Earnings Call: Q2 2016

Aug 17, 2016

Thank you for standing by, and welcome to the Tencent Holdings Limited 20 16 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. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Catherine Chen from Tencent. Please go ahead, Ms. Chen. Thank you, operator. Good evening, and welcome to our Q2 interim results conference call. I'm Katherine Chen from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions coming from a variety of quarters outside of Tencent. This presentation will contain 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 our documents downloadable on www.tencent.com/ ir. Now let me introduce the management team on the call tonight with our Chairman and CEO, Peng Li Ma President, Martin Lau Chief Strategy Officer, James Mitchell and Chief Financial Officer, John Lo. Pengi will kick off with a short review. Martin will discuss strategic highlights James will speak to business review and John will go through the financials before we take your questions. I'll turn the call over to Pune now. Thank you, Kevin. Good evening. Thank you for joining us. In the Q2 of 2016, we delivered robust growth in established businesses such as mobile, games and social based performance ads. We have also different user engagement for our existing businesses, such as digital content and online payment. 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 RMB35.7 billion, up 50 2% year on year and 12% quarter on quarter. Non GAAP operating profit was RMB14.7 billion, up 42% year on year and 9% quarter on quarter. Non GAAP net profit to shareholders was RMB11.3 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 $899,000,000 with 6 67,000,000 of monthly active user log in via smart devices. Combined MAU of Weixin and WeChat increased 34% year on year to $806,000,000 For our social network Qzone, smart devices MAU increased 4% year on year to $596,000,000 In games, we expand our user base and revenue in smartphone games through our broadening portfolio of casual RPG and player versus player titles. We retain 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, Yingdong Bao, we enhanced app discovery by providing users with deep linked ad content. I now invite Martin to discuss strategic highlights. Thank you, Caponi, and good evening, good morning to everybody. An important strategic focus area for us is our content businesses. So in this section, I'll give you an update on our ecosystem for content businesses. From an industry perspective, we believe 3 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 incentivizes 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. 3rdly, we facilitate digital content purchases via Weixin Payments and QQ Wallet. 4thly, we recommend content and display ads to users based on our proprietary targeting technology. And thirdly, 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 selected basis. In the next two slides, I will discuss 2 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 Corp, CMC. Kugo and Kuo, 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 its 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 will 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, they reported declining global revenues in the past 15 years due to declining CD sales. But since 2005, global revenues began to recover as the consumers subscribe to streaming services. So the global music business is at a turning point. Now particularly in China, music is among the top 5 Internet activities by users, but the market is very small from a revenue perspective. Leading music streaming platforms in the U. S. Are serving large user base, but generating small revenues due to piracy, which is not good for artists and creative people. But 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. Now 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'll 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 a SPV structure. This way we can achieve optimal capital efficiency for us and also allowed 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 NiuZhu, 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, but in our view has got even greater potential with the help of Tencent. As the top 2 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 Q2 of 2016, our total revenue grew 52% year on year. BAMs represented 72 percent 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 25,700,000,000, up 39% year on year and up 3% quarter on quarter. Social network revenue was RMB 8,600,000,000, 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 105,000,000 dollars although 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 RMB17.1 billion, up 32% year on year and stable quarter on quarter. For 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 midsize titles contributed to the year on year growth, but revenue dipped quarter on quarter during the weak period in the Q2. 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 3rd party online education content such as question banks, which helps students and teachers enhance their efficiency and increase their engagement with our platform. Also, 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 then distribute this video to a broad audience via the StartNote Now app or share the video with selected friends by 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 mid end office workers are now users of these enterprise accounts. We expanded our municipal services to 3rd tier cities and we launched e loyalty cards within Weixin Pay that merchants can issue to their customers in lieu of physical loyalty membership rewards cards. And 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 7,400,000, down 9% year on year, and average concurrent users for MMOGs were 1,500,000, 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 2 ks, benefited 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 and Fighter themed comics, literature, music and later a mobile game. And 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 RMB9.6 billion, up 114% year on year and up 17% quarter on quarter. We continue to lead China's iOS top grossing game chart, publishing 6 out of the top 10 titles. In the second quarter, we published 3 new casual games and 4 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 TV Run Every Day and Fight the Mad Dog, drove our overall smartphone gain 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 caps and substantial revenue. For example, Honor of Kings has over 30,000,000 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 Junko Mobile, JX Mobile, and Dragon Ball Z Mobile. Moving to online advertising, segment revenue was 60% year on year and up 39% quarter on quarter. Brand advertising revenue was RMB 2,800,000,000, 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 reflects 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 100,000,000. Our top 5 brand advertising categories this quarter were online services, food and beverages, automobiles, online games and personal care. Our performance advertising revenue was RMB 3,700,000,000, up 80% year on year and up 46% quarter on quarter. The key driver of the growth is Weixin Moments. Supported by the launch of our self-service advertising platform in the Q1, we were able to bring many more regional advertisers on board and increase the utilization of city level traffic in sideways in moments. In addition, in Qzone, we launched Carousel Ads, which contributed to new ad impressions and more revenue. I'll now pass to John to go through the financials. Thanks, James. Hello, everyone. For the Q2 of 2016, our total revenue was RMB35.7 billion, up 52% year on year or 12% quarter on quarter. Gross profit was RMB20.5 billion, up 42% year on year or 10% quarter on quarter. Share of loss of associates and joint venture was RMB292 1,000,000 in the quarter. On a non GAAP basis, it was approximately RMB206 1,000,000,000. Income tax expense was RMB2.8 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 RMB10.7 billion, up 47 percent year on year or 17% quarter on quarter. After adjustment to non GAAP, operating profit for the quarter was RMB14.7 billion, up 42% year on year or 9% quarter on quarter. Net profit attributable to shareholders was RMB11.3 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 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 high end marketing spending on products and platforms. The sequential increase was mainly due to seasonal increase in advertising and promotional activities in the 2nd quarter, as well as greater marketing expense due to business expansion. G and A expense was RMB5.3 billion, up 32% year on year or 21% quarter on quarter, within which R and 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 force. As a percentage of quarterly revenue, selling and marketing expense was 7% and G and A was 15%. R and D represented 8% of quarterly revenue. Share based compensation was approximately 2%. Looking at margin ratios for the 2nd 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 and 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 Q2, total CapEx was RMB1.5 billion, down 47% year on year and 63% per se on quarter. Operating CapEx was RMB1 1,000,000,000, 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 1,000,000, down 77% year on year or 83% quarter on quarter. The significant year on year and sequential decrease were mainly due to no additional value stress 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 1,000,000,000, up 11% year on year or down 12% quarter on quarter. This sequential decrease was mainly due to end new 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. 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. So can you share with us some colors on the latest self-service tools that enable the regional advertisers to buy those targeted traffic in the lower tier cities? So what type of regional advertisers specifically that are you attracted to these ads? And then looking forward into medium term, how should we think about the revenue contribution split for Moments ads between the MMC advertiser for broad branding exposure versus the opportunity coming from this self serve regional advertiser group? And also related to ads for the can you give us some colors on the tractions for these new ad format, Carousel on the Q zone? Will this actually help to stimulate higher social ad budget for Qzone in the coming months? So thank you for the congratulations on the question, Alicia. In terms of the advertising on Weixin Moments and specifically the self service advertising, I think we outlined some of the tools we introduced 3 months ago, and those had a somewhat beneficial effect. The number of self-service advertisers increased over 400% quarter on quarter and resulted in Weixin Moments becoming to the largest ad revenue generating inventory. Specific categories that we're most interested in the self serve product and 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. So 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 the performance advertising as a whole, the mix will heavily skewed towards self-service advertisers, which is what we've seen elsewhere in the world with Google for that matter. Now within our performance advertising inventory, which includes not only Weixin Moments, but also Weixin Efficient accounts, Qzone, Yim Yong Bao, 3rd 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. So it's possible that wei shen moments will always be heavily influenced or heavily used by those big budget Fortune 500 advertisers. But 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 new ad formats within Qsurge and within our other performance advertising products. And so that's an ongoing effort. And while Weixin Moments, it's the single biggest inventory opportunity within our performance ad portfolio, there are many discrete inventories that are attractive for their own reasons as well to add to different types of advertising. I see. I see. Great. Thank you. My second question is related to the compared to the online video platform, music and online literature content less competitive compared to online video? And 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. So hence leads to slightly better economics of return. So any comments or view on the bigger pictures on this digital content landscape will be appreciated. Thank you. Well, 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. So I think by default, all other digital content industry is actually sort of in a better shape than the video industry. But I think for the new 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 records company or the creative artists, they will benefit from having a multitude of different business models. So I think we need to strike the right balance among all different parties. And 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. But 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. So 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. 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 this development? And then 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. Yes. In terms of user generated video, I think it's actually growing very nicely within our platform and especially sort of on the mobile platform. It's fair to say sort of a significant amount of official account media related content is actually sort of from user generated video. And so it has actually sort of 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 your creative content and putting their video on their push messages and that actually will be pushed to users on the official account system and it will be shared widely within the moment of different people. So that's actually going to be a very significant amount of traffic within our ecosystem. And 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. And so far, I would say the quality of the content is not sort of 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 and 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. I mean, you can see if you look at Korea 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 cannibalize other titles in the market. And for us, Korea is a low single digit percent through 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, that's probably the most superficially similar to Overwatch. And so I think it's fair to believe that Overwatch has grown the market in the Western world. And then 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. And then secondly, and more narrowly, Overwatch's success is obviously good for the developer Blizzard, and we're actually the 2nd biggest shareholder in Activision Blizzard. John, do you want to? In relation to the ARPU for games, for MMOG ranges from $310,000,000 to $450,000,000 For ACG, it ranges from $85,000,000 to $350,000,000 And for smartphone games, if we view the core portfolio as one game, it ranged between 150 to 165 per quarter. Thank you very much. Yes. Next question please. Your next question comes from Ben Talebao from Deutsche Bank. Please ask your question. Excuse me. Thank you very much. As James mentioned, other revenues have 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 payments and cloud. And then, whether what's And then, whether what kind of impact this growth will have on margins going forward? We have referred from other peers in the market that margin profiles improved dramatically. So would like to get a sense of what you could write between other revenues and GP margin going forward? Thank you. Yes. Well, in terms of other revenue, we actually certainly do not provide the mix. What we certainly described is it consists of cloud business and revenue from our payment business. But both of the businesses that we are in relatively early stage of development. And on the cloud business, it's still a very low margin and sometimes sort of negative margin business. In terms of our payment business, I think the goal is actually sort of to provide infrastructure service for our entire ecosystem. And as a result, we're not aiming to make much money from that business. And we're glad that sort of the as a whole, this series of revenues are not sort of making losses for us as we grow. But 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 balance sheet actually record new high at RMB125 1,000,000,000 again. So how should we actually interpret this into the growth on your payment platform? And also how have you seen the payment transactions momentum change since there is payment policy change either by the industry or by yourself effective March 1? 1? My second question is, you mentioned that your subscription revenue actually declined sequentially due to the press down on the Parallel distribution. Can you provide more color on that one? Thank you. Yes. In terms of the payment business, I would say the number of transactions as well as transaction volume has continued to grow pretty healthily. And the amount of cash in the escrow account, as you pointed out, part of it actually sort of is a reflection of the fact that sort of the user activities have been growing. The other one is really sort of as part of the policy that we put in place in the 2 quarters ago when we were sort of incurring a lot of losses when people sort of transfer money from one one account to another. We actually sort of 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 more incentive to or less incentive to sort of move money immediately out of the account once they've received the money. And 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 sort of for webpackets and a whole series of different payment scenarios, then sort of I think consumers are happier to just talk the money within the account. So that contributes to part of the increase. In terms of the subscriptions, I apologize, you may have misheard me a little bit, but I didn't say the subscription revenue was down quarter on quarter. I said the subscription consumers of we've enabled consumers of other companies' products, if we belong to other companies, membership rewards schemes to use their membership rewards to purchase some of our privilege payments, such as QQ membership. And we actually reduced some of that low revenue, low margin distribution channel during the Q2, 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. And then the overall subscription revenue increased quarter on quarter because the accounts we were sort of reducing were low revenue accounts versus the digital content accounts that are growing relatively high ARPU accounts. Okay. Thanks for the clarification. 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. So I have two questions. The first is regarding your subscription business. Can you share with us latest number of subscribers and also the output trend? First question and 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 and A, it was $115,000,000 And after trend for the subscription, we never sort of disclosed that. Yes, 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 is in. Our music pricing is normally RMB 15 and our video pricing is normally RMB 20 deeper. Sorry, what was the second question? Okay. Sure. My second question is on the WeChat monetization advertising. So we noticed from some third party research report that the readership or average readership periodical of public account is declining. So could management share with us the latest public account activity and also the WeChat time spent trend and what's the implication for the WeChat monetization? And lastly, the progress in your targeting? Thanks. Well, I think, sort of, there's actually a number of different ways to look at the traffic and at the same time, sort of the readership actually sort of distribution is somewhat changing. And what do I mean by that? I think in terms of your question, what we see as sort of the highest quality traffic is actually 1 when official accounts actually sort of send out those articles, how many PB are generated there? And second one is we actually see the high quality content being those which are original content rather than sort of a retweet of other people's content. So I would say on the number of TVs that official accounts are generating as a whole is actually sort of growing on a pretty steady and healthy basis. Now I think when you comment on sort of the traffic has been going down, I think there are a group of official accounts in which sort of they try to put out some jokes and sort of retweak some other people's content, repackage some other people's content and use a network of accounts to try to sort of cross promote for each other. Those are the kind of accounts that may see somewhat reduced traffic because I think sort of our system actually sort of try to encourage the original content over those people who are repackaging content. Your next question comes from the line of Evan Jo from Credit Suisse. Please ask your question. Hi, good evening, ma'am. And thank 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, it's roughly lower than 40% year over year compared to last year, this time it's probably over 100% year over year. So I was wondering like any sort of industry channel 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? Or did you see the advertisers maybe shifting somebody to some short video format? And in terms of our strategy on content spending, any updates on that will be helpful. Thank you. So in terms of video advertising revenue growth, I think that both couple of fairly structural reasons. One is the large base effects and actually percentage growth rates decelerate as the base gets bigger. And the second is the growth of subscription video. So 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. And to some extent, the 2 are very complementary to each other. But to some extent, if the biggest investment in U. S. Content some percent of it is going behind the subscription wall, then that may have an impact on the growth rate for the advertising funded wall. But I think we're okay with that because as a business historically, we'd be very comfortable with consumers paying us directly for content they want. And 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 1 or 2 years ago. But this quarter, we also saw very good growth in our news app advertising and in our Weixin Moments advertising. So it seems as if advertisers, news apps in both us and Jingotojiao 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. And that's especially true of specific verticals such as the top tier kind of S Class, domestic drama serials and also the sports category. And so the video business for us and for the entire industry remains a loss making business because of the rapid escalation of video content costs. But I would say that when we in the industry think about video content costs, then the advertising growth that we can 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. So 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 color. 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? Also, are these trends sustainable at this higher clip? And I had a question on Supercell's revenues in China. Could you give us a sense of what percentage of revenues for Supercell are coming from China? So in terms of the you're correct to identify that the revenue growth has been driven less by ARPU and more by an increase in paying users, 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 that there's a couple of factors. One is, as you know, we have successfully released a number of role playing games on mobile, which intend to achieve quite high conversion ratios as well as ARPU. And then the second is, if you look at some of our big player versus player games like Crossfire or like Honor of Kings, then those sort of achieve the holy grail in terms of both attracting big user base, as we mentioned in the opening remarks. But also, over time, users are increasingly willing to purchase items within the games in order to be more competitive. So that's on the paying user trend. In terms of Supercell's position in China, interestingly, some of Supercell's games, Clash of Clans, 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. But Supercell has not historically customized monetization for the China market. For example, it hasn't introduced products that are sort of at a China friendly price point necessarily. And so Supercell in China has been very popular but has not monetized that popularity in the past. And if I can add a question on Supercell. What is the rationale for the creation of the consortium contrast, for example, to the full ownership of Supercell? Well, the main reason sort of are 2 fold, right? One is really sort of 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 sort of the secret sauce of the success of the company. And this structure actually sort of new is more consistent with this sort of overarching principle. And second one is really sort of new because we're doing this, we want to sort of preserve our capital efficiency and by establishing SPV and taking on non recourse debt and also inviting certain equity consortium partners. We actually sort of can put in less money, but at the same time, sort of have a significant relationship with Supercell. Thank you, Martin. Thank you, James. Thank you very much. Operator, in the interest of time, we shall take the last few questions, please. Your last question is coming from the line of John Choi from Daiwa Capital Markets. 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, you've Tencent has done a really good job of stepping into different types of revenues. I was wondering what other opportunities you guys are seeing there? And secondly, on the Superstar investment, apart from the consortium, I was wondering that you guys mentioned about the strategic cooperation opportunities. I was wondering if management could elaborate a bit more. 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. But historically, we had sort of spent a lot of time talking about the pipeline because we'd rather sort of demonstrate through results than demonstrate through promises. We'll continue to release mobile role playing games, sticky 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. Because 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 3 of revenue reach and engagement. We're also intrigued. I mean, as some of you may be aware, there's been a successful mobile game in some parts of the world called Pokemon GO that utilizes location based services technology. And 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 that as other audiences have been remains to be seen. In terms of collaboration with Supercell? Yes. I would say the immediate and sort of obvious synergies actually sort of around China where Supercell would believe that we have already achieved some, but certainly the potential is still quite high in terms of attracting more users as well as getting better with monetization. But I think even bigger picture is really the fact that both Supercell and large are leaders within the mobile gaming industry, which we believe is 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. And by having the 2 sets of minds together, we hope to facilitate ideas exchange and create great user experience, 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 sort of 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 and by exchanging ideas, we can help each other do better. Thank you. The next question comes from the line of Yi 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 how much what are the kind of the revenue drivers, especially on the both payments and cloud? Is there a lot were there any one time revenue impact at this quarter that we saw, whether that's promotional activities on either front. Should we expect those kind of year over year jumps for the following couple of quarters? And are you actually monetizing SME Neil, for payment and cloud service, we're running it more like infrastructure service for our overall ecosystem. I think certainly in the revenue lines, there are not there's not sort of one time revenue per se. But at the same time, I would sort of try to deemphasize this a little bit to the extent that from a profit contribution perspective, both of them are more like infrastructure services. And they are still relatively early in terms of development. So it may fluctuate from time to time. But I would say that on the cloud business, we are growing our business and revenue on a pretty consistent basis. And we'll actually invest more into this business in order to expedite the growth. Your last question comes from the line of Xu Sheng from HSBC. Please ask your question. Hello. Hi. Thanks for taking my question. This is Jing calling on behalf of Qi. Actually, I've got a cost of a question regarding your like advertising margin. The margin actually came down quite a bit like by 3 percentage points. And the management mentioned like it's mainly because of content costs, but actually like content cost as a percentage of advertising revenue came down a bit from last year. So just wondering like can management give some color on like the margin difference between performance based ad and brand ad because like Wave War is also a performance based ad platform and it has margin as high as like 70%. So shall we expect like the margin improvement like because of the increasing contribution from performance based ads? Also like on the other revenue side, the business baseline, kind of like we are like QIELA Pictures and Tencent Pictures are releasing the pipeline for this year and next year. Now we've got quite a few films and TV dramas coming out. So shall we are we going to book that revenue in the other revenue side others revenue line? And 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 drops year over year. Okay. Sure. I think you disclosed the content and agency cost in your like expense by nature. And I divided by the online advertising revenue and actually it's like $0.76 this year and compared to 88% last year, like in the Q2 last year. So I'm not quite sure like I think we can I'm not quite sure which number you're using because we for content calls, we only disclose, well, including a lot of other things just like licensing costs for games, it's all aggregated into one line. Okay. So that's the wrong comparison. It is not a correct comparison, yes. So it is because of the content for us and things that the margin actually decreased. The second question is about other revenue. Yes. Actually, it increased a little bit of contribution from movies, but it's quite small at this point in time, so negligible. Okay. So when do you just like quite a few like Tencent Pictures released like 7 movies this year and it's going to be like expecting 10 next year. So kind of like when it's going to be contributes or you are going to We have sort of a certain percentage of the revenue. So I don't think certainly they will be very significant from a revenue perspective. And since we're still in the process of getting inducted into this industry, I don't think Sotomi will be a major profit generator either. So I think sort of it's probably better to be sort of even in all of this. High. 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's website at www.fensen.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 in Tencent Holdings Limited 20 16 Second Quarter and Interim Results Announcement Conference Call. You may all disconnect now.