Earnings Call: Q1 2015

May 13, 2015

Thank you standing by and welcome to Tencent Holdings 2015 First Quarter Results Announcement Conference Call. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Katherine Chen from Tencent. Please go ahead, Ms. Chen. Thank you so much, operator. Good evening. Welcome to the Q1 of 2015 results conference call. I'm Katherine Chen from the IR team of Tencent. Before we turn 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 consent. 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 www.tencent.com/ir. Now let me introduce the management team on the call tonight. We have our Chairman and CEO, Tony Ma President, Martin Lau Chief Judge Advocate Officer, James Mitchell and Chief Financial Officer, John Ho. Tony will take off with a short overview. Martin will review value added services segment performance, James will speak to my advertising and John will go through the financials before we take your questions. I'll now turn the call over to Tony. Thank you, Kevin, and good evening. Thank you for joining us. In the Q1 of 2015, we achieved solid financial growth in our core platforms with an expanded mobile user base in rich entertainment media content and enhanced ad solutions. A few numbers to highlight. Total revenue excluding e commerce transactions was RMB22.2 billion, up 40% year on year and 8% quarter on quarter. Non GAAP operating profit was RMB5.4 billion, up 45% year on year and 16% quarter on quarter. Non GAAP net profit to shareholders were RMB7.1 billion, up 36% year on year and 5 percent quarter on quarter. Turning to our key platforms. Total MAU for QQ was RMB 832 $1,000,000 within which smart devices MAU grew 23% year on year to 603,000,000. Dollars Weixin and WeChat reached a combined MAU of 549,000,000, up 39% year on year. Total MAU for Qzone was $668,000,000 within which smart devices MAU rose 22 percent year on year to RMB568 1,000,000. Our online games platform sustains its leadership on PC and mobile with a broader and more diversified games portfolio. Among our media platform, our mobile news is the most widely viewed news service in China. Our video platform solidified its leadership, a leading position in China with traffic more than doubling year on year. About our utility services, we drove higher adoption of our mobile security solution and mobile browser services and app store. With that, I will pass to Martin to speak to his business review. Thank you, Bonnie, and good evening, everybody. In the Q1 of 2015, our total revenue grew 22% year on year. Excluding e commerce transactions, our total revenue increased 40% year on year. VaaS revenue represented 83% of total revenue, of which online games contributed 59% and social networks 24%. Online advertising represented 12% of total revenue, up from 6% a year ago. For value added services, segment revenue was RMB18.6 billion, up 29% year on year and 9% quarter on quarter. Social Networks revenue was RMB5.3 billion, up 32% year on year and 3% quarter on quarter. The growth flows from higher sales of in game items and monthly subscriptions for mobile privileges and premium entertainment content. Online games revenue was RMB13.3 billion, up 28% year on year and 11% quarter on quarter. Contributions from new games on smartphones and PC and increased monetization of popular events casual game titles led to year on year revenue growth. Sequential performance benefited from positive seasonality in PC games and also broader mix of smartphone game genres. Moving to social networks. For Mobile QQ, during the quarter we further reinforced the young and active differentiation of Mobile QQ via new personalization and entertainment options and we deepened penetration among young Internet users. We promoted user engagement on a daily basis via nearby groups and on special occasions through Red Envelope gifting. Our nearby groups, which was launched a year ago, scaled to around 1,700,000 and we also have 1,000,000,000 red envelopes shared among QQ users over the 6 day Chinese New Year period. For Weixin, we organized shake for red envelopes promotions, which spread widely among Weixin users. This led to a record 3,000,000,000 red envelopes shared over Chinese New Year, as well as a meaningful increase in Weixin payment adoption and payment transactions. As part of a connection strategy, we enabled offline merchants to offer user coupons to promote their products and services. We also connect to users in 5 major cities to local health, transport, utilities and municipal services. Now moving on to games, looking at PC client games. The average concurrent users trend showed an ongoing shift of users playing time from MMOG to advanced casual games. For advanced casual games in the battle arena category, League of Legends' robust performance benefited from enhanced sales of holiday items as well as player to player gifting over Chinese New Year. We're closed beta testing new 3 d Battle Arena titles including SMITE and Master Cross Master to expand this genre. In the sports category, holiday gift tag sales boosted revenue of FIFA Online 3. In April, in order to enhance local content and player engagement, we introduced China soccer teams and also enabled global tournament play mode. In the shooting category, we deepened our leadership, offering the broader selection of shooting games in China. For MMOG, we're working to bring more compelling and innovative titles to attract users. Moonlight Blade, our in house martial arts role playing game is now one of the top 3 most highly anticipated PC games in China will enter closed beta testing in late May. We also started to close beta test some groundbreaking hybrid genre games, including Monster Hunter Online, the 1st action role playing MMO in China with hunting gameplay. The game is the 1st free to play online game from Capcom's popular console game franchise. And also MX, the first action role playing MMO in China with 3rd person shooting gameplay We'll leverage this creative IP to develop not only PC games, but also mobile game, anime series well as books. For smartphone games, we widened our mid core audience, adding 7 new mid core titles for mobile QQ and Washing game centers. To diversify player base, we're introducing new genres like shooting, quiz show and dress up. We extended our success in shooting genre from PC to mobile with the game We Fire, which reached number 1 in China's iOS app store revenue ranking during the quarter. We're licensing titles based on popular game and anime IPs. We operate the game IMMT Q, which is sequel to 20 thirteen's most popular card battle game. In the pipeline, we also have Infinity Blade Saga, Carrot Fantasy 3 and mobile versions of DNF as well as Naruto. Besides Mobile QQ and Weixin Game Center, we've also extended our game platform to include app store in NingXiao and mobile browser, and they're emerging as important game distribution hubs in China. 1st quarter smart phone games revenue from Mobile QQ and Weixin Game Center, Yin Yong Bao and Browser as well as other platforms altogether reached RMB4.4 billion and that's up 82% year on year and 8% quarter on quarter on a gross basis. With a multi platform distribution platform and with continued general diversification, we retained our position as the leading mobile game publisher in China by both daily active users and revenues. With that, I'll pass to James to review our online advertising segment. Thank you, Martin. Good evening, everyone. Our online advertising segment revenue was RMB2.7 billion, up 131% year on year and up 4% quarter on quarter, within which our brand advertising revenue was RMB 1,400,000,000 up 90% year on year and down 7% quarter on quarter. Revenue jumped year on year due to strong video traffic growth particularly on mobile. Sequentially increased video viewership partially offset the usual weak seasonality in Q1. Mobile contributed approximately 40% of our brand advertising revenue. Our performance advertising revenue was RMB1.3 billion, tripling year on year and up 18% quarter on quarter. New mobile ad inventories more effective targeting driving higher click through rates and higher cost per click drove the year on year revenue growth. New mobile ad inventories, particularly from mobile Qzone, Weixin official accounts and our Yingying Bao app store were the primary drivers of the sequential performance advertising revenue growth and mobile contributed about 75% of performance advertising revenue during the quarter. For brand advertising, our top 5 advertiser industries were food and beverage, automobiles, online services, personal care and consumer electronics. Benefiting from more TV drama series and movie rights, our video platform attracts a wider viewer base and increased engagement in terms of video views per user. This resulted in a more than doubling of video views and video ad revenue year on year. For our mobile news service, daily page views increased 75% year on year and ad revenue more than doubled year on year. For performance advertising, mobile Qzone ad revenue increased quarter on quarter as click through rate and cost per click both improved. Weixin official account ad revenue increased modestly quarter on quarter as traffic growth offset seasonally lower demand from e commerce advertisers in the Q1 versus the Q4. We began generating meaningful revenue from Yin Yong Bao listing ads. And in Weixin Moments, a limited number of brand advertisers ran ads to help us establish advertising case studies and best practices for the future. We monitor consumer engagement with the ads across a number of metrics such as click through rates, viral ad shares, and voice mobile advertisers, test drives actually taken on the cards that are advertised. The results so far are encouraging and we will therefore progressively expand the number of advertisers, range of ad formats and ad targeting mechanisms for Weixin Moments advertising in the months to come. In April, we combined the product and ad sales team of our Weixin Group and our Social Network Group into a single operation. We believe this unification enables us to better serve our advisors across our different properties and better target ads to consumers across our different properties using the GuanDianTong targeting engine. And with that, I'll pass to John. Thank you, James. Hello, everyone. For the Q1 of 2015, our total revenue was RMB22.4 billion, up 22% year on year or 7% quarter on quarter. Gross profit was RMB13.4 billion, up 27% year on year or 6% quarter on quarter. Operating profit was RMB9.4 billion, up 20% year on year or 27% quarter on quarter. Finance costs were RMB433 million, up 82% year on year or 59% quarter on quarter. Interest expense incurred on new US2 1,000,000,000 dollars bonds issued in February as well as ForEx loss contributed to the quarter on quarter increase. Income tax expense was RMB1.7 billion, up 46% year on year or 91% quarter on quarter. The increase mainly reflected higher pretax profits and a higher corporate income tax applied for certain subsidiaries in China. Effective tax rate for the quarter was 19.7%. Net profit to shareholders was RMB6.9 billion, up 7% year on year or 17% quarter on quarter. On a non GAAP basis, operating profit for the quarter was RMB9.4 billion, up 45% year on year or 16% quarter on quarter. Net profit attributable to shareholders was RMB7.1 billion, up 36% year on year or 5% quarter to quarter. Diluted EPS was RMB0.752 for the quarter. Turning to segment gross margin. Gross margin for value added services was 65%. On a gross to gross basis, it was down 2 percentage points year on year and up 1 percentage point quarter on quarter. The lower gross margin year on year was primarily due to increased revenue sharing cost from a larger mix of third party smartphone gains and increased channel costs. Gross margin for online advertising was 39%, up 4 percentage points year on year and was down 1 percentage point quarter on quarter. The higher gross margin year on year resulted from rapid advertising revenue growth, partially offset by greater investment in video content. Moving on to operating expenses. Selling and marketing expense was RMB1.3 billion, down 29% year on year or 36% quarter on quarter. The year on year decline mainly reflected reduced subsidies to user who booked taxi rides using Weixin payments, sequential decrease primarily resulted from a seasonal reduction in advertising and promotional activities. G and A expense was rmb3.7 billion, up 25 percent year on year or down 8% quarter on quarter, of which R and D expense was RMB2 1,000,000,000, up 34% year on year and down 6% quarter on quarter. The year on year growth in G and A expense was mainly driven by increased R and D expense and staff costs. Sequentially, G and A expenses decreased mainly due to lower consultancy fees, outsourcing costs for ad hoc research and development projects and office related costs. As a percentage of quarterly revenue, Selling and marketing expense was 6% and G and A 16%. R and D represented 9% of quarterly revenue and share based compensation was about 3% of quarterly revenue. As at quarter end, we had just under 28,000 employees, up 4% year on year or 1% quarter on quarter. Looking at margin ratios for the Q1, gross margin was 60% on a gross to gross basis, it increased 3.7 percentage points year on year and was broadly stable quarter on quarter. The year over year increase in gross margin was mainly driven by mix shift away from low margin e commerce business. Non GAAP operating margin was 42%. On a gross to gross basis, it was up 7.6 percentage points year on year and 3.5 percentage points quarter on quarter. Higher margins year on year was mainly due to higher gross margins and the decline in selling and marketing expenses as a a total revenues. Non GAAP net margin was 31.9%. On a gross to gross basis, it is up 4.2 percentage points year on year and down 0.7 percentage points quarter on quarter. The higher net margin year on year was mainly due to higher operating margin, partially offset by higher effective tax rate. The sequential dip in net margin resulted from higher effective tax rate. For the Q1, total CapEx was RMB1.3 billion, up 17% year on year or down 17% quarter on quarter. Operating CapEx was RMB656 1,000,000, down 27% year on year and up 11% quarter on quarter. And operating CapEx was rmb676 1,000,000,000, up 187 percent year on year and down 33% quarter on quarter. Free cash flow was RMB8.4 billion, up 52% year on year and down 9% quarter on quarter. Our net cash position at quarter end was RMB25.3 billion, down 26% year on year or up 11% quarter on quarter. Year on year decline in net cash was mainly due to strategic investments, partly offset by an increase in free cash flows generated during the year. The fair market share value of our listed associates and available facile investments were RMB74 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. Certainly. Your first question comes from the line of Dick Wavencrestis. Please ask your question. Hi. My first question is on the maybe on the expense front. It looks like the sales and expenses for the quarter is a bit lower, maybe the sequential decline is high more than the normal seasonality. Should we see that trends to continue? Or are we moving some of the expenses essentially go to the COGS line, cost of goods sold on the other services line because there are more like maybe payment related spending on there. Just wanted to see what the general thoughts on sales marketing or the COGS of data services going forward at NEMS? Yes. On the sales and marketing expense, the decline is mainly due to the fact that in the Q1 of last year, there was a very big campaign for taxi subsidy in relation to promoting our mobile payment solution. And this year, the Q1, we don't have that expense. Now having said that, I think, 1, mobile payment is actually a very important strategic initiative for us. And second, as you can see in the O2O space, there's actually a very competitive landscape with a lot of companies offering services and subsidies to the consumers. And for some of those services, there is actually a pretty good ability to promote our mobile payment solution. So I think while we have scaled down that promotion on taxi hauling, If there are other ways to which we can actually promote our mobile payment solution, we will actually invest that money in order for us to continue to build our mobile payment franchise. And would it be booked under sales marketing or would it be more under other cost line? Sales and marketing. Sales marketing. Okay, Got it. Maybe if Martin, if you can give us, I guess, maybe 2 months ago, I asked the same questions about any updates on maybe the performance based advertising on the Moments area. And again, with the restructuring, I don't know any and more testing, what kind of visibility we have for that area as well as maybe some of the kind of the performance from the official accounts. If you can share some of the parts that would be great. Lance? I think as we mentioned in the prepared remarks, we're very happy and more importantly the advertisers are very happy with the results of the first sequence of advertisements that occurred in the Q1. And because it's performance advertising, we can kind of quantify their happiness through looking at engagement metrics, viral shares, actual actions undertaken and so forth. So given the advertiser happiness, we're going to be progressively expanding the number of advertisers, range of advertising formats and so on as we move through the year. With regards to the restructuring internally, we thought it was important to create the advertising platform with the most simplicity and therefore the greatest liquidity. And in order facilitate that consolidation, we actually took 2 teams and products that were previously separated and unified them into a single team with a single product that will serve ads across all of our performance advertising inventory. Thank you. Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question. Good evening. Thank you for taking my questions. I have a follow-up question on your performance based advertising solution. Could you give us a little bit more color on the advertisers you expect to have going into the future. Do you expect the advertiser base to continue to be very different than your brand advertising solutions? Is there any opportunity to bring some of those performance based advertising system? So that's my first question. And then secondly, just a housekeeping question on your game business. Any update on the revenue contribution of your mobile game portfolio as well as the ARPU of different types of your games? Thank you. I think with regards to whether our big brand advertisers will buy performance advertising, It's a global trend that we've seen in the United States and Europe that brand advertisers are increasingly beginning to allocate some percentage of their ad budget towards performance formats. And if you look at our own results, then we only had about a dozen advertisers on Weixin Moments during the Q1 of 2015, but the majority of those were kind of classic brand advertisers looking at advertising in a performance format. So going forward, we feel that there'll be some of our ad inventory, for example, at the Ying Yong Bao app store where the preponderance of the advertising may come from classic performance oriented advertisers such as e commerce companies. And then there'll be other ad inventories perhaps including Weixin Moments where we'll have performance advertising coming from more advertisers who have more traditionally be brand advertisers. So we believe that our performance advertising solution is increasingly suitable for increasingly broad range of advertisers. And maybe I'll pass the ARPU question on to John. Yes. For the MMOG, the quarterly ARPU, it's between 295 to 395. For advanced casual game, it would fall within the range of $100,000,000 to $245,000,000 And in relation to smartphone games, it will be within 100 and 55 to 165. Your next question comes from the line of Alicia Yap from Barclays. Please ask your question. Hi. Good morning and good evening, everyone. Thanks for taking my questions. I do have a quick questions on the smartphone games revenue. So it looks like Inbound and mobile browser contribute about $400,000,000 revenue this quarter. I assume this mainly come from the games revenue sharing. So how should we think about the App Store revenue line? And how meaningful will this grow into? I think on the App Store revenue line, we have a model that's somewhat similar to those of a couple of our listed competitors. And as of today, we have traffic activity that's similar to or greater than our competitors, but revenue that's materially lower than our competitors. So over time, if we execute on monetization and our market share remains where it is, then we should expect our app store mobile game revenue to increase. I see. Then is there any update on the Weixin payment account in terms of traction and also the numbers of accounts? I think last quarter you guys mentioned about 100,000,000 paying user that linked to the bank account. Any update for this quarter, especially after the Chinese New Year? Yes. After Chinese New Year, well, number 1, during Chinese New Year, we actually had a pretty big campaign around red envelopes and that actually sort of add meaningfully to both the number of people who bind their accounts as well as the activity within the accounts. And then sort of after Chinese New Year, there's a consistent growth in terms of the number of people who buy their cards because not only we have person to person transactions, We also have an increasing number of merchants who are using the payment solution. And for mobile payment solution, it's actually sort of a 2 ended platform, you need to have more merchants than you can actually attract more users using it. And then sort of by having more users, you can actually attract more merchants. So I think we have seen a virtuous cycle in terms of increasing number of people who can pay and increasing number of merchants. So the overall growth track is actually quite healthy. Thank you. Your next question comes from the line of Alex Yao from JP Morgan. Please ask your question. Hi, good morning and good evening, everyone. Thank you for taking my question. The first question is to follow-up with the previous question on moment monetization. James, you discussed the feedback from advertiser are encouraging and they are happy. And now that you guys have already accomplished the restructure of internal ad system, what's the strategy to release more inventory to larger number of advertisers into the next few quarters? And then the second question is, can you share with us the development of affiliate as network on mobile? Do you book that on gross revenue basis and the development there? Thank you. Yes. On mobile, moment, as I think, we'll continue to sort of develop it in a paced manner, I would say, because I think very clearly we know that there's a lot of traffic in the moment's timeline. There are a lot of people who are paying a lot of attention and both in terms of number of visits as well as the amount of time to spend on moment and actually sort of being quite high. What we want to do is actually to make sure that we have the right advertising format that one would sort of present a good user experience to users. We want to make sure that we can actually sort of target the advertisement so that the efficiency actually increase. And thirdly, we actually want the advertisement to be interesting enough that the users would actually share them, so you get sort of an additional benefit. So I think the first round of testing, right, have confirmed that we were able to create these elements. But we also have continued room to improve. In particular, sort of how exactly we can actually make the creation of these advertisement more efficient and sort of coming with standardized formats so that advertisers can actually come up these ads in a faster manner, I think is an important aspect. So I think that's sort of one thing that we're doing. The other thing is actually sort of testing on other formats of advertising, so that it has you can provide the same elements, right? Good response from the users, good exposure for the advertisers and also sort of having the viral effect. So we will also work on that. So over time what you can see is there will be an increasing number of advertisers. There will also be an increasing number of ad formats that will be added. And then sort of the performance metrics is both in terms of targeting, in terms of viral effect hopefully will continue to increase as well. Okay. So the next question is I think in relation to the ad network we book on net basis. Sorry, it's gross. I've got one question here. Yes. Consistent with industry practice, we book ad network advertising on a gross basis, which both our domestic and our global peers do. Yes. Thank you. Next question please. Thank you. Your next question comes from the line of Cynthia Meng from Jefferies. Please ask your question. Thank you, management and congratulations for a solid quarter. I have two questions. Number 1 is, what contributed to the sequential jump in the other revenue category? And how much of this was contributed by e commerce? And how much was from online payment? And gross margin of this segment declined to 19%. How should we think about this going into the rest of the quarter? Can management give us some more color please? I have a second question after this one. In relation to the other revenue, there are a few big components, one of which would be obviously the e commerce transaction, which has been moved from the e commerce segments to others. And other than that, they are also revenue generated from business like payment services as well as some virtual e commerce transactions as well as some enterprise software revenue. Understand. Thank you. And in terms of advertising gross margin trajectory, given the launch of performance based advertising, which typically is higher margin, can you can management give us some more color on how we should look at this? And particularly, we have seen after Facebook launch performance based advertising, the gross margin started to trend up. Will this also apply to Tencent? Thank you. I think if you look at our advertising business, we have a traditional portal business, which is now becoming a new stable over time. Then we've layered on a video business where margins have been very negative and now improving, but still remains a drag on profitability. And then within the performance advertising business, the substantial component is on our own inventory where the incremental margins would be rather high because we're already bearing the content costs. And at some portion is the affiliate ad network, where the margins would be lower, because we would share the revenue with our affiliate ad network partners. Great. Thank you. Your next question comes from the line of Erika Poon Wirtgen from UBS. Please ask your question. Yes. Hi. Thank you. Just want to have a quick follow-up on the Moments advertising, whether you can just share with us in the Q1, how much it contributed to revenue? 2nd question is on just the breakdown on your advertising revenue. How much was that was coming from video? Thank you. I think that if you look at the brand advertising revenue then a substantial portion of the base and very much of the growth comes from video. On the performance side, we won't disclose advertising product by product because there's a lot of products. But we did say that the sequential growth was driven notably by mobile Qzone, Weixin official accounts and Yong Yong Bao. So while we're excited about Weixin Moments advertising, we only had a dozen advertisers in the Q1 and we're still at the very, very early stage of deploying that, whereas we also have lots of room to grow inventory and grow click through rates and to grow revenue on some of our other properties including QoSehun, Weixin Official Accounts and Yinyong Bao App Store. Thank you. Next question please. Thank you. Your next question comes from the line of Chitling from HSBC. Please ask your question. Great. Thank you so much for taking my question. My first question is, I was wondering if you guys can give us an update on your initiatives on Dbank? And secondly, I was wondering if you can give us sort of an update on your expectations for your smartphone gaming portfolio for the balance of the year and in particular the mix between licensed in house and casual and mid core? Thank you so much. In terms of WeBank, I think there's to some extent not that much to update. I think we have talked about many times it's going to be sort of a bank cooperation platform with banking license. It will be focused on building up the credit needs of our vast number of users as well as the smaller enterprises. And it will be based on sort of our understanding of the users, if the users so required, then we can actually sort of leverage that understanding to do dynamic pricing of their credit. And we will sort of deliver those credits to our corporation banks for money to be lent to these users. So this setup requires actually a lot of work in terms of coming up with the product, coming up with the right way to reach the users, coming up with the right way to sort of determine credit for these users. So we are in the process of actually designing these products and also sort of on a very limited basis testing some of these products among the users. So I think I can give an update on that. Building a bank actually requires a pretty long time, especially sort of building a bank with sort of such a distinctive positioning actually requires a lot of patience. So I think we will give it quite a bit of time for it to come up with the right product and right technology. So that's on ReBank. In terms of games, why don't James talk about it? Okay. I mean, I'll start with history and finish with future. But historically, when we started launching smartphone games integrated with Weixin and Mobile QQ, our primary objective was to train consumers who previously weren't playing smartphone games or indeed playing any games to begin doing so. And in order to do that, we initially focused on developing relatively casual mass appeal games ourselves. And we're pretty happy with our trajectory. We've disclosed that over 100,000,000 people play our mobile games every day, which is more than double the number of people playing PC games every day. And through last year, we felt the market was beginning to evolve and that it was important that we provide an attractive venue for 3rd party game developers and also we provide our users with relatively more mid core games. So the second half of last year moving into early this year, we put a great deal of energy into securing 3rd party game licenses and publishing some successful mid call games such as IMMT2 or Tri Min 2 gs and so forth. Sitting here today, we believe the market will continue to evolve in multiple directions And therefore, we want all of the above. We continue to develop many games internally, an increasing number. We continue to license many games. We have some relatively casual games in the portfolio, which are intended to call games in the portfolio. Today, we're in a position where we have somewhere in the region of half of the mobile game market. But if you look at it on a category by category basis, then there are certain genres which we have essentially pioneered and created ourselves like mobile shooting games. And there's other genres where we actually have very low market share. And we're looking forward to releasing good games that can increase our market share. Thank you. Your next question comes from the line of Vivien Ho from Deutsche Bank. Please ask your question. Hi. Thank you for taking my question. I have two quick questions. First of all, regarding the organizational streamlining for our advertising WeChat advertising business, can Matt please provide some more color on the incoming execution plans for this streamlining. More specifically, what are the key differences before and after this integration for advertisers? I have another question after this one. Thank you. Yes. Well, the organization basically just combined 2 teams into 1. It's essentially sort of new combine our platforms into 1 performance based platform. And so both from the advertisers' perspective, there will be one platform for them to put money in to. Internally, all the different media platforms or traffic platforms will be facing 1 platform. And also sort of the data that we own will be sort of unified, so that it would actually achieve the best results in terms of targeting users. So those are the key differences. Right. So we meant to make it more user friendly that would be the key purpose for this one. Yes. I think we talked about the 3 elements, right? User friendly from the advertiser perspective, it will be sort of more unified from an internal communication perspective and also sort of from a product and technology development perspective, it will be one platform rather than 2 platforms. Okay. Understood. There's a second question actually related to this. What is it if it's possible if management can also give us some rough idea in terms of the CPC level and also the revenue sharing scheme for the WeChat public account owners we're offering right now? So I think generally the CPC trend I think the CPC level is still relatively low compared to sort of the other performance based ads. And the CPC level in terms of trend has been trending up as we continue to improve our targeting technology. In terms of revenue share with OA accounts, it's an evolving situation. We have initially sort of tried to provide more advertising split to the OA accounts, right, so that we can actually incentivize more and more third parties to put up advertising. Over time, we start to discover sort of there are the traffic are not sort of created completely equal. There are certain accounts that are sort of original content. There are certain accounts which are sort of your less original in terms of content, right? So over time, I think we will refine the revenue sharing mechanism so that we will ascribe more revenue share to the OA accounts that are actually providing the most original content as well as the most incremental value, whereas we may actually sort of reduce some of the revenue share to the guys who are just sort of taking other people's content and putting on to their official account. So it will become a much more sophisticated system in order to try to sort of grow this ecosystem. Thank you. Your next question comes from the line of Ting Yu from Mizuho Securities. Please ask your question. Hi, good evening. When you say that advertisers seem happy with the results from performance based ads, how are you comping performance based ads in China with? Is it performance relative to ROI to other social media companies globally? Or is it comping it to search? Can you kind of provide some color on that? And I have a follow-up as well. Well, I think, one, it has to be sort of compared to China, right? I think the advertisers are operating in China. So they have certain expectations of a campaign. And these are sort of advertisers who have very experienced marketing team. They have essentially run campaigns across all different platforms. And usually what happens is that they have certain expectation on a certain amount of money to be spent and how much results will be achieved. And what happens is, I think the moment advertising has been going through all of these metrics and exceeding their expectation. Got it. And just to follow-up on your previous comment, you talked about the importance of the ad engagement, providing ads that are more engaging for the consumer. So are all the ads on WeChat now native or unique ads? And how much is Tencent involved in the creative process? So is that all from the advertisers themselves? Well, number 1, sort of all the moment ads are original. And number 2, in the very initial stage where we're actually very involved in the creation of these ads because we want to make sure that the ad formats are something that's sort of in line with what consumers' expectation of what moments represent. Over time, we said that in order for this to scale, we actually have to somewhat standardize it, right? So we are in the process of helping the advertisers as well as a lot of ad agencies now, right, to standardize these ads. So that's where we actually come up with different formats. We can come up with sort of certain elements. We can come up with a quality standard. And the good thing is that we can also sort of test on some of the ads, right? So that if it's actually effective then we can sort of broaden the exposure. So there are a lot of things that we're doing in order to standardize the ads so that the production of these ads can be done on a scale basis. Great. Well, thanks for the feedback. Thank you. Thank you, operator. In interest of time, we shall take the last three questions, please. Certainly. Your next question comes from the line of Wendy Huang from Macquarie. Please ask your question. Thank you. My first question is on the recently announced TOS. So what's the rationale behind started developing the operating system this year? And how will this actually change Tencent mobile ecosystem in the long term? My second question is on the mobile game. In April, I think China Mobile actually closed down its payment channel in several provinces. So according to some media report, this actually result in the 30% decline in the whole mobile game industry revenue. So is Tencent being affected? If that's the case and how should we actually read your Q2 mobile game revenue as well as the seasonality on the mobile games? Thank you. Yes. On POS, it's really an extension of our ROM initiative. Our POS is really sort of leveraging Android then we're providing a layer that has sort of the deep integration with Android on one end and then on the other end with a range of services that we provide. And we also create a framework such that it can be used for different hardwares, right. So it can be done for mobile phones, but it can also be used for watch, for virtual reality glasses and over time for other devices that people they come up. So that's what we have done. I think we leverage quite a bit on the technology know how that we have developed both from sort of very system end technology such as RAM, such as our browsers, such as our security technology. And then on the other end, we have a broad range of applications which are widely used by consumer. So we can actually sort of provide the APIs to make much better connection with these applications. So far, I think we have received quite enthusiastic response from the industry. A lot of hardware manufacturers are interested in exploring cooperation with us based on the U. S. It's still an early initiative, but sort of I think it's a good aggregation of many technologies that we have developed over the years and now sort of we will bring it into one framework that we can bring to the hardware industry in a very systematic way. On mobile games, I don't think we have seen much impact from that. Actually, we have not really paid attention to the first time I heard about. Thank you. Thank you. Your next question comes from the line of Ming Zhao from 86 Research. I got two questions. First question is on your mobile gaming. So if we look at last two quarters performance on QQ games and the wishing game, I mean, they're pretty healthy, but they are kind of lukewarm. Why is that? Why is because the mobile gaming industry is still very short history. So this kind of trajectory seems a little bit less steep than expected. Do you see it because of the overall market is maturing? Or maybe give us your thoughts. Do you think this mobile gaming market is a bigger or smaller market than the PC gaming? That's the first question. The second question is your video ads are doing great. My question is on your digital content strategy. Can you give us more color about users paying for movies, your initiatives in literature, music and so on and so forth? Thank you. Okay. On the mobile games, I think we reported 8% sequential revenue growth for our overall mobile game business. So while that's certainly cooler than the double digit sequential growth rates that we were generating a year ago. I mean, I think it's still relatively comfortably warm for us. And we do not feel that the industry is at a late maturation stage yet given it's only a couple of years old and very early in terms of moving game genres from PC to mobile. In terms of the long term size of the market, I think again it depends heavily on how successfully different game genres move from PC to mobile particularly some of the higher ARPU game genres. What we know for sure today, as I mentioned earlier, is the number of people playing mobile games is much greater than the number of people playing PC games. And so if the right gaming experiences can be brought to them then the monetization revenue will follow. But that may take many years to fully transpire. So I guess that's our view on mobile games. On the digital content strategy that was something we outlined as one of our focal points for 2015. And we've been investing against it. I think that the products you mentioned video, music, literature growing varying degrees of growth depending partly on the timing with which we add new content. So for example, in the Q1, we started to see the benefit of our HBO relationship, which brought very popular shows like Game of Thrones for the first time to Internet users in China. And that's been very well received by our subscribers and by our free users. And then as we move through the year, we'll have other exclusive content such as the NBA Basketball games joining our platform as well. Thank you. Our last question comes from the line of Piyush Mubay from Goldman Sachs. Please ask your question. Thank you. On the mobile gaming revenues itself, should I be taking out the revenues that you're earning from the App Store, which is about €400,000,000 If I do that, then the sequential growth rates become narrow. Is that the right way to be thinking about it? And also on the relationship with JD, the first the previous quarter, the relationship looked like it was very strong. Could you share with us your thoughts on the partnership with JD? Thank you. I think on the mobile game side, if you exclude the portion related to Ying Yong Bao and also our browser and other distribution channels and also those games that we publish onto iOS that are not linked to mobile QQ or Weixin, then the mobile game revenue increased by a single digit mid single digit percentage quarter on quarter. So again, that's not the pace at which our mobile gen revenue was increasing a year ago, but we think it's a reasonable rate of increase and we're happy with it. For the JD question. Yes. For JD, I think we we're still in the process of sort of continuing to create more synergies out of the relationship. And so whatever level of value that sort of you have seen in the previous quarter, I think without our trend is actually sort of need to magnify that over time. I think so far what we have seen is through an entry point within our platform, we have been able to bring a lot of users, particularly the users who are on mobile platform and who are in cities that have not been active users of JD yet because the delivery network has not been covering those. But sort of over time, it's expanding to cover these cities. Our platform have been able to bring these users to be first time user of JD services. And over time, they may actually continue to visit JD and byproducts on our platform, but they also sort of install a JD app and they get sort of loyal enough and start buying from the JD app. But I think to the extent that we can actually convert users and help them to grow their overall user coverage, I think that's I think one thing that's already adding a lot of value. And over time, we are also our ad network can also sort of bring new users to JD because JD is actually a pretty big advertiser on our platform and they serve as an aggregate of a lot of their merchants. And altogether, they're putting ads on our network. They're bringing users to their merchants, but also sort of in the process, build more fidelity with JD's e commerce platform. And we're also testing on new ways to bring social traffic into e commerce. So I think that continues to progress pretty well. Thank you, Martin. Thank you, operator. We're it up to Cornell. If you wish to check our press release and our financial information, please visit our corporate website at www.tenzen.com on the site shortly. Thank you and see you next quarter. Ladies and gentlemen, this does conclude our conference for today. Thank you for participating in Tencent Holdings Limited 20 15 First Quarter Results Announcement Conference Call. You may all disconnect now.