Thank you for standing by, and welcome to Tencent Holdings 2015 first quarter results announcement conference call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question and answer session. If you wish to ask a question, you will need to press star one on your telephone to join the question queue. Your name will be announced when it is your turn to ask the question. If you wish to cancel your request, please press the pound or hash key. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Catherine Chan from Tencent. Please go ahead, Ms. Chan.
Thank you very much, operator. Good evening. Welcome to the first quarter of 2015 results conference call. I'm Catherine Chan from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties, and may not be realized in future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited Non-GAAP financial measures that should be considered in addition to, but 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, Pony Ma, President Martin Lau, Chief Strategy Officer James Mitchell, and Chief Financial Officer John Lo. Pony will kick off with a short overview. Martin will review value-added services segment performance. James will speak on advertising, and John will go through the financials before we take your questions. I'll now turn the call over to Pony.
Thank you, Catherine, and good evening. Thank you for joining us. In the first quarter 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 CNY 22.2 billion, up 40% year-on-year and 8% quarter-on-quarter. Non-GAAP operating profit was CNY 5.4 billion, up 45% year-on-year and 16% quarter-on-quarter. Non-GAAP net profit with shareholders was CNY 7.1 billion, up 36% year-on-year and 5% quarter-on-quarter. Turning to our key platforms. Total MAU for QQ was 852 million, within which smart devices MAU grew 23% year-on-year to 603 million. Weixin and WeChat reached a combined MAU of 549 million, up 39% year-on-year. Total MAU for Qzone was 668 million, within which smart devices MAU rose 22% year-on-year to 568 million.
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 solidifies its leadership, its leading position in China with the traffic more than doubling year-on-year. Among 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 business review.
Thank you, Pony, and good evening, everybody. In the first quarter of 2015, our total revenue grew 22% year-on-year. Excluding e-commerce transactions, our total revenue increased 40% year-on-year. VAS 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, the segment revenue was CNY 18.6 billion, up 29% year-on-year and 9% quarter-on-quarter. Social networks revenue was CNY 5.3 billion, up 32% year-on-year and 3% quarter-on-quarter. The growth flowed from higher sales of in-game items and monthly subscriptions for mobile privileges and premium entertainment content. Online games revenue was CNY 13.3 billion, up 28% year-on-year and 11% quarter-on-quarter. Contributions from new games on smartphones and PC, and increased monetization of popular advanced casual game titles led to year-on-year revenue growth.
Sequential performance benefited from positive seasonality in PC games and also a 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 1.7 million, and we also had 1 billion red envelopes shared among QQ users over the six-day Chinese New Year period. For Weixin, we organized shake for red envelopes promotions, which spread virally among Weixin users. This led to a record 3 billion 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 connected users in five major cities to local health, transport, utilities, and municipal services. 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 3D battle arena titles, including Smite and Master X Master to expand this genre. In the sports category, holiday gift pack 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 broadest 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 closed beta test some groundbreaking hybrid genre games, including Monster Hunter Online, the first action role-playing MMO in China with hunting gameplay. The game is the first free-to-play online game from Capcom's popular console game franchise. Also [MX], the first action role-playing MMO in China with third-person shooting gameplay.
We'll leverage this creative IP to develop not only PC games but also mobile game anime series, as well as books. For smartphone games, we widened our mid-core audience, adding 7 new mid-core titles for Mobile QQ and Weixin 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 WeFire, 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 I Am MT 2, which is sequel to 2013'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, Yingyongbao, and mobile browser, they're emerging as important game distribution hubs in China. First quarter smartphone games revenue from Mobile QQ and Weixin Game Center, Yingyongbao, and browser, as well as other platforms altogether reached CNY 4.4 billion. That's up 82% year-over-year and 8% quarter-over-quarter on a gross basis. With a multi-platform distribution platform and with continued genre 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 CNY 2.7 billion, up 131% year-over-year and up 4% quarter-over-quarter, within which our brand advertising revenue was CNY 1.4 billion, up 90% year-over-year and down 7% quarter-over-quarter. Revenue jumped year-over-year due to strong video traffic growth, particularly on mobile. Sequentially increased video viewership partially offset the usual weak seasonality in the first quarter. Mobile contributed approximately 40% of our brand advertising revenue. Our performance advertising revenue was CNY 1.3 billion, tripling year-over-year and up 18% quarter-over-quarter. New mobile ad inventories, more effective targeting driving higher click-through rates and higher cost per click drove the year-over-year revenue growth.
New mobile ad inventories, particularly from Mobile Qzone, Weixin Official Accounts, and our Yingyongbao App Store, were the primary drivers of the sequential performance advertising revenue growth. Mobile contributed about 75% of our performance advertising revenue during the quarter. For brand advertising, our top five 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 first quarter versus the fourth quarter. We began generating meaningful revenue from Yingyongbao listing ads. 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 monitored consumer engagement with the ads across a number of metrics, such as click-through rates, viral ad shares, and for automobile advertisers, test drives actually taken on the cars that are advertised. The results so far are encouraging. 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 advertisers across our different properties and better target ads to consumers across our different properties using the Guangdiantong targeting engine. With that, I'll pass to John.
Thank you, James. Hello, everyone. For the first quarter of 2015, our total revenue was CNY 22.4 billion, up 22% year-on-year or 7% quarter-on-quarter. Gross profit was CNY 13.4 billion, up 27% year-on-year or 6% quarter-on-quarter. Operating profit was CNY 9.4 billion, up 20% year-on-year or 27% quarter-on-quarter. Finance costs were CNY 433 million, up 82% year-on-year or 59% quarter-on-quarter. Interest expense incurred on new $2 billion U.S. dollars bonds issued in February as well as forex loss contributed to the quarter-on-quarter increase. Income tax expense was CNY 1.7 billion, up 46% year-on-year or 91% quarter-on-quarter. The increase mainly reflected higher pre-tax 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 CNY 6.9 billion, up 7% year-on-year or 17% quarter-on-quarter.
On a non-GAAP basis, operating profit for the quarter was CNY 9.4 billion, up 45% year-on-year or 16% quarter-on-quarter. Net profit attributable to shareholders was CNY 7.1 billion, up 36% year-on-year or 5% quarter-to-quarter. Diluted EPS was CNY 0.752 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 two percentage points year-on-year and up one percentage point quarter-on-quarter. The lower gross margin year-on-year was primarily due to increased revenue sharing costs from a larger mix of third-party platform gains and increased channel costs. Gross margin for online advertising was 39%, up four percentage points year-on-year and was down one 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 CNY 1.3 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 Pay. Sequential decrease primarily resulted from a seasonal reduction in advertising and promotional activities. G&A expense was CNY 3.7 billion, up 25% year-on-year or down 8% quarter-on-quarter, of which R&D expense was CNY 2 billion, up 34% year-on-year and down 6% quarter-on-quarter. The year-on-year growth in G&A expense was mainly driven by increased R&D expense and staff costs. Sequentially, G&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&A 16%. R&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 first quarter, 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 a 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 a decline in selling and marketing expenses as a proportion of total revenues. The sequential uptick was primarily due to a decline in operating expenses as a proportion of 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 rates. For the first quarter, total CapEx was CNY 1.3 billion, up 17% year-on-year or down 17% quarter-on-quarter. Operating CapEx was CNY 656 million, down 27% year-on-year and up 11% quarter-on-quarter. Non-operating CapEx was CNY 676 million, up 187% year-on-year and down 53% quarter-on-quarter. Free cash flow was CNY 8.4 billion, up 52% year-on-year and down 9% quarter-on-quarter. Our net cash position at quarter end was CNY 25.3 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 value of our listed associates and available-for-sale investments were CNY 74 billion as at quarter end.
This concludes our presentation. Thank you.
Thank you. Operator, we are now open the floor for questions, please.
Certainly. Ladies and gentlemen, if you wish to ask a question now, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Please note we will take two questions at a time from each caller. If you have more questions, please request to join the question queue again after your two questions have been addressed. Thank you. Your first question comes from the line of Dick Wei, from Credit Suisse. Please ask your question.
Hi. Thank you for taking my questions and congrats on the solid earnings. My first question is maybe on the expense front. It looks like the sales margin expenses for the quarter is a bit lower. Maybe the sequential decline is high more than the normal seasonality. I wonder, should we see that trend 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 they are more maybe payment-related spending on there. Just want to see what the general thoughts on sales marketing or the COGS of other services going forward are. Thanks.
On the sales and marketing expense, the decline is mainly due to the fact that in the first quarter of last year, there was a very big campaign for taxi subsidy in relation to promoting our mobile payment solution. This year, the first quarter, we don't have that expense. Having said that, I think, one, mobile payment is actually a very important strategic initiative for us. 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. For some of those services, there is actually a pretty good ability to promote our mobile payment solution.
I think while we have scaled down that promotion on taxi hauling, if there are other ways through 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.
Would it be booked under sales marketing, or would it be more under other COGS line?
Sales and marketing.
Sales marketing. Okay. Got it. Maybe if, Martin, if you can give us, I guess maybe two months ago, I asked the same questions about any updates on maybe the performance-based advertising on the Moments area, maybe 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 thoughts, that would be great. Thanks.
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 first quarter. 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. Given the advertiser happiness, we're gonna be progressively expanding the number of advertisements, range of advertising formats, and so on as we move through the year. With regards to the restructuring internally, we felt it was important to create the advertising platform with the most simplicity and therefore the greatest liquidity.
In order to facilitate that consolidation, we actually took two 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 large brand advertisers on your performance-based advertising system? That's my first question, and the second is just a housekeeping question on your game business. Any updates on the revenue contribution of your mobile game portfolio? As well as the ARPU of different types of your games. Thank you.
With regard to whether our big brand advertisers will buy performance advertising, it's a global trend that we've seen in the U.S. and Europe, that brand advertisers are increasingly beginning to allocate some percentage of their ad budget towards performance formats. If you look at our own results, we only had about a dozen advertisers on Weixin Moments during the first quarter of 2015, but the majority of those were classic brand advertisers looking at advertising in a performance format. Going forward, we feel that there will be some of our ad inventory, for example, the Yingyongbao App Store, where the preponderance of the advertising may come from classic performance-oriented advertisers such as e-commerce companies. There will be other ad inventories, perhaps including Weixin Moments, where we will have performance advertising coming from advertisers who would more traditionally be brand advertisers.
We believe that our performance advertising solution is increasingly suitable for an increasingly broad range of advertisers. Maybe I will pass the ARPU question on to John.
For the MMOG, the quarterly ARPU is between CNY 295-CNY 395. For advanced casual game, it would fall within a range of CNY 100-CNY 245. In relation to smartphone games, it would be within CNY 155-CNY 165.
Thank you. 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 question on the smartphone games revenue. It looks like Yingyongbao and mobile browser contribute about CNY 400 million revenue this quarter. I assume this mainly come from the games revenue sharing. 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. 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. 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. Is there any update on the Weixin payment account, in terms of tractions and also the numbers of accounts? I think last quarter you guys mentioned about 100 million paying user that linked to the bank account. Any update for this quarter, especially after the Chinese New Year?
Well, number one, during Chinese New Year, we actually had a pretty big campaign around red envelopes, and that had actually add meaningfully to both the number of people who bind their accounts as well as the activity within the accounts. After Chinese New Year, there's a consistent growth in terms of the number of people who bind 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. For mobile payment solution, it's actually a two-ended platform. You need to have more merchants, you can actually attract more users using it. By having more users, you can actually attract more merchants.
I think we have seen a virtuous cycle in terms of increasing number of people who can pay and increasing number of merchants. The overall growth track is actually quite healthy.
Thank you. Your next question comes from the line of Alex Yao from JPMorgan. 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 advertisers are encouraging, and they are happy. Now that you guys have already accomplished the restructure of internal ad system, what's the strategy to release more inventory to a larger number of advertisers into the next few quarters? The second question is, can you share with us the development of affiliate ads network on mobile? Do you book that on gross revenue basis and the development there? Thank you.
Yeah. On Moment ads, I think we'll continue to sort of develop it in a paced manner, I would say. I think very clearly, we know that there's a lot of traffic in the Moment timeline. There are a lot of people who are paying a lot of attention, both in terms of number of visits as well as the amount of time they spend on Moment is actually sort of 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. Two, we want to make sure that we can actually sort of target the advertisement so that the efficiency actually increase.
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. I think the first round of testing, right, have confirmed that we were able to create these elements. 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 format so that advertisers can actually come up these ads in a faster manner, I think is an important aspect. 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 can provide the same elements, right? Good response from the users, good exposure for the advertisers and also sort of having the viral effect.
We'll also work on that. 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. 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. The-
A question sort of related to ads.
ads. I think in relation to the ad network we book on net basis. Sorry, it is crossing up. One more question, James. Yeah. Consistent with industry practice, we book ad network advertising on a gross basis, which both our domestic and our global peers do. Yep. 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 one is, what contributed to the sequential jump in the other revenue category? How much of this was contributed by e-commerce, and how much was from online payment? 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 have been moved from the e-commerce segments to others. Other than that, there are also revenue generated from businesses like payment services as well as some virtual e-commerce transactions, as well as some enterprise software revenue. In terms of margin, because it's a mixture of a lot of things, so at this point in time, it will fluctuate quarter over quarters.
Okay, understand. Thank you. In terms of advertising gross margin trajectory, given the launch of performance-based advertising, which typically is higher margin, can management give us some more color on how we should look at this. Particularly, we have seen after Facebook launched 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 news app business, where margins have been relatively stable over time. We've layered on a video business where margins have been very negative and are improving, but still remains a drag on profitability. 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 cost. 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.
Right. Thank you. Your next question comes from the line of Erica Poon Werkun from UBS. Please ask your question.
Yes. Hi, thank you. Just want to have a quick follow-up on the Weixin Moments advertising, whether you can just share with us in the first quarter how much it contributed to revenue. Second question is on just the breakdown on your advertising revenue. How much was that coming from video? Thank you.
I think that if you look at the brand advertising revenue, 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. We did say that the sequential growth was driven notably by mobile Qzone, Weixin Official Accounts, and Yingyongbao. While we're excited about Weixin Moments advertising, we only had a dozen advertisers in the first quarter, and we're still at the 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 Qzone, Weixin Official Accounts, and Yingyongbao App Store.
Thank you.
Next question, please.
Thank you. Your next question comes from the line of Chi Tsang 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 WeBank. 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, in particular, the mix between licensed and in-house and casual and mid-core. Thank you so much.
In terms of WeBank, I think there's 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 taking up the credit needs of our vast number of users as well as small enterprises. It will be based on sort of our understanding of the users. If the users so require, 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 cooperation banks for money to be lent to these users. 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 credits for these users.
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. 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. I think we will give it quite a bit of time for it to come up with the right product and right technology. That's on WeBank. In terms of games, why don't James talk about it?
I'll start with history and finish with future. 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. In order to do that, we initially focused on developing relatively casual mass appeal games ourselves. We're pretty happy with our trajectory. We've disclosed that over 100 million people play our mobile games every day, which is more than double the number of people playing PC games every day. Through last year, we felt the market was beginning to evolve and that it was important that we provide an attractive venue for third-party game developers and also we provide our users with relatively more mid-core games.
The second half of last year, moving into early this year, we put a great deal of energy into securing third-party game licenses and publishing some successful mid-core games such as I Am MT 2 , [inaudible], and so forth.
Sitting here today, we believe the market will continue to evolve in multiple directions. 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 educate our users on the joys of gaming and also serve those of our users who want a casual game experience. Then we have some more mid-core games in the portfolio. Today, we're in a position where we have somewhere in the region of half of the mobile game market.
If you look at it on a category-by-category basis, there are certain genres which we've essentially pioneered and created ourselves, like mobile shooting games. There's other genres where we actually have very low market share. We're looking forward to releasing good games that can increase our market share.
Thank you. Your next question comes from the line, Vivian Hao from Deutsche Bank. Please ask a question.
Hi. Thank you for taking my question. I have two quick questions. First of all, regarding the organizational streamlining for our WeChat advertising business, can Martin 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.
Yeah. Well, the reorganization basically just combined two teams into one. It essentially sort of combined our platforms into one performance-based platform. Both from the advertiser's perspective, there will be one platform for them to put money into. Internally, all the different media platforms or traffic platforms will be facing one platform. Also the data that we own will be unified so that it would actually achieve the best results in terms of targeting users. Those are the key differences.
Right. We meant to make it more user-friendly. That would be the key purpose for this one.
I think we talked about the three elements, right? User-friendly from the advertiser perspective, it will be sort of more unified from an internal communication perspective, and also from a product and technology development perspective, it will be one platform rather than two platforms.
Understood. There's a second question actually related to this. 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.
I think generally the CPC trend, I think the CPC level is still relatively low when compared to certain other performance-based ads. 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 tried to provide more advertising split to the OA accounts, so that we can actually incentivize more and more third parties to put up advertising. Over time, we start to discover the traffic are not sort of created completely equal. There are certain accounts that are original content. There are certain accounts which are sort of less original in terms of content, right?
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 it onto their Official Account. 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 Tian Yao from Mizuho Securities. Please ask a 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? 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. These are sort of your advertisers who have a very experienced marketing team. They have essentially run campaigns across all different platforms. Usually what happens is they have certain expectations on a certain amount of money to be spent and how much result will be achieved. What happens is, I think the Moments advertising had going through all of these metrics and exceeding their expectation.
Got it. 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. Are all the ads on WeChat now native or unique ads? How much is Tencent involved in the creative process, or is that all from the advertisers themselves?
Well, number 1, sort of all the Moments ads are original. In the very initial stage, 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 a consumer's expectation of what Moments represent. Over time, we said that in order for this to scale, we actually have to somewhat standardize it. We're in the process of helping the advertisers as well as a lot of ad agencies now, to standardize these ads so that we can actually come up with different formats. We can come up with certain elements. We can come up with a quality standard. The good thing is that we can also sort of test on some of the ads, right.
That if it's actually effective, then we can sort of broaden the exposure. 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 that feedback. Thank you.
Thank you, operator. In the 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 TencentOS. What's the rationale behind start 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. According to some media report, this actually result in the 30% decline in the whole mobile game industry revenue. Is Tencent being affected? If that's the case, how should we actually read your Q2's mobile game revenue as well as the seasonality on the mobile games? Thank you.
On TencentOS, it's really, I think an extension of our ROM initiative. Our TencentOS is really sort of leveraging Android, providing a layer that has sort of your deep integration with Android on one end, and then on the other end with a range of services that we provide. We also create a framework such that it can be used for different hardwares, right? 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 may come up. 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 ROM, such as our browser, such as our security technology.
On the other end, we have a broad range of applications which are widely used by consumers. We can actually sort of provide the APIs to make much better connection with these applications. Far, I think we have received a quite enthusiastic response from the industry. A lot of hardware manufacturers are interested in exploring cooperation with us based on TencentOS. It is still an early initiative, but I think it's a good aggregation of many technologies that we have developed over the years and now sort of bring it into one framework that we can bring to the hardware industry in a more systematic way. On mobile games, I don't think we have seen much impact from that. Actually, we have not really paid attention. This is the first time I heard about it.
Thank you.
Thank you. Your next question comes from the line of Ming Zhao from 86 Research. Please ask your question.
Thank you. I got two questions. First question is on your mobile gaming. If we look at the last two quarters of performance on QQ and the Weixin Game, they are pretty healthy, but they are kind of lukewarm. Why is that? 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 is 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, so forth. Thank you.
Okay. On the mobile games, I think we reported 8% sequential revenue growth for our overall mobile game business. While that's certainly cooler than the double-digit sequential growth rates that we were generating a year ago, I think it's still relatively comfortably warm for us. 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.
If the right gaming experiences can be brought to them, then the monetization and revenue will follow. That may take many years to fully transpire. 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 are growing at varying degrees of growth, depending partly on the timing with which we add new content. For example, in the first quarter, we started to see the benefit of our HBO relationship, which has 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.
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 Mubayi 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 CNY 400 million? If I do that, the sequential growth rates become narrow. Is that the right way to be thinking about it? Also, on the relationship with JD.com. The previous quarter, the relationship looked like it was very strong. Could you share with us your thoughts on the partnership with JD.com? Thank you.
I think on the mobile games side, if you exclude the portion related to Yingyongbao 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 still increased by a mid-single-digit percentage quarter-on-quarter. Again, that's not the pace at which our mobile game revenue was increasing a year-ago, but we think it's a reasonable rate of increase, and we're broadly happy with it. For the JD.com question-
Yeah, for JD.com, I think we're still in the process of sort of continuing to create more synergies out of the relationship. For whatever level of a value that sort of you have seen in the previous quarter, I think our trend is actually sort of going 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.com yet because their delivery network has not been covering those. Sort of over time, it's expanding to cover these cities, and our platform have been able to bring these users to be first-time user of JD.com's services.
Over time, they may actually continue to visit JD.com and buy products on our platform, but they may also sort of install a JD.com app if they get sort of loyal enough and start buying from the JD.com app. I think to the extent that we can actually convert users and help them to grow their overall user coverage, I think one thing that's already adding a lot of value. Over time, our ad network can also sort of bring new users to JD.com because JD.com is actually a pretty big advertiser on our platform, and they serve as an aggregate of a lot of their merchants. 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.com's e-commerce platform.
We're also testing on new ways to bring social traffic into e-commerce. I think that continues to progress pretty well.
Thank you, Martin. Thank you, operator. We're rounding up the call now. If you wish to check our press release and our financial information, please visit our corporate website at www.tencent.com/ir. We'll post a replay of this webcast on the site shortly. Thank you, and see you next quarter.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. Tencent Holdings Limited 2015 First Quarter Results Announcement Conference Call. You may all disconnect now.