Thank you for standing by, welcome to Tencent Holdings Limited 2016 first quarter results announcement conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press star one on your telephone to join the question queue. Your name will be announced when it 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 first quarter 2016 results conference call. I am Catherine Chan from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in future for various reasons. Information about general market conditions is 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 as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of the risk factors and non-GAAP measures, please refer to our disclosure documents on www.tencent.com/IR. Let me introduce the management team on the call tonight.
We have our Chairman and CEO, Ma Huateng, President Martin Lau, Chief Strategy Officer James Mitchell, and Chief Financial Officer John Lo. Pony will kick off with a short overview. Martin will review value-added services. James will speak to online advertising, John will discuss the financials before we take your questions. I will turn the call over to Pony now.
Okay. Thank you, Catherine. Good evening, everyone. Thank you for joining us. During the first quarter of 2016, our mobile social communication platform, Weixin and QQ, further deepened penetration in China and connected users to an expanding portfolio of online and offline services in our ecosystem. We further expanded our digital entertainment business, especially smartphone games, and strengthened the foundation of our online advertising business. Financially, we delivered a solid set of results for the first quarter. Total revenue was RMB 32 billion, up 43% year-on-year and 5% quarter-on-quarter. Non-GAAP operating profit was RMB 13.5 billion, up 34% year-on-year and 17% quarter-on-quarter. Non-GAAP net profit to shareholders was RMB 10 billion, up 39% year-on-year and 12% quarter-on-quarter. John will provide more details in the financial section. Moving on to online platforms. Total MAU for QQ was 877 million, up 5% year-on-year.
Within which smart devices MAU was 658 million, up 9% year-on-year. Combined MAU of Weixin and WeChat increased 39% year-on-year to 762 million. For our social networks, Qzone smart devices MAU was 588 million, up 4% year-on-year. In PC games, we maintained market leadership and continued to grow paying users via new content and items in key genres. In smartphone games, we broadened our portfolio and claimed leadership in multiple new genres. We are planning several gala e-sports tournaments during the year to deepen user engagement and activities. Our media platforms, which include news and video, delivered healthy growth in mobile usage. In particular, our exclusive partnership with NBA enabled us to significantly expand NBA viewership nationwide. In mobile utilities, we exposed our mobile security capabilities to more third parties and widened our lead. Page views from our mobile browser increased significantly after we introduced Newsfeed in Homepage.
Our app store, Yingyongbao, gained incremental market share during the quarter. With that, I pass to Martin to speak to business review.
Thank you, Pony, and good morning and good evening. In the first quarter of 2016, our total revenue grew 43% year-on-year. VAS represented 78% of the total revenue, of which online games contributed 53% and social networks contributed 25%. Online advertising was 15% of total revenue. We moved cloud services revenue from social networks to others this quarter, and the others segment represented about 7% of total revenue. Let's take a closer look at value-added services. Segment revenue was RMB 25 billion in the first quarter, up 34% year-on-year and 8% quarter-on-quarter. Social networks revenue was RMB 7.9 billion, up 48% year-on-year and 11% quarter-on-quarter. Strong performance of monthly subscriptions as well as increased revenue from game-related item sales drove segment revenue growth. Monthly subscriptions of membership In particular, music and video content grew, boosting total subscription accounts by 33% year-on-year to 108 million.
Online games revenue was RMB 17.1 billion, up 28% year-on-year and 7% quarter-on-quarter. For PC games, user activities benefited from positive seasonality during the Chinese New Year. Monetization increased year-on-year and quarter-on-quarter as we further enhanced our operational capabilities. For smartphone games, new titles launched in the last six months drove both year-on-year and sequential revenue growth. In social networks for QQ, we further enhanced community stickiness via product upgrades and new group functions. In Interest Tribe, we launched a new timeline homepage that served a selection of content feeds based on users' interest graph. In group chats, we're increasingly using video to make group interactions more likely. We added peer-to-peer video messaging. We also enabled users to watch professional video together with each other. We also released new virtual gifts which are popular among young users.
For Weixin, we launched the enterprise version of Weixin app to serve mobile communications needs at work. The new Enterprise WeChat app is also synergistic with existing enterprise accounts that are running in Weixin. We'll continuously enrich this new application to facilitate mobile office management, thereby increasing efficiency for our enterprise users. A point on Weixin payment, we began in March to collect a cash withdrawal fee of 0.1% of transaction value when users move money out to their bank accounts. The cash withdrawal fee has helped us to contain losses, and in terms of user activities, it has a little impact on user activities. As a result, our payment platform continued to grow healthily since the policy change. Looking at games. On PC client games, the combined average concurrent user accounts for advanced casual games was 7.9 million, down slightly by 4% year-on-year.
In the quarter, CrossFire, one of our biggest title, hit a new record PCU at 6 million, even after the launch of its mobile version last December. Combined ACU for MMOGs was stable at 1.5 million. During the quarter, we released expansion packs, new items, and seasonal operating activities during the Chinese New Year, driving engagement as well as paying user growth. We are also increasingly leveraging esports to generate excitement among gamers. During the quarter, we kicked off a new tournament season for our lead titles in the MOBA, shooter, sports, and music genres. User metrics has indicated strong enthusiasm among players and audiences, both in-game as well as in offline arenas. For smartphone games, revenue reached 8.2 billion RMB, up 86% year-on-year. Sequentially, revenue grew 16%. This is mainly driven by strong performance of our MOBA, shooter, and action games.
We continue to dominate China's iOS top-grossing chart with six out of the top 10 games. Within top 20, we operate 10 games, with three serving a lifespan of more than two years. We believe our market position on Android is even stronger. We're currently enriching our IP catalog with in-house and licensed titles from China and globally. In the first quarter, we operated 84 games in total. New casual games include a 3D running game as well as board games such as Bridge and Go Chess. The success of Naruto Mobile also illustrates the power of combining a proven IP with Tencent's development as well as operational capabilities. In order to promote mobile esports, we're leveraging multiple Tencent properties such as QQ, Weixin, Tencent Video, and Tencent News App.
In the final tournament of QQ game competition, nearly 2 million players participated in the matches and over 30 million users watched this event on their smartphones. I will invite James to talk about our online advertising business.
Thank you, Martin. Our online advertising segment revenue was 4.7 billion RMB, up 73% year-on-year and down 18% quarter-on-quarter. Mobile contributed 80% of our total ad revenue, within which our brand advertising revenue was 2.2 billion RMB, up 56% year-on-year and down 23% quarter-on-quarter. Year-on-year, the increased mobile impressions and ad price across our media platforms delivered above industry revenue growth rates. However, revenue declined sequentially due to weak seasonality in the first quarter and macro conditions. Our performance advertising revenue was 2.5 billion RMB, up 90% year-on-year, but down 13% quarter-on-quarter. Since we began testing Weixin Moments advertisements one year ago, we have employed user feedback data to refine our targeting capabilities and deliver more relevant advertising to users.
This, in turn, allowed us to release more inventory in Mobile Qzone and Weixin Moments, contributing to the rapid year-on-year growth. Sequentially, our performance advertising revenue declined primarily due to the weak season for e-commerce in the first quarter. Looking more deeply at our media and social advertising inventories, in news, mobile traffic grew as we adopted enhanced targeting based on users' interest. In the first quarter, 80% of our news advertising revenue was from mobile. In video, we saw rapid growth in both user visits and mobile video views due to an expanded catalog and enhanced curation capabilities. Benefiting from our exclusive partnership, NBA Games attracted a large number of fans to our platform, driving up unique viewers significantly. The NBA fan base has particularly appealed to big-budget advertisers such as automobile and food and beverage companies. In social, we're gradually building the business to scale.
For Qzone, we have expanded to better serve brand advertisers via campaign solutions that facilitate brand storytelling. For Weixin Official Accounts, we're testing product listing ads that deep link directly into advertisers' app product pages. The initial feedback from e-commerce advertisers indicates they see a lift in ad conversion as a result. For Weixin Moments, we're bringing long-tail advertisers on board by using traffic generated from tier 3 and 4 cities. We've lowered the minimum ad budget and educated them to use our self-service bidding platform. We constantly monitor user feedback and balance inventory growth with ad performance. I'll now invite John to walk through the financials.
Hello, everyone. For the first quarter of 2016, our total revenue was 32 billion RMB, up 43% year-on-year or 5% quarter-on-quarter. Gross profit was 18.6 billion RMB, up 38% year-on-year or 5% quarter-on-quarter. Share of losses of associates and joint venture was 1.1 billion RMB during the quarter. On a non-GAAP basis, share of losses of associates and joint venture was approximately 340 million RMB. Income tax expenses were 2.6 billion RMB, up 50% year-on-year or 28% quarter-on-quarter. Effective tax rate for the quarter was 21.6%. Net profit attributable to shareholders was 9.2 billion RMB, up 33% year-on-year or 28% quarter-on-quarter. After adjustment to non-GAAP, operating profit for the quarter was 13.5 billion RMB, up 43% year-on-year or 17% quarter-on-quarter. Net profit attributable to shareholders was 10 billion RMB, up 39% year-on-year or 12% quarter-on-quarter. Operating margin was 42%, stable year-on-year and up four percentage points quarter-on-quarter.
Net margin was 32%, down 1 percentage point year-on-year or up 2 percentage points quarter-on-quarter. Let's turn to segment gross margin for the quarter. Gross margin for VAS was 66%, broadly stable year-on-year or up 2 percentage points quarter-on-quarter. Sequential increase reflected the increase in revenue proportion of self-developed products, including smartphone games. Gross margin for online advertising was 44%, up 5 percentage points year-on-year or down 7 percentage points quarter-on-quarter. The sequential dip was mainly due to weaker seasonality. Moving on to operating expenses, selling and marketing expense was RMB 2 billion, up 53% year-on-year or down 33% quarter-on-quarter. The year-on-year increase primarily reflected higher marketing spending on products and platforms such as payment services and online media as well as greater staff costs. The sequential decline mainly reflected a seasonal reduction in advertising and promotional activities.
G&A expense was RMB 4.4 billion, up 19% year-on-year or down 8% quarter-on-quarter. Of which R&D expense was RMB 2.3 billion, up 15% year-on-year or down 6% quarter-on-quarter. The year-on-year increase was due to greater R&D expense and staff costs, whereas the sequential decline was mainly driven by lower R&D expense, consultancy fees and staff costs. As a percentage of quarterly revenue, selling and marketing expense was 6% and G&A was 14%. R&D represented 7% of quarterly revenue. Share-based compensation was approximately 2%. We had approximately 31,000 employees as at quarter end. Looking at margin ratios for the first quarter, gross margin was 58.1%. It was down 1.9 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 42.1%, flat year-on-year or up 4.2 percentage points quarter-on-quarter.
The sequential increase was mainly due to lower selling and marketing expense and general administrative expense as a proportion of total revenues. Non-GAAP net margin was 31.7%. It was down 0.9 percentage points year-on-year and up 2.1 percentage points quarter-on-quarter. The year-on-year decline was mainly due to the increase in the share of the losses of associates and joint venture. The sequential increase was due to higher operating margin, partially offset by increased income tax expense. For the first quarter, total CapEx was RMB 4.1 billion, up 208% year-on-year or 118% quarter-on-quarter. Operating CapEx was RMB 1.3 billion, up 105% year-on-year and 4% quarter-on-quarter. As a percentage of revenue, it was consistent with last quarter at 4%.
Non-operating CapEx was RMB 2.8 billion, up 308% year-on-year or 371% quarter-on-quarter. The significant year-on-year and sequential increase was mainly due to addition of land use rights in Guangzhou. Free cash flow was RMB 13.9 billion, up 67% year-on-year or down 14% quarter-on-quarter. The year-on-year increase reflected to higher operating cash flow, whereas the sequential decline was reflected to lower operating cash flow as we paid year-end bonuses in the first quarter and higher capital expenditure pay as we had more CIP and land use right outlay during the quarter. Our net cash position as at quarter end was RMB 27.4 billion, up 8% year-on-year or 44% quarter-on-quarter. The sequential increase in net cash was primarily driven by free cash flow generation, partially offset by payments for M&A initiatives and license content. Fair market value of our listed associates and available-for-sale financial assets was approximately RMB 82 billion as at quarter end.
This concludes our presentation. Thank you.
Thank you, John. Operator, shall we take the first question, please? We would like to invite one question from each analyst at a time. Thank you.
We will now begin the question and answer session. If you wish to ask the 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. Our first question comes from the line of Dick Wei from Credit Suisse. Please ask your question.
Hi, good evening. Thanks for taking my questions. My question is on Tencent's plan on some new initiatives. For example, number one is on personalized news. I think some of the other vertical news site has more personalization on the news. I wonder any plans about for Tencent, particularly beyond our Kuai Bao. Any plans for change in terms of the WeChat Moments, kind of ways we present the news or the newsfeed rather than just purely time-based would be more interest-based. So personalized news is one area. Another second area may be the live video market, I think has drawn a lot of the attention these days. Wonder how does management see about opportunities as well as the plans for that going forward for us? Thank you.
In terms of personalized news, we feel that it's definitely a trend that consumers actually clearly want. At the same time from a technology perspective, especially on mobile, it's actually easier to identify the person and then provide personalized news. We believe when people read news, there is a part of people's needs which actually wants to read the hottest news. There's another part which there's an interest element, and hence, there requires a personalization. As a result, if you look at the range of initiatives that we're doing to cater to these two needs, obviously Tencent News is one that presents the most authoritative and the hottest news to the users. On the personalized front, I think there are a number of venues we can do it.
One is actually, as you said, Kuai Bao, which is our Everyday News Express app, which we have launched, which primarily present news as well as additional news-related information to the users through a personalized timeline mechanism. In addition to that, even within Tencent News, we are actually trying to incorporate some elements of personalization to the consumers, so that in addition to the most authoritative news that everybody sees, our users can also see some personalized authoritative news for them. Thirdly, within the official account in Weixin, you can consider it as another way of personalization, but this is a personalization in which the consumers clearly tells us what accounts they want to follow. Then people see these news pushed to them. Now on Moments, I think we already captured some of the personalization through social sharing. I think that's already quite enough.
We do not want to turn the Moments into primarily a news reading vehicle. That's why I think we're not going to do much of that within Moments. Rather focus on pushing on our Kuai Bao as well as personalization within Tencent News and continued pushing of our official account. In terms of live video, we consider live video from two elements. One is, live video is actually a media format. It's a capability that a lot of our media properties would actually need to incorporate. That's why, within a number of different of our properties video platform, even within our music platform, potentially, we could support live video functionality. Yet on the other hand, we saw in a number of our investee companies. For example, DouYu, they are actually sort of a live video platform which focuses on game-related live video streaming.
That's also a capability that's tied in with that kind of business model. The other aspect of live video is, a way for people to perform, then that's a business model. It looks like it's actually generating quite a bit of revenue for different platforms. On that one, we felt there's less of a network effect. It's essentially a group of content that's curated for users to pay for. Over time, we think there's less network effect, there's less stickiness, and that's a revenue stream that I don't think we'll chase with a lot of focus.
Got it. Thanks, Martin.
Thank you. Our next question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.
Hi. Good evening. Thank you for taking my question. I wonder if you could elaborate a bit more on the macro impact on your advertising business. Could you update us on some of your top advertiser industries and any strength and weakness that you have observed in them, which you came up with this conclusion of some macro impact? Thank you.
Eddie, I think it's really a general feeling that we see, and there's some weakness in terms of the propensity to spend within amongst the top advertisers and a little bit across the board, and particularly stronger with sectors which require bigger ticket item sell. I think that's a general sense. In the past, for example, it takes two meetings to nail down a certain amount of contract. Now it takes longer time, and the average contract size is typically smaller and advertisers are keeping more of the budget for later of the year until they see sort of clearer picture around the macroeconomics. These are the general feeling that we're getting from the frontline salespeople.
Martin, can I have a follow-up question? Just broadly speaking, do you feel the impact is more on the brand advertising side or on the performance advertising side? Thanks.
I think, for us, if you look at our current business portfolio, we feel it more on the branded side. I think, on the performance side, we are still in the process of ramping our business. That's one factor. The other one is, generally, I think, the small to medium enterprises, the smaller ticket items are less affected by this.
Very helpful. Thanks.
Thank you. Next question, please.
Thank you. Our next question comes from the line of Chi Tsang from HSBC. Please go ahead.
Hi. Good evening. Thank you so much for taking my questions. I wanted to ask you a little bit about Weixin Moments. In particular, I was wondering if you can discuss sort of what your ad load is currently and how that might progress over the next one or two years. Secondly, I also wanted to ask you about Enterprise Weixin and how that business model might evolve over the next few years. Thank you so much.
For Weixin Moments, I think the ad load sort of would gradually increase. I want to stress the point of gradually, and alongside with this gradual increase, there's a lot of work for us to do in order to accompany that. To make sure that the overall user experience are not impacted negatively. A lot of it is related to improving our targeted ad platform capability so that we can actually target our advertising to consumers with that kind of need. We need to sign up a range of high-quality advertisers and also couple that with a lot of customer education so that the quality of the advertising is actually high. We need to train up a lot of intermediaries so that they can act as our helper in enforcing a healthy ecosystem around advertisers.
There's a lot of work that we need to do with respect to ad format so that the ad formats are naturally embedded into the user experience, so that it's effective on one hand, but it doesn't affect the user experience on the other hand. We need to put in a lot of effort in creating our self-serving, developing our self-serving ad buying system so that it can actually help more advertisers come in. There's a lot of fundamental work to be done, and releasing more inventory is actually the easy part. What we need to do is actually making sure that all the other capabilities are increased so that when we release inventories, it's actually conducive to user experience rather than impact negatively user experience. In terms of Enterprise WeChat, I think, it's too early to talk about business model, right?
Right now, what we focus on is actually launching a product, understanding what the enterprise users' needs are, and trying to keep improving our product so that we can serve the enterprise users' needs. That's at the moment our focus.
Okay. Thank you. Operator, next question, please.
Thank you. Our next question comes from the line of Wendy Huang from Macquarie. Please go ahead.
Thank you. On the advertising front, you also quoted the weak seasonality in the e-commerce as a reason for the advertising revenue sequential decline. I just wonder, what's your advertising revenue contribution from JD.com? Was it very significant to your advertising revenue? Also, you mentioned that you already rolled out the self-bidding system in the lower-tier cities for the Weixin Moment Ads. Just want to clarify, in the longer term, the Weixin Moment Ads platform, should it be more for the brand ads or the SME advertisements? Lastly, I want to clarify on the RMB 260 million other revenue that you reported this quarter. Is it Enterprise WeChat related, or is it cloud related, or is it payment related? Thank you.
Well, in the e-commerce comment, it's more sort of related to quarter-on-quarter comparison, right? Because the fourth quarter of every year usually it's a big season for e-commerce industry. It's more of that reference. In terms of JD.com, I would say, it's a meaningful contribution, but it's not sort of quote unquote overly a heavy proportion of our performance ads. In terms of the 3rd tier and 4th tier cities, we have launched that functionality as a testing. So far, I think the testing result is actually encouraging. We're cautious in doing this because we want to make sure that we continue to enforce the quality of the advertisers.
Over time, we will see this platform to be sort of both serving the needs for branding as well as serving the needs for small and medium enterprises in terms of targeting their users, right? The more targeting capability that we add, the more ad format that we can actually make it consistent with the user experience, then it has more scalability, both from the branded sort of perspective as well as from a performance perspective. In terms of others revenue, I would say the biggest chunk is actually related to payment. In that regards, one of them is actually related to the revenue that we receive from merchants, third-party merchants, when we actually sort of serve as their payment gateway, and then sort of new users use Weixin Pay in the merchant's consumption pathway.
Second is slight revenue from, essentially one-month revenue from cash withdrawal fee from the consumers. The other big portion is really cloud service.
Thank you very much.
Next question, please.
Thank you. Our next question comes from the line of Erica Poon-Rorke from UBS. Please go ahead.
Hi, thank you. We note that you've launched a number of the mid, high-core mobile games titles across different genres. Just wondering if you can share, are there any particular genres that Tencent has found a stronger niche and where you're likely to spend more focus on? Thank you.
I think when we look at the mobile game industry in general, there's about a dozen genres which are either large and well-established today, or we see as becoming very substantial in the next couple of years based on global trends and based on PC gaming behavior in China. Several of these big genres are genres that are already popular on PC in China. We see some convergence of gameplay mechanics, game behavior between PC and mobile as the mobile gamer audience becomes more sophisticated. I think that if you look at those big genres, that there's some such as turn-based role-playing games where other companies are obviously very successful, and we'll seek to build market share incrementally.
There's other categories such as shooting games, battle arena games, running games, board and card games, where not only are we very successful, but you could also argue that we have sort of created those game genres in China or at least made those game genres five times bigger than they would otherwise be if we hadn't released the flagship games in those genres.
Thanks, James.
Thank you. Operator, next question.
Sure. Next question comes from the line of Thomas Chong from Citigroup. Please go ahead.
Hi. Thanks for taking my questions. I have two questions. The first question is about the ARPU for MMO, advanced casual, and smartphone games, if management can provide some more color. My second question is about online video. Can management comment about the online video competitive landscape for this year compared to last year? Thanks.
For the ARPU for MMOG, it's within RMB 310-450 per quarter. For advanced casual games, RMB 85-330. For smartphone games, if we look at the portfolio, it's between RMB 150-160 per quarter.
I think for the online video competitive landscape, the short answer is it would be extremely competitive and likely more competitive this year than last year due to some of the mergers and acquisitions that have taken place and the emergence of newer companies like LeTV in the space. To get a little bit more granular, in general, those companies that bid aggressively for top content during 2015, such as iQIYI and Tencent Video platform, gained substantial user and revenue share, which I think in turn is inducing everyone to bid aggressively for top-tier content moving into 2016. Some of the areas where the bidding would be more intense would include drama serials, particularly drama serials that attract a 15- to 30-year-old female audience, and also content that has the ability to drive subscription as well as advertising revenue would be areas where the competitive intensity is especially heightened.
Thanks.
Yep. Next question, operator, please.
Thank you. Next question comes from the line of Natalie Wu from CICC. Please go ahead.
Hi. Good evening, management. Thanks for taking my question. I have a question regarding your advertising business. It seems to be a little bit lower in terms of sequential growth. Just wondering if there any different revenue associated with that. Could management give us some color on the contribution of e-commerce advertisers contribution on the performance-based ad in the first quarter?
In terms of the second question, e-commerce would be the largest advertising category for our performance advertising business. It would be a healthy double-digit chunk, but a minority of the total. In terms of the quarter-on-quarter trends, we've called some of them out. First of all, there's the usual negative seasonality for the brand advertising business, which I think in some previous years we've sort of grown straight through that because the emergence of new platforms like online video. Whereas this year we had a more sort of industry normal impact from negative seasonality in Q1 on the brand advertising side.
Secondly, on the performance advertising side, every year the fourth quarter is a peak season for e-commerce activity, but this year or fourth quarter 2015, there was the 1212 event as well as the 1111 event, and more e-commerce companies participated more aggressively than in previous years. To some extent, the hangover from Q4 to Q1 was more pronounced this year than previous years. Thirdly, this year, again for performance advertising during the Chinese New Year, we had a number of advertisers who bought combined packages of advertising together with red envelopes, and the accounting for those had the effect of moderately reducing our performance advertising revenue. In general, I would say that without sort of over-focusing on the whys and wherefores of Q4 to Q1 trends, our advertising business is becoming quite large by China internet industry standards.
While we still believe that it will grow faster over time and while we still aspire to outgrow the industry over time, the percentage growth rates may slow down for some of our advertising products, such as our online video business.
To be more specific, I think there needs to be some kind of reset in terms of the year-on-year growth rates that people expect for our advertising business. I would say last year was a breakout year in the sense that our mobile video business actually grew a lot. It was the first year in which we monetized our mobile news app in a significant way. It's also sort of the year in which we really flex our muscle around performance ads, as well as the launching of the Moments ad in the second quarter of last year. It's a confluence of a lot of factors, which drove very fast year-on-year growth. Now, as we look into the future, the brand ads is already approaching a pretty large size, which means that it will be more closer to the industry growth.
Of course, we strive to work to exceed that. In terms of performance ads, we look at it as a long-term business. We will be deliberately building it over the longer run, which means that there will not be a very fast release of inventories. We want to make sure that everything is actually done right alongside with the gradual release of inventories.
Great. Very helpful. Actually, could I have a very quick up, if I may? I heard that Qzone actually lifted the ad load a quarter ago. Should we be expecting a similar level improvement of advertising revenue related with Qzone? Will there be a similar plan on Weixin Moments as well this year?
Well, I think as we said, we'll gradually release more inventories. If we're not doing well in terms of the five different initiatives that we're doing in terms of ad technology and advertiser education and things like that, then any release of inventory will have a marginally lower return in terms of the additional revenue. It will have bigger negative impact on the users. That's why we need to make sure that we continue to push forward on our own capabilities, and that should precede the release of inventories or that should be done alongside with the release of inventories.
Thank you. Operator, next question, please.
In the interest of time, we shall take the last three questions, please.
Thank you. Next question comes from the line of John Choi from Daiwa. Please go ahead.
Hi, thanks for taking my question. My question's on the mobile games right now. Seems like you guys have been pretty aggressively pushing the esports culture. If the management could give more color how this is impacting the ARPU, the game life and life cycle, and how that's impacting the monetization rate. Secondly, just want to quickly have more detail on your subscription. RMB 108 million, any more details apart from music and online video? Thank you.
In terms of the esports events around games, you asked whether it should impact ARPU or monetization rate or game longevity. I would say that we see it primarily affecting game longevity and user retention. There may or may not be ARPU or monetization benefits over time. With League of Legends, normally when a team wins the global championships, then players like to buy similar skins to what the winning team has used. That's a sort of happy byproduct. It's not the primary reason for us to be in the esports business. The primary reason is that we see a huge pent-up user interest in esports, both competing but also watching other people compete. We believe that by tapping into this cultural phenomenon, A, we can increase our mind share with game players.
B, we can also deepen the engagement with the games and extend the longevity of the games. That's really the rationale, the core reason for being involved in esports. Along with the fact that we're a gaming company and games are fun and esports can be very fun. Your question around the subscriptions, sorry, I didn't catch, you asked about RMB X million subscriptions and the growth in music and video?
Yeah, I'm just wondering, you guys just quoted RMB 108 million. Any trend on the ARPUs, particularly on music and online video, that would be helpful. Thank you.
In general, if you look at our privileged subscriptions, which represents the majority of our subscriptions, such as QQ membership and VIP, the blended ARPU is drifting higher over time because there's an increasing propensity to take the RMB 20 super VIP package rather than the RMB 10 VIP package. Our focus is more on adding more value to the packages and maximizing the number of privileged subscribers. The ARPU increase is again, a happy byproduct. If you look at the digital content subscriptions, for video, the price point has been RMB 20 a month since we launched, which at the time was a premium to the industry, but now the industry's converged around RMB 20 per month as well.
For music, the initial price point was RMB 10, now there's an increasing number of people taking RMB 12 or RMB 15 packages that enable them to download several hundred songs onto their phone as opposed to just streaming. There's also a gradual upward drift in ARPU on the music product. The bigger focus for us is really on persuading more consumers to subscribe, and then the amount they pay can follow naturally over time.
Thank you. Next question, please.
Thank you. Our next question comes from the line of Vivian Hao from JPMorgan. Please go ahead.
Hi. Thank you for taking my question. My question is still around your pay-for-performance ads. Apart from the seasonality in Q1, we saw that probably for JD.com, the second quarter guidance is still relatively soft. Just wondering how should we expect the P4P revenue to trend in Q2? Also, on the new in-feed autoplay video ads to be launched on Moments, can we get an update as well? Thank you.
Yeah. In terms of pay for performance, as I said, JD.com, as an important partner, their ecosystem contributes a meaningful portion of our total performance ads, sort of it's not overly heavyweight. That should be put into perspective. Now, I think as a result, we talked about our performance ads business as a long-term business. That's why, I would like people to sort of reset some of the overly high expectations for us to step on the pedal and keep on releasing inventories. I think we would like to sort of do it on a gradual basis, sort of this is the third time I talk about it. I think that will be a much more important driving factor, when you look at our performance ads, in the next few quarters. What was the next question?
About the in-feed autoplay video ads.
I think that one is still being tested right now. It's not sort of fully operational. We'll see how it perform, and then we may report once it's really sort of live.
Do we have a timeline?
It will be released when it's ready.
Okay. Thank you.
Thank you.
Operator, shall we take the last question, please?
Certainly. Our last question comes from the line of Richard Kramer from Arete Research. Please go ahead.
Thank you very much. I'm just wondering two things briefly. One is can you update us on some data on the user base, attach rates, TPV, et cetera, of Weixin Pay? Will the 0.1% withdrawal fee from March grow to be something that's material to Tencent revenues by the end of 2016? I guess the other thing that seems to be a question among some investors with the recent capital raising, can you talk through your acquisition strategy and the need for raising another RMB 3 billion-RMB 4 billion of capital? What and in what areas do you think we should expect Tencent to look to deploy this capital? With the cash flow generation you're seeing right now, what prompted this move, given that obviously the business is profitable and quite cash generative? Thanks very much.
Yeah. In terms of payment business, I think sort of the general direction as we have provided is that the platform continued to grow healthily, and in terms of the total number of transactions, in terms of number of active users, sort of it's growing healthily. I think sort of in terms of the revenue from both the merchants as well as the revenue from the consumers, I think a lot of this revenue is actually for us to recoup the cost that's associated with our payment platform. On the consumers, because we actually pay for whatever money that comes into our system, so as a result, when the money actually leaves our system, we actually sort of try to recoup that expense. I think overall, we look at payment as a business that sort of may generate more revenue, but we continue to invest in it.
The charging mechanism is actually for us to make sure that we don't sort of keep on increasing the subsidizing that platform. For now, I think the more important thing for us is actually sort of continue to grow the platform rather than sort of making a lot of profit from it. In terms of acquisition, if you think about this, our revenue and profit, cash flow is actually generated onshore. We actually need to have cash offshore in order to pursue investments and acquisitions, because sort of most of the companies, even sort of if these are Chinese companies, they have overseas holding structure, which requires US dollar investment. For example, if you look at Didi's recent financing, we actually sort of put in US dollars. If you look at Meituan, for example, we put in $1 billion. That's US dollars.
That's the reason why we actually need to raise cash outside of China in order to fund these investments. Overall, I would say our investment strategy is that we continue to look at strategic alignment with us. We continue to look at the business momentum and positioning of the business that we invest in. We continue to look at the management quality. As a whole, we use our investment strategy to enhance the overall ecosystem so that, one, we benefit from the growth of internet into multiple vertical sectors within the economy. Two, we try to sort of create synergies between these companies and our own platform so that they will derive value from their growth.
Okay.
Thank you. Ms. Chan, please begin your closing remarks.
Thank you, operator. We're now rounding the call now. If you wish to check our press release and other financial information, please visit our corporate website at www.tencent.com/ir. We'll post a replay of this webcast on the site shortly. Thank you, and see you next quarter.
That does conclude our conference for today. Thank you for participating Tencent Holdings Limited 2016 First Quarter Results Announcement Conference Call. You may all disconnect now.