Earnings Call: Q2 2015

Aug 12, 2015

Ladies and gentlemen, thank you for standing by, and welcome to the Tencent Holdings Limited 2015 Second Quarter and Interim Results Announcement Conference Call. I I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Catherine Chen from Tencent. Please go ahead, Ms. Chen. Thank you, operator. Good evening. Welcome to the Q2 of 2016 results conference call. I'm Katherine Chen from the RO 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 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 on ww. Henson.com/ir. Now let me introduce the management team on the call tonight with our Chairman and CEO, Mr. Billy Ma President, Mr. Martin Lau Chief Strategy Officer, Mr. James Mitchell and Chief Financial Officer, Mr. Zhuan Luo. Billy will kick off with a shorter review. Review, Martin will speak to strategy, James will review our business and John will go through the financials before we take your questions. I'll now turn the call over to Tony. Thank you, Kevin. Good evening. Thank you for joining us. During the Q2 of 2015, we sustained our leadership across our social, games and media platforms. Operationally, we made notable progress across our portfolio of mobile utilities with a mobile manager security service and mobile QQ browser and Yingying Bao app store moving into industry leadership positions. Strategically, we achieved rapid growth of our mobile payment solutions and expand subscriber base for our premium literature, music and video services. Financially, we delivered a solid set of results benefiting from the growth of our online advertising. Let me highlight a few numbers for you and give the details to John's financial section. Total revenue excluding e commerce transactions grew 27% year on year to RMB23.3 billion. Sequentially, it rose 5%. Non GAAP operating profit was RMB10.3 billion, up 34% year on year and 10% quarter on quarter. Non GAAP operating margin crept up 2 percentage points to 40 4 percent for the quarter. Non GAAP net profit to shareholders was RMB8.0 billion, up 32% year on year and 11% quarter on quarter. For our key platforms, total MAU for QQ was 843,000,000 within which smart devices MAU grew 20% year on year to RMB627,000,000. Total MAU for Qzone was RMB659 1,000,000, within which smart devices MAU rose 15% year on year to RMB574 1,000,000. Weixin and WeChat reached combined MAU of 600,000,000, up 37% year on year. For online games platform, we retained leadership across PC client, web and mobile games in terms of users and revenues. We are adapting our strategies for mobile games to the changing market conditions and James will discuss this in the business review section. Among our media platforms, our mobile news is the most popular among Internet users in China. Our mobile video service more than doubled its video traffic year on year, anchoring our leadership across PC and mobile. For our mobile utilities portfolio, we recently achieved significant milestones in product performance and market share. Martin will share more with you in the statistic highlights section. With that, I will pass to Martin. Thank you, Pony, and good evening and good morning to everybody. For this quarter's strategic highlight, I would like to highlight the breakthrough that we have achieved in our mobile utilities. Our mobile utilities include security, browser and app store and they are fundamental in providing the infrastructure support to our expanding mobile ecosystem. This portfolio of mobile utility service is very valuable to us where they technically support each other to deliver seamless product experience to our users and also cross channel traffic to our partners in the ecosystem. Each one of these apps rank within the top 20 mobile apps in China in terms of MAU. On its own, our mobile manager ensures a secure environment for digital consumption and transactions online. Mobile QQ Browser and Yiling Bao respectively provide our users quick access to a broadening mix of web based and app based content and services. Together, the trail allowed us to establish constructive relationship with a very large number of industry partners. Benefiting from our overall mobile social franchise as well as our continuous efforts on product innovation and performance enhancement, we're able to leap from a late entrant to a market leader in each one of these area. Recently, we're beginning to see the financial benefits materialize through advertising in mobile QQ browser and in app user spending in Linyong Bao App Store. I'll discuss each one of these mobile utilities in turn. Starting with our security service mobile manager, according to QuestMobile, our mobile security app gains market share continuously in terms of monthly active users in the past years and in the most recent month overtook the incumbent industry leader. How do we achieve this? We provide best in class performance across core protection features such as virus scanning, cleaning and speed boosting. We innovate and differentiate our product offering by investing to enhance our capabilities, especially in payment security and anti fraud phone database. This enabled us to earn trust and credibility from users. In addition to our standalone security app, we are also building a network of partners including handset manufacturers, ROM developers and O2O partners, offering them our mobile security solution through software development kit as well as open API. Our standalone app and security solution together now protects over 60% of Android smartphones and support leading Android app stores in China. We believe a neutral and secure online environment is crucial to the development of our mobile ecosystem in China and our mobile security service ensured this is the case. Turning to Mobile QQ Browser, our standalone app has evolved into a platform that supports HTML5 websites and provides quick access to digital content such as video and literature to our users. According to Quest Mobile data for June, our mobile browser had achieved the number one position by monthly active users. We're gradually monetizing browser traffic through advertising. In addition to our standalone app, we also use our browser kernel to support Tencent Browser Service, which enables viewing of web based content within non browser apps such as Weixin, Mobile QQ and many of our partners' apps. As these apps continue to attract users and serve content via our browsing solution, we saw very heavy volume of page views traffic and monthly active users on Tencent browser service, exceeding any standalone mobile browsers in China. Moving on to Yinying Bao App Store. Our market share by monthly active users doubled in the last 2 months 12 months to make yinyongbao the 2nd most popular Android App Store in China according to iResearch. We believe we lead the industry in terms of the total number of apps available and in terms of the speed of bringing updates from majority of top apps to our users. Leveraging our mobile social franchise, we have refined our targeted recommendation based on social and interest graphs and we're working with partners to deep link in app content. These efforts enhance the overall user experience, the download conversion as well as the revisits to our app store, thereby enabling us to increase our market share on a consistent basis. On the monetization front, we have implemented revenue sharing arrangements with game developers and are also testing our cost per download advertising. So with that, I'll pass to James to talk about our business review. Thank you, Martin. In the Q2 of 2015, our total revenue grew 19% year on year. Excluding e commerce transactions, total revenue increased 27% year on year. BAS represented 79% of our revenue, within which online games contributed 56% and social networks 23%. Online advertising represented 17% of total revenue, up 7 percentage points year on year. For our value added services segment revenue was RMB 18,400,000,000, up 17% year on year and down 1% quarter on quarter. Social Networks revenue was RMB 5,400,000,000 up 18% year on year and up 3% quarter on quarter. Premium subscription packages and item based content drove the year on year revenue growth, while subscriptions for mobile privileges and for premium literature, music and video services led the sequential revenue increase. Online games revenue was RMB13 1,000,000,000 up 17% year on year and down 3 percent quarter on quarter. Revenue grew year on year due to higher monetization of core PC gamers and to contributions from some new smartphone games. Adverse seasonality for PC games in the Q2 resulted in the sequential revenue decline. Looking at social networks. In Mobile QQ, we enabled direct streaming of music, books, comments and videos to deepen user engagements and promote digital content purchases. We integrated access for over 200,000 interest tribes into Mobile QQ to facilitate discovery of popular chat topics, such as celebrities, sports and movies. For Mobile Q Zone, we introduced a smartphone storyline and new photo editing features that boosted photo sharing activity. Average daily photo uploads increased 70% year on year in June. For Weixin, broader use of digital red envelopes in everyday social interactions and corporate marketing events led to dramatic increase in payment transaction volume year on year. We're encouraging content producers to enhance their quality of their content through sharing our advertising revenue with them and through incentive schemes, such as enabling users to send cash rewards to creators of especially interesting content. We've connected users in 47 cities to local health, transport, utilities and municipal services as part of our Internet plus strategy. Looking at PC client games, total average concurrent users increased year on year, although the mix shift from massively multiplayer online games to advanced casual games continued. Within advanced casual games, League of Legends grew users and increased monetization through new skins and gift packs. We're enhancing our sports games, FIFA Online 3 and NBA 2 ks Online by tying them more closely into high profile sports events such as the new NBA season, where we hold exclusive China online distribution rights. We're investing time and energy into eSports activities, which we believe enhance community activity around our games and so contribute to games longevity. We organized some of the most watched eSports events in China. Massively multiplayer online games, we saw lower average concurrent users and higher spending per user year on year. In early July, we began large scale beta testing of Moonlight Blade, a new self developed martial arts RPG. Initial user feedback is positive and are internally testing several high profile new titles, including Monster Hunter Online. For smartphone games, we generated revenue of RMB4.5 billion in the 2nd quarter, up 11% year on year on a gross to gross basis and up 1% quarter on quarter. We remain the largest platform for smartphone games in China, operating the top titles in the playing card, shooting, running and fighter plane genres. We're implementing several strategies to extend our leadership and to benefit from the increasing use of propensity to spend money on mid core mobile games. Specifically, over the coming months, you'll see us exporting some of our most popular PC game IPs onto mobile. We're also bringing some of our PC game best practices in the areas of testing, marketing and operations to mobile, so as to encourage user engagement, enhance user spending and In the Red Sea categories that are well developed and intensely competitive, such as Battle Card and Role Playing Games, we're focusing our key marketing resources on our most promising titles to cut through the industry clutter. And we're developing high quality games in blue ocean genres such as action role playing and tower defense to cultivate new user behaviors as we've already done with our We Fire shooting game. Moving to online advertising. Segment revenue was RMB 4,100,000,000, up 97% year on year and up 50% quarter on quarter. Mobile contributed over 60% of our total advertising revenue. Our brand advertising revenue was RMB 2,000,000,000, up 47% year on year and up 45% quarter on quarter. Year on year revenue growth slowed from increased video traffic higher sell through of mobile ad inventory for both portal and video. Quarter on quarter revenue growth positive benefited from positive Our performance advertising revenue was RMB 2,100,000,000 up over 100% year on year and up 54% quarter on quarter. Revenue jumped year on year due to new ad inventories, especially in Qzone and Weixin and official accounts and due to higher cost per click. Sequentially, increased ad impressions and positive seasonality drove the performance advertising revenue growth. For brand advertising, we believe we again outgrew the overall market. Based on internal tracking over the past 12 months, we've gained substantial market share in 3 of our top 5 advertiser categories: personal care, online services and consumer electronics. And we have sustained our market share in food beverage and automobiles. Through our video platform, traffic increased substantially and revenue more than doubled year on year. Our mobile video views more than doubled year on year and mobile now contributes most to our video ad revenue. During the second half of twenty fifteen, we're adding more exclusive content, including Voice of China Season 4 and NBA coverage. For our mobile news service, average daily page views and the number of advertisers both increased substantially, such that our mobile news ad revenue more than doubled year on year and exceeded our PC portal ad revenue. For social performance advertising, we've integrated Weixin Efficient account ads into the Guangdian Tong engines, simplifying the advertiser experience and increasing liquidity. The advertiser base or number of advertisers on Qzone tripled year on year, supporting higher cost per click and overall revenue. Advertising on Weixin official accounts benefited from more traffic and more ad impressions. Advertising on Weixin Moments offers significant potential, especially among brand advertisers. We're currently adding new categories of brand advertisers to the mix, including luxury products and financial services. We ran over 60 advertisements on Weixin Moments in the second quarter. In the second half of the year, we'll continue to refine our ad formats, processes and our ad targeting within Weixin Moments. And with that, I'll pass you over to John to talk through the financials. Thank you, James. Hello, everyone. For the Q2 of 2015, our total revenue was RMB23.4 billion, up 19% year on year or 5% quarter on quarter. Gross profit was RMB14.4 billion, up 19% year on year or 7% quarter on quarter. Operating profit was RMB10 1,000,000,000, up 28% year on year or 7% quarter on quarter. Income tax expense was RMB1.8 billion, up 10% year on year or 9% quarter on quarter. Effective tax rate for the quarter was 20%. Net profit attributable to shareholders was RMB7.3 billion, up 25% year on year or 6% quarter on quarter. In the Q2, we included non GAAP adjustments for material associates in the definition of our non GAAP measures. We believe this will reflect a more accurate picture of our core businesses and renders us more easily comparable with peers. Non GAAP operating profit for the quarter was RMB10.3 billion, up 34% year on year or 10% quarter on quarter. Non GAAP net profit attributable to shareholders was RMB8 1,000,000,000, up 32% year on year or 11% quarter on quarter. Non GAAP diluted EPS was RMB0.849 for the quarter. Turning on to segment gross margin. Gross margin for value added services was 66%, down 1 percentage point year on year on a gross to gross basis and up 1 percentage points quarter on quarter. The year to year deal was primarily due to increased revenue sharing costs from a larger mix of 3rd party smartphone gains and increased channel costs. The sequential change reflected a mix shift towards higher margin first party games in the 2nd quarter. Gross margin for online advertising was 52%, up 7 percentage points year on year or 13 percentage points quarter on quarter. The higher gross margin resulted from rapid advertising revenue growth, partially offset by high sharing and content costs. Moving to operating expenses. Selling and marketing expense was RMB1.6 billion, down 19% year on year or up 21% quarter on quarter. The year on year decrease mainly reflected reduced subsidies relating to taxi booking services, while the sequential jump was a result of increased advertising spend to promote key products and mobile payment solutions. G and A expense was RMB4 1,000,000,000, up 16% year on year or 9% quarter on quarter, of which R and D expense was RMB2.1 billion, up 10% year on year or 2% quarter on quarter. G and A expense increased mainly due to annual salary review and higher R and D expenses. As a percentage of quarterly revenue, selling and marketing expense was 7% and G and A 17%. R and D represented 9% of quarterly revenue. Share based compensation was approximately 3% of quarterly As at quarter end, we had 28,072 employees, up 12% year on year and broadly stable quarter on quarter. Looking at margin ratios for the Q2, gross margin was 61.6%. It increased 2.1 percentage points year on year on a gross to gross basis and increased 1.6 percentage points quarter on quarter. The year on year increase primarily reflected a mix shift away from low margin revenues following the divestment of our e commerce business. The sequential increase mainly reflected higher online advertising gross margin as well as a mix shift to higher margin gains within our game portfolio. Non GAAP operating margin was 44%. It was up 6.4 percentage points year on year on a higher gross margins and reduced selling and marketing expenses as a proportion of revenues. The sequential uptake mainly flowed from higher gross margins. Non GAAP net margin was 34.5%. It was up 4.8 percentage points year on year on a gross to gross basis and up 1.9 percentage points quarter on quarter. The higher net margin year on year was mainly due to higher operating margin, partly offset by recognized share of loss of associates as proportion of total revenues. The sequential increase in net margin was due to a higher operating margin. For the Q2, total CapEx was RMB2.8 billion, up 2 10% year on year and 113 percent quarter on quarter. Operating CapEx was RMB801 1,000,000, up 38% year on year and 22% quarter on quarter. The increase in operating CapEx is primarily for the purchase of network equipment and replacement of office computers. Non operating CapEx was RMB2 1,000,000,000, up 50 7% year on year and 2 0 2 percent quarter on quarter. Non operating CapEx in the Q2 mainly relates to land use rights for Penn construction of a new office building to support business growth. Free cash flow was RMB5.4 billion, down 14% year on year and 35% quarter on quarter. Cash flow decreased on higher capital expenditure paid during the quarter for the land use Frank mentioned above. Our net cash position at quarter end was RMB21.7 billion, down 4% year on year and 14% quarter on quarter. Year on year decline in net cash was mainly due to dividend payments of approximately RMB2.8 billion of about US450 $1,000,000 in the 2nd quarter. Fair market value of our listed associates and available for sale financial assets rose to approximately RMB90 1,000,000,000 as at quarter end. This concludes our presentation. Thank you. Thank you, operator. We shall open the floor for questions, please. Thank you. We will now begin the question and answer Alicia Yap from Barclays. Please ask your questions. Hi, good morning. Can you hear me? So good evening, everyone. Thanks for taking my questions. I have the first questions that can you elaborate a bit more details on your plans and strategy, how to potentially increase the payment fees revenue that you could generate via your partners that integrate into the Weixin and Mobile QQ. In related to that, can you share with us currently what are the rankings of the payment transaction volume that come through the retail payment currently? For example, after the gaming payment, the Red Pack at French Circle transfer, what are some of the higher frequency transaction that you could monetize and your plans for increasing the fee based income in the future? Yes. In terms of payment, I think the strategy for us is really to increase the number of users that use our payment solution, thereby increasing the attractiveness of the payment solution to At this point in time, we actually do At this point in time, we actually do not really look at the revenue as much. I think broadly speaking our payment business is actually at breakeven from a fee generation versus sort of banking charge perspective. And then sort of we do spend quite a bit of money actually in terms of subsidies in order to drive the adoption of the payment solution among users and among merchants. So that the most important thing for us is really to increase the usage. We believe this is actually important for our overall value, not in the sense of generating revenue, but more importantly, we can increase the efficiency of our advertising business in the future, right, when you actually have merchants and service providers who actually can get their users to respond to an ad and pay for the services sort of in a very seamless way than sort of the advertising rates will go up. In addition to that, payment also generates a very good entry point for our online finance applications going forward. And it also provides us a lot of data which we believe the consumption pattern of users and that would also help our targeted performance advertising performance. So I think that's where we stand on the strategic plan for our payment solution. In terms of the key categories of payments, right, so you have sort of the wrap packet, the person to person. And then from their point onwards, we have a number of virtual items, let's say, sort of mobile charge up, People will pay for games and Tencent as well as our partners virtual services. In addition to that, we have a whole range of O2O services as well as e commerce services, which sort of new follow that in terms of ranking. I see. My second question is thank you, Martin. My second question is on mobile games. So yinnggba app store, it seems like the tractions on mobile QQ and WeChat Game Center has experienced some slowdown. Is that mainly due to the saturations of the mobile gamers, which is more an industry issue? Or is it just because during Q2 for Tencent, there was lack of the big hit titles released in the WeChat game center. How should we think about the growth outlook for the overall mobile games revenue in the coming quarters? Thank you. So Alicia, perhaps I'll seek to address that question. We believe there's ample room for revenue growth for the mobile game industry in China. So today there's more than twice as many people playing mobile games as PC games each day, but both for the industry as a whole and for Tencent specifically within the industry. Recently there's been some of titles that can both monetize a of titles that can both monetize to relatively healthy levels and enjoy relatively long use lives. So we believe that the China mobile game industry is becoming more like the U. S, European, Japanese or Korean mobile game industries, where not only do you have very casual games with long life and mid call games with short life, but also you have hit mid call games that can really define, redefine their genres and generate substantial revenue over extended periods of time. In recent months, we've been following the evolution of the industry with great interest. We've seen some challenges, but we also think therein lies opportunities. And so that's really behind the strategic shift that I outlined earlier that within the Red Sea categories, we're focusing more resources on fewer titles that we believe can not only participate in a genre, but also potentially redefine the genre. And then in the blue ocean categories, we're focused on developing new game experience that currently don't exist in China and training people to play mobile games in a way that they haven't before. And we'll see what happens going forward. But if you look at the App Store rankings, today, for example, you can see that some of our new titles, for example, King of Fighters or Legend of Mir 2, fit squarely within that criteria of being mid core games with a great user experience where we're cautiously optimistic that they'll enjoy a healthy longevity. Okay. Next question please. Thank you. Your next question comes from the line of Wendy Huang from Macquarie. Please ask your questions. Thank you and congratulations on the solid results and also the breakthrough you made on the different mobile products. My first question is about mobile games. So are you seeing any new technology such as MTN-five actually revolutionize the mobile game industry in the near future and also to bring the monetization opportunity for Tencent? And second, your margin record very high level in the past 3 years. So is this kind of high margin sustainable for the rest of the year? Thank you. Okay. So on the game question, I'll answer that. I think at this point in time we look at sort of native apps as sort of the best technology for mobile games. I think sort of there are a lot of industry participants and we ourselves are actually sort of testing out HTML5 as platform for games and I try to see sort of whether they are more casual games that could actually fit into that category. Here sort of this technology becomes an important technology for games, I think we are very, very well positioned in that segment. In fact, we wish there's a big market for that segment because as we went through in our speech highlight, right, we have a very strong browser app right on a standalone basis, which is leading in terms of the market. And at the same time, we actually sort of have even bigger traffic on our HTML5 Tencent browsing service in terms of page views, in terms of active users, right? So if there are games which actually fit into this technology platform, which we believe there will be, but whether how big it is, it's a question mark. It becomes very big right then we will be a major beneficiary of that technology shift. Just on the margin outlook. First, as you know, we generally don't comment on margin outlook going forward. So my answer to the question will be consciously vague. 2nd, in terms of specific cost items, our cost of revenue is experiencing some weight. And we'll experience some weight going forward from items such as our exclusive content payments, for example, for MBA rights and also for the support for our online payment business where we have to incur the interbank handling fees. Thirdly, I would say that by global standards, our margins are fairly comparable to those of global peers. And it's important to bear in mind that our margins are not they don't bear the cost of margin disruptive O2O experiences, O2O activities because we've adopted a strategy where, generally speaking, those O2O activities and the financing around them takes place at our partner company level rather than the consolidated Tencent level. Thank you. Next question please. Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your questions. Teddy, can you hear us? Perhaps we'll go to the next question. Yes, please, operator. Thank you. Your next question comes from the line of Xinjiang Mo from Jefferies. Please ask your questions. Hi, everyone. Thank you for giving me the opportunity. I have two questions. First one is on the advertising. Currently Tencent doesn't participate in the revenue sharing on mobile, Is this the revenue share to advertisers recorded on the cost of goods sold line? And does Tantan have any near term or a midterm plan of participating in doing so? I have a second question on online travel. We noticed that you submitted a going private proposal to Yilong recently. Just wonder if management can share some of your overarching strategy behind online travel and how does that feed into Tencent's overall O2O footprint? And given that Baidu and Alibaba are both quite aggressive in O2O, if you can talk about your O2O strategy as well, that will be great. Thank you. Actually for the Gong Tian Tong on our official account, we share revenue with the content providers and the sharing would be included under comps. Right. In terms of online travel, right, we look at it as an important well as attractive vertical right here, but sort of it's not sort of new the biggest contribution in terms of frequency of payment, but it's an attractive business in itself, right. So we have some participation in the sector. As you can see, we have invested in a number of different companies, including Elong, including 17U. Now, a number of these companies actually sort of coincidentally also sort of have investments from Ctrip. So I think overall, we look at sort of ealone as an attractive business going forward because it does have a pretty good exposure to the hotel segment. And we feel that in the public arena, right, it has to make continuous investment. And so that's why the share price are very suppressed. If we can actually take it private, we can actually invest in the company and really make it a more viable business. And over time, we may actually sort of list it in the Asian market in the future. But that's undecided at this point in time. Overall, we feel that our various investments in the travel segment as well as our partnership with Ctrip at different levels and you'll give us pretty good exposure to a good vertical business. In terms of our O2O initiative, right, we do focus a lot on the high frequency O2O services. So we have a number of different investments including investment in Didi, KwayD, including our investment in DMP, including our investment in Ele. Me and a number of other investments too. As James talked about, right, we feel that these O2O services on one end requires some traffic right now, but on the other hand requires actually a lot of offline exposure and the ability to manage a very large sales force in particular. So these are not the kind of expertise that we as a technology company and user experience company sort of is very good at managing. So what we have decided on a strategic basis is really sort of working with a number of best of breed partners and help them to sort of generate the online exposure, while they actually sort of focus on building out on their offline expertise. And at the same time, as James has said, this not only give us exposure to the best team in the industry with a lot of focus, it also allows us to leverage our capital in a more efficient basis because we don't necessarily need to spend all the money that these companies are going to loss in the process of building up market leadership. As you know, all these companies are actually generating pretty heavy subsidies and losses at this point in time. Thank you. Your next question comes from the line of Natalie Wu from CICC. Please ask your questions. Hi, good evening management. Thank you for taking my question. Can you speak up a little bit please? Okay. Can you hear me? Thank you. Yes. Okay. I have two questions actually. The first is, congratulations on the strong performance in your online advertising business. But can you elaborate a little bit more about your advertising revenue? You mentioned that for RMB2 billion was generated from branded. I'm just wondering how much is contributed from online video? Also for performance based ad, what is the mobile revenue contribution? And the second question is actually on your deferred revenue. If we look at your deferred revenue in current liability line, there is actually a RMB1 1,000,000,000 decline from last quarter's level. So just wondering, can you share with us what is the major cause for this sequential change? I would appreciate it if you could just break down this effect from maybe game and advertising business? Thank you. Why don't I handle the advertising question and then John will look after the deferred revenue question. So we can follow-up with a detailed analysis offline. But given that the rapid growth in our video business, video would be the largest portion now, the largest contributor to our brand display, which I think was your first advertising question. And then for your second advertising question, on the performance advertising, mobile would be the large the very large majority at this point. It's primarily a mobile business or essentially a mobile business. In respect of deferred revenue, actually this quarter it increased by about 6.3%. There are two reasons for that, because number 1 is in terms of the business cooperation agreement of Jingdong every quarter there will be a natural decrease of more than RMB200 1,000,000. And secondly, you can see that this quarter is a lower season for online games, which in 2014, it was the same case. And at that time, it decreased by about 3% quarter on quarter. Your next question comes from the line of Dick Wei from Credit Suisse. Please ask your questions. Good evening. Thanks for taking my questions. I have two questions. First question is on the premium content subscriptions. I wonder if you can give some updates on how Tencent is progressing across different videos and also some of the music reading content subscription. And wonder is the number is also included in the fee based VAS versus subscription line as well? How about that? Sure. So yes, it's included inside our fee based VAS. I think that the big picture here is that the Chinese consumer behavior is changing and that's very positive for everyone in this business, including us, but also our competitors. If you look at the U. S. Today then, the top 10 highest revenue apps in Apple App Store in the U. S, 7 of them are games, but then 3 of them are HBO Now, Spotify and Pandora. So in developed markets, there's a very well established trend now toward people spending substantial time and money on premium digital content, especially on smart devices. And we're just starting to see that happen in China. If you look at some of our own products, recently we've run a promotion for a Korean singer called Big Bang, and that's generated millions of digital album sales in the last few weeks. We just put online the Universal Movie Fast and Furious 7 that will generate millions of transactions in a few days. So it seems like there's a great deal of demands now emerging among consumers to pay for premium content. We're tapping into that with our digital literature business, which is a very clear industry leader. We're tapping into that with our digital music business, which is in a very clear industry leader. Our digital video business, which has added millions of subscribers year to date. But I don't want to give you the impression that this is all a $0.10 alone. I mean, we feel that both we and our competitors are together enjoying a buoyant and increasingly substantial next question is on Internet Finance. I think company started some of the small lending program maybe back in May June timeframe. How is that progressing along? And any kind of color you can share with us? Thank you. Yes. WeBank launched a product called We Loan, which is a consumer on a very convenient basis. So we have actually launched it on the basis of white list. So we go through the list of users within Mobile QQ at this point in time and basically sort of new leveraging on our credit model identify a certain number of users and then sort of we're going to offer them sort of an entry point to these credit product and see what the response is. I think at this point in time, it's still on trial. We have put in a small number of users into this program. So far I think the result is encouraging I would say both in terms of for the people that we have shown the entry point, the adoption of these loans as well as when we look at the credit model, right. So far with limited data of course, but we feel pretty good about the credit model that we have at this point in time. Obviously, sort of in the next few months, we will gradually roll it out to a larger number of users within Mobile QQ. Over time, we'll also launch this product on Weixin as well. So by that time, we'll certainly be able to give you much more color on how this product is faring. But so far I think so good. Okay. Thank you. Next question please. Thank you. Your next question comes from the line of Erica Wilkerson from UBS. Please ask your questions. Thank you. My first question is on Moments advertising. I think James mentioned that you ran about 60 advertisements in Q2. Can you share just how significant was the revenue contribution for Q2? And if we kind of look at that run rate for on a 12 month basis, how significant can Moments advertising be? And my second question is on selling expenses. That amount was down 19% year on year. And one of the reasons cited was WeChat marketing. Were you being more selective in your global expansion of WeChat? Thank you. So on the first question about advertising and sideways in moments. I'd say it was a contributor to our performance advertising business in the Q2. But given it's still very early stage, a substantially smaller contributor than advertising on mobile Q zone or advertising on Weixin official accounts as comparison points. Over the long term, we think that it has the potential to be one of the largest products within our mobile performance advertising portfolio because it enjoys enormous traffic. It enjoys relatively affluent users who are disproportionately appealing to advertisers. And therefore, we believe it can tap into not only the kind of hardcore performance advertisers such as e commerce companies and app developers, but also the brand performance advertisers. And we're already seeing that with very good response from luxury goods advertisers or automobile advertisers to participate in Weixin Moments. So, advertising. In respect advertising. In respect of the selling and marketing expenses for year on year, it was mainly due to the significant reduction in subsidies for taxi hailing apps, Didi, Dasha, as well as a little bit of a reduction in the WeChat overseas marketing expenses. Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your questions. I apologize. Back to the questions. Two questions. The first one is about mobile games. I'm wondering if James could talk a little bit about you guys view on the future of overseas mobile games in China. It seems like we haven't seen too many successful overseas games in China. And traditionally, we all know Tencent has an advantage in licensing overseas games in China. So just wondering what's your thought on that? And then secondly, perhaps something more long term. Could you guys give us any updates on the so called social commerce within your ecosystem? We have heard certain anecdotal data points that the growth has been pretty good. So just wondering if any more color on this business? Thanks. Yes. So with regard to the success or lack thereof of overseas mobile games inside the China mobile game market, I think that's a fair observation. If you look at Southeast Asia or India, then the correlation between the top mobile games in those markets and the top mobile games in the percent. So for a number of reasons, including local taste localization, publishing and so forth, so far, the Chinese mobile game market has evolved relatively independently from the rest of the world with a couple of high profile exceptions such as Clash of Clans. Our belief is that over time as the Chinese mobile game audience becomes sophisticated and as foreign games are better localized to suit Chinese tastes, then there will be an increase in the success of overseas games in China. And we have certainly tried to position ourselves for that trend. So we have partnered with and made investments in some of the biggest and best mobile game companies in Korea. We have a relationship with CJ Games, for example, in Europe with MiniClip in the U. S, with Glu in Japan and so forth. And we have a number of international games, both from 3rd parties and from our partners, which we're looking forward to releasing in China. But as of today, the Chinese mobile game market is still in a 75% local game market. And that hasn't hurt us so far. I mean, I'd emphasize that most all of our biggest and most successful mobile games historically have been mobile games developed by our in house studios, such as Tian Tian KuPao or such as Quanmin 2G. Yes. In terms of social commerce, right, I think at this point in time, it's still at a very primitive stage of growth. We do see sort of quite a bit of action that's happening within our social network. And we do see sort of one of our investee companies like Kodai has seen pretty good traction in terms of their growth. But I feel that how can we really capitalize more growth of social commerce. Think there are certain elements that's needed. One is actually payment. The other one is advertising. For example, other ways of for people to discover about these shops, these sellers. Also, the supply chain of good products is actually But over time as we continue to build up our own payment system as advertising continue to grow within our ecosystem. And then we provide different ways to capitalize the discovery of these products. And as more and more good sellers actually start to use this channel, I think there could be more growth, right? But we need to sort of keep trying. And I think if you look across the ocean, right, Facebook has been trying quite a bit in terms of figuring out what would be a good way to capitalize commerce on their platform as well. So I think we are in the experiment and learning mode in terms of doing this and we are also building a lot of the infrastructure to support this. Okay. Thank you. And operator in the interest of time, we'll take the last three questions please. Thank you. Your next question comes from the line of Alan Hellowell from Deutsche Bank. Please ask your questions. Thank you very much. Forgive me if you mentioned this already, but what is the current number of official accounts on Weixin? And how many do we now have on mobile Q2? And also curious as to what the timeline might be for launching official account based ads on mobile QQ. My second relates to the appreciable sequential improvement in advertising gross margin in the second quarter. I assume it's largely into the interplay of P4P margins, which are very high, but also content spend on video, which is consequential to the face of margins. The question is, is content spend growth likely to continue to stay significantly relative to overall ad revenue growth given current marketing conditions? Thank you. In terms of official accounts, right, I would say, so we have continued to see a healthy growth in terms of the total number of official accounts on WeChat, on Weixin, as well as sort of the number of active official accounts and the number of page views and the number of articles that sort of these official accounts send out. So all in all sort of the trend has been sort of quite nice. In terms of ballpark figures, we have sort of more than 10,000,000 official accounts registered and on active basis a couple of 1,000,000 active. So in terms of Mobile QQ, we are creating a whole infrastructure for supporting official accounts too. And that will be launched in the next couple of months. And we expect that could also sort of generate additional traffic on our official accounts. With regards to advertising gross margin, so you're correct that the increase reflected performance advertising, which tends to be higher gross margin or else equal. With regard to content costs, our experience historically is that when we buy excellent content exclusively such as the Voice of China program or the Game of Thrones series, then that content combined with our platform strengths, combined with our distribution through Weixin and so forth, can deliver a jolt search to our video traffic, to our video advertising and more naturally also to our video subscription revenue. So given those very positive experiences, we continue to reinvest very aggressively in video content. And we've mentioned numerous times that our video advertising revenue more than doubling year on year. And you should assume that as our revenue grows, our content will grow at not exactly the same rate, but at a relatively rapid rate as well, because we find that buying the best content delivers the biggest and most successful results for us. Thank you. Next question please. Your next question comes from the line of Thomas Choe from Citigroup. Please ask your questions. Hi, thanks for taking my questions. I have two questions. The first question is about the macro headwinds. Can management comments about how it impacts the brand advertising business? And my second question is about the M and A strategy. What other verticals would Tencent be interested to invest in the future? Thanks. Well, in terms of macro headwind, I think we don't really feel that that I think you have identified sort of among our entire business probably sort of the only thing that's exposed to it is actually our branded advertising, which actually sort of is relatively small compared to our total revenue. And at the same time, within the branded advertising, a big part of it is actually video advertising, which is on secular or structural growth mode. So I think the macro headwind is not felt that much at Tencent at this point in time. In terms of M and A, as we said, right, we in the past we focus on acquiring stakes in companies that would enhance our overall ecosystem. And at the same time, these are management who have proven track record and have a similar culture with us. So I think these are sort of the criteria for our investment. And with the rollout of Internet plus strategy with Internet actually sort of approaching different verticals within the economy, I think there are actually more opportunities for us to find ourselves being at the crossroad with a partner. And if our technology, if our ecosystem, if our user base is actually helpful to help companies to make use of Internet to capture opportunities, I think we will be happy to do that. So I think that's sort of in broad general terms what we are looking for. Thanks. Thank you. The last question please. Thank you. Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your questions. Thank you. Could you talk about the net revenues that you earned in mobile games in the quarter as well as the new genre of games that you'll be launching in the coming months. How soon can we see that breadth improve? That's the first question. And second on WeBank and the strategy, will you remain focused on micro loans? Or should we expect WeBank to evolve into a platform potentially supporting all but the top 5 banks? Thank you. Piyushan, the first question, we can go into net revenue versus gross revenue offline because it's a fairly technical discussion. I think with regards to the new genres of games, it's a combination of a new approach of putting more resources behind key titles within the sort of existing Red Sea genres and then developing and publishing what we hope will be big transformative games in blue ocean genres, which have not yet formed in China, but which we hope to form. And you should expect that to be a kind of gradual but continual process. If you look in recent weeks, we've already released 2 mobile games that are more sort of Red Sea in nature that seem to be successful, one being King of Fighters, another one being Legend of Mir that are based on proven IP. And one trend that's become very apparent in the first half of this year, whether you look at NetEase's fancy Western Journey game in China or the Fallout Shelter game in the U. S. Is that PC gamers who in the past treated mobile games the way that someone who reads novels might treat a comic book adaption and now taking mobile games much more seriously and are much more willing to play mobile games that are tied into PC games. So we've already released a couple of titles that are linked on mobile that are linked to PC and going forward we'll seek to attack both these Red Sea and Blue Ocean categories progressively. Yes. I would just sort of just add one more point to James' discussion about sort of our strategy. I think if you look at sort of PC platform, we actually sort of have spent many years in terms of developing the best traffic paths for bringing traffic into games. I think sort of the same exercise needs to be done for our mobile platforms. And so if you look at the first inning of that effort was really sort of creating these game centers. But I think that's just sort of the first part of the story, right? We arguably have a much bigger franchise on mobile Internet than we had on PC Internet. And as a result, there are actually sort of a lot of venues through which we can actually generate traffic for our games. I think some of the things that James talked about for example sort of cross promoting our content with the games. So video platform can be sort of brought to bear. For example, we can actually sort of leverage music to bring traffic to music games. So there are a lot of our existing platforms which have not really participated in our game initiative yet. So it would take time for us to view that. But over time, they will be built. In terms of our Internet Finance and WeBank initiative, I think WeBank as we constantly said, WeBank wants to be the wants to be a provider of products that actually sort of can bring value to consumers as well as to its partner banks. So WeBank is not sort of just a bank, but really sort of an open platform for banks to access users and provide better services to users. So I think, We Loan is one of these products, but sort of we'll continue to develop good products along these lines. But sort of for example, making loans to stay on enterprises or large corporates is not really something that's along the lines. So we probably sort of refrain from doing that for some time. Yes. Thank you very much for joining the call and thank you operator. We're rounding up the call now. If you wish to check our press release and other information, please visit our corporate website at ww.tencent.com.sr. 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 Second Quarter and Interim Results Announcement Conference Call. You may all disconnect now.