Thank you for standing by. Welcome to the Tencent Holdings Limited 2016 second quarter and interim results announcement conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by the question and answer session. If you wish to ask a question, you will need to press star one on your telephone and 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 would now like to hand 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 second quarter interim results conference call. I'm 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, including but not general market conditions coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and non-GAAP measures, please refer to our disclosure of above documents downloadable 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 speak to business review. John will go through the financials before we take your questions. I'll turn the call over to Pony now.
Thank you, Catherine. Good evening. Thank you for joining us. In the second quarter of 2016, we delivered robust growth in established businesses such as mobile games and social-based performance ads. We have also deepened user engagement for our existing businesses, such as digital content and online payments. While we continue to invest in early-stage activities, including video content, cloud services, and Internet finance, we are generating healthy margins and profitability on a blended basis. Specifically, total revenue was RMB 35.7 billion, up 52% year-on-year and 12% quarter-on-quarter. Non-GAAP operating profit was RMB 14.7 billion, up 42% year-on-year and 9% quarter-on-quarter. Non-GAAP net profit to shareholders was RMB 11.3 billion, up 42% year-on-year and 13% quarter-on-quarter. Moving to our online platforms, total MAU for QQ increased 7% year-on-year to 899 million, with 667 million of the monthly active users logging via smart devices.
Combined MAU of Weixin and WeChat increased 34% year-on-year to 806 million. For our social network, Qzone, smart devices MAU increased 4% year-on-year to 596 million. In games, we expand our user base and revenue in smartphone games through our broadened portfolio of casual RPG and player versus player titles. We retain a clear industry leadership in PC games. In media, we saw healthy growth in users and impressions for our news and video platforms. Digital content subscriptions for video and music services also increased. We recently merged our music business with the China Music Corporation, and believe the combined company can help to improve the overall digital music market in China. In mobile utilities, we maintain market leadership in mobile security by expanding our cooperation model to international handset brands such as Apple and Samsung. Our leading mobile browser records healthy growth in users and page views.
For our app store, Yingyongbao, we enhance app discovery by providing users with deep link app content. I now invite Martin to discuss strategic highlights.
Thank you, Pony, and good evening, good morning to everybody. An important strategic focus area for us is our content businesses. In this section, I'll give you an update on our ecosystem for content businesses. From an industry perspective, we believe three major forces are contributing to the evolution of a healthy ecosystem over time. Firstly, regulators and industry players have been working closely to improve IP protection and strengthen anti-piracy enforcement in the past few years. Secondly, mobile internet connectivity and smartphone adoption are making content consumption ubiquitous. Thirdly, revenue models are evolving from advertising only to hybrid freemium models with subscriptions, transactions, as well as advertising. This, in turn, incentivize content creators and publishers to provide more and better content sooner to the users. For us, Tencent, we act as a driving force for industry change, and we are also a major beneficiary of the industry change.
We can satisfy the growing appetite of our large user base with diversified quality content. Secondly, we serve as a strong distribution to content creators as well as publishers, leveraging our extensive user reach and social graph. Thirdly, we facilitate digital content purchases via Weixin Pay and QQ Wallet. Fourthly, we recommend content and display ads to users based on our proprietary targeting technology. Fifthly, we own multiple media platforms, and thus can unlock the synergistic potential of a well-known IP across literature, games, video, and music platforms. Now, in addition to organic business execution, we also pursue strategic transactions on a selective basis. In the next two slides, I will discuss two transactions that will strengthen our alliance with ecosystem partners. The first one I would like to discuss is the merger between our QQ Music business and China Music Corporation, CMC.
Kugou and Kuwo under CMC and QQ Music are highly popular online music streaming platforms in China. As part of this transaction, Tencent will have a controlling stake in the merged company, and will consolidate financials. We'll appoint the majority of directors to the board, and key executives from Tencent and CMC will join force in managing the platforms and products. The merged company would focus on providing authorized music and superior experience to users, helping artists to reach more fans, and support record labels to drive new business models. We believe digital music business is a strategically attractive vertical for our content business. According to IFPI, the record label reported declining global revenues in the past 15 years due to declining CD sales. Since 2005, global revenues began to recover as the consumers subscribed to streaming services. The global music business is at a turning point.
Particularly in China, music is among the top five internet activities by users, but the market is very small from a revenue perspective. Leading music streaming platforms like us are serving large user base, but generating small revenues due to piracy, which is not good for artists and creative people. Through close cooperation with regulators and like-minded industry players, we believe the merged company will create a more healthy dynamics for the overall industry, which will benefit everyone as a whole. In addition to the music company, we also made a significant substantial investment in Supercell during the quarter. Supercell is the world's largest standalone mobile games company with a proven track record in developing games that can deliver innovative gameplay and long life cycles. We are extremely excited about Supercell joining our global network of game partners.
With this transaction, we are empowering the founders of Supercell to manage the company independently. In China, we leverage our social graph and platform distribution capabilities to help their games further popularize among experienced and core game users. In terms of financing for the transaction, we will co-fund the investment with lenders and consortium investors under an SPV structure. This way, we can achieve optimal capital efficiency for us and also allow Supercell founders to have the autonomy to drive the company forward. We expect to adopt dividend accounting for our significant stake in Supercell. In terms of strategic benefits, the transaction is highly strategic for Tencent's gaming business. According to Newzoo, mobile games now represent over 30% of global games revenue, and it's also growing rapidly. China is the biggest mobile games market in the world, where Supercell has already achieved good results.
In our view, has got even greater potential with the help of Tencent. As the top two players in the world by revenue, Supercell and Tencent can join force to build an even stronger presence in the market. Both of us are pioneers in real-time player versus player games, which is a big hit in China, and also gaining popularity globally. We're committed to delivering innovative and best-of-breed game experience to users worldwide. With that, I'll pass to James to talk about our business review.
Thank you, Martin. In the second quarter of 2016, our total revenue grew 52% year-on-year. VAS represented 72% of our revenue, within which online games contributed 48% and social networks 24%. Online advertising was 18% of our revenue. The other segment, for the first time, reached 10% of our total revenue. Other revenue includes payment-related services, cloud services, some e-commerce transaction, and other activities. Looking at value-added services, segment revenue was RMB 25.7 billion, up 39% year-on-year and up 3% quarter-on-quarter. Social network revenue was RMB 8.6 billion, up 57% year-on-year and up 9% quarter-on-quarter. The robust growth was driven by increased revenue from game-related item sales and from digital content sales. Our monthly subscription count grew 25% year-on-year to 105 million.
It decreased 3% quarter-on-quarter as we restricted parallel distribution of our subscription services through somewhat lower margin distribution channels. Our online game revenue was RMB 17.1 billion, up 32% year-on-year and stable quarter-on-quarter. The smartphone games, our player versus player games and new role-playing games drove both the year-on-year and the sequential revenue growth. For PC games, several existing and newer mid-size titles contributed to the year-on-year growth, revenue dipped quarter-on-quarter during the weak period in the second quarter. Turning to social networks. For the QQ, we added a number of new features and services catering to young entertainment-driven users, thereby improving the overall engagement. Specifically, we enhanced chat experiences with a new video function. Users can create video GIFs of themselves, decorate the GIFs with animated stickers, and share the GIFs with friends.
Within school groups, we provide third-party online educational content such as question banks, which help students and teachers enhance their efficiency and increase their engagement with our platform. We launched a UGC live streaming service called Now that enables users to record videos of interesting events and of their daily life. Users can distribute this video to a broad audience via the standalone Now app or share the video with selected friends via Qzone. For Weixin, more companies are adopting enterprise accounts, which provide a built-in infrastructure supporting staff to manage work process flow, such as claiming expenses or applying for leave. Over 20 million office workers are now users of these enterprise accounts. We expanded our municipal services to third-tier cities, we launched e-loyalty cards within Weixin Pay that merchants can issue to their customers in lieu of physical loyalty membership rewards cards.
Weixin Pay experienced rapid growth in users, particularly in people using Weixin Pay for everyday commercial transactions. Looking at PC client games in more detail, average concurrent users for advanced casual games were 7.4 million, down 9% year-on-year, and average concurrent users for MMOGs were 1.5 million, up 2% year-on-year. We're doing several things to engage core users with our PC game platform. For example, in April, we released a new game mode for League of Legends in China. User activity on our sports games, FIFA and NBA 2K, benefited from excitement around the UEFA Champions League and the NBA Finals during the quarter. We're using our action RPG, DNF, as a test case in developing our IP strategy by releasing Dungeon & Fighter-themed comics, literature, music, and later, a mobile game. We added a new game this quarter in the combat genre.
War Thunder is set in World War II and enables gamers to fight with tanks and aircraft. Our smartphone game revenue reached RMB 9.6 billion, up 114% year-on-year and up 17% quarter-on-quarter. We continue to lead China's iOS top grossing game chart, publishing six out of the top 10 titles. In the second quarter, we published three new casual games and four new mid-core games. We believe our smartphone game portfolio benefits from publishing a range of game types. Specifically, our casual games play a key role broadening the gaming audience. The rapid success of our new casual titles, such as Carrot Fantasy 3, as well as the ongoing popularity of our existing casual titles, such as Cool Run Every Day and Fight the Landlord, drove our overall smartphone game daily active user count up materially this quarter.
Our big player versus player games, such as Honor of Kings and CrossFire Mobile, generate both large DAU counts and substantial revenue. For example, Honor of Kings has over 30 million daily active users but is also one of the top revenue games on Android in China. Our role-playing games, in common with role-playing games elsewhere in the industry, generally achieve smaller DAU bases but contribute disproportionately to revenue, especially on iOS. During the last few months, we've released several new role-playing games, including Zheng Tu Mobile, JX Mobile, and Dragon Ball Z Mobile. Moving to online advertising, segment revenue was RMB 6.5 billion, up 60% year-on-year and up 39% quarter-on-quarter. Brand advertising revenue was RMB 2.8 billion, up 41% year-on-year and up 31% quarter-on-quarter. The year-on-year growth was mostly driven by increased traffic and thus mobile ad impressions, particularly in our news app and our video app.
The quarter-on-quarter growth reflected positive seasonality. Our video traffic sustained healthy expansion rate, especially for TV drama series, web-native videos, and sports. For example, the number of unique viewers in China for NBA games more than doubled year-on-year to over 100 million. Our top five brand advertiser categories this quarter were online services, food and beverages, automobiles, online games, and personal care. Our performance advertising revenue was RMB 3.7 billion, up 80% year-on-year and up 46% quarter-on-quarter. The key driver of the growth was Weixin Moments. Supported by the launch of our self-service advertising platform in the first quarter, we were able to bring many more regional advertisers on board and increase the utilization of city-level traffic inside Weixin Moments. In addition, in Qzone, we launched carousel ads, which contributed to new ad impressions and more revenue. I'll now pass to John, go through the financials.
Thanks, Shane. Hello, everyone. For the second quarter of 2016, our total revenue was RMB 35.7 billion, up 52% year-on-year or 12% quarter-on-quarter. Gross profit was RMB 20.5 billion, up 42% year-on-year or 10% quarter-on-quarter. Share of losses of associates and joint venture was RMB 292 million in the quarter. On a non-GAAP basis, it was approximately RMB 206 million. Income tax expense was RMB 2.8 billion, up 51% year-on-year or 9% quarter-on-quarter. Effective tax rate for the quarter was 20.4%. Net profit attributable to shareholders was RMB 10.7 billion, up 47% year-on-year or 17% quarter-on-quarter. After adjustment to non-GAAP, operating profit for the quarter was RMB 14.7 billion, up 42% year-on-year or 9% quarter-on-quarter. Net profit attributable to shareholders was RMB 11.3 billion, up 42% year-on-year or 13% quarter-on-quarter. Let's turn to segment gross margin for the quarter. Gross margin for value-added services was 66.7%, broadly stable year-on-year and quarter-on-quarter.
Gross margin for online advertising was 45.3%, down 6.6 percentage points year-on-year and broadly stable quarter-on-quarter. The year-on-year dip was mainly due to higher content costs. Moving on to operating expenses. Selling and marketing expense was RMB2.4 billion, up 48% year-on-year or up 16% quarter-on-quarter. The year-on-year increase was mainly driven by higher marketing spending on products and platforms. The sequential increase was mainly due to seasonal increase in advertising and promotional activities in the second quarter, as well as greater marketing spend due to business expansion. G&A expense was RMB5.3 billion, up 32% year-on-year or 21% quarter-on-quarter, within which R&D expense was RMB2.7 billion, up 33% year-on-year or 18% quarter-on-quarter. The year-on-year and sequential increase were primarily due to higher research and development expenses and staff costs. As a percentage of quarterly revenue, selling and marketing expense was 7% and G&A was 15%. R&D represented 8% of quarterly revenue.
Share-based compensation was approximately 2%. Looking at margin ratios for the second quarter, gross margin was 57.3%, was down 4.3 percentage points year-on-year and broadly stable quarter-on-quarter. The year-on-year decrease was mainly due to the increase in proportion of other segment revenue with lower margins. Non-GAAP operating margin was 41.2%, down 2.8 percentage points year-on-year and stable quarter-on-quarter. The year-on-year decrease reflected lower gross margin, which was partially offset by lower G&A expenses as a proportion of total revenues. Non-GAAP net margin was 32.2%, down 2.3 percentage points year-on-year and broadly stable quarter-on-quarter. For the second quarter, total CapEx was RMB1.5 billion, down 47% year-on-year and 63% quarter-on-quarter. Operating CapEx was RMB1 billion, up 30% year-on-year and down 23% quarter-on-quarter. As a percentage of revenue, it was at 3%. Non-operating CapEx was RMB466 million, down 77% year-on-year or 83% quarter-on-quarter.
The significant year-on-year and sequential decrease were mainly due to no addition of venue strikes during the period. Free cash flow was RMB9.7 billion, up 80% year-on-year and down 30% quarter-on-quarter. The year-on-year increase reflected high cash generated from operations. The sequential decline was primarily due to PC game cash flow seasonality. Our net cash position at quarter end was RMB24 billion, up 11% year-on-year or down 12% quarter-on-quarter. This sequential decrease was mainly due to annual dividend payouts. Thank you. We'll now open the floor for questions.
Thank you, operator. We shall take the questions, please.
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 your request, please press the pound or hash key. Your first question comes from the line of Alicia Yap from Citigroup. Please ask your question.
Hi. Good evening, management. Thanks for taking my questions. Congrats on the good results. I have two questions. My first question is related to the advertising. Can you share with us some colors on the latest self-service tools that enable the regional advertiser to buy those targeted traffic in the lower-tier cities? What type of regional advertisers specifically that are you attracted to these ads? Looking forward into medium term, how should we think about the revenue contribution split for Moments ads between the MNC advertiser for broad branding exposure versus the opportunity coming from this self-serve regional advertiser group? Also related to ads, can you give us some colors on the tractions for this new ad format, Carousel on the Qzone? Will this actually help to stimulate higher social ad budget for Qzone in the coming months?
Thank you for the congratulations and the question, Alicia. In terms of the advertising on Weixin Moments, specifically the self-service advertising, I think we outlined some of the tools we introduced three months ago, and those had a
A somewhat beneficial effect. The number of self-service advertisers increased over 400% quarter-on-quarter, and it results in Weixin Moments becoming the largest ad revenue-generating inventory. Specific categories that were most interested in the self-serve product in targeting some of the non-first-tier cities included, for example, the real estate category, which makes sense given if you're developing an apartment building in Chengdu, you may not want to advertise it in Beijing. We saw a good broadening of our advertiser mix by category as well as expansion in absolute numbers on Weixin Moments. In terms of the long-term split of advertising revenue on Weixin Moments between self-service versus Fortune 500 advertisers, I think that for performance advertising as a whole, the mix will heavily skew toward self-service advertisers, which is what we've seen elsewhere in the world with Facebook or with Google for that matter.
Within our performance advertising inventory, which includes not only Weixin Moments but also Weixin official accounts, Qzone, Yingyongbao, third-party ad network, and so forth, as a generalization, the Weixin Moments would be particularly attractive to the bigger budget, more brand-conscious Fortune 500 advertisers. It's possible that Weixin Moments will always be heavily influenced or heavily used by those big-budget Fortune 500 advertisers. Nonetheless, we're obviously very gratified with the progress that our self-service tools have achieved and with our traction in smaller cities this quarter in Weixin Moments, and we're pleased with the diversification of revenue. In terms of the introduction of carousel ads on Qzone, as you'd expect, we're continually seeking to introduce new technologies, new ad formats within Qzone and within our other performance advertising products. That's an ongoing effort.
While Weixin Moments, it's the single biggest inventory opportunity within our performance ad portfolio, there are many other discrete inventories that are attractive for their own reasons as well to add to different types of advertising.
I see. Great. Thank you. My second question is related to the digital music business. Is that fair to assume that with you consolidating China Music Corporation, compared to the online video platform, music and online literature content less competitive compared to online video? For the content shelf life, is that also fair to assume that the music and literature content will have longer shelf life and less pressure to always acquire the latest content compared to the video, hence leads to slightly better economics of return? Any comments or view on the bigger pictures on this digital content landscape would be appreciated. Thank you.
I think it's fair to say the video business is a loss leader for us right now, and the industry structure is actually sort of very unhealthy for everyone. I think by default all other digital content industries actually are in a better shape than the video industry. I think sort of the philosophy that we take in our content business is a bit like what we have taken in the gaming business, which is we try to create a model in which every party benefit from a healthier industry condition so that on one hand, the users actually benefit from having better content. At the same time, our partners, be it the records company or the creative artists, they will benefit from having a multitude of different business models. I think we need to strike the right balance among all different parties.
As you can see in the way we sort of curate the music business. Right now, the streaming business, by and large, is free for all users. At the same time, we have been able to create packages including subscription, including transaction-based albums, and as well as advertising, such that we actually sort of can create enough business model for the other industry partners to benefit. I think sort of that's how we look at the content businesses, and we hope that we can create the right model for everybody to benefit.
Okay, great. Thank you so much.
Next question, please.
Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.
Good evening. Thank you for taking my questions. Could you share your thoughts with us on the trend of user-generated video? What could be the impact on social media? Any updates on how Weixin can deal with these development? Secondly, just a couple of housekeeping questions. Wondering if you could share some color with us on the impact from the launch of Overwatch on your game portfolio, and how about the game ARPU of different types of games? Thank you.
Yeah. In terms of user-generated video, I think it's actually growing very nicely within our platform and especially on the mobile platform. It's fair to say a significant amount of official account media-related content is actually from user-generated video. It has actually transcended from, in the past, where you have to go to a video site to actually view these user-generated video, to now there are a lot of different official accounts which are creating content and putting their video on their push messages. That actually will be pushed to users on the official account system, and it will be shared widely within the Moments of different people. That's actually a very significant amount of traffic within our ecosystem. We felt that it's good for user engagement. Right now, these videos are not generating much revenue, but it's very good for user engagement.
So far, I would say the quality of the content is not up to the professional or even semi-professional level yet, but we are starting to see some good content creators. Over time, what we hope to see is, while the entire video content ecosystem will still be dominated by professionally-made content, the user-generated content will become more and more professional. Over time, it will continue to add to our traffic, it will continue to add to our engagement, and hopefully sometime it will start contributing to our advertising revenue.
In terms of Overwatch and the impact on our PC game business and the industry as a whole, I think it varies to some extent by geography. You can see if you look at Korean Click data on Korean internet cafe behavior, or you look at the results from Korean game companies, that Overwatch clearly grew the market in Korea, but also to some extent it cannibalized other titles in the market. For us, Korea is a low single-digit % of our PC game revenue. If you look at, for example, Steam engagement data for the U.S. and Europe, then it's evident that while Overwatch is very popular, it actually has not had a noticeable impact on the major online games in the Western world, such as Counter-Strike or even Team Fortress 2, probably the most superficially similar to Overwatch.
I think it's fair to believe that Overwatch has grown the market in the Western world. In China, Overwatch has not so far had a very dramatic negative impact on any incumbent titles. I think that there's a couple of sort of bigger picture silver linings to be aware of. The more important one is that I think the success of Overwatch and also the success of other recent PC games like No Man's Sky shows that there is still quite a high pent-up demand for new games, including new IP, among PC gamers, both in the West and in Korea, and we think also in China. Secondly, and more narrowly, Overwatch's success is obviously good for the developer, Blizzard, and we're actually the second biggest shareholder in Activision Blizzard. John, do you want to-
In relation to the ARPU for games, for MMOG, it ranges from RMB 310-RMB 450. For ACG, it ranges from RMB 85-RMB 350. For smartphone games, if we view the whole portfolio as one game, it ranges between RMB 150-RMB 165. That would be equivalent.
Thank you very much.
Yeah. Next question, please.
Your next question comes from Alan Hellawell from Deutsche Bank. Please ask your question.
Excuse me. Thank you very much. As James mentioned, other revenues has surged to roughly 10% of consolidated revenue, and I believe that in the prepared remarks, we ascribed a majority of the year-on-year decline in gross margin to the growth in areas such as cloud. I was wondering if you could give us a sense of revenue contribution from those two elements, maybe growth rates, and then what kind of impact this growth will have on margins going forward. We've heard from other peers in the market that margin profiles improved dramatically, so would like to get a sense of what you expect between other revenues and GM margins going forward. Thank you.
Yeah. Well, in terms of other revenue, we actually do not provide the mix. What we described is, it consists of our cloud business and revenue from our payment business. Both of the businesses are in relatively early stage of development. On the cloud business, it's still a very low margin and sometimes negative margin business. In terms of our payment business, I think the goal is actually sort of provide infrastructure service for our entire ecosystem. As a result, we're not aiming to make much money from that business. We're glad that as a whole, this series of revenues are not making losses for us as it grow. I think these are more like infrastructure businesses that we will be investing for the long run.
Thank you.
Thank you. Next question, please.
Your next question comes from the line of Wendy Huang from Macquarie. Please ask your question.
Thank you. My first question is regarding your payment business. I noticed restricted cash on the balance sheet actually record new high at RMB 125 billion again. How should we actually interpret this into the GMV growth on your payment platform? Also, how have you seen the payment transactions momentum change since there is a payment policy change, either by the industry or by yourself, effective March 1st? My second question is, you mentioned that your subscription revenue actually declined sequentially due to the crackdown on the parallel distribution. Can you provide more color on that one? Thank you.
Yeah. In terms of the payment business, I would say, the number of transactions as well as transaction volume has continued to grow pretty healthily. The amount of cash right in the escrow account, as you pointed out, part of it actually is a reflection of the fact that user activities have been growing. The other one is really as part of the policy that we put in place two quarters ago, when we were incurring a lot of losses when people transfer money from one account to another. We actually put in a charging mechanism so that we can recover part of the costs in relation to the money transfer. A byproduct of that measure is that people have less incentive to sort of move money immediately out of the account once they've received the money.
As we continue to increase the number of payment scenarios that they can use, they can use online, they can use offline, they can use it for red packets and a whole series of different payment scenarios. I think consumers are happier to just park their money within the account. That contributes to part of the increase.
In terms of the subscriptions, I apologize, you might have misheard me a little bit. I didn't say the subscription revenue is down quarter-on-quarter. I said the subscription counts or accounts were down quarter-on-quarter. The reason for that is that in the past, we've enabled consumers of other companies' products, particularly belong to other companies on a membership reward scheme, to use their membership rewards to purchase some of our privilege memberships, such as QQ membership. We actually sort of reduced some of that low revenue, low margin distribution channel during the second quarter, which in turn reduced the subscription accounts for the privilege memberships. The subscription accounts for the digital content services such as premium music and premium video, showed healthy quarter-on-quarter growth.
The overall subscription revenue increased quarter-on-quarter because the accounts we were sort of reducing were the low revenue accounts versus the digital content accounts that are growing a relatively high ARPU accounts.
Okay. Thanks for the clarification.
Next question, please.
Your next question comes from the line of Erica Walker from UBS. Please ask your question.
Good evening. This is Ming Xu asking on behalf of Erica. I have two questions. The first is regarding your subscription business. Can you share with us the latest number of subscribers and also the chartful trend? Particularly on the
Excuse me. I think your line is cracking. We couldn't hear your question. Excuse me. I think your line is cracking. I think we first question, then we'll come back to your second question. Okay?
Okay.
I apologize. I didn't hear the first question either. Beyond the subscription accounts, which we disclosed in the MD&A at, was it 150 million?
An upward trend for the subscriptions.
We never But we don't disclose the ARPU. I mentioned in the previous answer that for our digital content services, they're often slightly higher ARPU. You'll see if you go to our site that our music ARPU, our music pricing is normally 15 RMB, and our video pricing is normally 20 RMB. Sorry, what was the second question? Didn't hear that.
Okay, sure. My second question is on the WeChat monetization advertising. We noticed from some third-party research report that the average readership per article of a public account is declining. Could management share with us the latest public account activity and also the WeChat time spend trend? What's the implication for the WeChat monetization? Lastly, the progress in your IP targeting. Thanks.
Well, I think there's actually a number of different ways to look at the traffic and at the same time the readership actually, distribution is somewhat changing. What I mean by that, I think in terms of your question, what we see as the highest quality traffic is actually one official account actually sort of send out those articles, how many PV are generated there. Second one is we actually see the high-quality content being those which are original content rather than a retweet of other people's content. I would say on the number of PVs that official accounts are generating as a whole is actually growing on a pretty steady and healthy basis.
I think when you comment on the traffic has been going down, I think there are a group of official accounts in which they try to put out some jokes and retweet some other people's content, repackage some other people's content, and use a network of accounts to try to cross-promote for each other. Those are the kind of accounts that may see a somewhat reduced traffic because I think our system actually specifically try to encourage the original content over those people who are repackaging content.
Okay, thank you.
Next question.
Your next question comes from the line of Evan Zhou from Credit Suisse. Please ask your question.
Hi, good evening, gentlemen. Thank you for taking my questions. My first question is regarding our brand ad growth, especially just for the video ads. I think if my number is correct, I think the growth rate for video probably like lower than 40% year-over-year compared to last year this time, it's probably over 100% year-over-year. I was wondering like any sort of industry trend or budget shift trend that you have seen in the recent quarters about the willingness of ad spending budget shift to the traditional online video format? Did you see the advertisers maybe shifting some budget to some short video format? In terms of our strategy on content spending, any updates on that will be helpful. Thank you.
In terms of our video advertising revenue growth, I think that both for the industry as a whole and for Tencent Video there has been a deceleration in growth, and I think that's for a couple of fairly structural reasons. One is the large base effects, and actually percentage growth rates decelerated as the base gets bigger. The second is the growth of subscription video. If you take our video revenue growth, then the growth rate for our advertising plus subscription revenue together is actually twice as fast as the growth rate for our advertising revenue alone. To some extent, the two are very complementary to each other. To some extent, if the biggest invest in U.S. content, some percentage of it is going behind the subscription wall, then that may have an impact on the growth rate for the advertising-funded wall.
I think we're okay with that because as a business, historically, we've been very comfortable with consumers paying us directly for content they want. As a generalization, the subscription-funded video content market is more tightly concentrated than the advertising-funded video content market. In terms of advertiser behavior, as I mentioned, we saw good growth in video advertising this quarter as we've done in one or two years ago. This quarter, we also saw very good growth in our news app advertising and in our Weixin Moments advertising. It seems as if advertisers, while they continue to favor video, particularly for reach, that they're also increasingly allocating to news apps, both us and Jinri Toutiao, as well as to performance advertising within the Weixin Moments format. With regard to video content spend, the industry continues to be extremely competitive, more competitive this year than last year.
That's especially true of specific verticals such as the top tier, S class, domestic drama serials, and also the sports category. The video business for us and for the entire industry remains a loss-making business because of the rapid escalation of video content costs. I would say that when we in the industry think about video content costs, the advertising revenue we can generate off the content is one component, but the subscription revenue we can generate off the content is another increasingly important component as well. It would be wrong to compare the video ad revenue growth rates, which have slowed down for the industry, versus the video content costs alone, because you should actually think about the video subscription revenue opportunity as well.
Thank you, James, for the comment.
Thank you. Next question, please.
Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.
Thank you for the opportunity. Given the disclosed flattish ARPU for mobile games, what is driving the surge in the paying user number, which seems to be around 125% year-on-year? Are these trends sustainable at this higher clip? I had a question on Supercell's revenues in China. Could you give us a sense of what % of revenues for Supercell are coming from China? Thank you.
You're correct to identify that the revenue growth has been driven less by ARPU and more by an increase in paying users, which we think is quite a healthy phenomenon and differentiates us from many of the big mobile game companies in the West. In terms of what's behind that shift, I think there's a couple of factors. One is, as you know, we've successfully released a number of role-playing games on mobile, which tend to achieve quite high conversion ratios as well as ARPU. The second is, if you look at some of our big player versus player games like CrossFire or like Honor of Kings, those sort of achieve the holy grail in terms of both attracting big user bases, as we mentioned in the opening remarks.
Also, over time, users are increasingly willing to purchase items within the games in order to be more competitive. That's on the paying user trend. In terms of Supercell's position in China, interestingly some of Supercell's games, Clash of Clans, for example, are already very popular in China. Clash of Clans has many millions of daily active users. It's probably one of the, or certainly one of the 10 highest DAU games in the China market. Supercell has not historically customized monetization for the China market. For example, it hasn't introduced products that are at a China-friendly price point necessarily. Supercell in China has been very popular, but has not monetized that popularity in the past.
If I can add a question on Supercell, what is the rationale for the creation of the consortium in contrast, for example, to the full ownership of Supercell?
Well, the main reason are twofold. One is really the structure of our partnership is actually that we empower the founders of Supercell to continue to run the company on a very independent as well as entrepreneurial basis, which we believe is really the secret sauce of the success of the company. This structure actually is more consistent with this overarching principle. Second one is really because we're doing this, we want to preserve our capital efficiency. By establishing SPV and taking on non-recourse debts and also inviting certain equity consortium partners, we actually can put in less money, but at the same time have a significant relationship with Supercell.
Thank you, Martin. Thank you, James.
Thank you very much. Operator, in the interest of time, would you take the last few questions, please?
Your last question is coming from the line.
Last three, please.
Oh, sorry. Your next question comes from the line of John Choi from Daiwa Capital Markets. Please ask your question.
Thanks, and congratulations on a great set of results. I have a couple of questions here on your second half mobile game pipeline. I was wondering if management could share what genres that you guys are still seeing opportunities, given that since your launch, Tencent has done a really good job of expanding into different types of genres. I was wondering what other opportunities you guys are seeing there. Secondly, on the Supercell investment, apart from the consortium, I was wondering that you guys mentioned about strategic cooperation opportunities. I was wondering if management could elaborate a bit more on. I'm pretty sure James did highlight that Supercell didn't really monetize that efficiently in China yet, but can you give us more color there, and also any opportunities overseas with Supercell? Thank you.
I think in terms of the mobile game pipeline for the second half of the year, as you'd expect, we're being enthusiastic. Historically, we don't spend a lot of time talking about. Because we'd rather demonstrate through results than demonstrate through promises. We'll continue to release mobile role-playing games, particularly role-playing games that are associated with existing PC or comic book intellectual property. We'll continue to look for opportunities to expand in player versus player games, and we'll continue to also look for opportunities to release board game-type experiences that amass a large number of users if we succeed, even if they don't immediately generate revenue.
Again, we're really focused on the health of the mobile game portfolio, and that health can be measured by revenue, it can be measured by engagement, it can be measured by reach, and we'd like to deliver all three of revenue, reach, and engagement. We're also intrigued, as some of you may be aware, there's been a successful mobile game in some parts of the world called Pokémon GO, that utilizes location-based services technology. We've been intrigued for some time by the opportunities around injecting LBS into smartphone games, and whether the China audience is as receptive as other audiences have been remains to be seen. In terms of collaboration with Supercell
Yeah. I would say the immediate and sort of obvious synergies is actually around China, where Supercell, we believe that we have already achieved some, but the potential is still quite high in terms of attracting more users as well as getting better with monetization. I think the even bigger picture is really the fact that both Supercell and us are leaders within the mobile gaming industry, which we believe is actually still at a relatively early stage of development, which means that there's going to be a lot of innovation that is yet to come. By having the two sets of minds together, we hope to facilitate ideas exchange and create great user experience, create great operational processes, so that we can deliver a better experience and create and capture a bigger share of the overall market going forward.
In particular, I think we have a lot of knowledge about emerging markets and how the users behave, whereas Supercell has got a lot of knowledge about the developed markets. By exchanging ideas, we can help each other do better.
Thank you. Next question, please.
The next question comes from the line of Li Jun from Mizuho Securities. Please ask your question.
Hi. Good evening, guys. Just going back to the other services revenues line on payments and on cloud. Can you just kind of talk about what are the kind of the revenue drivers, especially on both payments and cloud? Were there any one-time revenue impact at this quarter that we saw, whether that's promotional activities on either fronts? Should we expect those kind of year-over-year jumps for the following couple of quarters? Are you actually monetizing SME enterprises on payments now as well? Any color on that'd be great. Thanks, guys.
Yeah. As I said earlier, for payment and cloud service, we're running it more like infrastructure service for our overall ecosystem. I think sitting in the revenue lines, there's not sort of one-time revenue per se. At the same time, I would sort of try to de-emphasize it a little bit to the extent that from a profit contribution perspective, both of them are more like infrastructure services, and they're still relatively early in terms of development. It may fluctuate from time to time. I would say that on the cloud business, we are growing our business and revenue on a pretty consistent basis. We'll actually invest more into this business in order to expedite the growth.
Got it.
Okay. All right. Last question.
Your last question comes from the line of Chi Tsang from HSBC. Please ask your question.
Hello. Hi. Thanks for taking my question. This is Jean calling on behalf of Qi. Actually, I've got a cost question regarding your advertising margin. The margin actually came down quite a bit, like by 50 percentage points. The management mentioned it's mainly because of content cost. Actually, content cost as a percentage of advertising revenue came down a bit from last year. Just wondering, can management give some color on the margin difference between performance-based ad and brand ad? Because Wavewalk is also a performance-based ad platform, and it has margin as high as 70%. Shall we expect the margin improvement because of the increasing contribution from performance-based ads? Also, on the other revenue side, the business line, kind of like iQIYI Pictures and the Tencent Pictures that are releasing. The pipeline for this year and next year.
We've got quite a few films and TV dramas coming out. Are we going to book that revenue in the other revenue side, others revenue line. How shall we expect when they are going to contribute a meaningful revenue?
I think in terms of the online advertising content cost, I'm not quite sure why you said that it dropped year-over-year.
Okay. I think you disclosed the content and agency cost in your expense by nature, and I divided by online advertising revenue, and actually it's like 76% this year and compared to 88% last year, in the second quarter last year. I'm not quite sure.
I think we can. I'm not quite sure which number you're using because for content costs, we only disclose while including a lot of the other things in, just like licensing costs for games, it's all aggregated into one line.
Okay.
That's a wrong comparison.
I guess that's not a correct comparison, yeah.
It is because of the content costs increase that the margin actually decreased. The second question is about.
Other revenues.
Other revenues. Are you thinking.
Other revenues, yeah.
Actually, it increased a little bit of contribution from movies, but it's quite small at this point in time, so negligible.
When do you Because quite a few, like Tencent Pictures released like seven movies this year, and it's expecting 10 next year. Kind of like when it's going to be contribute or you are going to?
We have sort of a certain percentage of the revenue. I don't think they will be very significant from the revenue perspective. Since we're still in the process of getting inducted into this industry, I don't think it will be a major profit generator either. I think.
Okay.
For now, it's probably better to be sort of leaving it out for now.
Okay. Thank you.
Okay. Thank you very much, operator, and thank you everybody for joining the call tonight. 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. The replay of this webcast will also be available soon. Thank you and see you next quarter.
That does conclude our conference for today. Thank you for participating Tencent Holdings Limited 2016 second quarter and interim results announcement conference call. You may all disconnect now.