Earnings Call: Q2 2017

Aug 16, 2017

Thank you for standing by and welcome to the Tencent Holdings Limited 2017 Q2 and Interim Results 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. 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 Q2 and interim results 2017 conference call. I'm Jane Deeb 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, President, Martin Lau Chief Strategy Officer, James Mitchell and Chief Financial Officer, John Ngo. Tony will kick off with a brief overview. Martin will discuss strategic highlights. James will speak to business overviews. 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, Jim. Good evening, everyone. Thank you for joining us. During the Q2 of 2017, we delivered strong growth across our revenue segments, including smartphone games and PC games, payment related services, online advertising and to store content subscription and resell. Let me highlight the key financial numbers for you. Total revenue was RMB56.6 billion, up 59% year on year and 14% quarter on quarter. Non GAAP operating profit was RMB20 1,000,000,000, up 36% year on year and 8% quarter on quarter. Non GAAP net profit to shareholders was RMB16.4 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 Weixin and WeChat increased 19% year on year to $963,000,000 Total MAU for QQ was $850,000,000 within which smart devices MAU was RMB662 1,000,000 down 4% year on year due to fewer casual users, while engagement with core users increased. Specifically, PCU increasing PC and mobile increased 8% year on year to 268,000,000. 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 News Feed increased average user time spent within QQ. For social networks, Qzone smart devices MAU was 586,000,000. 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. With that, I will pass to Martin to discuss strategic highlights. Thank you, Bonnie, 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 content talent will give us a favorable position in this strategic initiative, Especially, a 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 but patient 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 would 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 the 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 3 more specific examples on how we can apply AI to our existing products and services. These three examples are 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 formats 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 recommendation 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 selected 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 Arts 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 Arts 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, FPPB. We have gradually applied this technology in a variety of different ways. For example, firstly, enhanced and enriched the features of our photo editing app, P2, 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's report missing, helping many families in the process. In addition, we have recently released our first medical imaging AI product, MiAIS, 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. So 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 Q2 of 2017, our total revenue grew 59% year on year. BAS 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 coproduced TV shows and rubies and cloud services contributed strong to the quarter on quarter revenue growth. For value added service, segment revenue was RMB36.8 billion in the 2nd quarter, up 43% year on year and up 5% quarter on quarter. Social Networks revenue was RMB12.9 million, 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 in smartphone games more than offset decreased revenue from our legacy privilege subscriptions such as the QCY and Yellow Diamond product. Online games revenue was RMB23.9 billion, up 39% year on year and up 5% quarter on quarter. From a year on year perspective, revenue grew primarily due to small 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 Pay grew commercial transactions at a rapid rate and cooperating with channel partners such as Meituan, Jianping 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 continue 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 Kandyan, 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 Candian increased significantly and Candian has become an important destination within the QQ app. For our live streaming app, 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 the 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. They also ran festival promotions, esports tournaments and a variety of 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 reinforce League of Veterans' 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 increased paying users, providing 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 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 the app from PC games. Active user accounts also increased year on year, mainly driven by mid core games. In the quarter, we released 5 new titles, including 1 puzzle game, 1 ARPG, 1 massive multiplayer role playing game and 1 strategy game. In player versus player competitive games, they build 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, JX Mobile from Kingsoft and Legacy TLBB Mobile from Changyou were both 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 Q2 and it generated enthusiastic response from players, ranking number 4 in China's iOS top grossing chart in June. For online advertising, our revenue was RMB10.1 billion, up 55% year on year and up 47% quarter on quarter with mobile contributing over 85 percent of this revenue. Our media advertising revenue was RMB4.1 billion, up 48% year on year and up 60 percent quarter on quarter. Popular video content and improved video content distribution resulted in the substantial increase in our video traffic and thus our video advertising revenue, which was the primary driver of this rapid growth. The 2nd quarter is seasonally stronger for our media advertising in the 1st quarter and this year drama series such as Ode to Joy Season 2 and Surgeons and self commissioned variety of 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 Q1 when some of our strongest video content was prioritized for video subscribers. For our media news products, we're 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 brands 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 RMB6 1,000,000,000 up 61% year on year and up 39% quarter on quarter, driven by higher fill rates in Weixin Moments and Weixin 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 efficient accounts to carry advertisements benefiting creators of those efficient accounts. And now I'll pass to Francois to the financials. Thank you, James. Hello, everyone. For the Q2 of 2017, our total revenue was RMB56.6 billion, up 59% year on year or 14% quarter on quarter. Gross profit was RMB28.3 billion, up 38% year on year or 11% quarter on quarter. Net other gains were RMB5.1 billion. We recorded net other totaling RMB5.1 billion for the Q2 of 2017, which mainly consists of fair value gains as a result of significant increase in valuations of certain investment verticals, including fact sharing and FinTech, as well as game disposal gains arising from capital activities of certain Investing Companies, particularly the IPO of Korean mobile game publishers atmarble. They are partially offset by impairment provision charges for certain Investing Companies. Share of profit of associates and joint venture was RMB498 1,000,000 in the quarter. On a non GAAP basis, we generated profits of RMB947 1,000,000 in quarter 2, comparing to losses of RMB206 1,000,000 in the Q2 of 2016. Income tax expenses were approximately RMB4 1,000,000,000, up 43% year on year or 9% quarter on quarter. Effective tax rate for the quarter was about 18%. Net profit to shareholders was RMB18.2 billion, 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 RMB20 1,000,000,000, 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 RMB16.4 billion, 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 better wireless services was 60.6%, down 6.1 percentage points year on year mainly due to higher channel cost of smartphone gains paid to third party app stores including handset manufacturers and 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 strongest seasonality in the Q2. 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 RMB3.7 billion, 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 scores. The sequential increase mainly reflected seasonally more advertising and promotional activities in the Q2 versus the Q1. Selling and marketing expense was 6% of quarterly revenue. Total G and A expense were RMB8.2 billion, up 54% year on year or 17% quarter on quarter. Under G and A, R and D expenses was RMB4.2 billion, up 54% year on year or 18% quarter on quarter. The year on year increase mainly reflected higher staff force. As a percentage of total DD and A was 14% and R and 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 and 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 Q2. Gross margin was 50%, down 7.3 percentage points year on year, mainly due to decrease in BaaS segment gross margin and increasing contribution from low margin other segments. Gross margin did 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 and A expense. Non GAAP net margin was 29.1%, down 3.1 percentage points year on year and fully stable sequentially, sorry. For the 2nd quarter, total CapEx was RMB3 1,000,000,000, double year on year and up 43% quarter on quarter. Operating CapEx was RMB2.3 billion, up 124% year on year and 30 6% quarter on quarter. And it represented about 4% of total revenues. Non operating CapEx was RMB683 1,000,000, up 47% year on year or 73% quarter on quarter. Free cash flow was RMB17.5 billion, up 80% year on year and down 28% quarter on quarter. Sequential decrease was mainly due to weaker seasonality for our PC client games. Our net cash position at quarter end was RMB21.3 billion or US3.1 billion dollars down 12% year on year or 23% quarter on quarter sequential drop in net cash flows mainly due to payment of final dividends for 2016. The market value of our listed associates and available for sale financial assets was approximately RMB146 1,000,000,000 or US21.5 billion dollars at quarter end. Thank you. We shall now open the floor for questions. Operator, we will take one main Your first question comes from Zhu Xia 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? And what do you think it will take for this business to reach breakeven? Thank you very much. On online video, I think it's going to take quite some time unfortunately for the business to breakeven. I think dynamics at this point of time is that number 1, there's a lot of usage. More and more people are watching online video at longer and longer time on a daily basis. But at the same time and at the same time, advertising revenue has been increasing and there's also an increasing willingness for consumers to pay. So the subscription number as well as revenue has been increasing quite rapidly. On the other hand, the flip side of news is the cost of content has been increasing even faster. So what we see is that over time, we believe the content will continue to increase, but the rates would probably be lower. And the subscription as we continue to increase would deliver a higher revenue per active user. So we will get closer to a more equilibrium between cost and revenue at some point in time. But 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 a subscription, the rate could be the increased rate could be slower than before. Thank you. Yes. And 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 adding some advertising inventories. 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, 1 or 2 quarters besides the traffic and inventories? And then secondly, also curious to hear your thought on the usage of user generated video in social networks, how important you think these trends 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 is some help from the other two factors, which is slight increase in terms of the inventory and an increase in terms of the general traffic. But I think from the inventory angle, we have achieved a second ad for some cities, but within a 24 hour period, not everybody is seeing 2 ads. So compared to our international peers, I think the amount of inventory is still relatively small. And at the same time, the traffic increase has been most significant around Moments. But then if you look at our performance ads, it's across a pretty large number of different properties, right? So the traffic growth in the other areas might not be as great as at the moment's traffic increase. Now in terms of user generated video, I think there has been a pretty large amount of user generated content, video content in our social network. It has already been the case and it has been increasing. But 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 investee 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. And of course, you also have the video apps, which are not only having the professionally made content, but also user generated content. So the user generated content has already been spread over many, many different platforms in China. And 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 video 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 Yu of Mizuho Securities. Please ask your question. Yes. Thanks very much for your time. So can we just go back to video revenues again? So as subscriptions ramp and video as subscriptions ramp, I assume that people are going to be watching less ads. Is there a potential 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? And just a 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. So in the Q1, 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. Now in the Q2, some of our biggest content was including Go Fridge Season 3 and Surgeons and Ode to Joy and so forth, was made available to the advertising consuming viewers. And so 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 revenue saw a very sharp, sharply seasonal uptick quarter on quarter supported by strong content. So 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. Now the video advertising doesn't completely disappear. And if you watch some of our really hallmark content like the Ghost Buzz out of the candle, we have sponsorships and so on that appear on the screen during the program. But 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. And then the migration between those buckets happens relatively slowly, typically at the beginning of each year rather than happening on a month by month basis. So 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. And as such, we are actually very honored to participate in the scheme. And 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. And in this particular case with China Unicom, right, at a very important juncture of their business development, we are very happy to be involved in this strategic manner. And 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 Daewang Card, which provides unlimited data bandwidth for Tencent apps and that has been a very, very great success and we help Chinese Newcom to sign up a lot of new users. So we actually look forward to with this strategic partnership to look forward to developing more and more cooperation with China Unicom. And we believe if you look at the participants, right, there are a lot of different potential partners who can bring potential skills and resource into China Unicom and we think it is beneficial to the entire industry And we look forward to a deeper relationship with China Unicom. And we also hope to have a deeper relationship with all telcos across the board. The next question comes from Alicia Yao 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 period. I wanted to get management opinion on a broader view as almost all large Internet companies are investing heavily in the AI technology. So in your view, what are the most important competitive strength and advantage that could set each company different from their peers? And what are the competitive strengths for Tencent AI? And then separately for this AI, I understand it may help better targeting, improving user experience and benefit overall monetization over time. But then besides benefiting internal business, in the longer term, so 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? And then second question is on advertising. Just can you share briefly what are some of the initial attractions and contributions from the video app format that within your Weixin properties? What are the user feedback and the click through on those video ads? And are these video ad formats mainly consumed by bigger brands and 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. And for the companies who can develop their mobile apps in a successful way, then you can benefit from that big trend. And I think AI is to some extent similar in nature. But of course, a lot of it 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. And of course, the computing power and engineering capabilities are also very important. So if you look at Tencent, we believe for us we have a very wide and diversified business group, 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. So, because of the availability of these use cases, it provides the best value for our AI and our engineering talent to develop AI technologies. And at the same time, I would say, we are very patient in our overall approach and we'll 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, but we believe when we get all these technologies and you will benefit our existing business almost immediately. And 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 and 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'll do a 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 question comes from Alex Yao of JPMorgan. Please ask your question. Thank you, management, for taking my question and congrats on another solid quarter. My first question is about the payment. With the payment MAU exceeded $600,000,000 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 Q2 and continue into the Q3? And then related to the can you talk about the implication of official introduction of net union to Wanglian recently? How will this change the economic interest of various players in payment value chain? And then second question is on the SMS. For QQ casual users who reduced their usage of QQ and Qzone, are they migrating to Weixin at the moment or something else? With such a mixed operating metric between QQ and Weixin, do you think your position in China's SMS and the communication market as equally strong or is your position slightly changing? Thank you. I'll stop here. Yes. 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. And 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. So that's the overall guiding principle. And 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. So 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. So 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. And at the same time, I want to point out that there is an increasing competition also in this area. So that's why we do expect our investment into this payment business to increase over time. Now in terms of net union, NetsUnion is a backend clearing system, which allows 3rd party online payment companies to connect to the different banks via 1 centralized clearing system. And I think the PBOC wanted to have the system so that they can have more control over the routing of the payment services. And we have been actively working with NetsUnion in developing their system. The way we look at the system is, it's 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 Nets Union. So for us, the most important thing is to make sure that Nets Union system can handle the amount of transactions that we handle in a reliable way. And we have dedicated a pretty large team of people to be working full time at NETZYUNION in the formation of the company. And we have provided a lot of technology and modules to enable it to be functional in a very short time. And we are the 1st transaction that go through the entire system And it's now experimenting with some payment traffic and we're the biggest provider of such payment traffic right now. So we believe it's going to ensure the very stable and reliable operations in that union then will be beneficial to us. The next question comes from Randy Kwan of Macquarie. Please ask your question. Thank you. My first question is also about your others and payment business. So your total others increased by 177% year over year. Can you give some color which one is growing faster, whether it's payment or cloud business? And also the gross margin for this business seems stabilized at 22 percent level. So 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? 2nd question is, can you help us to understand the future driver of your game business from those pipeline perspective and ARPU perspective. So you just launched the 5 new games in the Q2. What's the pipeline look like for the rest of the year? And also, Kissei game revenue increased by 29% year over year. You mentioned in the presentation earlier that it's mainly driven by the ARPU. So what's up 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. And both of the two businesses grew at triple digit with the payment business growing faster slightly. So 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 relations embedded in the sales and marketing. And hence, a pretty big growth year on year growth rates in marketing expenses. At the same time, there's also the human resource related to these businesses, which are embedded in the G and A. So I would not go as far as saying they're making a meaningful contribution to our earnings yet. Sidney, 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 China Joy Conference and there's a number of titles that we hope to release in coming months that we're quite optimistic about. But the bigger point to make here is that smartphone game playing in China is still at a relatively early stage of growth. And if you look at, for example, our smartphone game, daily active users in the Q2 grew over 40% year on year. And then 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 1, 2, 3 years ago. So 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 play 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. And then we're also trying to develop new game segment opportunities such as the console games that we discussed. So 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 key PC game titles, ARPU for Animoji was in $370,000,000 to $560,000,000 for the quarter and advanced casual gain ranges from 100 to 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 tracking technology while releasing ad inventories on a measured pace. As you just mentioned that Tencent is doubling ad inventory in moments in some cities. So can you share with us your thoughts about your what you consider as the key factors to determine how fast you would increase our inventory? And is there a timeline in your plan to roll out the allo increase nationwide? Apart from the increasing monetization in WeChat Moment, we also understand Tencent has many other properties with great potential to increase monetization such as Tencent Video, Tencent News, TianXin, Kuibao. So can you also share with us your monetization plan in these properties as well? Thank you. Yes. I think ultimately, the question is really a balance between user experience and monetization. And we do want to make our targeting better and better and better. And so far, I would say we're erring on the very conservative side in terms of releasing our inventories. And I think it will be a function of when do we feel more comfortable in terms of achieving a level of user experience than when people see the ads, right, 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 better and better advertising content than 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. And we do have some luxury of working on our technology and making sure that our user experience is the best in kind among our industry peers. Moving on, the next question is from Ellen Hellingway of Deutsche Bank. Please ask your question. Thank you, management. Congratulations on the strong quarter. This is Eileen Dong from Deutsche Bank asking question on behalf of Allen Halloway. I want to ask with details of mixed ownership recently having been announced, are we expecting any further government involvement in our business in forces, gaming or social networking? And 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. So 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 a stable enterprise to be more competitive. So due to the time constraint, we have the last two questions from the floor. Certainly. The next question is from Ming Shu of UBS. Please ask your question. Thanks. Good evening, management, and congratulations on the strong quarter. So two questions. Firstly, on the payment and finance business. We read a lot of news regarding the loan strong loan growth of Willi Dai from WeBank. So I'm just wondering, could you share with us, except for your stake in WeBank, how should we think about the revenue opportunity inside from this business? And 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. Well, in terms of WeBank, in addition to the ownership we have in WeBank, we also have platform fee in which we charge to WeBank because we do offer a lot of value add to WeBank in terms of acquired customers as well as helping them to assess the credit. So 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. And some of the same trends are underway in China. And what we're trying to do is working with the game developers to make sure that we tie their games to the users who are likely to be most receptive. So 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. And 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 the Japanese animation style, those uses and so forth. So 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 uses. There are some games which we think have kind of transcendent appeal and can bring all sorts of different people on board. And we continue to market those broadly and widely. But there are other games will resonate most with a very narrow but deep audience. And so for the 2nd class of games, we want to help the developers by reaching that narrow but deep audience rather than than waste the developers' time and money by trying to reach a much broader, shallow audience who will display inferior retention rates. So that's what we were talking about. The last question is from Piyush Mubayah of Goldman Sachs. Please ask your question. Thank you for the opportunity. Very specifically on HOK, what is the amortization that you're following right now? Because that seemed to be one area where we didn't get meaningfully surprised on the revenue side. 2nd 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? And very quickly also on payments, what how much traffic and payment does Meituan drive? Thanks. In relation to the amortization of owner of Cain's, it's about 9 months. Okay. In terms of AI's impact on the FinTech business and advertising, I would say it's an ongoing process, right? And in the past, we have been already doing a lot of optimization, but those are more rule based optimization. And when we now start to add deep learning to the process, we can see this, the headroom can be improved by a lot. But at the same time, it takes time to develop the technology and also have it worked into our entire system. So 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, I think 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. And as a result, because of that coverage, we are able to have direct coverage of through them, right, of most of the restaurants in China. And I think that's a very important aspect of our cooperation. So not only they generate transaction for us in their core business, but they also help us to get access to a lot of 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 in Tencent Holdings Limited 2017 2nd quarter results announcement conference call. You may all disconnect now.