Earnings Call: Q1 2017

May 17, 2017

Thank you for standing by and welcome to the Tencent Holdings Limited 2017 First Quarter 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 Yi from Tencent. Please go ahead, Ms. Yi. Thank you. Good evening. Welcome to our Q1 2017 results conference call. I'm Jane Yi from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non GAAP measures, please refer to our disclosure documents on tensen.com/ir. Let me introduce the management team on the call tonight. We have our Chairman and CEO, Tony Ma President, Martin Lau Chief Strategy Officer, James Mitchell and Chief Financial Officer, John Moll. Pony will kick off with a short overview, Martin will view our value added services, James will speak on online advertising and John will discuss the financials before we take your questions. I will now turn the call over to Pony. Thank you, Jane. Good evening, everyone. Thank you for joining us. In the Q1 of 2017, we delivered a strong set of operational financial results across games, payments, digital content and advertising. Sei Min runs through the key financial numbers for you. Total revenue was RMB 49.6 1,000,000,000 up 55% year on year and 13% quarter on quarter. Non GAAP operating profit was RMB18.5 billion up 37% year on year and 24% quarter on quarter. Non GAAP net profit to shareholders was RMB14.2 billion up 42% year on year and 15% quarter on quarter. John will provide more details in the financial section. Operationally, our key platforms continue to grow robustly. Combined MAU operation and WeChat increased 20 3% year on year to 938,000,000. Total MAU for QQ was 861,000,000 within which the overall smart devices MAU for QQ was 678,000,000, down 0.4% year on year, while daily active users of Mobile QQ who were age 21 or below increased by double digit year on year indicating QQ continues to be very popular among young users. For our social networks Qzone smart devices MAU was 605,000,000. In games we To increase community stickiness, we expanded our revenue market share in both PC and smartphone games. For our media platforms, we believe our video, news, literature and music services are each the largest in China measured by usage. In mobile utilities, we solidified our lead by monthly active users for mobile security, mobile browser and Android app store. Martin and James will discuss further in business review. Thank you, Pony and good morning and good evening to everybody. In the Q1 of 2017 our total revenue grew 55% year on year as Pony has talked about. Our VAS represented 71% of total revenue of which online games contributed 46% and social networks 25%. Online advertising was 14% of total revenue. Other segment accounted for 15% of revenue of which payment related services and cloud services contributed to both year on year and quarter on quarter revenue growth and they both grew triple digits year on year. Let's then take a look at value added services. The segment revenue was RMB 35,100,000,000 in the Q1 up 41% year on year and 20% quarter on quarter. Social Networks revenue was RMB 12,300,000,000 up 56% year on year and 15% quarter on quarter. Digital content revenue drove year on year and quarter on quarter growth. Total subscriptions increased by 10% year over year to 119,000,000 driven by video and music subscriptions and partially offset by decreases in subscription count as we shifted users from QQ VIP to Super VIP which offers more privileges. As a result the blended ARPU for subscription products actually increased. Online games revenue was RMB22,800,000,000 up 34% year on year and 24% quarter on quarter. In PC games due to strong performance of expansion pack and Chinese New Year promotions this year, the year on year revenue growth accelerated from the last quarter. The sequential growth benefited from positive seasonality. In smartphone games, key titles continued to perform robustly and contributed to both year on year and quarter on quarter growth. The successful launch of new games such as Dragon Nest Mobile also contributed significantly to sequential growth. Turning to social networks, Weixin is increasingly playing an important role in the commercial world. For Weixin Mini Programs we launched more developer friendly features to generate more organic traffic to Mini Programs. For example, in April we introduced a new scannable code which can be found off line or inside official accounts to lead traffic to Mini Programs. Also allowed service providers to embed links in official accounts to access Mini Programs and we enabled users to discover Mini Programs from nearby merchants using the look around feature. In March we introduced Weixin Index which allows users and merchants to analyze the popularity of keywords within official accounts and in app search. For our other major social property QQ it is increasingly focused on serving younger internet users. To enhance its appeal to this audience we upgraded the viewing feature of QQ's KanDian News Feed to recommend personalized content to young QQ users based on their interest graphs and applying big data analysis. We also expanded our QQ Smart Campus service to support the administration of college student affairs, facilitate school student communication, make paying tuition fees more straightforward and host job listings. Almost 900 tertiary institutions have signed up to QQ Smart Campus. Now a bit more on our gaming business, looking at PC client games, the revenue was up 24% year on year and quarter on quarter benefiting from activities such as a well received expansion pack for DNF and popular Chinese New Year promotions for League of Legends. Active user accounts generally declined year on year as players continued to shift time from PC to mobile and from in game to other game related activities such as forums, game video streaming and offline Esports events. But this quarter we saw a seasonal improvement in active user accounts for games with new content such as DNF. The ratio of paying user to total users increased in particular for sports and action games. For example in FIFA Online 3 we added several famous soccer players which stimulated more in game purchases. While we view the strong performance of PC games in the Q1 as a pleasant surprise rather than a new trend and expect performance to return to prior trends later, we believe the strong Q1 performance illustrated that while the popular content can indeed energize PC game activity and revenue if they are launched right. For smartphone games, the revenue was up 57% year on year and 21% quarter on quarter. Our key titles such as Honor of Kings and Crossfire Mobile expanded paying user accounts and increased user activity during Chinese New Year. In the quarter we released 8 new games including 2 casual and 6 mid core games. We reinforced our lead in multiple game genres. In the genre of MOBA, Honor of Kings expanded its user base and increased user engagement via in game competition, video broadcast and video replay on multiple platforms. We believe Honor of Kings is one of the most popular mobile games globally by daily active users. In FPS, Crossfire Mobile enlarged its user base leveraging our operational expertise and marketing know how from PC shooting games, seasonal gift pack promotions boosted user activities and ARPU. In RPG we deepened penetration in key subcategories leveraging licensed IP games with Dragon Nest Mobile in the Action subcategory, JX Mobile in the MMO subcategory and Fantasy Zhu Xieng Mobile in the turn based subcategory we now operate 3 highly popular RPGs in the China market representing a major step forward in our mobile gaming strategy. Now I would invite James to talk about online advertising. Thank you, Martin. Our online advertising segment revenue was RMB6.9 billion, up 47% year on year and down 17% quarter on quarter. Mobile contributed over 85% of our advertising revenue. Under our prior classification, brand advertising revenue was rmb2.1 billion, down 1% year on year and down 31% quarter on quarter, while performance advertising revenue was rmb4.8 billion, up 87% year on year and down 8% quarter on quarter. Given we're seeing advertisers increasingly buying performance format advertising within traditionally brand oriented properties such as cost per click ads in our news apps and newsfeed, the distinction between brand and performance is becoming decreasingly useful. Starting this quarter we'll therefore classify online advertising revenue by the type of ad property rather than by ad pricing models. Under the new classification scheme, media advertising revenue includes advertising carried on our news, video and music properties, which was historically mostly brand format, but is now becoming increasingly performance driven, especially for news feeds within our news apps. Social and other advertising revenue includes advertising on our social properties Weixin and QQ, app store, browser and ad networks, which is mostly performance format in the past and continues to be so. Using this new classification, media advertising revenue was RMB 2,500,000,000 up 20% year on year due to more inventories created by traffic growth in our video and news app together with increased ad loads in our news feeds. Sequentially, media advertising revenue decreased 26% quarter on quarter because of 1Q seasonality. Social and other advertising revenue was RMB 4,400,000,000 up 67% year on year driven by higher ad fill rates in moments, better click through rates in efficient accounts and more advertisers buying our app store advertisements. Revenue declined 11% quarter on quarter because the 4th quarter is the peak season for e commerce advertising. Leveraging partners such as jd.com, 58.com and Meituan Dianping as well as advertising agencies, we have substantially expanded our social advertiser base, especially among offline merchants buying Moments advertisements and we have enhanced location based targeting capabilities for Moments advertisements, which allows retailers to target customers who are physically close to their shop locations. And with that, I'll pass on to John to discuss our And with that I'll pass on to John to discuss our financials. Thank you, James. Hello everyone. For the Q1 of 2017 our total revenue was RMB 49,600,000,000 up 55% year on year or 13% quarter on quarter. Gross profit was RMB 25,400,000,000 up 37% year on year or 8% quarter on quarter. Net other gains were RMB3.2 billion, it was due to net disposal, DIMM disposal gain on investees, semi annual dividend income from SuperThao and subsidies and tax rebates which were partly offset by donations made to Tencent Charity Fund and impairment provision charges for certain industry companies. Share of losses of associates and joint ventures was 1,000,000 in the quarter. On a non GAAP basis, we generated profits of RMB199 1,000,000 in Q1 2017 comparing to losses of RMB 339 1,000,000 in Q1 2016 or profits of RMB391 1,000,000 in Q4 2016. Income tax expenses were RMB3.7 billion, up 43% year on year and 52% quarter on quarter. Effective tax rate for the quarter was 20.1%. Net profit attributable to shareholders was RMB 14,500,000,000 up 58% year on year or 37% quarter on quarter. After adjustment to non GAAP, operating profit for the quarter was RMB 18,500,000,000 up 37% year on year and 24 quarter on quarter. Operating margin was 37 percent down 5 percentage points year on year and up 3 percentage points quarter on quarter. Net profit to shareholders was RMB 14,200,000,000 up 42% year on year or 15% quarter on quarter. Net margin was 29% down 3 percentage points year on year and up 1 percentage point quarter on quarter. Let's turn to segment gross margin. Gross margin for value added services was 60.9% down 4.7 percentage points year on year mainly due to revenue mix change to low margin products including digital content subscriptions. The sequential decline of 2.3% points mainly due to higher content costs, especially for our video subscription services. Gross margin for online advertising was 34.8 percent down 8.9 percentage points year on year due to increased video content investment. Sequential decline of 11.8 percentage points reflected lower revenue generated during weak seasonality in the Q1. Gross margin for others was 21.9 percent up 14.9 percentage points year on year or 1.5 percentage points quarter on quarter. The year on year increase in gross margin was due to the charging of cash withdrawal fees from the beginning of March 2016. Moving on to operating expenses, selling and marketing expense was RMB3.2 billion, up 55% year on year or down 29% quarter on quarter. The year on year increase was mainly due to higher marketing and promotional spending for games, video and news apps as well as staff course. Sequentially it reflected slowdown in promotion and marketing activities during Chinese New Year holidays. Selling and marketing represented 6% of quarterly revenue. Total G and A expenses was RMB7 1,000,000,000 up 61 percent year on year and 1% quarter on quarter. Under G and A, R and D expense was RMB 3,600,000,000 up 54% year on year and broadly stable quarter on quarter. The year on year increase mainly reflected higher staff scores. As a percentage of quarterly revenue, total G and A was 14% and R and D was 7%. At the end of the Q1 we had just over 39,000 employees. Year on year growth of 26% was mainly due to one off inclusion in our head count of some outsourced manpower who engage in our customer support group mainly in quarter 3, 2016 and were previously classified as consultants. And the business combination of music streaming business. Excluding these two factors, headcount grew by 13% year on year. Looking at the margin ratios for the Q1, gross margin was 51.3% down 6.8 percentage points year on year mainly due to increasing contribution from other segments which carry lower margin and decreased value added services gross margin. Other segment revenues accounted for 15% of total revenues now compared to 7% the same quarter of last year. Gross margin dipped 2.6 percentage points sequentially primarily reflecting lower gross margins of value added services and online advertising businesses. Non GAAP operating margin was 37.4 percent down 4.7 percentage points year on year primarily reflecting lower gross margin partially offset by an increase in net other gains. Sequential increase of 3.3 percentage points was mainly due to lower selling and marketing expenses and higher net other gains which was partly offset by lower gross margin. Non GAAP margin was 29% down 2.7 percentage points year on year and broadly stable quarter on quarter. For the Q1, total CapEx was RMB 2,100,000,000 down 49% year on year and 26% quarter on quarter. Operating CapEx was RMB 1,700,000,000 up 27% year on year or down 20% quarter on quarter. The sequential decrease was mainly due to less purchase of servers in Q1 2017 as we prepared more service in Q4 2016 for the past and during Chinese New Year. Non operating CapEx was RMB395 1,000,000 down 86% year on year, mainly due to the fact that there was no land use rent purchase in Q1 2017 as opposed to Q1 2016. Sequential decrease of 44% was because of slower construction work for our new offices during Chinese New Year holidays. Free cash flow was RMB24.2 billion up 74% year on year and 41% quarter on quarter. The sequential increase was mainly due to seasonally strong operating cash flow generated from both our PC client games and smartphone games. Our net cash position at quarter end was RMB 27.6 1,000,000,000 or US4 $1,000,000,000 up 1% year on year and 52% quarter on quarter. Sequential increase in net cash was driven by free cash flow generation partly offset by payments for M and A initiatives and license content. Fair market value of our listed associates and available for sale financial assets were approximately RMB112 1,000,000,000 or US16.2 billion dollars at the quarter end. Thank you. Thank you. We shall now open the floor for questions. Operator, we will take one main question and one follow-up question each time. Shall we invite the first question now? We will now begin the question and answer session. Your first question comes from Deutsche Bank, Mr. Alan Halloway. Please ask your question. My first question relates to digital content subscription being lower margin. I hope I was correct in that and would love to get a little more context about that. And specifically with video, if we were again to try to construct a hypothetical video P and L with advertising and subscriptions as inputs to revenue. Has loss margin narrowed? And would we expect margin to improve year after year going forward? Thank you. I'll save my follow-up. So, Adam, we disclosed the total subscription counts, which includes both subscriptions for our traditional privileged services such as QQ VIP and Super QQ as well as subscriptions for our digital content services such as our streaming music, streaming video, literature and so forth. And as a general rule, the privilege subscriptions have been declining partly because we've been consolidating the Super QQ and the VIP QQ together into the Super VIP QQ package. But that decrease in privileged subscriptions has been more than offset by growth in our digital content subscriptions around video, music, literature and so forth. And the combination of the overall subscription base increased plus the mix shift from privileged subscriptions, which generally lower ARPU to digital content subscriptions, which are higher ARPU, plus the mix shift within privileged subscriptions from lower ARPU to the higher ARPU Super VIP package, together have resulted in the fairly rapid growth that we're experiencing in our digital subscriptions revenue. In terms of the margin, it varies by digital subscription products. But in general, the incremental margin on a digital subscription is lower than the incremental margin on a virtual privilege, because the virtual privileges are generally piggybacking on our social networks and carry low incremental expense versus the digital content subscriptions carry incremental costs related to movie studio output deals to record label output deals and so forth. In terms of the margins for the video business, in recent quarters we've taken a number of amortization charges against our video program library and that's had some impact on both the advertising gross margin and this quarter on the value added services gross margin. For the first quarter, for the first time, our digital subscription video revenue exceeded video advertising revenue, although that's partly a seasonal factor because the Q1 is seasonally weak for advertising and seasonally strong for consumer digital spend. So we wouldn't necessarily expect that to be the case in subsequent quarters. Finally, I should just add as we often do that the video product for us is very much in investment mode. It is heavily loss making and we expect it to remain loss making for the foreseeable future. But it's gratifying that while we are incurring those losses, we're also seeing growth in traffic, growth to some extent in video advertising revenues and then more substantially growth in video subscription revenues. Your next question comes from Alicia Yap of Citigroup. Please ask your question. Hi, thank you. Good evening, management. Congrats on the strong results. I have a question relating to the cloud and the AI. So we noticed that Tencent Cloud is actually stepping up investment in penetrating into more industry vertical and also oversee expansions? And also recently Tencent U2 Lab actually breaks the record, a world record in the facial recognition task. So can management share with us what is your current thinking about the Tencent cloud growth opportunity in the coming years and also your investment target in the AI? And do these initiatives actually have any connections or rationale behind your recent public market purchase of the Tesla shares? So any comment or color will be appreciated. And second, on the housekeeping questions, just what is the company deferred revenue policy on the average duration? Is there a difference for PC game versus mobile games? Thank you. Okay. In terms of cloud, thank you for being very observant on a lot of our releases. I think you're right in observing that we have really stepped up our effort in cloud. And the reason is we view cloud business as a very strategic piece of our business in terms of providing infrastructure to support a broader ecosystem of Internet penetration. The way we see it is, as more and more users become Internet enabled and mobile Internet enabled, All industries including companies, corporates, governments will have to embrace Internet business in a much bigger way and as a result there will be a number of infrastructure businesses that will be very important for them to make that transition and cloud business is one of them. So that's why we have really been stepping up our investment and corresponding to that we have actually been growing our business very rapidly as indicated in our prepared remarks. Our cloud business continued to grow in triple digit. And looking forward, we do believe that we can actually scale continue to scale up the cloud business. We have a lot of we have very big scale infrastructure which offers efficiency as well as cost effectiveness for our clients. At the same time, because of our very long history of developing all kinds of different technologies for our own use, Now as we step into the cloud business, we'll increasingly open up these technologies and capabilities to support our cloud customers. And going forward, I think these capabilities will help us to sign up more and more customers. And obviously the bigger gap in terms of the cloud business is actually in terms of sales force and marketing. This is sort of something that we have been building on an instrumental basis to give us the capability to cover more customers, to support more channel partners and at the same time to do a better job in marketing our brand name and services. As it relates to AI, we view AI as 1 and a core capability for us to continue to build our own business, right. AI actually touched a point a lot of our existing businesses in the area of advertising for increasing our targeting capability in the area of our news feed and information to allow us to customize and personalize our offerings to our users in the area of online finance to help us to target users with the right profile. So by developing artificial intelligence and these core technologies will benefit our core business. AI can also help us to get into new businesses in the future and we are actively developing these capabilities. And finally AI, as we continue to build our cloud business right now, it will become a core capability that we'll be opening up to our cloud partners as well as our ecosystem partners. So that's sort of the way we look at it. As it relates to Tesla, I think sort of it's somewhat related to AI, but what we feel is that sort of new automobiles as they become more and more connected with the Internet as well as it becomes smarter in terms of control and autopilot, assisted pilot and over time autopilot. The automobile is becoming a smart device and there will be much more connection between the physical world and the virtual world. So that's the reason why we felt we want to partner with the leading company in such field, right, in order for us to get on with these capability as well as to figure out whether we can learn something new or whether we can actually build some businesses together. Now as it relates to deferred revenue, I think John will answer that question. In relation to the deferral methods for virtual game items, on the PC side basically for both of the games is within 6 to 9 months whereas for some special category just like the mobile and OVA type of games, it might be up to 12 to 18 months. And on the mobile side, generally game items have been amortized over 3 to 6 months and more on the 3 month side, whereas for especially category of games, again, such as mobile, it might be up to 9 to 12 months. Thank you. May we have the next question please? Your next question comes from Eddie Lau of Merrill Lynch. Please ask your question. Good evening. We have heard that some social media mentioned that they would focus more on short form video as a format for social users to communicate. So just wondering, what's your thought on the trend? And any information on operating metrics that you could share with us that you have seen a change in user behavior on the Tencent platform would be helpful. And then finally, just a housekeeping question. Wondering if John can share with us the ARPU of various types of games? Thank you. Yes, in terms of short form video, I think it's definitely picking up. I think short form video is really an extension of photo and we have seen short form video growing very rapidly across all our properties. In terms of sort of the social platform, the short form video has been growing very quickly, particularly with QQ, which catered to young user base. I think the new generation are much more accustomed to be sharing short form video. So that's growing very quickly. At the same time, we also believe that short form video is increasingly going to be a form of media consumption. So across a lot of our media properties, including our news, Kuaibao as well as Tencent Video, the short form video has also been growing very quickly. In terms of ARPU for MMOG, the reported ARPU ranges from 3.20 to 5.20 in the quarter, ACG 100 to 370 and smartphone gains within 100 and 25 to 135. Thank you. And the next question please. Thanks. Next question comes from Alex Yao of JPMorgan. Please ask your question. Hi, good evening everyone. Thank you for taking my question. I have a question regarding the music business. You guys apparently have majority of the market share after the acquisition of China Music Group. Can you talk about the difference between music and video in terms of market structure, content supply demand relationships and long term monetization as well as profitability outlook. My follow-up question is, as the video industry move towards original content production direction, how do you think the competition in terms of content budget will impact the industry and your profitability? Thank you. So in terms of the music industry market structure, there's a number of competitors in the music streaming business in China, but they're not necessarily the same companies as in the subscription video business. So example, NetEase has a relatively clear strong position in music streaming in China and we actually sublicense music to NetEase. I think I would also say that the music industry has been plagued more recently by piracy. And so in the music industry, cooperation of our downstream partners such as NetEase is try to shift user behavior away from the Pirate model and toward the paid model because if we can do that, we can make the pie bigger for everyone. And you may be aware that China is undoubtedly the world's largest music market in terms of music listening, but it's historically the world's 20th largest market in terms of music industry revenue. So there's a great deal of work for us to do, but we're pleased with the progress so far. Looking at the content supply in music versus in video, then I think in video, 80% of the content is from primarily midsized domestic suppliers and 20% is from foreign suppliers supplying English language or Korean language or Japanese language video content into the Chinese market. For the music industry, quite different in that you have a handful of global music labels, including Universal, Warner and Sony that not only have very strong English language music presence, but also have a decent Chinese language music presence, particularly in Taiwan, Hong Kong and more recently in Mainland China itself. So there are those 3 relatively larger labels that account for a decent double digit chunk of total music supply in China. And then there's a long tail of many small domestic record labels, as well as a few Korean and Japanese record labels that account for the majority of the music that's streamed in China. So quite a different content supply structure, but we're quite pleased that, as I mentioned, we have excellent relationships with the 3 global music labels as well as very strong relationships now with many of these smaller domestic Korean music labels as well. So that's the music industry structure. With regard to the video industry, you're correct to observe that we and our peers in the industry are increasingly commissioning our own content. This has several advantages. One advantage is the ability to schedule the content when we choose, so we can space out the most important programs through the year. Another is if we commission the content, we can decide whether to put it into the pay window or into the free window or how to allocate the time between the pay and the free windows. And that's something that worked very well for us in the Q1 and it's part of the reason why you saw our video subscription revenue grow several 100 percent year on year and overtake our video advertising revenue. In terms of costs, to some extent, it means we have more visibility over our cost structure. But obviously, there's very substantial expense associated with commissioning the content directly as opposed to sub commissioning it from a TV broadcaster. So when we and our peers talk about video costs increasing sharply this year, then a substantial component of that cost increase is indeed the commissioning of original TV content. Thank you. Thank you. Your next question comes from Jane Yong of Mizuho Securities. Please ask your question. May we have the next question please? Certainly. Your next question comes from John Trow of Daiwa. Please ask your question. Good evening and thanks for taking my question. I have a question on the mobile games. Basically, I think management did share that the paying accounts has been the key factors of a strong performance. But as we go forward, how should we be thinking of the key drivers? Obviously, it seems like the RPG genre is being doing a lot better with 3 strong games. Should we be expecting ARPU be the major force or should we expect expecting the paying accounts to increase or the paying ratio to follow-up? And just quickly on the Weixin Moments advertising, I was wondering where if management could share with us where we're at right now because it seems to us that the expansion pace of the advertising is a little bit weaker than what the market has previously expected. So any color on that will be very helpful. Thank you. In terms of mobile games, I think obviously the most important thing is actually sort of to be able to come up with successful games on an ongoing basis. But sort of if you look at our overall strategy, we've always been saying sort of we have been very strong in casual games and we wanted to develop a genre of a player versus player mid core games and we are growing our RPGs by working with our partners as well as sort of doing internal development. So on each one of these initiatives, I think sort of we have made progress in the past year. So if we look at player versus player games, right, typically I would say sort of they have a longer lifespan because it's like a competitive sports, right. It has every time you play the game, the game experience is actually very different. It's sort of not that much content driven. And then sort of in the area of RPGs, I think we are at the beginning of developing sort of new strategy. We have a few games which have been popular. We will continue to work with our partners as well as leverage our own development to come up with RPG games. Now whether the games will be successful, I think sort of will be tested out over time. So I think that's what we have been doing on mobile games. Now in terms of performance ads, right, I would say we continue to look at performance ads as a long term opportunity and we will be solving this problem and exploiting this opportunity in that manner, which means that we'll focus a lot on building our own capability in terms of understanding the users' needs, in terms of perfecting our targeting technology, in terms of developing the right ad format, so that it has the best trade off between response as well as user experience. And of course, right, there is a component of releasing more inventories, but that's something which is sort of very easy to do. That's exactly why we do not want to do it in a very fast manner. So what we have been focusing on is really sort of making sure that we get all the capabilities right so that we can actually based on existing inventories, we can actually do a better and better job and we can sign up more advertisers. And over time, we will release inventories on a measured basis. In fact, we have increased our inventories a little bit, but not that much. But I think what we continue to focus on is that we want to make sure that our user experience is not compromised and by having a better targeting capability, we can actually sort of take in more advertising without compromising user experience. And that's something that we're going to be focused on. Thank you. Your next question comes from Richard Kramer of Arete Research. Please ask your question. Thank you very much. I guess just a quick follow on to that as my follow-up. Is there any plan that now that you're lapping the high growth rates in Moments to consider potentially increasing the ad loads there? And do you see additional formats as you've seen other large Internet or social networking companies do? You see other formats you could start to introduce which would further increase pricing? And my main question was really on payments. Clearly one part of the other. I think I don't know sort of how you get the impression that sort of the Moments ads is actually entering into slow growth and at the same point we need to sort of overload our users with more inventories. I think sort of this is not the right interpretation. I think number 1, the performance at large is actually growing at a rate which we felt is actually quite encouraging. And 2, we are far from being sort of approaching the end of improving our own capabilities so that we have to sort of keep on increasing the ad inventories. So I just want to make sure that nobody gets misled by your statement. No, I think maybe it was misinterpreted a little bit. I think the point is that you're reaching the year on year comparisons and they're still at quite high levels. But I'm wondering if there are ways to further improve the performance of the performance based ads by adding formats, adding new formats. Yes, I think the performance is actually quite good already. We should be overloading our users with a lot of downloads. Okay. And my second question was on payments and I guess, it's clearly part of the other business, which is growing at a very high rate. Do you expect it to be permanently sort of an enabling service for your other social network services? Or do you see a standalone role for it, which would include maybe some more distinct disclosure of how the adoption has been faring and the user base and the range of services that we could provide since it's mentioned in a very cursory way in the release? Thanks. Well, I think from a business perspective we view our payment business as an infrastructural service for our ecosystem. That's not just for our social network, but also for all sorts of different activities within our ecosystem and with our partners. So it should cover all aspects of our users' everyday life when they're sort of shopping online, when they are sort of subscribing to content and then sort of when they are shopping offline, when they are experiencing different kinds of offline services. So I think that's sort of the positioning. And from a, I would say, sort of business perspective, we do not view it as a profit center for the foreseeable future. We want to make sure that we continue to build our coverage in terms of both users as well as user frequency as well as merchant coverage, so that we can really make our payment services as a ubiquitous service for our users. Now, in terms of the payment service, essentially it has a number of different components. 1 is social payments and that would include our very famous rat packet. There is sort of money transfer aspect when sort of people can transfer money back and forth in a very cost effective as well as convenient way. And then there's an online commercial transaction where if people shop on e commerce sites or if they order for delivery food, they can actually sort of use our payment service. And then there's also an offline merchant component in which merchants can leverage our payment platform to get paid. So in a lot of different retail outlets and restaurants as well as sort of offline services like Didi, you can actually sort of find our payment solution sort of feature it. And even in some of the hawker stores, right, when they are not covered by any POS, if you just get a QR code, you can actually sort of get paid using our payment service. And I think sort of these are the different categories of payment services that we offer. Thank you. Your next question comes from Grace Chen of Morgan Stanley. Please ask your question. Thank you for taking my question. My question is about your successful mobile game, Arnold Kings. Can you help us better understand the design of the game and other factors that help contribute to the success of this game? And also can you help us compare the key metrics of Honor of Kings with other games, maybe League of Legends in terms of the lifecycle paying ratios and ARPU? And I will believe that Honor of Kings is now a substantial contributor to the overall mobile games. And how does the mix change has been affecting the key gaming performance metrics that we discussed above? Thank you. I think, a very successful game and I think the success stemmed from the fact that sort of the game format is sort of new, a very attractive game format as improved in League of Legends, right? When you have all sorts of different characters, 5 on 5 team play against each other, players versus player, I think sort of this MOBA genre is actually an attractive game format. I think secondly is the fact that sort of technically we actually solved the very difficult challenge of having a real time fighting on mobile and it actually overcomes a lot of latency within mobile network. That's a key breakthrough. And I think we also benefit finally from our long standing operating experience in the mobile category. And if you look at sort of the way we manage eSports, the way we actually manage the promotion and how do we sort of talk to the different gaming groups. So this is sort of what we have accumulated over years of operating the mobile genre. And as we said, we believe Honor Kings right now is one of the highest DAU game, mobile game globally. And I think at this point in time, it's relatively early in terms of its lifecycle. We want to make sure that we continue to develop the game, continue to add exciting features and content so that we will keep our users happy. And I think that's sort of the focus at this point in time. Thank you. Your next question comes from Chi Chen of HSBC. Please ask your question. Great. Thank you and Doug. Good evening and thanks for taking my questions. I had 2 things I wanted to ask you about. Firstly, I was wondering if you can comment on some of the different habits of WeChat users in Tier 1, Tier 2 cities as well as sort of the lower tier cities. In particular, I'm curious about things like time spent, so the different types of services or content that maybe different user groups are consuming in these different areas. And secondly, I was wondering if you can give us an update in terms of online finance, the business is separate from your payment business, in particular things like WeBank, things like lending, things like asset management, any sort of update on that would be very useful. Thanks so much. Well, I think in terms of the different behavior across different cities, I would say sort of number 1, right, the lowest tier cities sort of has got still more users using QQ as opposed to Weixin. And I think sort of if you look at the user behavior just sort of on social network, I would say that there are more business related activities. So if you look at sort of e commerce, 1st year and second tier cities, people are more active on those type of services. And then lower tier cities, people are less active on that. And then in terms of sort of what kinds of official accounts that people read, there's sort of some differences in the interest of people. I think that's broadly speaking what it is. But in terms of the amount of time that people spend, I think it's actually pretty similar across the board. People spend quite a bit of time on WeChat. Now in terms of online finance, I think we continue to sort of make progress in each category of our online finance business. Obviously, the flagship is our online payment service, which will continue to grow in terms of our user base, number transactions. In terms of finance, I think sort of we have been building WeBank on a continuous basis and I think so it's flagship product Weili Dai is actually sort of seeing good traction. We are able to leverage our big data capability as well as our ubiquitous touch point with users to offer these consumer loans on a very convenient basis to users and it's growing on a nicely rate. And finally, sort of in terms of our and I think on WeBank, right, we just wanted to sort of reemphasize the way we manage WeBank is that we have a very broad partnership with all sorts of different banks because certainly the way we fund WeBank right now is that while WeBank is in charge of originating the loans, a lot of these consumer loans were actually joint loans made in conjunction with a number a pretty large number of banks, so that we have a profit sharing with the banks that are partnering with us. Now in and finally sort of the loan quality that WeBank is lending to is quite good from a delinquency ratio perspective. So that means our big data analysis is actually quite effective in controlling risk. In terms of our asset management platform, the CaiTong, our asset under management continues to grow. But we also sort of want to do it in a very measured basis because we felt that it's very important for us to control the quality of the investment products that we offer. In China, there's a sort of broad base of different types of wealth management products. When we looked at the whole list, there are a lot of ones which sort of we felt are too risky to offer to our users. So that's what we have been trying to do. So on one hand, we have been trying to make sure that we source the wealth management products of the right quality. And on the user end, we have been trying to sort of do a lot of user education so that users will make decisions on an educated basis instead of blindly investing in wealth management products, which offer supposedly high yield, but in fact, it's actually a risk that they cannot take. So that's sort of progressing pretty well. Thank you. And due to the time constraint, we will take the last three questions from the floor. Your next question comes from Xu Min of UBS. Please ask your question. Thank you, management, and congrats on the strong earnings. So I have two questions. First is on the finance side. So we noticed recently a series of regulatory events. So for example, you were not granted the credit rating license and also you and your main competitor was fined a little amount by the Central Bank. So I just want to understand, do you think this is separate events or is it indicate a change in regulatory attitude and what's the impact to your finance and payment business? And a follow-up is on the advertising side. So you announced a reorganization of the advertising business management in early Q2. So is there any update on the on that front you can share with us and whether we when can we see a pickup in your like the branded business? Thanks. In terms of financial regulations, I think it is indeed a very important area that we have to focus on a lot. And in terms of the fine, it's actually sort of in relation to the real name policy required by the PBOC. And on that front, I think we treat the fines and the penalty as very seriously and we are sort of making a lot of changes as required by PBOC. The key issue sort of for us and I think sort of for Ali is that our user base is way beyond any measure, right. So the number of users using our payment service is in the 100 of millions number. And so when we need to turn all these people in to real name basis, we put in a lot of different measures, but still it takes time for us to sort of do the conversion and we need to balance between how fast we can actually do it versus the user experience and user complain. We were under a lot of pressure when we tried to step up our measure to turn people into real name users with all sorts of different certification. So I think that's something which corresponds to a time last year when we were not able to turn people into real name fast enough. And I think a lot of the issues were rectified. The credit rating license is another thing. I think there is to some extent a question of whether there is a business that can be built in China by offering credit rating services. I personally think a 3rd party credit rating service which charge financial institutions money is probably sort of not a very advanced model. It's sort of a model that exists a long time ago. And at the same time, if you look at PBOC, it is actually providing a better and better overall credit rating infrastructure for the entire country. So I think that's the reason why the license was eventually not granted yet to anyone because there is a question of how do we define the scope and and what value would it create for the overall financial industry. So those are 2 different separate events. But I think you're right in saying when we get into financial services, regulations are very important and we will build up our infrastructure to talk to the regulators much more often and we'll step up our effort in compliance. Thank you. Your next question comes from Thomas Chong of Bank of China International. Please ask your question. Hi. Thanks management for taking my questions. I have a quick question about our overseas strategy in games, payment and cloud. Do we have a priority in which area we particularly focus in over the next few years? Thanks. Yes. I think gaming definitely sort of would be a key area of our focus, right. I think as you can see we are already at this point in time through our investments and acquisitions been we're already pretty big in terms of global gaming exposure. And I think certainly we'll continue to build that presence through investments and acquisitions. At the same time, we are also going to launch our self developed games over time into the overseas market. Obviously, this is something which we need to take much longer time to learn the lessons and to build the infrastructure to find the right games and so on and so forth, right? So that would take some time for us to do. But sort of gaming overall is definitely going to be sort of number one priority. I think payment at this point in time will continue to leverage sort of the fact that Weixin payment is already very big, has a lot of users and a lot of these users are traveling aboard and they're spending abroad and I think certainly we'll definitely follow that trend. Now in terms of building presence of our payment service in different local markets to serve local people, I think that each local market has got a different set of regulations and a different set of interaction protocol with financial institutions. So that has to be done on a case by case and sort of on a much longer term basis. I think sort of with our cloud business at this point in time, we're very focused in building our presence in China. And at the same time, we know that sort of a lot of our customers actually have a presence outside of China and that's something that we'll build up in terms of infrastructure, in terms of our sales force in order to serve their needs outside of China market. That will be sort of the first layer of our strategy. Over time, when we build enough presence in different markets, we'll continue we'll start serving local clients. Thank you. Your next question comes from Natalie Wu of CICC. Please ask your question. Hi. Thank you for taking my question. Just wondering, can management update us what's the current split in terms of mobile game revenue between iOS and Android handset? And especially on the Android handset, how much percentage of your mobile game revenue is generated from those distributed by external channel or third party app stores? Is there any notable change in the latest several quarters? And very quickly, just regarding the Weixin payment, just wondering about the promotion program for restaurant merchants that Weixin payment just announced earlier this month? How much budget Tencent prepared for this program? And what kind of margin impact should we expect regarding payment promotion this year? Thank you. So in terms of the mobile games split between iOS and Android, it bounces around a little bit quarter to quarter. But generally speaking, Android is a larger proportion of the total and then iOS is a significant double digit, but minority proportion of total mobile game revenue. Interestingly, there's also a fairly high variance by genre of games. So for example, our shooting games tend to over index very heavily toward Android versus our role playing games tend to over index a little bit toward iOS, which I think is also true of the industry as a whole that the iOS owners are more prone to spending money in role playing games versus the Android, are more prone to playing and spending money in shooting games, racing car games, Bath Arena games and so forth. Now within the majority that's Android, historically we've relied largely on our own app store in order to get our games to critical mass. Now we're in a position where we have several games that are actually at very substantial mass through our own channels. And we want to further increase value of equity in China. In order to facilitate doing that, we're actually working more aggressively with 3rd party Android app stores than we have in the past. So as you probably know from looking at other mobile game developers that rely entirely on 3rd party app stores, As you sort of rely more into 3rd party app stores, you have to incur some cost of revenue to incite them promote you. And therefore, there's some margin drag impact that we've started to experience and will continue to experience in our mobile game business as we increasingly utilize 3rd party app stores as well as our own higher margin distribution channels. So that's on the mobile game side. In terms of Weixin. On Weixin payment, we are putting up quite a big initiative sort of around the restaurant vertical. And the reason is because it is a vertical that's very competitive. And what we're doing is leveraging our relationship with Meituan Dianping who has a very strong coverage among restaurants. And at the same time, we can offer significant promotional budget as well as discount for users so that we can actually get back some of these restaurant customers because sort of in the past half a year to a year, I think sort of we in fact have lost some market share in the restaurant category, not the fast food, but sort of the more people sort of sit down dinner type of restaurant category. So we are indeed putting aside a pretty big budget to get back on the competition front. Thank you. Thank you, operator. We are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website attencent.com. The replay of this webcast will also be available soon. Thank you and see you next quarter.