Thank you for standing by, and welcome to the Tencent Holdings Limited 2017 second quarter and interim result announcement conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press dial one on your telephone to join the question queue. Your name will be announced when it is your turn to ask a question. If you wish to cancel your request, please press the pound or the hash key. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Jane Yip from Tencent. Please go ahead, Ms. Yip.
Good evening. Welcome to our second quarter and interim results 2017 conference call. I am Jane Yip from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties, and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-GAAP measures, please refer to our disclosure documents on our IR website. Let me introduce the management team on the call tonight.
We have our Chairman and CEO, Pony Ma, President Martin Lau, Chief Strategy Officer James Mitchell, and Chief Financial Officer John Lo. Pony will kick off with a brief 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 Ma.
Okay. Thank you, Jane Yip. Good evening, everyone. Thank you for joining us. During the second quarter of 2017, we delivered a strong growth across our revenue segments, including smartphone games and PC games, payment related services, online advertising, and digital content subscription and sales. Let me highlight the key financial numbers for you. Total revenue was RMB 56.6 billion, up 59% year-on-year and 14% quarter-on-quarter. Non-GAAP operating profit was RMB 20 billion, up 36% year-on-year and 8% quarter-on-quarter. Non-GAAP net profit to shareholders was RMB 16.4 billion, up 45% year-on-year and 15% quarter-on-quarter. John will provide more details in the financial section. Moving on to online platforms. Combined MAU of WeChat increased 19% year-on-year to 963 million. Total MAU for QQ was 850 million, within which smart devices MAU was 662 million, down 4% year-on-year due to fewer casual users, while engagement with core users increased.
Specifically, PCU, including PC and mobile, increased 8% year-on-year to 268 million. In addition, smart device MAU for users aged 21 years or below was up year-on-year, demonstrating QQ's increased popularity among younger users. Popular features within QQ such as Kandian and News Feed increased average user time spent within QQ. For social networks, Qzone smart devices MAU was 586 million. In games, we maintained our leadership in mobile and PC, as measured by users and revenues. Our media business grew users and traffic at healthy rates, and we retained leadership in the core news, video, music, and literature categories while developing new categories such as online comics. In mobile utilities, we remain the China industry leader in mobile security, mobile browser, and Android apps box. With that, I will pass to Martin to discuss strategic highlights.
Thank you, Pony, and good evening, good morning to everybody. I'm going to elaborate our thoughts in this strategic review on artificial intelligence, which is a hot topic. We have been investing heavily in AI, but relatively quietly, as we view AI as an essential capability that enhances user experience and empowers us to capture the new exciting opportunities to grow our businesses for the future. We're confident that our existing strength in computing power, data, engineering technologies, as well as use cases, coupled with our proactive buildup of AI talent, will give us a favorable position in this strategic initiative, especially our wide and diversified business scope creates a variety of use cases for AI research and application across a range of AI fundamental research areas such as machine learning, computer vision, speech recognition, and natural language processing.
We will be persistent, the patience with our AI investment because we believe it is a long-term initiative, and we do not necessarily require our research to generate revenue directly in the short term. On the other hand, we believe AI will significantly benefit all of our existing products, services, and businesses in many ways. For example, in consumer-facing products, AI enhances user experience as we understand more about the users. For enterprise-related businesses, AI optimizes big monetization as we sharpen our targeting technology. For our ecosystem, our investee companies and cloud partners can leverage our strong AI capability, allowing all of us to achieve mutual benefits. Now on the next page, I will give you three more specific examples on how we can apply AI to our existing products and services. These three examples are our performance ads, information-based services, and fintech businesses.
For performance ads, we applied AI technology throughout the process of ad placement, from understanding users' preferences, contextual and ad content, to ranking the bidding price, optimizing the display format, and eventually to matching the most appropriate advertisers. This increases the ROI for advertisers, while at the same time enhancing the reading experience for our users. For information-based services, including news apps, video, music, and app store, AI enables us to have a better knowledge of users' interest. This will help us to make more relevant and customized recommendations to users, so that they can access their favorite content more efficiently. Across Tencent platforms, there are multiple digital content access points, which we believe will all benefit from the smarter recommendation engine. For internet finance businesses, including mobile payment, wealth management, and micro loans, we use AI to predict users' behavior in financial activities more precisely.
This will help us to provide the most suitable products to the most appropriate users, and in the process, minimize the risk involved. On top of these existing business lines, I would also like to give you some example on our selective breakthroughs to date developed by our AI teams in-house. These include our computer Go chess master called Fine Art, face recognition technology, and medical imaging AI product. Early this year, Fine Art won the UEC Cup, a global computer Go tournament. Fine Art was developed by our AI Lab in less than a year. We have accumulated, in this process, significant know-how in the development of Fine Art, and the strategy and reinforced learning AI technology behind Fine Art can be applied to many other use cases in the future. Our face recognition technology also scored excellent results with the world-leading face detection dataset and benchmark, FDDB.
We have gradually applied this technology in a variety of different ways. For example, firstly, enhance and enrich the features of our photo editing app, Pitu, which has become the number 2 app of its kind in China. Secondly, enable users to complete ID identification online for financial services and government municipal affairs. Thirdly, assist in the search for children and elderly reported missing, helping many families in the process. In addition, we have recently released our first medical imaging AI product, AIMIS, which applies deep learning to detect early signs of disease in images generated by various medical imaging technologies, including endoscope, CT, and MRI. We believe this tool can help increase the accuracy and efficiency of early detection and diagnosis. These areas may not generate revenue immediately, but we think they're important and beneficial for advancing our AI know-how, which will benefit us in the long run.
With that, I'll pass to James to talk about our business review.
Thank you, Martin. Good morning, good afternoon, good evening to everyone. In the second quarter of 2017, our total revenue grew 59% year-on-year. VAS represented 65% of our revenue, within which online games contributed 42% and social networks 23%. Online advertising was 18% of revenue. The other segment accounted for 17% of total revenue. Within this other segment, payment-related services and cloud services drove the year-on-year growth, both sustaining triple-digit revenue growth rates. Payment-related services, revenue from co-produced TV shows and movies, and cloud services contributed strongly to the quarter-on-quarter revenue growth. For value-added services, segment revenue was RMB 36.8 billion in the second quarter, up 43% year-on-year and up 5% quarter-on-quarter. Social networks revenue was RMB 12.9 billion, up 51% year-on-year and up 5% quarter-on-quarter.
From a year-on-year perspective, digital content services, including our video subscription business, music gifting and subscription businesses, and literature transaction business, were the primary revenue growth drivers. From a quarter-on-quarter perspective, increased revenue from digital content services, including live broadcast and from virtual items and smartphone games, more than offset decreased revenue from our legacy privilege subscriptions, such as the Qzone Yellow Diamond product. Online games revenue was RMB 23.9 billion, up 39% year-on-year and up 5% quarter-on-quarter. From a year-on-year perspective, revenue grew primarily due to more smartphone game users and a higher proportion of those users making payments, as well as increased ARPU from our key PC game titles. From a quarter-on-quarter perspective, user growth in our established as well as new smartphone games drove the sequential revenue increase.
Turning to social networks, for Weixin, we made it easier for users to access Mini Programs via initiatives such as enabling keyword search and location-based search for the relevant Mini Programs. These initiatives significantly increased the number of unique visitors and interactions with Mini Programs. Weixin paid through commercial transactions at a rapid rate. In cooperation with channel partners such as Meituan-Dianping, as well as major commercial banks, we added a substantial number of offline merchants. Our average daily commercial payment transaction volume more than doubled year-on-year, driven by strong growth in offline commercial transactions. For QQ, we continued to enhance functionalities most suitable for young internet users, such that while overall MAU declined, smart device MAU for under 21-year-olds increased year-on-year, and daily time spent also rose.
Some of you may have experienced Kandian, an algorithmic news feed service embedded inside QQ, where we enhanced the recommendation technology and added social sharing features. As a result, DAU and time spent for Kandian increased significantly, and Kandian has become an important destination within the QQ app. For our live streaming app, NOW, we enriched our offering via content verticals such as campus life, cosplay, and outdoor game shows. We also distribute these content verticals through QQ, Qzone, and our video and music apps, providing an attractive breadth of users to professional and amateur content creators. Looking at PC client games, revenue grew 29% year-on-year, driven by unusually strong performance for our key established titles. Revenue declined 3% quarter-on-quarter due to seasonality. Average revenue per user broadly increased year-on-year and quarter-on-quarter, particularly for League of Legends and Dungeon and Fighter.
Active user accounts generally declined year-on-year, due to the ongoing trend of some users shifting a percentage of their playing time to mobile games. League of Legends released some popular updates with new skins that drove user activity and spending. We also ran festival promotions, esports tournaments, and a variety show around the game, which enabled users to connect with the game in multiple ways so as to further deepen their engagement. All these activities reinforced League of Legends position as an immersive and hardcore game, appealing to the most professional players. Dungeon and Fighter outperformed the industry to grow active users year-on-year and increase paying users riding on successful expansion packs. As our first case study for a cross-media intellectual property strategy, Dungeon and Fighter published its first minor animation series, following on from themed comic books and novels.
We believe these initiatives broaden user engagement and contribute to DNF's impressive longevity. For smartphone games, revenue was up 54% year-on-year and up 14% quarter-on-quarter, surpassing that from PC games. Active user accounts also increased year-on-year, mainly driven by mid-core games. In the quarter, we released five new titles, including one puzzle game, one ARPG, one massively multiplayer role-playing game, and one strategy game. In player versus player competitive games, they built up strong products, publishing expertise, and substantial audiences for key titles in genres such as battle arena, shooting, sports, and board games. For these types of games, a big player base tends to virally attract new users, as well as providing better matching and liquidity for existing users, creating a virtuous cycle of new player activation and existing player retention.
For role-playing games, we utilize our knowledge of user behavior, our gaming content-oriented communities, and our targeting technologies to highlight the most appropriate role-playing games to the most suitable users, which has contributed to us gaining market share in the action role-playing game and massively multiplayer role-playing game subcategories. Our published role-playing games, Dragon Nest Mobile from Shanda Games, JX Mobile from Kingsoft, and Legacy TLBB Mobile from Changyou were all ranked in the iOS top 10 grossing apps chart in China during the period. For console-style games, we had licensed from Konami the right to develop a mobile version for China of its classic console IP, Contra. We launched this game, Contra: Return, in the second quarter, and it generated an enthusiastic response from players, ranking number 4 in China's iOS top grossing chart in June.
For online advertising, our revenue was RMB 10.1 billion, up 55% year-on-year and up 47% quarter-on-quarter, with mobile contributing over 85% of this revenue. Our media advertising revenue was RMB 4.1 billion, up 48% year-on-year and up 62% quarter-on-quarter. Popular video content and improved video content distribution resulted in a substantial increase in our video traffic, and thus our video advertising revenue, which was the primary driver of this rapid growth. The second quarter is seasonally stronger for our media advertising than the first quarter, and this year, drama series such as "Ode to Joy," Season 2 and "Surgeons," and self-commissioned variety shows such as "Go Fridge," Season 3, boosted our user engagement and traffic, contributing to an unusually rapid quarter-on-quarter improvement in media advertising compared to the first quarter when some of our strongest video content was prioritized for video subscribers.
For our media news products, we are primarily focused on enhancing our news feed algorithms, and our news advertising revenue grew at a slower rate than our video advertising revenue. Our top 5 brand type advertising categories during the quarter included food and beverage, transportation, online services, online games, and consumer electronics. Our social and other advertising revenue was RMB 6 billion, up 61% year-on-year and up 39% quarter-on-quarter, driven by higher fill rates in WeChat Moments and WeChat official accounts, by more advertisers buying mobile browser advertisements from us, and by more advertising impressions coming to us from our affiliate ad network. We extended our self-service platform capabilities to facilitate nationwide buying, and we enabled more of the official accounts to carry advertisements, benefiting creators of those official accounts. Now I'll pass to John Lo through the financials.
Thank you, James. Hello, everyone. For the second quarter of 2017, our total revenue was 56.6 billion RMB , up 59% year-on-year or 14% quarter-on-quarter. Gross profit was 28.3 billion RMB, up 28% year-on-year or 11% quarter-on-quarter. Net other gains were 5.1 billion RMB. We recorded net other gains totaling 5.1 billion RMB for the second quarter of 2017, which mainly consists of fair value gains as a result of significant increase in valuations of certain investment in verticals, including bike sharing and fintech, as well as game gains arising from capital activities of certain invested companies, particularly the IPO of Korean mobile game publisher Netmarble. They are partially offset by impairment provision charges for certain invested companies. Share of profit of associates and joint venture was 498 million RMB in the quarter.
On a non-GAAP basis, we generated profits of 947 million RMB in Quarter Two, comparing to losses of 206 million RMB in the second quarter of 2016. Income tax expenses were approximately 4 billion RMB, up 43% year-on-year or 9% quarter-on-quarter. Effective tax rate for the quarter was about 18%. Net profit to shareholders was 18.2 billion RMB, up 70% year-on-year or 26% quarter-on-quarter. I will walk you through our non-GAAP financial numbers, which provide a useful reference to evaluate the operating results of our organic businesses. After adjustment to non-GAAP, operating profit for the quarter was 20 billion RMB, up 36% year-on-year or 8% quarter-on-quarter. Operating margin was 35%, down 6 percentage points year-on-year and 2 percentage points quarter-on-quarter. Net profit attributable to shareholders was 16.4 billion RMB, up 45% year-on-year or 15% quarter-on-quarter. Net margin was 29%, down 3 percentage points year-on-year and broadly stable quarter-on-quarter.
Let's turn to segment gross margin. Gross margin for value-added services was 60.6%, down 6.1 percentage points year-on-year, mainly due to higher channel cost of platform gains paid to third-party app stores, including Tencent manufacturers. Revenue mix change to low-margin products such as digital content services. Quarter-on-quarter change was broadly stable. Gross margin for online advertising was 37.8%, down 7.5 percentage points year-on-year due to increased video content investment. Sequential increase of 3 percentage points reflected stronger seasonality in the second quarter. Gross margin for others was 22.4%, up 11.8 percentage points year-on-year and broadly stable sequentially. The year-on-year increase was mainly due to gross margin improvement of payment-related services. Moving on to operating expenses. Selling and marketing expenses were 3.7 billion RMB, up 55% year-on-year or 16% quarter-on-quarter.
The year-on-year increase was mainly due to higher marketing and promotional spending on products such as online games, payment-related services, and online media, as well as higher staff costs. The sequential increase mainly reflected seasonally more advertising and promotional activities in the second quarter versus the first quarter. Selling and marketing expense was 6% of quarterly revenue. Total G&A expenses were 8.2 billion RMB, up 54% year-on-year or 17% quarter-on-quarter. Under G&A, R&D expenses was 4.2 billion RMB, up 54% year-on-year or 18% quarter-on-quarter. The year-on-year increase mainly reflected higher staff costs. As a percentage of revenue, total G&A was 14% and R&D was 7.5%. At the end of the second quarter, we had over 40,000 employees. Year-on-year growth of 29% was mainly due to, Number 1, organic headcount increase. Number 2, one-off inclusion in our headcount of some outsourced manpower who engage in our customer support work.
3, the business combination of our music businesses. Excluding the later two factors, headcount grew by 16% year-on-year. Looking at the margin ratios for the second quarter. Gross margin was 50%, down 7.3 percentage points year-on-year mainly due to decrease in [inaudible] gross margin and increase in contribution from low-margin other segments. Gross margin dipped 1.3 percentage points sequentially, reflecting change of revenue mix. Non-GAAP operating margin was 35.4%, down 5.8 percentage points year-on-year, primarily reflecting lower gross margin, partially offset by an increase in net other gains. The sequential decrease of 2 percentage points was mainly due to lower gross margin and higher G&A expense. Non-GAAP net margin was 29.1%, down 3.1 percentage points year-on-year and broadly stable sequentially. Sorry. For the second quarter, total CapEx was RMB 3 billion, double year-on-year and up 43% quarter-on-quarter.
Operating CapEx was RMB 2.3 billion, up 124% year-on-year and 36% quarter-on-quarter. It represented about 4% of total revenues. Non-operating CapEx was RMB 683 million, up 47% year-on-year or 73% quarter-on-quarter. Free cash flow was RMB 17.5 billion, up 50% year-on-year and down 28% quarter-on-quarter. Sequential decrease was mainly due to weaker seasonality for PC client games. Our net cash position at quarter end was RMB 21.3 billion or $3.1 billion, down 12% year-on-year or 23% quarter-on-quarter. Sequential drop in net cash was mainly due to payment of final dividends for 2016. Fair market value of our listed associates and available-for-sale financial assets was approximately RMB 146 billion or $21.5 billion at quarter end. Thank you. We shall now open the floor for questions.
Thank you.
Operator, we will take one main question and one follow-up question each time. May we have the first question, please?
Certainly. We will now begin the question and answer session. If you wish to ask a question, please press star on telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. Your first question comes from Chi Tsang, of HSBC. Please ask your question.
Hi. Good evening. Thanks so much. I was wondering if you could discuss online video for a few minutes. In particular, how do you think this business will evolve over the next few years in terms of things like paying subscriber ratio, ARPU, and margins? What do you think it will take for this business to reach breakeven? Thank you very much.
On online video, I think it's gonna take quite some time, unfortunately, for the business to breakeven. I think dynamics, at this point in time, is that, number 1, there's a lot of usage. More and more people are watching online video at a longer and longer time on a daily basis. At the same time, advertising revenue has been increasing, and there's also an increasing willingness for consumers to pay. The subscription number as well as revenue has been increasing quite rapidly. On the other hand, the flip side of the news is the cost of content has been increasing even faster. What we see is that over time, we believe the content will continue to increase, but the rates will probably be lower. The subscription, as it continue to increase, would deliver a higher revenue per active user.
We will get closer to a more equilibrium between cost and revenue at some point in time. I think unfortunately at this point in time, the net loss of the business is still increasing. Although, depending on how much revenue we generate from advertising as well as from subscription, the increased rate could be slower than before.
Thank you.
Yes. The next question comes from Eddie Leung of Merrill Lynch. Please ask your question.
Good evening. Thank you for taking my questions. Two questions. The first one is about your advertising business. It's quite obvious that traffic has been growing very rapidly. You're also added some advertising inventories. I'm just curious if you could talk a little bit about the trends on the conversion rate or click-through rate as well as pricing. How important are they in terms of driving the advertising growth in the past, let's say, one or two quarters besides the traffic and inventories? Secondly, also curious to hear your thought on the usage of user-generated video in social networks. How important you think this trend can be, and any update would be great. Thanks.
In terms of the advertising, I think most of the growth has actually been from the click-through rates as well as the improvement in targeting technology. As a result, the pricing achieved has been higher. There's some help from the other two factors, which is a slight increase in terms of the inventory and an increase in terms of the general traffic. I think from the inventory angle, we have achieved a second ad for some cities. Within a 24-hour period, not everybody is seeing two ads. Compared to our international peers, I think the amount of inventory is still relatively small. At the same time, the traffic increase has been most significant around Moments. If you look at our performance ads, it's across a pretty large number of different properties, right?
The traffic growth in the other areas might not be as great as the Moments traffic increase. Now, in terms of user-generated video, I think there has been a pretty large amount of user-generated video content in our social network. It has already been the case, and it has been increasing. At the same time, I think as you would notice, there are a lot of other apps which are also hosting these user-generated content, including our invested company, Kuaishou, as well as a lot of the news apps, right, which has customized content for people. In addition to text and picture, they are also adding short video to the overall content. Of course, you also have the video apps, which are not only having the professionally made content, but also user-generated content.
The user-generated content has already been spread over many different platforms in China. I think everybody has been seeing a general growth in this. I think overall, it's definitely good in terms of user engagement. It's a little bit tough to make advertising revenue from that because usually these videos are relatively short, and depending on how aggressive you are in terms of balancing user experience and monetization, I think if you really care about user experience, then the chance of putting advertising on these short videos are more limited.
Thank you. Next question is from Junkyu Yoon of Mizuho Securities. Please ask your question.
Yes. Thanks very much for your time. Can we just go back to video revenues again? As subscriptions ramp, I assume that people are going to be watching less ads. Are you seeing any impact where those potential video ads could be more directed towards social going forward? Have you seen that trend, or is that even a possibility? Just to follow up on that, any commentary on the Unicom investment today? Thanks.
I think on the video side, in different quarters of the year, our biggest and best content appears in different monetization windows. In the first quarter, we mentioned that the drama serial, "The Ghost Blows Out the Candle," was prioritized for subscribers, and that coincided with a very sharp upsurge in subscription revenue. In the second quarter, some of our biggest content was including "Go Fridge" season three, "Surgeons," and "Ode to Joy" and so forth, was made available to the advertising-consuming viewers. While our subscription revenue continued to increase quarter-on-quarter, the rate was not as sharp. On the other hand, you can infer from our media advertising revenue that our video advertising revenues saw a very sharp, a sharper than seasonal uptick quarter-on-quarter, supported by strong content. As you would expect, video in the short term is a content-driven business.
We have stated in the past that as an increasing proportion of our video users become subscribers, then those subscribers become subject to fewer video ads. The video advertising doesn't completely disappear, and if you watch some of our really hallmark content, like "The Ghost Blows Out the Candle," we have sponsorships and so on that appear on the screen during the program. I think you're also asking whether the video advertising gets displaced elsewhere, and I think that's difficult to say. At this point, my guess is that the big advertisers have a certain budget for television and then for online video, and then they have a separate budget for social and a separate budget for search and so forth. The migration between those buckets happens relatively slowly, typically at the beginning of each year rather than happening on a month-by-month basis.
On China Unicom, I would say the mixed ownership reform scheme of China Unicom, in our view, is a very monumental step in the economic development of the country. As such, we are actually very honored to participate in this scheme. On the business side, we have always been seeking more and more and deeper and deeper cooperation with telcos because we believe they are very important ecosystem partners of ours. In this particular case with China Unicom, at a very important juncture of their business development, we are very happy to be involved in this strategic manner. In terms of business cooperation, we've already got a lot of cooperation with China Unicom, including, most recently, the joint launch of a broadband card called Dawang Card, which provides unlimited data bandwidth for Tencent apps.
That has been a very great success, and we help China Unicom to sign up a lot of new users. We actually, with this strategic partnership, look forward to developing more and more cooperation with China Unicom. We believe, if you look at the participants, there are a lot of different partners who can bring potential skills and resources into China Unicom, and we think it is beneficial to the entire industry. We look forward to a deeper relationship with China Unicom. We also hope to have a deeper relationship with all telcos across the board.
The next question comes from Alicia Yap of Citigroup. Please ask your question.
Hi. Good evening, management. Thanks for taking my questions, and congratulations on another strong quarter. I have two questions. Number 1 is related to your AI technology. You mentioned some of the recent breakthrough achievement by your team in this area. Wanted to get management opinion on a broader view, as almost all large internet companies are investing heavily in the AI technology. In your view, what are the most important competitive strength and advantage that could set each company different from their peers? What are the competitive strength for Tencent AI? Separately for this AI, I understand it may help in better targeting, improving user experience, and benefit overall monetization over time. Besides benefiting internal business, in the longer term, will AI also help your platform partners?
Any chance that AI could become a service that you can license to your external partners that help enhance your monetization even more in the longer term? The 2nd question is on advertising. Just can you share briefly, what are some of the initial attractions and contributions from the video ad format within your Weixin properties? What are the user feedback and the click-through on those video ads? Are these video ad format mainly consumed by bigger brands in the 1st-tier city at this stage? Thank you.
Okay. In terms of AI, I think all large internet companies would benefit from this. To some extent, it's a little bit like the mobile internet, in which when mobile internet came around, a lot of users can use mobile internet on a more frequent basis. For the companies who can develop their mobile apps in a successful way, then you can benefit from that big trend. I think AI is, to some extent, similar in nature. Of course, since it's early days, a lot of it depends on whether you are able to develop the technology, who can develop the technology better. We have highlighted in our prepared remarks that there are a few things which are very important in AI. That includes AI talent, that includes the ability to have a lot of data and a lot of use cases.
Of course, the computing power and engineering capabilities are also very important. If you look at Tencent, you would believe, for us, we have a very wide and diversified business scope, not only in our own businesses, we have a very broad line of business, but at the same time, in our ecosystem. We have a lot of partners in the form of investee companies, in the form of commercial partnership, and in the form of our cloud business customers. Because of the availability of these use cases, it provides the best venue for our AI and our engineering talent to develop AI technologies.
At the same time, I would say we are very patient in our overall approach, and we take a long-term perspective so that we will not be too eager to say, "Oh, you have to generate revenue in a very short term." We believe when we get all these technologies, it will benefit our existing businesses almost immediately. At the same time, when we keep on advancing our technology and developing new applications, it will help us to open up new business areas, as well as help our partners to open up new business areas. In terms of providing AI as a service, I think this is definitely one direction that we're going into.
In our cloud business already, we're seeing a lot of demand on that, and we have been able to sign up a lot of customers because of our ability to offer them AI capability, and that's just the beginning. Over time, I think we will do much more on that. I think in terms of advertising, you're talking about the video ads on Moments. I think right now, video ads on Moments is still a very small part of our overall revenue.
The next question, please.
Next questions comes from Alex Yao of J.P. Morgan. Please ask your question.
Thank you, Martin, for taking my question, and congrats on another solid quarter. My first question is about the payment. With the payment, MAU exceeded 600 million in December last year. I think consumer adoption for the payment has come to an end. Can you talk about the rationale of payment subsidy strategy that you guys introduced in the second quarter and continue into the third quarter? Related to that, can you talk about the implication of official introduction of NetsUnion, the Wanglian, recently? How will this change the economic interest of various players in payment value chain? Second question is on the SMS. For QQ casual users who reduce their usage of QQ and Qzone, are they migrating to Weixin at the moment or something else?
With such a mixed operating metrics between QQ and Weixin, do you think your position in China's SMS and communication market is equally strong, or is your position slightly changing? Thank you. I'll stop here.
Yeah. On payment, I would say, again, the overall strategy for our payment service is to provide an infrastructure for service for our own business, as well as for all our ecosystem partners. As a result, it's not a business that we would want to make a profit. It's not the target to make a profit from it. That's the overall guiding principle. As a result, we do want to reinvest the revenue and potential profit that we can make from this business into growing the coverage, the usage of the service. One of the important aspect of payment is we want to not only cover the transactions online, but also in O2O services as well as offline. A lot of the marketing expenses are directed in that direction. We want to support commercial transactions in O2O area as well as in offline scenario.
At the same time, I want to point out that there is an increasing competition also in this area. That is why we do expect our investment into this payment business to increase over time. Now, in terms of NetsUnion is a back-end clearing system, which allows third-party online payment companies to connect to the different banks via one centralized clearing system. I think the People's Bank of China wanted to have the system so that they can have more control over the routing of the payment services. We have been actively working with NetsUnion in developing their system. The way we look at the system is, it is a back-end system. We are still responsible for the front-end connection with consumers, as well as the connection with the merchants. But the connection to the bank would eventually go through the NetsUnion.
For us, the most important thing is to make sure that NetsUnion system can handle the amount of transactions that we handle in a reliable way. We have dedicated a pretty large team of people to be working full-time at NetsUnion in the formation of the company. We have provided a lot of technology and modules to enable it to be functional in a very short time. We are the first transaction to go through the entire system, and it is now experimenting with some payment traffic, and we are the biggest provider of such payment traffic right now. We believe if we can ensure the very stable and reliable operations NetsUnion, then it will be beneficial to us.
The next question comes from Wendy Huang on Macquarie. Please ask your question.
Thank you. My first question is also about your other payment business. Your total others increased by 177% year-over-year. Can you give some color which one is growing faster, whether it is payment or cloud business? Also the gross margin for this business seems stabilized at 22% level. Is this other business already actually contributing to the bottom line? If not yet, when do you expect it to be a meaningful contribution to the earnings? Second question is, can you help us to understand the future driver of your game business from both pipeline perspective and ARPU perspective? We just launched the five new games in the second quarter. What is the pipeline look like for the rest of the year? Also, PC game revenue increased by 29% year-over-year. You mentioned in the presentation earlier that it is mainly driven by the ARPU.
What's the ARPU right now, and where do you see the ceilings? Thank you.
Okay, on the others category, I would say the following. It's mostly constituted of the payment business revenue as well as the cloud revenue. Both of the two businesses grew at triple digit, with the payment business growing faster, slightly. In terms of margin, bear in mind, this is gross margin, and there's a lot of marketing expenses related to both the payment business as well as the cloud business, which is embedded in the sales and marketing. Hence, a pretty big year-on-year growth rate in marketing expenses. At the same time, there's also the human resource related to these businesses, which are embedded in the G&A. I would not go as far as saying they're making a meaningful contribution to our earnings yet.
Dennis.
As far as the smartphone games are concerned, I think that with regard to the pipeline, you could refer to our activities at the recent ChinaJoy Conference, there's a number of titles that we hope to release in the coming months that we're quite optimistic about. The bigger point to make here is that smartphone game playing in China is still at a relatively early stage of growth. If you look at, for example, our smartphone game daily active users in the second quarter grew over 40% year-on-year. Of course, part of that's driven by new games that we've released in the last several quarters, but another part of that is driven by the increased popularity of games that we released one to three years ago. We'll continue to explore new market segments in smartphone games.
I think we've done a good job of really cultivating the big DAU moderate ARPU player versus player competitive games like sports, shooting, and so forth. We've started to do a good job of colonizing the small DAU high ARPU role-playing game segment that we talked about. Then we're also trying to develop new game segment opportunities, such as the console games that we discussed. That's on the smartphone games. In terms of the PC game ARPU, I'll hand that to John.
Actually, with reference to the description we have made in relation to increased ARPU from PC game titles, ARPU for MMOG is within RMB 370-560 for the quarter, and advanced casual game ranges from RMB 100-440 this quarter, which increased quarter-over-quarter and year-over-year.
The next question, please.
Sure. The next question is from Grace Chen of Morgan Stanley. Please ask your question.
Hi. Thank you for taking my question. My question is also about the advertisement business. We understand Tencent has been focusing on enhancing capabilities, such as targeting technology, while releasing ad inventories on a measured pace. As you just mentioned that Tencent is doubling ad inventory in Moments in some cities. Can you share with us your thoughts about what you consider as the key factors to determine how fast you would increase ad inventory? Is there a timeline in your plan to roll out the ad load increase nationwide? Apart from the increasing monetization in WeChat Moments, we also understand Tencent has many other properties with great potential to increase monetization, such as Tencent Video, Tencent News, Tian Tian Kuai Bao. Can you also share with us your monetization plan in these properties as well? Thank you.
I think ultimately, the question is really a balance between user experience and monetization. We do want to make our targeting better and better. So far, I would say we're erring on the very conservative side in terms of releasing our inventories. I think it will be a function of when do we feel more comfortable in terms of achieving a level of user experience that when people see the ads, they will not be turned off, but rather they see it as a pretty delightful experience. At the same time, I think we also do a lot of education and joint partnership with the advertisers so that we want to increase the quality of the advertising.
We felt if we can have better and better targeting technology, and at the same time we have better and better advertising content, then the user experience of seeing advertising would be better for the users. Right now, I just have to say, there's really no urgency for us to put a lot of inventories out. We do have some luxury of working on our technology and making sure that our user experience is the best in kind among all industry peers.
Moving on. The next question is from Alan Hellawell of Deutsche Bank. Please ask your question.
Thank you, management. Congratulations on the strong quarter. This is Annie Dong from Deutsche Bank, asking question on behalf of Alan Hellawell. I want to ask, with details of mixed ownership recently having been announced, are we expecting any further government involvement in our business, in, for instance, gaming or social networking? Do we see growing regulatory risk on that front? Thank you.
Well, I think mixed ownership is actually a direction for the government to embrace more market governance for state-owned enterprise. I think that has no implication on more regulatory pressure on our business. In a way, it's actually the other direction. It's hoping that the market force can help state-owned enterprise to be more competitive.
Due to time constraint, may we have the last two questions on the floor?
Certainly. The next question is from Ming Xu of UBS. Please ask your question.
Good evening, management, congratulations on the strong quarter. Two questions. Firstly, on the payment and finance business, we read a lot of news regarding the strong loan growth of Weilidai from WeBank. I'm just wondering, could you share with us except for your stake in WeBank, how should we think about the revenue opportunity from this strong growth of Weilidai for Tencent? What's the current revenue size inside from this business? Second is for the gaming business. I noticed in your slide, you mentioned that you use your targeting technology to acquire users for RPG games. Could you maybe elaborate on that? Thanks.
In terms of WeBank, in addition to the ownership we have in WeBank, we also have a platform fee in which we charge to WeBank, because we do offer a lot of value add to WeBank in terms of acquiring customers, as well as helping them to assess the credit. As their business grow over time, we will book a revenue from them, and at the same time, we have an equity participation in their profits.
In terms of games and targeting, I think if you look at game playing globally, particularly on the personal computer, it's moved from being media-driven to being increasingly community-driven. 20 years ago, people discovered new games on the PC in the U.S. and Europe through computer magazines. Now they're discovering them through Reddit, through Twitch, through those kinds of more communal venues. Some of the same trends are underway in China. What we're trying to do is working with the game developers to make sure that we target their games to the users who are likely to be most receptive.
When a company like Shanda releases a mobile game like Dragon Nest Mobile, which is a mobile port of a somewhat successful PC game, and they share with us something about who played the PC games, then we can effectively catch up with those users, 5 or 10 years on mobile and recommend this game to them on mobile. That's something that's highly effective. Similarly, if we know that there are certain users who are particularly interested in, for example, Japanese animations, then we can target games with a Japanese animation style at those users and so forth. That's part of what we were referring to when we were talking about the ability to target the role-playing games at the most appropriate users. There are some games which we think have kind of transcendent appeal and can bring all sorts of different people on board.
We continue to market those broadly and widely. There are other games that will resonate most with a very narrow but deep audience. For the second class of games, we want to help the developers by reaching that narrow but deep audience rather than waste the developers' time and money by trying to reach a much broader, shallower audience who would display inferior retention rates. That's what we were talking about.
The last question is from Piyush Mubayi of Goldman Sachs. Please ask your question.
Thank you for the opportunity. Very specifically on AOK, what is the amortization that you're following right now? That seemed to be one area where we didn't get meaningfully surprised on the revenue side. Second question for Martin on AI. You talked about how it could transform your performance advertising and fintech businesses with better targeting. How quickly do you think that can get manifested in these two businesses, for example? Very quickly also on payments, how much traffic and payment does Meituan drive? Thanks.
In relation to the amortization of Honor of Kings, it's about nine months.
Okay. In terms of AI's impact on the fintech business and advertising, I would say it's an ongoing process, right? In the past, we have been already doing a lot of optimization, but those are more rule-based optimization. When we now start to add deep learning to the process, we can see there's the headroom can be improved by a lot. At the same time, it takes time to develop the technology and also have it worked into our entire system. I would say some of the impacts have already been seen, but over time, there will be more to be explored and to be captured. In terms of Meituan, that's a business which has grown quite significantly, and as a result, we also benefit from that.
At the same time, I think the significance of having that ecosystem partner is that they are very deeply engaged with the food and beverage industry with all kinds of restaurants around the nation. As a result, because of that coverage, we are able to have direct coverage through them of most of the restaurants in China. I think that's a very important aspect of our cooperation. Not only they generate transaction for us in their core business, but they also help us to get access to a lot of the third-party restaurants, which also add to our total number of transactions.
Thank you, operator. We are closing the call now. If you wish to check out our press release and other financial information, please visit our IR website. The replay of this webcast will also be available soon. Thank you and see you next quarter.
That does conclude our conference for today. Thank you for participating. Tencent Holdings Limited 2017 second quarter result announcement conference call. You may all disconnect now.