Thank you for standing by, 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. If you wish to ask a question, you will need to press star one on your telephone to join the question queue. Your name will be announced when it's your turn to ask a question. If you wish to cancel your question, please press the pound or hash key. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Jane Yip from Tencent. Please go ahead, Ms. Yip.
Thank you. Good evening. Welcome to our first quarter 2017 results conference call. I'm Jane Yip from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, 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 tencent.com/ir. Let me introduce the management team on the call tonight.
We have our Chairman and CEO, Pony Ma, President Martin Lau, Chief Strategy Officer James Mitchell, Chief Financial Officer John Lo. Pony will kick off with a short overview. Martin will view our value-added services. James will speak on online advertising, 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 first quarter of 2017, we delivered a strong set of operational financial results across games, payments, digital content, and advertising. Let me run through the key financial numbers for you. Total revenue was CNY 49.6 billion, up 55% year-on-year, 13% quarter-on-quarter. Non-GAAP operating profit was CNY 18.5 billion, up 37% year-on-year, 24% quarter-on-quarter. Non-GAAP net profit to shareholders was CNY 14.2 billion, up 42% year-on-year, 15% quarter-on-quarter. John will provide more details in the financial section. Operationally, our key platforms continue to grow robustly. Combined MAU of WeChat increased 23% year-on-year to 938 million. Total MAU for QQ was 861 million, within which the overall smart devices MAU for QQ was 678 million, down 0.4% year-on-year.
While daily active users of mobile QQ who were age 21 or below increased by double digits year-on-year, indicating QQ continues to be very popular among young users. For our social networks, Qzone smart devices MAU was 605 million. In games, we deepened penetration in multiple genres and organized several esports tournaments in the first quarter 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. Good morning and good evening to everybody. In the first quarter 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 take a look at value-added services. The segment revenue was CNY 35.1 billion in the first quarter, up 41% year-on-year and 20% quarter-on-quarter. Social networks revenue was CNY 12.3 billion, 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 million, driven by video and music subscriptions.
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 CNY 22.8 billion, 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 offline or inside official accounts to lead traffic to Mini Programs. We 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. 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. 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 first quarter as a pleasant surprise rather than a new trend, and expect performance to return to prior trends later, we believe the strong first quarter performance illustrated that widely popular content can indeed reenergize 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 eight new games, including two casual and six 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 shooter 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 Xian Mobile in the turn-based subcategory, we now operate three highly popular RPGs in the China market, representing a major step forward in our mobile gaming strategy. I would invite James to talk about online advertising.
Thank you, Martin. Our online advertising segment revenue was CNY 6.9 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 CNY 2.1 billion, down 1% year-on-year and down 31% quarter-on-quarter. While performance advertising revenue was CNY 4.8 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 news feed, 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, WeChat and QQ, app store, browser, and ad networks, which was mostly performance format in the past and continues to be so. Using this new classification, media advertising revenue was CNY 2.5 billion, 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 one Q seasonality.
Social and other advertising revenue was CNY 4.4 billion, up 67% year-on-year, driven by higher ad fill rates in Moments, better click-through rates in official accounts, and more advertisers buying our app store advertisements. Revenue declined 11% quarter-on-quarter because the fourth 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. We've enhanced location-based targeting capabilities for Moments advertisements, which allows retailers to target customers who are physically close to their shop locations. With that, I'll pass on to John to discuss our financials.
Thank you, James. Hello, everyone. For the first quarter of 2017, our total revenue was CNY 49.6 billion, up 55% year-on-year, or 13% quarter-on-quarter. Gross profit was CNY 25.4 billion, up 37% year-on-year, or 8% quarter-on-quarter. Net other gains were CNY 3.2 billion. It was due to net disposal, deemed disposal gain on investees, semi-annual dividend income from Supercell, and subsidies and tax rebates, which were partly offset by donations made to the Tencent Charity Foundation and impairment provision charges for certain investee companies. Share of losses of associates and joint ventures was CNY 375 million in the quarter. On a non-GAAP basis, we generated profits of CNY 199 million in first quarter 2017, comparing to losses of CNY 339 million in first quarter 2016, or profits of CNY 391 million in fourth quarter 2016. Income tax expenses were CNY 3.7 billion, up 43% year-on-year, and 52% quarter-on-quarter.
Effective tax rate for the quarter was 20.1%. Net profits attributable to shareholders was CNY 14.5 billion, up 58% year-on-year, or 37% quarter-on-quarter. After adjustment to non-GAAP, operating profit for the quarter was CNY 18.5 billion, up 37% year-on-year and 24% quarter-on-quarter. Operating margin was 37%, down 5 percentage points year-on-year and up 3 percentage points quarter-on-quarter. Net profit to shareholders was CNY 14.2 billion, 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 percentage points mainly due to higher content costs, especially for our video subscription services.
Gross margin for online advertising was 34.8%, 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 seasonality in the first quarter. Gross margin for others was 21.9%, 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 CNY 3.2 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 costs. Sequentially, it reflected a slowdown in promotion and marketing activities during Chinese New Year holidays. Selling and marketing represented 6% of quarterly revenue. Total G&A expenses was CNY 7 billion, up 61% year-on-year and 1% quarter-on-quarter.
Under G&A, R&D expense was CNY 3.6 billion, up 54% year-on-year and broadly stable quarter-on-quarter. The year-on-year increase mainly reflected higher staff costs. As a percentage of quarterly revenue, total G&A was 14% and R&D was 7%. At the end of the first quarter, we had just over 39,000 employees. Year-on-year growth of 26% was mainly due to one-off inclusion in our headcount of some outsourced manpower who engaged in our customer support work mainly in quarter three 2016, and were previously classified as consultants, and the business combination of our music streaming business. Excluding these two factors, headcount grew by 13% year-on-year. Looking at the margin ratios for the first quarter, gross margin was 51.3%, down 6.8 percentage points year-on-year, mainly due to increasing contribution from other segments, which carry a 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%, 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 first quarter, total CapEx was CNY 2.1 billion, down 49% year-on-year and 26% quarter-on-quarter. Operating CapEx was CNY 1.7 billion, up 27% year-on-year or down 20% quarter-on-quarter.
The sequential decrease was mainly due to less purchase of servers in first quarter 2017 as we purchased more servers in fourth quarter 2016 during Chinese New Year. Non-operating CapEx was CNY 395 million, down 86% year-on-year, mainly due to the fact that there was no land use right purchase in first quarter 2017 as opposed to first quarter 2016. Sequential decrease of 44% was because of slower construction work for our new offices during Chinese New Year holidays. Free cash flow was CNY 24.2 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 CNY 27.6 billion or $4 billion, 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&A initiatives and licensed content. Fair market value of our listed associates and available-for-sale financial assets were approximately RMB 112 billion or $16.2 billion 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. If you wish to ask a question, please press star on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. Your first question comes from Deutsche Bank. Mr. Alan Hellawell, please ask your question.
My first question relates to subscriptions. I would love to just get a sense as to what our subscription base is now. Then I heard passing reference from John about digital content subscription being lower margin. I hope I was correct in that, and would love to get a little more context about that. Specifically with video, if we were again to try to construct a hypothetical video P&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.
Alan, we disclose the total subscription counts, which includes both subscriptions for our traditional privilege 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. 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. That decrease in privilege subscriptions has been more than offset by growth in our digital content subscriptions around in video, music, literature and so forth.
The combination of the overall subscription base increased, plus the mix shift from privilege subscriptions, which generally lower ARPU, to digital content subscriptions, which are higher ARPU, plus the mix shift within privilege 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. 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
Amortization charges against our video program library, 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 our video advertising revenue, although that's partly a seasonal factor because the first quarter is seasonally weak for advertising and seasonally strong for consumer digital spend. 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. 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 questions relating to the cloud and the AI. We noticed that Tencent Cloud is actually stepping up investment in penetrating into more industry vertical and also overseas expansions. Recently, Tencent YouTu Lab actually breaks the world record in the facial recognition task. 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? Do these initiatives actually have any connections or rationale behind your recent public market purchase of the Tesla shares? Any comment or color will be appreciated. Second, on the housekeeping questions, just what is the company defer 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 are right in observing that we have really stepped up our effort in cloud. 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. 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. That's why we have really been stepping up our investment. 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. Looking forward, we do believe that we can actually continue to scale up the cloud business. 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 will increasingly open up these technologies and capabilities to support our cloud customers. Going forward, I think these capabilities will help us to sign up more and more customers.
Obviously, the bigger gap in terms of the cloud business is actually in terms of sales force and marketing, and this is 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 one, a core capability for us to continue to build our own businesses. AI actually touch 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.
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, we are actively developing these capabilities.
Finally, AI, as we continue to build our cloud business, it will become a core capability that we'll be opening up to our cloud partners, as well as our ecosystem partners. That's sort of the way we look at it. As it relates to Tesla, I think it's somewhat related to AI, but what we feel is that 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. There will be much more connection between the physical world and the virtual world. That's the reason why we felt we want to partner with the leading company in such fields.
In order for us to get on with this 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, it's within six to nine months, whereas for some special category, just like the MOBA, MOBA type of games, it might be up to 12 to 18 months. On the MOBA side, generally, game items have been amortized over three to six months and more on the three-month side, whereas for a special category of games, again, such as MOBA, it might be up to nine to 12 months.
Thank you. May we have the next question, please?
Your next question comes from Eddie Leung 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. Just wondering, what's your thought on this trend, and any information or operating metrics that you could share with us that you have seen a change in user behavior on the Tencent platform would be helpful. Finally, just a housekeeping question. Wondering if John can share with us the ARPU of our various types of games. Thank you.
Yeah. In terms of short-form video, I think it's definitely sort of picking up. I think short-form video is really sort of an extension of photo. We have seen short-form video growing very rapidly across all our properties. In terms of the social platform, the short-form video has been growing very quickly, particularly with QQ, which caters to a young user base. I think the new generation are much more accustomed to be sharing short-form video. 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. Across a lot of our media properties, including our news, Kuai Bao as well as Tencent Video, the short-form video has also been growing very quickly.
In terms of ARPU for MMOG, the quarterly ARPU ranges from CNY 320-CNY 520 in the quarter, ACG CNY 100-CNY 370, and smartphone games within CNY 125-CNY 135.
Thank you. 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 the majority of the market share after the acquisition of China Music Corporation. Can you talk about the difference between music and video in terms of market structure, content supply-demand relationships, and the long-term monetization as well as the profitability outlook? My follow-up question is, as the video industry moves 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.
In terms of the music industry market structure, there's a number of competitors in the music streaming business in China, they're not necessarily the same companies as in the subscription video business. For example, NetEase has a relatively clear, strong position in music streaming in China, and we actually sub-license music to NetEase. I think I would also say that the music industry has been plagued more recently by piracy. In the music industry, a great deal of what we're trying to do with the cooperation of Warner Music, Sony Music, now Universal Music, as well as with the 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.
You may be aware that China is undoubtedly the world's largest music market in terms of music listening, it's historically the world's 20th largest market in terms of music industry revenue. That's a great deal of work for us to do, we're pleased with the progress so far. Looking at the content supply in music versus in video, I think in video, 80% of the content is from primarily mid-sized 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.
There are those three relatively larger labels that account for a decent double-digit chunk of total music supply in China. 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. Quite a different content supply structure, we're quite pleased that, as I mentioned, we have excellent relationships with the three global music labels, as well as very strong relationships now with many of these smaller domestic and Korean music labels as well. 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, 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. That's something that worked very well for us in the first quarter and is part of the reason why you saw our video subscription revenue grow several hundred% 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, obviously, there's a very substantial expense associated with commissioning the content directly as opposed to sub-commissioning it from a TV broadcaster.
When we and our peers talk about video industry costs increasing sharply this year, a substantial component of that cost increase is indeed the commissioning of original TV content. Thank you.
Thank you. Your next question comes from Jin Yoon on Mizuho Securities. Please ask your question.
May we have the next question, please?
Certainly. Your next question comes from John Choi 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 one of the key factors of a strong performance. As we go forward, how should we be thinking of the key drivers? Obviously, it seems that the RPG genre is doing a lot better with three strong games. Should we be expecting ARPU be the major force, or should we be expecting the paying accounts to increase or the paying ratio to fall? Just quickly on the Weixin Moments advertising, I was wondering if management could share with us where we are 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. Any color on that will be very helpful. Thank you.
Yeah. In terms of mobile games, I think obviously the most important thing is actually to be able to come up with successful games on an ongoing basis. If you look at our overall strategy, we have always been saying we have been very strong in casual games, and we wanted to develop a genre of player versus player mid-core games. We are growing our RPGs by working with our partners as well as doing internal development. On each one of these initiatives, I think we have made progress in the past year. If we look at player versus player games, typically, I would say they have a longer lifespan because it's like a competitive sports. Every time you play the game, the game experience is actually very different. It's not that much content driven.
In the area of RPGs, I think we are at the beginning of developing this 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. Whether the games will be successful, I think will be tested out over time. I think that's what we have been doing on mobile games. In terms of performance ads, 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 user's 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. Of course, right, there is a component of releasing more inventories, but that's something which is very easy to do. That's exactly why we do not want to do it in a very fast manner. What we have been focusing on is really sort of making sure that we get all the capabilities right, so that based on existing inventories, we can actually do a better and better job, and we can sign up more advertisers. Over time, we will release inventories on a measured basis.
In fact, we have increased our inventories a little bit, but not that much. I think what we continue to focus on is that we want to make sure that our user experience is not compromised. By having a better targeting capability, we can actually sort of take in more advertising without compromising user experience. That's something that we're gonna be focused on.
Thank you. Your next questions 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? Do you see additional formats as you've seen other large internet or social networking companies do? Do you see other formats you could start to introduce, which would further increase pricing? My main question was really on payments, clearly one of the other-
Sorry, let me just stop you on that. I think-
Okay
I don't know how you get the impression that the Moments ads is actually entering into slow growth and at the same way, we need to sort of overload our users with more inventories. I think this is not the right interpretation. I think, number one, the performance ads at large is actually growing at a rate which we felt is actually quite encouraging. Two, we are far from being approaching the end of improving our own capabilities so that we have to sort of keep on increasing the ad inventories. I just want to make sure that nobody gets misled by your statement.
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. I'm wondering if there are ways to further improve the performance of the performance-based ads-
Maybe it's because the performance-
by adding format, adding new formats.
I think the performance is actually quite good already.
Okay
I don't think that we should be overloading our users with a lot of ad loads.
Okay. My second question was on payments, 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 sort of for all sorts of different activities within our ecosystem and with our partners. 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, then sort of when they are shopping offline, when they are experiencing different kinds of offline services. I think that's sort of the positioning, from a, I would say, 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. In terms of the payment service, essentially, it has a number of different components. One is social payment, and that would include our very famous Red Packet. There is a money transfer aspect when people can transfer money back and forth. In a very cost-effective as well as convenient way. There's an online commercial transaction where if people shop on e-commerce sites or if they order for delivery food, they can actually use our payment service. There's also an offline merchant component in which merchants can leverage our payment platform to get paid.
A lot of different retail outlets and restaurants as well as offline services like DiDi, you can actually find our payment solution featured. Even in some of the hawker stores, when they are not covered by any POS, if you just get a QR code, you can actually get paid using our payment service. I think 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. Thank you for taking my question. My question is about your successful mobile game, Honor of Kings. Can you help us better understand the design of the game and other factors that help contribute to the success of this game? Also, can you help us compare the key metrics of Honor of Kings with other games, maybe League of Legends, in terms of the life cycle paying ratios and ARPU? I will believe that Honor of Kings is now a substantial contributor to the overall mobile games. How does the mix change has been affecting the key gaming performance metrics that we discussed above? Thank you.
I think Honor of Kings is definitely a very successful game, and I think the success stemmed from the fact that the game format is a very attractive game format, as improved in League of Legends, right? When you have all sorts of different characters, five-on-five team play against each other, players versus player. I think this MOBA genre is actually an attractive game format. I think secondly is the fact that 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. I think we also benefit finally from our longstanding operating experience in the mobile category. If you look at the way we manage esports, the way we actually manage the promotion, and how do we talk to the different gaming groups.
This is what we have accumulated over years of operating the MOBA genre. As we said, we believe Honor of Kings right now is one of the highest DAU mobile game globally. I think at this point in time, it's relatively early in terms of its life cycle. 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. I think that's the focus at this point in time.
Thank you. Your next question comes from Chi Tsang of HSBC. Please ask your question.
Great. Thank you. Good evening, and thanks for taking my questions. I had two 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 the different user groups are consuming in these different areas. Secondly, I was wondering if you can give us an update in terms of online finance, the businesses separate from your payment business, in particular, things like WeBank, things like lending, things like asset management. Any update on that would be very useful. Thank you so much.
Well, I think in terms of the different behavior across different cities, I would say number 1, the lowest tier cities sort of have got still more users using QQ as opposed to Weixin. I think if you look at the user behavior just on social network, I would say that there are more business-related activities. If you look at sort of e-commerce, 1st tier and 2nd tier cities, people are more active on those type of services. Lower-tier cities, people are less active on that. In terms of what kinds of official accounts that people read, there's some differences in terms of the interest of people. I think that's broadly speaking, what it is. 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 of transactions. In terms of finance, I think we have been building WeBank on a continuous basis, and I think its flagship product, Weilidai, is actually seeing good traction. We are able to leverage our big data capability as well as our ubiquitous touchpoint with users to offer these consumer loans on a very convenient basis to users, and it's growing on a nicely rate.
I think on WeBank, we just want to re-emphasize the way we manage WeBank is that we have a very broad partnership with all sorts of different banks, because 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 pretty large number of banks, so that we have a profit-sharing with the banks that are partnering with us. Finally, the loan quality that WeBank is lending to is actually quite good from a delinquency ratio perspective. That means our big data analysis is actually quite effective in controlling risk. In terms of our asset management platform, our asset under management continues to grow.
We also 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 broad base of different types of wealth management products. When we looked at the whole list, there are a lot of ones which we felt are too risky to offer to our users. That's what we have been trying to do. On one end, we have been trying to make sure that we source the wealth management products of the right quality. On the user end, we have been trying to 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 higher yield, but in fact, it's actually a risk that they cannot take.
That's progressing pretty well.
Thank you. Due to the time constraint, we will take the last three questions from the floor.
Your next questions comes from Ming Xu of UBS. Please ask your question.
Thank you, management, and congrats on the strong earnings. I have two questions. First is on the finance side. We noticed recently a series of regulatory events. 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. I just want to understand, do you think this is a separate event, or is it indicate a changing regulatory attitude, and what's the impact to your finance and payment business? A follow-up is on the advertising side. You announced a reorganization of the advertising business management in early Q2. Is there any update on that front you can share with us, and when can we see a pickup in your brand ad business? Thanks.
In terms of financial regulations, I think it is indeed a very important area that we have to focus on a lot. In terms of the fine, it's actually in relation to the real name policy required by the PBOC. On that front, I think we treat the fine and the penalty very seriously, and we are making a lot of changes as required by the PBOC. The key issue for us, and I think for Ali, is that our user base is way beyond any measure. The number of users using our payment service is in the hundreds of millions number. When we need to turn all these people into real name basis, we put in a lot of different measures.
Still, it takes time for us to do the conversion, and we need to balance between how fast we can actually do it versus the user experience and user complaint. We were under a lot of pressure when we try to step up our measure to turn people into real name users with all sorts of different certification. I think that's something which corresponds to a time last year when we were not able to turn people into real names fast enough. 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 third-party credit rating service which charge these financial institutions money is probably not a very advanced model.
It's a model that exists a long time ago. 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. 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 what value would it create for the overall financial industry. Those are two different separate events. 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.
Yeah, I think gaming definitely 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, we're already pretty big in terms of global gaming exposure. I think 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? That would take some time for us to do. Gaming overall, is definitely going to be sort of number one priority.
I think payment, at this point in time, we'll continue to leverage the fact that Weixin Pay is already very big, has a lot of users, and a lot of these users are traveling abroad and they're spending abroad. I think we'll definitely follow that trend. Now, in terms of building a presence of our payment services in different local markets to serve local people, I think each local market has got a different set of regulations and a different set of interaction protocol with financial institutions. That has to be done on a case by case and on a much longer term basis. I think with our cloud business at this point in time, we're very focused on building our presence in China.
At the same time, we know that 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 the first layer of our strategy. Over time, when we build enough presence in different markets, we'll start serving local clients.
Thank you. Your next questions come from Natalie Wu of CICC. Please ask your question.
Hi, thank you for taking my question. Just wondering, can management update us what the current split in terms of mobile game revenue between iOS and Android handset? 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? Very quickly, just regarding the Weixin Pay, just wondering about the promotion program for restaurant merchants that Weixin Pay 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.
In terms of the mobile game split between iOS and Android, it bounces around a little bit quarter to quarter. Generally speaking, Android is a larger proportion of the total, iOS is a significant double digit, but minority proportion of total mobile game revenue. Interestingly, there's also fairly high variance by genre of games. 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, battle arena games, and so forth.
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. 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 their ubiquity in China. In order to facilitate doing that, we're actually working more aggressively with third-party Android app stores than we have in the past.
As you probably know from looking at other mobile game developers that rely entirely on third-party app stores, as you rely more on the third-party app stores, you have to incur some cost of revenue to incite them to 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 third-party app stores as well as our own higher margin distribution channels. That's on the mobile games side.
On Weixin Pay, we are putting up quite a big initiative around the restaurant vertical. The reason is because it is a vertical that's very competitive. What we're doing is leveraging our relationship with Meituan-Dianping, who has a very strong coverage among restaurants. At the same time, we're going to offer significant promotional budget as well as discounts for users so that we can actually get back some of these restaurant customers, because in the past half a year to a year, I think we, in fact, have lost some market share in the restaurant category. Not the fast food, but the more people sit-down dinner type of restaurant category. We are indeed putting aside a pretty big budget to get back on the competition front.
Thank you. There's no more question on the queue. Miss Kit, please begin your closing remarks.
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 at tencent.com. The replay of this webcast will also be available soon. Thank you, and see you next quarter.