Tencent Holdings Ltd

HKEX:700

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Tencent Holdings Limited 2019 First Quarter Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today.

I will now hand the conference with your host today, Ms. Jane Yip. Thank you. Please go ahead.

[Jane Yip, executive]

Thank you. Good evening. Welcome to our 2019 first quarter results conference call. I'm Jane Yip 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 the future for various reasons. The 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 risk factors and non-GAAP measures, please refer to our disclosure documents on the IR section of our website.

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 strategic review; Chief Strategy Officer, James Mitchell, will speak to the business review; and Chief Financial Officer, John Lo, will conclude with financial review before we open the floor for questions.

I will now turn the call over to Pony.

[Huateng Ma, executive]

Thank you, Jane. Good evening, everyone. Thank you for joining us. Our key platforms continue robust growth in users, traffic and activities, nourishing our environment ecosystem and reinforcing our expansion from consumer Internet to industrial Internet.

In the first quarter of 2019, we generated moderate growth in areas such as online games and our new segment, FinTech and Business Services, contributed significantly to overall revenue growth year-on-year. We have also managed our cost effectively amidst the challenging macro and business environments. As a result, for the quarter, total revenue was RMB 85.5 billion, up 16% year-on-year and broadly stable quarter-on-quarter.

Gross profit was RMB 39.8 billion, up 7% year-on-year and 13% quarter-on-quarter. Non-GAAP operating profit was RMB 28.5 billion, up 13% year-on-year and 27% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB 20.9 billion, up 14% year-on-year and 6% quarter-on-quarter.

Now let me give you a quick update on our key platforms. In Social, combined MAU of Weixin and WeChat increased 7% year-on-year to over 1.1 billion. Smart devices MAU of QQ increased slightly year-on-year to over 700 million, within which young users became more engaged and grew double-digit year-on-year. Qzone smart devices MAU was 572 million, up 4% year-on-year.

In online games, we expanded total user base for our overall portfolio. Daily active user benefit from content updates and in-game marketing activities in several key PC and mobile titles, such as Honour of Kings, LoL and DnF as well as our new game, Perfect World Mobile.

In media, Tencent Video average daily active users increased slightly year-on-year while our daily video views increased drastically benefiting from short videos and popular anime series. Short and mini video daily views grew strongly, boosting our media feeds business in mobile QQ browser, QQ KanDian and Tencent News.

In payment, our merchant network further expand and enable strong growth in commercial payment business. We operate the largest mobile payment platform in China measured by active users and number of transactions. In utilities, our mobile security products continued to strengthen market leadership in this strategically important segment.

I will invite Martin to discuss strategic view.

[Chi Ping Lau, executive]

Thank you, Pony, and good evening and good morning.

Over the years, we have been incubating new businesses organically within the company. Some new businesses have reached significant scale. Starting this quarter, we have a new revenue stream, a segment called FinTech and Business Services, to mark a new milestone for the evolution of our business. This revenue segment reflects, number one, the emerging demand for digital payments, financial services and enterprise solutions as China's economy grows rapidly. Number two, the synergies between these services with our existing online businesses. Number three, the robust scale and operational expertise in these areas accumulated through substantial organic investments for years. And overall, this segment demonstrates our drive to expand our company capabilities as well as to broaden our revenue base.

Now let's take a closer look at FinTech services which constitute the majority of revenues within the segment. We have 2 revenue streams in this subsegment. Number one, payments, where merchants pay us transaction fees and consumers pay us cash withdrawal fees and credit card repayment charges. Number two, other FinTech services such as wealth management, micro loan and insurance products where financial institution partners pay us fees and commissions for distributing their products to our user base.

As for the business dynamics, social payment fees cover significant costs that we pay to banks when consumers move money from their bank accounts into our payment system. On the other hand, commercial payment generates reasonable gross margin but bears marketing costs which may dial up or dial down depending on the competitive dynamics in the market. Micro loans and wealth management products are generally higher in margin. Overall, we operate our FinTech businesses in a highly regulated environment.

Under Business Services, we have 2 revenue streams. One, cloud, where enterprise customers pay for IaaS, PaaS and SaaS products as well as our tailored technology solutions. Secondly, smart industry offerings, where our partners pay service fees for our industry-specific solutions to assist enterprises in their industry embarking on digital transformation.

In terms of business dynamics, cloud business, where IaaS and PaaS products, like the majority of our offerings, have low margins and is capital-intensive. SaaS and technology solutions, which are currently subscale in China, is expected to generate healthy margins over the longer run. Smart industry solutions are at nascent stage but carry attractive business potentials in the future.

Now moving on to discussing milestones and outlooks for the 2 different subsegments. For FinTech services, we launched Tenpay in 2005, built the technology rails for our payment service on PC and later expanded into mobile. In 2013, Weixin expedited mobile transition with the launch of Weixin Pay. User adoption quickly expanded especially during the Chinese New Year in 2014 when we used the red envelope gifting function to unleash the power of social payment and later to shape the consumer habit of using Weixin Pay in commercial transactions. We increased our user stickiness by creating more and more use cases over the years.

In 2016, we kicked off our merchant adoption campaign to deepen off-line penetration. We signed up flagship partners in key verticals such as retail and restaurants. In addition, we proliferated our coverage of long-tail merchants through channel partners as well as leveraging our investees' merchant network.

For mom-and-pop store merchants, we provided innovative and easy-to-deploy turnkey solutions, such as QR codes and Mini Programs to enable online and off-line convergence. These initiatives allowed us to provide point-of-sale solutions to tens of millions of merchants nationwide.

Executing these initiatives enables payment-related revenue we generated today as well as supports the efficient distribution of financial services, such as personal wealth products and micro loan products online. With a strong focus on risk management, we have grown our FinTech business at measured pace. FinTech business also allowed us to build enterprise relationships and industry expertise that are complementary to our emerging Business Services subsegment.

Now for our Business Services, our cloud infrastructure was already at substantial scale for meeting our internal cloud requirement before we began serving external customers. Built upon our established strength, the Internet sectors such as games and video, we expanded our external cloud business, integrating our technological capabilities in areas such as security, AI, big data analytics and LBS. Through cloud-based solutions, our customers can apply advanced technologies to their businesses, facilitating their digital upgrade.

We differentiate ourselves in this business not only with advanced technology, but also by providing customers with options to connect to our vast and active user base on Weixin, QQ, Official Accounts, Mini Programs, Payments and WeChat Work, et cetera. We work with our channel partners and ISVs to develop tailored offerings including over 200 IaaS, PaaS and SaaS products and more than 90 industry-specific solutions.

Through data centers across 25 geographic regions worldwide, we're able to better serve our customers. In return, our scalable services allow us to pass along the benefits to customers through attractive rates or deals, maximizing value for their IT budget.

Benefiting from the above initiatives and our full suite of business services, we made breakthroughs in smart industries such as finance, retail, municipal services, tourism and health care. As example, we have built showcases around tourism services in Yunnan province and municipal services via Digital Guangdong initiative.

To conclude this strategic review session, our decade-long investment in FinTech and Business Services prove that our strategy of allocating capital to a range of organic investments can expand our capabilities, broaden our revenue base as well as generate sustainable profitable growth for the future.

Now with that, I'll pass to James to talk about our business review.

[James Mitchell, executive]

Thank you, Martin.

For the first quarter of 2019, our revenue grew 16% year-on-year. VAS remained our largest revenue segment, representing 57% of our revenue, within which online games was 33% and social networks 24%. Online advertising represented 16% of our revenue and our new FinTech and Business Services segment contributed 25%, leaving the other segment at 2% total revenue.

Diving into Value Added Services, segment revenue was CNY 49 billion in the first quarter, up 4% year-on-year and up 12% quarter-on-quarter. Social network revenue was up 13% year-on-year and up 5% quarter-on-quarter. Virtual gifts and live streaming services and video subscriptions contributed to the year-on-year and quarter-on-quarter growth rates and increased in-game item sales also contributed to the sequential revenue growth.

Our total VAS subscription count increased 13% year-on-year to 165 million due to the growth of online video and music services. Our video subscription counts were 89 million, up 43% year-on-year but stable quarter-on-quarter as the rescheduling of several top tier drama series impacted our rate of new subscriber additions.

For online games, our total cash receipts were up 10% year-on-year while our reported revenue dipped 1% year-on-year. The difference between the cash and reported revenue trends is a result of our deferral policy for virtual items sold within games.

PC client games revenue is CNY 13.8 billion, down 2% year-on-year. And total smartphone games revenue was CNY 21.2 billion, also down 2% year-on-year. We released 1 new mobile game in the quarter compared to 8 games in the first quarter of 2018.

Sequentially, reported game revenue grew 18% quarter-on-quarter due to favorable seasonality plus content updates in key titles. PC client game revenue was up 24% Q-on-Q and smartphone game revenue increased 11%.

Moving on to our social networks initiatives, first, social video. Users are increasingly using Weixin and Mobile QQ's in-app camera functions to record samples of their daily lives which they share to friends and in their timelines. Each day, hundreds of millions of videos are uploaded with active users of this function posting an average of 4 social videos per day.

Second, content video. Our original long-form IPs are developing their own fan bases and activities within our social networks. For example, we recently released Season 2 of Produce 101 for which we provided short and mini video highlight clips that our users share and vote on, amplifying the usage content engagement.

Third, Mini Programs. We're enabling users to share interesting or practical information, products and services for Mini Programs via Weixin groups. For example, millions of users participated in community group buy activities, enabling merchants serving localities to effectively access their potential customers.

We released our latest version of Mobile QQ in April with features for young users such as recommending new friends based on similar interests. And we enabled Mini Programs and mini games within QQ.

For smartphone games, our user base continues to grow in key genres. Honour of Kings released a substantial content update in January which increased its active users and monetization. We introduced additional seasonal skins for limited time sales. For example, the seasonal white tiger skin was among the game's top 5 grossing products to date.

Our new 3D massively multiplayer online role-playing game, Perfect World Mobile, generated an enthusiastic response from players, increasing our DAU within the role-playing game genre. The game has achieved healthy cash receipts. But because we launched it late in the first quarter and because of our deferral policy, the game only contributed marginally to first quarter reported revenue.

Outside China, PUBG MOBILE exhibited strong usage trends exceeding 100 million monthly active users in February. We introduced a new Royale Pass in PUBG MOBILE in March to celebrate its first anniversary, contributing to higher monetization.

Looking forward, we're pursuing multiple initiatives to revitalize growth. First we're resuming a more normal pace of new game launches in coming quarters. For example, we launched Peacekeeper Elite to our tactical tournament user base last week. Second, we're introducing Season Passes in several key games in China to stimulate user engagement and retention with opportunities to incrementally increase monetization and pay rates too. And third, following the success of PUBG MOBILE in international markets, we'll seek to identify other China-developed games suitable for international publishing over the medium term.

In PC client games, core users' activity levels and monetization improved quarter-over-quarter, benefiting from favorable seasonality and content updates.

For League of Legends, user engagement grew as we released several skin items which proved very popular, driving cash receipts to rebound both year-on-year and quarter-on-quarter.

In Dungeon & Fighter, we raised the game level cap to 95 in the January content update, enhancing user engagement. And the Chinese New Year promotional packages contributed to the sequential growth of DnF's paying users and ARPU.

Shifting to online advertising, segment revenue of CNY 13.4 billion increased 25% year-on-year which we view as a reasonable growth rate given an expanded revenue base and challenging macro environment. Revenue declined 21% sequentially, hurt by seasonality and by rescheduling of top-tier drama series out of the quarter.

Media advertising revenue was CNY 3.5 billion, up 5% year-on-year and down 33% quarter-on-quarter. In-feed ads grew substantially year-on-year and quarter-on-quarter. However, we did not air certain top-tier drama series that we intended to broadcast during the first quarter, reducing our video pre-rolled ad inventory and negatively impacting our overall media advertising revenue.

Social and other advertising revenue was CNY 9.9 billion, up 34% year-on-year and down 16% quarter-on-quarter. Higher ad fill rates and increased ad loads across our inventories in Weixin Moments, Mini Programs and QQ KanDian contributed to the year-on-year revenue growth. Bidding intensity generally reduced in the first quarter versus the eCommerce high season of the fourth quarter, pushing down our average cost per clicks quarter-on-quarter.

We continue to grow our advertising business at a measured pace reflecting our commitment to optimizing long-term advertiser returns rather than maximizing short-term revenue growth.

Looking at our a new revenue segment, FinTech and Business Services. For the first quarter, segment revenue was CNY 21.8 billion, up 44% year-on-year due to robust growth in commercial payment, other FinTech services, such as WeiLiDai and cloud services. Sequentially, segment revenue was stable as healthy growth in commercial payments and cloud services offset the absence of interest income from custodian cash accounts since January 14 per People's Bank of China guidelines.

Within FinTech services, commercial payment volume increased sharply year-on-year driven by more transactions per user. Per user transactions, in turn, benefited from the number of monthly active merchants accepting our payment service more than doubling year-on-year.

Within Business Services, Tencent Cloud sustained a rapid year-on-year revenue growth rate. Our enhanced and broader IaaS and PaaS offerings contributed to growth in new customers and in spending priorities in existing customer.

And with that I'll pass it to John to discuss the financial review.

[Shek Hon Lo, executive]

Hello, everyone.

For the first quarter of 2019, total revenue was CNY 85.5 billion, up 16% year-on-year or 1% quarter-on-quarter. Gross profit was CNY 39.8 billion, up 7% year-on-year or 13% quarter-on-quarter. We have net other gains of CNY 11.1 billion in contrast to net other losses of CNY 2.1 billion last quarter. The change is mainly due to increases in net fair value gains and deemed disposal gain relating to our investee companies, which are both non-GAAP adjustments. During the quarter, we donated CNY 700 million to Tencent Charity Fund.

Operating profit was CNY 36.7 billion, up 20% year-on-year or 113% quarter-on-quarter. Share of loss of associates and joint ventures was approximately CNY 3 billion compared to share of profit of CNY 16 million last quarter. On a non-GAAP basis, share of losses of associates and joint ventures was CNY 518 million compared to share of profits of CNY 1.9 billion last quarter.

Income tax expense was CNY 4.8 billion, down 16% year-on-year as a result of lower withholding tax as well as entitlements of preferential tax treatments and benefits. The sequential increase was due to recognition of preferential tax benefit for key software enterprise in last quarter which led to a lower base in the fourth quarter. The effective tax rate for the quarter was 14.7%.

GAAP net profit attributable to shareholders was CNY 27.2 billion, up 17% year-on-year or 91% quarter-on-quarter. GAAP diluted EPS was CNY 2.844, up 17% year on year and 91% quarter-on-quarter.

Let me walk you through our non-GAAP financial numbers. Operating profit was CNY 28.5 billion, up 13% year-on-year or 27% quarter-on-quarter. Operating margin was 33.3%, down 1.1 percentage points year-on-year or up 6.9 percentage points for the quarter-on-quarter.

Net profit attributable to shareholders was CNY 20.9 billion, up 14% year-on-year or 6% quarter-on-quarter. Non-GAAP diluted EPS was CNY 2.187, up 14% year-on-year or 6% quarter-on-quarter. Net margin was 25.4%, down 0.6 percentage points year-on-year or up 1.6 percentage points quarter-on-quarter.

Turning to segment gross margin. Gross margin for Value Added Services was 57.6%, down 5.7 percentage points year-on-year or up 4.2 percentage points quarter-on-quarter. The year-on-year decrease primarily reflected, a, revenue mix shift to lower-margin digital content services; and b, higher content costs as we renew and sign up more authorized music content during the year.

Sequentially, revenue growth from our in-house games and lower video content costs due to rescheduling of top-tier genres contributed to margin improvement.

Gross margin for online advertising was 41.9%, up 10.7 percentage points year-on-year or 5.3 percentage points quarter-on-quarter. The year-on-year and quarter-on-quarter changes primarily reflected relatively lower video content costs as discussed earlier as well as revenue mix shift to higher-margin social and other advertising.

Gross margin for FinTech and Business Services was 28.5%, up 2.4 percentage points year-on-year and 4 percentage points quarter-on-quarter. Margin improved due to, a, growth of high-margin services such as commercial payments; and b, we've reduced subsidies to mom-and-pop store merchants and small merchants in certain verticals despite the loss of interest income as a result [ for things ] custodian money mentioned earlier.

As we move revenues relating to FinTech and Business Services to the new segment, other segment will now comprise the financial results of investment in, production of and distribution of films and television programs for third parties, copyright licensing, merchandise sales and various other activities. These initiatives generally carry a rather low and choppy margin, but it's small, [ therefore ] the new base will have an insignificant impact on our branded gross margin.

On operating expenses. Selling and marketing expenses were CNY 4.2 billion, down 24% year-on-year or 26% quarter-on-quarter. The reduced expenses year-on-year was due to fewer games released and our cost management initiatives. Selling and marketing represented 5% of quarterly revenue compared to 6.7% last quarter.

G&A expenses were CNY 11.3 billion, up 20% year-on-year or broadly stable quarter-on-quarter. The year-on-year increase reflected higher R&D expenses and staff costs and G&A. R&D expenses were CNY 6.5 billion, up 30% year-on-year or 9% quarter-on-quarter as we increased investments in people, platforms and technologies to support business expansion. As a percentage of revenue, G&A was 13.3% and R&D was 6 -- 7.6% compared to G&A at 13.4% and R&D at 7% last quarter. At quarter end, we had approximately 54,600 permanent employees, up 18%, 16.6% year-on-year and broadly stable quarter-on-quarter.

Let's go through margin ratios. Gross margin was 46.6%, down 3.8 percentage points year-on-year or up 5.2 percentage points quarter-on-quarter. The year-on-year decrease reflected fast margin contraction and revenue mix shift to FinTech and Business Services which carry a lower margin. Sequentially, segment gross margin ratios improved through FinTech gross margin.

Non-GAAP operating margin was 33.3%, down 1.1 percentage point year-on-year or up 6.9 percentage points quarter-on-quarter.

Non-GAAP margin was 25.4%, down 0.6 percentage points year-on-year or up 1.6 percentage points quarter-on-quarter.

Before I close my remarks, I will share several key financial metrics for the first quarter. Total CapEx was CNY 4.5 billion, down 29% year-on-year or 1% quarter-on-quarter. Of which, operating CapEx was broadly stable at CNY 3.9 billion and nonoperating CapEx dropped 74% year-on-year to CNY 636 million.

Free cash flow was CNY 23.9 billion, up 72% year-on-year or down 20% quarter-on-quarter. In line with historical trend, lower operating cash flow due to payments of year-end bonuses reduced free cash flow sequentially.

Benefiting from healthy operating cash flow and controlled investment activities, we further reduced our net debt position by 21% quarter-on-quarter to CNY 9.6 billion.

The fair value of our shareholdings in listed investee companies excluding subsidiaries was approximately CNY 310.7 billion or USD 46.1 billion compared to CNY 238 billion or USD 34.7 billion at the end of 2018.

Thank you. We shall now open the floor for questions.

[Jane Yip, executive]

Operator, we'll take one question from each person. We invite the first question now.

[Operator]

Our first question comes from the line of Natalie Wu from CICC.

[Yue Wu, analyst]

I have a question regarding the advertising business. Just wondering apart from the macro and the seasonality issue you mentioned above, did you see any competition issue coming from other parties? And how should we see this sector growth in the rest of this year, given that you just lifted your ads inventory in several key products like Moments, like KanDian? Should we expect some reacceleration later this year for advertising business revenue?

[James Mitchell, executive]

Thank you for the question, Natalie. So in terms of the factors affecting advertising as well as the macro environment, we also pointed to the impact of several top-tier drama series that we expect to broadcast in the first quarter and were not broadcast in the first quarter, which had a negative impact on our media advertising revenues since those drama series can carry substantial advertising loads. You also asked about the competitive landscape and clearly, it is a competitive market. We think we have a very differentiated proposition. But within our overall advertiser -- advertising revenue mix, there are some products which have more direct competition and some products have less direct competition. And then in terms of the growth rate looking forward, there's a number of puts and takes. The macro environment will be whatever it will be. We are adding advertising inventories over time at a steady pace. But as we mentioned in the introductory remarks, our focus is really on optimizing the long-term returns for our advertisers as well as sustaining a very healthy user experience rather than on maximizing the short-term advertising revenue results.

[Operator]

Our next question comes from the line of Grace Chen from Morgan Stanley.

[Grace Chen, analyst]

My question is about -- and also thank you for the additional disclosure of the FinTech and Business Services breakdown. My question is about the margin for this segment. We're seeing sequential margin improvement even though there's negative impact on the absence of income generated from custodian cash balances. With enhanced monetization of FinTech, should we expect margin will continue to increase in the following quarters?

[Shek Hon Lo, executive]

In terms of the FinTech and Business Services margin, we can see that there's quite a lot of improvement during the period despite the fact that we had ended our custodian money to PBOC and there will be a loss of interest due to a few reasons. Number one is in terms of the face-to-face receipts, payment platforms, we have been -- beforehand, we have been giving out subsidies or exemptions on cash withdrawal fees to those mom-and-pops merchants. But now we have adjusted the program a little bit by offering loyalty program points rather than free withdrawal quotas. As a result, the margins improved by quite a bit. Number two is in terms of some sort of verticals which we have given out exemptions on rates or concession rates, take rates, we have resumed the normal take rate for those verticals such as small restaurants and things like that. And also, I think in terms of the Licaitong, beforehand, we had to grow up this wallet alternative, but now it has padded up a little bit and the interest generated from this account. All in all, there will be - there has been improving gross margin in this period. Having said that, the margin you're looking at is just the gross margin and not necessarily mean that that's operating margin. From time to time, we will look at the competitive landscape and we'll dial up or down promotion costs and subsidies when appropriate.

[Operator]

Our next question comes from the line of Wendy Huang from Macquarie.

[Wendy Huang, analyst]

I just want to get more color on the cloud's new trend for growth as well as the long-term outlook. So since you really built the structure last year, which particular industry -- for example, you had mentioned the health care cloud, the retail cloud, et cetera, which particular industry has made clear progress since then? And also, can you provide more disclosure on the cloud revenues in the loan growth as well as the profitability?

[Chi Ping Lau, executive]

Yes. In terms of the cloud business, I think it's actually progressing quite nicely. And as we have talked about in our prepared remarks, number one, we have made breakthroughs in a number of different segments, in particular, I would say it's around smart retail and the financial sector as well as municipal services. So I think those are clear examples. In smart retail, we're able to really combine the strength of our cloud infrastructure and our ecosystem, which include our advertising and our Mini Programs, our Payments as well as our Official Accounts. And we also add in our technology in particular the analytics and AI. And we are providing very strong solutions to retailers. For example, retailers can actually easily digitize their customers. When the customers go to their physical stores, by scanning a QR code, they can pay for the services and then access the Mini Programs and become a digital member. And as a result of that, we've built strong relationships with these retailers and subsequently help them to digitize their operations and help them to move their operations into cloud and help them to engage in efficiency improvement through data analytics. We also called out examples, such as our project with the Yunnan province in which we helped them to embark on digitization of their tourism industry and also in Digital Guangdong in which we helped the municipal services to be digitized and be cloud-based so that they can be serving the citizens of Guangdong in a big way. So these are clear examples. Now in terms of the actual number, we don't have a separate disclosure on the subsegment, but I would say the growth trend have been pretty consistent. Now in different quarters, sometimes there are lumpy revenue here and there, so the year-on-year growth rate may go up and down a little bit, but I think the growth trend has been consistent for our cloud business. In terms of margin, it is still losing money on an operating basis. So that's what we can tell for now. Thanks.

[Operator]

Our next question comes from the line of John Choi from Daiwa.

[John Choi, analyst]

I was wondering if we could get some update about the recent launch of your new game, Peacekeeper Elite. How is that trending and what kind of monetization that management is expecting? And we've also noticed that Tencent has launched quite a bit of Season Passes in China, how is that progressing as well? And just a housekeeping question on the content cost and video content. In your release, it says it's relatively controlled this quarter. Should we be expecting that this is going to be a new trend or this is more of a quarterly issue?

[Chi Ping Lau, executive]

Yes, in terms of Peacekeeper Elite, for a new game it's actually a very successful launch. And part of the reason is because we have provided pretty individualized incentive package for users which have been playing Exciting Battleground.

So I think that's quite successful, and we have been able to monetize the game. And there was initial spending that people who came into the game and then spent and over time, it becomes sort of more normalized. Now I would say at the current time, we're much more focused on making sure that we retain customers. Number one, we want to attract the gamers and number two, we want to retain the gamers. And then over time, we would work more on the monetization side. So at this point in time, it is still much more focused on the user experience. Retention, I would say, as we observed in the past, it has been pretty good. But on the financials, I also have to note that because we have a deferral policy, so even when we are generating gross revenue, for the revenue to actually come into our P&L, it will take some time.

Now in terms of the Battle Pass, James will actually talk about it.

[James Mitchell, executive]

So as you may know, the Season Passes have proven very impactful for certain games such as Fortnite in the rest of the world in the past year. And now we are starting to launch the Season Pass concept in China for a number of our key games, such as Honour of Kings and QQ Speed. And in terms of the impact of Season Pass, first, engagement. What we generally see is the players who buy the Season Pass engage with the game more because there are more activities for them to complete in order to unlock the rewards that they have sort of paid for through the Season Pass. Secondly, paying ratio. Typically, introduce of Season Passes boosts paying ratio because there are some users who didn't want to pay purely for the in-game items but are willing to pay for the Season Pass and the associated activities. And then third, if we look at cannibalization impact, then when we introduced Season Pass in these games, we study what's the impact on spending prior to the Season Pass and post the Season Pass and whether the Season Pass is bringing revenue forward that we would otherwise generate it later anyway. And depending on the game, what we see is that the cannibalization impact is either relatively smaller or at 0. So net-net, the Season Passes can be quite accretive to revenue, if they're targeted correctly and have the right content and activities inside them. So that's on the Season Pass. And then for your question around the video content costs, there's a number of forces at work. One force is that I believe the biggest participants in the online video, streaming video industry have generally become more cost conscious in the last 6 to 9 months. A second is that a number of us, including Tencent, have shifted some of our spend from licensed content to self-developed content, wherein we're more in control of our destiny. But then the third which is very important for the current period is that because there is some content that the industry intended to put on air in the first quarter and couldn't put on air, therefore, while the cash costs have already been borne, the reported expenses have not yet been expensed and will be expensed as and when that content is ultimately put on air. So some part of the reduction in video content costs that you're seeing is due to that timing impact rather than due to a real change in underlying fundamentals.

[Operator]

Our next question comes from the line of Alicia Yap from Citigroup.

[Alicis a Yap, analyst]

I have questions related to these industrial Internet initiatives. What could be the biggest hurdle that prevent you from executing the initiatives smoothly? Will that be the corporate budget constraint now that we have more intense trade war and potential weaker Chinese economy or would that be the talent and the readiness of the corporate, whether the enterprise are able to get enough software or IT talent to help them upgrade the process? And then with monetization, besides all these Payment, cloud service and also the Mini Program apps that we can charge, will there be incremental solutions revenues that Tencent expects to capture down the road? And then just one housekeeping question for Peace Elite (sic) [ Peacekeeper Elite ], the deferred revenue schedule, will that be 3 months, 6 months, 9 months or 12 months?

[Chi Ping Lau, executive]

Yes, that's actually a pretty good question. And I think the key challenge to invest through Internet is actually the creation of the solutions that can actually help the companies in different industries to embark on this digital transformation. I think if you look at the willingness, right, more and more companies realize that at the end of the day all their consumers are actually on the Internet, they are connected to the mobile Internet so they need to be there. They also recognize that there's a lot of technology solutions out there which eventually can actually help them to improve their operations and make them more efficient in their operations and help them to serve their customers on the overall mobile Internet better. Now the problem is really how to make that transformation. And it feels like if we create a big team of people and help a company, we can actually sort of create very compelling solutions. So in the case of, for example, when we dedicate a team of people to helping Yunnan province and the Guangdong province, then it actually helps them to really upgrade their technology infrastructure and help them to really provide the solutions to serve the citizens. But -- and then sort of in other companies, when we dedicate resources to do it, then there's a lot that we can do. But the problem is it's actually not that scalable, right? Every single company will need a team of tens or even hundreds of IT people to create custom-made solution. So what we have been trying to do is really to provide these kinds of development capabilities as well as solutions at scale. And that would involve us creating showcases and trying to generalize these showcases into more applicable solutions throughout the entire industry that would also involve us working with a lot of third parties, such as ISVs and system integrators and help them to embark on -- or create this capability so that they can actually create digital transformation solutions for the different industries and businesses. So if you look at China, it's actually a market which has less penetration of technology solutions, SaaS solutions. So that's sort of a manifestation of this problem. And I think it would take some time before we create these solutions and create these awareness and capabilities in the ecosystem. But we felt that if that's done, right, and if we look at longer term when these solutions and resources are available, companies can really benefit from these digital transformation. The value propositions are obviously there. So we felt that over the long run, these challenges will be overcome.

[Shek Hon Lo, executive]

In relation to the PC game deferral period, for the major PC games it normally ranges from 6 to 9 months, whereas for games just like League of Legends, it might be up to close to 1.5 years.

[Operator]

Our next question comes from the line of Gregory Zhao from Barclays.

[Gregory Zhao, analyst]

So my question first about your FinTech business. So assuming your cloud business is still -- is breakeven or maybe some -- later, I mean, lossmaking, so can we see the gross margin of your FinTech business is that can be, currently it's above 30%? Also can you help us understand the margin profile of each of the FinTech segment like payment, like wealth management and financial businesses? So what is your current take rate, annualized take rate and the margin profile? And also if we look at the Payment business on long run, although we know the take rate is much lower than your U.S. peers, but given the business scale, so how shall we think about the margin profile of your Payment business?

[Chi Ping Lau, executive]

Well, as we have discussed, right, the FinTech business is actually much bigger than the Business Services, right? So I think that would be the way -- if you try to sort of allocate the margin, which we don't disclose, right, that is one factor that you need to consider. Now in terms of the FinTech businesses, right, you can see we disclosed that there are a number of different revenue streams. There is a revenue stream which is social payment in the sense that we charge users when they withdraw fees -- withdraw money into their bank account. We also charge the users when they use our payment platform to pay for credit card charges which is essentially a withdrawal as well. But that's actually really an offset against a very high banking charge that we pay to banks when consumers transfer money from their bank into our payment system. So that's firstly, right? Secondly is actually the commercial payments which we said generates modest margin. And as John talked about, the margin that we generate on that is actually somewhat dependent on competitive pressure. Sometimes, we actually have to subsidize the charges that we charge on merchants if we want to expand our footprint. And finally, it's the financial FinTech services charge that we charge on different products when we distribute these wealth management products or microloans or insurance products to our user base. And on that, we charge a net fee so the margin is actually quite good. So I think that's sort of the margin profile of this business. Now in terms of the take rate that we have vis-à-vis global peers, I think you're absolutely right in the observation that it's actually much lower than global players. But at the same time, right, even if you look at credit card charges in China, it's actually much lower than credit card charges around the world as well. I think it's really because of the fact that the Chinese economy was actually built -- the payment infrastructure was actually built at a later time and as a result, it's somewhat reflective of a lower cost. If you think about the credit card charges, then you will determine that it was actually a long time ago in which you pay a much higher IT cost, you may pay much higher communication costs. But today, the efficiency of the entire system is actually higher. So to some extent, I felt that the Chinese credit card charge is actually a good benchmark of what the cost it is today, and what we are trying to provide is actually a competitive solution that allowed the extension of payment solution and penetration of the solution into a wider penetration in China. So that's why it's somewhat even lower than a credit card charge which I think is actually quite reasonable.

[Operator]

Our next question comes from the line of Karen Chan from Jefferies.

[Karen Chan, analyst]

Just a question on your new mobile game, Peacekeeper Elite, how does the margin of that compare to other self-developed titles? And also, is it fair to say that the payment competitive landscape in China is sort of easing off in a way that we can potentially scale back in merchant or user subsidy?

[James Mitchell, executive]

I think that the margin on Peacekeeper Elite has many factors flowing into it. And let's see how the game monetization behaves then we'll have a clearer view on the margin.

[Chi Ping Lau, executive]

In terms of the payment side, I think that in the first quarter it has moderated a bit, right? But I think if you look at the historical trend, it's actually quite fluctuating from quarter-to-quarter, right? It really depends on the promotion activities of the different players in the market. So I would not say this is a trend that the subsidy is actually moving towards a lower end. I think it's a historical phenomena in the first quarter.

[Operator]

Our next question comes from the line of Tammy Wong from HSBC.

[Wai Yan Wong, analyst]

This is Binnie here. My question is basically on the online advertising and overall in terms of on a macro level we see the trade war tension has been heating up and there's also macro uncertainties. How does that change our growth outlook? And especially coming to advertising which is relatively more sensitive to macro here. The reason we ask is that we observed some of your competitors have been seeing some challenges. And then I guess on the industry level, it seems that competition remain intense as there's always concern about an oversupply of advertising inventory. How does that impact our pricing and also the timing of potentially launching our third ad load in a moment?

[James Mitchell, executive]

So thank you for the question, Binnie. So in terms of the macro impact on our advertising business, then there clearly is some flow-through from both the weak economy and also the volatile stock market to advertising activity, and that's particularly evidenced in sectors such as automobile, real estate and then Internet services, both the big, established but not yet profitable O2O companies and also some of the Internet start-ups who have curtailed their spending. On the other hand, there are some other sectors, such as consumer products, games, education which are relatively robust. But in aggregate, it is a mixed picture because of the macro impact. From a competitive perspective, we feel that our advertising pricing is generally quite competitive already. That's not true all across-the-board. But in general, we think that we have a very keen pricing, and where we don't, then we'll optimize by improving our technology, driving up the click-through rates and delivering a better return to advertisers. So we really add inventory based on when we believe that our platforms and technologies in force are ready to ingest more inventory and to serve the right appropriate advertising into incremental inventory rather than based on the macro environment. So the inventory deployment plan is more a function of our internal development rather than the external macro situation.

[Operator]

The next question comes from the line of Eddie Leung from Bank of America.

[Eddie Leung, analyst]

Just a follow-up question on industrial Internet. How should we think about investment for these business initiatives in the sense that how much are we thinking about tangible investments in the form of capital expenditures, sales and marketing? And how much is more like covered by diverting the internal resources to focus on certain projects? And if it's more about the tangible part, could you give us some color whether we would be seeing for example the CapEx or headcount growing more significantly in this year?

[Chi Ping Lau, executive]

So Eddie, it is true that we have to make investments in pretty much the areas that you talked about, right? Firstly, it is the capital expenditure and we have to invest in servers particularly ahead of the demand so that we can actually serve our customers. And that will be in the form of a fixed investment. And in addition, we need to add our headcount, and that would be in the form of both sales and marketing as well as the delivery of the services, right? We need to add tech people so that we can build the products and solutions for our customers. And as I alluded to in the earlier answer on industrial Internet, one of the key challenges is actually making sure that there are solutions available for the companies who are eagerly hoping to upgrade themselves digitally. And as a result, we actually have to dedicate a pretty large team of development people just to provide the showcases.

And at the same time I would say that we would, to some extent, divert some resources. But the resources are actually quite different people, right? If you think about product managers who -- and then engineers and developers who are actually developing solutions that can serve hundreds of millions of people in our Internet platform versus creating more enterprise-like solution to customers, it's actually somewhat different. And we also leverage quite a bit of our internal technology team, right? When somebody in our overall Internet platform create, let's say, a machine learning algorithm, we can actually sort of provide it as a solution to our enterprise customers. So to some extent, there are some synergies that we can actually leverage. And I would say from an operating perspective, this business is still in investment mode. So in addition to the capital expenditure, we also generated some operating losses. So that's another area of investment. And finally, I would say around industrial Internet, we are also seeing investment opportunities, right? So there are companies which are developing interesting solutions. There are partners who can actually help us to build our business faster. And there are ecosystem partners in which they can actually develop a specific solution for an industry that has strategic synergies with us. And these are companies which we'll invest in. So I think investments actually come into play in these areas.

[Operator]

Our last question comes from the line of Han Joon Kim from Deutsche Bank.

[Hanjoon Kim, analyst]

We disclosed that our PUBG global MAU is around 100 million, so I just wanted to get a perspective on how you guys are thinking about the globalization of your business, kind of revenue generation? Is it contributing to your mobile game revenues now? And how do you think about scaling this?

[James Mitchell, executive]

So if you look at our game revenue then, non-China contributes a high single-digit percentage of our global game revenue. Looking forward, as we mentioned in the prepared remarks, we believe that there's a convergence underway between the China game market and the rest of the world, Western game markets. That's convergence in terms of the platforms on which people are playing games, meaning PC, console, mobile, it's convergence in terms of the game business model meaning that the shift to the free to play games. And it's also convergence in terms of the genres of games that people like, meaning the, for example, first-person shooter games which historically were less popular in China, have now become more popular in China. So given those convergence trends, we are more closely reviewing future games to assess whether they are suitable for global publishing as opposed to just China publishing. And importantly, we have built up a degree of global publishing infrastructure for PUBG MOBILE. And we now have people in different geographies who are accustomed to doing in-game operations, communicating with the app stores, communicating with users, enhancing and localizing content for the different geography needs. And so over the medium to long term, then we hope to derive more value out of that infrastructure by publishing more appropriate games through that infrastructure globally.

[Jane Yip, executive]

Thank you, operator. And we are closing the call now. 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.

[Operator]

Thank you. Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.