Earnings Call: Q3 2017

Nov 15, 2017

Thank you for standing by, and welcome to the Tencent Holdings Limited 20 17 3rd Quarter Results Announcement 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. Jamie from Tencent. Please go ahead, Ms. Yi. Thank you. Good evening. Welcome to our Q3 results 2017 conference call. I'm Jane Yi from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non GAAP measures, please refer to our disclosure documents on the IR section of our website. Let me introduce the management team on the call tonight. We have our Chairman and CEO, Tony Ma President, Martin Lau Chief Strategy Officer, James Mitchell and Chief Financial Officer, John Mo. Tong Li will kick off with a short overview Martin will discuss strategic highlights James will speak to business overview and John will go through the financials before we take your questions. I will now turn the call over to Pony now. Okay. Thank you, James. Good evening, everyone. Thank you for joining us. During the Q3 of 2017, we recorded strong user traction and revenue growth across games, digital content, online advertising and payment businesses. Our video platform gained audience and revenue market share becoming China's top online video platform in terms of mobile daily active users and monthly subscriptions. In November we list our online literature platform in Hong Kong. The successful listing reflects the value of our years of investment in the business. We believe our multi phased digital content businesses are synergistic with each other and allow us to deliver unique content to our users. We will continue to invest in our platforms and technologies to strengthen our content ecosystem. Now let me highlight the key financial numbers for you. John will provide more details in the financial section. Our revenue was RMB65.2 billion up 61% year on year. Non GAAP operating profit was RMB 21,600,000,000 up 44% year on year. Non GAAP net profit to shareholders was RMB 17,100,000,000 up 45% year on year. Moving on to our online platforms. Combined MAU of Weixin and WeChat increased 16% year on year to 980,000,000. Daily text messages increased 20% year on year indicating increased engagement. Total MAU for QQ was 843,000,000 within which smart devices MAU was 153,000,000 down 3% year on year due to fewer casual users while engagement with core users increased. Smart device MAU for users below 21 years old was up year on year. PCU including PC and mobile increased 9% year on year to 272,000,000. Popular features within QQ such as candy and news feeds increased average user time spent within QQ. For social network QZon smart device MAU was 552,000,000. In games we maintain our leadership in mobile and PC as measured by users and revenues. We expand our game genres strengthened into strategic games. And on our media business, good users and traffic at healthy rates and we sustained leadership in the news, video, music and literature categories while developing new verticals such as live streaming and comics. In mobile utilities we remain the China industry leader in mobile security and mobile browser and Android app store. With that I will pass to Martin to discuss strategic highlights. Thank you, Pony. Good evening and good morning everybody. In this section I would like to give you an update on our video business which has consistently gained audience market share over the past few quarters. As of September, we believe Tencent Video has achieved leadership in terms of average daily active mobile users. We have achieved this by leveraging our large and highly engaged user base which are active in consuming content and at the same time making progress in 2 important areas. Firstly, we have a comprehensive content strategy, which I'll elaborate in a minute. Secondly, our expertise in content curation, program scheduling and content recommendation allowed us to make users engaged on a continuous basis in our platform. Driven by traffic growth, our online video revenue increased more than 100% year on year in the Q3 of 2017 within which our video advertising revenue grew over 70% year on year. Our video subscriber base more than doubled year on year to exceed 43,000,000 driving equally strong subscription revenue growth. As you can see recently App Annie ranked Tencent Video number 1 in terms of China's iOS top grossing chart for the entertainment category. In terms of our video content strategy, we do have a comprehensive video content strategy, which I would like to summarize in a succinct way as follows. For drama which is the most popular and revenue generated type of content we invest in exclusivity that elevates our brand as well as drives subscription and ad revenue. We target the content to right users within our large user base and have successfully expanded young female user base in recent quarters. For variety show, we have accumulated expertise in co producing differentiated shows tailored to young audience. For example, we could produce a very popular singing contest called The Coming 1, which is the most viewed talent show in our platform during the Q3. For animation, we cooperated with leading domestic studios and also commissioned top tier anime studios to create anime based on Chinese online literature IP. These anime in turn can support our game business. For example, we're creating a game based on a famous literature IP called the Fighter of Destiny and later we created a Tencent commissioned anime and over time we're going to turn it into a TV drama series. For movie, we have a rich library comprised of domestic and Hollywood studio productions. Leveraging our locked in user base and data analytics, we can target and alert potential viewers when a new movie become available in our platform. For documentary, we partner with the leading studios globally and in some cases co finance their productions. Recently, we released Blue Planet 2, a highly acclaimed and exclusively licensed documentary from BBC. We believe we're increasingly recognized as a preferred online partner for publishing niche, but highly influential content in China. Within our expanding content catalog, we are optimizing the proportion of licensed and original content especially in the past few quarters. We've invested quite heavily in original content. For example, our original content Candle in the Tomb Season 12 were ranked most watched drama series by video views and attracted over 10,000,000 monthly subscriptions. To succeed in original content, we invest heavily to expand our talent pool and accumulate key IP collection. Internally we established production teams comprising producers, screenwriters and editors and introduced a review mechanism to better manage the selection and production of original content. Externally we have invested in a number of leading studios which are specialized in producing different content genres. We draw on our other businesses, especially China Literature to source differentiated IPs and in turn we amplified user exposure to popular video content by creating several media formats in particular games developed out of the same video IP. Our investment in our regional content generates benefits for us in a number of ways. First, we can tailor content to cater to our online audience whose preferences often differ from traditional TV audience. 2nd, we have total control over the content on a long term basis. 3rd, it allows us to have a share in the upstream profit pool of content production. And 4th, we can use high quality exclusive original content to educate our users to pay for monthly subscriptions. While the online video sector as a whole is still making losses, we will continue to invest for the long run. We view online video business as a strategic priority given it is a high engagement product. In terms of time spent, it is second only to social. Online video is an important component of our cross media IP strategy and also our investments has generated positive traction in terms of market share and revenue growth. So with that, I'll pass to James to talk about our business review. Good evening and good morning. In the Q3 of 2017, our total revenue grew 61% year on year. VAS represented 65% of total revenue, of which online games contributed 41% and social networks 24%. Online advertising was 17% of total revenue and the other segment accounted for 18% of total revenue within which payment related services and cloud services delivered triple digit year on year revenue growth rates. The other segment revenue in aggregate increased 143% year on year and increased 25% quarter on quarter. For value added services, segment revenue was RMB42.1 billion in the 3rd quarter, up 51% year on year and up 14% quarter on quarter. Social Networks revenue was RMB15.3 billion, up 56% year on year and up 18% quarter on quarter. Video streaming subscriptions, music live broadcast activities revenue and game related item sales were the main contributors to the year on year and the quarter on quarter growth rates. Total VAS subscriptions including our VIP products, our video products, our music products and so forth increased by 19% year on year to 125,000,000 subscriptions. Online games revenue was RMB26.8 billion, up 48 percent year on year and up 13% quarter on quarter. Increased users and monetization for our key smartphone games and new smartphone game releases as well as expansion packs around major PC games drove the year on year and quarter on quarter growth. Turning to social networks, we introduced a smart transport solution for Weixin users. By generating a mini program QR code in their phones to be scanned at the point of transaction, users can instantly pay for public transport fares even in areas where they don't have internet access. In Mini Programs we continue to enrich functionalities most recently adding new tools that empower retailers to integrate offline and online resources to grow their businesses more efficiently. According to our latest survey, the top 5 mini program categories by monthly visits include transportation, online shopping, tools, lifestyle services and IT services. For QQ, we're strengthening content curation particularly for our younger user base. Daily active users and time spent in our news feed service, Kandyan, continue to increase. Recently, we introduced a pop up feature topics to help users discover trending content more easily. Our eSports app, Penguin Esports is also seeing rapid growth in live broadcast views and exceeded 10,000,000 daily active users. This app leverages Tencent's leadership in games and esports tournaments, facilitating interactions among gamers and promoting the development. Looking at PC client games, revenue grew 27% year on year and grew 7% quarter on quarter to RMB14.6 billion. Active users declined year on year for our overall PC game portfolio due to users increasing time spent on smartphone games. However, ARPUs generally increased year on year and quarter on quarter driven by key titles including League of Legends, Dungeon and Fighter and Crossfire. Touching on a few of these important titles, League of Legends for the first time held its League of Legends World Championship in China. The finale in Beijing in early November attracted over 60,000,000 unique viewers, placing it amongst the most watched live sports events of any kind this year in China. FIFA Online 3 recorded solid revenue growth as its paying ratio increased benefiting from synchronization between in game events and offline activities such as the China National Team's World Cup qualifying games and the European League season kickoffs. Dungeon and Fighter received enthusiastic user feedback for its latest content update and gift packs and we've commissioned a cartoon series based on Dungeon and Fighter which accumulated over 500,000,000 video views since launch. A new game MapleStory 2 began open beta testing in September. For smartphone games, revenue was RMB 18,200,000,000 up 84% year on year and up 23% quarter on quarter. Active users in ARPU grew year on year on quarter on quarter, driven particularly by our mid call games. During the period, we released 6 games, 3 developed in house and 3 licensed. Within the competitive player versus player genre of games, Honor of Kings Esports continued to gain popularity and Contra Return recorded its 1st full quarter of monetization. Chaos ranked number 8 in iOS China's top grossing chart in September. In the role playing game genre, we released 2 games based on originally PC intellectual properties, Legend of Xuan Yuan Mobile and Journey to Fairyland Mobile during the quarter, and both received strong responses from gamers. We've recently seen very strong user interest in emerging genre of game survival shooters. Overnight, we released a survival shooter expansion pack called Deserted Island for Crossfire mobile game. And later this month, we'll release a new survival shooter game, Glorious Mission. Each of these titles has already accumulated over 20,000,000 registrations within their 1st week of availability. For online advertising, our revenue was RMB11 1,000,000,000 up 48% year on year and up 9 percent quarter on quarter. Mobile contributed about 90% of our advertising revenue. Our media advertising revenue was RMB4.1 billion up 29 percent year on year and broadly stable quarter on quarter. Our video platform contributed most to this year on year and quarter to quarter revenue growth. Popular drama series such as Nothing Gold Can Stay and our self commissioned variety shows such as Talk Show drove substantial increases in video traffic and revenue. However, our news ad revenue declined year on year versus the high base from the Olympics last year and was also soft quarter on quarter as we reduced advertising inventory in our Kuaibao news feed product while we revamped its advertising system. We have several of the leading news feed products in China, but we're currently focused on optimizing their user experience which should in turn increase long term user on revenue market share. Our social and other advertising revenue was RMB6.9 billion, up 63% year on year and up 14% quarter on quarter contributed primarily by Weixin properties, our android based app store, YinNong Bao and our ad network. The ad fill rate in Weixin moments increased benefiting from stronger advertising demand from existing and new advertisers as the number of Weixin Moments advertisements grew over 30% quarter on quarter. And with that, I'll pass on to John. Hello everyone. For the Q3 of 2017 our total revenue was RMB65.2 billion up 61 percent year on year or 15% quarter on quarter. Cost of revenues increased by 81% to RMB33.5 billion for the Q1 of 2017 on a year on year basis. The increase primarily reflected Brita sharing and content costs, cost of payment related services as well as channel costs. Gross profit was RMB31.7 billion up 45% year on year or 12% quarter on quarter. Net other gains were at RMB3.9 billion which primarily consists of same disposal gains arising from the capital activities of certain invested companies including the IPO of ZhongAn Insurance. Fair value gains of certain investments in verticals such as healthcare as well as subsidies and tax rebates. Share of profit of associates and joint venture was RMB818 million for the quarter compared to share of losses of RMB619 1,000,000 for the Q3 of 2016. Some of our investee companies registered profits including one off gains for the Q3 of 2017 compared to losses for the Q3 of 2016. Income tax expense was approximately RMB5 1,000,000,000 up 103% year on year or 26% quarter on quarter. The increase was mainly due to greater profit before income tax and withholding tax. Effective tax rate for the quarter was 21.7%. Net profit attributable to shareholders was RMB18 1,000,000,000 up 69% year on year or down 1% quarter on quarter. I'll walk you through our non GAAP financial numbers. After adjustment to non GAAP, operating profit for the quarter was RMB21.6 billion, up 44% year on year or 8% quarter on quarter. Operating margin was 33%, down 4 percentage points year on year and 2 percentage points quarter on quarter. Net profit to shareholders was RMB17.1 billion, up 45% year on year or 4% quarter on quarter. Net margin was 26%, down 3 percentage points year on year and 3 percentage points quarter on quarter as well. Let's turn to segment gross margin. Gross margin for value added services was 59.9 percent down 5.3 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 third party app stores, including handset manufacturers and iOS and revenue mix change to lower margin products such as digital content services. Gross margin for online advertising was 36.3 percent stable year on year and down 1.5 percentage points quarter on quarter. This sequential change was mainly due to reduced inventory as we revamped quite our advertising system. Gross margin for others was 20.3 percent up 2.2 percentage points year on year and down 2.1 percentage points sequentially. The year on year increase was mainly due to gross margin improvement of Benjamin related services as a result of larger base. The sequential decrease was because of mix shift in funding channels as some funding channels incurred higher handling fee rates. Moving on to operating expenses, selling and marketing expenses were RMB4.8 billion up 47% year on year or 31% quarter on quarter. The year on year increase mainly reflected greater spending on products and platforms such as online games and online media as well as higher staff costs. The sequential increase was primarily driven by greater marketing spending on our mobile apps and seasonal promotional activities launched during summer holidays. As a percentage of revenue, selling and marketing expenses decreased to 7% for the Q3 of 2017 from 8% for the Q3 of 2016. Total G and A expenses were RMB9.1 billion, up 54% year on year or 11% quarter on quarter. Under G and A, R and D expenses were RMB4.8 billion, up 53% year on year or 14% quarter on quarter. The year on year increase mainly reflected higher staff force. As a percentage of revenue, total G and A was 14% and R and D was 7%. At the end of the quarter, we had about 43,500 employees. The quarter on quarter increase of 7% was mainly due to enrollment of over 1500 graduates. Looking at the margin ratios for the Q3, gross margin was 48.6%, down 5.4 percentage points year on year or 1.4 percentage points quarter on quarter, mainly due to decrease in VAS segment gross margin and increasing contribution from low margin other segments. Non GAAP operating margin was 33.1 percent down 4.1 percentage points year on year primarily reflecting lower gross margin. Sequential decrease of 2.3 percentage points was mainly due to lower gross margin and higher selling and marketing expenses. Non GAAP net margin was 26.3 percent down 3.2 percentage points year on year and 2.8 percentage points quarter on quarter. Year on year decrease was mainly due to lower operating margin, partially offset by the increase in share of profit of associates. Quarter on quarter decrease was mainly due to lower operating margins. For the 3rd quarter, total CapEx was RMB3.5 billion down 4% year on year or up 16% quarter on quarter. Operating CapEx was RMB 2,300,000,000 up 11% year on year and down 2% quarter on quarter and it represented 3% of the total revenue. Non operating CapEx was RMB1.2 billion down 24% year on year and up 78% quarter on quarter. Free cash flow was RMB27.5 billion up 94% year on year and 57% quarter on quarter. Year on year and quarter on quarter increases were mainly contributed by higher cash flow generated from online games and on advertising business. Our net cash position at quarter end was RMB18.9 billion or US2.8 billion dollars up 125% year on year or down 11% quarter on quarter. The sequential decline was mainly due to payments for M and A initiatives and investments as well as licensed content purchase partly offset by free cash flow generation. Fair market value of our listed associates and available for sale financial assets was approximately US25.8 billion dollars as at quarter end compared to US21.5 billion dollars as of last quarter end. Thank you. We shall open the floor for questions. We will now begin the question and answer session. Your first question comes from the line of Wendy Huang from Macquarie. Please ask the question. Thank you for taking my question. First, congratulations on very strong game revenue growth. So given that you have launched the survival type of game recently as well, also those games are gaining very strong traction. Can you also comment on the impacts on recent relations on this type of new games? And secondly, I think this year is a very fruitful year for Tencent because you started to spin off lots of your investees such as the China Literature, Sogou as well as the C. So can you maybe comment on your strategy on the investees in the longer term? Thank you. Wendy, question, what was the game that you referred to? The survival type of game. Okay. I think survival game is definitely a very popular category and important category and we have been tracking it from the PC side already and we have a constant dialogue with the original IP of the survival game producer and have been trying to establish relationship. At the same time, what we have seen is there have been mobile survival games that have been launched in China and we have our own set of games which are in the pipeline. There will be a whole series of survival games. And the most immediate ones are going to be 1 within our crossfire mobile, there's going to be a survival mode. And as James also mentioned in the prepared remarks, we have licensed game called Glorious Mission, which is of a survival nature. And both of these games have actually achieved more than 20,000,000 pre registrations, each one of them. So that indicates there's a lot of players' enthusiasm toward this type of title. Now over the long run, I think what we're seeing is just the beginning of this genre. And we felt this genre in itself, it's more of a resemblance to the shooter's genre. And if you look at the shooter genre, it has remained the most dominant games have remained more or less the same for about 10 years. So I think that points to why there's a lot of enthusiasm when you have a new interpretation of the genre that comes up and without there's a long latent demand for some kind of innovation in the genre. And what we felt is over time, obviously, we would like to work with the original IP in this genre. But at the same time there will be adaptations and differentiated gameplays coming out of this bigger survival concept and we're going to have a whole pipeline of games that will be targeting this broader genre. In terms of our investment strategy, right, I would say Tencent actually pursue an open platform collaboration strategy. As a result, since 2010 we have continuously stepping up in investing in different companies, which can have a synergistic operation with our own business. And at the same time because we have our traffic, we have our whole set of infrastructure services. We also have the mindset of helping these investing companies, right. So over the past few years, we have seen many of these investing companies benefited from the industry growth from their own effort as well as from the collaboration with us. And some of these companies now have reached the stage that they can actually pursue an IPO. So we are very glad to see that. And we felt over time there will be more and more of our investee companies which reach that kind of maturity that they can be IPO ed in the market. In addition to that right now, China literature is slightly different story. This is a company which is a spin off. We do control a majority stake in the company. But at the same time, if you look at its history, right, it is a company that has been formed outside of Tencent despite of our controlling stake and we have also made acquisitions and merger along the process. So that's why it is a company that has a more specific situation that supports a case for IPO, the spin off in an IPO. I would say for the majority of our businesses which have been homegrown and organic, there's actually more reason for them to stay together so that they can reinforce each other in a synergies way. So I don't think spin off is going to be especially of our 100% owned business is going to be a norm for us going forward. Thank you. And the next question. Your next question comes from the line of John Choi from Daiwa. Please ask your question. Good evening and thanks for taking my question and congratulations on a great set of results. I have two questions here. Could you first of all elaborate on your recently launched content platform unified into Penguin Inc. Accounts and how this basically will kind of fold into your content creation strategy that you guys just mentioned? And should we be expecting more or less unified account in terms of ad infrastructure system going forward? And secondly, could management also give us some more details about the recent investment into Snapchat? That will be very helpful. Thank you. Yes, in terms of the content creation platform, I think the starting point is that we do have quite a number of newsfeed products within our overall group. And the first and the most foremost one is actually official account system within WeChat. And in addition to that, we have a newsfeed product within QQ, which is called KanDian, which has seen significant growth. We have news feed products in our news, which is a leading news app and as well as our newly as our acquired product which is based on interest based recommendation engine and we also have a browser which has News Feed as well. So we have multiple News Feed products. And I would say, on one hand, official economy is actually quite a self sufficient and unique platform in itself. A lot of content providers who want to operate their own official accounts and has their own fan system, that would continue to stay. But at the same time, there's a whole host of information sources that we have been using for different newsfeed products within our group and we want to consolidate all of these into a common content platform which is the Penguin content platform, so that we can maintain a one stop shop user experience as well as interface and management system with the content providers. And I think that's essentially the idea. Now the ad system is a different story. As John has talked about, we have been also consolidating our advertising platform attached to different feeds products into a common social and performance ads platform. And that has led to some disruption in terms of the ad business in some part of that newsfeed. But over time, we believe when we consolidate that advertising system, it will be much more efficient, it will be much more convenient for the advertisers to be using. The second one is on the Snap. I think if you look at Snap, we have actually invested in Snap in the very early days of growth. So I think there's a long history in terms of our engagement with the company and along the years we have always been very impressed with the progress and with the innovative nature of the company and the founders and we have a very good relationship with them. And as a result, right, we have been a long term shareholder. And recently, as we can see, there's an opportunity for us to acquire shares at a pretty attractive price in our mind. And when we look at Snap's business, we continue to feel that there's a lot of engagement with young users, there's a lot of innovativeness in the company's product and there's a lot of potential for them to build its business further. So that's why we have taken up more share and try to establish closer relationship and over time we try to see whether we can do something more strategic with them. Thank you. And the next question please. Your next question comes from the line of Gregory Zhao from Barclays. Please ask your question. Hi, management. Thanks for taking my question and congratulations on a strong quarter. So my first question is about AI. Recently, Tencent announced the AI in all strategy. So can you help us better understand how AI can help improve our existing business, specifically like gaming, advertising and the social network? And what other business you think AI can help potentially like improve the efficiency? And my second question is about our financial services. So we saw our financial services such as payment, wealth management and insurance all show very strong momentum in the domestic market. So my question is about our expansion in the overseas market. Do we have any plan to compete with international players such as Visa, Mastercard and PayPal to expand in the like the U. S. And U. Mastercard and PayPal to expand in the like the U. S. And European markets targeting those domestic users? And if the answer is yes, what's our plan to acquire these local users? Thank you. Yes, I think for AI in all, the concept is really a number fold, right. Number 1 is, it's we believe AI can actually help our various businesses. And I think in the last quarter, we have actually sort of walked through the multiple examples in which AI can help. I think it can help, for example our content business by providing a better recommendation to our users. It can help our advertising business because it can help on the targeting of the ads. It can help our financial business because it can help us to cater our offers to our users and at the same time analyze credit worthiness of our users in a better way. So it's really sort of across the board many of our products and services can actually benefit from AI. But at the same time, it's also a concept that we want to make our AI technology available to all of our partners and all of our industry customers through cloud services because we see AI as an enabling service that can help multiple industries to get more efficiency to understand their users, understand their data better. So that's why we would like to offer AI capability through our cloud business and to a lot of our own partners, customers, so that they would also enjoy the benefit of our AI investment as well as advancement. Now in terms of overseas business, I think for our payment business, the initial growth on the overseas front will be serving the Chinese users that are going increasingly abroad. There are many, many Chinese users who are going on travel or going on business and we felt by following their footsteps, we can actually establish a presence in the different countries and serve them better. In terms of globally, I think we're much more pursue a partnership strategy. We felt each one of the market for financial businesses is actually quite heavily locally regulated and there's a lot of expertise that local players have already built. So it will be much rather instead of saying, oh, we're going to go out and compete with them. It's much better if we can go out and cooperate with them and fund partnerships so that we can leverage their expertise, we can bring in our own expertise as well as our flow from China and bring to a mutually beneficial outcome. And next question please. Your next question comes from the line of Eddie Leung from Merrill Lynch. Please Firstly, about time spent of users. You have been sharing user trends with us for a long time. Could you also talk about the development of our time spent of users across various applications of Tencent in the past year or 2, especially given your investment in digital content? And then secondly, just a quick follow-up question on the negative users on QQ and Qzone. How much of the decrease was due to migration to Weixin? Thanks. Well, in terms of time spent of users, right, I think the short and quick answer is, it has been going up in across the board pretty much. And I think the key factor has been, I think people are using their handsets more, right. And especially when we look at, for example, platform like products such as Weixin, such as QQ, such as our browser, when you have a platform oriented business, which can provide more and more content as well as different types of services to the users, right, then there's a tendency for people to spend more time. I think the official account system within Weixin is a very important example. And I think the other thing is really about as we as the content format turned into more video oriented, people tend to spend more time on it. And the thirdly is, as recommendation technology keeps on improving, right? And there's a better chance that you can actually provide better content to the users and as a result you can keep them longer. So I think it's a number of these factors. And now of course, within our games, there has been a very strong increase in terms of both the DAU as well as time spent on our very successful titles. In terms of the inactive users on QQ, I would say it's a combination of factors, right. There are people who have been relatively inactive and then they have to switch over to Weixin. A lot of them were spending time on both products, right, and certain users would gravitate toward a platform more. So in this case, as people get a little bit older, then they may be spending more time on mission. Whereas what we have seen is for QQ, the positioning among younger users have really been strengthened over time and there's more engagement with the younger users. Thank you. And the next question please. Your next question comes from the line of Alex Yao from JPMorgan. Please ask your question. Hi. Thank you, management, for taking my question and congrats on a very solid quarter. First of all, I would like to follow-up on the survivor shooter game. Because in some of the game genres on both PC and mobile, it could form a winning take for situation. For example, mobile in both PC and mobile are winner takes all, even the shooter game is pretty much winner takes all. Do you think this mobile survivor shooter game genre will also become a winner takes all market structure in China? And then how do you see about the current competitive landscape given some of the industry peers? How are your shooter mobile shooter game in the past few days? And second question is about WeChat Moments of QA. Is the improvement more driven by technology or is it driven by your efforts to penetrate into different demographic or geographic that doesn't have advertiser demand in the past? Thank you. So on your first question about whether the survival shooter games will be winner take all or not, I think the short answer is it's too soon say. I mean even for the traditional first person shooter games on PC, you're right that in China, our Crossfire game has a very good market share, but then our Nijan game and our Call of Duty Online game also have decent market share. And if you look outside China, then Call of Duty, Battlefield, Grand Theft Auto to some extent, Titanfall, there's a whole range of successful first person shooter games on the PC and console outside China. I think that if you look at the history of this survival genre then it's actually a relatively long history that we've been following through, armor, through Daisy, through a number of predecessor games and the most recent iteration is PlayerUnknown: Battleground on PC and that's very successful. But there's also a game from one of our investee companies Epic called Fortnite Battle Royale that's proven popular on both PC and on consoles. So I think with PC games, it's too soon to say. It may be that in the future, the traditional first person shooter games incorporate these Battle Arena, Battle Royale activities as a mode of operation. Within the game it may be standalone games, triumphant it may be that they both prosper at the same time. That's on the PC. With mobile, I think that the industry is at much earlier stage of development, partly because there isn't the same history of first person shooter games on mobile for the survival shooter games to grow out of and partly because it's harder to get the controls right, get the ability to look around or hear things behind you on mobile than it is on PC today. So, the short answer is it's too soon to say. The second question that you asked was with regard to the advertising. Moments, right? Yes. So on Moments ads, well, there's a combination of both, right? There is improved technology in terms of targeting. We have also increased our presence within local markets, right, to allow smaller but more local advertisers to leverage our system to reach their smaller catchment of users. And I would say it goes hand in hand because of the better targeting technology, you can actually allow smaller advertisers to target a smaller group of users and still deliver a good result. So I think it goes both hand in hand as you said. Thank you. And the next question please. Your next question comes from the line of Alicia Yap from Citigroup. Please ask your question. Hi, thank you. Good evening, management. Congratulations on the strong set of results and thanks for taking my call. I have two questions. First is related to follow-up on the smartphone games. Just curious, do some of the newly launched games such as Contra and King of Chaos have a shorter deferred schedule? Just trying to reconcile the 84% growth in the smartphone games revenue this quarter. Is that due to a lot of the deferred got released from the past quarter together with some of the shorter deferred cycle for these newly launched games? And then internally in terms of the survival games, what type of monetization that you guys are expecting? 2nd question is related to the in your press release, you noted that related to the cloud and AI, you will be looking can you elaborate a little bit, because I thought, So just can you elaborate a little bit because I thought Tencent already have very strong technology and won a lot of awards, beating several worse than that previously. Are you referring to specific industry know how or more collaborations with like application software developers? So in other words, what are the areas that you hope to strengthen in your cloud and AI area? Thank you. Regarding the drivers of smartphone game growth, This quarter of course we have new games which have shorter life cycle because they haven't got track record and history to prolong the deferral. But at the same time, most importantly, it's the honor of Cain's for this quarter they are more instant consumption items rather than deferral items. So as a result you can see that while the smartphone games grew by quite a lot, at the same time the deferral, the deferred revenue didn't grow a lot this quarter, only a few percent quarter over quarter. On the survival game monetization, I think if you look at the successful PC products in the market, initially they monetized by selling the software upfronts to users and tens of millions of people globally, including in China who have paid to download those games. And then more recently, they've begun layering in loot boxes. Looking forward, I think that a key element of the survival games is that they are intended to be relatively fair competitive experiences. And so I think it's reasonable to assume that the natural monetization will be more of an upfront or decorative nature rather than more of a in game advantage nature. That's something that we're quite accustomed to because that's largely true of the Battle Arena games as well. On the cloud and AI, right now, I think you have touched upon the right idea, right. I think in terms of core technology, we do have a lot of investment and we felt we were very strong. But as we try to leverage these technologies to adapt them for the benefit of different industries, we actually require a lot of different partners. So that's the kind of investment I think we are mostly referring to. Thank you. And the next question please. Your next question comes from the line of Natalie Wu from CICC. Please ask your question. Hi, good evening, management. Thanks for taking my question and congratulations on a very solid quarter. My question is regarding the survival shooter game, Glorious Mission. Just wondering, given Tencent's very strong game R and D capability, why would you still license this game to another domestic studio? And also, for the mini program in just mentioned? So as far as you just mentioned? Thank you. So as far as Glorious Mission being a licensed game, I think if you look at our history, we really seek to serve the players with the content that's most appropriate to them and most attractive to them and different players will have slightly different needs. So if you take again looking back at the 1st person shooter genre out of which survival shooters have grown, then we publish Crossfire that serves certain user needs. We publish Niihana's Southfire that serves a slightly different user need. We published Call of Duty Online that's a more sophisticated game involving more tactics and more aiming down the scope and so forth. So you should assume that within this survival shooter genre, we have a number of titles in the pipeline. Some of those will be licensed, some those will be developed, but more importantly, different games will serve different audiences in different ways. And then hopefully, in doing that, we can seek to please the aggregate player base as much as possible. Your second question was about mini programs and monetization of mini programs within e commerce. I mean, I think that as you probably know, there's a number of e commerce companies that have embraced the Weixin ecosystem through official accounts, through mini programs, through viral marketing and so forth. Some of those have grown extremely swiftly. That includes well known incumbent companies such as jd.com, also some emerging companies that have enjoyed dramatic growth rates such as Pinduoduo. So at this stage, our focus is really about facilitating those companies being able to reach out to users and facilitating users being able to find the products that are attractive to them. Great. Thank you. Thank you. And operator, may we have the last three questions? Your next question comes from the line of Jin Yuen from Mizuho Securities. Please ask your question. Hi, good evening, guys. I think, James, in your prepared remark, I think you said that News Feed revenues were down year over year. If you could give us some color behind that? And then how much of that is just kind of a 1 quarter impact versus kind of a long lasting into the Q4 and perhaps the early part of next year? And second of all, with that news potential revenues from newsfeed going away, have you seen that kind of revenues go into other aspects of performance base? Thanks. Well I think what I said was that if you look at our media advertising revenue then we've seen very strong growth in video. Video was up over 70% year on year, but we've seen weaker trends both year on year and quarter on quarter for the news category. And within that one reason for the weaker year on year growth for news was that a year ago we had the Olympics. So that all boys brings in substantial revenue and substantial associated cost. And this year there's the Olympics. And then the second factor is that we had run some moderate amount of monetization within our news feed products, including Kandi and including Kuaibow, including Tencent News. And as Martin mentioned, in the last few months, we have really decided to focus our resources on getting the underlying infrastructure and user experience right. And one part of that focus is the Penguin accounts we talked about whereby we encourage and nurture the creation of in content by small professional content generators. And then we find the most effective means to distribute that content to users through our various channels. And in the course of focusing on the content side of the equation, we have chosen to deemphasize temporarily the revenue generation side of the equation. And on the revenue generation side, we're more looking at how to optimize the back end to create a scalable platform that can really build something impressive and sustainable in the future. All of which means that, yes, our newsfeed advertising revenue has been adversely affected as a result. I don't think that we would necessarily see other categories of our advertising benefiting instead. I don't think we'd really see that substitution effect. Got it. And do you expect that to linger into the Q4 as well? Any significant revenue impact in the Q4? Yeah, that would linger into the Q4. This is a multi quarter initiative. And it's actually a number of initiatives. One initiative is really getting the content equation right, so that there's proprietary or fresh content that appears on our platforms before it appears elsewhere. And another set of initiatives is around building out the core advertising platform. If you look back in the past, you may remember we went through a similar process with the advertising inside our social networks where we actually took the GuanDianTong platform that we built for QQ and applied that progressively to Weixin official accounts, Weixin Moments and elsewhere. So that's where we are right now. We're in the process of building that advertising infrastructure back end. And again, looking back at the GuanDian Tong experience that was a multi quarter construction if you will. But once the construction had reached a certain level of stability and maturity, then we're able to grow our revenue much more sustainably than if we just rushed into it. Thank you. And then next question please. Your next question comes from the line of Cheet Chen from HSBC. Please ask your question. Great. Good evening. Congratulations on a very nice set of results. I wanted to ask you about 2 things. Firstly, on eFinance, what sort of progress are you making in terms of consumer loans and also selling other financial services to your users? And secondly, as it relates to AI, there's been some sort of press announcements about you guys working on autonomous driving. Can you give us a sense of what sort of progress you're making? And I know you're working on a number of AI projects. How does autonomous driving stack up in terms of priority? Thank you. In terms of our FinTech products, right, I would say the initiatives can be summarized into different categories. The first one is WeBank and I think WeBank has been operating quite well and the loan outstanding has been growing on a pretty nice trajectory. The second one is our online wealth management platform LiCaitung and I think we are seeing quite a strong traction in LiCaitung and we have been able to offer both the more standardized money market products as well as other type of fixed income products to our users. And I think both the number of users and as well as the average ticket size, AUM per person has been growing nicely. In the recent months, we have launched Wishure, which is an online insurance gateway. And what it does have is an insurance distribution license and what we intend to do is actually leverage that gateway to work with other insurance companies such as leading companies within the sector as well as our investing company for example, ZhongAn Insurance, right, because they are the insurance companies, they can original products and our gateway is actually a distribution platform, so that we can actually help our partners to sell their insurance products better and customize their products better to our users. In terms of autonomous driving, I think it's very, very early days for us. We do have an overall initiative working with auto companies and with strategic partnership with them. And we have Mabs, we have our in car solution, which include all sorts of entertainment and speech recognition services that we can install within cars and autonomous driving. I would say as a starter, assisted driving will be a system that we'll be developing as an option for our automobile companies partners to choose from. Thank you. And last question please. Last question comes from the line of Thomas Chong from Credit Suisse. Please ask the question. Hi, thanks management for taking my questions and congratulations on a strong set of results. I have two quick questions. The first one is about the ARPU for PC and mobile games. And my second question is about cloud. Can management provide some color about the number of paying customers if any? Thank you. Alright. In respect of the ARPUs for MMOG, it's from 350 to 670 and for advanced casual gains it's 110 to 500 and for these platform gains it's between 170 to 80 for the quarter. And I'm sorry, your second question was about the number of paying customers for which product? For comp. Yeah, unfortunately, we don't disclose that number at this point in time. Got it. Thank you. We are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website. The replay of this webcast will also be available soon. Thank you and see you next quarter. That does conclude our conference for today. Thank you for participating in Tencent Holdings Limited 2017 3rd quarter results announcement conference call. You may all disconnect now.