Thank you for standing by, welcome to the Tencent Holdings Limited 2016 third 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 is 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 will now turn the conference over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chan.
Thank you, operator. Good evening. Welcome to our results conference call for the third quarter of 2016. I am Catherine Chan 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 future for various reasons. Information about general market conditions is also coming from a variety of sources outside of Tencent. This presentation also contains some 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 the risk factors and Non-GAAP measures, please refer to our disclosure documents on www.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; and Chief Financial Officer, John Lo. Pony will kick off with a short overview, Martin will discuss strategic highlights, James will stick to business review, John will go through the financials before we take your questions. I'll now turn the call over to Pony. Thank you.
Thank you, Catherine. Good evening. Thank you for joining us. During the third quarter of 2016, we delivered strong financial performance for our core businesses. In particular, our smartphone games and social performance advertising businesses reported above-industry revenue growth rate and continue to generate healthy margins. For key infrastructure platforms supporting our ecosystem, specifically payment and cloud services, we saw significant progress in adoption and usage. We will continue to make investments in these strategic areas. Let me give you the headline numbers and defer the discussion to the financial section. Total revenue was RMB 40 billion, up 52% year-on-year and 13% quarter-on-quarter. Non-GAAP operating profit was RMB 15 billion, up 43% year-on-year and 2% quarter-on-quarter. Non-GAAP net profit to shareholders was RMB 11.7 billion, up 42% year-on-year and 4% quarter-on-quarter.
Moving to our online platforms, total MAU for QQ increased 2% year-on-year to 877 million, with 647 million of monthly active users logging via smart devices. Combined MAU of Weixin and WeChat increased 30% year-on-year to 846 million. For Qzone smart devices, MAU increased 1% year-on-year to 584 million. In games, we launched several successful smartphone games, including role-playing games, which help us expand user bases. Our PC client games sustained leadership in several genres, retaining many loyal gamers through a range of immersive in-game and less intense game-related activities. In media, we saw healthy growth in users and traffic for our news and video platforms. Digital content subscriptions for music and video services increased. In the third quarter, we merged our online music business with the China Music Corporation. We believe the combined company can help shift China digital music ecosystem to more sustainable business models.
In mobile utilities, our mobile security service continue its momentum. Our mobile browser partnered with the China Literature to promote authorized content distribution. We continue to improve search, discover, and download experiences in our app store, YingYongBao, via deep linking. I now invite Martin to discuss strategic highlights.
Thank you, Pony, and good morning, good evening to everybody. Tencent not only conduct our businesses, but also invest heavily into developing technologies that may not generate revenue directly but are important for our ecosystems. One of these technologies is our security technology. In the course of the past few years, we have made significant advancement in our online security technology, which has enabled us to become a leader in the market. In mobile security, QuestMobile ranked us number 1 in MAUs 18 months ago, with a widening lead. In PC security, our market share exceeded 30%, according to iResearch. These achievements were supported by our core security technologies. For example, we scored excellent results at the Global Hacking and Vulnerability Discovery Contest this year, winning the number 1 title in Pwn2Own.
Several months ago, engineers in our Keen Security Lab, in their efforts to enhance security for internet-enabled cars, had discovered vulnerabilities that conceded direct manipulation of Tesla's control system, and that was a very significant event in the entire industry. Following international standards practices, we shared our findings with Tesla, who implemented the patches immediately. We continued to be a leader in fundamental security technologies, such as scanning viruses, releasing memory, as well as boosting speed of handsets. We're also the leader in anti-fraud technology for smartphones. We own the most adopted detection system for phony base stations. We also own the largest database of fraud phone numbers, and industry-leading prediction technologies based on big data analytical capabilities. As an evidence of our leading position, we became Apple's official partner in anti-spam services, supporting iOS users to identify, report, and block nuisance calls in China.
With best-in-class security capabilities, we are providing a superior infrastructural service with the ecosystem of our own applications, as well as our partner services. For Tencent apps, we protect user ID, passwords, personal information, and virtual property. Our security app, Mobile Manager, will automatically ensure a virus-free terminal environment by scanning the mobile phone, Wi-Fi access, as well as in-app links. Our cloud-based security capability help to detect fraudulent web pages and phone calls. For online finance, the security technology is particularly important because it allowed us to provide users a safe environment for payment and financial transactions. Based on data analytics, we can identify and control dubious transactions before they are conducted. By ensuring security, we can speed up the adoption of online financial transactions and make users comfortable with conducting high-value financial transactions on their smartphones.
For our partners, we integrate our security capabilities into our cloud services to protect enterprise IT systems, defend against DDoS attacks, and safeguard their products and services. For developers, we helped them to screen applications for security vulnerabilities before release. All in all, our security capabilities has allowed us to develop a healthy ecosystem for our businesses. With that, I'll pass to James to talk about our business review.
Thank you, Martin. In the third quarter of 2016, our total revenue grew 52% year-on-year. Value-added services represented 69% of our revenue, within which online games contributed 45% and social networks, 24%. Online advertising was 19% of total revenue. The other segment, which includes payment-related and cloud services, accounted for 12% of total revenue. Looking at value-added services, segment revenue was RMB 28 billion in the third quarter, up 36% year-on-year and up 9% quarter-on-quarter. Social network revenue was RMB 9.8 billion, up 58% year-on-year and up 15% quarter-on-quarter. Strong performance of game-related item sales and digital content sales drove the year-on-year and quarter-on-quarter revenue growth. In the third quarter, the consolidation of China Music Corporation contributed over RMB 800 million to sequential revenue growth, of which over RMB 700 million was booked under the social network category. Our online game revenue was RMB 18.2 billion, up 27% year-on-year and up 6% quarter-on-quarter.
New smartphone games and strong performance of key PC titles contributed to the year-on-year revenue growth. Sequentially, PC games benefited from positive seasonality. Some of our big smartphone games, such as Honor of Kings and JX Mobile, delivered strong operating performances as well. Turning to social networks. For QQ, we added creative and fun features to enliven chat and community experiences. Specifically, we launched CM Show, a mobile QQ product that provides users with animated personal avatars. With these avatars, users can interact with their friends inside the chat box or collect items from friends to unlock new features. We conducted an augmented reality torch relay campaign for the Rio Olympic Games, and over 100 million mobile QQ users participated in the 22-day event. For Weixin, we're beta testing a new function called Mini Programs. Users will enjoy a native app-like experience conveniently without needing to leave the Weixin interface.
Consequently, they can reduce their phone CPU usage and phone memory storage requirements. For Weixin Pay, we significantly increased merchant adoption. On August the 8th, we launched our annual Cash-Free Day in many Tier 1 and Tier 2 cities. The total number of stores participating in this promotional campaign increased by over seven times year-on-year to almost 700,000. In September, we added Weixin Checkout, a feature that helps merchants simplify payments integration and reduce registration process time. By scanning a unique QR code assigned to each store, consumers can check out and pay quickly, while store managers can manage billing activities efficiently. Looking at PC client games, revenue grew 10% year-on-year and 9% quarter-on-quarter.
Daily active user accounts were down 9% year-on-year and stable quarter-on-quarter, while average concurrent user accounts for advanced casual games were down 18% year-on-year, and average concurrent user accounts for massively multiplayer online games were down 11% year-on-year. To put some color around these trends, increasingly fast broadband speeds are enabling more PC gamers to enjoy real-time player versus player games such as "League of Legends" and "FIFA Online," in which they alternate high engagement competitive sessions with low intensity practice review and game related chat sessions. Consistent with this migration in behavior, we're shifting our engagement focus away from maximizing user time spent in game and toward broadening overall user engagement via game related activities such as esports and tournaments, video streams of popular gamers, and game specific interest stripes within QQ and Weixin.
This shift in focus results in users spending less time passively sitting inside the game client, which naturally translates into fewer average concurrent users, since the average concurrent user metric measures total active users multiplied by average time spent in the game client per user. However, the shift is not necessarily reducing user engagement with our games or willingness to spend money on game items, and our PC game revenue increased despite the decline in average concurrent users. Ultimately, we believe this broader engagement model should result in healthier, more sustainable gaming relationships with our key products. Our smartphone games revenue reached RMB 9.9 billion, up 87% year-on-year and up 3% quarter-on-quarter. We were the number one ranked publisher in the iOS App Store top grossing chart globally, and also number one publisher in Android app stores inside China.
In the third quarter, we published two new casual games and three new mid-core games. Our player versus player competitive games and role-playing games continue to drive key metrics. "Honor of Kings" recently surpassed 40 million daily active users, which we believe is a usage record for mid-core games in China. Our recently launched role-playing games such as "JX Mobile," "YuLong Mobile," and "Zhu Xian Mobile" contributed materially to sequential revenue trends. We're cultivating an esports culture for mobile games through high profile tournaments for titles such as "CrossFire Mobile" and "Honor of Kings." Moving on to online advertising. Segment revenue was RMB 7.4 billion, up 51% year-on-year and up 14% quarter-on-quarter. Brand advertising revenue was RMB 3.1 billion, up 21% year-on-year and up 9% quarter-on-quarter.
Revenue grew year-on-year and quarter-on-quarter due to mobile news feed ads in the Rio Olympic Games. About 700 million unique visitors followed the Rio Olympic Games in our news and video platforms, cementing our position as the online leader in terms of sports related traffic and revenue. Our top 5 brand advertiser categories were food and beverage, automobile, online services, personal care, and consumer electronics. Performance advertising revenue was RMB 4.3 billion, up 83% year-on-year and up 18% quarter-on-quarter. Weixin advertising, including Moments and official accounts inventories, was the biggest contributor to the year-on-year and quarter-on-quarter growth. In September, we launched Nearby Ads that enable local merchants to promote their services and products to the most relevant users within 4,000 business hubs in major cities. The number of Weixin Moments advertisers increased by over 100% quarter-on-quarter.
In response to advertiser demand, we've been shifting some mobile news feed inventory from selling on a cost per time brand model to selling on a cost per click performance model. This has had the effect of reducing our brand advertising revenue and increasing our performance advertising revenue during the period. Now I'll pass to John to talk through our financials.
Thanks, James. Hello, everyone. For the third quarter of 2016, our total revenue was RMB 40.4 billion, 52% year-on-year or 13% quarter-on-quarter. Gross profit was RMB 21.8 billion, up 40% year-on-year or 7% quarter-on-quarter. Share of losses of associates and joint venture was RMB 619 million, an increase from RMB 292 million in the second quarter. On a Non-GAAP basis, share of losses of associates and JV reduced sequentially from RMB 206 million to RMB 107 million. Income tax expense was RMB 2.5 billion, up 57% year-on-year or down 11% quarter-on-quarter. Effective tax rate for the quarter was 18.6%. Net profit to shareholders was RMB 10.6 billion, up 43% year-on-year or down 1% quarter-on-quarter. After adjustment to Non-GAAP, operating profit was RMB 15 billion, up 43% year-on-year or 2% quarter-on-quarter.
Net profit attributable to shareholders was RMB 11.7 billion, up 42% year-on-year or 4% quarter-on-quarter. Let's turn to segment gross margin. Gross margin for VAS was 65.2%, up one percentage point year-on-year, reflecting a revenue mix shift to in-house gains. Sequentially, it dipped 1.5 percentage points, reflecting increased content amortization costs relating to our premium video subscription businesses and the consolidation of China Music Corporation. Gross margin for online advertising was 36.3%, down 12.6 percentage points year-on-year, and nine percentage points quarter-on-quarter. Increased investments in video content was the primary reason behind the margin contraction. Moving on to operating expenses. Selling and marketing expense was RMB 3.3 billion, up 60% year-on-year, or 39% quarter-on-quarter. The year-to-year jump reflected our aggressive marketing efforts to promote mobile apps preloads, to drive mobile payment adoption, and to promote our cloud services.
Sequentially, marketing expenses for games, mobile news, and video services were the main drivers. Total G&A expense was RMB 5.9 billion, up 34% year-over-year, or 11% quarter-over-quarter, within which R&D expense was RMB 3.2 billion, up 29% year-over-year, or 15% quarter-over-quarter. The year-over-year and sequential increase reflected staff costs relating to our organic businesses. We had just over 38,000 permanent employees at quarter end. University recruitment, CMC consolidation, and one-off recruitment of some outsourced manpower who previously engaged in our customer support work contributed to the sequential increase in headcount. As a percentage of quarterly revenue, selling and marketing expense was 8% and G&A was 15%. R&D represented about 8% of quarterly revenue, while share-based compensation was approximately 3%. Looking at margin ratios for the third quarter, gross margin was 54%, down 4.6 percentage points year-over-year, and 3.3 percentage points quarter-over-quarter.
The combined effect of online advertising gross margin decline and bigger contribution from other segments drove year-over-year margin decline. Sequentially, pull through from lower VAS and online advertising gross margin, as well as bigger contribution from other segments were the main reasons. Non-GAAP operating margin was 37.2%, down 2.3 percentage points year-over-year, or 4 percentage points quarter-over-quarter. Non-GAAP net margin was 29.5%, down 2.3 percentage points year-over-year and 2.7 percentage points quarter-over-quarter. Finally, let me provide a few key financial numbers for your reference. Total CapEx was RMB 3.7 billion, up 121% year-over-year, or 143% quarter-over-quarter. Operating CapEx was RMB 2 billion, up 76% year-over-year and 97% quarter-over-quarter. We purchased more servers and network equipment to support business growth, such as cloud-based services. Non-operating CapEx was RMB 1.6 billion, up 228% year-over-year and 245% quarter-over-quarter. We added RMB 1.2 billion for land use rights.
Free cash flow was RMB 14.1 billion, up 113% year-over-year or 45% quarter-over-quarter, reflecting strong cash flow generated from our operations, especially online games during the positive season in the third quarter. Our net cash position at quarter end was RMB 8.4 billion, down 61% year-over-year and 65% quarter-over-quarter. The decline was primarily relating to the acquisition of Supercell, which we were funding investment with a combination of cash and debts. In July, we made a cash prepayment of $3.7 billion, or approximately RMB 24.7 billion, and subsequently, we recouped approximately $1.2 billion in October, which is approximately RMB 8 billion. Fair market value of our listed associates and AFS financial assets amounted to approximately RMB 94 billion as at quarter end. Thank you. We shall now open the floor for questions.
Thank you. We will now begin the question-and-answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel a request, please press the pound or hash key. Our first question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.
Good evening. Thank you for taking my questions. I have a question on some of your cost items. Just wondering if you could share more color on the trend of sales and marketing expenses as well as headcounts going into the future. Particularly, if you are investing more for certain opportunities, what are some of the key areas that you pay extra attention to? Just a housekeeping question, would be great if you could update us on, number 1, your mobile game pipeline, and number 2, the ARPU of different types of games. Thank you.
Yeah. Thanks, Eddie. In terms of sales and marketing, I think we continue to invest pretty heavily in a number of our strategic products. Obviously, the first one is around games. Games is our largest business segment and the marketing of games actually, especially sort of new games, can generate good ROI if the game is of good quality. The sales and marketing pattern is more around the launch of new games. In certain areas, such as new MMORPGs, there needs to be continued marketing to attract the core users.
The other large area of sales and marketing really goes into our payment business, as well as our mobile app installation, because we now own a large number of high DAU apps, and as a result, we actually continue to market these apps, especially in working with handset manufacturers as well as app stores to get these apps distributed to the users. The other one that I think John mentioned in his prepared remarks is on the cloud business, which we are really opening up a new market segment, which is around enterprises, and that's why we are spending in the marketing expenses.
Now, in terms of headcounts and our human expenses, I think the overall approach is that we try to control the number of our people, but we continue to enhance the quality of our overall team, as well as we continue to pay competitively in the market and reward our employees when the company is actually achieving great results. That's the overall philosophy.
Yeah. Also in terms of the headcount, perhaps you might feel that the increase was so significant this quarter versus last quarter, but as I mentioned before, this is a special quarter because we have the new fresh graduates. We have the consolidation of the CMC as well as converting some of our outsourcing functions, such as customer support to be handled by our own permanent staff. In relation to the ARPUs, for MMOG, it is between RMB 310-RMB 450. Advanced Casual Games was between RMB 85-RMB 370, and the Smartphone Games is between RMB 145-RMB 155.
Thank you.
Next question, please.
Thank you. Our next question comes from the line of Yoshimichi from Goldman Sachs. Please ask the question.
Thank you. We observe that Supercell's games have risen back to the top of the charts, displacing games that were popular a quarter ago. From a Tencent perspective, when and how does Supercell impact the P&L? Also, is there going to be a specific strategy you'll deploy for Supercell games as and when they get launched in China? Second is related to the tripling in the cloud number that you've reported this quarter. Could you give us a sense of what the numbers are looking like, as well as what % of the dip in gross margins can be attributable to potentially the cloud business or the payment side? Thank you.
In terms of Supercell games, well, thanks for your observation. I think, yes, we're very glad to see that the games of Supercell actually returned to the top of the chart. I think it's actually consistent with our long-term view of Supercell, which is that they create very exciting games that actually can be played by people, large number of people for a long time. I think part of it is also as we continue to exchange knowledge about how to design the commercialization of the games and how to actually attract more people to pay for the games, they have actually achieved better monetization on the games. Now, with respect to the accounting, Supercell is going to be accounted for through the dividend method. For this year, I don't think there's going to be any dividend distributed.
That's why it's not gonna make a meaningful contribution to our earnings for a while. Now, with respect to the cloud business- I think if you look at the others category, you can see the gross margin has improved quite significantly. It's around 18% now. We have also talked about the fact that we are investing very heavily in the marketing of the services for both payment and cloud. There's also a large team of people who are actually working on these products. If you count in the overhead, if you count in the marketing expenses, I think these expenses are very significant compared to the gross profit. That continues our theme around these services, which is we view the payment business, the cloud business as infrastructural businesses, services for our overall ecosystem. It's beneficial for our own services.
It's beneficial for our partners and our services. That's why we're willing to take a very long-term view and to continue to invest in these businesses, despite the fact that it may not be profitable for the time being. We felt that they are very beneficial for our ecosystem going forward and can enhance the value of our overall business portfolio. That's sort of the kind of philosophy that we're attaching to these businesses for the time being.
Thank you, Martin.
Thank you. Our next question, please.
Thank you. Our next question comes line of Alan Hellawell from Deutsche Bank. Please ask your question.
Great. Thank you very much. Sorry, just a follow-up question on payment. Was wondering if you could offer some more color on the GMV mix between non-monetizing payments and B2C payments, and how that mix is likely to shift over time. If we reference some of the publicly listed pure play payments companies, which seem to have operating margins in the low 20s, I'll take on board Martin's comment that this is a strategic part of the company, but how do we think about profitability emerging if we have those mile markers already? Then would love a little more detail on the quarter-on-quarter decline in advertising margin. I guess related to that, any color on how the video market is evolving, particularly if it's different to original expectations. Thank you.
In terms of payments, I think we can't give you the exact GMV, but I would say we look at it from both angles. We look at it from sort of the number of transactions. We do handle hundreds of millions of transactions a day. Out of that, I would say a big proportion of it is actually in the category of social payments, which include Red Packet, which also include the transfers among consumers. At the same time, we're seeing also a significant amount of transactions that are business-oriented, and these transactions include our own transactions, for example, game transactions. It includes a lot of the online merchants transactions that would include DiDi and JD, and Meituan Dianping as well as people who use our platform to top up their cell phone.
There's an increasing number of transactions which are actually conducted by offline merchants. So you have the KFC, the McDonald's, and the supermarkets, and the convenience stores who are actually now receiving payment through WeChat and QQ Wallet. At the same time, we are also seeing even smaller merchants where they can actually use a QR code and get paid, and so that they can use our face-to-face payments to effect transactions. I would say there is a large number still, a predominant number of person-to-person social payments. But in terms of growth rates, the commercial transactions are actually growing faster in terms of growth rate. I think James will talk about our video and advertising business.
For the advertising gross margin, there are positive factors and negative factors. In this quarter, the negative factors are more obvious. On the positive side, there's the growth in social performance advertising, which tends to be relatively high gross margin because it's on our own social properties. And there's the rapid growth more recently of news app advertising, which is also relatively higher margin. On the negative side, there's specific kind of cost-heavy events during the quarter for video, notably The Voice of China or Sing! China competition and the Olympics. And then there's a more general trend of video content costs increasing extremely rapidly due to a relatively competitive environment. You asked whether the video environment is evolving as we would have thought or differently from what we would have thought?
It's evolving pretty much as we would have thought, but perhaps even more swiftly in terms of the shift from being a primarily advertising-funded model toward consumers being willing to pay for subscriptions. And our video team recently disclosed we have about 20 million people now paying for subscriptions, up from under a million a couple of years ago. That shift overall, we think is positive in the long term, but it's not without its costs. And one of the costs is that as more and more users pay for the premium video service in China, there's a history where once you pay for these premium video services, as well as having access to premium content such as Western movies or Chinese TV series, you also don't watch ads.
The increased take-up of premium video subscriptions has a negative impact on the industry's total advertising inventory load. That's what's happening in the online video market in terms of competition margins and the shift from an ad funded to an ad plus subscription funded model.
Yeah.
I'm sorry, James.
Go ahead.
Yeah, sorry. As I recall, I think there was a quintupling in the number of either P4P or WeChat-based advertisers in the June quarter over March. Could you guys also update us on what kind of growth you've seen in the number of P4P advertisers quarter-on-quarter?
I think we disclosed the total number of Weixin Moments advertisers more than doubled quarter-on-quarter. That would've been driven primarily by what you refer to as the P4P advertisers.
Got it. Thank you.
Yeah. I actually missed sort of answering your question about payment margins, right? I think what you're seeing in the listed payment companies is actually sort of operating in the U.S., I suppose. The environment is actually very different. Payment is actually quite a local practice and is also the regulation driven business in the sense that if you look at credit cards in the U.S., they get paid 300 basis points, or thereabout, but in China, credit cards get paid a fraction of that. I would say in China, the situation for online payment is similar in the sense that it's actually a more competitive market. If we're dealing with captive business, if for example you have a captive e-commerce business then the kind of margin is different.
If the commercial transactions is actually out there competing by having two large payment platforms, I think the pricing is actually very competitive. Marketing is actually competitive. That's why I feel that we should be looking at in the medium term of our payment business as more like an infrastructure business for the entire ecosystem rather than a business that will generate profit.
Understood. Thank you.
Thank you, Alan. Next question, please.
Thank you. Our next question comes line of Alicia Yap from Citigroup. Please ask your question.
Hi. Good evening, management. Thanks for taking my questions. I have 2 questions. Number 1 is related to the overall mobile games industry for the third quarter. Wanted to get a sense, was the revenues that you achieved meeting your internal expectation? Was there any seasonal effect for the industry as a whole for the 3Q? Is there any lack of new games launch, or was that other social activity that might have taken away some of the user time spent? In related to that, for mobile games, if you could share with us some of your user analysis, for example, on average, how many games a single user usually play during the same period? If you have data, for example, on percentage of gamers who play 2 to 3 games, gamers who play maybe only one games, and maybe gamers that play more than 3 games.
I think in terms of the mobile game business performance versus our expectations in the industry, we disclosed our mobile game revenue grew over 80% year-on-year. I think you can assume that we're fairly happy with 80-something% year-on-year revenue growth.
From a quarter-on-quarter perspective, the trends get bounced around by the timing of specific new games, the timing of monetization events within games and so forth. We tend to look more at longer time periods and at year-on-year comparisons rather than very short-term comparisons, because otherwise we'd be kind of continually chasing our tails.
In terms of the user analysis, one appealing trend about our mobile game position this year has been that we've seen quite a nice uptick in the number of people playing our mobile games, as measured by DAU, for example. We have well over 100 million daily active users from mobile games. That number's increased quite substantially year-to-date. We think that that puts us in a very strong position in the industry where our leadership in revenue is balanced by actually a wider leadership in terms of usage. I think that the sort of median would be that the users would be playing sort of 2 games or so on a regular basis, although there's obviously a very high degree of dispersion around that median.
I see. Very helpful. My next questions is related to payment. I think you mentioned on the press release that you attracted 700,000 merchants to participate on that promotion day in August. Just could you elaborate a bit of the backgrounds of these merchants, for example, the industry vertical, the size of their business, and also maybe average numbers of payment transaction that they received during that day of their promotions? In related to that, also noticed you have gradually introducing On various payment scenarios for the Hong Kong WeChat Pay feature. Wonder if management could share your strategies and thoughts about expanding your payment service into the overseas market. Thank you.
Yeah. In terms of the cashless pay, right? I think this is a sort of a way for us to raise the awareness among the merchants on getting their customers to use WeChat Pay and QQ Wallet. The 700,000 merchants are actually sort of pretty widely distributed sort of across different industries that include, as I said, convenience stores and sort of food and beverage outlets and supermarkets, to name a few of those. I would say the result is actually sort of quite good, despite the fact that we did spend quite a bit of money in terms of subsidizing some of these payments. What we actually usually look at is how many of the converted users actually sort of continue to use the mobile payment services afterwards, right?
We found that sort of there's a pretty high rate of users once adopting this payment solution, then sort of continue to use it on an ongoing basis. We are very pleased with that result. Now, in relate to the Hong Kong expansion, I would say sort of it's obviously sort of important long-term strategy for us to serve different markets. I think the first group of users that we definitely want to serve is actually the people who are traveling, China people who are traveling outside of China, right? When they're traveling overseas, we actually want to allow them to be able to pay with WeChat Pay and QQ Wallet. Then, we will look at expansion into selected local markets, I think on a much more cautious basis. Now Hong Kong is a market which serves both purposes, right?
One is, there are a lot of Mainland Chinese who are traveling to Hong Kong on a continuous basis. A lot of Hong Kong merchants actually sort of would welcome the adoption of a coverage of WeChat Pay. At the same time, we have a pretty large user base in Hong Kong for WeChat.
As a result, we would like to be able to serve them with our payment services. Having said that, I think sort of the regulatory environment, as I said, sort of for each one of the markets, right, is actually very different and sort of the practices of financial institutions are actually quite different. Right now, for example, in Hong Kong, there are only a limited number of banks who can actually allowed us to have the kind of experience in China where you can just bind a banking card to the WeChat and QQ account. If you actually have to use credit card for the payment, right, then a lot of the social payment actually sort of is very difficult because the transaction cost is actually high.
Also sort of the credit card companies do not like to move cash. I think Hong Kong will continue to cover our services, but the kind of dynamics is actually quite different from China.
Okay, great. Thank you.
Thank you, Alicia, for your questions. Our next question, operator, please.
Sure. Our next question comes line of Wendy Huang from Macquarie. Please ask a question.
Thank you. Currently, you are lumping the payment and cloud revenue together in the others. Can you give us some color which part contributed to the bigger portion of the other revenue? Also the gross margin 18% you reported for this segment, is this margin expansion more driven by the payment or more driven by the cloud? Related to that, I also noticed that there is an accounting change on your restricted cash, which I believe is related to the RMB 125 billion on your WeChat payment platform. You mentioned in your press release, this is because some of the operating environment change in the PRC. Can you maybe share what kind of operating environment change in the payment or internet finance space trigger you to make this change? That's my first question on the payment and cloud. Thank you.
Let me answer the question regarding the restricted cash first. I think from time to time, there has been guidance being promulgated by relevant authorities in relation to cash hold on behalf of your customers. I think during the third quarter, there has been some guidance that talks about that. As a result, we make some changes to the customer agreement in terms of the payment business. As a result, the related asset, which is the restricted cash, as well as the liabilities have been made off balance sheets. Anyway, it hasn't got any impact on the net asset as a whole, because anyway, we have the corresponding liabilities in there beforehand.
I think for this, we have made clear that the restricted cash does not belong to us.
Yeah. In terms of others, Payment is the bigger portion. In terms of the pickup in gross margins, Payment is also the higher contributor. Part of it is our charge on people's withdrawing cash. It start to really come into full force. The other one is that, as you see, when we launch a lot of promotions, in terms of Cash-Free Day, in actually induce a lot of transactions on the offline merchants. For those, we actually generate revenue as well as some gross profit. Of course, accompanying that is actually an increased amount of marketing expenses.
Thank you. My second is-
Maybe next, we should leave this to other-
Wendy, we'll put you back on the queue for the second round of questions, okay?
Sure. Thank you.
Thank you.
Yeah, next question, operator, please.
Sure. Our next question comes from the line of John Choi from Daiwa. Please ask the question.
Good evening, thanks for taking my question. My question is on your new initiative on the Mini Program. Could you guys share with us the latest progress on the beta testing, including the developers' feedback, and when do you expect to launch and how you plan to monetize it? Is it fair to say this is the major purpose is to increase the user engagement within the Weixin users? Secondly, a follow on your content side, content investment. What is the plan for next year on the investment side, and how will this further impact your margins on the advertising side? Thank you.
Our Mini Programs, we're still in the beta testing. There are several hundred developers who are now developing Mini Programs, and we are doing the testing. In the next version of Weixin, it will support the Mini Program. In terms of the feedback, we have to see. From a technical perspective, the goal for us is actually, for Mini Program to provide, to some extent, an upgrade experience from our official accounts. Official accounts, if you look at it's actually a media and content type of platform. Whereas Mini Programs actually provide much more flexibility for the developers to develop their services into the Weixin platform. It will help the service to actually run like a native app with much faster speed.
It would actually allow a lot of services which we believe are hard to induce people to download an app. These are, a lot of times, infrequently used services. If you have the Mini Program, the users when they want to use the program, when they need to use the service, they can actually access the service very quickly. Some of these may be merchants offline, they can actually promote these Mini Programs, and some of the developers may be online operators, but their services are infrequently used. If users want to search for their services and then use it immediately, they can actually do that. That was the goal of Mini Program. We'll have to see how many developers would develop the programs and how would these be received by the users.
What we want to do is actually provide a platform so that more creativity can be put into the Weixin platform.
In terms of video content costs, I think it will come as no surprise to you or anyone else that the industry is experiencing very rapid content cost inflation, particularly for certain categories of content, such as high-profile TV drama series from both China and Korea. We've accordingly been expecting modeling for a very sharp increase in our video content costs as we move from 2016 to 2017, and some of that would already be locked in because of the need to pay for content ahead of screening. The increase in content costs naturally flows through into downward pressure on our video and our online advertising margin structure. The extent of that downward pressure naturally depends on how much we offset via video advertising growth and video subscription revenue growth.
Thank you. Next question, please.
Thank you. Our next question comes from the line of Alex Yao from JP Morgan. Please ask the question.
Hi. Good evening, everyone. Thank you for taking the question. I have two question. One is on gaming side. Can you guys discuss where and how will you deploy augmented reality, AR technology to your gaming content, and how should we think about the impact from introduction of AR on gaming engagement and monetization? Secondly is on the performance ads. Can you comment on the ad load of Moments and Qzone? We understand that you guys are prioritizing on the harder part of ad infrastructure such as technology, distribution, et cetera. What will make you comfortable to release more inventory, and when would that be? Thank you.
In terms of AR, I think it's actually very early technology, right? The industry is actually sort of testing it out, both VR and AR. I think we are quite some time away from these technology being used in big user games. I think with AR and VR, and particularly VR, we felt this is more like a deep, immersive type of gaming experience. It would appeal to people who are now the console or PC game players who want to have a much more immersive experience. We need to have the developers who can develop these games. I think it's unlikely in the near future that we will see large DAU games coming in the form of either AR or VR. Pokémon GO, you may say, oh, it's an AR game, but we don't think it's core to the user experience.
Yeah. It's more like an LBS type of game. I think that would be some time to go. Performance ads, maybe James, you want to talk about that?
Yeah. As you're aware, we have, I think, a very moderate ad inventory load on Qzone and an even more moderate one ad per day ad inventory load on Weixin Moments. I think our focus is less on increasing that ad load and more on providing better tools, providing better performance measurements, and so on, so that we can utilize the existing ad inventory more efficiently. If you look at the growth in our performance advertising revenue year-to-date, a great deal of it has been driven by us utilizing the existing Weixin Moments ad inventory increasingly efficiently, particularly by allowing smaller advertisers, more local advertisers to buy more targeted slices of consumer attention in 3 and 4 tier cities. We have plenty of room to increase ad inventory at the right time.
If you compare the ad inventory on our properties with those of our peers globally, or even if you compare the ad inventory on our social properties with the ad load on news apps in China, there's a very substantial gulf. That's something we can sort of hold in reserve for the future and for the present. We're really focused on the tools, the performance measurements, and on increasing the raw number of advertisers who are participating in the performance bidding.
Thank you. Operator, in the interest of time, we'll take the last three questions, please.
Sure. Our next question comes from the line of Chi Tsang from HSBC. Please ask your question.
Great. Thank you very much. I wanted to ask you a little bit about brand advertising. What do you think the current demand outlook might be for brand advertising for next year? Also, I wanted to know if you can add a little bit more color regarding the shift in the news feed revenue from CPT to pay for performance in terms of maybe the magnitude of that shift. Thanks so much.
On your second question about the magnitude of the shift, we're quite conscious about what we call out in the commentary. You can assume that it was of sufficient magnitude that we felt it ought to be called out. I think it reflects some interesting trends. One is that traditionally brand advertisers are increasingly adopting a performance mindset. A second is that the growth of news aggregator services like, perhaps Headline Today or Jinri Toutiao that monetize more aggressively than we might have done in the past, has illustrated that there is very great performance advertiser demand to put their ads into a sort of a news-driven news feed environment. I think that's partly because of the nature of smartphone screen versus PC screen, that on the smartphone screen, you're kind of trained to continually scroll, click, scroll, click, scroll, click.
That lends itself very well to performance advertising that's paid on a cost per click basis, in a way that it didn't necessarily lend itself for a Yahoo homepage on the PC. There's been a fairly substantial shift driven really by advertiser demand as opposed to our supply decisions away from brand and toward performance advertising within particularly our news app and also some of our other services. That's part of the reason why you have seen the divergence in growth rates between very fast performance advertising revenue growth on the one hand, and decelerating brand advertising revenue growth on the other. In terms of the brand advertising outlook for next year, historically, we don't have a great deal of visibility until we enter the annual commitment process in December, January.
Overall, it's clearly a relatively weak economic environment, and there are specific pockets of additional weakness, whether due to government regulatory policies such as real estate I think for Tencent, we believe that the pattern of performance advertising growing faster than brand advertising will certainly continue in 2017, while brand advertising will have to grapple with these macro headwinds as well as specific factors, such as advertising inventory moving from brand to performance and the trend I mentioned in video of consumers paying for subscriptions and then enable them to skip the brand advertising.
Thank you.
Thank you. Next question, please.
Thank you. Our next question comes from the line of Evan Zhou from Credit Suisse. Please ask the question.
Hi, good evening. Thank you for taking my questions. My question is regarding our core products user engagement. I noticed that there is a slight decline quarter-over-quarter on our QQ product, especially on the smart device MAU also came down even a little bit larger than the overall MAU for QQ. Also Qzone, quarter-on-quarter MAU went down as well. I was wondering, is there any kind of seasonality impact or any specific product feature changes that is making this a move? What do you see as kind of the overall outlook for our, relatively speaking, more legacy product lines such as QQ and Qzone? Thank you.
Yeah, I think on the social products, we look at it from two different angles. The first one is actually sort of overall user base and engagement across our platforms, because there are a sort of pretty significant number of people who are actually using both QQ and WeChat. I think for us as a company, we tend to look at sort of whether we are increasing the total number of users using both QQ and WeChat and whether sort of the users are using our platform on a more frequent basis. I think the answer to both of the two questions is actually yes. The second perspective that we looked at is actually sort of are we covering the different segments of people with some kind of dedicated and specialized products.
I think if you look at the user base where sort of people use either QQ or WeChat, I would say QQ now is actually increasingly popular among the young cohorts, the young users. Obviously, QQ continues to be sort of very strong with users who are using sort of office workers when they are in office, when they are sitting right next to a computer, when they need to send very large files, and communicate with other users, other workers, coworkers, and sort of QQ is the preferred product. With these two group of users, I think QQ's engagement is still very high, particularly with respect to the young users. It is actually sort of increasing the adopter by the young users at a younger age.
I think overall, we are actually pretty happy to see the overall portfolio is actually engaging with more users with higher frequency of engagement, and at the same time, each product is actually sort of pretty successful in covering the differentiated user base as well.
Got it. Thanks, Martin.
Thank you. Operator, we shall take our last question, please.
Thank you. Our last question comes from the line of Natalie Wu from CICC. Please ask the question.
Hi, thank you for taking my question. Just a quick question. What's the split of brand ad format and performance-based ad format in terms of mobile news revenue? What's the current revenue split among Tencent News app and Tian Tian Kuai Bao? Thank you.
Well, right now, the revenue on the news side is actually predominantly Tencent News. Tian Tian Kuai Bao is actually a relatively new product. We actually sort of want to focus on improving the user experience. That's why as you look into the app, the ad load is actually relatively small. I think there is a potential to have sort of a meaningful ad load on Tian Tian Kuai Bao going forward, but sort of for the time being, I think we're much more focused on the user experience.
Natalie, sorry, I didn't catch the first part of your question.
Yeah, I think that for your mobile news app revenue, you just split that into brand advertising and performance-based advertising, right? I just want to get some color about the split. Every RMB 100 you get from your mobile news app, how much will you recognize into the brand advertising and how much-
Roughly, it's been changing very quickly. As of Q3, it was roughly two-thirds brand, one-third performance. If you go back a year and a half ago, it would have been 90% brand, 95% brand. It's in flux. For the reasons I mentioned, that the overall industry is changing, the advent of new news aggregator services that have driven performance advertising very aggressively, monetized at very high rates, has sort of unlocked the door to performance advertisers being willing to advertise much more in a news-driven, news feed environment.
Understand. Thank you.
Thank you very much for your questions, and thank you, operator. We're closing the call now. If you wish to check our press release and other financial information, please visit our company website at www.tencent.com/ir. A replay of this webcast will also be available soon. Thank you and see you next quarter.
That does conclude our conference call today. Thank you for participating. Tencent Holdings Limited 2016 third quarter results announcement conference call. You may all disconnect now.