our market position.
First, by better serving core PC gamers with enhanced live operations and content updates. Second, by popularizing game streaming and esports streaming. For example, Riot hosted this year's League of Legends World Championship series in Beijing, we saw 43% year-on-year audience growth for the event. Thirdly, by identifying and partnering with breakout games that can reenergize the overall PC game market as PUBG and Fortnite have recently done. Finally, by discovering innovative types of games to open up new PC game niches, especially those niches naturally more suited to a PC than a smartphone environment. For smartphone games, our fourth quarter revenue was CNY 16.9 billion, up 59% year-on-year, but down 7% quarter-on-quarter.
The sequential decline reflected several factors, including first, for our shooting game, CrossFire Mobile, we launched a survival shooting mode, which drove a sharp increase in the game's player base, but adversely affected its revenue as many of the existing players moved into the new mode, which we're not yet monetizing. Second, for role-playing games, revenue from several substantial titles, including Legacy TLBB, and Dragon Nest declined, reflecting their maturation cycles. Third, for the portfolio as a whole, we launched some of the bigger new games relatively late in the quarter. The performance of some of these new games is quite instructive, though. QQ Speed is an internally developed PC game that leads the racing car genre in China. One of our internal studios created a smartphone interpretation of that IP called QQ Speed Mobile, which we published at the end of last year.
That game has attained over 20 million daily active users and robust monetization, ranking among the top few grossing games in the iOS App Store since launch, and is successfully expanding the racing car genre from PC to mobile. Moving on to PlayerUnknown's Battlegrounds, or PUBG, it's a globally popular survival shooter game on PC. We secured a license from Bluehole, its developer, to operate the PC game in China, but also to develop mobile games based on the PUBG IP. Two of our internal studios created a couple of smartphone PUBG games, which we released just last month. Both games have achieved rapid user adoption and robust user retention with our PUBG: Exhilarating Battlefield becoming the clear leader in the genre with over twice as many daily active users as any competing game in China.
For now, we're purely focused on expanding these two games' user base and have not yet commenced monetizing. We believe the success of these games speaks to our team's capabilities in identifying emerging user needs, nurturing our own or our partners' key intellectual properties, developing best-in-category mobile games based on those properties, and then publishing those mobile games to large engaged audiences. For online advertising, our fourth quarter revenue was CNY 12.4 billion, which was up 49% year-on-year and up 12% quarter-on-quarter. Mobile contributed about 90% of our advertising revenue. Our media advertising revenue was CNY 4.1 billion, up 22% year-on-year, and flat quarter-on-quarter. Our video advertising revenue grew at healthy rates year-on-year and quarter-on-quarter as successful content increased user traffic and advertisers invested to reach the growing audiences.
Our news advertising revenue declined year-on-year and quarter-on-quarter as we revamped our newsfeed ad system and focused on optimizing the content we display on our newsfeed products. Our social and others advertising revenue was CNY 8.3 billion, up 68% year-on-year and up 19% quarter-on-quarter. Year-on-year revenue growth benefited on the demand side from a larger advertiser base and from us providing advertisers with enhanced targeting, and on the supply side from increased ad impression volume, especially from WeChat Moments, WeChat official accounts, and our mobile ad network. Sequential revenue growth benefited from e-commerce positive seasonality, as well as some of the factors I mentioned earlier. We continue exploring new ad formats such as cost-per-click ads inside WeChat official accounts, which link users directly through to Mini Programs.
We're particularly pleased with the operating progress of our video business, where we believe we've achieved China market leadership based on several metrics, including mobile DAUs, the number of subscriptions, and the advertising and subscription revenue. For the fourth quarter of 2017, Tencent Video's average mobile DAU grew 44% year-on-year to 137 million users. Benefiting from DAU growth, our video ad revenue increased 68% year-on-year to CNY 2.7 billion. At the end of 2017, the number of Tencent Video subscriptions had increased 121% year-on-year to 56 million, and in February grew further to approximately 63 million. Our video subscription revenue grew 149% year-on-year to CNY 2.2 billion in the fourth quarter. We believe our video market share gains stem from several factors, including the following. First, our original and licensed content.
During 2017, we sharply increased investment in original content, at times utilizing IP generated by our affiliate content generation businesses such as China Literature and Tencent Games. We also continue to identify and purchase the rights to category-leading drama series, variety shows, animations, movies, documentaries and so forth. Secondly, our platform capabilities. Our large, highly engaged user base generates substantial demand for video consumption and video sharing. We have built a sophisticated content scheduling system, which, together with our personalized recommendations, enables us to alert users to a fast-flowing stream of new content relative to their personal needs, which enhances user retention for our video service in general and our subscription service in particular. To deepen user engagement and time spent on our platform, we nurture fan-celebrity interactions in Doki, a new social community within our Tencent Video app. Third, our partnerships with adjacent businesses.
Upstream, we've made dozens of equity investments in established and new-entry content studios, which provides us with reliable content output and, to some extent, hedges us against content cost inflation. Downstream, we've partnered with a number of major TV set manufacturers who pre-install our TV launchers on their sets, accelerating the growth of our over-the-top video and streaming to TV set service, where we believe we're also the China market leader. I'll now pass on to John to go through the financials.
Hello, everyone. For the fourth quarter of 2017, our total revenue was CNY 66.4 billion, up 51% year-on-year or 2% quarter-on-quarter. Gross profit was CNY 31.5 billion, up 33% year-on-year and down 1% quarter-on-quarter. Net other gains were CNY 7.9 billion for the fourth quarter of 2017. It primarily reflected net dealing disposal gain relating to the IPOs of Yixin Group, Sea Limited, and Sogou, subsidies and tax rebates, as well as dividend income for certain investee companies. Share of losses of associates and joint venture was CNY 120 million in the quarter, compared to share profits of CNY 818 million for the third quarter. On a non-GAAP basis, share of profits of associates and joint venture was CNY 495 million in the quarter, versus CNY 802 million for the third quarter. Income tax expense was approximately CNY 3.1 billion, up 30% year-on-year or down 37% quarter-on-quarter.
The year-on-year increase was mainly due to greater profit before tax. The quarter-on-quarter decrease was mainly due to a reversal of income tax expense for certain subsidiaries in China, which were qualified for high-tech enterprise in quarter four to enjoy lower corporate income tax. Effective tax rate for the quarter was 12.6%. Net profit attributable to shareholders was CNY 20.8 billion, up 98% year-on-year or 16% quarter-on-quarter. For the full year of 2017, total revenue was CNY 237.8 billion, up 56% versus last year. Gross profit was CNY 116.9 billion, up 38%. Operating profit was CNY 90.3 billion, up 61% versus 2016. Net profit attributable to shareholders was CNY 71.5 billion, up 74% year-on-year. The effective tax rate for the year was 17.8%. I will walk you through our non-GAAP financials.
For the fourth quarter and after adjustments to non-GAAP, operating profit for the quarter was CNY 21.9 billion, up 46% year-on-year or 1% quarter-on-quarter. Operating margin was 32.9%, down 1.2 percentage points year-on-year and broadly stable quarter-on-quarter. Net profit to shareholders was CNY 17.5 billion, up 42% year-on-year or 2% quarter-on-quarter. Net margin was 27.7%, broadly stable year-on-year and up 1.4 percentage points quarter-on-quarter. Let's turn to segment gross margin. Gross margin for value-added services was 59.3%, down 3.9 percentage points year-on-year and broadly stable quarter-on-quarter. The year-on-year decrease was mainly due to higher channel costs of smartphone games paid to third-party app stores, including handset manufacturers and revenue mix change to lower margin products, such as digital content services. Gross margin for online advertising was 37.2%, down 9.4 percentage points year-on-year and broadly stable quarter-on-quarter.
The year-on-year change was mainly due to increased video content costs and higher traffic acquisition costs due to the rapid growth of our advertising network business. Gross margin for others was 22.8%, up 2.4 percentage points year-on-year and 2.5 percentage points sequentially. The year-on-year and quarter-on-quarter improvement were mainly due to gross margin improvement of payment-related services as a result of larger base. For the full year 2017, gross margin for VAS decreased 5 percentage points to 60.1%. Gross margin for online advertising decreased 6.2 percentage points to 36.7%, and gross margin for others increased 5.9 percentage points to 21.9%. Moving on to operating expenses. Selling and marketing expenses were CNY 6 billion, up 35% year-on-year or 25% quarter-on-quarter. The year-on-year increase mainly reflected greater marketing spending on products and platforms such as online games, online media, and payment-related services.
The sequential increase was primarily driven by greater marketing spending on products and platforms such as payment-related services and online media, as well as seasonal marketing and promotional activities for our online games. As a percentage of revenue, selling and marketing expenses increased to 9.1% for the fourth quarter versus 7.4% for the third quarter of 2017. Total G&A expense were CNY 8.8 billion, up 28% year-on-year and down 3% quarter-on-quarter. Under G&A, R&D expenses were CNY 4.8 billion, up 33% year-on-year and down 1% quarter-on-quarter. The year-on-year increase mainly reflected higher staff force. The quarter-on-quarter decrease was mainly due to true-up of our bonus forecast at the end. As a percentage of revenue, total G&A was 15% and R&D was 7%. At the end of the fourth quarter, we had about 45,000 employees. The year-on-year increase of 16% was mainly due to our expanded business group.
On a full year basis, selling and marketing was CNY 17.7 billion, up 45% and represented 7% of revenue. R&D expenses was CNY 17.5 billion, up 47% and represented 7% of revenue. Total G&A excluding R&D was CNY 15.5 billion, up 47% and represented 7% of revenue as well. Let's go through margin ratios for the fourth quarter. Gross margin dipped 6.5 percentage points year-on-year to 47.4%, mainly due to a decrease in BaaS segment gross margin and increase in contribution from other segment, which carried lower margin. Gross margin was down 1.2 percentage points sequentially. Non-GAAP operating margin was 32.9%, down 1.2 percentage points year-on-year, primarily reflecting lower gross margin, partially offset by higher other gains and lower selling and marketing and G&A expense as a percentage of revenue. Quarter-on-quarter change was flat.
Non-GAAP net margin was 27.7%, down 0.6 percentage point year-on-year, up 1.4 percentage points quarter-on-quarter, mainly due to lower income tax expense. On a full year basis, gross margin was 49.2%, down 6.4 percentage points. Non-GAAP operating margin was 34.5%. Non-GAAP net margin was 27.9%. Turning to earnings per share and proposed dividends for 2017. For the whole year, GAAP basic EPS was CNY 7.598 and diluted was CNY 7.499. Non-GAAP basic EPS was CNY 6.92 and diluted was CNY 6.83. Subject to the approval of shareholders at the AGM to be held on 16th of May 2018, we are proposing an annual dividend of HKD 0.88, representing an increase of 44% from last year. Let's share some of the key financial metrics with you before ending running of this presentation. For the fourth quarter, the CapEx was CNY 5 billion, up 75% year-on-year and 42% quarter-on-quarter.
Operating CapEx was CNY 3.8 billion, increased by 69% quarter-on-quarter, mainly due to increased number of servers for cloud and basic businesses. Non-operating CapEx was CNY 1.1 billion. For the full year of 2017, total CapEx increased 12% year-on-year to CNY 13.6 billion. Free cash flow reached CNY 24.2 billion, up 41% year-on-year or down 12% quarter-on-quarter. The quarter-on-quarter decrease was mainly due to lower operating cash flow and higher operating CapEx. On a full year basis, free cash flow was CNY 93.4 billion, up 70% year-on-year. At year-end, our net cash position was CNY 16.3 billion, down 10% year-on-year or 13% quarter-on-quarter. The sequential decline primarily reflected payment for M&A initiatives, partly offset by free cash flow generation. The fair market value of our listed associates and available-for-sale financial assets, of course excluding subsidiaries, were approximately CNY 210.8 billion or about $32 billion as at year-end. Thank you.
We shall open the floor for questions.
We will now begin the question and answer session. If you wish to ask a 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. First question comes from the line of Grace Chen from Morgan Stanley. Please ask a question.
Hi, thank you. Thank you for taking my question. I have two questions. My first question is about your accelerated investments in e-commerce and various offline retailers. Can you share with us your insight about how your recent offline investments, ranging from Yonghui, Carrefour, Wanda and Hailan Home, how these investments would help realize your smart retail strategy? We can expect there will be more investments in offline retailers to come, can you help us understand what will be your key considerations for more offline investments in the future? That's my first question, my second question is on other business segments. Payments and cloud have been growing very fast, this segment made up 21% of total revenue already in the fourth quarter.
We also noticed that gross margin for this segment, in a quarter, also improved to 23%, which I think should be the highest ever. Can you help us understand the drivers for the margin improvements in the quarter? Also share with us the monetization progress of the payment business specifically, given the rising contribution from this segment, which should have a bigger impact on the blended margin going forward. Thank you.
Okay, thank you. In terms of Smart Retail, I would say, as we have pointed out in our prepared remarks, Smart Retail is an important strategic initiative for the company to enable retailers and also allow Tencent to get a stronger presence within the retail vertical. We believe that this is going to benefit our payment, it's going to benefit our advertising as well as cloud services. At the same time, it will allow us to help retailers to leverage as well as to benefit from the increasing online and offline integrated user behavior of the users, given that smartphones are being used in a very ubiquitous way by the users. Now, with respect to the investment itself, what we try to do there is really, it's an add-on to our Smart Retail strategy.
If you look at our Smart Retail strategy, we have solutions that we're developing to enable different types of retailers, merchants. When we started working with them, some of the retailers and some of the players would tell us that, "Look, we may have a specific project that we want to explore with you. It's very strategic in nature." They would like us to help them on their digital transformation. Sometimes the value of the project is very hard for us to figure out exactly how to divide up the value that's created.
In those situations, and usually it's a pioneering type of cooperation, we'll say, okay, maybe one way to overcome this uncertainty in terms of how do we add value to each other is that we take a stake in you, so that we show our commitment, and at the same time, we would benefit if you benefit. That's more of a special case in Smart Retail rather than a general practice. In a lot of times when we look at retailers, we may be able to benefit from their digital transformation and we want to invest, and they say, "Oh, we don't need the capital." There are a lot of cases like that, in which we basically work with them on a commercial basis.
I would say, retail is an important sector that we believe, given our traffic, given our technologies, we can actually help them to create more value, and we can create more value through commercial cooperation. We can also create value through sometimes investing, if they find a situation that they need capital and want us to invest.
In terms of your second question about our other revenue lines, The primary driver of the revenue line and of the revenue growth in that revenue line and of the gross margin for that revenue line is our payments and financial services business. You asked about the monetization, there's a few drivers. One is the consumer withdrawal fees that are tied to usage of Tenpay, particularly for money transfers. Second one is the merchant fees that is tied to usage of Tenpay for commercial transactions. Third one is interest income on the float, which is subject to regulatory changes. The fourth one is building up adjacent financial services, such as the Weilidai micro loan. The improvement in gross margin you have seen reflects a few factors. One is overall scale benefits.
The second one is a gradual revenue mix shift towards some potentially higher margin products. The third one is us pulling levers on individual products. I think during the quarter, we mentioned that we adjusted some of the levers around using Tenpay to settle credit card outstanding liabilities. On the flip side, we think this is a very early-stage growth market, and we see ability for us to sustain and extend the market share gains we've recently been enjoying. We intend to reinvest very aggressively in our payment business during 2018 to further drive adoption. That may have a negative impact in margins. I think that both we as market participants and you as market observers focus a great deal on the short-term dynamics of subsidies and competition and margins and so forth.
Sometimes it's important to step back and look at the bigger picture, which is that China is arguably the most successful mobile payment market in the world. Part of the reason for that success is because there are two big, strong companies competing to really drive mobile payments adoption. While the competition has caused our margins to be volatile in the past and will cause our margins to be volatile in the future, we think that we, together with our competitors and our customers and our merchants, are creating a really big interesting market opportunity over time here that is an example to the world.
The next question, please.
The next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.
Good evening. Thank you for taking my questions. Have a question on more the content side. Could you share your thought with us on the industry development of short-form video and self-media? We have seen Tencent being very strong in professional content. Just wondering how you think about the potential cannibalization on user time between professional content versus this type of more user-generated content, what's our strategy going forward? Thank you.
Yeah, that's a good question, Eddie. I think number one, there's definitely a very strong growth in terms of short video content. I would say it's around content feeds. Basically, when you have a feed, you can actually put self-media content, news, magazine type of content, interest type of content, as well as short video. What we have seen is that the growth of this market is more of an incremental to the growth of the professional content. An example is that while all the growth happens within the content feed industry, our Tencent Video business continues to break new records in terms of DAUs, user time, and subscriptions. I would say it's a new opportunity. In terms of this new opportunity, if you roll back, self-media was really almost created by WeChat when Weixin came up with the official account.
That allowed a lot of different types of content owners to have a channel so that they can sign up subscribers and start pushing their content to the subscribers. Now, some of our industry peers actually took advantage of that and created content feed, that's arguably a more efficient way for users to read and explore new content. As a result, that market start to bloom. At the same time, when content feeds become more and more popular, short video becomes a very important content type for the content feed business. Now, for us, I think in response to this very big incremental market opportunity, we have been doing a number of different things.
Number one, we have actually launched a number of different products with the content feed front end, and that would include our Kuaibao, that would include our news and video, and that's in our traditional media business. We have also put it into our social platform. If you look at Kandian, if you look at Kankan, which is on WeChat, Kandian, which is on QQ, and also our browser has got this content feed front end. We have seen very strong growth in a lot of these front-end content feed business, in particular for Kandian, which has a very strong growth in the past year. In addition to the front end, we are actually working on the back-end content side. Of course, we have official account, which is already a very strong content ecosystem.
At the same time, we are also launching our Tencent Open Media Platform, which tries to integrate the acquiring of all the different types of content, including self-media, including news, interest-based content, and short video, and use that as a way so that we can distribute across all our front-end content feed business. That I think has seen a very strong progress. At the same time, we're also developing our targeting technology so that we can support all our front-end content feeds with more personalized content. Across the board, I think it is a great opportunity for us. We have a lot of user touch points, and we believe that if we can really get the content integrated and well-distributed, and the technology well-distributed, then we can actually grab a very significant part of the new market.
At the same time, these content feeds is actually a great venues for putting performance-based ad as well. Over the longer term, that would become a revenue opportunity for us as well. Now, in the meantime, we felt it's such a great opportunity that we need to invest more into the content acquisition. That's why we point out in our prepared remarks that this year we're gonna step up in a pretty aggressive way in acquiring video content, be it long-form or short-form.
Thank you. The next question, please.
Next question comes from the line of Alex Yao from J.P. Morgan. Please ask your question.
Hi. Good evening, everyone. Thank you for taking my question. You guys mentioned in the prepared remarks that 2018 will be a year of more aggressive investments, while vast majority of the investment areas were already in place way before 2017. I'm just wondering what triggers you to make the decision to more aggressive in 2018? Is it a change in the competitive landscape in those markets and the areas, or is it something related to internet macro, such as the slowdown of mobile traffic? The second question is more or less related to the first one. In the past, you guys have been quite balanced operationally and financially speaking. As you turn more aggressive in investment in 2018, what will you increase monetization to potentially alleviate the financial impact from this investment? Thank you. I stop here.
Yeah. I think, in terms of the aggressive investment, there are a number of factors which is driving this decision. Number one, of course, is the amount of opportunity that we see. We build a company on the principle that we want to go for long-term, large opportunities, and that's what we focus on. As we continue to explore and develop our different verticals, we found that the amount of long-term opportunity that's available is actually increasingly bigger. We believe that it's actually very important at this stage for us to make the necessary investments so that we can actually achieve a better market position and accelerate the development of our business.
Secondly, I would say is, clearly in a lot of the areas, we are actually doing well, so that it's actually worth for us to double down in terms of our investment so that we can accelerate the growth. For example, in video, last year was a banner year for us in which we have worked on a multi-year journey so that we became the absolute leader in the market by the end of year last year. We enjoy a much faster growth in terms of our DAU, in terms of the subscriptions. That's why we felt that if we increase our investment in 2008 and in 2009, we're going to reap much bigger benefits for the future. Finally, I would say, obviously, we have a very strong profit growth, right, we can really afford to make such investments.
We felt that every CNY invested today is going to generate much more for the future. In terms of monetization, I would say we don't monetize for the sake of monetization, right? We have always been pretty measured in terms of our monetization. We focus much more on how much is monetizable than how much is monetized. If you look at, an example is our advertising, right? I think our performance ads business on the social front has got a lot of potential for inventory growth. I think we have been pretty measured and disciplined in terms of adding inventories so that we maintain a great user experience. At the same time, we only monetize more with the growth of our technical capabilities. Another example is in our content feeds business.
Our ad load is actually much lower than our industry peers, which we felt there's room for us to grow, at the same time, we'll be doing it in a measured and disciplined way. The other example is, in this survivor shooting game genre, in which I would say if you look at the amount of success that we have achieved with the two PUBG Mobile games, we have a very large DAU, which is not monetized yet. We felt pretty good about this, right? In the future when you have such an engaged user base, we believe there is a lot of potential for us to monetize. In the meantime, it's actually much more important for us to keep on improving the user experience, the game content, adding game content so that we can really solidify our position.
Next question, please.
Next question comes from the line of Gregory Zhao from Barclays. Please ask your question.
Hi, [Martin]. Thanks for taking my question. My first question is about your social e-commerce. In the past year, we saw very strong growth and momentum of the social e-commerce, and in terms of both GMV growth and social influence. Can you help us understand how WeChat can benefit from this trend and what the potential monetization opportunity to WeChat? My second question is a follow-up question to payment. In the past Q4, when the Chinese New Year Gala, we saw that Alipay increased its investment in marketing and user acquisition. What will be your strategy and response to the competition, and will you follow that strategy? How should we think about the implication to your margin going forward? Thank you.
Around social commerce, we felt this is an important way through which people shop for products. You can do it offline, you can do it online in a centralized e-commerce site, but at the same time, you can also engage in social commerce, and it allows smaller merchants to be able to find their users through a social channel. There's also a lot of interaction between social commerce and a shop front. If you look at Pinduoduo, for example, it has both a centralized storefront and social commerce. If you look at JD, it has a very strong centralized shop front, and it's also getting better in terms of leveraging social traffic to increase their engagement of users. We felt social commerce, if done well, is actually a net addition to the user experience for our users.
It's actually very important to make sure that the quality of the products are actually well-maintained. In the past, we have seen there are a lot of companies which try to leverage social e-commerce in the wrong way, in terms of over-spamming the users, in terms of providing bad products, and those are the kind of things that we want to weed out. I would say, we have a lot more work to do in order to cultivate the good kind of social commerce. At the same time, we need to protect our users against abusing social commerce in a bad way. In terms of Alipay, I would say yes, we have seen a significant increase in terms of our peers' subsidy level.
Starting from the beginning of this year, we have also rolled out a pretty aggressive program of providing subsidies to merchants and users and have received great result. I would say, going back to what James said, in a market where the opportunities is much bigger than what we see today, in which there is a lot of growth opportunity, then it makes a lot of sense for any player to invest more so that we can expand the market further, even if we cannot grab share from each other. That's why we have said we would be investing more in this year in the payment platform so that we can capitalize a faster growth in the overall market, and hopefully we can also grab more share.
Operator-
Thank you very much
We will take the last three questions.
Your next question comes from the line of John Choi from Daiwa. Please ask your question.
Good evening, guys. Thanks for taking my question. I have two questions here. First of all, I noticed that Tencent have completed the revamp of the News Feed ad system and also launched a unified advertising platform to integrate all the inventories across the News Feed products. Should we expect a notable increase in terms of the revenue from the media advertising in the coming quarters since this has been behind us? Second is on the Mini Programs. I was wondering that it's been a little bit more than a year since the Mini Programs has been launched. We now have 170 million DAU. What have you guys seen in terms of the user behavior change within the WeChat for these users, and how do you think you could further monetize or seize the opportunity in the Mini Programs in the coming years? Thank you.
You want to answer that question?
Yeah. I think on the News Feed side, we have a number of tasks ahead of us. It's obviously a relatively competitive market with Jinri Toutiao as a dynamic first mover that keeps pushing in new directions, including short video. On our side, there's a number of products that incorporate News Feeds. In the near term, our primary focus is really on the content we show to those users in the News Feed. It's on securing more better content. It's on surfacing the right content to the right users in a more targeted fashion. We have been in the process of centralizing and upgrading our advertising capabilities, I think you'll see those advertising capabilities put to work in a measured step-by-step function.
You'll probably see it first in our Kandian News Feed, which sits within QQ, that's already very popular and a relatively well-established and relatively stable platform. You may see it extend to some of our other News Feed distribution channels, such as the Kuaibao app or the News Feed product within our mobile browser. Over the medium to longer term, we're also ramping up new News Feed products, such as the Kankan product within Weixin. Generally speaking, we're more focused on the product today than we are on the monetization.
Yeah. In terms of Mini Programs, we are very encouraged by the recent development of Mini Programs. As you know, we launched the Mini Program more than a year ago. In the very beginning, there was a lot of fanfare, a lot of expectation. It was actually off to a slower start. I think the main reason at that time was really, we need the time for education, as well as also for us to build up the necessary infrastructure supporting Mini Programs. After a whole year of development, we actually have seen the first breakout growth in Mini Programs, that's mainly catalyzed by, I would say, three things. One is the accumulation of Mini Programs and the increasing adoption of that in the offline world. That's the slow build-up.
Toward the beginning of this year, we have launched mini games, which is I would say an easy way for people to get to know what Mini Programs is. Not everybody would have run into a Mini Program QR code offline, but everybody can sample a mini game, and that's a great way to educate the users about the ecosystem. We also provide this, in the chat screen, we have this pull-down menu for most recently used Mini apps, and Mini Programs, which allowed people to access Mini Programs that they have used in a very convenient way. The two new measures really, I would say, catalyzed the latent and build-up growth of Mini Programs that are already in place. The three factors added together has brought the Mini Programs to a new height.
I think going forward, we continue to view Mini Programs as a way for service providers to engage with users in a very light and convenient way. Particularly, it would help offline, online integration. It would help apps which are complicated to serve their users in a very simple and fast and convenient way. It would also help some long tail services, which used to be very hard for them to convince users to download their apps. Now they can actually provide their services directly to their users, and get a chance to have their app downloaded if users like their app. We would say it would be a platform for all kinds of innovation to happen and it would also become a service ecosystem for WeChat.
The next question, please.
Next questions comes from the line of Thomas Chong from Credit Suisse. Please ask your question.
Hi. Thanks management for taking my questions. I have two questions about the online gaming space. First, can management comment about the mobile games and the PC games industry landscape for this year, given the emergence of PUBG games? My second question is about a more housekeeping question. Can management provide us with the ARPU for PC and mobile games? Thank you.
Okay, Thomas, I'll attempt the second question. The ARPU for MMOG is CNY 400-CNY 660. For ACG, it's CNY 120-CNY 590. For the special games, it's CNY 150-CNY 160.
In terms of the outlook for PC games and mobile games, in the end, it really comes down to the quality of the games being released and the quality of the content upgrades and live operations activities for the existing games. To get a little bit more granular than that, I think the PC game industry in China is clearly undergoing a maturation consolidation phase because incremental users are spending more time on mobile games and less time or no time on PC games. That's a headwind that everyone in the PC game industry, including Tencent, faces. At certain points in 2017, we benefited from a particularly strong content upgrade on game X or from particularly popular skins on game Y, but there is some volatility to those content upgrades and skin releases.
I think we were somewhat fortunate in 2017, which creates a tough comparison for 2018. What's interesting is if you look at the PC game industry outside China, then it's generally still growing at a decent single-digit rate. That growth, again, is driven by breakout new products, and that's both very massive-scale new products such as PUBG and Fortnite, but also new products that invigorate particular niches like the Monster Hunter game or the Dark Souls game. We think that at some point, the PC game industry in China would have consolidated down to the core PC gamers who play PC games for a reason. At that point, the growth opportunity will then belong to those companies who are still properly servicing those players with great new games and strong existing game content upgrades. That's on the PC game side.
On the mobile game side, we believe that the number of mobile gamers in China is still increasing as the smartphone installed base expands and as the quality of smartphones and the quality of the games themselves improves. There is some volatility as new genres are introduced to the market. If you look at PC games, when League of Legends first came to market, and you could see this particularly in Korea, actually, where the habit of playing PC games in internet cafes was most established, the immediate impact of League of Legends was to actually depress the PC game industry in Korea because people shifted from high ARPU existing titles such as role-playing games into League of Legends, which initially didn't really have an ARPU.
In the same way, it's possible that the China mobile game industry, since late last year when the survival shooter genre exploded onto mobile, has experienced a similar negative shift where people who were previously playing higher ARPU games, such as role-playing games, have shifted into these survival shooter games, which in some cases start off with no monetization. That is indeed the case with our survival shooter games. If your focus is very much on quarter-to-quarter revenue trends, that's absolutely something that you should be thinking about and concerned about.
If your focus is more on the long-term industry potential, it shouldn't be an undue concern because in our experience, whenever you have games that are highly engaging, that attract a substantial user base with great enthusiasm, sooner or later, and usually sooner, someone within the industry figures out how to monetize those games effectively, and the rest of the industry follows fairly quickly. You can already see with the survival shooter games, we are a very substantial investor in an excellent North Carolina-based game studio called Epic Games. They released a survival shooter game in the middle of last year called Fortnite Battle Royale. Fortnite Battle Royale is completely free to download and play, and I encourage those people who are gamers who don't already do so to try it.
In the last few months, they've been innovating around a battle pass concept, that actually has achieved a very healthy monetization within a free-to-play framework for that particular survival shooter game. Again, the timing of monetization for a new genre such as survival shooter game can be uncertain, longer-term probability of monetization is very high, if that's the case, which we think it is, we believe that the mobile game industry has a very bright future ahead of it.
Thank you. The last question, please.
This is the last question. Alicia Yap from Citigroup, please ask the question.
Hi. Thank you. Good evening, management. Thanks for taking my questions. I have two follow-up questions. One is actually related to your recent $1 billion investment into both DouYu and Huya. Can management share with us the rationale for the investment and how management see the overall landscape and the growth opportunity for the game live broadcasting industry going forward? Will there be more synergies if Tencent ultimately seek consolidated stakes in this company, which potentially could complement the slight lower monetizations of the survival games in the future? Second question is on the margins. Given management comment of stepping up the investment, any color in terms of what would be the percentage point of the margins under pressure this year, and will this mainly for 2018, or will that drag further into 2019? Thank you.
Well, I think, in terms of the game broadcasting revenue, we felt it is a great standalone business emerging, as well as having great synergies with our gaming business. We're seeing an increasing number of our gamers spending more and more time on the broadcast communities. We felt there's a lot of synergies that the broadcasting sites can have with us, including it's an extension of the gamers' usage time. It also allows a lot of gamers who don't have the time to play the game, to stay abreast of the games they like. It also is a great way for people to engage in community activities. I think over time, games broadcast can also support esports industry, and we'll see there is games which is like sports.
There will be sports fans who are beyond the number of people who play the sports. They will be watching ESPN, for example, these broadcast sites, and you will be like these media. At the same time, these platforms, because they are communities, they interact, they can facilitate more communities being formed around games and entertainment interests. We believe these broadcasting sites can not only allow us to build more synergies with our games. It would also develop new business models, both in conjunction with our games as well as on their standalone basis. They will be attractive standalone business on their own, and at the same time, there will be synergies with our games. I think it's at an early stage of development. The industry would benefit from having multiple entrepreneurial teams who are innovating in the industry.
We felt it's important for us to support a number of these companies and develop our own integration with them. In terms of the margin, I don't think we can actually provide you with that quantitative details. I think it's fair to say, in each one of the investment areas, we look at it much more on, how much future value we can build, and if it's going to generate a very strong return for the future, we would make the investment.
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. See you next quarter.
That does conclude our conference for today. Thank you for participating. Tencent Holdings Limited 2017 fourth quarter and annual results conference call. You may all disconnect now.