Tencent Holdings Ltd

HKEX:700

Earnings Call Transcript 2019-Q3

[Operator]

Thank you for standing by, and welcome to the Tencent Holdings Ltd. 2019 Third Quarter 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. Jane Yip from Tencent. Please go ahead, Ms. Yip.

[Jane Yip, executive]

Thank you. Good evening. Welcome to our 2019 Third Quarter 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. Information about general market conditions is coming from a variety of sources outside of Tencent.

This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. Non-IFRS measures, formerly referred as non-GAAP measures, are intend to reflect our core earnings by excluding certain onetime and 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 will discuss the strategy review. Chief Strategy Officer, James Mitchell, will speak about 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]

Okay. Thank you, Jane. Good evening, everyone. Thank you for joining us.

During the third quarter, we experienced sustained healthy growth rate in our operating and financial metrics. Notably, our FinTech and Business Services and advertising segment revenues each increased at double-digit percentage rates from the second quarter thanks to rising user activities and improved advertising technology. This growth demonstrate the strength of our new business and our diversified business metrics -- mix. Our non-IFRS operating and net profit grew at a faster year-on-year rate versus the prior quarter. Looking forward, we will continue investing in our products, technology and services as we seek to provide value to our users and to do good for society.

I will now share a few highlight numbers from the third quarter. Total revenue was RMB 97.2 billion, up 21% year-on-year and 9% quarter-on-quarter. Gross profit was RMB 42.5 billion, up 20% year-on-year and 9% quarter-on-quarter. Our non-IFRS operating profit was RMB 28.5 billion, up 27% year-on-year and 5% quarter-on-quarter. Non-IFRS net profit attributable to each equity holders was RMB 24.4 billion, up 24% year-on-year and 4% quarter-on-quarter.

Moving to platform update. In social, combined MAU of Weixin and WeChat increased 6% year-on-year to 1.15 billion. Smart device MAU of QQ declined 6% year-on-year to 653 million as we proactively clean up spamming and bot accounts. In games, we solidified our #1 position in China with Peacekeeper Elite's popularity and extend our international success with Call of the Duty mobile and Teamfight Tactics. In FinTech, we operate the largest mobile payment platform in China by DAU and payment volumes with increasing user engagement.

In media, daily video views within Tencent Video app increased both year-on-year and quarter-on-quarter despite a challenging content approval environment. Live streaming services and music subscriptions also grew strongly. In cloud, we continue to outgrow peers and has achieved significant scale in our business. In utilities, our app store and mobile browser app remained category leader in China.

I will invite Martin to discuss strategic review.

[Chi Ping Lau, executive]

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

This quarter marked the first anniversary of our strategic organization upgrade which strengthens our franchise in consumer Internet and extends our footprint to industrial Internet. While we believe that the upgrade would generate its desired results over the next few years, we're pleased to share some initial achievements, both quantitatively and qualitatively.

From a quantitative perspective, our non-IFRS earnings growth has accelerated from 19% in the second quarter to 24% in the third quarter. This growth is driven by: First, FinTech services; and second, social ads; and third, international games, which are all relatively new business areas and each one of them have large growth potential in our view. Over the past year, as a result, we have improved the quality, diversity and headroom of our growth profile in these tangible business areas while at the same time pursuing emerging growth in enterprise businesses and short-content industry.

From a qualitative perspective. First, we have consolidated our enterprise-facing activities into the cloud and smart industries business group to assist various industries in reaping the benefits of digitization. Second, we established the platforms and content business group to execute a more focused content strategy, leveraging our strength in high-DAU platforms and premium content. Third, we have proliferated our Mini Programs ecosystem, enabling service providers to efficiently connect with their customers. Fourth, we have made encouraging progress towards globalizing our business, particularly for online games, where we created, published and operated some of the most popular mobile games outside of China. Fifth, we have streamlined our operations to be more agile. For example, we merged our ad sales teams and simplified our inventory format. We set up a technology committee to drive the use of the common software code base, and we are more efficiently prioritizing our sales and marketing activities. In the same spirit of continuing innovation, we upgraded our corporate mission and vision to Value for Users, Tech for Good.

Now diving into the progress we have made in serving enterprises with CSIG. We have rapidly expanded our client base and locked in key contracts, driving fast growth in our cloud revenue, and more importantly, achieving substantial scale.

We have integrated our proprietary technologies in areas such as security software, streaming, AI and big data analytics into smart industry solutions. For example, our security software facilitates anti-fraud, identity authentication and data protection, and it's increasingly adopted by Internet, financial and municipal services customers. Operationally, we have optimized our supply chain for hardware, such as servers and networking equipment, enabling us to offer more cost-competitive products and services. And we have also unified our enterprise sales teams to increase customer acquisition efficiency.

During the year, we've built several industry-leading cases and made great progress in different sectors. For example, our Digital Guangdong project, it's regarded as the benchmark for digitizing municipal services in China. And we're leveraging that success by implementing WeCity solution in other cities, such as Changsha and Chongqing.

Our travel YunNan on mobile project pioneered digitizing tourism, facilitating tourist access to scenic spots, transportation and public facilities while supporting businesses and administrators to increase touch points and overall efficiency.

Our smart retail solutions provide digital tools to help retailers deepen consumer insight and streamline processes, with global initiatives to facilitate merchant onboarding process and are penetrating more subsectors.

Moving on to our content business and the progress in PCG. We're increasing the interaction between our content apps, traffic apps and social platforms so as to understand our users better, identify users' trends earlier and provide the right content to a broader audience in a more timely manner. In premium content, we're reinforcing our content-creation capabilities in areas such as drama series, variety shows, anime and literature.

We're also benefiting from synergies between different content formats. For example, we're developing popular online literature IPs into drama and anime series, and success examples such as The Untamed and The King's Avatar emerged. We are using variety shows to identify new artists who then contribute content and talent to our music platform. R1SE, a band selected from participants in a Tencent video variety show, sold almost 1.5 million copies of its first digital album on the debut of its release on Tencent Music platforms.

In the area of short-form content, we have built strong presence in news feeds via QQ Kandian, QQ Browser, Kuaibao and Weixin Top Stories and are now increasing our advertising revenue from these services. We believe the news feeds competitive landscape has largely stabilized, with our products holding a significant market share.

In short and media -- mini video, which emerged more recently, we already have over 10 billion video views per day. And we are building out our content curation and distribution system focused on our Weixin application. We believe the short and mini video market will eventually settle down around several successful apps, similar to the case in the news feed market.

In terms of Mini Programs, Mini Programs, in our view, present a vibrant ecosystem that facilitates service and transaction delivery, off-line and online integration and benefits our performance apps and payments business. We are the global pioneer for Mini Programs and the clear China market leader, with Mini Programs having over 300 million DAU. And the number of mid- to long-tail Mini programs grew 60% year-on-year in the third quarter.

To further our ability to serve vertical industries through smart solutions, we're now pilot testing vertical Mini programs via 3 new gateways in our Weixin Pay main interface.

First, health care. Our health care gateway integrates services such as medical content from Tencent Medipedia for information, direct connections to hospitals for registration and consultations and electronic social security card for efficient payment.

Second, mobility. Our mobility gateway allows users to check bus schedules, plan routes ahead, pay for public transportation and pay for traffic fines and parking if they are car owners.

Thirdly, smart retail. Our smart retail gateway is a decentralized marketplace for retailers. Users can browse recommended products from nearby franchise stores, brands and also communicate with sales representatives.

In terms of globalization, we have made good progress to increase our global presence and we believe we're making particularly -- a breakthrough in our games business. As a first step, if you remember, we have invested in and partnered with many of the best game companies in the world with business cooperation or equity investment in 8 out of the 10 game companies worldwide.

More recently, we have proven that we can ourself develop games that achieve global success. For example, PUBG MOBILE has become the top game in terms of DAU globally, excluding China, according to [ F&E ]. In the most recent quarter, the Call of Duty Mobile, which we co-developed with Activision Blizzard, gained over 4 million 5-star reviews on Google Play and a 4.9% rating on iOS following its October launch, which has become one of the most successful mobile game launch in the past couple of years. International markets now contribute a teens percentage of our games revenue.

Looking forward, we'll focus on strengthening our capabilities in serving international markets by: Firstly, incubating our own IPs that are suitable for global audiences and broadening our partnership with international IP owners; secondly, pioneering new types of gameplays that can resonate worldwide; and thirdly, localizing our game publishing and operational capabilities for multiple regional markets. We believe we have tailwind on our back because: a, gamers globally are increasingly active on smartphones; and b, gamers globally are increasingly excited about multiplayer action games, both of which are areas of strength for Tencent.

Now finally, I want to close this section by talking about something that's very important for us long term. This week, on the 21st anniversary of Tencent, we upgrade our corporate culture and announced our new corporate mission and vision, which is Value for Users, Tech for Good. Throughout our history, users and responsibilities have always been at the heart of everything we do. Whenever we faced challenges and crossroads, we abide by the user-oriented approach as our guiding principle. The 9.9 Giving Day Program, the implementation of our parental guidance platform and our use of AI technology in health care are a few examples illustrating our conviction and commitment to the cause of Tech for Good.

In order to fulfill our commitments, we continue to prioritize the needs of our users and to incorporate social responsibilities into our products and services. We support various industries to upgrade digitally and we will seek to promote the sustainable development of society. We'd like to have all of you, our investors and friends, to keep giving us suggestions to help us achieve this mission.

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

[James Mitchell, executive]

Thank you, Martin, and hello, everyone. For the third quarter of 2019, our total revenue grew 21% year-on-year. VAS remained our largest-revenue segment, representing 52% of revenue, within which Online Games were 29%; and social networks, 23%. FinTech and Business Services represented 28% of our revenue, and Online Advertising was 19%.

For Value Added Services, segment revenue was RMB 50.6 billion in the quarter, up 15% year-on-year and up 5% quarter-on-quarter. Social network's revenue was RMB 22 billion, up 21% year-on-year and up 6% quarter-on-quarter. Year-on-year growth benefited particularly from live streaming and in-game item sales while quarter-on-quarter growth benefited from the same factors as well as more streaming music subscriptions. Our total VAS subscription counts increased 11% year-on-year to 171 million due to the growth of online video and music streaming services. Video subscriptions reached 100 million, up 22% year-on-year, while music subscriptions reached 35 million, up 42% year-on-year.

Our Online Games revenue grew 11% year-on-year and 5% quarter-on-quarter to RMB 28.6 billion. Total smartphone game revenue increased 25% year-on-year to RMB 24.3 billion due to key game performance in China and increasing contributions from international markets. New role-playing and strategy games contributed to the quarter-on-quarter growth, along with Peacekeeper Elite, although there was a substantial gap between Peacekeeper Elite's cash receipts versus its reported revenues due to that game's long revenue amortization cycle. PC client game revenue decreased 7% year-on-year and 2% quarter-on-quarter to RMB 11.5 billion due to fewer paying users of Dungeon & Fighter.

Moving to social networks. In Weixin, we introduced initiatives to advance our partners' development skills and help them participate in our Mini Programs ecosystem. For system integrators, our growth program provides training and development tools to help them better assist Mini Program owners. For Mini Program owners seeking to enhance the performance of their Mini Programs, we launched Industry Assistant, a dashboard providing analytical insights such as comparing their customer acquisition and monetization capabilities against industry benchmarks.

In Q2, we added functionalities that enrich users' social and entertainment experience. We released a feature providing icebreaking topics into 5-minute chat rooms to inspire conversations. We enabled users to dedicate songs to their friends, and we allowed users to listen to synchronized music streams together.

During the quarter, our game business accelerated year-on-year revenue growth, and more importantly, improved its underlying vitality and longevity. We're increasingly developing games that can become global hits, such as PUBG MOBILE and Call of Duty Mobile; establishing leadership in the most competitive genres globally, such as first-person action games; and operating high-DAU games that can themselves become platforms for new modes, such as League of Legends with Teamfight Tactics. As a result, we and our majority-owned subsidiaries operated 6 of the top 10 smartphone games by monthly active users globally during the third quarter.

For smartphone games in China, Peacekeeper Elite released a summer content update which enhanced user engagement. We introduced a map editor for Honour of Kings that encourages user-generated content, and users are increasingly buying season passes in Honour of Kings.

For smartphone games internationally, PUBG MOBILE doubled its monthly active user base year-on-year and released successful Royale Passes in July and September. Call of Duty Mobile exceeded 100 million downloads in the month after its launch, making this game one of the highest-impact mobile game launches in recent history.

For PC games in China, D&F revenues decreased sharply year-on-year as its 11th anniversary expansion pack in June underperformed last year's 10th anniversary expansion pack. And we're focused on enhancing D&F's user engagement.

The PC games internationally, League of Legends' Teamfight Tactics mode has established global leadership in the emerging auto chess genre with over 30 million monthly users and is starting to contribute to revenue by the Little Legends.

Last week, China's government announced a regulatory policy limiting gameplay time for children and teenage players. We have already implemented a Healthy Gameplay System in our games with similar or stricter limits to those now being announced. And consequently, we expect very limited additional impact from this regulation on our game business.

Moving to online advertising. We grew our advertising revenue by 13% year-on-year and 12% quarter-on-quarter to RMB 18.4 billion in the third quarter. We saw strong advertising demand from the games, education and eCommerce verticals, offsetting weakness from the automobile sector. We believe our advertising business enjoys a long runway for profitable growth ahead as we make use of our rich data sets to target the right advertisements to our uniquely large user base across our broad range of social, media and affiliate properties. Our media advertising revenue was RMB 3.7 billion, down 28% year-on-year and down 17% quarter-on-quarter. Our mobile video DAU was stable year-on-year, but the uncertain video content schedule materially reduced our video sponsorship advertising revenue. However, we believe the worst of this trend, it now appears to be behind us.

Our social and other advertising revenue increased 32% year-on-year and 23% quarter-on-quarter to RMB 14.7 billion. Key drivers of the accelerated growth rate included, first, more inventory and more impressions in Weixin Moments, which remains the premium wide-reach online advertising venue in China, providing advertisers with multiple times more DAU than they can access through competing properties.

Second, streamlined ad formats and new video ad formats in our ad network resulted in our ad network revenue growing twice as fast year-on-year as our overall social and others advertising revenue. We believe the success of our ad network, which competes head-to-head with our biggest peers for advertiser budgets in real time, speaks to our increasingly competitive ad tech product following our 9/30 ad tech unification.

And third, increased DAU and new [ interstition ] and pre-rolled video ads within our Mini Programs, which we view as key properties of future advertising revenue growth given the increasingly high volume of consumer transactions taking place within Mini Programs.

Looking at FinTech and Business Services. Segment revenue was RMB 26.8 billion, up 36% year-on-year and up 17% quarter-on-quarter. Within FinTech services, our payment ecosystem posted more user activity and money flow, deepening consumer and merchant engagement. Our commercial payment revenues grew robustly year-on-year and quarter-on-quarter, benefiting from increased daily active consumers and per consumer transactions as Weixin Pay becomes more widely available, especially among high-transaction-value merchants. Our wealth management platform more than doubled its active customer base year-on-year, contributing to rapid growth in aggregated assets under management.

Users are increasingly retaining cash in their Weixin balance and LiCaiTong accounts. This trend hurts our revenue in the short term by reducing our withdrawal fees, but helps our margins as we don't incur funding costs on transactions funded from Weixin Pay

and LiCaiTong balances, and speaks to deepening consumer confidence in our payment services.

Our FinTech business generated a double-digit operating profit margin in the third quarter, benefiting from increased commercial payment volumes as well as fees associated with lending and asset management activities. We believe our FinTech business also enjoys a long runway for profitable growth given the value our mobile payment service contributes to the economy and to society, together with the convenience and innovation of our lending and asset management services.

Within Business Services, our cloud services revenue grew 80% year-on-year to RMB 4.7 billion as we expanded our customer base in the education, financial, municipal services and retail sectors as well as increasing revenue from existing customers. We're enhancing the operating efficiency of our cloud services as we expand our business scale and optimize our supply chain. For example, we're shifting from OEM to ODM procurement, which enables us to provide more tailored services and pass lower costs on to our customers.

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

[Shek Hon Lo, executive]

Thanks, James. Hello, everyone.

For the first quarter of 2019, total revenue was RMB 97.2 billion,

up 21% year-on-year or 9% quarter-on-quarter. Gross profit was RMB 42.5 billion, up 20% year-on-year or 9% quarter-on-quarter. Net other gains was RMB 932 million, down 89% year-on-year or 77% quarter-on-quarter. The year-on-year decrease was primarily due to non-IFRS items, including net gain from Meituan-Dianping upon its IPO in the same quarter last year, partially offset by greater impairment provision against investments. Sequentially, the decrease was mainly due to the decrease in net fair value gains of certain investees, which are also non-IFRS adjustment.

Operating profit was RMB 25.8 billion, down 7% year-on-year or 6% quarter-on-quarter. Net finance costs were RMB 1.7 billion, up 17% year-on-year or down 12% quarter-on-quarter. The year-on-year increase was primarily due to greater interest expense resulting from the increase in indebtedness, partially offset by the recognition of foreign exchange gains.

Share of profit of associates and joint ventures was down 90% quarter-on-quarter to approximately RMB 234 million, mainly reflecting certain associated booking noncash fair value changes of their investment portfolios. On a non-IFRS basis, share of profit of associates and joint venture decreased by 14% quarter-on-quarter.

Income tax expense was RMB 3.3 billion, up 3% year-on-year or 4% quarter-on-quarter, mainly reflecting higher taxable income. The effective tax rate for the quarter was 13.7%.

Net profit attributable to equity holders was RMB 20.4 billion, and diluted EPS was RMB 2.127, both down 15% year-on-year and 16% quarter-on-quarter. The year-on-year decrease was mainly due to a higher base last year as a result of recognition of fair value gains for Meituan-Dianping IPO. The Q-on-Q decrease was mainly due to a decrease in fair value gains from investment, as mentioned earlier. On a non-IFRS basis, net profit attributable to equity holders was RMB 24.4 billion and diluted EPS was RMB 2.548, both up 24% year-on-year and 4% quarter-on-quarter.

Let me walk you through our non-IFRS financial numbers. Operating profit was RMB 28.5 billion, up 27% year-on-year or 5% quarter-on-quarter. Operating margin was 29.4%, up 1.4 percentage points year-on-year or down 1.3 percentage points quarter-on-quarter. Net profit attributable to equity holders was RMB 24.4 billion, up 24% year-on-year and 4% quarter-on-quarter.

Turning to segment gross margin. Gross margin for Value Added Services was 51.8%, down 4.7 percentage points year-on-year or 0.8 percentage point quarter-on-quarter. The year-on-year decrease was primarily due to revenue mix shift from higher-margin products, such as PC client games; to digital content services, including music, video streaming subscriptions and live-streaming services as well as higher content costs for smartphone games. Sequentially, margin was broadly stable.

Gross margin for Online Advertising was 48.8%, up 12.1 percentage points year-on-year or 0.2 percentage point quarter-on-quarter. The year-on-year increase primarily reflected revenue mix shift from media advertising to social and other advertising, which has a higher margin. Sequentially, margin was broadly stable.

Gross margin for FinTech and Business Services was 27.7%, up 2.6 percentage points year-on-year and 3.7 percentage points quarter-on-quarter. The year-on-year increase reflected growth in merchant payment transaction volume and increased service fee income of various payment-related services and lending business. In addition, the increase in margin also resulted from [ better ] revenue contribution from cloud services and improved cost efficiency from economies of scale. The Q-on-Q increase reflected higher merchant payment, transaction volume as well as contributions from higher-margin activities within Business Services.

On operating expenses. Selling and marketing expenses were RMB 5.7 billion, down 13% year-on-year or up 21% quarter-on-quarter. The year-on-year decrease reflected our prudent cost management initiatives. Sequentially, solid marketing expenses increased due to seasonally higher marketing spending on digital content, FinTech Services and smartphone games. Selling and marketing expense represented 5.9% of the quarterly revenue.

G&A expenses were RMB 13.5 billion, up 24% year-on-year and 8% quarter-on-quarter, primarily driven by increasing R&D expenses and staff force. Within G&A. R&D expenses were RMB 7.9 billion, up 27% year-on-year and 11% quarter-on-quarter. As a percentage of quarterly revenue, G&A was 13.9% and R&D was 8.1%. At quarter end, we had approximately 60,000 employees, up 16% year-on-year or 8% quarter-on-quarter.

Let's take a look at the margin ratios. Gross margin was 43.7%, down 0.3 percentage point year-on-year and 0.4 percentage point quarter-on-quarter. Non-IFRS operating margin was 29.4%, up 1.4 percentage point year-on-year or down 1.3 percentage points quarter-on-quarter. Non-IFRS debt margin was 25.8%, up 0.5 percentage point year-on-year or down 1.4 percentage point quarter-on-quarter.

Before I close my remarks, I will share several key financial metrics for the third quarter. Total CapEx was RMB 6.6 billion, up 11% year-on-year and 52% quarter-on-quarter, of which, operating CapEx increased 4% year-on-year to RMB 5.8 billion. The increase mainly reflected more spending on servers to support expansion of our cloud business. Nonoperating CapEx increased 3% year-on-year to RMB 804 million. Free cash flow was RMB 37.7 billion, up 36% year-on-year or 82% quarter-on-quarter. This was the result of net cash flow generated from operating activities of 42 -- RMB 44.2 billion, offset by payments for capital expenditure of RMB 6.5 billion.

Net debt position was RMB 7.2 billion, which has improved 75% compared to last year. The sequential decrease mainly reflects a strong free cash flow generation, partially offset by payments for M&A initiatives and media content.

The fair value of our shareholdings and listed investee companies, excluding subsidiaries, was approximately USD 49.9 billion compared to USD 47.9 billion last quarter.

During the period from 28th of August to 11th of October 2019, we repurchased 3.5 million shares with an aggregate cost of approximately USD 148 million.

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

[Jane Yip, executive]

[Operator Instructions] Please, shall we invite to take question now?

[Operator]

The first questions comes from the line of Alicia Yap from Citigroup.

[Alicis a Yap, analyst]

I have a questions related to games developments and game publishing opportunity. With the success of Call of Duty Mobile, it seems that Tencent has further step up the development capability to win more well-known console IP to help global studio to transform their games into mobile gameplay. In selecting the titles or partners, what are the criterias that you will be looking when you decide to license for the IP?

And on domestic publishing, since there has been some noises about a new competitor maybe eyeing on games distribution and publishing, will this affect Tencent publishing market share in the coming future?

[Chi Ping Lau, executive]

Yes. In terms of game development and game publishing, I think the fact that our game development capability is now well recognized in the global market by consumers with the success of PUBG MOBILE and more recently the Call of Duty Mobile. I think it's a very big breakthrough for us and we're very pleased to see that. Now I think we have established ourselves as the pre-eminent mobile game developer for not only China but also global market. And when you add that to the fact that over the past many years, we have actually already established a very strong relationship through a strong partnership as well as equity investment relationship with many top game companies in the world. I think when you add those together, right, it's actually opening up a significant opportunity for us.

And of course, when we choose the titles, I think consumers' and gamers' need really are the most important criteria that we look at, right? If the game title has got a very large follow-ship, and consumers and gamers are expecting to see an exciting title and we can develop that and deliver that for the users, I think that's the most important criteria. And I think that philosophy also resonates with a lot of our partners. When we develop these games, it's not only games that open up commercial markets, but also, it retains the original creativity for the game developers and our partners, which is very important, too.

In terms of domestic publishing, I think we feel very good about our position and the fact that we have strong operational as well as development capability as well as very strong relationship around the world with the IP and game owners. And at the same time, the fact that we have a very strong leverage over our social platforms, I think, give us a pre-eminent position in the industry, which I think it's very difficult to shake up.

[Operator]

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

[Eddie Leung, analyst]

Starting with short and mini video strategy, you mentioned about strong growth of video views within some of your large user platforms, while you also run several independent short and mini video apps. So just wondering, is there any priority when you think about allocation of resources, for example, marketing resources, to grow the content consumption of video?

And related to that, if we have the traffic spread across different channels and platforms, would that affect the budget allocation from some of the advertisers?

[Chi Ping Lau, executive]

Yes. I think the way we look at the short and mini video landscape is very similar to the way we look at news feed with one additional tweak. If you look at short and mini video, I think the overall portfolio that we have created is, one, in our social platform, we continue to curate social short and mini video, which is not counted in the 10 billion video views, right? But that is really a video, short video and mini video that are sent among the different users. We think that's actually part of social network and that we have a very, very strong lead in. That's number one.

Number two, in terms of the media side of the mini videos and short videos, i.e., when people watch the video for content purpose, then it's actually very similar in our view to the news feed market in which you have people who just want to watch it for a light experience within the traffic platforms. And we offer that within our social platform, within our browser and within even our news feed. But at the same time, when you look at a very dedicated short and mini video experience, then the flagship product that we have is actually WeiShi. And a lot of marketing dollars and content dollars will be dedicated to that application.

And in terms of advertising, I think as long as the video format is actually quite similar, then the ad format will be very similar, and as a result, the pool of ad dollars that are in the pool for competitive pricing would be actually sort of quite similar too, so it should not be a problem.

[Operator]

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

[Han Joon Kim;Macquarie Group;Division Director, analyst]

Great. I wanted to get management's perspective on how you look at blended consolidated margin trajectory between all the puts and takes? I feel like we've started to see some slowdown in the second derivative of that. So just some perspective from your eye would be great.

[James Mitchell, executive]

Thank you for the question. I'm not sure that I completely understood the slowdown you are alluding to. I think in general, though, one broad observation to make is if you look at our gross profit growth year-on-year this quarter, then the very large majority was driven by, first of all, FinTech and Business Services segment, and secondly, our advertising segment. And in fact, each of those grew their gross profit dollars roughly 50% year-on-year, which we think speaks to the fact that our business is actually diversifying and incubating new growth drivers quite quickly. And obviously, there has been times in the early days of those new growth drivers when they generated low or negative margins. But you can see now, if you look at both our advertising and our FinTech and Business Services that the gross profits are growing very substantially, and that's translating into improved operating profitability as well for both of those segments. Did you have a second question?

[Han Joon Kim;Macquarie Group;Division Director, analyst]

No, no, that was it.

[Operator]

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

[John Choi, analyst]

I have a kind of a follow-up question from -- after Alicia. On your recent success on PUBG Mobile and Call of Duty Mobile, it seems like Tencent has been really positioned as a global powerhouse in game development, particularly in mobile. But now if we think like a longer perspective, where does the management think that Tencent has to further invest or strengthen its capability? Is there like -- is the -- is there any area where such as infrastructure, is it in place, or any new areas that Tencent has to really consider to become more of a true global player?

And second, just quickly on the media ads. I know third quarter was very challenging. Any color to the fourth quarter and 2020 will be very helpful.

[James Mitchell, executive]

Thank you for the questions, John. So on the media advertising, while we generally don't give detailed forward-looking guidance, we do believe that the worst is behind us now and our media advertising trends will improve.

In terms of the question about where we need to enhance our capabilities to further strengthen our game globalization strategy, then there's a few areas where we believe we have more work to do and room to further improve. One is incubating, nurturing and developing our own intellectual properties. That's something that I think we've achieved quite successfully within the China market and we would like to extend that IP management capability globally.

A second area of focus is extending into more genres of games. So to date, we have been most successful in the biggest, most competitive genre, which is first-person action games. And the fact that we can be successful in the biggest, most competitive genre gives us some confidence that we -- if we put our minds to it, we ought to be successful in some other genres. But clearly, that requires further effort.

And then thirdly, on the game operations, when we began our globalization, we largely operated the games from China. Subsequently, we've discovered that there's enormous value to actually having an international game operation platform. But if you look at the success of some of our peers such as, for example, Garena with Free Fire, then above and beyond the global platform, there's also increasingly value in having regional live operations and regional publishing capabilities, particularly in some of the emerging markets around the world that historically, monetize very poorly for mobile games but are now starting to monetize more substantially. So those are a few of the areas where we believe there's further room for us to improve as we globalize our game business.

[Operator]

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

[Grace Chen, analyst]

My question is about the gross margin. We can see Tencent is making really good progress to extend game business overseas. I'm wondering how the rising revenue mix from overseas gaming business will affect the VAS margin trend going forward? Is there any difference in terms of margin profile?

And a follow-up question is about 5G. It would be great if the management can share your view about the opportunities from the [ take-up ] of 5G in China in your business, like which segments in your business will benefit more from 5G and how?

[Shek Hon Lo, executive]

I think in terms of the overseas gains, it will carry normally a lower margin due to the fact that some of the games has been operated by other partners. And so as a result, it will be a little bit lower than that of those in China.

[Chi Ping Lau, executive]

Well, on the other hand, if you look at -- it depends on the different models, too, right? In some cases, right, we co-develop the game and the game is actually operated by our partner, then we book the development revenue, which is higher-margin in itself, right? So either it drives higher revenue growth, but then the margin will be lower or the revenue growth is not as much, but it's higher margin. So it depends on the model.

Now in terms of 5G, I think, obviously, we are at an early stage of the development of 5G, right? And we feel that when speed increases, it's going to be enabling for the bandwidth-consuming services. So video, I think, will definitely sort of be quite an interesting opportunity. And at the same time, I think it would allow a lot of new applications that can be delivered over the network instantaneously. So one area that we have been looking into is cloud gaming. And if you look at the current version of the cloud gaming, the most successful cloud gaming is actually our Mini Games within WeChat. And by and large, it's actually a relatively narrow band type of a game, very simple. But in the future, if very large amounts of data can be transmitted within a very short period of time, then the game experience of these cloud gaming models could be very, very interesting and different.

And in addition, I would also say that if you look at Mini Programs, right, Mini Programs is essentially an application that creates flexibility for bandwidth, right? So when you have almost unlimited bandwidth at flash speed, then Mini Programs will become very, very exciting. There will be a lot of other opportunities that will be opened up by Mini Programs. So these are the kind of things which I think it would be very tangible for us.

[Operator]

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

[Gregory Zhao, analyst]

So my question is about your FinTech business. So just wanted to understand a bit more about the overall, the industry, the TPV, the growth trend and your market share gain. So given your dominant market position, shall we expect some initiatives to expand the payment take rate in the next couple of years?

And also, if you can share some commercial payment TPV and the revenue growth trend would be very helpful.

And a quick follow-up on the Mini Program. So in the press release, you mentioned the Mini Program, the MAU exceeding 300 million and they expanding to some vertical areas like health care and the smart retail. So just wanted to understand a bit more about the monetization progress, especially in health care and smart retail and what's the contribution to your social advertising revenue.

[Chi Ping Lau, executive]

In terms of FinTech right now, I would say, number one, it is -- the TPV is actually growing quite rapidly because of both the number of merchants adopting the solution and the increase in payment habits created by the users and also the increase in average ticket size.

And secondly, I think if you look at the overall industry, right, there has been an improving economics and that's mainly driven by, one, there are actually less subsidies offered by -- up here, and as a result, it actually improved the overall industry dynamics; and two, we actually cross-sell FinTech solutions, FinTech Services such as loan products and money market and wealth management products.

I think in terms of the overall payment itself, it's still infrastructure type of business. There are monetization and in margin related to commercial payments. And I think the mobile payment solutions companies, including ourselves, are still adopting an approach that we are not making a lot of profit from the payment itself, but trying to expand the use case and expand the market share of mobile payment vis-à-vis other forms of payment.

Now in terms of Mini Programs, right, I would say at this point of time, number one, right, what we disclosed is actually DAU. So there's a huge difference between DAU and MAU. So I think that's #1 in our view.

Number two is there's a big difference between whether the Mini Programs are used for mid-tail and long-tail type of Mini Programs or they are actually just changing our functionality into a Mini Program, and as a result, that's called a Mini Program. So we focus much more on the mid- to long-tail ecosystem. And I think that's actually growing very vibrantly and that's definitely by far industry-leading in China.

And in terms of Mini Programs' monetization, I think we actually said Mini Programs actually helps to increase the ecosystem of transactions within our WeChat ecosystem. And as a result, it helps on performance ads and it helps on our payment business. Now it's a little bit hard to quantify this because the fact is our advertisers would advertise on our performance ad, and sometimes they get exposure on their services, and sometimes, they actually try to bring the transaction onto their Mini Programs. So it's hard to quantify that. But I think Mini Programs is definitely a very important part of the value chain when we try to monetize through advertising when there's traffic. And then when the brand and the content -- the merchants actually try to advertise, right? Mini Programs actually help them to execute the transactions faster. And so it's our WeChat payment, right? So the 2 added together actually helps transactions flow, and as a result, it helps more and more advertisers to advertise.

So when people look at WeChat performance ad solution, they look at, oh, there's a lot of traffic. They also look at the ease of transaction, which is facilitated by Mini Programs. So I think it's actually helping the entire social ads business.

[Operator]

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

[Wai Yan Wong, analyst]

A quick follow-up on the Mini Program, given the high-frequency DAU that we saw. And considering that many of our key strategic investments like Meituan, Pinduoduo, those guys are also spending quite aggressively on user acquisition. What is our strategy to incentivize more of these transactions, also got shifted to Mini Program and also within the richer ecosystem?

And then second question is that on the media advertising. I think management made a comment that the worst is likely behind us. I just want to understand that, is that more coming from the news feed? Or is it from the video properties we have? And also, how do we see the advertising inflection point? Are we there already? And then how should we see the outlook?

[James Mitchell, executive]

Binnie, thank you for the 2 questions. On the first question, we may need you to ask that again a different way as we didn't really catch the meaning behind it, unfortunately.

On the second question about advertising, the macro environment will be whatever it will be and we don't aspire to control that. But what we can control is our competitive position. And we believe that since the 9/30 reorganization and the combination of our ad sales and ad tech into combined advertising and marketing services group that we have sharply improved our competitive position. And I think that's in a manifest already in the acceleration you're seeing in our social and other advertising revenue. It's particularly apparent in, for example, the ad network business, where we're competing head-to-head with the other big online advertising companies in China where we have experienced very strong growth as we undertake measures like standardizing and unifying the different ad formats, which makes it a much larger, more liquid pool in which the media-buying trading desks find it easier and more efficient to transact than was the case before. So we believe that we've become sharply more competitive in the social and other advertising as a result. And we're also seeking to extend that competitiveness to the media advertising business, which we believe is well underway.

And once again, when you're looking at a business like advertising because of the intricacies of net versus gross, it's important to really focus on the gross profit growth as well as the revenue growth and our advertising gross profit grew at what we think is a very rapid rate year-on-year, reflecting the benefits of the technology changes we're putting in place.

Now if you could just ask the first question again?

[Wai Yan Wong, analyst]

Okay. Sorry. My first question is that on the Mini Program side, given that it's a high-frequency DAU app and then -- DAU that you see the frequency there, so how are you thinking that? Because we have a lot of investments and then, say, like Meituan, Pinduoduo, these guys also spending a lot in user acquisition, right?

And then also in your cloud conference, you also hear that some of the merchants, say, Uniqlo, I think they're talking about the improving conversion on Mini Program is actually better than the other app. So these improving conversion rates in e-commerce, is there something that we can actually see that is a major driver to get more and more of the Mini Program adoption, the rising adoption?

And what are the other things that we will -- management is expecting to see to drive the adoption in Mini Program from here? Because I think it's the increase -- the DAU is high. And then, I guess, the next step is that -- what is the next step in terms of going into monetization through this?

[Chi Ping Lau, executive]

I think you touched a point -- a lot of different points, right? So I would try to say, number one, Mini programs is actually adopted by a lot of different merchants and it's driven by the fact that it is a high-frequency usage scenario. And at the same time, it facilities off-line and online interaction. So a lot of offline players now, they can actually establish an online presence through Mini Programs. And it also benefits from the fact that there's a better ecosystem around Mini Programs, including the performance of ads ecosystem, including the payment. And as Mini Programs' providers actually get better in terms of their programming capability and operational capability, it actually helps Mini Programs to be more conversional, right? As you have identified in some of the off-line merchants, right, where the conversion rates have been improving continuously because they are leveraging, too, to make their Mini Programs better and better in serving those customers. So all these are drivers, right, which would benefit the Mini Program owners, and as a result, benefit our ecosystem.

And I think then what comes with -- will be quite natural, right? There will be more traffic being created by the Mini Programs, and the Mini Program owners will be spending more time into curating their Mini Programs. And so that would actually create a virtuous cycle. And when that happens, it will benefit our performance ads business. It will benefit our payments business. And it will create actually a stronger transactional culture within our social platform and that will actually benefit the entire Mini Program ecosystem further. So I hope that answers your question.

[Operator]

The next question comes from the line of James Lee from Mizuho Securities.

[James Lee, analyst]

My question regarding advertising, it seems like when we talk to advertising agencies in general, it seems like social advertising in general is gravitating towards influencer and [ KLL ] advertising and is moving pretty quick to top-tier influencer. I was wondering -- and same thing for eCommerce as well. I was thinking how are you guys responding to that specifically.

And also secondly, the NBA content, just curious what's the status on that? Is that still suspended indefinitely?

[Chi Ping Lau, executive]

Well, I think, to be honest, right, what you guys had identified is probably at the top of the [ tongue ]. But frankly, what we have seen is that, by and large, the ad dollars are still in the programmatic side, right, people who actually advertise with standardized content or standardized ad format and through AI and through data crunching and targeting, trying to find the right audience and eventually resulting in action and click as well as eventual transaction. I think that's still, by and large, the way to which performance ads work.

Now there is a pretty visible trend toward cable health. But I think in terms of total ad dollars, it's still relatively small.

In terms of NBA, I would say we have built a very strong relationship with NBA over the years, and we actually have a lot of users who are very positive on NBA content. I think what has happened in the market should not really be prohibiting the engagement between the users who like the NBA content and NBA as a franchise. So what we are trying to do is actually to work through this difficult period and to maintain the positive engagement of sports between the users and the sports franchise. And over time, I hope the problem resolves itself. Yes, sure. Please go ahead.

[Jane Yip, executive]

James, do you have another question?

[James Lee, analyst]

Yes. Oh, yes, yes. I was going to ask revenue contribution from Supercell in 4Q?

[James Mitchell, executive]

Well, we'll report the fourth quarter when we report the fourth quarter results. But I think that Supercell has filed financials historically in Finland. So I guess you can use those as a basis for modeling purposes.

[Operator]

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

[Alex Yao, analyst]

First question is regarding the international mobile gaming opportunity. How do you think about the size of the TAM addressable market for international gaming relative to the domestic gaming market?

And secondly, I'd like to follow up on the FinTech and the business segment gross margin trends. It seems to me that the gross margin has improved pretty meaningfully quarter-over-quarter and also year-over-year in this quarter. Can you elaborate the driver behind the margin improvement and help us understand to what extent can we extrapolate the margin improvement trend into the future quarters?

[James Mitchell, executive]

So the question on the international versus domestic game TAM, I mean, quantitatively, the game software market globally is about $100 billion, which China is about 30% and other countries are about 70%. So from that very top-down perspective, then the TAM is a little bit more than twice as big outside China as it is inside China. That's roughly true as well for the mobile game market, which is, I think, that we have most competitive advantage at this point in time. But obviously, there's total addressable market and then there's actually addressable market and the actually addressable market depends on some of the initiatives I talked about earlier in terms of us extending our footprint from action games to what other popular genres of mobile games in terms of us further regionalizing our publishing and live operation skills and also in terms of our ability to nurture and cultivate intellectual property.

On the second question around the FPS gross margin then, that there's a number of factors that contribute to the gross margin. One is the extent to which we aggregate financial services around the core payment platform. And as you're aware, on the asset management side, we've been growing quickly. The number of users of our asset management services more than doubled year-on-year. On the lending side, our WeiLiDai loan product has enjoyed rapid growth. It's extremely convenient and popular with users due partly to its convenience. In the most recent quarter, we've also begun to see some contributions from insurance. So that's on the FinTech.

On the payments itself, then there's margin tailwind, first of all, from the increasing propensity of consumers to fund with LiCaiTong or Weixin Pay accounts and that impacts the cost side of the equation. And then secondly, on the revenue side of the equation, to the extent that the commercial payment volume outgrows the remittance volume, then the commercial payment volume generates a much discount rate for us.

And then thirdly, on the business services component of FPS, the original infrastructure as a service tends to be lower-margin. But as we deliver solutions such as the smart retail solution, then we're aggregating in Software as a Service on top of the Infrastructure as a Service and the Software as a Service generates higher margins. So those are some of the structural tailwinds.

Now in addition, in any given financial period, there can be tailwinds or headwinds based on factors such as competitive intensity, particularly the subsidies around merchant adoption. And as Martin mentioned, now that many merchants do accept mobile payments already, some of that in merchant acquisition subsidy activity has decelerated, which has contributed to the improvement in margins that we have seen.

[Operator]

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

[Piyush Mubayi, analyst]

This is quick. I just wanted to understand the weakness in the media advertising revenue line for the quarter, which seems to be pretty sharp. And there's a -- if there is any color you can give us or provide how quickly this could bounce back?

[James Mitchell, executive]

Well, we've already provided color that we believe it is bouncing back. And by our standards, that's much more forward-looking commentary than we would normally give. So unfortunately, we're not going to provide further sort of details as to exact timing. And obviously, to some extent, it's a function of macro environmental factors as well.

But in terms of the sharp pace of decline in the third quarter, then one of the key factors is really the uncertainty as to when we would be able to serve in key drama series. Now in the end, we did add many of the drama series that we hoped to add during the quarter. But because there was uncertainty as to the timing. I mentioned it was more difficult to sell sponsorships than it would normally be. And for those big budget drama series, these sponsorships historically contributed a very substantial double-digit percentage for total revenue. And so even if we add the drama series, even if the drama series achieves the exact number of audience that we were hoping it would achieve, if we lose that sponsorship opportunity because the timing of the airing of the drama serial is volatile, then that has a meaningful negative impact on our media advertising revenue.

But again, I want to emphasize that there are many drivers in our business. And media advertising revenue, important as it is, it's now less than 1/3 of our advertising revenue, which in turn is smaller than our FinTech and Business Services revenue, so it's important to keep in mind. We have a broad portfolio, and when we have a broad portfolio, it's almost inevitable that at any point in time there will be activities that are underperforming, and there'll be other activities that are overperforming. But I think we are pleased that this quarter, our FinTech and Business Services, social advertising and our mobile games globally, which we view as key drivers for the future, overall are performing very well.

[Jane Yip, executive]

Thank you, and we're 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. A 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 in Tencent Holdings Limited 2019 Third Quarter Results Announcement Conference Call. You may now disconnect.