Earnings Call: Q4 2016

Mar 22, 2017

Thank you for standing by, and welcome to the Tencent Holdings Limited 20 16 4th Quarter and Annual 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 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. Catherine Chen from Tencent. Please go ahead, Ms. Chen. Thank you, operator. Good evening. Welcome to our annual results conference call for the year of 2016. I'm Catherine Chen from the IR team of Tencent. Before we start the presentation, we would like to remind you that in crisp forward looking statements, which are underlined by a number of risks and uncertainties, it may not be realized in 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 Bina as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and non GAAP measures, please refer to our disclosurable documents on www.tencent. Com/ir. Let me introduce the management team on the call tonight. We have our Chairman and CEO, Peng Li Ma President, Martin Lau Chief Strategy Officer, James Mitchell and Chief Financial Officer, John Lo. Peng Li will kick off with a short overview, Martin will discuss strategic highlights, James will speak to business review and John will go through the financials before we open the floor for questions. I'll now turn the call over to Pony. Please. Thank you, Kevin. And good evening. Thank you for joining us. In 2016, we delivered another set of solid financial results. While continue to invest in our social platforms, digital content and ecosystem and new technologies, which our long term competitiveness and drive future operational success. Then update you on our key achievements in 4 strategic areas. In social, we have definite user engagement on our social platforms Weixin and QQ. We recently launched Weixin Mini Program which facilitate convenient service delivery for our users. For QQ we introduced live broadcast to enhance social experience and integrate AR technology to our popular Red Envelopes campaign. In games, our smartphone games further expand product profile and achieved strong revenue growth. During the year, we launched many successful titles. In particular our in house title, Honor of Kings is the most popular mobile game in China with DAU existing 50,000,000. We expand our global footprint via strategic partnerships and investments. In PC games, we increased our market share by focusing on serving core gamers and extending life cycles of our broadcasters. In media and content, our news, video and sports platforms generate significant user growth. Our digital content monthly subscriptions more than doubled year on year. In music, we solidified China's online music streaming market last year. And our new Weixin app is now by far the highest DAU karaoke app in China. In our ecosystem we're strengthening our support to partners by ramping up our infrastructure services. Our mobile payment increased market share and daily transactions. Inlong Bao and Mobile Q2 browser widened their lead against peers and doubled their revenues year on year. And our cloud services extend its capabilities and customer base and tripled revenues year on year. Operationally, we maintain clear leadership in core operating platforms. Weixin and WeChat combined MAU exceed 889,000,000 up 28% year on year. Total MAU for Q2 grew 2% year on year to 868,000,000 within which smart devices MAU was 652,000,000 up 2% year on year. 4Q loan smart devices MAU grew 4% year on year to $595,000,000 For smartphone games we solidified our lead in several key genres especially in PVP games and deepened our penetration in RPG genre. For PC client games, we remain the industry leader by revenues and user basis. For our media business, we saw rapid growth in traffic and user for activities such as sports and music. In mobile utilities, we continue to lead bimonthly active users for mobile security, mobile browser and Android app store in China. Financially we delivered a strong set of results. For the Q4 of 2016 total revenue was RMB43.9 billion up 44% year on year and 9% quarter on quarter. Non GAAP operating profit was RMB14.9 billion up 30% year on year or down 1% quarter on quarter. Non GAAP net profit attributable to shareholders was RMB 12,300,000,000 up 38% year on year and 5% quarter on quarter. For the full year of 2016 total revenue was RMB 150 2,000,000,000 up 48% year on year. Non GAAP operating profit was RMB 58,000,000,000 up 39% year on year. Non GAAP net profit attributable to shareholders was RMB45 1,000,000,000 up 40% year on year. I now invite Martin to discuss strategic highlights. Thank you, Pony, and good evening and good morning to everybody. I'm going to update you on the 4 areas which we have achieved new developments in 2016 early 2017, fortifying our ecosystem and benefiting our users and partners. Starting with mobile payments, we achieved over 600,000,000 monthly active users as of the end of 2016 and our daily payment volume nearly doubled year on year to over 600,000,000 transactions a day. For social payments during the 2017 Chinese New Year period, our users exchanged over 46,000,000,000 Weixin Red Envelopes, up over 40% year on year. For commercial payments, we're driving user penetration by creating more online and offline use cases, in particular high frequency transaction activities. And we're driving merchant penetration by signing up flagship partners in key verticals such as retail, restaurants and we've also proliferated our coverage of long tail merchants through channel partners. For example, Starbucks recently enabled Weixin Pay in their 2,600 stores in China. As a result of all these efforts, our commercial payment volume tripled year on year. Our mobile payment platform also serves as an important channel for our wealth management platform LiCaitung and our banking affiliate WeBank to distribute their Internet finance products. We believe our user benefits from greater availability of such products and our partners benefit from targeted access to our user base through our payment platform. Moving on to news and content services, we are China's market leader on mobile and PC news service ranked by daily active users and we have also grown our user engagement and revenue significantly during the year. We provide news content to users through a number of different apps and online channels. In the app front Tencent News and Kuaibao are 2 standalone apps with complementary use cases. Tencent News provides series and deep news content based on the combination of editorial and machine recommendations. Kuaibao delivers personalized reading content to users based on deep learning of each individual's interest graph. To enrich the diversity of our content library we launched an open platform in early 2016 to facilitate content creators publishing articles. This has benefited Qaibao in particular which DAU has grown to over 20,000,000 multiple times of the beginning of the year in 12 months' time. In addition to our news apps, we operate news channels which reach a broader user base. These include Weixin and Mobile QQ plug in, official accounts, Mobile QQ Browser News Feeds and also our QQ KanDian. These channels deliver relevant news or broader content in a customized way to our users who can then share with their social graph through chat or moments. Our news and content traffic increased significantly during 2016. This substantial user traffic and the ability to target users are highly appealing to advertisers, which allowed us to increase the monetization of our news services through a combination of brand and performance advertising. In 2016, our mobile news advertising revenue grew more than 100% year on year. Moving on to cloud services, we see substantial market opportunities accompanying our connection strategy. Starting from primarily serving game developers, Tencent Cloud is now a clear leader in the online game space and live video broadcasting space and is increasingly penetrating verticals including O2O Internet Finance with NetSupport Services as well as Enterprise. A unique advantage we have is that Tencent has a solid foundation of technologies in areas such as security, payment, big data analytics, photo processing, mini programs and artificial intelligence. Utilizing these technologies Tencent Cloud provides tailored solutions for various customers and industries. For example, we have customized solutions with specialized data centers to satisfy Internet Finance customers' needs to comply with regulations and with additional security. In addition, we expanded our cloud service sales force significantly in the year of 2016 and divided it by industry and geographic focus to better serve our customers. We also quadrupled our range of channel partners which helped us to acquire more customers. As a result in the year of 2016 our cloud service customer base and revenue more than tripled year on year. Looking ahead, we'll further expand our overseas infrastructure and continue to invest heavily in cloud services in terms of talent, technologies, infrastructure and products. Finally, I would like to share our thoughts about Mini Programs, which has attracted quite a bit of attention when it was first launched in the beginning of the year. We view Mini Programs as an enhancement of our official account system designed to connect offline service providers with users online. For service providers, Mini Programs allow them to present QR codes at their offline channels, which convert into an online interaction when users scan the QR codes. For users, Mini Programs enhance convenient and fast sampling of interactive experiences such as O2O services. Users who discover a service via Mini Programs may choose to dig further and experience other functions in which case they would then download the service provider's native application. Han's Mini program is complementary to both official accounts and existing app ecosystem acting as an intermediary step in the process of user acquisition for app downloads. One of very good example of the usage of the Mini program is with MoBike which is a bike sharing app in China. Mobike users can access its Mini program when they scan QR codes that sit on their bikes. Once users initiate the Money program, they can use basic features such as registration, deposit paying and renting bikes. For those who want to have more comprehensive services they can download the app and experience the full suite of mobile application capabilities. As a result, after Mobike launched its Mini program it saw a sharp increase in users for both its Mini program and its native app. We are excited about the user experience that can be created with Mini programs and the benefits they bring to service providers and users. In line with Tencent's philosophy, we will build our Mini Programs ecosystem at a measured pace to ensure the quality and variety of service offerings that will match our standards. Now I will turn to James to talk about business review. Thank you, Martin, and good morning, good afternoon, good evening as the case may be. In the Q4 of 2016, our revenue grew 44% year on year. Value added services represent 66% of our revenue within which online games contributed 42% and social networks 24%. Online advertising was 19% of our total revenue and the other segments accounted 15% of total revenue, up from 5% in the Q4 last year. For the full year, revenue grew 48%. Looking into value added services, revenue in the 4th quarter was RMB 29 point 2,000,000,000 up 27% year on year and up 4% quarter on quarter. Social network revenue was RMB10.7 billion, up 51% year on year and up 9% quarter on quarter. Sales of digital content and game related items were the main drivers for the year on year and quarter quarter revenue growth. In particular, digital content revenues more than tripled year on year. Online games revenue was RMB18.5 billion, up 16% year on year and up 2% year on quarter. The increase is mainly driven by player versus player owned role playing smartphone games. For the full year, our VAS revenue was up 34%, our social networks revenue up 54%, and our online games revenue up 25%. Turning to social networks, for QQ we use location based technology to help now users discover interesting content broadcast by people in their neighborhoods contributing to increased DAUs for now. During the Chinese New Year, our QQ Red Envelope campaign also utilized location technology to guide users to pick up augmented reality red envelopes distributed by participating merchants. Over 250,000,000 QQ users joined the 5 day event opening over 2,000,000,000 red envelopes. For Weixin, we introduced mini programs which Martin's already discussed, and we integrated our enterprise accounts into our enterprise Weixin app with a unified set of management tools that facilitate synchronization. This unification allows enterprises to manage their internal communication and administration matters with greater efficiency. Moving to PC client games, for the full year 2016, our PC client game revenue increased 9%. But just looking at the Q4, historically in years such as 2013 2014, our PC game revenue typically declines quarter on quarter in Q4 due to fewer student vacation days and fewer special events 1st Q3. In 2015, our PC game revenue was unseasonally strong in the Q4 due to new item types in one of our biggest games, but in 2016 the usual negative seasonality from 3Q to 4Q reasserted itself, which resulted in a 2% quarter on quarter revenue decline and a rather modest 4% year on year revenue growth rate. PC game average daily active users decreased 13% year on year reflecting first users continuing to shift a portion of their gaming time from actual gameplay to engagement with game content in other mechanisms such as forums, videos and e sports events. And secondly, users for some titles moving part of their playing time from the PC edition to a mobile edition of the same IP. Taking Crossfire as an example, since we introduced the mobile version of Crossfire in late 2015, we have seen some impacts on our PC version DAUs, but the total unique Crossfire DAUs combining PC and mobile is substantially higher than what we had for PC alone. Looking at the global games market, the PC is still a vibrant platform especially for hardcore gamers and we believe that should remain the case in China too. We continue to operate some of the most popular games in the China market while seeking to nurture niche genre such as battle combat and sports as well as developing an esports ecosystem. For smartphone games, revenue in the 4th quarter was 10 point 7,000,000,000, up 51% year on year and up 8% quarter on quarter. And revenue for the full year was RMB 38,400,000,000 up 80% year on year. According to App Annie, we became the top publisher globally in iOS and we believe that our Android app store presence is generally stronger than our iOS app store presence. Strategically, we've made progress along several dimensions within smartphone games. First, we maintained our leadership in casual games and introduced new casual genres such as a fishing game and a chess game. 2nd, we've been developing big DAU audiences from biggest player versus player games. Honor of Kings surpassed 50,000,000 daily active users and we launched Freestyle Basketball, which has become among the top 3 mobile sports games in China. 3rd, we deepened our penetration in the important role playing game category via titles such as JX Mobile, Fantasy Zhu Shen Mobile and Dragon Nest Mobile, all consistently ranked in China's top 10 iOS grossing charts since their launches. Looking forward, we believe we've assembled a rich pipeline including both well known IPs such as NBA, Contra and TLBB as well as a range of new IPs. Moving on to online advertising, segment revenues for the 4th quarter was RMB8.3 billion, up 45 percent year on year and up 11% quarter on quarter. Our brand advertising revenue was RMB3.1 billion, flat quarter on quarter and up 11% year on year. User traffic created more inventory for our mobile news feeds and video, but our brand advertising revenue is being impacted by 2 negative factors. First, many traditionally brand oriented advertisers are increasingly purchasing performance ads, which shifts revenue from our brand to our performance category. And second is our video subscriber base grows, we have less opportunity to add pre roll and mid roll ads before and during our video content, shifting revenue from our brand ads to our social network subscriptions category. Our top 5 brand advertiser categories for online services in particular e commerce, automobile, food and beverage, personal care and consumer electronics. Our performance advertising revenue was RMB5.2 billion, up 77% year on year and up 18% quarter on quarter benefiting from positive seasonality for e commerce in the 4th quarter. More advertisers joined our self-service ad platform, especially after we launched neighborhood ads in September. The total number of Moments advertisers has more than doubled in the past 4 months. Weixin Moments and Official Account apps were the biggest contributors to the sequential in year on year growth and we also added more inventory in our App store, Qzone and mobile QQ browser products. For the full year, our online advertising was RMB 27,000,000,000 of revenue, up 54 percent year on year. Looking more closely at Tencent Video, we continue to invest in premium content which contribute significantly to user growth and time spent. In addition to high profile licensed premium content, we're increasingly investing in original premium content, leveraging our ecosystem for access to upstream IPs from literature and games, as well as cross platform user insights, we can create original content that is unique and exclusive to our platform. While there's a time lag between commissioning and creating and then screening our original content, we did put some of our original content on air during late 2016 including 2 big budget drama serials, a few animated TV shows and several variety programs. Original content has proven particularly effective at growing our video subscription base which increased over 300% year on year in the Q4 to over 20,000,000 subscriptions. Specifically, iResearch ranked our Gui Chui Dung or Candle in the Tomb TV series which is based on a number of novels published by our online literature business as achieving the highest user coverage of any online only drama serial during the Q4. And with that, I'll pass on to John to speak to our financials. Thank you, James. Hello everyone. For the Q4 of 2016 our total revenue was RMB 43,900,000,000 up 44% year on year or 9% quarter on quarter. Gross profit was RMB 23,600,000,000 up 33% year on year or 8% sequentially. Operating profit was RMB 13,900,000,000, up 28% year on year or down 4% quarter on quarter. Share of losses of associates and joint venture was RMB522 1,000,000 in the quarter down from RMB1.3 billion year on year or RMB 619,000,000 sequentially. On a non GAAP basis, we generated profits of RMB391 1,000,000 in the quarter comparing to losses of RMB164 1,000,000 year on year or RMB107 1,000,000 in the Q3. Income tax expense was RMB2.4 billion, up 20 percent year on year or down 2% quarter on quarter. Effective tax rate was 18.6 percent for the Q4 and 19.7 percent for the full year. Net profit attributable to shareholders was RMB 10,500,000,000 up 47% year on year or down 1% quarter on quarter. For the full year of 2016 total revenue was RMB 150 1,900,000,000 up 48% from 2015. Gross profit was RMB 84,500,000,000 up 38% from 2015. Operating profit was RMB56.1 billion, up 38% from 2015. Net profit attributable to shareholders was RMB41,100,000,000 up 43% year on year. For the Q4 on a non GAAP basis operating profit was RMB14.9 billion, up 30% year on year or down 1% quarter on quarter. Net profit attributable to shareholders was RMB4.3, up 38% year on year and up 5% quarter on quarter. Operating margin was 34%, down 4 percentage points year on year or 3 percentage points quarter on quarter. Net margin was 28%, down 1 percentage point year on year or 1 percentage point quarter on quarter as well. For the full year of 2016 on a non GAAP basis operating profit was RMB38.2 billion, up 39% from 2015. Operating margin was 38%, down 3 percentage points. Net profit attributable to shareholders was RMB 45,400,000,000, up 40%. Net margin was 30% down 2 percentage points. Let's turn to segment gross margin for the quarter. Gross margin for battery wireless services was 63% broadly stable year on year or down 2 percentage points quarter on quarter. The sequential decline reflected mainly revenue mix shift and increase in share based compensation relating to 18th anniversary bonus shares. Gross margin for online advertising was 47 percent down 5 percentage points year on year reflecting increased investment in video content. Sequentially, it rose 10 percentage points as a result of event driven content cost in the Q1 such as Rio Olympics and Voice of China came off season. For the full year 2016 gross margin for value added services was broadly stable at 65% compared to last year. Gross margin for online advertising decreased 6 percentage points to 43% mainly due to greater video content enhancement. Moving on to operating expenses, selling and marketing expense was RMB4.5 billion, up 48% year on year or up 36% quarter on quarter. The year on year and quarter on quarter increases were mainly due to higher marketing and promotion spending for games and Weixin payment businesses. Selling and marketing expenses represented about 10% of quarterly revenue. Included under G and A, research and development expense was RMB3,600,000,000 up 45% year on year or 14% quarter on quarter. Total G and A expense was RMB6.9 billion, up 45% year on year or 17 percent up Q on Q. R and D represented about 8% of quarterly revenue and total G and A was 16%. Share based compensation was 4% of quarterly revenue. In celebration of the company's 18th anniversary, we awarded 300 shares to every employee. The first 100 shares was vested in November of 20 16 and the remaining 200 shares in the following 2 years. In relation to this exercise, we booked stock based compensation expenses of over RMB500 1,000,000 in the quarter. On a full year basis selling and marketing expense was RMB 12,100,000 up 52% from 2015 and represented 8% of revenue. R and D expense was RMB11.9 billion up 31% from 2015 and represented 8% of revenue. Total G and A expense was RMB22.5 billion, up 33% over 2015 and represented 15% of revenue. As at quarter end, we had approximately 39,000 employees, up 27% year on year or 2% quarter on quarter. Let's go through margin ratios for the Q4. Gross margin did 4.5 percentage points year on year to 53.9%, mainly due to increasing contribution from the other segments which carried lower margin as well as continued increase in video content costs. Gross margin was stable sequentially. Non GAAP operating margin was 34.1% down 3.8 percentage points year on year reflecting lower gross margin. Sequential decrease of 3.1 percentage points was mainly due to seasonal increase in selling and marketing expenses, less dividend received from Investing Companies and donation made to Tencent Charity Fund in quarter 4. Non GAAP net margin was 20 point 3%, down 1.3 percentage points year on year and 1.2 percentage points quarter on quarter. On a full year basis, gross margin was 55.6 percent down 3.9 percentage points. Non GAAP operating margin was 38.3 percent down 2.3 percentage points. Non GAAP net margin was 30.3 percent down 1.6 percentage points. Turning to earnings per share and proposed dividend for 2016. GAAP basic EPS was RMB4.383 and diluted EPS was RMB4.329. Non GAAP basic EPS was RMB4.844 and diluted EPS was RMB4.784, subject to the approval of shareholders at its Annual General Meeting to be held on 17th May, 2017, we are proposing an annual dividend of HKD0.61 per share. Let me share some key financial metrics with you before rounding up this presentation. For the Q4, total CapEx was RMB2.8 billion, up 51% year on year or down 22% quarter on quarter. Operating CapEx was RMB2.1 billion, non operating CapEx was RMB709 1,000,000. For the full year of 2016, total CapEx increased 57 percent year on year to RMB 12,100,000,000 Free cash flow reached RMB 17,200,000,000 up 6% year on year or 21% quarter on quarter mainly due to increasing operating cash flow from our games business. On a full year basis free cash flow was RMB55 1,000,000,000 or US8 1,000,000,000 up 15% year on year. As of year end, our net cash position was about RMB18.1 billion, down 5% year on year and up 117% quarter on quarter. The year on year decrease was mainly due to payments for M and A, license content and dividend payments, partially offset by free cash flow generated from operations during the year. The substantial increase mainly reflected approximately RMB7.8 billion recouped from Supersal financing arrangement in the 4th quarter when we compare with quarter 3. The fair market value of our listed associates and available for sale financial assets were approximately RMB89 1,000,000,000. This concludes our presentation. Thank you. Thank you, John. We shall open the floor for questions now. And before you ask your question, please tell us your name and also restrict yourself to one question and we'll start the queue for the 2nd round of questions if we have time. Operator, shall we take the first question please? Thank you. First question comes from the line of Wendy Huang from Macquarie. Please go ahead. Thanks, management, and congratulations on the very solid results, especially the progress you made on the payment front. So with your payment daily transactions now exceeding KRW 600,000,000, what kind of breakdown are you seeing between the online versus offline? And also, can you provide some color of the transactions breakdown between the virtual items versus physical goods and services? And also your other strategy, which include payments, achieved gross margin 20%. So when do you see actually the payment to breakeven or make some breakthrough on the monetization side? And what kind of take rate you are currently charging towards your merchants? And finally, still regarding the payment, I think in light of the recent upcoming online clearing platform implemented by PBOC, how do you see actually with the new online clearing platform to actually change Tencent payment ecosystem and market share in the longer term? Thank you. Okay. Let me take that question. In terms of payment transactions, we have achieved as we said more than 600,000,000 daily transactions and if we have to rank right, the basic ranking is sort of social payment, which include wrap packets and then online payments and then offline payments. So that's the sequence. And we felt this is sort of consistent with the way we leveraged to make our payment platform a ubiquitous platform. We actually leverage the rat packets to allow users to have a very unique experience and very high frequency experience and leveraging that we were able to deliver commercial transactions to online service providers and subsequently sort of in the course of last year and we were able to leverage that to convince a lot of offline merchants to use our payment solution. And as a result, we proliferated the payment platform on an offline basis. So that's sort of the breakdown as you can see. In terms of magnitude, as we said, the total number of transactions close to double on a year on year basis. And on the other hand, the commercial transactions, which we include both online and offline commercial transactions actually tripled on a year on year basis. So you can have a sense of the magnitude of the growth among the different segments. Now in terms of the monetization of the payment platform, we actually view payment as infrastructure service for our ecosystem and our intention is actually to leverage our payment platform to engage our users to solve the pain points between merchants and users. As a result, we can actually sort of allow our users to conduct more activities on our platform and we can also allow a lot of our partners to get paid from the users. As a result, we will actually benefit as the platform. So our main motivation is not actually to make money. If you remember, around this time of last year, we're actually sort of making losses, quite a bit of losses from our payment platform. And then subsequently we made some adjustments so that we were able to recoup some of the costs associated with bank charges. And now you can see sort of we do make some gross margin, but at the same time, we actually sort of put in a lot of investments at the marketing level, at the infrastructure level, at the people level. So by and large, we consider sort of new payment at this point in time is still an infrastructure service rather than a service that generates profit for us. And I think sort of that status will maintain for quite some time. And finally, you are right in pointing out that sort of there's going to be a new system put in place by PBOC and I think there are 2 things, right. One is sort of on a technical level, we're actually sort of helping PBOC quite a bit in terms of organizing the new platform and also sort of contributing our own technology to help the PPOC platform to develop and over time we expect some transactions would actually sort of be migrated to the centralized platform. We believe if there is a central clearing platform that sort of is very scalable, I think it's actually sort of new good for the entire industry. The second one is actually related to part of the float of the users, which need to be deposited with PBOC. Right now, I think sort of roughly 12% of the float is actually required to be deposited with PBOC in which actually sort of we do not receive any interest. We believe over time this number may increase. But at the same time, I think the government is also cognizant of the fact that a lot of the payment solution providers are actually sort of rely on some of these interests to actually recoup some of the costs. So that's why I think there will be measured schedule in terms of increasing that deposit number. Okay. Thank you, Martin. Operator, shall we take the next question please? Certainly. Next question is from the line of Alicia Yap from Citigroup. Please go ahead. Hi. Good evening, management. Thanks for taking my questions. My question is related to advertising. Just wanted to get a sense how much of the decelerations of the brand advertising revenue growth is attributed to the shifting of the ad inventory from the brand to the performance base versus the impact from the soft macro and also the impact from the subscription cannibalization. So we appreciate if management could share some color the upcoming trend of the brand ad growth outlook as well. On the performance based ad site, can management share some feedback on the recent small scale adoption for the short form video ad format in Beijing? So any plans for a broader rollout on the video format in the future and also the ad inventory increase in the coming months? Thank you. Okay. In terms of the brand advertising question, the answer differs by the type of inventory you're thinking about. So for our online video advertising revenue, the deceleration is likely primarily due to the growing percentage of video MAUs that are also video subscribers, which entitles them to skip most forms of in video in feed or pre feed advertising. On the other hand, if you look at our news advertising revenue, which is actually our biggest brand ad category or if you look at our mobile browser or our mobile app store, which are very fast growing categories, then the primary change is the mix shift from inventory being allocated to brand into inventory being allocated to performance. And so for those products, the overall advertising revenue is growing quite quickly, but it's just that the brand proportion is declining as the performance proportion ramps up. In terms of the overall macro, I mean, it's always nice to blame one's challenges on the macro environment. But in reality, the Chinese macro economy, I think, has been fairly healthy the last few months. So it would be kind of an easy escape for us, but not necessarily a correct attribution for us to say that the brand advertising slowdown was due to macro reasons. I think it's less due to macro and more due to the 2 substitution effects. In terms of the second question around advertising on short form video within Weixin, I mean, clearly there's a global trend toward putting more advertising around short form video, especially on social networks. And equally, clearly, it's a trend that being 10%, we would follow with a high degree of carefulness, so as to not upset our users and so as to provide good environments and a high click through rate for our advertisers. So we are seeing very rapid growth in video views within our social networks. But we're cognizant that putting in a heavy ad load around those short form videos could both be irritating to users and for those users who are on wireless data rather than Wi Fi plans, costly for those users as well. So we're moving forward at a measured pace. Thank you. Operator, next Next question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead. I I have a question more on the potential impact of certain applications on your social apps. So we have seen more and more of your peers launching softphone video content as well as mobile news apps. So wondering if you have seen any cannibalization of these type of new applications on your social apps and how you are going to deal with any problem? Thank you. I think you're right in pointing out that sort of new short form video and news feeds are becoming sort of very popular product category among a lot of industry players. I think as a matter of fact, if you look at our especially in my prepared remarks, when we talk about news and content services, we have also launched a number of these products within our both in terms of sort of individual app like Kuaibao as well as in our various different products as a product feature. And as a result, our overall page views on text, on photos, pictures as well as on short video has actually increased quite substantially across our platform. So I think it's a phenomena that clearly the mobile handset is actually bringing to the industry by having a new way for distributing content, not just based on editorial way or social way, it's actually based on machine learning. You can actually sort of map the interest graph of users better. And as a result, you can actually sort of increase the amount of user engagement on those content. And also sort of by having a platform of a more diversified content, right, there can be sort of a lot of different writers writing articles and shooting short video of different kinds. And if you have a platform to include these content and sort of it would also increase the user engagement. So I would say, this is an industry phenomena and we actually sort of have also rolled out products and services to as well as overall content platform to benefit ourselves from this. And as a result actually our total page views across all these formats have actually increased quite substantially as well as our revenue has actually increased quite substantially too. So it's actually sort of positive for us. Thank you. Operator, next question please. Next question is from the line of Colvin Halliwell from Deutsche Bank. Just a question on ads. If we hypothetically cobble together video subscription revenues and ad revenues, do we see any trappings of a potential improvement in that P and L from what has been a chronically negative margin business? And related to that or as far as ads go, could you just give us an update on the number of P4P advertisers we have on the platform now and what we can expect throughout 2017? Thank you. I think if you take the video advertising subscription revenue together, they're growing at a relatively healthy rate, albeit the mix has obviously shifted fairly substantially from advertising being the growth driver to subscriptions being the primary growth driver. We're not focused on profitability for our video business this year. And I think that in the longer term, it is correct to observe that globally video subscription business is a much higher margin than video advertising businesses. ESPN or CNN achieves 3 to 5 times higher margin than CBS or ABC. But at this point in time, I think we and our peers in the market are investing to grow the video subscription business, particularly by purchasing original content, which we alluded to in the remarks earlier. So for the foreseeable future, you should expect the video business to remain loss making, although in the longer run, the subscription aspect should be breakeven sooner and become more profitable than the advertising aspect. In terms of the number of pay for performance advertisers, we don't necessarily disclose that every quarter. Okay. Thank you. Next question please. Next question from the line of Jun Young from Mizuho Securities. Please go ahead. Hi, good morning or good evening guys. Just a question on your mini apps. I know that, Mark, you gave a little bit of an update on the on your prepared remarks, but just wanted to just kind of ask what metrics should we follow in terms of how to gauge the performance of that business going forward? And second of all, a follow-up to that is, can you give us an update in terms of like how many partners you're working with? What are the monetization opportunities in the near term? And at the same time what verticals are most active in that particular field? Thanks. Yeah, I think, so if I have to reiterate sort of the mini programs, I think sort of the purpose is actually to solve a pain point in the ecosystem in the sense that a lot of offline service providers, when they actually suddenly can access users, it's very difficult for them to provide a sampling of their services online to these users. And if they sort of get people to sign on to our existing infrastructure, which is an official account, the official account sort of new can allow the sending of content, but certainly not really sort of readily available interactive services. And if the service provider wants to induce the users to download an app, the barrier of entry is actually quite high. So by leveraging Mini Programs, the service provider can actually sort of help the users sample the online interaction very quickly and as a result provide value to the users and at the same time the users actually like the service can actually go ahead and download the native app. So I think that's sort of what we're trying to provide. And as a result, I would say, if you look at the type of service providers, it's essentially sort of mostly offline service providers who can actually provide some kind of interactive services online. And if you look at sort of our purpose of launching this service, this platform, it's actually sort of new to solve a pain point. Then sort of I think it's not actually for short term profit. I don't think that mini program would actually sort of generate any significant financial return to us, but it would actually help our ecosystem to be more convenient for both users and service providers. And we believe that sort of from a long term perspective, we can actually help users and service providers to connect with each other in a more seamless way then sort of we'll benefit as a platform. I think that's really sort of what our intention is. So as you see how do you actually monitor the performance of this platform, I think certainly looking at some of the use cases that's in the market, I think it's actually a better way to observe it. If you look at MoBike, I think very clearly they have benefited a lot from this mini program. And we actually hope in the near term to just work with different service providers and to establish some really great pilot projects and then sort of demonstrate the value proposition of Mini Programs and as a result how more and more service providers to get on this platform. Great. Thank you. Next question comes from the line of John Choi from Daiwa Capital Markets. Please go I have a question on the AI, artificial intelligence. Which are the areas that Tencent is considering when it comes to AI investment? And also, from the management's perspective, where does Tencent stand in terms of other players within the industry given that AI is becoming such an important part of technology these days? And just quickly on cloud, I remember that on the prepared remarks that it seems like Tencent is willing to invest more. So could you kind of elaborate which areas management sees in terms of potentials within the cloud opportunities for Tencent in the long term? Thank you. Yes, in terms of AI, we actually view AI as a core technology across all our different products. So what we're trying to do is actually in each one of our businesses we encourage our team to apply to build up the talent pool as well as to apply the core technologies around AI, machine learning and deep learning. And at the same time at the corporate level we've also established an AI lab which is more research based so that they can actually focus on the more basic building blocks around AI. And if you look at sort of the areas of AI that we are investing in, it would include areas such as speech recognition, it will include picture and photo recognition, computer vision, natural language processing and all sorts of deep learning as well as basic architecture for deep learning platform. And the way we look at this technology is also that in order to build long term competitiveness, you don't only need sort of the people as well as sort of the mathematical and computational expertise. But at the same time, you also need a lot of data, you also need a lot of usage scenarios so that you can actually apply these AI technology and as a result you can actually keep progressing. So I think if you look at our actual products, right, around content recommendation, around our advertising, around our photo processing app. There are actually a lot of existing products which will benefit from AI. We are also sort of investing in more pure research projects. You may notice that our Go chess player, Fine Art, has recently won the championship in UEC competition. That's an example of our research project. And at the same time, in the future, we believe that our AI technology can also allow us to explore new areas such as personal assistant, such as maybe even sort of autonomous driving. So these are the areas that we will focus on. Now in terms of cloud, right, we believe that at this point in time, we have a lot of internally developed technologies which we can actually sort of package into the cloud and share with broader community and ecosystem. So if you look at, for example, we are the leader now in gaming cloud as well as in video cloud. And the reason we were able to actually come from behind and sort of took the leadership is because of the fact that we have a lot of core technologies in those fields, which we share with our ecosystem. And over time, right now, we're going to package more and more of our service our technologies around big data, around scalable system, around security and mini programs, payment platform in order to benefit our cloud customers. And we're also building up our sales and distribution channel in order to scale up our business. We believe that at this point in time we want to certainly keep on investing in infrastructure as well as our sales and distribution channel so that we can actually sort of build a scale of our business. Over time, if we can actually sort of package more and more of our tele technology into PaaS or SaaS solutions for our customers then that will be another add layer of opportunity for us to generate more value added for our customers and also more monetization opportunity for ourselves. Okay. Thank you very much for your question. Operator, next question please. That's only the next question is from the line of Piyush Mubayi from Goldman Sachs. May I just ask a question about the gaming revenues, which appear to have slowed down and exited the year at a slower run rate than we've seen for the previous three quarters? Could you give us any sort of indication of whether we should expect this to be the run rate into 2017? And also if you could touch you talked about 4 new PC games, 6 new mobile game launches for 'seventeen and you've named them all. Could you give us a sense of how big we could expect these to be or any other color that would help us gauge the size? And may I confirm that, I think you said on the press call that the restriction on Korean games won't impact you? Thank you. Yes. So I'm not sure this answer will be all that helpful for you, but in terms of the game revenue growth in Q4 2016, as we mentioned, if you look back at prior years, historically, dollars 0.10 PC game revenue is seasonally strong in Q3 when there's summer holidays and events around the summer holidays and seasonally weaker in Q4. 2015 was an exception to that pattern because of some specific new items within our biggest game. Then in 2016, we kind of reverted to that pattern with PC games descending from Q3 to Q4, which was different from 2015 and makes for a tough year on year comp, but in line with what's happened in years prior to 2015. So I think that's all we can really say about the 4th quarter PC game revenue growth deceleration. In terms of how successful the new games proved to be, obviously we hope that they're as successful as possible. In terms of the impact of the regulations around Korean games, for those Korean games that are already operated in China and for those new Korean games, which are not yet operated, but have already been approved, as best we can tell at this point in time, it should be business as usual. Now there may be other Korean games that we're hoping to source in the future. And if they are delayed, then that would potentially be unhelpful. But set against that, A, Korea is just one of many sources for games along with China itself, the U. S, Europe and so forth for us. And then B, in our experience, it's often the case that delaying a game, spending a few more months or quarters tuning it results in a bigger, better game once we do finally publish the product as opposed to rushing it to market as soon as possible. Thank you. Operator, next question please. Next question is from the line of Ming Xu I have a question on the margin impact from the video and cloud. So your competitors both of the 2 competitors announced a very aggressive content budget for the online video in 2017. And also we recently read from news about one of the very aggressive bid from you on the government cloud program. So my question is, firstly, can you maybe give us more color on your online video content cost for this year? And secondly, what kind of revenue or market share target for your online video and cloud service business? And thirdly, to achieve those target, what kind of margin drag or loss can you tolerate? Thanks. Yes, these two businesses are definitely sort of new areas that we invest in. I would say sort of video loss is sort of new, actually quite a bit bigger than cloud business loss. But on video, as we have repeated sort of multiple times before, we actually view video as a very important part of our overall customer experience because it actually provides a lot of engagement with our users on a very large scale. So as a result, right, we felt this is actually an area that despite the fact that it's losing us quite a bit of money, we actually feel that it's important for us to invest in. And as you pointed out, in order to stay competitive in this market, we actually sort of have to spend quite aggressively on the content and I think that's exactly what we have been doing and will continue to do. On a medium term basis we felt the loss would actually increase because the cost of content has actually increased much more than the revenue increase in the market. Despite the fact that you can see advertising revenue has been increasing and then subscription revenue has been increasing even more. I think over time as we continue to do original content, as we continue to increase our more organization around subscription and at the same time if we can actually participate in the creation of the original content and share some of the upside in terms of content then the economics may actually sort of move toward the more positive side. But I think that would happen in a few years, not these 2 years. In terms of cloud, right, the point that you mentioned is really sort of more of an isolated case. I think what we do now is actually in some of the smaller orders we actually allowed our sales people to make on the spot decisions on how to bid for projects. And I think like it or not, our frontline people decided to make that bid. I think it's much more of an isolated case. And given it's a small order and frankly, it has attracted a lot of attention in the industry and it probably pays back from a media value perspective. But I think on a longer term basis, right, we don't view undercutting price as the core strategy for us in cloud. Of course, we will provide a very, very competitive price in the market. But as I said, in our cloud service, over time, we believe that it's actually the value addedness that would actually differentiate cloud service providers and we're confident that with our technology we can actually do that. Thank you. Operator, in the interest of time, we will take the last three questions please. That's coming. The next question is from the line of Thomas Chong from BOCI. Please go ahead. Hi. Thanks management for taking my questions. I have two quick questions. The first one is about Honor of Kings. Can management give us some color about the performance in the month of January February? And are we seeing accelerating trend for mobile games in the Q1? And my second question is more on a order basis. Can management give us some color about the ARPU for MMO, advanced casual and smartphone games in the 4th quarter? And my final question is about the operating expenses trend, in particular the sales and marketing trend in 2017. Thanks. Yes, I think on Kings, right, I think if are in the market, you can feel that sort of in January February, it has become more popular among the users. I think that's the extent we can give you, because certainly on a financial basis we don't actually provide guidance and we'll continue with this tradition. Now I think with the margin question, I'll pass to John. In relation to the ARPUs for MMOG, the quarterly ARPU is within RMB 310 to RMB450. And for advanced casual game, it was within RMB 100 to RMB365, whereas for smartphone games, we treat it as one portfolio, it ranges from RMB145 to RMB155 per quarter. In relation to the selling and marketing expenses, I think at this point in time it is not really growing at a very quick rate taking into account that year on year growth, it's only increased by about 36%, which we consider not to be very significant, especially when selling and marketing costs are basically discretionary in nature and if there are opportunities, we'll invest heavily on it, whereas under normal circumstances, I think you will grow quite organically. Thank you. Next question please. Next question from the line of Chit Sang from HSBC. Please go ahead. Great. Hi, everybody. Thanks so much for taking my question. I wanted to ask about WeChat Moments user experience. Can you share with us what sort of metrics you're monitoring to sort of measure user experience, what trends you're seeing and how people are spending time on Moments. And I'm wondering if you see if there's a lot more potential engagement time that people can spend more on WeChat Moments. Thanks so much. Yes, in terms of WeChat Moments, right, we obviously do look at the number of users who actually sort of use the feature and how many times they actually open it as well as how much time they spend on it. But at the same time, right, we actually sort of pay a lot of attention to the quality of the content that people are seeing because one of the things that we actually do not want is actually sort of new people get overloaded with content, which sort of are of low quality. So there's a range of quantitative indicators that we look at, but at the same time we also look at a lot of qualitative indicators to make sure that quality of engagement is actually high. I think so far we believe that WeChat Moments, it's still a very vibrant part of users' experience and the quality is actually quite good. Thank you. Operator, we'll take the last question please. That's all me. Last question comes from the line of Natalie Wu from CICC. Please go ahead. Hi, good evening, management. Thanks for taking my question. So my question is regarding the game business. So given the fact that Order of Kings resemble League of Legends in a lot of ways and Order of Kings is obviously delivering a very impressive performance during the past several months. So just wondering will Honor of Kings have some kind of cannibalization effect for League of Legends in terms of active user engagement, game revenue, etcetera? Thank you. Yes, I think the 2 games actually cater to different kind of positioning. If you look at the League of Legends, it's actually sort of catered to core gamers. And if you look at Honor of Kings, it's actually an experience that's catered to more casual players. And so far what we have found is sort of the growth in Honor of Kings is accompanied of continued growth in leader matches. So in some cases, users actually sort of will play Honor of Kings when they get more and more hardcore they can actually sort of move over to League of Legends. So what we have seen is that they're not really hurting each other. Thank you very much, operator. We're closing the call now. If you wish to check out our press release and other information, please visit our company website at www.tencent.com/ir. R. The replay of this webcast will also be available soon. Thank you and see you next quarter. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation in Tencent Holdings Limited 20 16 earnings conference call and Annual Results Announcement Conference Call. You may all disconnect, ma'am.