Tencent Holdings Ltd

HKEX:700

Earnings Call Transcript 2020-Q2

[Operator]

Thank you for standing by, and welcome to the Tencent Holdings Limited 2020 Second Quarter and Interim Results Announcement Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today.

I would now like to hand the conference over to your host today, Ms. Wendy Huang from Tencent. Please go ahead, Ms. Huang.

[Wendy Huang, executive]

Thank you. Good evening. Welcome to our 2020 Second Quarter and Interim Results Conference Call. I'm Wendy Huang from Tencent IR team.

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 and 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. Non-IFRS measures are intended to reflect our core earnings by excluding certain onetime and/or noncash items. For a detailed discussion of risk factors and non-IFRS 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; and Chief Strategy Officer, James Mitchell, will provide a business overview. 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]

Okay. Thank you, Wendy. Good evening. Thanks, everyone, for joining us today. Since the beginning of this year, the COVID-19 pandemic has threat the world, disrupting our daily work and life routines. During this challenging time, we utilized our platforms and technologies to help users adapt to the new normal via online tools to support enterprises in conducting digital upgrades and to broadly contribute to economic recovery. And now I will highlight the results we achieved in the second quarter of 2020.

Total revenue was RMB 115 billion, up 29% year-on-year and 6% quarter-on-quarter. Gross profit was RMB 53 billion, up 36% year-on-year and 1% quarter-on-quarter. Our non-IFRS operating profit was RMB 38 billion, up 38% year-on-year and 6% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB 30 billion, up 28% year-on-year and 11% quarter-on-quarter.

Moving to our online platform. In social, combined MAU of Weixin and WeChat increased 6% year-on-year to 1.21 billion. Just for those who may not be familiar with the distinction between Weixin and WeChat, they are 2 different products. Weixin is a chat that serves the users in the Mainland of China, while WeChat is a sister product which serves users outside of the Mainland of China. And smart devices MAU of QQ was 648 million.

In games, we expand our leadership via extended popularity amongst established franchise and success of new release in both China and international markets. In media, video and music subscriptions increased as we released the top-tier content and add songs to the paid library. In FinTech, commercial payment transaction resumes growth, and our wealth management platform extends its aggregate customer assets. Leveraging our broad user base, we assist the SMEs digital upgrades and contribute to economic recovery.

In cloud, we signed up a large contract in key verticals and captured opportunities in emerging sectors. In utilities, we maintain our industry leadership in mobile security, mobile browser and Android app store in China.

I will invite Martin and James to discuss the business review.

[Chi Ping Lau, executive]

Thank you, Pony, and good evening and good morning to everybody on the call. For the second quarter of 2020, our total revenue grew 29% year-on-year. Value Added Services represented 57% of our total revenue, within which social networks was 23% and online games was 34%. Online Advertising was 16% of total revenue. FinTech and Business Services represented 26% of our total revenue.

Moving into more granularity for Value Added Services. Segment revenue was RMB 65 billion in the second quarter, up 35% year-on-year and 4% quarter-on-quarter. Within Value Added Services, social networks revenue was RMB 26.7 billion, increasing 29% year-on-year, mainly driven by more subscriptions for animated series and music as well as in-game item sales. The consolidation of HUYA contributed to both year-on-year and quarter-on-quarter revenue growth as well.

Total VAS subscriptions increased 20% year-on-year to 203 million. Video subscriptions increased 18% year-on-year to 114 million mainly due to the success of animated series and drama series such as The Land of Warriors Season 3 and a new season of Candle in the Tomb: The Lost Caverns. Music subscriptions rose 52% year-on-year to 47 million as we included more songs in the paid library.

Online games revenue grew 40% year-on-year and 3% quarter-on-quarter to RMB 38.3 billion driven by mainly smartphone games. Total smartphone games revenue increased 62% year-on-year to RMB 36 billion. The strong performance primarily flowed from our key titles in China and international markets and the release of deferred revenue generated in previous periods, including the COVID lockdown period. The growth also benefited from the low base of Peacekeeper Elite in the same quarter last year, which was launched in May 2019, and from the financial consolidation of Supercell, which happened October 2019.

PC client games revenue decreased 7% year-on-year to RMB 10.9 billion due to soft DnF and cross-buying performance, offsetting increased revenue from League of Legends.

Moving on to social networks. We released during the quarter update for Weixin to enhance features and functionalities for communication, content and services. On communication, users can virtually tap their friends via Tickle, which has enabled many creative expressions. The addition of live broadcast function in groups facilitates various vertical use cases such as online education. Daily messages grew both year-on-year and quarter-on-quarter.

On content, we upgraded Official Accounts' video publishing capabilities, strengthening our recommendation algorithm and released new content aggregation tools. These initiatives enabled more efficient content delivery and revitalized content consumption in the Official Accounts. As a result, Official Accounts' page views increased year-on-year during the first half of 2020, rebounding after 3 years of consecutive declines.

As for services, we launched a free and easy-to-use toolkit to help SMEs, especially long-tail merchants, build and operate Mini Stores, empowering them with functions such as order management, after-sales services and live broadcast.

In QQ, we enriched features for users to stay together online while they are physically apart. Users can initiate online parties and play AI-empowered social games in video chat environment.

To engage the expanding fan base for anime, comics, games and novel content, we rolled out customizable comic stickers within QQ chats and strengthened content offerings through popular ACGN-related Mini Programs. All these help us to make QQ continue to be front and center with the young users.

For games, during the quarter, play activity in China normalized downwards versus the first quarter as users returned to offices. However, user time spent on smartphone games in China increased year-on-year, suggesting that the work-from-home period has structurally widened appeal of playing games. Internationally, our MAU increased significantly as many users connected with their colleagues and classmates via online games during the stay-at-home period.

Two new smartphone games and one new PC games also contributed to our international MAU growth. Our flagship titles maintained a high cadence and quality content updates, including new game modes, virtual items and graphics upgrades. Specifically, Honour of Kings motivated users to play more matches with extra rewards, which deepened its user engagement during its annual Give Me Five festival. We also released high-quality skins for its well-known 3 kingdom heroes.

Peacekeeper Elite celebrated its first anniversary with new content and game modes to enhance the competitive game experience. In the crossover promotion in July, we launched appealing Tesla-branded car skins in the game, which gained widespread popularity.

For new releases, Supercell's Brawl Stars in China was especially well received as players enjoyed its easy-to-learn yet competitive game play. It topped the iOS China download chart in June, extending Brawl Stars' global leadership in the fast-paced 3 versus 3 MOBA genre.

In recent years, we have achieved significant success in game development. We continue to strengthen several key structural factors, which are critical for developing and operating highly successful games. Firstly, our homegrown and international flagship game studios have proven track record in creating category-leading games, especially on smartphones. We established 17 long-standing franchises, which have each individually exceeded 10 million daily active users in their operating histories. Studios develop content with a high degree of autonomy while leveraging Tencent's publishing resources. Their capabilities in innovating attractive core game play, creating immersive story lines and releasing engaging updates are vital in sustaining long-term success.

Secondly, our studios are early adopters of cutting-edge technologies. Tencent's back-end infrastructure is designed to support a massive number of players concurrently. We deploy industry-leading game engine and AI-empowered tools to shorten development lead time and provide unique game experiences. For example, we applied our proprietary technology in Honour of Kings Wukong AI challenge, which attracted over 50 million players to play against the AI. We constantly upgrade our anti-cheat system to foster fair competition, which is crucial for game play and especially eSports tournaments. And we collaborate with external IP and nurture internal IPs to enrich content and enhance game longevity. We create popular narratives that tie into well-known literature, anime and famous characters such as Moonlight Blade, Naruto and Pokémon's Pikachu. We expand own IP influence through cross-media adaptation, leveraging our large media platforms.

Looking forward, we're committed to investing in talent, technologies and IPs to strengthen our leadership in game development.

Now I pass on to James.

[James Mitchell, executive]

Thank you, Martin. Turning to Online Advertising. Overall, our ad revenue grew 13% year-on-year, which we believe was an above-market rate, to CNY 18.6 billion. Sequentially, revenue grew 5%, a little bit slower than our normal second quarter seasonal upturn because ad spends by the games and Internet services categories normalized downwards on less traffic during the second quarter after surging due to abnormally high traffic in the work-from-home period during the first quarter. However, we diversified our advertising industry breadth as categories such as eCommerce and education increased investment for their June 18 promotional campaigns for summer courses, and categories such as automobile and consumer electronics marketed more aggressively with us as consumption recovered.

To reinforce our long-term competitiveness, we launched a new integrated ad platform, enabling advertisers to more efficiently place ads across all of our inventories, including our mobile ad network. This new platform should also increase bidding efficiency and provide smarter targeting for advertisers.

For social and others advertising, Weixin properties, particularly Moments, saw rapid ad impressions growth, while our mobile advertising network experienced higher eCPMs as video advertisements' revenue contribution increased from a single-digit percentage a year ago to over 40% in this quarter. We believe the Weixin ecosystem is redefining China's online advertising by enabling advertisers to effectively channel online, social and off-line traffic to their own private domains such as Official Accounts and Mini Programs, with the result that our advertisers are effectively investing in long term and loyal customer relationships, not just purchasing onetime transactions.

For media advertising, revenue declined year-on-year due to weak demand from brand advertisers and the delayed production and release of certain variety shows and drama series during the second quarter. However, subsequent to the quarter end and helped by popular drama series, Nothing But Thirty, Tencent Video's traffic has materially improved, which we think testifies to the resilience of our long-form video platform.

Looking at FinTech and Business Services. Segment revenue was CNY 29.8 billion, up 30% year-on-year and up 13% quarter-on-quarter. Within FinTech services, revenue grew year-on-year and quarter-on-quarter mainly driven by increasing user base and business scale as consumption rebounded on people returning to their places of work.

Our service ecosystem, including payment solutions and business management tools, provides off-line merchants an efficient path to digitally upgrade themselves and to access customers and settle transactions via mobile phones. During the quarter, merchant for our payment solutions stepped up, especially from categories such as retail and restaurants. As a result, our commercial payment number of average daily transactions and value per transaction each increased year-on-year, rebounding robustly from the COVID-19 impact in the first quarter.

For our wealth management business, aggregated customer assets and the number of active customers rose rapidly year-on-year as more customers came to appreciate the convenience of managing their cash through our secure and well-curated platform.

Within Business Services, revenue expanded both year-on-year and quarter-on-quarter as cloud services consumption by Internet companies in the public sector increased. Although off-line project deployment has not fully resumed its normal pace, reflecting the lingering impact from COVID-19, we have seen growing demand in industries, including financial services, the public sector, health care and education. We strengthened our back-end infrastructure capabilities by adopting more custom-made equipment, and we're building and expanding more of our own hyperscale data centers.

And I'll now pass to John.

[Shek Hon Lo, executive]

Thank you, James. For the second quarter of 2020, total revenue was CNY 114.9 billion, up 29% year-on-year and 6% quarter-on-quarter. Gross profit was CNY 53.2 billion, up 36% year-on-year or 1% quarter-on-quarter. Net other gains was CNY 8.6 billion, more than double year-on-year and quarter-on-quarter. This mainly comprised non-IFRS adjustment items, including net gains on deemed disposals of certain investees in verticals such as eCommerce, live broadcast services and online games as well as net fair value gains resulting from increased valuations of investees. Such gains were partly offset by impairment provisions for goodwill at China Literature and, again, certain investee companies.

Operating profit was CNY 39.3 billion, up 43% year-on-year and 6% quarter-on-quarter. Net finance costs were CNY 2 billion, stable year-on-year and up 19% quarter-on-quarter. The quarter-on-quarter increase was primarily due to the recognition of foreign exchange losses for the second quarter 2020 compared to -- for a gain in the first quarter, partially offset by decreased interest expense due to refinancing exercise capturing the lower interest rate environment.

Share of losses of associates and joint venture was CNY 295 million compared to share of profit for the same quarter last year. Sequentially, share of losses widened by 5%. The movement mainly reflected the impact of longer revenue deferral period and greater marketing spend at an associate game company. On a non-IFRS basis, we recorded share of profit of CNY 658 million for the second quarter of 2020.

Income tax expense was CNY 4.6 billion for quarter 2 2020, and the effective tax rate was 12.3% this quarter.

IFRS net profit attributable to equity holders was CNY 33.1 billion, up 37% year-on-year and 15% quarter-on-quarter. Diluted EPS was CNY 3.437, up 36% year-on-year and 15% quarter-on-quarter.

Let me walk you through our non-IFRS financial numbers. For the second quarter, operating profit was CNY 37.6 billion, up 38% year-on-year and 6% quarter-on-quarter. Net profit after NCI was CNY 30.2 billion, up 28% year-on-year or 11% quarter-on-quarter. Diluted EPS was CNY 3.13, up 27% year-on-year and 11% quarter-on-quarter.

Turning to segment gross margin. Gross margin for VAS was 53.7%, up 1.1 percentage point year-on-year or down 5.3 percentage points quarter-on-quarter. This sequential decrease was primarily due to, number one, revenue mix of lower-margin digital content services, including the live broadcast of HUYA and music streaming services; two, higher mix of lower-margin platform games versus PC games.

Gross margin for Online Advertising was 51.4%, up 2.8 percentage points year-on-year or 2.2 percentage points quarter-on-quarter. The industry-wide removal of cultural construction fees contributed to the year-on-year and quarter-on-quarter increase. Sequentially, the improvement was also driven by a weaker proportion of advertising revenue derived from higher-margin Weixin Moments.

Gross margin for FinTech and Business Services was 28.9%, up 4.9 percentage points year-on-year and stable quarter-on-quarter. The year-on-year increase mainly reflected improved margin contributed by wealth management and payment-related services.

On operating expenses. Selling and marketing expenses were CNY 7.8 billion, up 64% year-on-year or 10% quarter-on-quarter. Marketing spending increased year-on-year, particularly on online game, Weishi as well as cloud and business services. As a percentage of revenues, selling and marketing expenses increased to 6.8% from 5.3% in quarter 2 2019. Sequentially, greater marketing spend was primarily driven by online games, cloud and business services as well as the consolidation of HUYA.

G&A expenses was CNY 16.5 billion, up 31% year-on-year and 17% quarter-on-quarter mainly due to prudent investment in R&D and staff costs. Within G&A, R&D expenses were CNY 9.9 billion, up 39% year-on-year and 23% quarter-on-quarter. G&A and R&D represented 14.4% and 8.6% of revenues, respectively. As at quarter end, we had approximately 71,000 employees, up 26% year-on-year and 10% quarter-on-quarter.

For the second quarter of 2020, gross margin was 46.3%, up 2.2 percentage points year-on-year or down 2.6 percentage points quarter-on-quarter. Year-on-year increase reflected improved gross margin across all 3 business segments. Sequentially, margin decreased, mainly reflecting lower gross margin of VAS, as mentioned before.

Non-IFRS operating margin was 32.8%, up 2.1 percentage points year-on-year and largely stable quarter-on-quarter. Non-IFRS net margin was 27.2%, stable year-on-year or up 1.3 percentage points quarter-on-quarter.

Finally, I will share with you some key financial metrics for the quarter. Total CapEx was CNY 9.5 billion, an increase of 117% year-on-year or 54% quarter-on-quarter. Operating CapEx grew 120% year-on-year to CNY 8.3 billion, mainly due to advanced procurement of servers to open business growth. Nonoperating CapEx decreased 96% year-on-year to CNY 1.2 billion, primarily reflecting spending on data center construction.

At quarter end, free cash flow was CNY 28.5 billion, up 127% year-on-year or down 27% quarter-on-quarter. We reported net cash position at CNY 7.2 billion comparing to net debt of CNY 5.7 billion last quarter, which reflected our strong free cash flow generation and the consolidation of HUYA net cash balance, partially offset by payments for M&A initiatives.

Fair value of our shareholdings in listed investee companies, excluding subsidiaries, was approximately CNY 726 billion or USD 103 billion as at the end of second quarter.

In concluding my remark, I would like to mention that we have made a statutory announcement on the White House issuance of the Executive Order relating to WeChat. WeChat and Weixin are 2 separate products, with WeChat serving our international users. Based on our initial reading and subsequent press reports, the Executive Order is focused on WeChat in the United States and not our other businesses in the U.S. We are in the process of seeking further clarification from relevant parties in the U.S.

[Wendy Huang, executive]

Thank you, John. We shall now open the floor for questions. As the company is seeking clarification on the Executive Order, we will not be in a position to answer speculative or hypothetical questions. Let's move to the Q&A about our second quarter results. Thank you for your understanding. [Operator Instructions]

[Operator]

We have the first question comes from the line of John Choi from Daiwa.

[John Choi, analyst]

Congratulation on a great quarter. My first question is on your mobile games. I think if you look at this quarter, management did mention that we've seen a decline sequentially in user time spend, but in terms of the revenue, it has done very well. I think flagship titles did very well this quarter. So could management elaborate a bit more what has driven this? Is it more on the ARPU side or paying ratio? I guess some of the new promotions did help.

And just a quick follow-up from here, like, judging from this, we do have some news on the recent delay on DnF mobile. So how should we -- what should we expect for the second half growth for mobile games? And just quickly, if you could touch base on your overseas revenue contribution from your online game will be very helpful.

[James Mitchell, executive]

John, thank you for the questions. I'll try to catch all of them. But starting with the last one, the overseas contribution to our games revenue was actually similar to the fourth quarter last year. We have a number of successful new games launched overseas. But as you know, due to our relatively long amortization period, it will be a few quarters before those new games flow through from our cash receipts into reported revenue.

Then in terms of the growth in the mobile games business, in the second quarter, we saw time spent normalizing downward to some extent versus the first quarter as people return to work in China. However, on the positive side, we saw time spent still increasing year-on-year in China, whereas we think the audience for some of these games have structurally expanded, and we can see that in the data. And we saw uplift in time spent as well as investment in our international games, which was helpful.

I'd also say that while it would be hard to sort of understate the transformative impact of the COVID disruption, the game industry continues to innovate and develop and grow in ways that will continue to yield benefits long after COVID. And if you look, for example, the quality of virtual items that we're releasing now versus the quality of virtual items that were released 10 or 5 or even 2 years ago, then in the past, a virtual item might be a red pistol instead of a blue pistol. Today, if you look at the game Peacekeeper Elite and users have the ability to actually customize their car into a Tesla, and that's proven extremely popular. And of course, when you're talking about customizing an entire car rather than just customizing a pistol, that's a different price point.

Another example on the customization of guns itself is if you look at the game VALORANT, there's a customization option called the Elderflame, which basically transforms your guns into dragons. And the dragons eat ammunition with their jaws and then spit out bullets in the form of flames. And it's amazing to look at. And I think that 5 or 10 years ago, the technology didn't really exist for people to customize their cars into Teslas and customize their guns into dragons. And of course, these higher-technology virtual items come with higher price points, and many players choose not to purchase those. But for the ones who do purchase, then they're unlocking something that is actually really cool for themselves to enjoy, really interesting for other players to see, and it helps fund the cost of continuing to make these games bigger and better going forward.

Then finally, on your question about the DnF mobile delay and the impact on the second half of this year. I think it's important to bear in mind that our game business growth in any period is driven by a multitude of games. So while, for example, Peacekeeper Elite monetization has certainly helped our mobile game revenue in the first half of the year, we also saw strong growth from Honour of Kings. We also saw successful new releases like Brawl Stars and so on and so forth. And as we go through the rest of the year, we'll continue to introduce more value-added virtual items within our existing games that we think will enjoy more resonance, and we'll continue to release a multitude of other games. So while we expect to bring mobile DnF to market quite quickly, we think that in reality, there's a number of growth drivers for our mobile game business beyond any single title. Thank you.

[Operator]

The next question comes from the line of Han Joon Kim from Macquarie.

[Han Joon Kim, analyst]

I'll ask them one by one. The first one is really just a question about your M&A strategy, and perhaps I'm reading this pattern wrong. But in the past, we've kind of seen you guys take a minority stake and kind of take it virtually from an ecosystem approach. I think more recently, I feel like you've been seeing things that -- whether it's [indiscernible], a deal over the other branch [ Daiichi ], and things like that. We're trying to absorb them a little bit more. So am I reading this pattern wrong? Or has there been a difference in kind of thought process about how we should be internalizing some of these assets that might be creating more synergies if we do internalize them? So just kind of perspective on that would be great.

[Chi Ping Lau, executive]

Yes. I think our M&A strategy has always been trying to invest in up and coming companies which have a great management, who have innovative products, and at the same time, they have synergies with our existing platforms. And that has served us very well in the past. And we are actually very much sticking along with the strategy. And if you look at the overall portfolio that we have, we now have more than 700 companies. And by and large, most of them, the vast majority of them are still existing in that mode, right? We are backing entrepreneurial teams to drive their companies forward. And at the same time, we try to figure out organic ways to work with them in a synergistic way.

It just happens that when you have 700 companies, then some of the companies may actually get to a stage where the entrepreneurs, the management figure out maybe they want to seek even tighter cooperation with Tencent. In some cases, they may want to retire. In some cases, they actually want to enter into a new stage of working. In some cases, their products can actually be integrated as well as cooperating much more closely with our platforms. And that's the time when we may consider changing a different way of working with them and moving them into a more consolidated portfolio.

And so this is not a change in our strategy. This is just -- within our strategy, there will be different life stages of the life cycle of the companies. And in some cases, there's another way for us to be working with these portfolio companies, and you're just seeing some of them happening in the course of this year.

[Han Joon Kim, analyst]

Got it, got it. That makes sense. My second question, and I think you partially touched upon this with the Official Accounts earlier, but there's more going on in WeChat, whether it's Moments or the short video or channel growing or whether it's Mini Programs. So within all the activity that's been going on within WeChat, do we see kind of any cannibalization between traffic? Or what kind of patterns do you see to the extent that can reach out in capacity all sorts of broader sets of behavior, whether it's commerce, whether it's advertising and all of that, just kind of how we think through as you attach on incremental services, how that's transferring into traffic and time spent across these services?

[Chi Ping Lau, executive]

Yes. I think this is a good question. And the way we look at WeChat and Weixin, in particular Weixin, it's really -- from a user perspective, right, what are going to be useful for users? I think we're not trying to sort of aggregate a lot of services just to increase the amount of user time. What we want to do is actually we want to build these services one by one, right, so that they actually can add value to solve some real-life problems and add utility to our users.

So if you look at the history of Weixin, which has been quite long, we started off to be a communication platform, then we added Moments, and then we have Official Accounts, and then we have payments. And over time, we add one service up in another. But it's actually spread across a very long period of time. And every time we introduce a new service, it's with a lot of caution and thoughts and testing so that we want to make sure that it's not a cluttered experience for the users, and it actually helped to solve a particular user need in an elegant way. So I think that's the design approach and principle of Weixin, and we have always been following along with that. In a lot of cases, we actually try to actually send away the users and not occupy them for too long a time. So in the case of payment, for example, we don't give them a lot of -- all kinds of different experiences, right? We actually try to get the payment done and then off they go, right? In a lot of search experiences, we actually sort of try to help the users find the content right away and then send them away to the content. So a lot of these principles help us to make sure that while we actually are offering a lot of services within Weixin, the experience is not cluttering and it's not confusing and it's not self-cannibalizing for the users.

[Operator]

The next question comes from the line of Alex Yao from JPMorgan.

[Alex Yao, analyst]

First question is regarding the runway of ad network business. So compared to the WeChat ads, this is a less well-understood business. So can you help us understand, for example, to what extent the media sites in China already joining the S network? What is the typical ad load in the network, the potential for pricing increase, format transition from banner to video, et cetera, et cetera? To the extent that you can share any metrics, any direction will be helpful.

And then my follow-up question is regarding the Shiping Hao video accounts. Can you give us an update in terms of the traffic, time spent and your initial thoughts on the monetization strategy?

[James Mitchell, executive]

Thank you, Alex. So to start with the ad network question, and Martin will talk about Shiping Hao. But on ad networks, I think it's relatively easy to size the opportunity. And if you look at Internet advertising in the rest of the world then, and Google ad network, Facebook ad network, very substantial businesses, representing a double-digit percentage of total online ad spend. And equally importantly, they enable a number of smaller sites and medium-sized sites, which I wouldn't be able to justify building out their own direct ad sales force to generate revenue and fund themselves and create new content. And we think that, that trend is also underway in China. And we see more and more of the media sites, for example, joining our ad network. So we think that's win-win.

In terms of the ad loads, then it's obviously a function of the site owners' decision-making rather than a function of a Tencent-imposed directive. In terms of the pricing, then historically when ad network was predominantly a banner ad business, the typical ad pricing was correspondingly low, in the mid-single digits effective revenue per thousand impressions range. However, as we mentioned in the opening remarks, today, over 40% of the revenue in ad networks is actually video format. And there, the pricing is substantially higher, closer to high-teens renminbi eCPM. So as a result, the blended eCPM for ad networks in China is now moving up to high single digits and low double digits, which is once again good both for us, but also more so for the underlying property owner.

So ad network is an important business to us. It's important financially. Ad network actually contributed more of our year-on-year advertising revenue growth than Weixin Moments, for example. And it's important as proof of our technology prowess. I think there's a perception sometimes that Tencent's strength as an advertising platform derived solely from the owned and operated properties and the traffic and engagement in the owned and operated properties. But in reality, while those are very important, the fact that we're extremely competitive and extremely fast growing in our network is a proof point that our ad technology is increasingly best-in-class as well.

[Chi Ping Lau, executive]

Now in terms of the Shiping Hao, the Weixin channels, I will make a few points. First of all, it actually flows from the Weixin design principle that I talked about earlier, which is it actually comes from user insights and also the content creation community insights, right? We can see there's a need for short-form video content. And we know that there are a lot of content providers who actually want to leverage Weixin to provide their users, their own fans with short video content. So that's sort of the starting point of Shiping Hao.

And I would say, logically, it can be considered as an extension of the Weixin Official Accounts. Only in this case, we're actually changing the text and photo content into video content, and we're encouraging existing Official Accounts content providers as well as new content providers to provide short video content and sign up plans within the Weixin ecosystem.

Right now, I would say we -- it's still in beta test. So it's too early to talk about any user numbers, metrics as well as even further into monetization. But I have to say, so far, during the beta test, right, it looks like it's well received by the users as well as the content production community.

[Operator]

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

[Alicis a Yap, analyst]

Congrats on the solid set of results. I have 2 quick questions. Number one is with the launch of the Mini Store, and also you mentioned more established integration between the Mini Program and also Official Account. Is there any chance that we could further broaden our Weixin advertising ecosystem with in-app, pay-for-performance product or service search in the coming future?

And the follow-up is on the cloud business. You mentioned on -- there's a few of the major contracts signed. So just roughly, what is the sense of the -- your cloud revenue that is coming from the project base, the customized service versus the more general infrastructure service revenue?

[Chi Ping Lau, executive]

In terms of the Mini Store, I think it is a good addition to the overall Weixin Mini Program ecosystem in support of eCommerce and other retailers. I think, overall, right, as we continue to improve our set of tools for the retailers, for the eCommerce providers, then we believe that the Mini Program ecosystem will become even more prevalent to retailers, and the transaction ecosystem within Weixin would improve. And when that happens, then it's definitely going to have a spillover effect into our advertising business, right? Because then it will be much more economical and valuable for the retailers to put in advertising in our ecosystems, which should include Moments ads as well as ads in the Official Accounts. So all these will have a synergistic impact on each other.

In terms of cloud, I would say the project base is actually a very small percentage of our total revenue. By and large, it's actually the recurring revenue from some of the cloud service itself.

[Operator]

The next question comes from the line of William Packer from Exane BNP Paribas.

[William Packer, analyst]

It's Will Packer from Exane. Congrats on the strong quarter. Understandably, there is a significant uncertainty around the substantive content and enforcement of the WeChat order. So stepping away from that, could you help us think about your revenue exposure to the U.S. and U.S. companies? What percentage of video games is -- of that video games revenue is generated in the U.S.? And what percentage of Online Advertising revenue in China is generated from U.S. firms? That's my first question.

And just as a follow-up, we're now a little bit further on from the COVID crisis. Could you share some thoughts on the longer-lasting changes in consumer behavior and how they impact your business, for example, lasting shifts in gaming and online engagement, use of digital payments and cloud services?

[James Mitchell, executive]

Thank you, Will. So this is James. So to answer your first question, the U.S. represents less than 2% of our global revenue. And within that, advertising in the U.S. would be less than 1% of our total advertising revenue.

Now I think you were also asking about the percentage of advertising revenue in China from U.S. companies. And our understanding is that's not kind of a relevant metric for the discussion at this point in time because if you look at the Executive Orders from May 2019 and then more recently the Executive Order a couple of days ago, then they specify very clearly that they cover U.S. jurisdiction. And consequently, we don't see an impact on companies advertising on our platform in China.

[Chi Ping Lau, executive]

Right. I'll answer your second question. But before that, just one point to add on James' answer is that there's actually a lot of other advertisers right now. So to some extent, once we have an advertising space and inventory, right, then basically, there are a lot of advertisers who are bidding for such an inventory space. So as long as the ad space is there, I think the revenue is going to be there. So that's in addition to James answer.

Now in terms of post-COVID right now, I think, obviously, consumers have spent more time online. And after that, they, by and large, have gone back to work and going back to school in China. In the rest of the world, it's not the same. It's a much longer period. But even within sort of that small period of time, I would say consumer behavior have changed to the extent that more online behavior has been embraced, and be it online entertainment, online games, as well as online consumption, people are now more used to shopping for groceries online. And they probably sort of are more accustomed that should be shopping online by -- through many programs or by watching online broadcast.

And I think working online has also become more familiarized with the users as well as for the youth, right? Getting educated online is actually more familiarized for them. So these behaviors, I would say, would have implication for a number of different industries, including the online entertainment, the retail, not just eCommerce but also all retailers, they need to think about how to serve their customers online, and education companies will need to think about how to embrace online education.

And I would say for businesses, right, more and more businesses are now embracing an online collaboration type of working mode. It's not to say they would be seeing all their employees working from home, right? I don't think that is actually going to happen in China. But rather, there's going to be a much more conducive environment for people to be collaborating online. A lot of times, some meetings, which otherwise in the past have to be done in face to face, now can be conducted online. Conferences can be conducted online. Company and companies -- inter-companies meetings can be conducted online. And as a result, it would actually capitalize a move of companies and enterprises into digitization.

And I think that would be the biggest takeaway from COVID, right? We all know that consumers are already online. Now they're spending more time. Yes, it's not -- it's a quantitative change, not qualitative change. But for businesses, right, when they now see their customers moving online, when they see their employees moving online, when they see other companies moving online, there's going to be a much higher impetus for them to be digitized and move online. And this is essentially the digitized economy future that we're embracing. And I think our services and in particular our cloud services and our SaaS services will be there to serve them in this large transition toward a digitized working mode.

[Operator]

The next question comes from the line of Jerry Liu from UBS.

[Yuan Liu, analyst]

Yes. I have 2 questions as well. And the first one is back on mobile gaming. James, you mentioned earlier that you look at some of the virtual items we have today like Tesla cars or these dragon guns that they do really encourage more spending. I'm interested, when you look at the international gamers, do you think over time, they can spend close to the level of Chinese gamers in some of your high-quality mobile games?

[James Mitchell, executive]

I think that what we see over time is that the behaviors are increasingly kind of convergent rather than divergent. Meaning that if you went back 10 years ago, then in the western world, the dominant monetization model was consumers paying $50 for a software. And in China and Korea, the dominant model was consumers consuming games for free. And then for a certain sort of narrow genre of historical role-playing games, paying large amounts of money for magic sorts and sorcerer's bows and arrows and things. And over the last decade, what has been happening is that in the West and in Japan, increasingly, there's been innovation around deploying virtual items in sports games, in shooter games, in modern-day games more generally. And at the same time, in China and Korea, we've seen increasing uptake of those more kind of team-based action games as well.

And as games become more and more important and more and more part of the millennial consumer mind space, then you begin to see a really powerful crossover. So I mentioned crossover between Peacekeeper Elite and Tesla. But I think that Epic has done a phenomenal job with the crossovers with the DC and Marvel superhero characters. And once again, those are skins, but they also have game modes where the superheroes actually unlock, in movies, superpowers.

So what we see is that, actually, the willingness to purchasing game items. And pricing of the in-game items on these modern-day shooter games, sports games and so forth can catch up with or even overtake the history of role-playing games, which pioneered the virtual item model. So that's a really big change. It's a change that I think is good for the game industry globally and it's simply good for Tencent because we tend to be overrepresented toward team-based action games.

[Operator]

The next question comes from the line of Binnie Wong from HSBC.

[Wai Yan Wong, analyst]

Congratulations on a very strong quarter. I have 2 strategy-related questions. One is on the Mini Program. So with the recent launch of the Mini Stores, right, to help our long-tail merchants to build and operate the digital assortment and, of course, all the way to aftersales customer service. Can you share with us what are the key categories of merchants that you have been seeing and also been doing well?

And also, second, is that based on your observation, how is Tencent solutions more compelling to other eCommerce platforms? And I'll have a follow-up question.

[Chi Ping Lau, executive]

Well, I would say the Mini Stores have just been launched, so we don't have a lot of figures to share yet. But this is a set of tools which are mostly helping the long-tail merchants, right? So if you're thinking about, oh, how it's going to be compared to the other Mini Program tools companies, which are providing these tools in the past, then they're actually very different, right? Those companies are primarily providing tools to larger merchants, especially larger retailers. And it's intended to be this way so that we're differentiated from them. They are our good partners, and we continue to work with them to help the larger retailers who want to have much more customization to get their Mini Programs up and running. But at the same time, we know that there are a lot of long-tail merchants who actually also want to have a relatively standard set of tools so that they can engage with their customers. And this is what the Mini Stores are intended for.

[Operator]

The next question comes from the line of Piyush Mubayi from Goldman Sachs.

[Piyush Mubayi, analyst]

I have a few questions on games. But the first question is when you launch -- or are the cusp of the launch of a game like mobile DnF, how do you strategize the allocation of marketing dollars towards that? And how do you take into account the relative success of that game versus all of the other games to maximize overall revenue? That's my first question.

And second, related to the points you made earlier, Martin, about the strength of your game platform and how well it's been growing, if you look at how successful you've been internationally, it does appear that there's a lot more leg room there for how much further you can grow. Would you hazard a guess of with technology, with IP, game play and M&A, what sort of market shares we can expect, let's say, 3 to 5 years down the line? Would it be anywhere near where you are in China at this point of time?

[Chi Ping Lau, executive]

Well, in terms of looking at a particular title and how much marketing budget we're going to put in, I think the way we look at it is we look at how big the addressable market is, how big the opportunity is, how big an IP and the potential user base is, and then we put enough dollars, right, to reach those customers. And of course, because we have our own platform advantage, so typically, the amount of money that we spend is actually less than otherwise a stand-alone game company will be spending. But we'll be spending enough dollars so that we can actually achieve the maximum success for a particular title.

I think in your question, you also somewhat think about maybe a success of a game would actually eat into the success of another game. I think we don't look at it that way. I think each game has its own appeal to the customers, and we don't think games tend to cannibalize too much with each other, right? And it's a very large market out there with a lot of different titles. So each title should be given enough marketing dollars to maximize its own success.

In terms of international, I think we're definitely very focused on developing a long-term strategy to capture the opportunities in an international market. And in a way, I think China is a more developed market for mobile gaming compared to other markets. And as a result, we felt that the expertise and the experience we have developed in China can actually help us to capture opportunities around the world.

I cannot give you a guess of the market share. We'll try to do our best. But in China, we do have Weixin and QQ as a platform. So I think the franchise that we have is actually stronger out in the world. We would not be having such a strong franchise. So I think that is a reality that we have to recognize. But at the same time, the gaming industry is about talent. It's about game development capabilities, about technology, and we have these core competencies to help us to develop better and better games and also work with partners around the world so that we can bring games that are exciting to the users. And hopefully, through that, we can actually capture some of the opportunities in the gaming market internationally.

We do not believe it's just a zero-sum game, right? The market actually has got a lot of opportunities for growth as well. So we are operating in an expanding market, and we're excited about that.

[Operator]

The next question comes from the line of Gary Yu from Morgan Stanley.

[Gary Yu, analyst]

Congratulations on the strong set of results. I have 2 related questions regarding international strategy. Given the rising of geopolitical tensions, how do you think it will change our international strategy differently? Do we intend to kind of limit our overseas exposure to the less sensitive gaming market? Or we have more kind of ambition to tap into global opportunities?

And a follow-up related question is do we expect some of our competitors redirecting the focus and resources back to China as they also scale down kind of global exposure? And how should we tackle that?

[Chi Ping Lau, executive]

In terms of the international markets, right, we do have a long-term strategic goal of developing international presence. And we are actually very patient about it. We emphasize it's long term, right? And so far, we have made good progress around certain verticals such as games. But we also anticipate that there will be challenges and obstacles.

But we believe that along the way, right, the way we develop our international strategy is by focusing on a number of principles. The first one is we focus a lot on users and user experience and products. And that will include protecting the privacy as well as the security of data for our users. And second one is we operate straightly in compliance with the laws and regulations in each one of country that we operate. And thirdly, we actually rely on a lot of win-win partners, right? In a lot of cases, we actually work with local partners in each one of the countries that we have a presence in. And we strive to create a win-win partnership with them. We respect their entrepreneurism. We respect their independence. But at the same time, we can actually bring in our expertise to help them to be more successful. And we believe these principles, right, would actually serve us well over the long run. There may be countries which may be challenging at one time or another, but overall, we believe it's a very large international market, and there are a lot of countries, a lot of companies, a lot of products that we can be successful in if we are patient and if we continue to stick to these principles.

Now in terms of your second question, I think, to some extent, it's actually highly speculative, but what you should have some comfort is that no matter what the competitive dynamics are, Tencent continues to focus a lot on improving our own capabilities as well as improving our product, user experience and value proposition for our users regardless of the competitive dynamics. So we are already working very hard, and we'll continue to work very hard to focus on these factors, which I think are much more intrinsic to the long-term success of the company rather than what other companies would do.

[Operator]

We will be taking the last question. It's from the line of Eddie Leung from Bank of America.

[Eddie Leung, analyst]

Two questions. The first one is about your FinTech and Business Services segment. Could you elaborate on the relative importance of the few factors behind the improving gross margin trend of the segment? And what could be the outlook for that? And then secondly, regarding the integrated advertising platform for advertisers, obviously, you guys mentioned that it would help the efficiency for the advertisers. But do we expect any potential influence on their spending or budget going forward?

[Chi Ping Lau, executive]

So on FinTech, right now, I think -- well, part of it, if you compare year-on-year, is actually the fact that we actually start collecting some of the interest back from the deposit with Central Bank. And I would say the fact that marketing expenses come down into a more rational level also helps this is as part of the competitive dynamics becoming less cutthroat. And thirdly is the fact that as we continue to develop the other nonpayment FinTech products, right? So be it our loan products or the wealth management products, these are products which actually generate profit. And as the scale of these products go up, then the margin profile actually improves.

So with the advertising, I will pass to James.

[James Mitchell, executive]

Yes. With the integrated ad platform, then naturally, we would hope that with more attractive, more powerful, more simplified ad purchasing and tracking and performance solutions, then we would inherently increase our share of advertiser activity and budgets. And I think that if you look globally, there are many other Internet companies that moved from sort of lacking to leading ad tech positions, and as they did so, capture progressively larger shares of ad spend.

Now of course, there should be some sort of upper limit on how much ad spend one can capture no matter how excellent one's technology is. But for us, I think that upper limit is still rather far away because our share of time spent in China Internet is around 40%, while our share of advertising spend in China Internet is under 14%. So I think that there's a very long growth runway for us as we continue to enhance our ad tech through solutions like the new integrated ad platform to deliver long term but sustained market share gains.

[Wendy Huang, executive]

Thank you. Operator, we are closing the call now. If you wish to check 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]

That does conclude our conference for today. Thank you for participating Tencent Holdings Limited 2020 Second Quarter and Interim Results Announcement Conference Call. You may now disconnect.