Earnings Call: Q3 2015

Nov 10, 2015

Ladies and gentlemen, thank you for standing by, and welcome to the Tencent Holdings Limited 2015 Third Quarter Results Announcement Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today. I would now like to turn the conference over to your host today, Ms. Katherine Chen from Tencent. Please go ahead, Ms. Chen. Thank you, operator. Good evening. Welcome to the Q3 results conference call of Q3 2015 results conference call. I'm Catherine 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 that 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 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 our non GAAP measures, please refer to our disclosure documents downloadable at www.tencent.com/ir. Now let me introduce the management team on the call tonight. 1 of our Chairman and CEO, Pony Ma President, Mr. Martin Lau Chief Strategy Officer, Mr. James Mitchell and Chief Financial Officer, Mr. John Lo. Billy will kick off with a short overview. Martin will speak to strategy. James will review our business and John will go through the financials before we take your questions. I'll turn the call over to Pony now. Now. Thank you, Katherine. Good evening. Thank you for joining us. During the Q3 of 2015, we delivered solid growth in our core platform across social, games, news, video and payment. Financially our mobile games business has led growth growing implementation of the new strategy that extend our product range. Our online advertising revenue doubled year on year, benefiting from growing mobile contributions in our popular media platforms and our unique social performance advertising. We also saw a sharp increase in mobile payment In addition to commercial success, we also seek to leverage our platform to create positive social impact. On September 9, we launched a one of its kind Internet plus donation campaign. The Double 9 Charity Day creates widespread resonance among our partners and the community at large. Let me highlight a few numbers for you. John will provide you the details in the financial section. Total revenue excluding ecom transactions grew 37% year on year to RMB26.5 billion sequentially it rose 14%. Non GAAP operating profit was RMB 10,500,000,000 up 27% year on year and 2% quarter on quarter. Non GAAP net profit to shareholders was RMB 8,300,000,000 up 26% year on year and 4% quarter on quarter. Moving on to platform update. Our social communication product QQ and Weixin further deepened engagement with a wide spectrum of Internet users in China. QQ is the most popular social platform for young entertainment driven users. Total MAU reached 860,000,000 in the 3rd quarter, within which smart devices MAU increased 18% year on year to 639,000,000. Weixin is the faster growing mobile only social platform that was able to convert users who had not used instant messaging before. Combined MAU of Weixin and WeChat rose 39% year on year to 650,000,000. Qdron, our social sharing platform integrated to QQ, grew total MAU to 653,000,000 within which smart devices MAU rose 14% year on year to 5 77,000,000. For online games, we deepen penetration in multiple genres in PC and mobile, reinforcing our leaderships as the largest operator and publishing platform in China. Among our online media platforms, our mobile news service continued to grow due to better content, curation and improved customization. Total video views increased robustly, both within the mobile apps and we think Weixin official accounts. In mobile utilities, popular third party app store in China. And our mobile security and mobile browser are also a market leader in respective categories. With that I will pass to Martin. Thank you, Bonnie. Good evening and good morning to everybody. Since there have been many news flows in the online to offline O2O space and we have also made quite a number of significant investment in best of breed O2O Companies. We feel that it's important to provide you with more information around our O2O strategy. First of all, we do believe that the O2O space is very important to Tencent. Why? Firstly it's a way for us to capture business opportunities when various industries move part of their business processes from offline to online as part of the bigger Internet plus movement in China. Our highly engaging social apps Weixin and QQ can connect users to a broadening spectrum of vertical services. This unlocks business opportunities for partners in our O2O ecosystem and at the same time provides our users with better user experience. Secondly, O2O activities can grow Weixin Pay and QQ Wallet user base as well as develop payment habit among our users. Thirdly, we can also source new advertisers for our performance based advertising platform via our O2O partners as we look into the future. Now why do we choose to partner with best of breed companies as opposed to doing it ourselves? The most important reason is that O2O businesses require significant domain expertise as well as significant offline execution capabilities. These are not particularly the strongest suit of a technology and product focused company like us. By partnering we can actually leverage the skills owned by the best in class management in the entire market. In addition, we can also increase our capital efficiency by investing in multiple companies and multiple category leaders and achieve best overall consumer experience. Now as to the future of O2O Companies, we believe that while many of them are still in investment mode in the near term, but over time we believe that our investment in these leading O2O companies will generate significant value as these companies gain better efficiency in business processes as well as achieve economies scale when their businesses continue to grow rapidly. In addition to that we believe the O2 activities also help to deepen mobile payment among our users. Our mobile payment solutions, Weixin Pay and QQ Wallet have grown rapidly to produce a synergistic relationship with our O2O ecosystem. There are now more than 200,000,000 users with bank cards bound to Weixin Pay and QQ Wallet. This impressive growth was initially driven by C2C transactions among users such as Red Envelope gifting and Money Transfer. And now it is increasingly expanding to commercial payments such as O2 activities, utilities payment as well as e commerce. Weixin Pay and QQ Wallet are very important building blocks in our overall ecosystem. We're doing a number of things to grow user adoption and deepen payment habit among our users. Firstly, we invest in technologies to upgrade our product as well as to enhance the security protection for our users. Secondly, our key O2O partners such as Didi Kway Dee, Meituan Dianping and 58.com generate millions of transactions per day. By integrating Weixin Pay and QQ Wallets to their platforms we leverage these high frequency payment scenarios to deepen users' habit of using our mobile payment solutions. And at the same time also drive traffic through our important O2O partners. Thirdly, we encourage repeated usage of the users by subsidizing the bulk of the bank handling charges to the users. Although we are now incurring a significant cost as a result, we believe that these subsidies are worthy investments for the future. As our mobile payment solutions continue to gain traction, our ecosystem can be more useful to our partners where consumers can find what they need, interact with merchants and complete transactions in a seamless manner. Now with that, I'll pass to James to talk about the business review. Thank you, Martin. In the Q3 of 2015, our total revenue increased 34% year on year and excluding e commerce transactions, it grew 37% year on year. VAS represented 77% of our revenue, within which games contributed 54% and social networks 23%. Online advertising represented 19% of our revenue, up 7 percentage points year on year. For value added services, segment revenue was RMB20.5 billion, up 28% year on year and up 12% quarter on quarter. Social Networks revenue was RMB6.2 billion, up 32% year on year and up 14% quarter on quarter. Our Super VIP Privilege subscription service, premium content subscriptions and item sales drove the growth. Online games revenue was RMB14.3 billion, up 27% year on year and up 11% quarter on quarter. New smartphone games and the strong performance of advanced casual games delivered the year on year growth, while new smartphone games and positive seasonality contributed to the quarter on quarter increase. Looking at social networks and starting with mobile QQ, enrich functionalities for specific types of QQ groups such as project assignments for students and friend finding for nearby groups. We introduced celebrity themed fonts, stickers and chat bubbles to make messaging friends more fun and more engaging. With our QQ wallet products, we're leveraging Red Envelope gifting to drive greater QQ wallet adoption. For Weixin, we upgraded voice and video technologies to support 9 party video conferencing. We added group chat management features such as a publishing tool for group announcements. And for Weixin Pay, we've seen very rapid growth in consumer to consumer transactions over the last 2 years. More recently, Weixin Pay has started to experience a surge in money transfer, e commerce and O2O transactions. Looking at our PC client games, average concurrent users for our advanced casual games grew 14% year on year to 8,700,000 reflecting deeper engagement within our key genres. Average concurrent users for massively multiplayer games were flat year on year, stabilizing after several quarters of declines. Within the major game genres, for our battle arena games, League of Legends sustained healthy total user growth and expanded its paying user base with new limited edition skins. Within our shooting games, we organized several e sports events such as the national finals for Crossfire and City Match for Topfire. For our sports games, we're looking for new users with co marketing activities such as cross promoting FIFA Online 3 with a new reality TV show and cross promoting our NBA 2 ks online game with specialized programming on our video platform. And for massively multiplayer games, we put 2 new games, Moonlight Blade and Archeage into large scale open beta testing in the Q3 and these contributed to the sequential uptick in average concurrent users. For smartphone games, during the Q3, we began implementing new developments and publishing strategies for specific types of gaming experiences. For example, the content driven games such as role playing games, which generate most of the mobile game industry's revenue today, we're launching titles based on proven IPs and targeting them at existing fan communities. For example, our new RPG and battle card games, Legend of MIR 2 and King of Fighters 98 ranked within the top 5 revenue grossing games in China in September. For gameplay driven titles such as shooting and action games, which we expect to become increasingly important in the future, we're building on our PC experiences to launch innovative titles that should define and popularize their genres. For example, our shooting and bath arena games, Free Fire and MOBA are leaders in their emerging categories. And for platform driven titles such as board and playing card games, which generate low ARPU but high daily active usage, we're leveraging Weixin and QQ to drive activity into our titles and maximize their social impact. For example, our playing card puzzle and Mahjong games each have millions or tens of millions of daily active users. While it's still early days for these new strategies, the initial results are quite encouraging. We generated RMB5.3 billion smartphone game revenue in the 3rd quarter, up 60% year on year on a gross to gross basis and up 18% quarter on quarter. Out of the 12 new titles we launched in the quarter, 8 were mid core. And according to App Annie data, we operated 5 of the top 10 grossing titles in China during the Q3 of the year. Moving on to online advertising, segment revenue doubled year on year to RMB4.9 billion and rose 21% quarter on quarter. Our brand advertising revenue was RMB2.5 billion, up 67% year on year and 27 percent quarter on quarter. More traffic in our video and news apps drove the year on year growth. The Voice of China full program and monetization of our news app contributed to the sequential growth. Performance advertising revenue was RMB 2,400,000,000, up 160% year on year and up 16% quarter on quarter. Mobile inventory fill rates and pricing all contributed to the year on year growth. Revenue grew sequentially due to higher click through rates and CPCs on our Weixin official account ads and more impressions in our mobile ad network. Taking a closer look at our media brand advertising, we gained market share across our top 5 advertiser categories, namely food and beverage, automobile, personal care, online services and consumer electronics. In video, if we add together the video views within our Tencent video app, the video views inside Weixin official accounts, we enjoy increasingly clear mobile traffic leadership. Compared with the same quarter a year ago, our average daily video views within our video app almost doubled and our average daily video views within Weixin official accounts quadrupled. Consequently, our mobile advertising inventory more than doubled year on year, resulting in our video advertising revenue in total almost doubling year on year. We continue investing in high quality content, licensing live sports broadcast and movies as well as online drama series. In news, we improved mobile sell through rates and revenue by shifting to selling more paid feed ads on a CPM basis. For social performance advertising, continue to carefully control ad loads but grew revenue rapidly nonetheless by enhancing our targeting capabilities and broadening our advertiser client base. Looking at some of our major social ad inventories, Qzone CPC increased year on year due to more bidders and better targeting. Weixin official accounts ad impressions more than tripled year on year. Weixin Moments ad campaigns increased quarter on quarter as we lowered the minimum ad spend threshold to RMB200,000 per city and added new verticals such as travel and real estate advertisers. And finally, our mobile ad network traffic partners compression volumes grew significantly year on year from a low base. And I'll now pass on to John to walk through the financials. Thank you, James. Hello, everyone. For the Q1 of 2015, our total revenue was RMB26.6 billion, up 34% year on year, or 14% quarter on quarter. Gross profit was RMB15.6 billion, up 23% year on year or 8% quarter on quarter. Other gains of RMB614 1,000,000 in the Q1 primarily reflected disposal and DIMM disposal gains arising from 58.com and other investee companies, which was partly offset by impairment provisions for certain investee companies. Operating profit was RMB10.3 billion, up 37% year on year or 3% quarter on quarter. Net finance costs of RMB481 1,000,000 in the Q1 mainly reflected interest expense on debt balance in the Q3 as well as foreign exchange losses of about RMB108 1,000,000 mainly arising from renminbi depreciation. The increase in share of loss of associates and joint ventures mainly reflected additional loss related to one off non GAAP expenses incurred by associates. Income tax expenses were RMB1.6 billion, up 13% year on year or down 15% quarter on quarter. Effective tax rate for the quarter was 17%. Net profit attributable to shareholders was RMB7.4 billion up 32% year on year or 2% quarter on quarter. Looking at non GAAP, operating profit for the quarter was RMB10.5 billion up 27% year on year or 2% quarter on quarter. Net profit attributable to shareholders was RMB 8,300,000,000 up 26% year on year or 4% quarter on quarter. Diluted EPS was RMB0.881 for the quarter. Turning to segment gross margin. Gross margin for value added services was 64%, roughly flat year on year on a gross to gross basis and down 2 percentage points quarter on quarter. Sequential dip in gross margins primarily resulted from a mix shift towards lower margin third party smartphone games revenue and higher channel cost in the 3rd quarter. Gross margin for online advertising was 49%, down 3 percentage points year on year and quarter on quarter. The lower gross margin mainly flowed from higher video content cost. Moving to operating expenses. Selling and marketing expense was RMB 2,000,000,000 up 7% year on year or 28% quarter on quarter. The year on year increase was a result of greater staff calls and advertising spending, which was partly offset by reduced marketing expenses for WeChat. The sequential jump was mainly driven by greater advertising spending to promote key products such as online games, online media and mobile utilities, some of which are seasonal in nature. G and A expense was RMB4.4 billion, up 16% year on year or 9% quarter over quarter, of which R and D expense was RMB2.5 billion, up 21% year on year or 19% quarter on quarter. G and A expense increased due to increased R and D expenses. As a percentage of quarterly revenue, selling and marketing expense was 8% and G and A was 16%. R and D represented 9% of quarterly revenue and share based compensation was approximately 3% of quarterly revenue. As at quarter end, we had just over 30,000 employees representing a 15% increase year on year or 7% quarter on quarter. Campus recruitment was the driver behind headcount growth sequentially. Looking at margin ratios for the Q3, gross margin was 58.6%. It was down 3.5 percentage points year on year on a gross to gross basis and down 3 percentage points quarter on quarter. Increased video content costs and bank handling fees on money transfers using our mobile payment solutions drove margins lower year on year. Sequentially, the mix shift to lower margin third party smartphone games and increased channel cost for smartphone games were additional factors that surpassed the margins. Non GAAP operating margin was 39.5%. It was down 1.1 percentage point year on year on a gross to gross basis or down 4.5 percentage points quarter on quarter. Lower operating margins year on year reflected lower gross margins partly offset by reduced operating expense as a proportion of total revenues. The sequential drop mainly from lower gross margins and higher end selling and marketing expense as a proportion of total revenues. Non GAAP net margin was 31.8%. It was down 0.8 percent year on year on a gross to gross basis or down 2.7 percentage points quarter on quarter. The sequential decrease was due to lower operating margin partly offset by reduced income tax expense as a proportion of total revenues. For the Q3, total CapEx was RMB1.7 billion up 56% year on year or down 42% quarter on quarter. Operating CapEx was RMB1.2 billion, up 94% year on year or 45% quarter on quarter. The increase was primarily for the purchase of service to support business operations. Non operating CapEx was RMB498 1,000,000, up 7% year on year or down 76% quarter on quarter. Non operating CapEx was significantly lower quarter on quarter because we had CapEx for land use rights in the 2nd quarter. Free cash flow was RMB 6,600,000,000 down 5% year on year and up 22% quarter on quarter. Free cash flow in the Q3 reflected higher operating cash flow, partly offset by payment for land use rights and service. Our net cash position at quarter end was RMB21.2 billion flat year on year and down 2% quarter on quarter. Slight sequential decline in net cash mainly reflected exchange losses on bank borrowings and notes payable denominated in U. S. Dollars. Fair market value of our listed associates and available for sale financial assets was approximately RMB73 1,000,000,000 as at quarter end. This concludes our presentation. Thank you. Thank you, operator. We will open the call for questions now. We will take one question and one follow-up in their return and would actually prefer the others to go back on the Q and do a second time if they have any more questions. Please operator, let's take the first question. Thank you. We will now begin the question and answer session. Your first question comes from the line of Eddie Leung from Merrill Lynch. Please ask your questions. Hi, good evening. Thank you for taking my questions. Just I want to understand how your O2O ecosystem benefits your advertising business? Could you share more color on that front? Any metrics would be helpful. And then just a housekeeping question. I wonder if you mind to share the ARPU of various types of your games. Thank you. Yes, in terms of the O2O ecosystem, I think right now we are still in the process of building the ecosystem. So there's not a lot of meaningful revenue contributed on the advertising side. But sort of if you take the e commerce ecosystem as an example or precedent, what we see is, as we work with each one of the e commerce network, the biggest being JD for example, because JD itself has got an open platform, which host a large number of merchants. When we work with JD, we're able to convert a lot of those merchants into advertising clients on our platform. And effectively JD's advertising platform would take in the advertising dollars from its own merchants. And then in order to get additional traffic, it would actually put some of the money in our own performance based advertising system. And as a result, a lot of the merchants on the JD network become our own advertisers. As we look into the O2O space, the O2O space is a big movement in which there will be platform companies which helps the merchants within a particular verticals to become online. So in the case of for example in the future, we look at DMP and we look at Meituan, When they host a lot of restaurants and when they host a lot of offline services companies, they can actually convert some of the merchants into our advertisers. Likewise for Five8 for example, when they host a number of different advertising on their platform, be it companies which are trying to hire people, be it property agencies which are trying to sort of promote their services. In the future, when we have these connection to their advertisers, our entire network of performance based advertising inventories can actually serve them. So right now, we're still in the process of building these links, but over time we can actually leverage them to get access to advertisers in different industries that they serve. In relation to ARPUs, for MMOG quarterly ARPU ranges from RMB145 to RMB4 55. For advanced casual games, it ranges from RMB80 to RMB270 and for smartphone mobile games, if we look at this as a platform as a whole, it will be within RMB170 to RMB180 on a quarterly basis. Thank you. Your next question comes from the line of Wendy Huang from Macquarie. Please ask your questions. Thank you. My first question is regarding the bank penalty fee you mentioned for the C2C money transfers. Was it actually mainly related to the red envelope issued in the WeChat platform? And I noticed the cost of revenues for others almost doubled to RMB1.1 billion. So is this amount actually mostly related to this the bank handling fee? And same question is regarding your ambition in the travel space. So currently you're holding 15% in Tongtrend and 37% in Elong. What's your plan to integrate those travel assets you already invested or you have other plan for the travel space? Thank you. Okay. In terms of the bank handling fees, what happens is when users transfer money from their bank cards, either debit card or credit card to our account or use our Weixin Pay and QQ Wallet to pay merchants, we incur a bank handling charge. And for the part which are related to merchant payments, right, we actually charged the payments and we generate sort of corresponding revenue. But for the consumer related payments, then we actually sort of incur a cost. And the cost actually sort of is proportional to the amount. And as you look at the 2 different big components, one is actually our rat envelope payment scenario. The other one is money transfers. It turns out that the rat envelope is actually a small amount, but sort of large volume type of payment scenario, whereas bank transfers among consumers can have much fewer transactions, but sort of much higher amount per transaction. So a lot of the bank account charges actually sort of related to the second part, which is the money transfer rather than the red envelope. So at this point in time, we're still subsidizing a lot of these bank charges, but over time, we'll think about ways to contain the bank charges, especially with respect to the higher amount per transaction type of transactions, so that we don't lose the high frequency transactions and we continue to sort of provide a lot of incentive for users to use the high frequency transactions, which sort of by the way constitute a small part of the overall expense. So that's sort of our plan going forward. In relation to the increase of cost and the other, you are right, the big chunk of it is attributable to the bank charges, but there are 3 parts of it as Martin has mentioned before. The first part is in relation to Red envelope and the second part is in relation to money transfer and the third part is in relation to our normal online payment businesses. Now in relation to the travel industry, as you have pointed out, we have investments in Tongsheng and we have investments in Yilong. And we think sort of each one of the 2 companies is actually sort of a competent player in the overall market and each one of them actually sort of plays a slightly different role in the overall ecosystem, which is actually very big. So Tongsheng is a player which focus on scenery spots and they are also moving into package tours, whereas Elong is actually a dedicated hotel player. And we feel that since the overall travel market is actually growing in a pretty rapid manner and the entire industry is actually moving online. We believe with the distinctive positioning of the 2 companies, they actually each one of them will have a pretty healthy growth going forward. Thank you. Your next question comes from the line of Zhu Zheng from HSBC. Please ask your questions. Hi, thank you very much for taking my question. I had just a kind of a question. My first question relates to the wallet. I mean, you're seeing the 200,000,000 users is a very, very impressive number. I was wondering if you can give us a little bit more color in terms of the transaction volume, How much is it is coming from C2C versus e commerce also? Maybe you can comment on what kind of market share you might have in mobile payments today? And secondly, I was wondering if you can just kind of comment on how you view the current video landscape, especially after Alibaba acquiring Youku? Thank you very much. What I can say in terms of Wei Xun Pay and QQ Wallet is that first of all, we have seen rapid growth in terms of the number of people who have binded their bank cards, that's the first step. Last time, we have provided the number of more than 100,000,000 and this time around, we have exceeded 200,000,000. And a pretty high proportion of these people actually are active users of the payment solution. And in terms of the payment scenarios, by far the largest is still C2C and which include by far the largest being the Red Envelope gifting, which is very unique to the Weixin and Q2 ecosystem. In addition to that, the transfers has got a pretty important volume and the amount is actually quite big because the transfer per transaction is much higher than the red envelope. Followed by that is actually O2O transactions, which is said our partners actually generates millions of order transactions on a daily basis. And then it's followed by utility payments, including people charging up their mobile phone cards, including people paying for different sort of types of utilities and then e commerce which constitute a smaller number of transactions, but usually higher amount per transaction. So the overall volume on e commerce is quite large as well. In terms of the video industry, as you know, we were not the 1st mover in video. And so for us, the video industry has always been extremely competitive and it always will be somewhat competitive. That said, we think that we've done several things that improve our competitive position and that insulate us to some extent from some of the shorter term disruptions in the market. For example, we've purchased a large volume of very high quality content on long term multiyear contracts, such as our NBA basketball rights, our HBO rights, our Paramount rights, our Star Wars rights and our James Bond rights, which we just announced yesterday. So again, those are long term multiyear contracts that don't come up for rebid every few months. And then more importantly, I think that our position in video is a little bit dissimilar to the rest of the industry and that we have some unique advantages that flow from our platform. One set of advantages is our ability to drive IP across different formats, such as from our online literature business or our online game business into online video. Another set of advantages that's becoming increasingly apparent is the increasing is the growing consumption of video content within social networks. And this is something that's happening globally, if you look at the big where the video views within Weixin official accounts, quadrupled this quarter versus the year ago period. Okay. Next question please. Thank you. Your next question comes from the line of Eric Hakone from UBS. Please ask your questions. Thank you. If I may just first follow-up on James' comment on video. For your overall video business or movie business, how should we think about the roles of Penguin's picture and also Tencent picture? And also how do you allocate capital among these 2 divisions and also online video? And then a quick question on Moments advertising. Could you just share, I think last quarter you shared that you ran about 60 ads. How many ads did you run-in the Q3? And what is the split between the Fortune 500 brands and the SME? Thank you. So, on the video front, we allocate capital based on expected return, but also on the broader halo impact around the platform, both in the eyes of users and advertisers, which means that we often focus disproportionately on very highly branded high value content in the eyes of both users and advertisers. With regard to the 2 vehicles you specifically mentioned, Tencent Pictures is primarily focused on managing Tencent sourced IP, particularly game and literature IP and then managing that through different windows such as movie, TV series, game and so forth. You may know that as well as having the leading online game platform in China, we also have the leading online literature platform in China. And you're probably aware that there's been a recent trend, which we think is a persistent trend of popular online novels becoming popular TV series, popular movies, popular games and so forth. And so Tencent Pictures is our attempt to leverage on and accelerate that trend. Penguin Pictures is a different vehicle, which focuses on taking stakes, usually minority stakes in drama series that are being created and therefore participating in the distribution of IP that's often sourced from outside Tencent. So although the 2 are superficially similar, one of them is more focused on the IP and then managing the IP through multiple windows, whereas the other is more focused on tapping into the single video window. So that's on the video question. With regard to Weixin Moments, we're progressively ramping that product up. It would be served over 100 advertisement in the Q3 and we continue to expand the number of advertisers. Although right now, we are still primarily focused on large size advertisers. So I think in the first half of the year, it's primarily Fortune 500 advertisers. During the second half of the year, we're enabling more targeting by city. And so that's opening up to some of the more kind of regional or provincial advertisers. But we're still primarily focused on bigger advertisers and we'll kind of democratize that as we move forward. Okay. Next question please. Your next question comes from the line of Alan Hallum from Deutsche Bank. Please ask your questions. Yes, hi. Thank you. Taking in turn Eric's question a bit further. With regard to Weixin, can you give us just a rough sense of what might have been the revenue contribution from Moments in the quarter? And I'm not sure maybe you mentioned this. How many P4P advertisers do we have currently? And how would we envision that growing maybe over the next year? And then one small other question. What is the current revenue share with official account owners? And is that likely to change? Thank you very much. Sure. So a number of questions there. I think that with regards to the Weixin Moments, we don't disclose the exact breakdown, But within our performance advertising business, some of the bigger contributors include advertising on mobile Qzone, advertising in the Weixin official accounts, advertising on our mobile ad network, advertising on Weixin Moments, also advertising within our app store and our mobile browser. So there's a range of different contributors and Weixin Moments is a meaningful, but certainly not the biggest one of those numerous advertisers. In terms of the number of advertisers, I think you're asking about the number of advertisers on our performance advertising platform in total. So that would be in the 10000s. That number is up over 50% year on year. And we have some initiatives that we think may accelerate the growth in number of advertisers going forward that we're seeking to develop. In terms of the revenue share with the official account owners, so this is situations where an advertiser buys an ad at the bottom of an official account within Weixin and then we'll share that advertising revenue with the owner of the official account. We have a sort of sliding scale based on the nature of the content, but the owner of that content might capture roughly half of the advertising revenue depending on where he falls in that scale. Thank you. Next question please. Your next question comes from the line of Dick Hui from Credit Suisse. Please ask your questions. Hi. I got two questions. First question is on how should we look at the IVAS gross margin trend going forward? I think there are a couple of dynamics about in house games, 3rd party games as well as Android OS. I wonder how should we think about that trend kind of going forward? And then secondly, as the shareholder of Meituan, Tien Tsin, I think what is the strategy Tencent thinking about the right strategy for the growth down the road in terms of the strategy, technology and subsidies? Thank you. Okay. Well, in terms of IDAS, right, that's a pretty big basket, right. I think certainly there are 2 components, right. 1 is obviously the games. And in terms of the games, as you can see, we have actually delivered pretty consistent growth, although sort of slower than before, but consistent growth on our PC games. And that's actually sort of mainly driven by our main games, including most probably Elite of Legends. In terms of mobile games, which is sort of the segment that's really gaining traction as overall gaming sector, We have put in a new strategy as we mentioned in our last conference call. In that if you think about sort of in the past, right, the key component of our strategy was actually sort of putting our mobile games on our 2 important social platform, one is Weixin, the other one is QQ. But over time we started to leverage the 2 platforms as well as leverage our Nying Yong Bao as well as our browser to push for to find more channels and traffic as well as more context to promote games to our users. And then sort of in terms of the content itself, we have actually moved from the casual games into mid core games now into more hardcore games. And as you move from these game genres, typically you will see sort of new fewer players, but sort of new higher ARPU. So the ability to more target advertising is actually important. So our strategy actually sort of also involve us identifying pockets of users which may be interested in certain hardcore genres and promoting those genres to these users. And as you can see in our latest MMOG on mobile, it's actually quite successful. We still believe that sort of the mobile game segment has got good growth opportunity. We continue to execute our new strategy to tap into that opportunity. Now with respect to Meituan and Dianping, I think we are very we are relatively small shareholder in the company right now. And we feel that sort of the 2 companies by merging sort of has established a very strong presence within the O2O space, both in terms of the restaurant as well as other lifestyle services, as well as the food delivery part. So over time we believe that they would be able to establish stronger economies of scale, they will also be able to not only just do the transactions, right, but also get deeper into the entire value chain, so that they can create more value for their merchants as well as for their consumers. And as mentioned in our O2O strategy section, we believe our ecosystem can help not only them, but other O2O partners in terms of directing user traffic to them, in terms of helping them with payment scenarios as well as going forward, if their network actually connects with our advertising network, we can actually help them to generate revenue and also direct even more traffic to them. Thank you. Operator, next question please. Your next question comes from the line of Jin Yoon from Mizuho Securities. Please ask your question. Hey, good evening guys. Just a couple more questions on Moments. Can you just talk about what are the current ad loads on Moments looking like right now? And what are the impending or what are the remaining impediments to kind of pushing forward with more Moments ads? And the follow-up question is to your prior statement that you said that on WeChat Moments or on SMS advertising, you're targeting more localized advertisers. Is that advertiser acquisition going to be direct or indirect coming from agencies? And if so, what are the economics behind that? Thanks guys. In terms of the Adlo right now, the moments sort of when we first launched moments, it was in a pilot launch mode and then sort of over time we continue to scale it. But in terms of the ad low right now, we still put in a very stringent control. Right now, a user would not see more than one ad within 48 hours, right. So when you compare it to a lot of the other apps, this actually very low ad load. The reason we're doing this is, this is very important user engagement scenario for us. We want to make sure that we can make we can get the content right, we can get the technology right, we can sort of understand the user behavior in relation to advertising and we want to invent certain mechanisms so that we can add the fun component and add the social component around advertising. So there are a lot of basic things as well as innovative things that we are testing on the Moments ads. And we want to make sure that quality is high, so that users would like these ads actually before we start to increase our ad load. So that would take a process. We know that sort of this is something that can be done over time, but we want to ensure the quality of execution along the way, along the different dimensions I talked about. Now in terms of the localized advertisers, for now in terms of the big advertisers we're leveraging our own sales force to do it and we're working with the 4A advertising agencies, which is sort of the typical channel. We also have a self serve channel, which allows advertisers to upload their advertising. But that's sort of in our general inventory. But in terms of moments, right now we're still in a pretty stringent mode, which is there needs to be a pretty heavily engaged process in which the advertiser will work with agencies and then sort of come up with a high quality advertising and then we put it into onto the moment. Over time, we'll continue to find other agencies who can actually sort of help us to source advertisers and also create campaigns that are of high quality and that will proliferate. Your next question comes from the line of Xinjiang Meng from Jefferies. Please ask your questions. Thank you, management. I have two questions. First of all, on e commerce, the newly announced Jinteng plan, can management give us more color on the progress of your corporation in terms of traffic directed to JD and conversion ratio that you can see from your statistics. And also the payment from Tencent, does that also benefit JD? And then I have a follow-up question. Okay, well the cooperation with JD has been progressing quite nicely I would say overall and that include generating transactions for JD within our ecosystem, within our Weixin and Mobile QQ apps in terms of sort of transaction on a daily basis that has been sort of growing on a consistent basis. At the same time, we also find that our apps are great sources for JD to reach new consumers. So as you know, in JD's brand and access is actually very strong in a lot of 1st tier cities, but sort of as he gets into sort of the 2nd tier, 3rd tier and the 4th tier cities, there are still users who have not really sort of new get exposed to the service. But through our app, a lot of these new users would put in their first order And once they discover that the user experience is great, the product is actually authentic and quality is high, fulfillment is great, then they may repeat purchase within Weixin or Mobile QQ and at the same time they may just download an app and start buying through the JD app. So from a new user acquisition perspective, we actually sort of contribute quite a large proportion of the new users to JD, especially on the mobile side. Now the new well, in addition to that, we also talked about the cooperation around ad networks, right. A lot of our traffic is actually directed to JD's advertising system for them to present these inventories to their merchants. And that actually sort of is a good way for them to bring more traffic to their merchants. The recent Jingtong plan is really for us to create more CRM and more marketing opportunities for high quality brands that sell on JD and that would include advertising inventories that would include a better promotion of the official accounts and that would also include some specific entry points for some of these good brands. So overall, I think sort of the relationship as well as the performance of our cooperation is actually progressing well as well as going from strength to strength. Thank you, Martin. My follow-up question is in the area of mobile game. Mobile game has shown a very strong growth this quarter compared to last quarter. I know some of that is related to product launch a delay in the Q2. Is there something else that has driven the rebound? Is it related to the overall industry or an uptick in the more sophisticated hardcore games? Thank you. I think the major change is our change in strategy. We had a mobile game strategy that we were executing from late 2013 until early 2015. We recognized that as the mobile game industry matured and segmented, it was time to adjust our strategy. We came up with the new strategy during the Q2, during which time we actually delayed several key new title launch as well as we were preparing the new strategy and then we began to implement the new strategy in the Q3. And I think that internal change was the primary dynamic. Thank you. Next question please. Thank you. Your next question comes from the line of Alicia Yap from Barclays. Please ask your questions. Hi, good I have a couple of questions. Number 1 is that, could you actually give us a little bit more detail how is the official account advertising is progressing? And how is that, for example, now this quarter versus 3 or 6 months ago? And then second, I have a broader question from the video industry landscape. So will video to be a winner takes all or the landscape will remain to have multiple players? Related to that, it seems like all the major online video platform are trying to own or secure as many differentiated content as possible to attract user? And with the takeoff of the video subscription service, what is the management view regarding the consumer behavior over time on the subscription side? Will one platform stand out to win more user or do you think that user could potentially subscribe to multiple video sites and then the attractive content will still be a swing factor? And then lastly, just related to that is that when should we expect Tencent Video to turn profitable? Thank you. So in terms of the official accounts, I believe we launched advertising the official accounts in the Q3 last year. It's actually a very powerful advertising medium. I think more powerful than many people in the financial community recognize and that's first because there's a gigantic volume of page views in the official accounts each day. We're talking in the billions of impressions. And secondly, because advertising within the official accounts can use deal targeting technologies, 1 based on the social profile of the Weixin or now the QQ user, which we know is very powerful from the ads we have in QZone and Moments and so forth. And then secondly, based on the content of the official account itself. So we're actually seeing very good growth in official accounts. We mentioned the inventory tripled year on year, good growth in CPC, very high click through rates, and we're quite optimistic about the future. One change we have made is that in the past, we had a flat fee or flat rate revenue share with the official account content creators. Now we actually channel a bigger proportion of the revenue to those official account owners who create original content into their official account first and then a lesser share to those who simply repurpose web based content into the official account. And that's having the desired impact of driving more original content creation, both text image and now video within the official accounts. So that's the official accounts. On the online video side of the business, I think you touched on an interesting issue, which is that all else equal, an advertising funded video world is more likely to be fragmented between multiple channels, whereas a subscription funded video, well, tends to consolidate a little bit more because it's easier for the consumer to change channels than it is for them to cancel 1 subscription account and subscribe to a new subscription account. So all else equal, while I think that both formats, ad funded and subscription funders, are super competitive today, will remain super competitive in the future. At the margin, the subscription funded business will probably be a little bit more consolidated and the ad funded business will probably remain more fragmented. In terms of user behavior, I think that I can give you a mix of quantifiables and qualitative factors. On the quantitative side, what's interesting is the habit of watching subscription video is something that's truly nationwide. It's still relatively concentrated in terms of age group and the type of content people pay for, which is top tier local drama serials, western drama serials, western movies and western sports. But it's a habit that's evolved nationwide. In terms of qualitative, if you look at the comments people put under the subscription funded comment a year ago, it was all about how can I watch this for free, which other sites have this free? Now people have largely kind of grown through that and are much more inclined to actually discuss the merits or drawbacks of the content itself, which is an encouraging signal. I think reflects the fact that the willingness to subscribe in order to the willingness to pay in order to watch high quality video content is increasingly embedded. And that's something that's benefited the whole industry. So our own subscription revenue video revenue is up about 800% year on year. But I think that's off a low base and many of our peers are seeing similarly rapid year on year revenue growth rates for the subscription video service. In terms of bringing the video business in aggregate to profitability, that's not a near term target for us. Right now, what we're seeing is that as we spend more money on content, we attract more users, which generates more revenue, enhances our platform quality. And so we continue to reinvest in content rather than focusing on near term profitability. I just want to add sort of, we don't look at the video platform sort of in isolation. We believe that the video platform is actually a very important part of our overall traffic ecosystem. And as we look at, as an engagement tool, it actually generates a very engaging time amount of time with the users. And at the same time, when you look at sort of our overall IP strategy, which sort of get us into the literature which sort of help us to monetize through the content as well as games. We believe a lot of these different platforms actually sort of will work together and the overall profitability of the entire ecosystem will be bigger than the individual platforms on aggregate basis. So I think that's the strategic importance of our overall video platform. Thank you, Martin. We will take the last question, please. Thank you. Your last question comes from the line of Thomas Chong from Citigroup. Please ask your questions. Hi, thanks management for taking my questions. I have two questions. The first question is about how we should think about the competitive landscape of the mobile games market next year because we see Tencent and NetEase already consolidating the market. And for the Horsefire and E and F for the mobile games, should we expect these 2 to be a blockbuster, if there any color on that one? And my second question is about the margin trend. Can management talk about how we should think about the margin trend going forward? Should we expect it to be year on year increase, stable? Any color would be great. Thank you. I think that in terms of the mobile game market, you're correct to observe that NetEase and Tencent have taken some share of the mobile game market this year. And more importantly, have enjoyed some sort of stability in terms of both of us having multiple games within the top 10 games by revenue month in month out. I think that's the sort of trend that we're seeing globally in terms of some of the bigger, more established mobile game developers in the United States, in Europe, in Japan, in Korea enjoying enhanced market share and more importantly, greater revenue stability from their mobile games. And I think it reflects structural changes in how easily consumers can discover new mobile games, the ability to update and enhance the player experience within the big existing mobile games and so forth. So that's something that's generally worked to the benefit of the stronger mobile game developers and publishers in the industry. With regards to specific new mobile games, we were obviously optimistic, otherwise we wouldn't be starting to publish the titles, but time will tell how successful they become. I think in terms of margins, as you know, we generally don't give margin guidance. You should be aware that in the Q3, we're still lapping the change in our accounting from net to gross. And that effect will drop out of the year on year comparisons going forward. And looking forward, we'll continue to bear some costs related to the growth of our payment business. We'll continue to bear some costs related to the growth of our video business. In the 3rd quarter, you saw some impact on our Internet BaaS gross margins because some of our newer mobile games, A, have a revenue share to the 3rd party developer and B, for various reasons, skew more toward iOS than Android. And to the extent that our future mobile games are also 3rd party and also skew more toward iOS than Android, that would have some impact on margins. But it's not something that particularly bothers us given the incremental margin on those 3rd party iOS skewing mobile games is still a very healthy incremental margin relative to our overall corporate operating margin, even if it's not as good as a first party game that's largely on Android. So anyway, those are just some of the things to think about when you're thinking about our margins. Thanks. Okay. Thank you very much, operator. We're rounding up 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 slide shortly. Thank you and see you next quarter. Thank you. That does conclude our conference for today. Thank you for participating in Tencent Holdings Limited 2015 Third Quarter Results Announcement Conference Call. You may all disconnect now.