Q1 2020 Earnings Call

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Operator: Good evening. Welcome to our 2020 first quarter results conference. Before we start the presentation, we would like to remind you that it includes four forward-looking statements, which are underpinned by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions It's coming from a variety of sources outside of, 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 calculated in accordance with IFRS. Non-IFRS measures are intended to reflect our core earnings by excluding certain one-time and all non-cash items.

Good evening welcome to our 2021st quarter results Conference call.

Before we started presentation, we would like to remind you that includes forward looking statements, which on the line by number of risks and uncertainties.

May not be realized in the future for various reasons.

Information about general market conditions, it's coming from a variety of currencies outside opinion.

This presentation also contains some oh no I financial measures that should be considered in addition to but not as a substitute for measures of the Companys financial performance prepared in accordance with ISI.

No I Advize measures I continued to reflect our core earnings by excluding certain onetime and all non cash items.

Well I detailed discussion of risk factors and now I buyers measures. Please refer to August Gaucher, Oh, the IR section of our website.

Operator: For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure in the IR section of our website. Now, let me introduce the management team on the call tonight. Our Chairman and CEO Pony Ma will kick off with a short overview. President Martin Lau and Chief Strategy Officer James Mitchell will then provide a business review. Chief Financial Officer John Loh will conclude with a financial review before we open the floor for questions. I will now turn the call over to Pony.

Now, let me introduce a management team on the core Tonight.

Our chairman and CEO Pony, my where kickoff with a short overview.

President mocking law and Chief strategy Officer, Jim Mitchell, where provide opinions review.

Keith financial if he said you'll know will conclude with financial review before we open the floor for questions.

I'd now turn the call over to Poland.

Huateng Ma: Thank you for joining our call at this unusual time. As the world tackles COVID-19, our thoughts and hearts go out to all the people who are suffering from the pandemic. During this difficult period, we seek to provide online services that keep people connected, informed, and others. Thank you.

Good.

Thank you for Gordon.

Our core.

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Keep people can that.

Huateng Ma: So far, our businesses have proved... enabling us to increase our investment and fulfill our mission of TANFO. We are allocating time and resources, including over 2 billion RMB of donations, to contribute to COVID-19 relief in China and globally. Now, I will highlight the results we achieved in the first quarter.

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So far our businesses.

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Huateng Ma: Total revenue was RMB108 billion, up 26% year-on-year and 2% quarter-on-quarter. Gross profit was 53 billion RMB, up 33% year-on-year and 15% quarterly. Our non-IFRS operating profit was $36 billion RMB, up 25% year-on-year and 17% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was worth 27 billion RMB, 79%.

So two in China globally.

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Total revenue was one of your age it at all and up 26% year on year and 2% quarter quarter.

Gross profit was just eat at all.

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Our non.

Operating profit was 46 theaters can be up 25% year on year, 17% quota.

So I had net profit attributable equity code was 27 billion on beef up 59%.

Huateng Ma: Our platforms and products have never been more neat and relevant as users stay at home. We believe this experience will also lead to a better future as the relationship of digitalization continues to move forward. In social, users heavily relied on our social platforms to stay connected; combined MAU of WeChat and WeChat grew 8% year-on-year to over 1.2 billion. In games, more players spend more time online, further strengthening our number one position. Our games also continue to grow in popularity.

6%.

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We believe these view this will also lead to a solution because utilization going forward.

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Combined it May you always you know, we check increased 8% year on year over 1.2 billion.

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For those things any at all and number one position in China.

Huateng Ma: In media, video views and subscriptions continue to expand as we reach the top tier, music [inaudible] and FinTech. We operate the largest mobile payment platform in China and a number of small businesses. In cloud, we are the number two public cloud services provider in China, steadily picking up market share. In utilities, we maintain our interest in Mobile Security, Mobile Browser, and Android App Store in China. I will invite Martin and James.

I'll walk ins also continues.

Well internationally.

The media video views as subscriptions continue to expand.

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Martin Lau: Thank you, Pony, and good evening and good morning to everybody. For the first quarter of 2020, our total revenue grew 26% year on year. VAS represented 58% of our total revenue, within which online games were 35% and social networks were 23%. FinTech and business services represented 25% of total revenue, and online advertising represented 16% of total revenue.

I don't know them by locking in June.

People.

Thank you for it and good evening and good morning to everybody.

For the first quarter 2020, <unk> total revenue grew 26% year on year.

That's represented 58%, although total revenue within which already games was 35% and social networks was 23%.

Fintech and business services represented 25% of total revenue and all that advertising represented 16% to [noise].

Martin Lau: For value-added services, segment revenue was 62.4 billion RMB in the first quarter, up 27% year-on-year and 19% quarter-on-quarter. For social networks, revenue grew both year-on-year and quarter-on-quarter, mainly driven by item sales in smartphone games. Total VAS subscriptions increased 19% year-on-year to $197 million, reflecting robust growth in video and music subscriptions as users spent more time online. Our video subscriptions increased 26% year-on-year to $112 million due to popular self-commissioned dramas and Chinese anime series such as Sansan Sansu Pillow and The Land of Warriors Season 3.

[noise] for value added services segment revenue was 62.4 billion or be in the first quarter up 27% year on year and 19% quarter over quarter.

And social networks revenue grew both you and your and quarter to quarter, mainly driven by themselves in smartphone games.

Total about subscriptions increased 19% year on year 297 million, reflecting robust growth in video and music subscriptions as users spent more time alike.

Oh video subscriptions increased 26% year on year 212 billion due to popular settled commissioned drama and Chinese animated series, such a sensitive so to say Hello, and the land warrior season through it.

Martin Lau: Our music services and expanding paid music library contributed to subscription growth of 50% year-on-year to $43 million. Online games revenue grew 31% year-on-year and 23% quarter-on-quarter, driven by more active users and a higher paying ratio during the stay-at-home period, although consumption will normalize as users return to work.

Well music services and expanding paid music library contributed to subscriptions growth of 50% year to year to 43 million.

Online games revenue grew 31% your your and 23% quarter on quarter, driven by more active users and higher paying ratio during the stay at home to it.

Martin Lau: Total smartphone games revenue increased 64% year-on-year to $34.8 billion RMB, driven by key titles including Honor of Kings, Peacekeeper Elite, and PUBG Mobile, as well as consolidation of Supercell. Sequentially, revenue grew 33% due to more playing time during the Chinese New Year and stay-at-home period. PC client games revenue decreased 15% year-on-year to $11.8 billion RMB due to the temporary closure of internet cafes and soft DNF performance. However, revenue increased quarter-on-quarter on favorable seasonality. Turning to social media now.

Consumption will normalize as users return to work.

Total smartphone games revenue increased 64% year on year to 34.8 billion RMB driven by key titles, including a lot of case peacekeeping elite impact your mobile as well as consolidation of Super So.

Sequentially revenue grew with 33% due to more playing time during the Chinese new year and stay at home to it.

PC client games revenue decreased 15% your year to 11.8 billion or be due to temporary closure of internet cafes and soft DNS performance.

Revenue increased quarter on quarter on favorable with seasonality.

Martin Lau: We are highly motivated by our roles and responsibilities in creating and helping people to stay in touch with their friends and families, and in connecting people to necessary services. During this critical period, user engagement on WeChat and QQ increased with daily messages and time spent on each service double digits year on year. We strengthened several functionalities on Weixin and QQ platforms to better serve specific use cases. For example, in e-learning, teachers can now customize the QQ group toolbar with relevant mini-programs, such as online exams and homework collection tools, to better manage online classes.

Turning to social networks.

We are highly motivated by roles and responsibilities in creating and helping people to stay in touch with their friends and families and then connecting people to necessarily services.

It is critical to it.

User engagement on wishes and keep the increased with baby.

Messages and time spent on each service up double digits year on year.

With strength in several functionalities and wish him and QQ platforms to better serve specific use cases.

For example for you learning teachers can now is customize QQ group to buy with relevant many programs such as old exams, and they'll move collection tools to better manage all in classes.

Martin Lau: Students can experience communal study time via virtual study rooms. Health Care Services connect Weishen users with medical professionals in private or group chats, and initiate the Tencent Health Mini Program, an access point embedded in WeishenK. To support remote presentations, we extend the QQ's screen sharing function in video calls from PC to mobile devices. On daily services, we increase the penetration in offline youth cases, contributing to Weishen Mini Programs, exceeding 400 million DAU.

Students can experience community study time year virtual study returns.

Healthcare services, we conducted wishing users with medical profession that was in private a good Chet initiated the attempts and held many programs or access point embedded in relation to.

To support remote presentation, we extend the QQ as screen sharing function and beauty caused from PC to mobile devices.

On a daily services, we increased penetration in offline use cases contributing to waste shouldn't many programs exceeding 400 million you.

Martin Lau: We helped accelerate digital distribution or only channel consumption for offline services, especially grocery shopping and municipal services. We assisted local governments and businesses to disseminate e-vouchers expediting the recovery in offline consumption after the lockdown is over, especially for retailers and restaurants. Now, let's move on to online games.

We helped accelerate digital distribution or omnichannel consumption for offline services, especially grocery shopping and municipal services.

We assisted local governments and businesses to disseminate you bolger's expediting the recovery in offline consumption. After the lockdown is over especially for retailers and restaurants.

Martin Lau: During the stay-at-home period, users spent more time on our games for entertainment and social interaction, leveraging our best in class game content and large game social communities. We captured incremental revenue, and Smartphone Games VAU recorded strong growth year-on-year and quarter-on-quarter among our leading mobile titles in China. We upgraded the Honor of Kings game engine last year, which allowed us to enhance the audio and visual experiences of the game, enabling more attractive content, such as the five mountain-themed skins we released during the Chinese New Year.

[noise] [noise], let's move onto online games.

During the stay at home pure it usually spent more time window games for entertainment and social interactions.

And your best in class game content, a large team came social.

Communities.

We capture incremental entertainment demand.

Smartphone games, you recorded strong growth year to year end quarter on quarter.

About Oh, leading mobile titles in China.

We upgrade the auto Kings game engine last year, which allowed us to enhance audio and video experiences of the game, enabling more attractive content such as the five momentum seems skins, we released during the Chinese new year.

Martin Lau: We also introduced a location-based play system, which encouraged more interactions among players in the same city. Peacekeeper Elite collaborated with Rocket Girls 101, an idol girl group managed by Tencent, which emerged from our popular TV variety show.

We also introduced a location based she say system, which encouraged more interactions among players in the same city.

Peacekeeping elite collaborated with dark kept goes one to one and Itll go group at managed by 10 cents, which emerged from a popular TV variety show. This joke user engagement to a new high demonstrating the success of across IP synergy.

James Gordon Mitchell: This drove user engagement to a new high, demonstrating the success of our cross-IP synergy. PUBG Mobile celebrated its second anniversary with multiple in-game events while we tailored our operations regionally to increase user reach and engagement. For League of Legends, we launched Teamfight Tactics mobile app, as well as new content, contributing to higher user retention and time spent on this long-standing friendship. For BroadStars, the high-cadence content updates kept users engaged, and the Optimized Player Matching Mechanism further enhanced the user experience.

International.

Touchy mobile celebrated its second anniversary with multiple income events, while we tailored operations regionally to increase usually rich and engagement.

The league of legends relaunched UQM fight tactics mobile app as well as new content contributing to higher user retention and time spent for this long standing franchise.

Football stars the high cadence content updates kept user engaged.

And optimized to play a matching mechanism further enhanced user experience.

James Gordon Mitchell: We do have a substantial new game pipeline in China, and we will launch more titles across different genres by June. Internationally Licensed Mobile RPG Code D Blood achieved initial success through downloads, as well as revenue, and rides new PC tactical shooter Valorant to enthusiastic responses from players during closed beta testing and was the most viewed title on Twitch in its first. Looking forward, we expect in-game consumption activities to dip back toward more normal levels as players go back to work, and time spent in games is no more. With that, I'll now pass it on to James.

We do have a substantial new game pipeline in China will launch more tied it was across different genres.

By June.

Internationally licensed mobile LPG Cody blood.

Achieved initial success by downloads as those grossing in Japan.

Rights, New PC technical shooter Valor end to end to end to cystic responses from play a student closed beta testing how what's the most viewed a title and twitch in its first month.

Looking forward, we expect Indian consumption activities to get back to more normal levels as players go back to work and time spent in games normalizes.

James Gordon Mitchell: Thank you, Martin. Turning to online advertising, revenue was 17.7 billion renminbi in the first quarter. The above-trend year-on-year growth rate of 32% reflected a. increased consumer time spent on our apps during the stay-at-home period, which we expect to normalize in future quarters, and b. our platform's ability to deliver attractive returns on investment to advertisers. Consequently, advertising revenue decreased due to seasonality. By industry, games, internet services, and online education, ad spend rose year-on-year, as these categories increased spending in reaction to more traffic and consumption for their services during the stay-at-home period. Fast-moving consumer goods, auto, and travel-related ad spend declined.

With that I'll now pass on to James. Thank you Matson signings online advertising revenue, a 17.7 billion renminbi into first quarter.

Above trend here on your growth rate of 32% reflected a increased consumer time spent on our apps trying to stay at home period, which we expect to normalize in future quarters and be a platform's ability to deliver at attractive returns on investment to appetizers sequentially advertising revenue decreased due to seasonality.

Industry games Internet services and online education, I've spent rose year on year as these categories increased spending in reactions more traffic and consumption for their services. During this time period.

James Gordon Mitchell: Looking forward, we expect the overall China online advertising industry to experience industry-wide headwinds, including first, consumers normalizing down their time spent on, Second, online service advertisers adjusting their customer acquisition budgets as they reflect revised customer lifetime value, and third, multinational brands reducing their spending significantly as they face the pandemic in their home markets. For social and others, advertising revenue grew 47% year on year driven by increased ad impressions, particularly on. Our mobile ad network revenue also expanded sharply on more traffic and higher eCPMs, with video ads now representing over one-third of our ad network ad impressions. We expect our social advertising revenue to revert to its prior trend growth rate from the second quarter as ad impressions normalize somewhat and as some advertising categories review their customer acquisition.

Cost moving consumer goods or show and travel related odd spends decline.

Looking forward, we expect the overall, China online advertising industry experienced industry wide headwinds and hitting fast to see must normalizing down that time spent online second online services advertisers adjusting that customer acquisition budgets as they reflect revised customer lifetime value assumptions and third multi.

The national brands, reducing their spending significantly as they faced a pandemic indefinitely markets.

For such than others advertising revenue grew 47% year on year, driven by increased AD impressions 60 on moments on mobile AD network revenue also expanded shop, the on more traffic and higher Cpms with video ads now representing over one third of AD network AD impressions, we expect our social advertising revenue to river.

Toward its prior trend for us right from the second quarter as AD impressions normalize somewhat and at some advertising categories review that customer acquisition budgets.

James Gordon Mitchell: For media advertising, revenue was 3.1 billion renminbi for the first quarter, down 10% year-on-year, within which sponsorship ad revenue declined year-on-year, as well as quarter-on-quarter, due to budget cuts, delays in producing and airing certain variety shows, and the suspension of NBA basketball. However, in-feed advertising revenue grew year-on-year and quarter-on-quarter due to the popularity of several top theatre We expect media advertising revenue trends will be more challenging.

The media advertising revenue was 3.1 billion renminbi first quarter down 10% year on year within which sponsorship revenue declined year on year as well as quarter on quarter due to budget cuts delays in producing an error in certain variety shows and suspension of NPK Bosqi four games.

In feed advertising revenue grew year on year on quarter on quarter due to the popularity of several top tier drama series and demand for reliable news and information during the pandemic.

James Gordon Mitchell: Reporter, as multinationals reduce their brand budget. Looking at FinTech and business services, segment revenue is $26.5 billion, up 22% year-on-year and down 12% quarter-on-quarter. Within fintech, revenue decreased sequentially as commercial, the Specialty Offline Payment Act, and cash withdrawals declined during the Chinese New Year and stay-at-home period. FinTech margins were, however, stable sequentially; the higher-margin revenue streams such as wealth management and lending continued to grow, and as we managed our marketing... Looking forward, we've seen a healthy rebound in payments activities across offline and online, including QR code as well as point of sale transactions.

We expect media advertising revenue trends will be more challenging in the second quarter as multinationals reduce that brown budgets.

The can't Fintech and business services segment revenue was 26.5 billion renminbi up 22% year on year down 12% quarter on quarter.

Within Fintech revenue decreased sequentially as commercial payments, especially offline payments activities and cash withdrawals, which use during the Chinese new year since that time periods.

Fintech margins will have a state was sequentially higher margin revenue stream, such as wealth management lending can see trucks and as we managed our marketing and subsidy costs.

Looking forward with seen a healthy rebound in payments activities across offline and online and QR code as well as point of sale transactions. For example, during the last week of April average daily commercial transaction side.

James Gordon Mitchell: For example, during the last week of April, our average daily commercial transaction... that recovered to late 2019. Wealth Management Business grew at a stable rate in the first quarter as aggregated customer assets increased year-on-year and quarter-on-quarter, and our Weili Dai Loan Book remained healthy, reflecting Weibang's prudent business practices. However, within business services, the pandemic delayed project deployments and new accounts, resulting in a However, our Tencent Meetings software achieved breakouts, and became the leading video conference app, strengthened its security measures, and introduced new... Facilitate discussion and conference calls. In late March, we launched an international version of the Tencent meeting called the VUZE meeting.

Recovered to late 2019 levels.

Our wealth management business grew at a stable rate in the first quarter as aggregated customer assets increase year on year on quarter on quarter.

And our weighted I learned book remained healthy, reflecting we backs prudent risk management policies.

Within business services, the pandemic today project deployments, new account acquisition, resulting in a sequential revenue decline. However attempts at meeting software chief breakout success and became the didn't video content SAP in China, we strengthened its security measures and introduce new functions facilitate discussion and conference call management.

In late March we launched international question, Tencent meeting who.

James Gordon Mitchell: For WeChat Work, we enhance industry solutions and deepen integration with Weixin, helping us to sign more key agreements, especially in retail, education, and public. Consequently, WeChat Work DAU has grown significantly during the period. Looking forward, we expect business services to remain challenging in the short term due to disrupted sales, but we'll continue increasing our investment, especially in enterprise software and cloud services. We believe the experience of remote working will ultimately prompt offline industries and the public. Swiggy, is that alright?

So we chat work, we enhanced industry solutions in detail integration with by Chen, helping us to sign more key accounts, especially in the reach our education and public sectors. Consequently, we chat work Tia you has grown significantly during the period.

Forward, we expect business services to remain challenging in the short term Judy disrupted sales cycles, but we'll continue increasing our investment, especially in enterprise software and cloud services as we believe the experience of remark lucky, but ultimately crops offline industries and the public sector to accelerate I just ization.

James Gordon Mitchell: Thank you. Bye. And with that, I'll pass it to John.

John Loh: Thank you, James. Hello everybody. For the first quarter of 2020, total revenue was 108.1 billion renminbi, up 26% year-on-year or 2% quarter-on-quarter. Gross profit was 52.8 billion renminbi, up 33% year-on-year or 15% quarter-on-quarter. Net other gains was 4 billion renminbi, down 64% year-on-year or up 11% quarter-on-quarter. This item mainly comprised non-IR virus adjustment items, including net gains on disposal of certain investing companies as well as net fair value gains on investing companies.

And with that I'll hop John to speak to financials. Thank you James Hello, everybody for the first quarter of 2020 total revenue was 108.1 billion renminbi up 26% year on year or 2% quarter on quarter.

Gross profit was 52.8 that then renminbi up 33% year on year or 13% quarter on quarter.

Other gains was 4 billion renminbi down 64% year on year or up 11% quarter cordis decide to many comprised of non I have iris, it's just been items, including net gains on disposal of so they investee companies. That's why is that fair value gains on MFC companies.

John Loh: It was partially offset by 2.6 billion renminbi in donations, primarily to combat the COVID-19 pandemic globally. Operating profit was $37.3 billion RMB, up 1% year-on-year or 30% quarter-on-quarter. Net finance costs were $1.7 billion RMB, up 51% year-on-year or down 39% quarter-on-quarter. The year-on-year increase was mainly driven by greater interest expense resulted from a higher amount of indebtedness.

It was partially offset by 2.6 billion renminbi donations, primarily to combat the cobot 19 pandemic globally.

Operating profit was 57.3 billion rather than be up 1% year on year of 30% quota and quota.

Net finance costs were 1.7 billion renminbi up 51% year on year or down 29% quarter on quarter.

The year on year increase was mainly driven by greater interest expense resulted from higher amount of indebtedness. The quote unquote a decrease was due to the recognition of Rx gains for Q1, 2020, well, we recorded as far as slow as a quarter ago.

John Loh: The quarterly-on-quarter decrease was due to the recognition of forex gains for Q1 2020, while we recorded a forex loss a quarter ago. Share of losses of associates on joint ventures was 281 million RMB, down 90% year-on-year or 79% quarter-on-quarter, mainly due to changes in non-IFRS adjustment items of certain associates. On a non-IFRS basis, we recorded a share profit of 164 million RMB for the first quarter of 2020, compared to share losses of 518 million RMB a year ago.

Share losses self associates on joint ventures was 281 million remedy that 90% year on year or 79% quarter on quarter, mainly due to changes in non I have iressa kits than items of certain associates.

And then on I have already phases, we recorded shift profit of 164 million renminbi for the first quarter of 2020, comparing to ship losses of 500, an 18 million renminbi a year ago did change mainly reflected improved performance of certain investee companies.

John Loh: The change mainly reflected the improved performance of certain investing companies. Income tax expense was $5.9 billion, $2.1 billion, and $4.8 billion RMB for Q1 2020, Q4 2019 and Q1 2019, respectively. The effective tax rate for the quarter was 16.7%.

Income tax expense were 5.9 billion 2.1 billion and 4.8 billion renminbi for quarter, one 2020 quarter for 2019 in quarter, one 2019, respectively.

John Loh: IFRS NAP profit attributable to equity holders was $28.9 billion RMB, up 6% year-on-year or 34% quarter-on-quarter. Diluted EPS was $2.999 RMB, up 5% year-on-year and 33% quarter-on-quarter. Now, let me walk you through our non-IFRS financial numbers for the first quarter.

Effective tax rate for the quarter was 16.7%.

I have IRS net profit attributable to equity holders was 20.9 been their money up 6% year on year of 34% quarter on quarter diluted EPS was 2.99, renminbi up 5% year on year and 33% quarter on quarter.

Now let me walk you through I don't know an IRS financial numbers for the first quarter operating profit was 35.6 billion Rand beats up 25% year on year or 17% quarter quarter.

John Loh: Operating profit was $35.6 billion RMB, up 25% year-on-year or 17% quarter-on-quarter. Net profit after NCI was $27.1 billion RMB, up 29% year-on-year or 6% quarter-on-quarter. Diluted EPS was 2.817 yuan, up 29% year-on-year and 7% quarter-on-quarter. Turning to Settlement Gross Margin.

Net profit of the NCR I was 27.1 billion renminbi up 29% year on year or 6% quarter on quarter.

Diluted EPS was 2.817, renminbi up 29% year on year, and 7% quarter on quarter.

John Loh: Gross margin for VAS was 59%, up 1.4 percentage points year-on-year and 8.9 percentage points quarter-on-quarter. The year-on-year growth was mainly due to improved margin for both PC and smartphone games, resulting from improved revenue mix towards high-margin in-house games, sequential increase was benefited from revenue makeshift towards high margin in-house smartphone gains, increasing margin of video subscription business as a result of higher subscription revenue and lower content costs due to the pandemic, and the absence of major eSports events, therefore lower content cost quarter on quarter.

Turning to segment gross margin.

Gross margin for buys plus 59% up 1.4 percentage points year on year, and 8.9 percentage points quarter on quarter.

The year on year growth was mainly due to improved margin for both PC as platform gains, resulting from improved revenue mix towards high margin in house games. The sequential increase was benefited from.

Revenue mix shifts towards high margin in house smartphone games.

Increasing margin of video subscription business as a reseller of higher subscription revenue and lower content costs due to the pandemic.

And the absence of major E sports events step or lower content costs quarter on quarter.

John Loh: Gross margin for online advertising was 49.2%, up 7.3% 7.3 percentage points year-on-year or down 5.1 percentage points quarter-on-quarter. The year-on-year increase refracted lower content costs for video advertising and improved efficiency. The sequential decline mainly reflected revenue decrease due to negative seasonality.

Gross margin gross margin for on a advertising was 49.2% up 7.3%.

7.3 percentage points year on year or down 5.1 percentage points quarter on quarter.

The year on year increase reflected lower content costs for view advertising and improving efficiency.

Sequential decline, mainly reflect that revenue decreased due to negative seasonality.

John Loh: Gross margin for fintech and business services was 27.9%, broadly stable year-on-year and quarter-on-quarter. Selling and marketing expenses were 7 billion renminbi, up 66% year-on-year or 5% quarter-on-quarter. Marketing spending increased year-on-year, particularly on content platforms, including Weixi's marketing campaigns during the Chinese New Year. As a percentage of revenue, selling and marketing expense increased from 5% in the first quarter of 2019 to 6.5% this quarter. GNA expenses were $14.2 billion RMB, up 25% year-on-year or down 12% quarter-on-quarter.

Gross margin for Fintech and business services was 27.9% broadly stable year on year end quarter in quarter.

On operating expenses.

Selling and marketing expenses were seven than ever and the 66% year on year of 5% quarter on quarter marketing spending increase year on year, particularly in content platforms, including ratio marketing campaigns during the Chinese new year.

As a percentage of revenue.

Selling and marketing expense increased from 5% during the first quarter, 2019% to 6.5% this quarter.

DNA expenses were 14.2 billion renminbi up 25% year on year or down 12% quarter on quarter.

John Loh: The year-on-year increase mainly reflected greater R&D expenses and staff work as we invested in talent and technology to support business development. The Q on Q decrease reflected reduced outsourcing activities for R&D projects and reduced travel entertainment expenses due to the pandemic.

The year on year increase mainly reflected Greta R&D expenses and software assessed we invested in patterns have technology to support business development.

The Q on Q decrease reflected reduced outsourcing activities for R&D projects and reduce traveling entertainment expenses due to depend damage as a result.

John Loh: As a percentage of revenue, GNA and R&D represented 13.1% and 7.4%, respectively. As at quarter end, we had approximately 64,000 employees, up 18% year-on-year or 2% quarter-on-quarter. Let's take a look at the margin rate. For the first quarter of 2020, gross margin was 48.9%, up 2.3 percentage points year-on-year or 5.3 percentage points quarter-on-quarter. The year-on-year increase mainly reflected settlement gross margin ratios improving and flowing through to our Brent gross margin, especially for bars and online advertising settlement. Sequentially, the margin increase was mainly due to revenue makeshift too fast, which carries a higher margin.

As a percentage of revenue DNA, and our new represented 13.1% and 7.4% respectively.

As at quarter end, we had approximately 64000 employees up 18% year on year or 2% quarter to quarter.

Let's take a look at a margin regionals for the first quarter 2020 gross margin was 48.9% up 2.3 percentage points year on year or 5.3 percentage points quarter on quarter.

The year on year increase mainly reflected segment gross margin ratios improve and flow through to our friends at gross margin, especially for fast and on that advertising settlements sequentially to margin increase was mainly due to revenue mix shift too fast, which carry a higher margin.

No one I have IRS operating margin was 32.9% broadly stable year on year or up four points.

Two percentage points quarter on quarter.

And on IR virus that margin was 25.9% I should be stable year on year end quarter on quarter.

John Loh: Non-IR virus operating margin was 32.9%, broadly stable year-on-year or up 4.6%, two percentage points, quarter after quarter. Non-IR virus net margin was 25.9%, which should be stable both year-on-year and quarter-on-quarter. Finally, I'll share with you some key financial metrics for the quarter. Total CapEx was 6.2 billion renminbi, an increase of 37% year-on-year or a decrease of 64% quarter-on-quarter, within which operating CapEx grew 41% year-on-year to 5.5 billion renminbi, mainly due to more spending on servers to support the operation of Tencent's crowd business, such as Tencent

Finally.

Share that view some key financial metrics for the quarter total Capex was 6.2 billion renminbi, an increase of 27% year on year or decrease of 64% quarter on quarter.

Well, then which operate in Capex grew 41% year on year to 5.5 billion renminbi, mainly due to more spending on servers to support operation of sensing crop business suggest that meeting so an operating capex increased 7% year on year to 682 million renminbi.

John Loh: So operating CapEx increased 7% year-on-year to 682 million renminbi. At quarter end, free cash flow was $39.2 billion RMB, up 133% year-on-year or 25% quarter-on-quarter. Starting from 2020, we adjusted our free cash flow parameters according to the latest market practice by subtracted payments for media content and lease liabilities in addition to subtracted payments for capital expenditure from the operating cash flow. Comparative figures have been restated accordingly. That position was RMB5.7 billion, improved sequentially due to stronger operating cash flow, partially offset by payments for M&A initiatives. The fair value of our shareholdings in listed investing companies, excluding subsidiaries, was approximately $410,000 billion renminbi, that is about 58 billion US dollars. Thank you.

At quarter end free cash pro was 39.2 billion renminbi up 133% year on year or 25% quarter on quarter.

Starting from 2020, we adjusted our free cash pro parameters. According to the latest market practice by subtracting payments for media content and this liability.

Addition to support subtracting payments for capital expenditure from the operating cash flow comparative figures have been restate it accordingly.

That that position was 5.7 billion renminbi improve sequentially due to strong the operating Castro, partially offset by payments for M&A initiatives.

The fair value of our shareholdings in this said investee companies, excluding subsidiaries was approximately 410.

The then remninbi that it's about a 30 day bill in us dollars.

Operator: Thanks, John. We shall now open up the floor for questions. Operators, you will take one question and one follow-up question each time. Please be mindful of the first question.

Thank you.

Thanks, John you're now there's a thoughtful question.

Operator that concludes my main question and one follow up.

Thank you Mike referred.

Operator: Thank you. Our first question comes from Gregory Zhao from Barclays. Please ask your question.

Operator.

Thank you for first question comes from Gregory So from Barclays. Please ask your question.

Gregory Zhao: Hi Management. Thanks for taking my question and congratulations on a very strong quarter. So first, I have a big picture question.

Hi, management's remarks, our consumer your question on their congratulation turn varies from quarter. So [laughter] Harlow one big.

Martin Lau: We know COVID-19 is gradually passing in China. So from your point of view, what kind of structural changes has COVID-19 brought to the industry and to Tencent? And also, how should we think about the changes to user behaviors and your business strategies? So also, a quick one about your overseas gaming business in Q2. So we saw Activision Blizzard and some other gaming companies give very strong guidance for Q2, and we know Corona is still ongoing in the overseas market in Q2. Shall we expect Tencent to deliver stronger overseas gaming performance in Q2?

Picture question [laughter] window, Koby Maritimes gradually passing in China. So from your point of view, so what kind of structural.

Hi, Andrew Koby 19 brought to the industry under 10 cents and also how shall we think about what changes to the user behaviors.

Hi. Thank you. So also a quick one about to oversee can you just making sure true.

So we saw Activision blizzard.

Other gaming companies are very strong guidance how Q2.

The accrual nice steer on going.

Overseas market are you care to ensure we expect I'm sorry.

Reverse stronger.

Overseas gave me in performance in Q2 Q.

James Gordon Mitchell: Thank you.

Yes. Thanks for your question I think in terms of structural changes the biggest structure change is really for.

Martin Lau: Yeah, thanks for your question. I think in terms of structural changes, the biggest structural change is really for businesses and organizations to realize that there needs to be an online presence. When everything is actually shut down, physically and offline, then it's actually very important for businesses and organizations to be able to have online access to the consumers, and then to the users via the internet. So I think, you know, that's a big realization, right? I think everybody feels that it's coming.

Businesses and organizations to realize that there needs to be an online presence when everything is actually shut down.

Physically and offline than it's actually very important for.

The businesses in the organizations to be able to have online access to their consumers and the to the users via incident. So I.

I didn't know that's a big realization, having everybody a few that it's coming but.

Martin Lau: But having experienced the COVID-19 lockdown means that it's real, and it's existential. So I think that would translate into many different trends. For example, in retail, there will be more investments by retail shops and brands to establish direct links with the consumers. And I think, you know, our mini programs are really one key infrastructure for them to be able to do that. I think different government and municipal governments and services will need to bring themselves online, and that would increase the overall investment in technology infrastructure and cloud investments on a longer-term basis. And in terms of specific segments, right, you know, obviously, there will be companies who need to build up a remote working infrastructure. And I think that would benefit tools that enable remote working.

Having.

Experience to call that 19, Lockdown, we intend to its real in its existential. So I think that would translate into many different friends for example on retail there.

We'll be more investments by the retail.

Shops in brands to establish direct linkage with the consumers and I think you really programs is really one a key infrastructure for them to be able to do that I.

I think different.

Government and municipal government and services with new too.

Bring themselves on line and that would increase the overall investment.

Technology infrastructure and cloud investments on the longer term basis.

And in terms of specific segments right obviously.

There will be companies, who needs to Buda remote to broking infrastructure and.

Martin Lau: And obviously, Tencent Meeting has grown its user base significantly during this this pandemic period. And in terms of verticals, I think online education is one area that would definitely benefit going forward because I think you know a lot of students have been experienced with online education and their parents. I have also experienced that, and that would drive the adoption of such a mode of education going forward. Online healthcare will be another area in which a lot of users would like to have access to more health-related information, and they're getting used to having their disease diagnosed online both through AI or even a connection with medical professionals.

That would benefit.

Tools that enable remote working and August 10th a meeting has accrued its user.

Significantly during this this pandemic period and in terms of verticals I think online education is a one area that with us the benefits going forward because I think automotive students have been experienced with the online education and the parents.

I have also experienced ads and that would drive the adoption of such a.

Mode of education going forward.

Online healthcare will be another area in which.

A lot of users would like to have access to more heavily related information and they're getting used to having their disease diagnosed online both to a high or even connection with.

Martin Lau: The awareness of health will be much stronger going forward, and I think online healthcare will be one area that will grow significantly in the future. So I think these are all the structural changes, right, you know, that COVID-19 brings to society as well as the mindset of businesses. I think a lot of the consumer mindset is already very much on the mobile internet, but businesses, there's some sort of inertia for them to make changes.

With medical professionals and the awareness for how is that will be much stronger going forward and I think on health care would be one area that would grow significantly in the future. So I didn't give the order structural changes radio that.

For the nine Tim brings to the overall.

Society as well as the mindset of businesses I think a lot of the consumers mindset is already very much on.

On mobile Internet businesses, there's some sort of issue for them to make changes, but having experienced comp at 19, I think really imperatives for change will be much stronger and rest assure that they are there a lot of.

Martin Lau: But you know, having experienced COVID-19, I think the impetus for change will be much stronger. And rest assured that there are a lot of investments that we have made in the past, and we will be making even more in the future, which help us to take advantage of and facilitate and even lead these structural changes. On the gaming part, I'll ask James to answer.

Investments that we have made in the past and to where we'll be making even more for the future, which help us to take advantage and to facilitate an even lead these structural changes.

James Gordon Mitchell: Thank you for the question on the overseas game market, Gregory. So, you know, we believe that the game markets outside China are indeed following a somewhat similar path. The market inside China, there's obviously a roughly two-month time lag, given the later start of the stay-at-home periods in the rest of the world. And the extent may not be as pronounced as in China, first of all, because in some regions, the lockdown... stay-at-home period. [inaudible] which may mitigate their in-game spending.

So on the gaming Pardot as James to answer.

Thank you for the question on overseas game market correctly. So.

Belief that the.

Okay markets outside China R&D, each following a somewhat similar pop to the market inside China.

Thats obviously a.

Roughly two month time lag given the night start of the staff and periods and the rest of the world and the extent to may not be aspirin ounces in China first of all because in some regions. The lockdowns stay at time periods.

Less.

Our announcement in China.

And then secondly, because there may be some consumers who are concerned about unemployment rates, which may mitigate that in game spending but overall.

James Gordon Mitchell: But overall, that there is, you know, and I... Time spent on games. Getting one degree more granular, the games that are seeing the biggest uplift are generally those that have longer session lengths; people now have more time to play the longer session length games and also the games that are somewhat team-based in nature, which I think reflects people realizing that, perhaps surprisingly, they actually miss their work colleagues, want to socialize with them, and one way of doing that is through games.

There is an optimist in end user time spent on games gained one three more granular the games the single biggest optimistic generally does.

Have longer session lengths because people are now have more time to play the longest session licensed games and also the games that are somewhat team based in nature, which I think reflects people realizing.

Perhaps the pricing it actually missed that what colleagues.

I just want to socialize with them in one way of doing that is through games routine base games.

James Gordon Mitchell: Looking forward, of course, we expect and hope that the situation will normalize in the rest of the world, as it has done in China. But taking a more structured, longer-term view, it's also worth observing that we're in the fortunate position of continuing to launch games globally during this period. Martin mentioned Code Deep Blood, an RPG that we're working on in Japan. Riot has launched its Legends of Runeterra card game on mobile and PC in the last few days.

Looking forward of course, we.

Expects and hut into the situation will normalize and the rest of the world as it has done in China, but taking a more structure longer term view. It's also worth of zapping that were in the fortunate position is continuing to launch games globally. During this period.

Martin mentioned her deep lot and all PGW launch in Japan.

Yes.

Launches lessons for in tower card game.

Operator: And then, as Martin also mentioned, Riot has launched Valorant, which has had an extremely positive reception from hardcore gamers on PC in the last month. Your next question comes from T.U.H. Mubai from Goldman Sachs.

On my bottom T C. In the last few days and then as Martin also mentioned Rice's launch, Nevada rooms, which has had an extremely positive reception from hardcore gamers.

PC and in the last month.

Thank you.

Your next question comes from.

This move body from Goldman Sachs. Please ask your question.

Piyush Mubai: Please ask your question. Thank you for taking my question and congratulations on your numbers. Hearing your commentary about how strong the quarter was and how you think the second quarter could see a reversal of that, could you just go through that factor about how much traffic is coming off and how quickly that's slowing down to the extent possible in the months of April and May? And just diving further into that question, if you look at advertising, how would advertising, for example, change or slow down from the pace that we've seen in the first quarter

Thank you for taking my question then congratulations on your numbers.

Hearing your commentary about how strong the quarter was on how you think the second quarter could see a reversal of that could you. Just go through that fact about how much traffic is coming off and how quickly that slowing down.

The extent possible in the months of April and May and just driving further into that question. If you look at advertising how with advertising for examples change or slow down from the the pace that we've seen in the month of in the first quarter and from if you go back and look at the AD load increase that came through.

Piyush Mubai: And if you go back and look at the ad load increase that came through, that wasn't a full quarter increase, if I'm not wrong about it, so surely the second quarter and hereafter, you should see substantial strength in the first quarter play through into Q2 and the rest of the year. Is there something I'm missing here?

That wasn't the full quarterly increase.

If I am not wrong about it so surely the second quarter and hereafter you should see substantial strength during the first quarter play through.

Into Q2, and the rest of the because that's something we're missing here.

Martin Lau: Piyush, sorry, on the first question, which business were you alluding to specifically? I'm alluding to the overall business, the strength that you've seen in the first quarter for both advertising and gaming, and your commentary that you're likely to see this reverse into Q2, because your guidance sounds a little bit more conservative came through in the first quarter because people stayed home more and thus had more time on the screen and spent more time on games, and video, and internet services. We are seeing that normalizing, basically, by and large in April. It started to normalize in March, but it pretty much normalized in April, and it all normalized after the May 1st holiday.

Hey, guys sorry on the first question, which business, we you alluding to specifically.

I'm alluding to the overall business the strength that you've seen in the first quarter on both advertising and gaming.

And your commentary that you likely to see this reverse into Q2.

Because you have gotten sounds a little bit more yeah I items.

Well for whatever a benefit that.

Came through in the first quarter, because people say that whole more and that does have more time.

On the screen and.

Spent more time on games and video and.

Services.

We're seeing that normalizing basically.

Five large in April it started to normalize in March but pretty much.

Martin Lau: So I think, you know, that's sort of, you know, the extent that you should think about. And in terms of advertising, I think James will probably give you some color. Yeah, I mean, this may be, you know, reiterating what we said in the prepared remarks, in which case I apologize. We'll try to go a little bit deeper or a little bit clearer, in case it wasn't clear.

Normalized in April and all normalized after me first holidays, so I think thats sort of.

The the extent that you should think about.

And in terms of advertising I think James we probably will give you some some color.

This may be reiterating what we said in the prepared remarks in which case I apologize, we try to go a little bit deeper or a little bit clearer and what success. So.

James Gordon Mitchell: So, you know, the three factors that we think will act as headwinds for the industry as we look forward beyond the first quarter. The first is that in the first quarter, because people were staying at home, they spent more time on... And, you know, more time results in more impressions, and particularly for direct response advertisers, if there are more impressions, then, you know, what else do you call them, mechanically buy more and spend more money with the industry as a whole. And so our assumption is that going into the second quarter, as people return to work and to school, the quantity of saleable impressions will normalize. Then the second factor is that...

The three factors that we think.

We're not as headwinds for the industry as we look forward beyond the first quarter.

First is that in the first quarter because of people staying at time. They spent more time on line.

More time results in more impressions and particularly for the direct response advertisers.

It's more impressions and all else equal down mechanically by more and spend more money with with the industry as a whole and so our assumption is.

Second quarter was people return to work into school the quantity of cited but impressions will normalize.

James Gordon Mitchell: If you look at how direct response advertisers operate, then they have, you know, a certain customer lifetime value assumption based on historic ARPUs and based on historic churn rates. And, you know, they will bid up the eCPM or eCPC that they're willing to pay to a customer acquisition cost derived from that customer lifetime value. And in the very short term, if there's a sudden shock, which was the case with COVID-19, then they may not have time to fully update their customer lifetime value assumptions. But over the months, as the situation stabilizes, then they may decide to review their customer lifetime value assumptions due to different assumptions about churn rates or... about retention rates, or they may not; we don't know.

And a second factor is that.

If you look at how the direct response appetizers operates and they have you know Sutton customer lifetime value assumption based on.

To start off crews based on historic churn rates and so forth.

They will be it off the.

Yeah, what you CTC that that willing to pay out to a customer acquisition cost.

From that customer lifetime value assumption and in very short time, it that's Sutton shop, which was the case with with the carpet 19.

Then you know they may not have time to fully updates that customer lifetime value assumptions spot over the months as situation stabilizes then they may decide to review that customer lifetime value assumptions due to a different assumptions about churn rate or different assumptions about retention rates well they may.

James Gordon Mitchell: What we do know is the third factor, which is certain online advertising properties in China, such as Online Video. Historically, close to half of the advertising revenue in the ad industry came from multinationals. And, you know, what we've seen in the last few weeks is that half of the revenue that comes from local China-based companies has been fairly resilient, but half of the revenue for long-form video that comes from multinationals experienced a substantial step down and, you know, a hypothesis.

No.

We don't know, it's a risk what we do not always a third factor, which is the Sutton online advertising properties in China such as.

Online video than historically close to half of the advertising revenue in that industry came from multinationals and what we've seen in the last few weeks is that the half is the revenue that comes from local China based companies has been fairly resilient thought the half the revenue.

Weve.

Long form video that comes from multinationals has experienced a a substantial step down and our hypothesis is this reflects the fact that these multinationals habit global perspective and to some extent what that seeing and the rest of world affects how willing to pay offs spend money in every country.

James Gordon Mitchell: and the rest of the world affects how willing they are to spend money in every way, including in China. So, you know, those are all headwinds that we think will affect the industry and whether they may affect us, and that you should bear in mind. But I think that it's important not to forget that in the past, there's always been this sort of discussion around whether our advertising revenue growth was constrained by a lack of advertiser demand.

Including in China. So those are all.

Headwinds that we think will affect the industry and with it may affect us.

That you should bear in mind, but I think it's important not to get into Pos that's always been.

It's sort of discussion around whether our advertising revenue growth was constrained by a lack of advertiser demand because of the our lives audience, we are attracting or limited supply and I think what you can see from these results is that when there is such enough supply even if it's inside.

James Gordon Mitchell: ROIs, the audience we were attracting, or limited supply. And I think that what you can see. These results show that when there is a surge in supply, even if it's a surge in supply for a reason, outside our control and beyond our expectations, then our revenue...

In supply for reasons outside our control and beyond our expectations, then our revenue experience as a corresponding up it because fundamentally our appetite and delivers high returns.

Operator: Your next question comes from Han Joon Kim from Macquarie. Please ask your question.

Thank you.

Your next question comes from Hi, Joon Kim on record.

Hyungwook Choi: Great, thank you for the chance to ask a question. I think you mentioned the structural changes that have been happening for the industry, but I wanted to kind of follow up on that. I wanted to see how you guys are thinking about your business plan as well. So I suspect you guys started the year with a certain frame in mind, that the world has changed. So to the extent of things like CapEx, to the things about your business mix between consumer-facing and enterprise-facing, how do you think the contour of your business has changed? How does your investment plans and your financial kind of expectations change alongside that? Well, I think.

Your question.

Great. Thank you for the trends to ask a question.

I think you mentioned about the structural changes that have been happening for the industry.

But I wanted to kind of follow up on that I wanted to see how do you guys are thinking about your business plan as well. So I suspect you guys started the year with certain payment Mike.

The World has changed so to the extent of things like contacts to those things.

Your business mix between them, you know consumer facing and enterprise facing you know how do you think the content of your business. Some changes how does your investment plans and your financial kind of expectations change alongside that thank you.

Well I think.

Martin Lau: I would say we have anticipated the structural change. And I think I have explained it. The structural change was something that everybody sort of anticipated. I think there's an inertia, especially from the side of established businesses, to say, oh, how much investment am I going to be making in order to make the change? And if I want to make the change, it requires money, it requires people, it requires a change, an overhaul of my supply chain, you know, there's a lot that needs to be changed.

I would say we have anticipated.

The structural change.

I think at explained at regular structural change was something that everybody sort of anticipated I think loaders and initiate especially from the side of established businesses to say Oh, how much investment I got to be making in order to make the change and if I want to make the change.

As muddy it requires people you revised a change in my organization and.

Overhaul my supply chain Theres, a lot that needs to be changed or so there's an issue.

Martin Lau: So there's an inertia, inertia, but then I think going through this COVID-19 process, everybody feels that they have to make the change, even though it's painful, it's costly, and it's going to be a bit challenging. So I think that's the structural change point. And as a result, I think, you know, we have not, we have not been experiencing any structural change in our framework of investment because I think the framework of investment was already there. We were, We were first to reorganize our organization in the year of 2018 to establish our CSIG cloud and industrial internet service group, right, you know, so that basically set us up to embrace this challenge.

Inertia, but then I think.

You are going through this call that 19 process than everybody feels that they have to make the change even though it's painful is costly and it's going to be a bit challenging so I think thats.

That's the structural change points as a result, I think we have not.

We have not been.

Still experiencing and structural change in our framework on investment because I think the frame of investment was already there we were.

We were first two to reorganize our organization into year 2018 to establish see ESI G cloud and industrial into that.

The script radio so so that.

Martin Lau: And it's actually because of that that we were able to have Tencent Meeting launched right in the midst of COVID-19 and be able to establish itself as the by and far number one standalone video conferencing tool in China, right?

Basically set us up to two embraces challenge and it's actually because of bad than we were able to have tens are meeting.

Launched right in the midst of of call. It nine shave and be able to its you asked I appreciate sell to be the buy in far number one standalone videoconferencing tool in China right. So I.

Martin Lau: So, I think, you know, from that perspective, there's no structural change in our investment framework, but I think, you know, we're excited that we'll be putting more investments into both the consumer internet as well as the industrial internet in order to drive and embrace the expedited change. Your next question comes from Harry Lu from UBS. Please ask your question. Hi, thanks guys.

I think it'll from that perspective.

There's no structural change you know investment framework, but I think there were excited to about which would be putting more investments into both the consumer internet as well as the industrial into that in order to.

Dr and embrace the expedited change.

Your next question.

Every lu from.

Harry Lu: Yeah, first just to follow up on gaming. I appreciate the idea that as people return to work, then they're spending less time on these games. But at the same time, we also heard comments about how we're excited about some upcoming games. So how do we reconcile those two things?

This past your question.

Hi, Thanks, guys. Yeah first just a follow up on on gaming I. Appreciate the idea that as people returned to work then they're spending less time and needs change, but at the same time.

James Gordon Mitchell: Could some of these new games bring some upside to grossing this year? Or are some of these big games the kind where, you know, we'll take time to build that user base? So maybe we should have some patience with monetization. And then the second question is just a question about the cloud.

I also heard comments about how we're excited about some upcoming game. So how do we how do we reconcile those two things.

Could some of these new games bring some upside to two grossing this year or are some of these speaking to kind, where you know will take time to build that user base. So maybe we should we should have some patients with monetization and then the second just a question on cloud.

James Gordon Mitchell: I appreciate also that with the cloud, you know, as people were at home, a lot of the projects were delayed. But as people go back to work now, I'm still hearing comments about some challenges from management. So I'm just wondering if this is just, you know, as people need some time to put these big projects together, or do we see maybe some of the enterprises being a little bit cautious with cap backs or just some of these bigger budgets?

Appreciate also that with cloud you know that's as.

People were at home a lot of the projects were delayed but as people I'll go back to work now I'm not sure hearing comments about some challenges from management. So I'm just wondering.

If this is just you know as people need from time to put these big projects together or do we see maybe somebody enterprises.

Being a little bit cautious with with cutbacks or just some of these bigger budgets. Thanks.

James Gordon Mitchell: Thanks. I think on the game question, then, you summarized the puts and takes very well, and there's not a lot I would add to it. If you're looking for a synthesis of the two forces and where it nets out, then the reality is that we don't have a crystal ball, and time will tell.

I think on the game question, then you summarized the puts and takes right one and that's not a lot I would add to it if you're looking for.

I think this is of that the two forces and where it nets out at than the reality is that new we don't have crystal ball and time will tell.

James Gordon Mitchell: But we wanted to be clear that on the one hand, we did have this unanticipated surge in use of time spent and to some extent in consumption. Some of our existing games needed to digest and stabilize after that for a little while. But on the other hand, I think that we're very pleased that just as we had the Tencent meeting launch just before the Coronavirus broke out.

But you know we wanted to be clear that on the one and we did have is an anticipated.

So in and use of time spent in to some extent in consumption within some of our existing games.

And he too.

Digest and stabilize after that.

So while but on the other hand, I think we're very pleased but just as we had.

Since that meeting.

James Gordon Mitchell: So on the game side, we have some big.., about to be released and we think, to your point, those games may or may not take some time, and Feedthrough into Monetization, that it's already clear. The critical reception to those, a reception of the IMO, demanding players within the card game genre, had to give fuss to us and shoot us, Your Honor, has already been extremely positive, and your leading indicators, positive leading, future, no matter how quickly the money, In terms of the cloud business, I think you have also pointed out the right points, which is, number one, as people return to work, then a lot of these projects, which have been put into a halt, would be restarted.

Launch just before.

The current environment for our accounts so on the game side, we have some.

Big interesting exciting.

Games that have already been release or about the release, John we think to your point.

No its gains may may or may not take some time to.

Feature into monetization.

It's already clear Dusty.

The critical reception to those games on the reception of the most.

Demanding players within the card game, Sean or what's the competitive first person shooter genre has already been extremely positive, which show you leading indicators positive leading indicators for the future and lot of how quickly the monetization flows through.

In terms of the cloud business I think with also pointed out that the right point, which is number one as people return to work.

Then a lot of these projects, which have been put into a hard would be restarted and it would actually took some time right for maybe the bidding process, maybe the negotiation to contract to maybe sort of implementation in order afforded to enter into production and revenue generating phase.

James Gordon Mitchell: And it would actually take some time, right, for maybe the bidding process, maybe the negotiation of the contract, maybe sort of the implementation in order for them to enter into production and revenue-generating things. And two, I think, from the enterprise's perspective, I think... There is a little bit of...

And curious I didn't know from from the Hello prices perspective, I think.

Martin Lau: I would say coming back to the drawing board and revisiting the business plan for some of the businesses which saw their business impacted during COVID-19. But I think the good thing is, I think Chinese economic activities have returned, and rebounded quite nicely right now, so when that happens, then when these businesses start to see their business recover, and we feel that they would then be able to normalize their business plan, and at the same time, because they have gone through the COVID-19 shutdown, their, You know, their plans for the future in terms of digitization will probably be speeding up. So I think there will be a period where everybody needs to restart. And There will be a period of hesitation.

There is a little bit of.

I would see come.

Coming back to the drawing board and really visiting the business plan for some of the businesses, which saw their business impacted during the call that 19, but I think.

Good thing is I think that China is the economic activities have returned.

Rebounded quite nicely right. So so.

When that happens then when these businesses start to see there.

This is recovered and we feel that they would then be able to.

Normalized their business plan and at the same time, because they have gone through the a corporate 19 shutdown.

The.

They fear.

Planned for the future in terms of Digitization will probably be be speeded up so I think where there will be a period, where everybody needs to restart and there will be period of hesitation, but then.

Martin Lau: But then, we hope, and I will believe that over time, the future digitization wave will start to... Your next question comes from John Choi from Daiwa Capital Markets. Please ask your question.

We hope and believe that overtime.

The.

The future.

Digitization wafer starts.

Take off.

Your next question comes from Georgia Toy from Daiwa capital market. Please ask your question.

Hyungwook Choi: Good evening, and thanks for taking my question. My question is on FinTech services. It seems like you guys have done a pretty good job in terms of, you know, stabilizing the margins. But, you know, going forward, how should we think about profitability given that, you know, are we going to continue to be aggressive in marketing or, you know, with the COVID-19 situation, how should we think about cost control and how this will offset with the, you know, further diversified revenue stream?

[music].

Good evening on that thanks for taking my question.

She is on the physics services on seems like you guys have been a pretty good job in terms of omni ops arms stabilizing the margins going forward, how should we think about profitability. Given that you know are we going to continue to be aggressive on their marketing or no with the combination of situation any to how should we think about the cost control and harvest.

Hyungwook Choi: And just a quick follow-up on the mini-programs, management did mention 400 million daily active users. How has this really kind of reinforced our other parts of the ecosystem like payments or advertising during this period of time? Thank you.

Offset what the further diversified revenue stream and just a quick follow up on the.

On the.

Okay and I imagine did mention is about 400 million on daily active users.

Hi, this really kind of reinforce our other parts of ecosystem that like lifelock teammates or advertising and during this period. Thank you.

Martin Lau: In terms of fintech services, If you look at the changes through the lockdown right now, during the lockdown offline transaction volume pretty much nose dived, but it didn't really hurt our profitability. One reason is that offline services were low margin.

In terms of Fintech services.

If you look at the.

The changes through.

The lockdown, they're doing a lot.

Offline transaction volume.

So much nosedived, but.

It didn't really hurt.

Stability one is the offline.

Martin Lau: At the same time, there is a lot of marketing that's related to getting the footprint out on the offline side. So when you have a lower transaction volume, we also didn't have as much marketing expenses, and that pretty much balanced out each other. I think when business returns to normal, right, you know, then they will have pretty much the payment volume returning to the same level as last year's December level.

Services, where.

Low margin at the same time their award at marketing that's related to.

You are getting the footprint out on the offline side. So when you.

Have lower transaction volume we also.

I didn't have as much marketing expenses and that pretty much balance each other I think when when the business returned to normal idea within.

We will have a pretty much the payment volume returning to the same level as last year's December level and.

Martin Lau: And at the same time, I would say we will be starting to conduct more marketing activities too, right, so that would be washing out each other pretty much. So, this pretty much reinforces our pretty consistent message, which is, especially on the offline payment side, it's helping us to build payment as an overall infrastructure. So we're not, Uh, we're not, uh, too much in a rush to create a profit out of it, but instead, it's important for us to build market share and build user behavior, as well as coverage of the merger.

At the same time I would say, we'll be starting to come that more marketing activities too right. So that will be washing each other.

Pretty much so so.

This is pretty much reinforces our.

Our.

Pretty consistent message, which is especially on the offline payment side, it's helping us to Butte payment has an overall infrastructure. So we're not.

We're not too.

Much in a rush to to create a profit out of it but instead, it's important for us to build market share and so to be able to user behavior as well as coverage of the merchants.

Martin Lau: Um, in terms of, um, the mini-programs, I would say, if you look at the mini-programs, they are a very basic infrastructure for our ecosystem, right? The mini-programs actually help us to establish relationships with a lot of service providers, and they also help the service providers to establish relationships with a lot of customers. And I think the ecosystem just gets stronger and stronger as we continue to build out the mini-program infrastructure, and it was actually somewhat expedited during the COVID-19 pandemic as well. And we would see, over time, it would actually help our payments. It would also help our advertising business. But it's not going to be an... immediate, direct impact.

In terms of.

[music].

The mini program. So I would say if you look that many programs. It it is a very basic infrastructure for our ecosystem.

It really programs actually help us to establish relationship with a lot of service providers and it also helps to service providers to establish.

Relationship with a lot of customers and I think the ecosystem just gets stronger and stronger.

As we continue to build out to the mini program infrastructure and it was actually somewhat expedited Ah during the call that 19 endemic as well and so we would see over time, but it would actually help our payment. It would also help our advertising business.

Alicia Yap: But very clearly, when businesses are running more of their services and getting more of their revenue and serving more of their customers on mini programs, then they will be more incentivized to run ads on our overall platform in order to drive more traffic into the mini program. And I think over time, it has also helped us to build stronger relationships with these businesses so that we can get the cloud business better. And we also provide soft services to them, be it data analytics, be it helping them to acquire traffic, and be it helping them to establish closer links with the customers. Your next question comes from Alicia Yap from Citigroup. Please ask your question. Hi,

But it's not going to be.

Immediate direct impact, but a very clearly when businesses.

Our running more of their service isn't getting more of their revenue and serving more customers amidi programs than they would be more incentivized to two.

Well pads on overall platform in order to drive more traffic into the many programs.

And I think over time.

So help us too.

Build stronger relationship with these businesses are that we can get their cloud business better and we also provide SaaS services to them a big data analytics admitted to helping them to acquire traffic and be at helping them to to establish a closer link with their customers.

Okay.

Your next question comes from Alicia Yap from Citigroup. Please ask your question.

Alicia Yap: Hi, good evening management. Thanks for taking my questions and also congratulations on the strong set of results.

Martin Lau: I saw a follow-up on the advertising. I think with retailers leveraging the mini programs, should we actually see an increase in the demand for online app opportunities within the mini program or official account to help mitigate some of the headwinds that we see from the multinational that you mentioned? And also the in-feed ads you mentioned experiencing some recovering growth for the media ads. So is that implying media ads will also come out from the declining trend, especially with the easier year-over-year comparison as we head into the second half? Quickly, any last thoughts on the rationale and synergies of the recent investment in Afterpay and the team quadrant? Thank you.

Hi, Good evening management, Thanks for taking my questions and also congrats on just trying to set up any thought I saw a follow up on the advertising I think.

Weve retailer collaborating than any pro blend.

Should we actually see over time the increase in the demand for all night opportunity, beating them any program official account to help me understand some of that means that we see from the multinationals that you mentioned and also there.

Oh, you mentioned at Stephens, Inc.

Recovering growth for the media assets.

That imply media assets to also come out from the declining trend, especially with the easier yeah. What your comments, we got into the second half.

Quickly and the last thought on the rationale on synergies on the reason enough long enough to pay and that team.

Martin Lau: Well, the first part is, I think, related to the question before, which is many programs benefit advertising. And I'll take that question, which is, I think it would definitely benefit advertising, but it will be more of a benefit in the longer term rather than the shorter term. Because, you know, it's a little bit like an infrastructure that you would have the retailers spend a lot of effort in terms of building their expertise in mini programs.

Thank you.

Well.

First part is I think related issue.

The question before which as many programs.

Benefit for advertising I'll take that question, which is I think.

It would definitely benefit advertising, but it will be more like over the longer term rather than shorter term because.

Yes.

It's a little bit like infrastructure that you would have the.

Retailers for spending a lot of effort to it in terms of beauty their expertise and really programs and.

Martin Lau: And it's not just the mini-program part, but also finding ways through which they can drive traffic to the mini-programs, right? In the past, a lot of them relied on offline stores and then having people to add to the official accounts. And then basically left it at that.

It's not just the mini program property also.

Finding ways to which they can try to drive traffic to the many programs right in the past.

A lot of them rely on offline stores, and then having people to add to the official accounts and then.

James Gordon Mitchell: But during the COVID-19 lockdown, it looks like a lot of the direct sales effort by their shopkeepers by leveraging the social network was actually very effective. They also started to leverage Life Broadcast as a way to acquire customers, so a lot of these new ways through which they can acquire traffic and attract users, be it new users or existing users, have been developed, and they need to start building these capabilities.

Basically leave it at that but during the quarter 19, a lot data it looks like a lot of direct sales effort to buy their shopkeepers by leveraging the social network.

Actually very effective they also have started to leverage.

A life broadcast as a way to acquire customers. So a lot of these new ways to which they can acquire traffic and attract users.

The new users or existing users have been developed and that they need to start during these capabilities are the ones. These are built then they could dedicate a portion of the corporate resources to start bringing people into transaction through many programs, which is something that.

James Gordon Mitchell: So once these are built, then they could dedicate a portion of their corporate resources to start bringing people into transactions through mini programs, which is something that they own themselves, which is very attractive for them when they think about the overall omnichannel mix. And when that happens, then I think they will start thinking about, oh, we actually need to put in more advertising so that we can drive incremental traffic to the mini programs.

They old themselves, which is very attractive for them, what they think about the overall omni channel mix and when that happens then I think there they would start thinking about oh, there, we actually need to put in more advertising to that we can drive incremental traffic to many programs. So I think it would take some time before we see the impact but still.

James Gordon Mitchell: So I think it would take some time before we see the impact, but the structural migration to what I call a mini-program would definitely help our advertising going forward. Alicia, on your question about media advertising, then I think you're asking about the second half of the year and... We're already somewhat swimming against the tide by talking about current quarter conditions at a time when many companies are not guiding at all, so I'll restrict myself to just talking about the second quarter because the second half... [inaudible] While the in-feed is growing quickly and is an increasing proportion of the total, historically, the pre As I mentioned in reply to an earlier question, a big double-digit chunk of that advertising comes from multinational brand advertisers who, unfortunately, are reviewing or reducing their spending globally.

True.

Migration towards really program will definitely help our advertising going forward.

Now the Sean your question about meeting our advertising then I think you're asking about the second half of the around.

You know, we've already somewhat swimming against the tide five by talking about current quarter conditions at a time when.

Many companies.

Not guiding adults so our restrict myself I just talking about the second quarter because in the second half is still up some way away, but as far as the second quarter is concerned and media rot Tae Sik, then technically we still have.

Thank you difficult comparison period year on year and more importantly, fundamentally if you look at a video advertising revenue mix lobby in fee is growing quickly and it's an increasing portion of the total historically to ponder in Savannah video advertising was the sponsorships and the 15 seconds fought ads and as I mentioned in replied.

An earlier question, a big double digit chunk of that appetite from multinational brand advertisers through unfortunately are reviewing all reducing that spending globally. So therefore, you should expect the media advertising revenue to be under pressure in the second quarter.

James Gordon Mitchell: So, therefore, you should expect media advertising revenue to be under pressure in the second quarter of the year. Your next question comes from Alex Yao from J.P. Morgan. Please ask your question.

Yeah.

Thanks.

Your next question come from and that you all from JP Morgan. Please ask your question.

Alex C. Yao: Thank you, management, for taking my question, and congratulations on a strong quarter. My first question is regarding your broader digital entertainment strategy. Based on our observation, there seems to be a change in your broader digital entertainment strategy, evidenced by the recent management change in China literature. Can you share with us your latest thoughts on Tencent's broader digital entertainment strategy? And then secondly, I believe you guys in the past have discussed strategies to increase payment monetization. Do you still plan to do such monetization? increase given the COVID-19 outbreak. Thank you.

Thank you management for taking my question congrats on a strong quarter.

First question is regarding your broader digital entertainment strategy.

Based on hours or observation, there seems to be a change in go a broader digital entertainment strategy as evidenced by the recent management change in China literature.

Can you share with us your latest thoughts on cans in the broader digital and the 10 minutes strategy.

And then secondly I.

I believe you guys in the past to discuss strategy to increase the payment monetization.

Do you plan to do such a monetization.

The increase given to cover 19 outbreak. Thank you.

Martin Lau: Well, in terms of the digital entertainment strategy, I think we have always been pretty consistent. We feel that digital entertainment is a very important part of our overall business. We have a number of different platforms, and if you look at the broad strategy, right, you know, we have always been focused on high quality, high fidelity, IP-oriented content. And if you look at the digital entertainment strategy, I think the key change over the past two years was actually the endorsement of short and mini videos, and that's not really related to Chinese literature.

Well in terms of the digital entertainment strategy I think there we have always been pretty consistent and do we feel that.

We tissue entertainment is a very important part of our overall.

This and we have a number of different platforms and if you look at.

The the brought strategy right you are we.

I have always been.

We are focused on on a high quality high fidelity IP oriented to content and.

If you look at that it did you entered in the strategy I think the key change over the past.

Martin Lau: But I think, you know, in the case of China Literature, it is really consistent with our overall strategy. And the management change there is really because of the fact that the founding team of China Literature had really started the entire literature platform business a long, long time ago. And they had been acquired, and then they left, and then they started again, and then they acquired, they reacquired the business that they sold. And it had been a long time.

Two years was actually sort of your endorsement short and medium videos.

And that's not really related to China literature, but I didn't know indicates a China literature is.

Really consistent with the over a strategy and what that the management change there [noise].

Because of the fact that.

The founding team of trying to literature have really started the entire literature platform business long long time ago radio and they have been acquired and then the lab to and then they they started again and then they acquired there.

Martin Lau: So ultimately, they basically decided that they wanted to take a rest, and that's why they passed on the passion to people at Tencent. And that's why, when we pick it up, right, you know, there's a transition, and it's a very smooth transition.

They we acquired the business episode.

As had been a long time, so ultimately they basically decided that they want to take a rest and thats why they passed on to bastion too.

People at 10 cents and.

And that's why when when we pick it up right there, there's a transition and it's very smooth transition.

Martin Lau: What we wanted to do was actually to continue to drive the core value of Chinese literature going forward. One is to enhance the value of the writers' work. We want to make sure that the value of the writers' work is respected, and they will receive monetization, and part of it is actually fighting piracy. Part of it is actually helping them to get more users and also helping the head IPs to get monetization through monetizing the IPs and extending the IPs into ancillary areas such as anime or videos or games.

What we wanted to do is actually too.

To continue to drive the core value of China literature going forward, one is to enhance the value of the writers work. We once you make sure that the value that value. After writers word a respected and they will receive the monetization and part of is actually.

Fighting piracy part of it is actually.

Helping them to get more users and also.

Helping but had IP is to.

Got to monetize issues to.

To.

Monetizing the high piece and extending I piece into ER and distillery areas, such as Ah, Ellie maes or videos or games.

Martin Lau: And at the same time, we would want to explore a free reading model, but that would only be with the writer's consent. And I think, you know, if this model was appealing to some writers, it would not be appealing to some other writers, especially for up-and-coming writers. I think the free model supported by ads would be an attractive model for them to get their initial audience and get their writing skills up.

At the same time, we would want to explore free reading model, but that will be only under the writers content and I think this model will be appealing to some writers would not be appealing to some other writers, especially for the upcoming writers.

The fee model supported by ads would be attractive model for them to to get the initial audience.

Martin Lau: But then we actually support, as you can see, right, you know, a lot of the businesses that we run, be it video and music and games, we always have a free model to attract a lot of users, but then there will be a paid model, right? So I think for China Literature, it's a little bit the reverse. We only have the paid model. So if we had the free model, ad-supported plus the paid model, I think, you know, it would actually be creating even more value for the writers.

And get kept their writings goes up but then.

We actually support as you can see if I did a lot of the business that we run be it the video and music and games, we always have a free model to attract that while users. But then there will be a paid model right. So so I think.

For China literature is limited to reverse we only have to pay model. So if we have to free model at support a plus the the the pay model I didn't hear it would actually.

The creating even more value for the writers.

Martin Lau: We feel we can also have a much tighter integration between Chinese literature and our traffic platforms and our video platform and our games business, and that would be overall positive for the core value proposition of Chinese literature. And that would create a lot of value for both the writers as well as the consumers. I think on the second question about fintech monetization, as you can see from this quarter's results, we have a number of different financial services within our recurse system, including, you know, the... Those various business lines have different margin profiles, and you know we are taking a long-term approach of, you know, progressing.

And.

We view.

We can also have a much tighter integration between China literature.

And our traffic platforms and our view.

Platform and our games business and the overall positive.

For the core value proposition to China literature, and that would create a lot of value for both the writers as well as the the consumers.

I think on that second question about Fintech monetization.

As you can see from this quarter's results, we have a number of different financial services or what do you know I read a system, including the victim.

Core payments, including wealth management business lending business and getting Adrien MACI businesses.

No its various business lines have different margin profiles on T. we.

Taking a long time approach of progressive de layering on incremental profit streams over time.

It doesn't feel the need to do everything well, which means that when when conditions are extremely benign, we're not going to grow at a hyper growth right, but on the other hand when conditions are challenging as they were in the first quarter. We can actually in a sustained what we view as a decent price right and also sustain what we view as up.

Operator: Operator, in the interest of time, we will take three more questions.

Attractive margins.

Eddie Leong: Your next question comes from Eddie Leong from Bank of America. Please ask your question.

Operator in interest sometime where they take same old question.

Your next question comes from these young from Bank of America. Please ask your question.

Eddie Leong: Hey, good evening guys. Have any questions related to...

Martin Lau: It's onwards to many more programs, but perhaps in a bigger scope.

Hey.

Hi, good morning, guys.

Having questions we leave it on wants to many programs.

Martin Lau: about Weixin as a whole. We have been seeing the development of features within Weixin probably supportive of e-commerce transactions, right? Live broadcasting, CRPT, et cetera. So I'm just curious about the potential of Weixin becoming more prevalent in the e-commerce industry chain going forward, and how would that potentially affect the positioning of Weixin versus some of your e-commerce sites.

Tops in it because scope.

Are you seeing Oh, we.

We have been seeing development. All feature is obviously seen called my supportive to E comm those transactions right.

Like most costly.

She option peak Cetra. So I'm just curious on your thought after Potanin show up where you see becoming more Pete they either in the E commerce industry change going forward and how would that potentially affect the positioning of where you see.

Martin Lau: versus some of your e-commerce partners. Thank you.

Some of you like ecommerce our partners. Thank you.

Martin Lau: Um, I think, You know, the mini programs, as I said before, is an infrastructural too, and it actually helps all kinds of different services to connect, themselves with consumers. And obviously, a big part of economic activities is actually in the form of retail, and selling of products. So that's why many programs thus have a affinity for serving these retailers and people and brands. Now, Therefore, if we look at e-commerce in the U.S., for example, right, you can see e-commerce platforms account for a certain percentage of total e-commerce, but then more than 50% of the e-commerce activities actually happen with the brands going directly to the consumers, and that's very, very low in China, and we felt that it's a combination of the fact that a lot of brands in China are nascent brands, so it takes time for them to build up their brand franchise, but also there is a big part of it, which is the lack of capabilities, right, you know, to move online.

I think.

The many programs as I said before is the infrastructural.

Two and actually helps.

All kinds of different services to connect.

Themselves with consumers and obviously, a big part of economic activities is actually in the form of of retail and selling of products right. So that's why media programs that have.

A affinity for for serving these retailers and people who and brands.

Now.

For if we look at.

<unk> ecommerce in the U.S. for example that you can see.

Ecommerce platforms.

Accounts for a certain percentage of total.

Ecommerce, but then.

More than 50% of the ecommerce activities actually happened with the brands going directly to to consumers and that's very very low in China, and we felt that it's a combination of the fact that.

A lot of brands in China, I made some brands. So it takes time for them to do it up there.

Brand franchise, but also a there is a big part of the which is the lack of.

Martin Lau: And to some extent, it's also harder in China to do that, because in the US, most of the sales, a lot of the sales are actually through websites, which are probably more traditional and easier to manage.

Capabilities right, you would shoot to move online and to some extent is also harder in China that you do that because the into you as most of the.

Sells a lot of the cells is actually a through web sites, which are probably more traditional and easier to manage but if you are actually doing it on.

Martin Lau: But if you are actually doing it on mobile phones, it's probably more difficult, especially if you want to develop a mobile app which sells a particular brand. It's going to be very, very difficult to reach the consumer, And that's where mini programs come into play. And we actually want to help a lot of brands and retailers to establish an online presence which they own, they control, and they can actually get a direct connection to their users, and they can also use to acquire new users online. So I think that's the reason why we are building up a lot of tools to facilitate that.

Mobile phones is probably be more difficult, especially if you want to develop a mobile app, which sells a particular brands. It's got to be very very difficult to get the consumer recognition and even remembrance and that's where our media programs come into play.

And we actually want to help a lot of the brands and retailers to establish and online presence, which they all the control and they can actually get to directly.

A connected to their users and they can also use the acquired new users online.

So I think that's the reason why we actually put a building up a lot of tools to facilitate that now in terms of how we feel about a lot of big Investee companies, which are also engaged in ecommerce platforms, we think that.

Martin Lau: Now, in terms of how we feel about a lot of the investee companies, which are also engaged in e-commerce platforms, we think that what we do here by building a stronger e-commerce ecosystem within WeChat is actually going to be synergistic with them. Because if there are more users who are more used to buying products and services on WeChat, then the spillover effect will be bigger. And people would also be buying from the e-commerce platform.

What we do here by building a stronger ecommerce ecosystem within a which is actually going to be synergistic to them right because.

If there are more users who are more used to buy a products and services on on we Chad.

In the spill over effect will be bigger and people would also be buying from the ecommerce platform. So if they're buying from a particular brands that they will be going to the many programs if they say oh I want to.

Martin Lau: So if they're buying from a particular brand, they will go to the mini programs. If they say, oh, I want to go take a look at a category, then they will go to the platforms that are working with us. And if the consumer habit is actually going to WeChat to look for products, that will be good for everybody. Your next question comes... Alright, your next question comes from Binnie Wong from HSBC. Please ask your question.

Go take a look at a category than they would be going to the the platforms that are working with us and if at the consumer habit is actually coming to reach out and look for products that will be good for everyone.

Oh.

Your next question income.

Your next question come from Binnie Wong from pitch activity.

Operator: Good evening, management. I would like to seek your thoughts here on payment and the overall margin. As Tencent competes more in higher-margin revenue streams like wealth management and lending, where our close competitor has the first mover advantage and is also committed to growing these streams of revenue, what is our competitive edge here to gain share? And presumably, as there's savings in overseas marketing spend maybe this year, is it realistic to say FinTech margins should improve this year overall?

My question.

[noise] the evening management I would like you see Gil sauce here on payment and the overall margin as tens and compete more into higher margin revenue streams like Ralph wealth management and lending a way all close competitor has done first mover advantage and also committed to also grow our peace treaties.

Operator: And if we think about on a group level, I think management highlighted near-term challenges in advertising and the cloud, and then we'll keep on investing in cloud content, and then maybe make a shift to oversee gains of lower margin. But yet, there are some positive drivers in margins, say expansion into higher margin payment revenue streams, along with public role-based gains revenue. Do you see the margins, the positive drivers? Hi Binnie. Thanks for your question. We will address those questions first. ,,,

Well, it's all competitors attached to your education, and presumably it stays like Oh savings in overseas marketing spend maybe this year is it realistic to say the scene that margins shit in Pittsburgh, Yes, if I'm wrong and if we think of all on a great. That's all right I think management highlighted our near term challenges.

Advertising and clocks and then we'll keep on investment into 'em calls content and then my connection to oversee came lower margin, but yet there are some positive drivers in margin say expansion into higher margin payment revenue streams as long as like probably go past bean crop paints revenue do you see the margins how I suppose if that's true.

Binnie Wong: Um, I, I think... You're thinking we don't think in terms of a blended margin. So, that's a very difficult question to answer because that's not the way we think about our business, right? You know, our business is always thinking business by business, product by product, you know, how do we expand the product itself? And, and, you know, if the product actually sort of can generate incremental users and value, and then over time, there will be monetization, and then there will be a margin, and the company, each business line as well as the company overall is actually an aggregation of such drivers.

Hi, Thanks, a question.

Oh, we were just his questions right. Thank you.

I.

Hey.

They are thinking we don't think in terms of a blend that margin so.

That's a very.

[laughter] question to answer because that's not the way we think about our business right you know business will always thinking from.

Your business by business product by product, how do we expand.

The product itself and there if the product actually sort of you can can generate.

Incremental users and value and then over time, there will be a monetization and then there will be a margin and.

The company each business line as well as the company overall is actually an aggregation of such drivers so it.

Binnie Wong: To some extent, we can't answer the question that you asked, but I will try to answer your question in relation to FinTech, and you probably can get a sense of how we think about it. In terms of FinTech, I think, you know, there are a number of different business components in there. The first one is actually the payment platform. And even within the payment platform, there is a component that is online, and there is a component that is offline.

To some extent we can answer the question that you asked but I would try to answer your question in relation to Fintech and you probably so you can get a sense of how we think about it so.

In terms of the Fintech I think you know there are a number of different business components in there or the first one is actually the payment platform and either within the payment platform. There is a component which is online theres a component, which is off line and I talked about the offline.

Martin Lau: And I talked about the offline part being, a relatively infrastructure type of business, right? It doesn't really generate a lot of profits, per se, because we, we have very little margin there to start out with the monetization scheme. And at the same time, we're actually sort of putting in a lot of marketing and promotional costs. But that helps us to build the use case and get a lot of users, and that would help us to monetize the online traffic, and it also sustains a very strong wallet presence, right, you know, so that it helps us to build our other FinTech businesses, which you talk about, which are wealth management and lending.

Part being.

Relatively infrastructure type of business I do it doesn't really is generally a lot of its not run to generate profit per se because.

We.

We have very fee margin there to start out with the monetize issues feed and at the same time, we actually sort of you're putting a lot of marketing and promotional costs.

But that helps us too.

Bill use case, it and get a lot of users and that would help us to monetize the online traffic and and it also sustained a very strong.

Wallet precedence right so that it help us to build our other fintech businesses, which you talk about the which is wealth management and lending and within wealth management lending right. The way that we think about.

Martin Lau: And within wealth management and lending, right? I think the way that we think about these businesses is not that, oh, we want to grab market share; we want to build scale. This is not the way we think about it.

These businesses are not bad Oh, we want to grab market share we want to build the scale. This is not the way we think about it the way we think about it is actually we want to the best in class in terms of product capability in terms of consumer value in terms of risk management and.

Martin Lau: The way we think about it is actually that we want to build the best in class in terms of product capability, in terms of consumer value, and in terms of risk management. And for example, in wealth management, it's very easy to say, oh, I just want to build scale, and as a result, I want to sell as many wealth management products as possible. And believe it or not, usually the wealth management product that sells the best is actually the most popular.

For example in wealth management right.

It's it's very easy to say Oh, I, just want to build scale and as a reason I want to sell as many wealth management products as possible and.

Believing that I'm not ready are usually the wealth management products is the cells. The best is actually the most toxic.

Martin Lau: And if you go down that track, right, you know, then we... We would not be fulfilling our promise to our users. So that's why I think the way we think about wealth management is like, how do we create a system in which we have a lot of user education? We have the best product, to our best knowledge, in the product selection process. And we don't offer all the products. We only offer the products that we feel are high quality.

And.

If you go down to attract what you're done then we.

We will not be fulfilling our our our promise to our users right. So that's why I think the other way we think about wealth management is I guess, how do we create a system in which we have a lot of a user education aware of the best product to our best knowledge to a product selection process and if we don't offer.

Martin Lau: And then we provide a lot of risk explanation to the users. And as a result, hopefully, over time, the users are not going to be all the users in the world, but the users who are willing to learn, the users who want to understand the risk that they're buying. And eventually, they can grow with the platform. These are the people that we want to serve.

Other products, we will lead off with the products that we felt a high quality and then we provide a lot of.

Risk.

Explanation to the users and as a result would hopefully overtime radio the users are not going to be all users in the world, but the users who are willing to learn that users who want to understand the risk that they're buying and eventually they can grow with their platform. These other piece.

Martin Lau: And ultimately, it's a great wealth management platform. Likewise, on lending, you can actually always lend a lot of money outside. But then whether you can collect is a very big question mark.

With that we want to serve and ultimately it's a great wealth management platform.

Likewise, our lending you can actually sort of will always lent a lot of money outside right. But then whether you can collect is a very.

Martin Lau: And you might also say, oh, we just want to charge more interest so that we can cover all the costs. But this is not the way we think about it. We actually want to be exposed to high quality risk and high quality credit. And as a result, we may not be investing as much in scale, but we definitely sort of have got the best credit in the market. And I think, you know, as we see in COVID-19, it's actually stress testing our FinTech services.

Big question, Mark and and you can also say Oh, we just want to charge more interest. So that we can cover on the cost there's a lot. The way, we think about it actually want to be exposed to.

High quality risk.

And the credit a high quality credit and and as a result would till we may not be expanding as much in scale, but we definitely sort of he has got the best credit in the market and I think you asked we see in carbon 19 or anymore. We it's actually stress testing, our fintech services and.

Martin Lau: And I think, you know, we have passed the stress test. And that's how we think about these things. It's a long-winded answer to your question, but I hope that you get a taste of how we think about our... Your last question comes from William Packer from Exchange BNP. Please ask your question. Hi there, thanks so much for taking my question and congratulations on the strong results.

I didn't get where pass the stress test and ER and that's how we think about these businesses.

It's a longwinded answer to your question, but I hope that you get a taste on how we think about how businesses.

Your next question comes from William Petco from Exane D. N P. <unk> ask your question.

Hi, there. Thanks, so much for taking my question on congrats on the strong results Firstly, you've talked about video games consumption normalizing as people return to work for you also talked about structurally expanding the long term of audience.

William Henry Packer: Firstly, you've talked about video game consumption normalizing, return to work, and structurally expanding in the long term. Is there any color or KPIs you could help us with on gaming engagement post lockdown for a better feel of those long-term changes? And then just a quick one on the advertising side, the color you've offered is helpful. Are there any underlying competitive shifts in the digital market? AdMarketShare, which we should be thinking about. Well, why don't I start with both of them and, you know, might as well have someone else make a supplement.

Is there any color or Cape yards, you could help costs on gaming engagement post locked down.

For better feel of those long term changes.

Just a quick one on the appetizing side.

The color you've offered is helpful is there any underlying competitive shifts in the digital AD market share.

We should be thinking about thank you.

Oh, why don't I start refer to them and someone else made supplement, but I think on the video games.

Question and specifically.

The comments about the structure and opportunity for video games than.

James Gordon Mitchell: But I think of the video game. Thank you. There are various entertainment formats, including radio, television, magazines, and so forth. And then there's interactive entertainment, which is what we call interactive entertainment. We have an interactive entertainment group within Tencent. And the reason why it's called interactive entertainment is because, to some extent, what we think of as video games are actually sort of a superset rather than a subset of entertainment activities.

In addition, our various.

Entertainment format, including.

You know radio television.

Magazines and Saar for and then that interactive entertainment, which is what we call video games, we have a interactive entertainment group within 10 cents and the reason why put interactive entertainment is because to some extent what we think of is video games are actually sort of a super sat rather than a subset of entertainment activities and that's also.

James Gordon Mitchell: And there are all sorts of, you know, entertainment activities that were traditionally passive and linear in nature, which, you know, we think can be enriched as they become interactive and immersive in nature. And so, you know, the earliest video games were effectively moving activities like solitaire or chess online, but over time, you see more, you know, team-based competitive social activities moving online.

It says in.

You know entertainment activities that would traditionally a passive and linear in nature, which we think can be enriched as they become interaction and in must've in nature and so at the audio video games were actively moving activities like solder Taro chats online, but over time, you see more team.

James Gordon Mitchell: And I think that, you know, during this period, you see more and more people engaging with interactive entertainment on a broader palette, meaning that, for example, you know, people who historically watched physical sports events are now watching, you know, Formula 1 or basketball, have become powerful sports in their own right in the past couple of years. So that represents a structural expansion in the market. Another example would be that historically there's a gigantic live entertainment business around music concerts and unfortunately those are not occurring at the moment, but what is happening, if you play Fortnite, it's fairly regular now, music concerts within Fortnite, So to some extent, you know, the time people are spending in the music concerts in fortnight or the time they're spending watching, racing car drivers playing a Formula One video game, it is not replacing the time they were previously spending playing in World of Warcraft.

Nice competitive social activities moving online and I think that at during this period, you see more and more people engaging with interactive entertainment on a on a broader pot, meaning that for example, and people who start watch.

Physical sports events, and now I'm watching affirmative auto basket all in all other sports side, and then any sports format often by the Formula One Dreyfus over the basketball professional players alongside watching game side, you know league of legends that become a powerful sports and they run right in the past couple of years, so that represents a structure.

Expansion in the market. Another example would be that historically that as a gigantic.

Live entertainment business around music concerts.

On $40 and not apparent at the moment, but what is happening if you play fortnight is fairly regular now.

The conference within fortnight, we've tried to start with dip.

With a number of out of stars recently endorsement tracking in a gigantic audiences and start to some extent.

The time people are spending in the music concerts in fortnight, all the time that spending watching right.

Right. Some heidrive is playing a formula one video game is not.

James Gordon Mitchell: It's sort of supplementing that and expanding the breadth of interactive entertainment into new and newer, broader entertainment categories. So that's an example of structural expansion in a qualitative sense, and then in a quantitative sense, we have seen that for some of our games, particularly for the more team-based competitive games, the audience is now structurally larger than it was going into this situation. So the time spent per user is normalizing downward because people are getting busier, So that's the video game question.

Replacing the time they have a previously spent in saying well.

Sort of supplementing dot and expanding the.

Brett if the interactive entertainment into a new and newer broader entertainment categories.

So that's an example of a structural expansion in a quantitative sense and then any quantitative sense, we have seen some of our games optically for that more team based on competitive gains.

Do you sense now is structurally larger than it was going into situations. So the time spent a user is normalizing downward because people are getting busier in China in particular, but the number of people who found Isa attractive forms of entertainment is broader than it was in the past.

James Gordon Mitchell: With regard to the advertising question and the competitive landscape, I think our view is that we've always been highly competitive within the Chinese online advertising industry by virtue of our traffic and by virtue of the premium nature of some of our content. What's changed in the last year or so is really that we've enhanced our technology. I think one of the best proof points for that is the very rapid growth, the more than doubling in revenue year on year in our ad network, other people's inventory.

So that's on the video game question with regards to the advertising question and the competitive landscape and I think op units.

With always being highly competitive within the China online advertising industry by virtue of high traffic driver.

Ah the premium nature of some of 'em horns hands or what's changed in the last year, our service ready that weve enhanced our technology and I think one at the best proof points that is the very rapid right into more than doubling in wrapping up year on year in our AD network business, because as you know yeah network businesses.

James Gordon Mitchell: It's not directly tied to whether Wei Xin has a white collar user base. We're running three or four ads per day on Weixin. It's tied to how competitive, on a real-time basis, our serving, and our target, versus the other companies providing ad networks in the market. And so the fact that our ad network business was actually the biggest contributor to our ad revenue growth in recent months, I think speaks to the fact that our ad tech capabilities are now more competitive than they've ever been.

It's other People's inventory, it's not direct t. types.

Oh, My Gosh in house, and White collar user base on what we were running three or four hours a day inflation, it's tied to how competitive on a real time basis are not something our AD targeting as fast as the other companies providing networks in the market and so the fact that are out of network business was actually up.

Biggest contributor to our AD revenue fraud.

In recent months I think speaks to the fact that speaks to the reality that our AD tech capabilities and now.

Operator: Thanks, James. We are now closing the call. If you wish to check out the press release and other financial information, please visit the IR section of our company website at www.tencent.com. A replay of this webcast will be available soon. Thank you, and see you next quarter.

More competitive than theyve ever been.

Thanks, James or we are now closing the call. If you wish to checkout press release, it added financial information sensitive to the IR section of our company website at Www <unk> Tencent Dotcom, we pay off the swap cost will be available. So thank you again next quarter.

Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect your line.

Ladies and gentleman.

This concludes today's conference call. Thank you for participating you may now disconnect your lines.

[music].

unknown: Thomas Chong, William Packer, Robin Zhu, Unknown Executive, Alicia Yap, Ronald Keung, Kenneth Fong, Hyungwook Choi, Huateng Ma, Tencent Holdings William Packer, Ronald Keung, Tencent Holdings [inaudible] Tencent Holdings Tencent Holdings Tencent Holdings