Earnings Call: Q4 2017

Mar 21, 2018

Thank you for standing by, and welcome to the Tencent Holdings Limited 2017 4th 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. 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 Q4 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 a substitute for, measures of the company's financial performance compared 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, Tony Ma President, Martin Lau Chief Strategy Officer, James Mitchell and Chief Financial Officer, John Lo. Tony will kick off with a short overview. Martin will discuss strategic highlights. James will speak to business overview. And John will go through the financials before we take your questions. I will now turn the call over to Pheong Liu. Thank you, Jane. Good evening, everyone. Thank you for joining us. In 2017, we delivered a strong set of financial results. For the Q4 of 2017 total revenue was RMB66.4 billion up 51 percent year on year and 2% quarter on quarter. Non GAAP operating profit was RMB21.9 billion up 46% year on year or 1% quarter on quarter. Non GAAP net profit attributable to shareholders was RMB17.5 billion up 42% year on year and 2% quarter on quarter. For the full year of 2017 total revenue was RMB237.8 billion up 56 percent year on year. Non GAAP operating profit was RMB82 1,000,000,000 up 41% year on year. Non GAAP net profit attributable to shareholders was RMB65.1 billion up 43% year on year. Our platforms also continue to get the strength. Combined MAU of Weixin and WeChat increased 11% year on year to 989,000,000 in 2,007 and exceeded 1,000,000,000 after 20 18 Chinese New Year. Total MAU for QQ was 783,000,000. Smart devices MAU was 683,000,000 up 2% year on year. Kandyan, the news feed within QQ achieved higher user engagement and traffic. For social networks, QZhong, smart devices, MAU was flat quarteronquarter@564,000,000. In games, we maintained our leadership in mobile and PC. On mobile, we recently launched several popular new titles including QQ Speed Mobile and 2 mobile games based on the popular survival shooting game PUBG. For our media business, we strengthened our video content and capabilities, moving us to 1st place in China terms of DAUs and subscriptions. In mobile payment, we continue to lead by MAU and achieved a 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 and good evening and 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 1,000,000,000. Mini Programs gained popularity following the launch of enhanced features and mini games. QQ deepened engagement with teenagers through personalized news feed 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 2 PUBG mobile titles right before Chinese New Year and build 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 1 in China by mobile DAU and subscriptions with faster growth rate than our industry peers. Tencent Music Entertainment Group operated China's top 3 music apps by DAU including QQ Music, Kugou and Weixin. 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. Off line 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've 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. On the other hand 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 Q4 of 2017 our daily offline commercial volume more than doubled compared to the previous 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, DMP. 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 LiqaiTong grew total AUM to over RMB300 1,000,000,000 as of January 2018. We also helped WeBank distribute its micro loan product WeiliDai over our social platform. As at the end of 2017, Weidai was managing an outstanding loan balance of over $100,000,000,000 Next 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 170,000,000 and as of January we had more than 580,000 Mini Programs running 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 attracted 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 help drive popularity of the ecosystem. Overall 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 Mobile 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 3 ways. Number 1, the light feature suits industries that require online and offline integration. Number 2, complex and heavy apps can provide users with convenient access to selected popular functions. And number 3, 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 3 major trends. Number 1, increasing integration of online and offline user behavior due to the proliferation of smart phones. Number 2, widespread use of mobile payment by consumers in offline premises. And number 3, 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 spending across online and off line 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, Geico 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 databank enables us to be better in targeting our users as well as in providing product recommendation. Our Smart Retail solution will empower retailers in 3 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. 2nd, it enhances customer shopping experience. Our indoor 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 sales services. Thirdly, it increases operational efficiency for the retailers. Our AI based cloud service helped to upgrade retailers IT infrastructure. Our big data analytic tools can help retailers optimize their marketing plans and supply chain and we also enhances retailer CRM system by leveraging our social network, unified ID system, official account, Mini Programs and eLoyalty 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 the 2017 are results from investments that we have been making years ago. This demonstrates the importance of forward looking investment for Tencent. So 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 and 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. And 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 Q4 of 2017, our revenue grew 51 percent 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 and the other segments accounted 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 RMB 39,900,000,000 in the 4th quarter up 37% year on year though down 5% quarter on quarter. Social Networks revenue was RMB15.6 billion up 45 percent 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 135,000,000 subscriptions benefiting Our online games revenue was RMB24,300,000,000 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 Gold the such as social security cards, student campus cards and driver's license for the convenient handling of administration on their smart phones. For example, a user who is bound to social security number to his e pass can then use his smartphone to book an appointment with a 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 are particularly popular among teenagers contributing to increased MAU. Our newsfeed service, Kandyan, continues to enhance its recommendation algorithm, boosting user time spent in video views. Looking at PC client games, for the Q4, revenue grew 13% year on year, but dropped 13% quarter on quarter to RMB12.8 billion. Active users of PC client games declined quarter on quarter due to increasing time spent on mobile games. Revenue due to fewer users, but also to negative seasonality. We operated fewer marketing activities during the 4th and the 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. 1st, by better serving core PC gamers with enhanced live operations and content updates. 2nd, by popularizing game streaming and esports streaming. For example, Riot hosted this year's League of Legends for our championship series in Beijing and 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. And 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 4th quarter revenue was RMB16,900,000,000 up 59% year on year, but down 7% quarter on quarter. The sequential decline reflected several factors including first for our shooting game, Foxfire Mobile. We launched the 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 new mode, which were not yet monetizing. 2nd, for role playing games, revenue from several substantial titles including Legacy TLBB and Dragonets declined, reflecting their maturation cycles. And 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 kart genre in China. 1 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 20,000,000 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 kart genre from PC to mobile. Moving on to Player Unknown: Battlegrounds or PUBG, it's globally popular survival shooter game on PC. We secured a license from Bluehole, the developer to operate PC game in China, but also to develop mobile games based on the PUBG IP. 2 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 exciting battleground 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 2 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 4th quarter revenue was RMB12.4 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 RMB4.1 billion, up 22% year on year and flat quarter on quarter. Our video advertising revenue grew at a healthy rates year on year and quarter on quarter as successful content increased user traffic and advertisers invested to reach growing audiences. But our news advertising revenue declined year on year and quarter on quarter as we revamped our news feed ad system and focused on optimizing the content we display on our news feed products. Our social and others advertising revenue was RMB8.3 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 Weixin Moments, Weixin Official Accounts and our mobile ad network. Sequential revenue growth benefited from e commerce peaked positive seasonality as well as some of the factors I mentioned earlier. We continue exploring new ad formats such as cost per click ads and sideways and efficient 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 have achieved China market leadership based on several metrics including mobile DAUs, the number of subscriptions and the advertising subscription revenue. For the Q4 of 2017, Tencent Video's average mobile DAU grew 44% year on year to 137,000,000 users. Benefiting from DAU growth, our video ad revenue increased 68% year on year to RMB 2,700,000,000. At the end of 2017, the number of Tencent Video subscriptions had increased to 121% year on year to 56,000,000 and in February grew further to approximately $63,000,000 Our video subscription revenue grew 149 percent year on year to $2,200,000,000 in the 4th quarter. We believe our video market share gains stem from several factors including the following. 1st, our original and licensed content. During 2017, we sharply increased investments 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 got a sophisticated content scheduling system to build our personalized recommendations, enable us to allow 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. 3rd, our partnerships with adjacent businesses. Upstream, we've made dozens of equity investments and established a new entrant content studios, which provides us with reliable content output and to some extent hedges up to date content cost inflation. Downstream, we've partnered with a number of major TV set manufacturers who pre installed our TV launches on their sets accelerating the growth of our over the top video streaming to TV set service, where we believe for us the China market leader. I'll now pass on to John to go through the financials. Hello, everyone. For the Q4 of 2017, our total revenue was RMB66.4 billion, up 51% year on year or 2% quarter on quarter. Gross profit was RMB31.5 billion, up 33% year on year and down 1% quarter on quarter. Net other gains were RMB7.9 billion for the Q4 of 2017. It primarily rebates as well as dividend income for certain investee companies. Share of losses of associates and joint venture was RMB120,000,000 in the quarter compared to share profits of RMB618 1,000,000 for the Q3. On a non GAAP basis, share profits of associates and joint venture was RMB495 1,000,000 in the quarter versus RMB802 1,000,000 for the Q3. Income tax expense was approximately RMB3.1 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 4 to enjoy a lower corporate income tax. Effective tax rate for the quarter was 12.6%. Net profit attributable to shareholders was RMB20.8 billion up 98% year on year or 16% quarter on quarter. For the full year of 2017, total revenue was RMB237,800,000,000 up 56% versus last year. Gross profit was RMB116.9 billion, up 38%. Operating profit was RMB90 point 3,000,000,000 up 61% versus 2016. Net profit attributable to shareholders was RMB71.5 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 Q4 and after adjustments to non GAAP, operating profit for the quarter was RMB 21,900,000,000 up 46% year on year or 1% quarter on quarter. Operating margin was 32.9 percent down 1.2 percentage points year on year and broadly stable quarter on quarter. Net profit to shareholders was RMB 17,500,000,000 up 42% year on year or 2% quarter on quarter. Net margin was 27.7 percent 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 cost of smartphone games paid to 3rd 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 rapid growth of our advertising network business. Gross margin for others was 22.8 percent up 2.4 percentage points year on year and 2.5% 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 RMB6 1,000,000,000 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 aggregate 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 4th quarter versus 7.4% for the Q1 of 2017. Total G and A expense were RMB8.8 billion up 28% year on year and down 3% quarter on quarter. Under G and A, R and D expenses were RMB4.8 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 and A was 15% and R and D was 7%. At the end of the 4th 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 RMB17.7 billion up 45% and represented 7% of revenue. R and D expenses was RMB17.5 billion, up 47% and represented 7% of revenue. Total G and A excluding R and D was RMB15.5 billion, up 47% and represented 7% of revenue as well. Let's go through margin ratios for the 4th quarter. Gross margin dipped 6.5 percentage points year on year to 47.4% mainly due to decrease in VAS Cement gross margin and increasing contribution from other which carried lower margin. Gross margin was down 1.2 percentage points sequentially. Non GAAP operating margin was 32.9 percent 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 and A expense as a percentage of revenue. Quarter on quarter change was flat. Non GAAP net margin was 27.7% down 0 point 6% 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 percent 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 dividend for 2017, for the whole year GAAP basic EPS was RMB7.598 and diluted was RMB7.499. Non GAAP basic EPS was RMB6.92 and diluted was RMB6.83. Subject to the approval of shareholders at the AGM to be held on 16th May, 2018, we are proposing an annual dividend of HKD0.88 representing an increase of 44% from last year. Let's share some of the key financial metrics with you before ending up this presentation. For the 4th quarter, the CapEx was RMB5 1,000,000,000 up 75% year on year and 42% quarter on quarter. Operating CapEx was RMB3.8 billion increased by 69% quarter on quarter mainly due to increased number of servers for cryo and leasing businesses. Non operating CapEx was RMB1.1 billion. For the full year of 2017, total CapEx increased 12% year on year RMB13.6 billion. Free cash flow reached RMB24.2 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 RMB 93,400,000,000 up 17% year on year. At year end, our net cash position was RMB 16,300,000,000 down 10% year on year or 13% quarter on quarter. The sequential decline primarily reflected payment for M and 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 RMB210.8 billion or about US32 $1,000,000,000 as at year end. Thank you. We shall open the floor for questions. We will now begin the question and answer session. First question comes from the line of Grace Chen from Morgan Stanley. Please ask the 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, WonDA and Halen Home? How these investments will help realize your smart retail strategy? And we can expect there will be more investments in offline retailers to come. So you can can you help us understand what will be your key considerations for more offline investments in the future? So that's my first question. And my second question is on other business segments. Payments and cloud have been growing very fast. So this segment made up 21% of total revenue already in the 4th quarter. And we also noticed that gross margin for this segment in the quarter also improved to 23%, so which I think should be the highest ever. Can you help us understand the drivers for the margin improvements in the quarter? And 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. And we believe that this is going to benefit our payment, it's going to benefit our advertising as well as cloud services. And 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, right, 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 and when we started working with them, right, 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 the digital transformation. But sometimes the value of the project is very hard for us to figure out exactly how to divide up the value that's created. So in those situations, right, 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, right, so that we show our commitment and at the same time we would benefit if you benefit. So 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. So there are a lot of cases like that in which we basically work with them on a commercial basis. So 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 line, so 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. And you asked about the monetization. So there's a few drivers. One is the consumer withdrawal fees that are tied to usage of Tempe, a usage of 10 pay, particularly for money transfers. 2nd one is the merchant fees that is tied to our usage of Tenpay for commercial transactions. 3rd one is interest income on the float, which is subject to regulatory changes and the 4th one is building up adjacent financial services such as the Waititi Micro loan. And the improvement in gross margin you have seen reflects a few factors. 1 is overall scale benefits. The second one is a gradual revenue mix shift towards higher margin products. And then the third one is us putting levers on individual products. I think during the quarter we mentioned that we adjust some of the levers around using 10 pay to settle credit card outstanding liabilities. Now on the flip side, we think this is a very early stage growth market invest reinvest very aggressively in our payment business during 2018 to further drive adoption and 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. But 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. And part of the reason for that success is because there are 2 big strong companies competing to really drive mobile payments adoption. And so 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 comes from the line of Eddie Leung from Merrill Lynch. Please ask your question. Good evening. Thank you for taking my questions. I have a question on more of the content side. Could you share your thought with us on the industry development of software and video and self media? We have seen Tencent being very strong in professional content. So just wondering how you think about the potential cannibalization on user time between professional content versus this type of more user generated content and what's our strategy going forward? Thank you. Yes, that's a good question Eddie. And I think number 1, there's definitely a very strong growth in terms of short video content and I would say it's content around content feed. So 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. But what we have seen is that these the growth of this market is more of an incremental to the growth of the professional content. So while an example is that while all the growth happens within the content feed industry, right, our Tencent Video business continues to break new records in terms of DAUs, user time and subscriptions. So I would say it's a new opportunity. And in terms of this new opportunity, if you look back right, self media was really almost created by WeChat when Weixin came up with the official account and that allows 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 and that's arguably a more efficient way for users to read and explore new content. So as a result that market start to bloom. And at the same time when content feeds become more and more popular then short video becomes a very important content type for the content feed business. Now for us, I think in response to this very, very big incremental market opportunity, we have been doing a number of different things. Number 1, we have actually launched a number of different products with content feed front end and that would include our Kuaibow, that would include our news and video and that's in our traditional media business. But we have also put it into our social platform. So if you look at KanDian, if you look at KanDian, which is on WeChat, KanDian which is on QQ and also our browser has got these content feed front end. And we have seen very strong growth in a lot of these front end content feed business in particular for CANDIAN which has a very strong growth in the past year. And in addition to the front end, we are actually working on the back end content side and of course we have official account which is already a very strong content ecosystem. But at the same time we are also launching our Tencent open platform media open platform, which tries to integrate the acquisition 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. And that's I think has seen a very strong progress. And so I think it is and at the same time, we're also developing our targeting technology so that we can support our front end content feed with more personalized content. So 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 new market. And at the same new market. And at the same time, these content feeds is actually great venues for putting performance based ad as well. So 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. So that's why we pointed out in our prepared remarks that this year we're going to step up in a pretty aggressive way in acquiring video content, be it long form or short form. Thank you. And the next question please. Next question comes from the line of Alex Yao from JPMorgan. Please ask your question. Hi, good evening, everyone. Thank you for taking my question. So 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 markets and 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 20 18, what will you increase monetization to potentially alleviate the financial impact from these investments? Thank you. I stop here. Yes. I think in terms of the aggressive investment, I think there are a number of factors which is driving this decision. Number 1, of course, is the amount of opportunity that we see. We build a company that on the principle that we want to go for long term large opportunities and that's what we focus on. So as we continue to explore and develop our different verticals where we found that the amount of long term opportunity that's available is actually increasingly bigger. And we believe that it's actually very important at this stage us to make the necessary investments so that we can actually achieve a better market position and grab and accelerate the development of our business. And secondly, I would say is clearly in a lot of the areas we're actually doing well so that it's actually worth for us to double down in terms of our investments 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 the year last year and we enjoy a much faster growth in terms of our DAU, in terms of the subscriptions. And that's why we felt that if we increase our investment in 2,008 and in 2,009, we're going to reap much bigger benefits for the future. And finally I would say, obviously we have a very strong profit growth, so we can really afford to make such investments and we felt that every dollar 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. So 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. But I think we have been pretty measured and disciplined in terms of adding inventories so that we maintain a great user experience and at the same time we only monetize more with our the growth of our technical capabilities. And 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, but then 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 2 PUBG mobile games, We have a very large DAU, which is not monetized yet. And 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. But 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, management. Thanks for taking my question. My first question is about your social e commerce. In the past year, we saw very strong growth 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's the potential monetization opportunity to WeChat? And my second question is a follow-up question to payment. So in the past Q4 and the Chinese New Year Gala, we saw the Alipay increase its investment in marketing and user acquisition. So what will be your strategy and response to the competition? And will you follow that strategy and how should we think about implication to your margin going forward? Thank you. Yes, I think around social commerce, we felt this is an important way through which people shop for products right now. So 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 it allows smaller merchants to be able to find their users through social channel. But there's also a lot of interaction between social commerce and a shop front, right. So if you look at PingDuo, for example, it has both a centralized storefront and social commerce. If you look at JD, I think 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. So we felt social commerce if done well is actually a net addition to the user experience for our users, but it's actually very important to make sure that the quality of the products are actually well maintained. So in the past, we have seen there are a lot of companies which try to leverage social e commerce in the long way in terms of overspending the users, in terms of providing bad products and those are the kind of things that we want to weed out. So I would say we have a lot more work to do in order to cultivate the good kind of social commerce, but at the same time we need to protect our users against abusing social commerce in a bad way. In terms of AliPay, right, I would say yes, we have seen a significant increase in terms of our peers' subsidy level. And starting from the beginning of this year, we have also rolled out a pretty aggressive program of providing subsidies to merchants and users and has received great results. So I would say going back to what James said, right, 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, right. So that's why we have said we would be investing more in this year in the payment platform so that we can capitalize faster growth in the overall market and hopefully we can also grab more share. Operator, we'll take the last three questions. Your next question comes from the line of John Choi from Daiwa. Please ask your question. Good evening, guys, and thanks for taking my question. I have two questions here. First of all, I noticed that Tencent completed the revamp of the Newspeed ad system and also launched a unified advertising platform to integrate all the inventories across the Newspeed products. In the coming quarters since this has been behind us? And second is on the Mini Programs. Just wondering that it's been a little bit more than a year since the Mini Programs has been launched. We now have 170,000,000 DAU. What has you guys seen in terms of WeChat for these users? And how do you think you could further monetize or seize the opportunity in the Mi programs in the coming years? Thank you. You want to answer the question? Yes. So I think on the news feed side, we have a number of tasks ahead of us. It's obviously a relatively competitive market with Junratosha as a dynamic first mover that keeps pushing in new directions, including short video. And on our side, there's a number of products that incorporate news feeds. And 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, so the right users in a more targeted fashion. We have been in the process of centralizing and upgrading our advertising capabilities, but 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 Candian newsfeed, which sits within QQ that's already in a very popular and relatively well established and relatively stable platform. Then you may see it extend some of our other news feed distribution channels such as the Kuaibao app or the news feed product within our mobile browser. And over the medium to longer term, we're also ramping up new newsfeed products such as the Cany Can product within Weixin. But generally speaking, we're more focused on the product today than we are on the monetization. Yes. 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. But then 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 many programs. After a whole year of development, we actually have seen the first breakout growth in Mini Programs and that's mainly capitalized by I would say 3 things. 1 is the accumulation of mini programs and the increasing adoption of that in the offline world. That's the slow buildup. But then toward the beginning of this year, we have launched mini games, which is I would say easy way for people to get to know what mini programs is, right. 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. And we also provide this in the chat screen, we have this put on 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. And the 2 new measures really, I would say, catalyzed the latent and build up growth of Mini Programs that are already in place. And the 3 factors added together has brought Mini Programs to a new height. And 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. And particularly, it would help offline, online integration, it would help apps which are complicated right now to serve their users in a very simple and fast and convenient way. And it would also help some long tail services, which used to be very hard for them to convince users to download their apps and now they can actually provide their services directly to the users and get a chance to have their app downloaded if users like their app. So we would say it will be a platform for all kinds of innovation to happen and it would also become a service ecosystem for WeChat. And the next question please. Next question comes from the line of Thomas Chong from Credit Suisse. Please ask the question. Hi, thanks management for taking my questions. I have two questions about the online gaming space. First, can management comments about the mobile games and the PC games industry landscape for this year given the emergence of our PUBG games? And my second question is about a more housekeeping question. Can management provide us with the ARPU for PC and mobile games? Thank you. Okay, Chris, I'll turn the second question. The ARPU for LLOG is 400 to 660 for ACG, it's 120 to 590 and for the smartphone games it's 150 to 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. But to get a little bit more granular than that, I think for 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. And so that's a headwinds that everyone in the PC game industry including Tencent faces and at certain points in 2017, we benefited from particularly strong content upgrade on GameX or from popular skins on Game Y, but there is some volatility to those content upgrades and skin release as I think we were somewhat fortunate in 2017, which creates a tough comparison for 2018. 18. But 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. And that growth again is driven by breakout new products and that's both in a very massive scale new products such as PUBG and Fortnite, but also new products that invigorate in particular niches like the Monster Hunter game or the Dark Souls game. So 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. And 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. So 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. Now 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 can see this particularly clearly in Korea actually, where the habit of playing PC games and Internet cafes was most established, then 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. So 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 are 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 and that is indeed the case with our survival shooter games. If your focus is very much on quarter to quarter revenue trends, then that's absolutely something that you should be thinking about and concerned about. If your focus is more on the long term industry potential, then it shouldn't be undue concern because in our experience, whenever you have games that are highly engaging, that attract a substantial user base with great enthusiasm, then 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. And 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 mid 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. But then in the last few months, they've been innovating around Battle Pass concept and that actually has achieved a very healthy monetization within a free to play framework for that particular survival shooter game. So again, the timing of monetization for in a new genre such as survival shooting game can be uncertain. But longer term probability of monetization is very high. And if that's the case, which we think it is, then we believe that the mobile game industry has a very bright future ahead of it. Thank you. And the last question please. This is the last question, Alicia Yap from Citigroup. Please ask the question. Hi, thank you. Good evening management. I have 2 follow-up questions. One is actually related to your reasons, RMB1 1,000,000,000 investment into both Douyu and Huya. So 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? And will there be more synergies if Tencent ultimately seek consolidated states in this company, which potentially could complement the slight lower monetizations of the Survivor games in the future? And then second question is on the margins. So 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, we felt is a great standalone business emerging as well as having great synergies with our gaming business. And we're seeing an increasing number of our gamers spending more and more time on the broadcast communities. So we felt there's a lot of synergies that the broadcasting sites can have with us including it's an extension of the user gamers uses Chime. 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. And it also is a great way for people to engage in community activities, right? So 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 and they will be watching ESPN for example and these broadcast sites will be like these media and at the same time these platforms because they are communities and interactive they can facilitate more communities based on games and entertainment interests. So 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. So they will be an 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. So we felt it's important for us to support a number of these companies and develop our own integration with them. And in terms of the margin, I don't think we can actually provide you with that quantitative details, but 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 very strong return for the future, we would make the investment. Thank you. And we are closing the call now. If you wish to check out our press release and other financial information, please visit the DIR session 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. Stennessend Holdings Limited 2017 4th quarter and annual results conference call. You may all disconnect now.