Earnings Call: Q2 2021

Aug 18, 2021

Good day, and thank you for standing by. Welcome to Tencent Holdings Limited 2021 Second Quarter Results Announcement Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. And now, I would like to turn the call over to Ms. Wendy Huang from the Tencent IR team. Thank you. Please go ahead. Thank you. Good evening, everyone. Welcome to our 2021 Q2 results Call. 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 the 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 IFRS 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 risk factors and non IFRS measures, Please refer to our disclosure documents on the IR section of our website. Now let me introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma, will kick off with a short overview. President, Martin Lau, will discuss strategy review. Chief Strategy Officer, James Mitchell, will speak to business review and Chief Financial Officer, John Lo, will conclude with financial discussion before we open the floor questions. I will now turn the call over to Pony. Thank you, Wendy. Good evening. Thanks, everyone, for joining us. In the Q2, we enhanced our services and achieved healthy growth across our businesses, particularly Business Services and Advertising, while our game revenue benefited from international growth. Now let me go through the headline number, financial number for the quarter. Total revenue was RMB138 1,000,000,000, up 20% year on year and 2% quarter on quarter. Gross profit was RMB63 billion, up 18% year on year and stable quarter on quarter. Non IFRS operating profit was RMB43 1,000,000,000, up 14% year on year and stable quarter on quarter. Non IFRS net profit attributable to equity holders were RMB34 1,000,000,000, up 13% year on year and 3% quarter For our key services, we generally retain our 1st place Position in activities including social, games, long form video, news, music, Combined MAU of Weixin and WeChat was 1,250,000,000. Mobile Devices MAU of QQ was RMB591 million. Martin and James will discuss our strategy to help Ryo Economy and Society as well as progress across different businesses. Now I will hand over to Martin for the strategic review. Thank you, Pony, and good evening and good morning to everybody. Today, I would like to share with you the encouraging progress of our communication and Productivity SaaS products, which are generating user and social value despite contributing very little revenue to us for now. Since the outbreak of COVID-nineteen, we have seen accelerated demand for digitization across industries. Our communication and productivity SaaS product Suite, namely VECOM, Tencent Meeting and Tencent Docs, assisted this digitization process and contributed to the growth of real economy. We achieved this by leveraging a number of our capabilities developed over the years. First, our advanced technologies and domains such as AI, real time communications and security second, our proven experience in operating large scale Internet services with robust performance and reliability 3rd, our ubiquitous coverage and deep engagement with consumers via Weixin and QQ, which facilitates industries building direct connection with their users and 4th, our vertical solutions for providing business services, including cloud services to key industries through our own product innovation and partnerships. By helping industries digitize, we believe we'll deliver critical benefits to different stakeholders. For SMEs, we have significantly lowered the barrier for technology adoption. They can leverage our products to increase customer engagement and sales as well as to enhance cost efficiency without making significant IT investments on their own. For public services, We enabled real time and direct connection with citizens and enterprises. We also facilitate productivity enhancements through improving their workflows and increasing their collaboration efficiency. For individual users, we help reduce their traveling burden and enhance convenience. We also enabled instant access to and sharing of vital information. Going through the different products, Wicom enables better connections within enterprises and with consumers externally. Wicom offers Collaboration tools for enterprises to enhance management efficiency. It is deeply integrated with Beijing Chats, Mini Programs and Weixin Payment. Enterprises can use VICOM as a backend to communicate with and serve customers on Weixin, enabling convenient Examples of how Wecom assists digitization include: For the government, Wecom supported The 7th National Population Census, the 1st digitized census in China's history, WeCOM enabled around 7,000,000 census tickers to submit massive amount of data online in a secure and reliable way and facilitated the efficient management and coordination of this large and mobile workforce. In the public education sector, Wicom has been increasingly adopted as a software for enhancing communications and operations management of schools. Wicom enables real time and direct communications between teachers and parents, where teachers can benefit from Wicom's CRM functionality, While parents can interact with teachers using the parents' own regulation accounts and app, Wicom also provides tools for education bureaus and schools to manage their day to day operations more efficiently. In the business sector, we have been upgrading tools in WingCon to enhance the private domain operations of retailers and brands as we improve their resources management. We believe these tools can help retailers and brands increase sales and improve cost efficiency. Now turning to Tencent Meeting, the most used standalone cloud conferencing app in China. Tencent Meeting has achieved double digit growth in both MAU and time spent per user in June 2021 compared with December 2020. We're increasing its penetration in medical and public education sectors, leveraging our vertical solutions and expanding industry partnerships. To enrich our solutions for meeting rooms, Tencent Meeting supports a wide range of hardware from around 30 partner vendors. We upgraded voice quality by launching our self developed voice solution Tencent Ethereal Audio. With enhanced AI based noise cancellation, our solution enables speech capture from up to 12 meters away in standard meeting rooms. Examples of how Tencent Meetings assist digitization includes for large enterprises, for example, such as State Grid Corporation of China and China Communications Construction Company, we customize solutions compatible with their existing IT systems and equipment for efficient collaboration. This illustrates our capabilities in supporting enterprises with vast operations and sophisticated requirements. For large scale conferences, we deliver secure, reliable and high performance solutions, among which We have supported China Import and Export Fair, or known as the Canton Fair, for 3 consecutive events since April 2020. Finally, Tencent Docs is now the leading cloud based productivity suite in China with spreadsheet, word processing and slide deck applications. It also allows Yixi sharing of files via Weixin and QQ. Building on its initial success in education sector, Tencent Docs is gaining popularity in traditional sectors such as finance, Media and Legal. This reflects increasing functionality of the service as well as its unique user experience for collaborative data collection and sharing. In July 2021, student volunteers used Tencent Dogs as a real time Our infrastructure and operations support Tencent Docs to deliver reliable performance in such an extreme situation The documents edited over 300,000 times and accessed over 2,500,000 times within 24 hours and in that process saved many lives. Now with that, I will pass to James to talk about our business review. Thank you, Martin. For the Q2 of 20 21, our revenue grew 20% year on year. VAS represented 52% of our revenue, within which the game sub segment was 31% The social network sub segment, 21 percent. Online advertising was 17% and FinTech and Business Services reached 30% of our total revenue. For value added services, segment revenue was rmb72,000,000,000 for the quarter, up 11% year on year and stable quarter on quarter. Social Networks sub segment revenue increased 9% year on year to RMB29 1,000,000,000 reflecting moderate growth Digital content subscriptions and in game item sales. Total VAS subscriptions grew 13% year on year to 229,000,000 Video subscriptions increased 9% to $125,000,000 benefiting from our diversified content across sports, animated series, drama series and movies. For example, our animated series, Land of Warriors, as well as Battle Through the Heaven Season 4 attracted wide audience spaces. Music subscriptions expanded 41 percent to $66,000,000 driven by TME's effective marketing and by increased consumer willingness to subscribe for music services. Games sub segment revenue increased 12% year on year to RMB43 1,000,000,000. Our international games revenue grew 29% to RMB11 1,000,000,000 or 37% in constant currency terms. Mobile games VAS revenue increased 13% year on year to RMB41 1,000,000,000 With higher ARPU and paying user ratios, revenue growth was primarily driven by Honor of Kings and Moonlight Blade Mobile in China and by PUBG Mobile in Clash of Clans Nationally, PC client game revenue increased 1% year on year to RMB11 1,000,000,000 as international growth Valorant and Warframe offset domestic softness from Dungeon and Fighter. Turning to Weixin, Mini Programs GMV more than doubled year on year as our decentralized commerce environment helps businesses thrive with their own channels and their own user While also enabling them to achieve higher profit margins than on other channels. Summarizing how the Weixin ecosystem can deliver success for our partners, Brands and merchants can acquire customers for their mini programs offline via QR codes and via Weixin Pay. They can create and distribute content via their own offline Weixin Groups engaging their users and driving repeat visits to Mini Programs. With powerful shopping functionalities such as single merchant membership Rewards, Mini Programs can convert visits into transactions. And we're also developing video accounts and live streaming As additional touch points for deepening user connectivity. For QQ, we enhanced the camera capabilities so as to provide better augmented reality experiences User generated content production and video chat. We automated the in app video editing process, encouraging users to generate and share more appealing video Turning to games. We reinforced the IP value of our leading titles. We adapted Honor of Kings into a drama series, You Are My Glory, Honor of Kings also released a series of popular skins. PUBG MOBILE collaborated with the movie Godzilla versus Kong to create crossover content and we revamped PUBG MOBILE's battlefield design and combat features in Increasing average use of time spent. For Clash of Clans, we released a major content upgrade in April and launched the 9th anniversary event in August. Supercell is developing 3 new games based on the Clash IP, including the term based strategy game Clash Quest, which has begun beta testing in Scandinavia. Valderant achieved 14,000,000 monthly active users on its 1st anniversary, benefiting from the game's competitive gameplay, robust technology We're also extending our presence in newly emerging games genres. Alchemy Stars, developed by our Tordog studio, was the most downloaded tactical RPG in benefiting from its anime art style, unique tile connecting gameplay and narrative created by a reputable Japanese scriptwriter. Light and Nights, developed by our Aurora studio, became China's top data simulation game by DAU in July, with particular popularity Our first survival open world crafting game, Undawn, developed by the Light Speed and Quantum Studios has accumulated over 30,000,000 pre registrations in China to date, ahead of its release on mobile. As a leader in the game industry, we have for many years sought to foster a healthy game playing environment. We believe playing appropriate games And in some cases, represents a first step toward acquiring coding skills. In 2017, we pioneered a system In 2018, we introduced the strictest in game measures in the China industry with mandatory real name verification And stringent game time and spending limits. Earlier this month, we further tightened our game time and spending limits beyond regulatory requirements, initially Honor of Kings and Peacekeeper Elite and in future for our other games. We reduced the time limit for miners to 1 hour holidays and 2 hours per day on statutory holidays. And we prevented in game spending by players aged under 12. We're also cracking down on minors misusing adult accounts and transactions of adult accounts on third party platforms. To fully implement the healthy gameplay environment in China, we have advocated industry wide coordinated discussion around regulating minus total time spent Cross games, further researching age based game classification systems and or potentially restricting under 12 year olds from playing games altogether. During the Q2, under 16 year olds accounted for 2.6% of our China gain gross receipts and under 12 year olds accounted for 0.3 Moving to online advertising, total revenue was RMB23 1,000,000,000 in the 2nd quarter, Up 23% year on year as growth in Internet services, consumer staples and automobile sectors outweighed weakness in education. Since May, the China online advertising industry has been impacted by the sharp decline of ad spend from canine after school Tuition services and to a lesser extent by regulation of launch screen advertisements. Conversely, Apple's IDFA changes appear to have had less We expanded our overall advertiser base by enhancing industry solutions, enabling merchants Better manage their private domain operations within Weixin. During the Tokyo 2020 Olympic Games, we provided integrated marketing solutions Weixin, QQ, Tencent Video, Tencent Sports and Tencent News. Leveraging our strengths in social, long form and Video distribution as well as in content management, we believe we outperformed other online platforms in terms of video views and user sharing activity. Our social and others advertising revenue increased 28% year on year to RMB20 1,000,000,000 primarily driven by Weixin In particular, Mini Programs as well as our mobile ad network. For Moments advertising, more advertisers adopted Mini Programs Landing pages leading to higher sales conversion and thus revenue growth. Video ad inventories contributed close to half Moments revenue. Ad revenue inside Mini Programs also doubled year on year following the growth in Mini Programs GMV. Official accounts revenue grew to The release of inventories and notification feeds and increasing recognition of official accounts' role in generating sales leads. Our media advertising revenue was stable year on year as increased monetization of our music apps offset weakness in advertising on our news app. Looking at Fintech and Business Services, segment revenue was RMB42 1,000,000,000, up 40% year on year and 7% quarter With business services growing at a relatively rapid rate, within fintech, year on year revenue growth was mainly driven by mobile payment volume growth. The number of consumers using our payment services and the number of payment transactions per consumer each increased. We believe SMEs play a valuable role in reaching our payment system generating payment user engagement and we in turn seek to help SMEs benefit from greater mobile payments acceptance by Charging very low or even 0 payment take rates in certain cases and by our commitment of resources and services to support SMEs growth. We're also researching new opportunities in the payment industry such as participating as a pilot in the digital yuan project, where we're supporting WeBank in developing and testing its new interface within the PBOC's digital yuan ER and BR application. For business services, our revenue grew at Rapid rate year on year as we help the digitalization of public services and traditional industries. We experienced an increasing number of customers adopting our platform and Ryan Platform was a service segment. And according to IDC, we ranked 1st in China in terms of video cloud solution revenues. During the quarter, we integrated our real time communication, instant messaging and CDN infrastructures into a unified solution called RT1 Network. For developers, RTWAN enhances their efficiency by providing a one stop software development kit with audio and video path solutions. For Tencent Cloud, RTY expands cross selling opportunities and increases cost efficiency. With that, I'll pass to John to discuss the financial review. Thank you, James. Hello, everyone. For the Q2 of 2021, total revenue was RMB138.3 Net other gains were RMB20.8 billion, up 141% year on year or 6% quarter on quarter. This mainly included non IFRS adjustments relating to our investing companies. Number 1, net fair value gains reflecting Increased valuations of investees, in particular, in the sectors of transportation services, FinTech services and local services. Number 2, net gains on DIMM disposal and disposals of certain investee companies. This was partially offset by fair value losses or impairment against Certain impact fees. Operating profit was rmb52.5 billion, up 34% year on year or down 7% quarter on quarter. Net finance costs were RMB1.9 billion, down 3% year on year or up 42% quarter on quarter. The 3% year on year decrease was a result of lower ForEx losses partly offset higher interest expenses due to higher amount of indebtedness. The Q on Q increase reflected ForEx losses in the 2nd quarter versus ForEx gains last quarter. Share of losses of associates and joint ventures was RMB3.9 billion compared to RMB295 1,000,000 a year ago. This resulted from non IFRS adjustments of certain associates and increased investments in community group buying initiatives by certain associates, as well as losses recognized from certain associates. On a non IFRS basis, We shared losses of RMB449 1,000,000 this quarter compared to share profit of RMB658 1,000,000 a year ago. Interest tax income tax expense was RMB3.7 billion this quarter. The effective tax rate for the quarter was 7.9%. IFRS net profit attributable to shareholders was RMB42.6 billion, up 49% year on year or down 11% quarter on quarter. Diluted EPS was RMB4.387, up 28% year on year or down 11% quarter on quarter. Now I'll share our non IFRS financials. For the Q2, operating profit was RMB42.8 billion, up 14% year on year or largely stable quarter on quarter. Net profit after NCI was RMB34 1,000,000,000, up 13% year on year or 3% quarter on quarter. Diluted EPS was RMB3.504, up 12% year on year or 3% quarter on quarter. Moving on to gross margin. The overall gross margin was 45.4%, down 0.9 percentage points both year on year and quarter on quarter By segment, gross margin for BaaS was 52.9%, down 0.8 percentage points year on year and 2.2 percentage points quarter on quarter. The year on year decline was mainly due to lower contribution from privileged subscriptions on PC games and higher revenue mix of lower margin digital content services with increased content costs. Gross margin for online advertising was 48.8%, down 2.6 The year on year decrease was mainly due to increased bandwidth and server costs, Sequential increase mainly benefited from mix shift to higher margin owned and operated inventories. Gross margin for FinTech and Business Services was 32%, up 3.1 percentage points year on year or stable quarter on quarter. The year on year increase reflected improvement in gross Operating expenses, Selling and marketing expenses were RMB10 1,000,000,000, up 29% year on year or 17% quarter on quarter. Both year on year and quarter on quarter increase mainly reflected increased market spending on business services, digital content services and games, including marketing spend associated with subsidiaries we consolidated over the past year. As a percentage of revenues, S&M expenses was 7% of revenues, broadly stable compared to the Q2 of 2020. R and D expenses were RMB12.8 billion, up 30% year on year or 14% quarter on quarter. R and D expenses represented 9% of revenues. G and A expenses excluding R and D were RMB9.8 billion, up 48% year on year or 28% quarter on quarter. Both year on year and quarter on quarter increase reflected RIZA's staff force. Excluding share based compensation, it increased by 37% year on year or 10% quarter on quarter. At quarter end, we had approximately 94,000 employees, up 33% year on year or 6% quarter on quarter. Let's take a look at the operating and net margin ratios. For the Q2, net non IFRS operating margin was 31%, down 1.8 percentage points year on year and 0.6 percentage points quarter on quarter. Non IFRS net margin was 25.4%, down 1.8 percentage points year on year or largely stable quarter on quarter. Finally, I will share some key financial metrics for the quarter. Total CapEx was RMB6.9 billion, down 27 Year on year or 10% quarter on quarter, within which operating CapEx was RMB5.9 billion, Down 29% from the high base in the Q2 of 2020 as we advanced procurement and amid the pandemic at that time. Non operating CapEx decreased 11% year on year to RMB1.1 billion reflecting Lower spending on land use rights and data centers constructions. Free cash flow for the quarter was RMB17.3 billion, down 39% year on year or 48% quarter on quarter. Net debt position was RMB21 1,000,000,000 compared to net cash of RMB5.6 billion last quarter, mainly due to a net Cash outflow for M and A activities and 2020 dividends of RMB12.5 billion partly offset by free cash flow generation. The fair value of our shareholdings and listed investee companies, excluding subsidiaries, was approximately RMB1.45 billion or US224 $1,000,000,000 as at the end of the second quarter. Thank you. We shall now open the floor for questions. Operator, we will take one question up to one follow-up question each time. Please invite the first question. Thank you. May we invite the first question from Han Joon from Alicia Yap from Citigroup. Please go ahead. Hi, good evening, management. Thanks for taking my questions. My first question is related to the advertising. So how should we think about these overall ad revenue growth in the second half of this year, given there are more Advertiser adopting the Mini program as the landing pages, which will help Moments advertising that lead to higher revenue Trinity, but in the meantime, there are regulatory headwinds on limiting these launch screen apps and also overall macro weakness that might lead to some cautious ad spending. So any colors on the near term ad revenue growth outlook and also the longer term at revenues opportunity given further integrations of these video account and moments that you're going to have within your mini program ecosystem? 2nd question very quickly is, you mentioned about You're deploying more of your technology and expertise to help the SME, the public service and also the enterprises with Tencent Docs and all these cloud based productivity solutions. How should we think about these comment any a complementary service that could evolve and develop around this software that could translate to future business opportunity? Thank you. So, Anish, on your first question around advertising, I think you summarized the puts and takes fairly well. Taking a long term strategic view, we're very happy with our position and how it's evolving, particularly in a couple of areas. One being, as you alluded to, the increasing adoption of mini programs by enterprises within Weixin, which It helps us a number of ways. First, it means that advertising within Weixin has more of a performance component, more akin to a search marketplace environment rather than the media environment, which is beneficial for advertising activity within Weixin Moments, within Weixin official accounts and elsewhere. And then secondly, the Mini Programs themselves constitute advertising inventory. So we mentioned that The advertising revenue within the Mini Programs themselves, which is quite substantial, more than doubled year on year during The second quarter and overall you can see that our advertising gross margins improved somewhat from the Q1 to the Q2 due to a mix shift From a lower margin ad network business toward a higher margin Weixin properties. Then secondly, from an inventory We're seeing good growth in video accounts, DAU and time spent. And that growth has benefited from the addition of high quality Content such as the Olympics in recent weeks and over the longer term when we monetize That video accounts inventory, and we know from the experience of other short video services that both the ad loads and The CPMs can be attractive relative to other advertising properties. So those are 2 structural drivers over the longer term, The mini program adoption and the video account inventory creation. In the near term, our expectation is the overall online ad We will experience slower growth in the Q3 than the Q2, and that is partly because of the full quarter impact of a Very sharp reduction in advertising by K9 after school tuition services, to a lesser extent, The negative effect on the supply side from the flash screen advertising regulation changes and then potentially Deceleration in overall consumer activity as well. So that's on the advertising side. Now in terms of the productivity software side, I think these are Services which we don't monetize directly at this point in time, but we believe they carry a lot of value to the customers. And over time, they will be valuable commercial products as well. But more immediately, a lot of these solutions, when they deployed by enterprise customers. It actually help us to open the door and as a result can help us to sell Our cloud services as well as our ad services to these companies, that's the immediate benefit. And then over time, if you look at the U. S. Market, right, each one of the product that we have actually has got a very Successful commercial product in the U. S, for example, Tencent Meeting, the counterpart is Zoom. And if you look at Wecom, it's partly Salesforce, partly Shopify and Tencent Docs. It's Google Docs and Microsoft Office. And these services all have their I think over time, while we don't charge at this point in time, over time, we may develop value added And for certain customers who want to use these value added services, there will be some kind of commercial solution. And Looking further into the future, these solutions also help to build an ecosystem of SaaS Software. So there will be other SaaS software who can actually rely on our productivity to and provide their services to the enterprise customers and we can actually derive some value from there as well. So all in all, we believe that at this point in time, it's a very valuable suite of service from User value perspective, over time, they would help us to generate commercial value as well. Operator, let's take your next question. Certainly. The next question comes from Han Joon Kim from Macquarie. Please ask your question. Great. Thank you for your time today, management. The first question really goes to kind of There's been a lot of regulatory developments in the market. Are there any in particular that you want to call out as things that might have been different from the way that you were envisioning it a few months or a few quarters ago and how that might impact our Strategic initiatives or priorities and so forth. So if you can just kind of call out 1 or 2 of them, that would be great. And that dovetails into my second question, which is around Professional tax that I think the industry has been benefiting from over the years. And I think some of your peers in the market have indicated that perhaps some of those So I just wanted to get some impression from how your conversations with the regulators have been about The idea that you would deploy your capital into reinvesting for the benefit of the society and whether you think that's still valid and that The perpetual tax treatment should remain for us on an ongoing basis. Thank you. I think if you want to identify a regulatory action, it's probably sort of around the after school tutoring, which is Impacting a pretty big advertiser group on our advertising Across industry and we're seeing part of the impact this quarter and we're going to be seeing the entire impact, full quarter impact next quarter. And that essentially took away a big buyer of advertising on our platforms and The inventories are still there. So over time, we'll be able to fill up the inventory with other advertisers, There will be an impact initially. So I think that's the most direct impact. But I think there's going to be a lot of questions with respect to regulation. So I might as well just sort of answer the more systemic view, I think that the point we want to make is that the number one, we felt that regulation on Internet is a global trend and it's not just limited China, it's actually happening in the U. S, in Europe. But China, I think it's a bit ahead in terms of the Execution of a more structural regulation framework. And I think this should be expected because The regulation has been actually quite loose over an industry like the Internet considering its size and the importance. Now secondly, I would like to say in terms of the regulators, the regulators are very focused on Identifying and rectifying industry misbehaviors and also establishing regulations that emphasize compliance, Social responsibility as well as fair and proper behavior. And we should expect in the future in the near future, more regulations should be coming. Thirdly, what are the goals? The goal from our understanding is that the government actually wants to foster a long term Sustainable development of the Internet industry. The government does recognize the importance on the economic side and social side The Internet industry and also the contribution of the industry to global competitiveness. So that's why it does want to foster a long Fourthly, I would say our attitude during this wave of Regulation is that we want to embrace this new environment fully, And we want to establish ourselves as fully compliant. And we felt that this is actually going to be good for us And for the entire industry over the long run. And on a relative basis, we felt we are also Quite well positioned to embrace the regulatory environment because we have been fully compliant with all regulations. Has always been our operating philosophy and our strategy has always been trying to create value for users And we have always been quite self restrained in terms of monetization. We have run our platforms so that we establish Open platforms to support individual enterprises and entities. And we have also, all along the way, quite emphasized social And emphasized we want to use our tech for good. So Given all these factors, right, I would say there will be short term uncertainties and there are a lot of new regulations that will be coming, but we are pretty confident We can be compliant and over the long run, it would actually position the industry for In relation to tax, I think the tax rebate has been reducing generally over time by implementing more detailed categorization of Key Software Enterprise. Beforehand, the group has about 4 to 5 companies, which were qualified for Key Software Enterprise, Well, for last year, we still had, but the number reduced by quite a lot. We only accrued tax at a preferential rate of 10% when we are sure that we can get it Normally in the subsequent year, we also accrued withholding tax when we generated profits as opposed to some of our peers, which As you can see, the effective tax rate for 2020 was about 11% and the first half of twenty twenty one was about 11% as well. We expect that the effective tax The entire year will be at similar level. On the face of it, the tax C and A is very low, Taking into account of a lot of non IFRS adjustments such as non taxable book profits on BIM Disposal or other valuation gains on investment. If we take out all this all the non IFRS adjustment that is There are the noises and withholding tax as well. The effective tax rate would have been approximately low teens for 2020 And mid teens for 2021, all in all, the total tax rate differential would be around 3%. Operator, let's move to the next one. Thank you. Our next question comes from Gary Yu from Morgan Stanley, please ask your question. Hi. Thank you for the opportunity to ask questions. I have One follow-up on regulation. I appreciate the fact that management has been proactive in kind of talking to The regulator self regulate some of the practices in the market. Based on our conversation with the regulator, do we See the risk of more kind of drastic measures that the regulator may impose on the gaming industry. So for example, we try to limit restriction on time For minors or below 12, is there any discussion on teenagers above 18 years old in terms of time spent on games? So that's my question on regulation. Thank you. On games, I think that the key issue At this point in time, it's still the amount of time and the amount of money that miners spend on games. And this is an area that we are very focused on. And as a result, as you can see in our latest pronouncements, we have put in a number of different measures that James has already talked about. But there is one issue, which I think we proactively take out to the regulators, which is About the total amount of time and money that miners spend on games, because right now I think a lot of the regulations is actually around Each game, but if you look at across the industry, right, and most of the people are, when they have concerns, they are concerned over Minor spending too much time on games as a category. So if we can actually find a way to regulate The total amount of time that's spent across different games that would address And it actually requires it's a complicated issue requiring a consensus of the regulator as well as the industry, it requires regulation and also requires a system to police it. But from the practicality perspective, it's actually doable. So this is one thing that we felt we would want to Take it up to the industry and the regulator to discuss. And if that can be achieved, then I think most of the criticism on the gaming industry, it will be resolved. Thank you. Our next question comes from Robin Chu from Bernstein. Please ask your question. Thanks, management. Thanks for the opportunity to ask a question. I guess A couple of questions, please. The first one is, there's been a lot of reports about the opening of the ecosystems between yourselves and And peers in the industry, can management just talk a little bit about the impacts or first of all, the whether this is Happening whether there's a time line for it to happen and subsequently the likely impact that you think will happen The $0.410 business or the opportunities that might open up. The other one is that Just to focus on video accounts, I think James mentioned that DAUs and time spent has been going out. Could you just share us some thoughts on the monetization strategy here? At what point In the development of video accounts or what are the prerequisites for monetization of video accounts to happen? Where are you on Content depth and creative depth and so on. Thank you. Yes. In terms of the ecosystem, I think our ecosystem It's fundamentally open and the priority of our ecosystem is actually helping smaller Companies and SMEs and Brands and Merchants to be successful. Now If you look at our ecosystem right now, it's fundamentally open. Links are not blocked. No things are blocked. Users can always copy and Some links are not particularly enhanced with the rich presentation. And Why is that the case, right? The ecosystem, if you look at our Weixin ecosystem, it's really built on the principle that it allowed individuals, SMEs, brands and merchants to engage with their users directly and in an unfettered way. When And we have actually always uphold that principle and we have built a lot of different tools and we're putting a lot of Guidelines and rules of operation in order to support this vision. Now when platforms actually interact with platforms, Different questions arose. It become much more complicated. Platforms do not offer individual services. They actually sort of have got a lot of Other merchants are behind them, right. In a lot of cases in some cases, there are like millions or tens of millions of merchants behind These very large and dominant platforms and the platform rules are very different from ours. So that actually raised a lot of complicated questions such as, will users be spammed, especially when other platforms With a lot of resources can offer subsidies. How do we deal with counterfeits and content piracy? How do we deal with commercial policies which are completely different? For example, we don't charge any take rate on our merchants And the brands, right, there but other platforms too. So how do we reconcile that? So we felt these are very complicated The questions need to be discussed and resolved over time is really not the most important priority For our vision and if these questions are not handled well, then it will be bad for our users. It will be bad for the brands and merchants on our platforms. So we want to handle these questions in a very cautious way. Now in terms of video accounts, I would Say video account has been growing quite nicely and healthy in terms of DAU and time spent for DAU as well as number of content contributors. The Olympics content was also a positive for video accounts. Right now, we are very focused on increasing The content improving content ecosystem, including increasing the high quality content as well as enhancing our core capabilities such as our Recommendation engine monetization is not a focus for now. We know that at some point in time, there will be monetization because monetization mechanism is actually well Established in that industry, but for now, our focus is not on monetization. Thank you. Our next question comes from John Choi from Daiwa Capital Markets. Please ask your question. Good evening, management. Thank you for taking my question. I have a question on your online games and then I've got a follow-up on the regulation. So on online games, I think you guys mentioned earlier that China market was about 8%. I understand last year was also So pretty high base. But as we go into the second half this year with the more tighter regulatory environment targeting the miners, Now how should we think about the gaming growth, particularly for the domestic market? I do understand that we do have a few games in the pipeline, but It seems like the pipeline could be a bit more softer depending on the delays. And a quick follow-up on the regulatory front. I think, Martin, you mentioned that while you guys are Complying more with the regulations, would this have somewhat impact on how we execute our business, meaning that Should we be seeing more of a slower business growth opportunities within your different businesses as you guys try to comply to the new regulatory standards. Thank you. John, so on your first question around our game business Look, Ben, we did quantify the impact of not generating revenue from users aged 12 years old and under, Which is 0.3% of our China game revenue and therefore a smaller percentage of our aggregate game Revenue. And then on the positive side, I think you made some comments about a soft gain pipeline, which It's not our perception. We're actually quite positive, excited about our game pipeline within China. And then without China, Outside China, we have what we think is also a fairly healthy robust game pipeline. We have seen some Success recently, really for the first time in Japan and Korea with tactical RPG. We're seeing good traction. Again, I can be for the first time with a console first game in the form of Pokemon Unite. So I think it's an uncertain environment. There's lots of moving pieces. But overall, we believe we have a very high quality game pipeline, both inside China and internationally. In terms of regulations, I would say there would definitely be Short term adjustments that are needed for the different businesses. But on the other hand, the long term strategy, I think, for us is actually very intact. We have always executed our strategy around creating services that has user value that help businesses and industries and then also create social value. And in that process, we invest in these We monetize in a very self restrained way and I think that strategy will continue. Thank you. Our next question comes from Alex Yao from JPMorgan. Please ask your question. Thank you, management, for taking my question. First question is on long term financial impact From increasingly more social initiative to take social responsibilities. In this quarter, you guys announced Two more initiatives to take social responsibility. Number 1 is the suspension of a minor monetization for people under 12 years old and then number 2 is that you will charge very low to 0 payment take rate for Some cases. As you take on more and more of those social responsibilities, how should we think about Had impact on your long term margin structure. And then secondly, I have a follow-up on Martin's comments Around more regulation coming to the market. Can you share with us your thoughts on the directions and the areas of Future regulatory direction or the areas that you expect to see more regulatory measures? Thank you. Well, on the last question, we have already provided the framework. I think it will be coming from all different Regulator entities as well as on different segments of the industries, And we think there will be quite a few coming out. So I think we can't provide a clinical Analysis of that until they come out. Now in terms of the impact on our businesses, if you look at the under 12 year, it's only 3% of our total revenues. So it's actually sort of very little. In terms of our SME benefits, By and large, it would slow down the growth of our revenue, but I think it will be well within that scope. In terms of longer term Impact, I would say our margin profile has always driven by our overall strategy of a combination of different One is monetization of profitable businesses, which usually the monetization from our side is actually And then we will have free services, which could be monetized over time. And then we also have loss making businesses, Which by now are actually quite significant, but they would actually over time hopefully narrow losses and over time be able to And this overall strategic mix has been actually been Quite consistent over the past many years and we intend to keep this strategy stable, which means that our earnings profile, I would say, over time would Continue to be relatively stable, although there will be some short term fluctuations. Now in terms of the SSV investment of RMB50 1,000,000,000, it will be again, I I want to emphasize that funded from a non IFRS profits in which we actually sort of have a pretty big pool. Oh, IFRS profit. So it will not impact our non IFRS profit. All right. The next question comes from Natalie Wu from Haitong International. Please ask your question. Hi, good evening. Thanks for taking my question. Just wondering, actually your FBS Financial Business Services Line actually grew very well this quarter. Just wondering how much of the growth is led by commercial payment and how much is Led by the cloud. And how should we see the future trend of this line? And also if Just wondering if the gross margin profile of cloud is similar with the Intech business. Thank you. So on your question, Natalie, then both the commercial payment and the cloud were the 2 primary contributors to the growth. Within cloud, we saw very rapid, very substantially above market growth, infrastructure as a service and then more rapid growth Our platform as a service and software as a service. And that translated into the margin where, as John mentioned, the gross margin for Cloud improved year on year. That's not because we're at the stage of focusing on margin optimization yet, rather it's Because there was a gentle mix shift from infrastructure as a service toward platform as a service and software as a service. So we're still focused on maximizing client penetration and growing our market share And helping industries digitize rather than on profitability, but the gross profit margin did improve notably year on year for business services because of the mix shift Thank you. Our next question comes from Garrett Wang from Citigroup Securities. Please go ahead. Hello, management team. In the first half year, I noticed that there's some reorganization of our management team. Some management team from IEG and PCG is now leading China Literature, GME, QQ and some other business department. It seems that we are focusing more on the content field. And the management team will walk us through the main strategy and the purpose of the human resource organization. As the Internet traffic is reaching its upper limit, under this background, what is the priority of our content investment? And can you give us some hints of our layout on the Changzheng Huang or Matterport? Thank you. Yes. Thank you for the questions, Garrett. So on your second question, the metaverse is a topic of great interest To us, albeit a longer term rather than the immediate opportunity. And we believe there's a number of potential pathways to the metaverse, Including very popular existing games that are highly social in nature, new games that are yet be created as well as existing social networks that can become more metaverse like progressively over We also think that there's certain skill sets or attributes that will be highly beneficial to companies seeking to provide a meta Including managing digital economies between users, which is akin to online games. And then also including the ability to Take physical world assets such as human faces or buildings or mountains and digitize them in order to populate the metaverse with people and with objects at a high And we're pursuing all of those parts and we believe that we're one of really a handful of companies globally And have all of those capabilities in terms of the social network expertise, in terms Experience managing online games in terms of the ability to take real world assets and digitize So that's on the second question. In terms of your first question, it is An interesting and astute observation. And I think your conclusion is correct that we are looking for To continually reinforce upstream content presence, whether that's in digital literature, Whether that's in video and film and TV series, whether that's in cartoons, comics and so forth. And we also believe that there's increasing opportunities for synergies between the different media formats in China. And you can see that very clearly from the fact that when we release the drama series based on Honor Kings, then that actually accretes to the popularity of the underlying honor of Kings game. And so you can have Different media interpretations of the same underlying IP, which if they're high quality, will self reinforce You can also see it in the fact that one of China literature's IPs, is now seeding a wide range of animated series, Drama series, mobile games and so forth. And with each iteration, the popularity of the IP that the Respect for the IP in the market appears to deepen and grow. So that's a very healthy trend and we think that by Moving people within our sort of content centric groups and by ensuring that what have historically been more platform centric Products become increasingly mindful of the opportunities around content, then we're in a very good position to Really helped drive that change in China. The next question comes from William Packer from Exane BNP Paribas. Please go ahead. Hi management. Many thanks for taking my questions. Firstly, now you've further developed your reinvestment plans, Could you perhaps which you communicated last quarter, could you provide more details on the scale of investment you're planning for 2021, Perhaps narrowing the range of guidance of 0% to 22% non GAAP EPS growth. And then secondly, I wondered if you had any force to share on 2022 in the context of both reinvestment plans and regulatory Can you return to trend profit growth or is that too soon? Thank you. So William, unfortunately, we We don't provide guidance. And we did so last quarter as a means of signaling that there could be A deceleration in growth because of the reinvestments in a short video and in our game business And in enterprise, and at this point in time, I think What's more important is really to measure whether we are or are not delivering on those reinvestments, meaning that from our When we look at our enterprise initiatives, the fact that our business services revenue growth accelerated so sharply, the fact that we're seeing very strong user growth Tencent Docs and for WECOM and for Tencent Meeting, you give us a degree of confidence that we're moving in the right direction. For our investments in game studios and game content, the fact that our international game revenue growth grew 37% year on year, the fact that we are for First time successfully penetrating Nintendo Switch opportunity, the first time in moving into the Japanese market, Give us some degree of confidence we're moving in the right directions for games. And then for short video, the increases in DAU and time spent on the Weixin Video accounts, we believe, signal that we're moving in the right direction. So in terms of where that shakes out From a bottom line perspective in the next two quarters or the next six quarters, that's a huge number of moving parts. Some of them are within our control, Some of them are outside our control, but we're less focused on those short term moving parts If you look at our enterprise software suite, we have the products, the analogs of Zoom and And arguably Microsoft Office in China, which is a very good place to be. If you look at our video accounts, we have an opportunity to drive Longer term advertising revenue growth at substantial scale, if you look at our game business, we have the opportunity to aggressively reposition this from a primarily The China centric business, we're truly global business and therefore more than tripled our addressable market for the game business group. So that's our focus really around that longer term opportunity rather than optimizing for the next 2 or 6 quarters. Thank you. Our next question comes from Eddie Leung from Bank of America Merrill Lynch. Please go ahead. Good evening. Thank you for taking my questions. The first question is a 4th question on advertising and regulation. We have read various from various media that there could be tightening in data connection and data privacy So just wondering what could be the potential impact on the different marketing solutions under your platform. Should we expect certain marketing solutions to have less an impact than others? And then secondly, A follow-up question on James. You just mentioned about, for example, some of the overseas game opportunities. So just wondering, when we expand our presence in overseas, especially game development, Are we going to focus on mobile games and how much we are actually looking at, as you mentioned, right, console games and other opportunities such as PC games. We also noticed that you just established a couple of studios in U. S. So it's kind of like along that line? Thanks. Yes. Thank you. So on your first question about data collection And using data to target advertising, I think we've always been well known in the industry for being very thoughtful and judicious about the extent to which we use consumer data for ad targeting purposes. And I won't go into all of the details here, but I think at a high level, our assumption is that there could be fairly Substantial changes in terms of the regulations around the use of data for advertising targeting purposes Before those would have any meaningful negative impact on us simply because we have not been nearly as aggressive Our Western peers or some of our local peers in terms of the granularity and the specificity of the ad targeting That we employ relative to the user data that we would potentially have access to. So that's on the first question. On the second question, I think it was specifically around whether we're focused on mobile games globally or on PC and console games as well as mobile. And the answer is the latter. I think if you look at one of our biggest international game success in the last year is Riot Valorant, which is a PC first game, one of our big game successes last quarter is Pokemon Unite, which is a Nintendo Switch Calling back a little bit then, I think that in years gone by, it would have required Effectively a tripling of headcounts and a tripling of effort in order to address PC and console as well as mobile at the same time. But that's Decreasingly the case for a few reasons. One is that the architecture of PC, Xbox and PlayStation Increasingly convergent around X86 and meanwhile the architecture of mobile and switch is increasingly convergent around Chipset Design and as a result, studios like Timmy that have been very much mobile first find it easier Support to switch that would have been the case when mobile and Nintendo architecture were further apart. And then secondly, there's a profusion of software Including our InvestoEmpics, Unreal Engine that simplify the process of developing for multiple platforms simultaneously. And thirdly, within Tencent, we've made a number of investments, often acquisitions of What we historically worked for higher studios outside China with a number of specializations, but one of Specializations was helping a great game on PC become a great game on console, mobile or vice versa. So I think for all of those reasons, We're addressing PC console and mobile together internationally, and we'll be increasingly doing so going forward. Thank you. Our next question comes from Thomas Chong from Jefferies. Please go ahead. Hi, good evening. Thanks management for taking my questions. My first question is about the online video landscape. Just want to get a sense about the regulatory environment in long form video. Are we seeing that it's relaxing and we should I expect more long form drama series and variety shows to come out in the second half. And my second question It's about just follow-up the previous questions on the international gaming side. Given that we have seen quite a very strong growth momentum in international games, I just want to get a sense about our strategies going forward. Should we expect it's more to be driven by in house development or M and A? And on that front, can management give us some color about the international gaming revenue contribution in Q2 as well as the long term KPI? Thank you. So why don't I address the international games question. We actually disclosed The international game revenue for 2Q, and you can back out, it's, I think, 25% of game segment revenue. And we also disclosed The revenue grew 37% year on year in constant currency terms. In terms of the strategy, then I think it's very much a content first In China, because of the QQ and Weixin distribution platforms, we're historically focused on Both distribution and content creation, although increasingly shifting to content creation over time versus outside China, it's much more Purely content driven. In terms of where the revenue and where the growth is coming from, Ben, it's primarily Existing studio, although supplemented periodically by acquisitions that we think can fit a particular hole or bring us a Technology capability we previously lacked. So looking at our international game revenue in the second quarter, then One big piece is games that we create in China, such as PUBG Mobile, such as Arena of Valor, and We export to the rest of the world. A second big piece relatively similar in size is games created by outside China by Some of our very successful investee studios outside China, such as Riot with League of Legends and such as Supercell with Clash of Clans and Clash Royale and Broad Stars. And then a smaller component is Other studios outside China that are at more of an incubation stage or have released one big game So that's as far as our international games are concerned. And with regard To online video, Martin may supplement me, but I think that as you're probably aware in the first half of this year, there was some content Constraints related to the July 1 celebration, and so it's possible that there may be more drama series appearing or We have experienced more successful drama series already this summer. On the flip side, I think that there's been some issues with a variety shows And therefore, there's some dislocation to the variety show output in the second half of the year. You're probably aware that historically, Variety shows tend to monetize primarily through advertising versus drama series monetize primarily through So our video business is increasingly subscription driven, and I think that will remain true going forward. Thank you. Operator, we are closing the call now. Thank you, everyone. If you wish to check out our press release And other financial information, please visit the IR section of our company website at www.tencent.com. The replay of this webcast will also be available soon. Thank you and see you next quarter. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.