Q1 2021 Tencent Holdings Ltd Earnings Call
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Good day, and thank you for standing by and welcome to Tencent Holdings Limited 2021 first quarter results announcement conference call.
Well at this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask the question. During the session you will need to press star 1 on your telephone. Please be advised the today's conference is being recorded if you require any further assistance. Please press star zero.
I'd now like to hand, the conference over to MS. Wendy Huang from Tencent IR team. Thank you. Please go ahead ma'am.
Thank you and good evening welcome to our 'twenty 'twenty, 1 first quarter results conference call.
Before we started the presentation, we would like to remind you of that it includes forward looking statements, which are underlined by a number of risks and uncertainties. It may not be realized in the future for various reasons.
Information about general market conditions is coming from a variety of sources outside of Tencent.
This presentation also contains some or all of you did it now I of ours financial measures should be considered in addition to but not out of the substitute for measures of the company's financial performance propelled ear accordance with ISR as.
What do you tell the discussion of risk factors in it now I have hours measures. Please refer to our disclosure documents on the IR section of our website.
Let me introduce the management team on the call Tonight.
All of China, and the CEO of Pony MA will kick off with a short overview president.
President Martin Lau will discuss the strategy reviews.
<unk> strategy Officer, James Mitchell will speak to business review and the Chief Financial Officer of Jumbo will conclude with financial discussion before we open the floor for questions.
I will now turn the call over to Pony.
Thank you Wendy.
But every day.
Thanks, everyone for joining on.
During the first quarter, we achieved solid growth across all of our businesses in particular, our fintech and business services.
Advertising revenue streams.
We are also stepping up the investment.
Including business services, and enterprise software high production value of games and short form video.
Which will be covered in more detail in the strategy section.
Now let me go through the headline financial number of all of it.
What's the.
Total revenue was 1 of Jay so the 5 be on be up to 25% year on year and want the same quote unquote.
Gross profit was 6 <unk>.
So the beat on the up 19% year on year and 6% of quote unquote.
Non.
Operating profit was 40 sleep eat it on the up 20% and 12% quarter on quarter.
On a net profit attributable to equity holders was 30 sleep on.
The 22% stake.
Staple of quote unquote.
Yeah.
For all of your services, despite intense competition on across the China Internet industry.
Generally of the King.
The extend our flip the page the position in activities, including social games wrong from video news music to true payment and mobile utilities and.
And we believe we gained market share and call services.
Combined in the Europe wishing of Wechat was 112.4 billion mobile devices in the U of QQ was 606 meet it.
Market on James will discuss our future strategy and progress of across some of these activities in detail and I hand over to the market what the strategy of the view.
Thank you Pony and good evening and good morning to everybody today.
Today I will walk you through a few strategic investment areas that we believe will support our long term growth.
In the course of 2020, what's sort of exciting new market opportunities emerging the first business as a salary of their movement on line and industries of speeding up the digitization across.
The value change.
The audience for games structurally extended due to the state at the home period, we believe the emerging genres and advanced technologies will drive for the game audience growth.
Third as the short video market matures well the lead users will seek more diverse and nutrients from building content.
At the same time at the end tie into the industry is undergoing a new round of additional investment in which investors and companies are prioritizing growth over the profit. We can see this in our own MST portfolio, where heavy investments are made in areas such as community group buy electric vehicles and user acquisition.
On the other hand, these initiatives boost the market valuation with the market value of the sticks enlist the investees exceeding $200 billion as of quarter end.
On the other hand of top 5 loss, making.
Associates reduced our non <unk> net profit by 7% in the first quarter.
As for Tencent, we see opportunities to proactively invest in several areas, where we can be an early mover in the shape of the industry evolution, rather than playing catch up later.
First of all business services, we're adding head count and infrastructure to assist the digitalization of various industries.
Games, we're investing in the high production value games with global appeal third short form video content, we're cultivating multiple ecosystems to meet users' emerging needs for more interest in content.
With sustainable social value, we announced the establishment of new assets the org to bring.
The larger benefits to the society.
Funding these investments will absorb a portion of the incremental profits from existing businesses for 2021 when.
But we expect.
Such investment would deliver very high return over the longer run.
In the next few slides I will discuss the specific opportunities the progress of achievements. We have made so far and the initiatives that we are funding going forward.
Now, let's start with business services.
Since we upgrade of our strategy to embrace industrial Internet of in 2018, which seen product and service providers and customers aspiring to optimize their connection with consumers digitally.
Various industries of deepening of digitalization across customer engagement operations production and supply chain, particularly after the COVID-19.
Meanwhile, the enterprises wildly widely adopted online collaboration tools internally to improve the efficiency.
Well the achieved some structural strength in this area for example on the scale of friends will believe that across our internet usage and external customers of cloud service now run the largest number of service in China.
On the platform and software front, we provide the lead NCR in collaboration and productivity solutions in the market, where those services are highly valued by enterprises.
After the period of disruption due to COVID-19 of cloud services moved back to an above industry revenue growth range in the first quarter.
It's the double down on 1 of these trends, we're increasing head count as from product development to enhance our service offering and also expanding on our sales team to facilitate the client acquisitions and service.
We're strengthening the capabilities and interconnections of out of productivity SaaS products and security software to extend the leadership positions.
At the same time, we're growing the networks of independent software vendors and SaaS partners sort of strategic collaborations and investments.
We are also deepening our smart industry strategy by expanding coverage and enhancing Upselling cross sell competences in key verticals, such as healthcare retail education and transportation.
Turning to games.
If the global industry opportunities and the resources required to capture the opportunities of larger than ever first mobile devices is extending the total addressable market for games, which was further boosted by the state at home period.
We believe the emerging genres and development toward the Matamoros will further expand the market.
Second game players are becoming more discerning and quality of sensitive high production value of innovated and cross platform games can attract and retain large audiences to the extent not previously possible.
Chinese game developers on attaining early success in global markets.
We believe we're already in the early stages of capitalizing on these trends.
Idea of your franchise games, such as honour of Kings of T Mobile Peacekeeper elite and league of legends uphold our leadership of major genres. Each 1 of them consistently deliver large loyal audiences as well as solid monetization.
On top of debt of internal and investing and studios are working on the large and diverse game pipeline.
International revenue is now also accounts for a substantial portion of our gaming revenues and titles such as punchy mobile at the end of legends of balance have achieved sustained play of recognition globally.
Looking forward, we aspire to lead the industry and of committing the necessary additional resources.
We're making long term investments in developing large scale high production value of games to attract players globally. We're funding the development of innovative games in the emerging verticals, where beauty on the IP of franchises suitable for games and expanding our cross media.
It will step up marketing expenditures and attract the bigger audience to the new games and we are investing in emerging areas such as our cloud gaming services.
Okay.
Next we'll talk about our investment in the short from video Arena.
Chinese consumers have shown great appetite for watching short from video and we are investing to address how we see that appetite evolving going forward.
We're positioning of video accounts as the new infrastructure innovation connecting users with the real life content in bridging high quality content creators with consumers.
Well provide the resources as well as hendi creation of monetization tools to attract diverse content creators dusk incubating of unique content portfolio.
We optimize technology to unlock the potential of social plus out of it makes the recommendations leveraging the strength to increase exposure of knowledge based content.
Besides we are adding service of bandwidth to support the solid organic growth in video accounts. We're confident that these investments will benefit the ecosystem kind of engage created audience over time.
Second we recently emerged Tencent video and the issue of shortfall of the new App and pizza.
Seeking to bring integrated viewing experiences to users and rich content offerings as well as shoppers the algorithm makes the recommendation.
Along with this internal business on the REIT.
Okay.
We are escalating self commission production to further expand on IP content library.
Which can facilitate creation of more video clips of bound creator of network and better serve users emerging needs of book high quality the short content.
We'll also leverage our capabilities acquired through building a base year to empower our long form video business in terms of content creation recommendation user acquisition and the operations.
Finally.
We announced our aspiration.
To promote sustainable innovations for social value.
We seek to bring sustainable benefits and value to society by leveraging of technology and products and to elevate the importance of sustainable social value when making decisions in all of our products and services.
By integrating our existing corporate social responsibility and charitable activities into a new sustainable social value organization SSB work with.
We created a dedicated team to deploy social value initiatives and of professional and entrepreneurial way.
We'll incubate projects in various areas such as basic science education innovation route of revitalization of carbon neutrality, and food energy and water provision.
Where appropriate.
These projects with our existing businesses.
In addition to making charitable donations, we seek to promote of the development of self sustainable operations, which could create new value for Reid of industries and for society.
Throughout the process, we'll pursue long term social value rather than economic profits.
We are committing in the initial capital of 50 billion RMB.
We funded by our investment gains.
We believe that our strategic upgrade and the new initiatives will allow us to make an even more positive impact of the society and Usher in a new phase of development with Tencent.
Now with that I'll pass to James to talk about our business review. Thank you very much Martin for the first quarter of 2021 total revenue grew 25% year on yeah. The I S represents a 50 fold satisfy revenue within which games for 32% from social networks, 22% online advertising was 16%.
On the Fintech and business services represented 29 percentage of total revenue.
The value added services segment revenue was 72 billion renminbi up 16% year on year on up 8% quarter on quarter.
Social networks revenue increased 15% year on year to 29 billion renminbi on moderate growth of digital content subscriptions and in game items sales.
V I S subscriptions increased 14% year on year to 226 million video subscriptions grew 12% to $125 million benefiting from the adaptation of IP such as the land of warriors ease the animated and live action drama series music subscriptions expanded 43% to $61 million due to better com.
The effective marketing campaigns and improved retention rate.
Games revenue grew 17% year on year to 44 billion renminbi against the high base stay at home period, which started in China in the first quarter of 2020 growth was primarily driven by mobile games in China, and by mobile and PC games in international markets.
A bunch of the game revenue increased 12% due to Chinese new year seasonality from.
Total revenue increased 19% year on year to <unk> 40 bump it in renminbi benefiting from robust performance of existing games, such as honour of Kings pop T mobile on Peacekeeper elite.
1 of the contributions from new games, such as moving I think mobile and call of duty mobile in China.
The PC client games revenue increased 1% year on year, It's 12 billion renminbi as contributions from valor and simple frame as well as growth from crossfire offset the declines in downstream.
Yes.
Selection, we've provided more support for our partners and I forgot the building of vibrant content from the service ecosystem on the content front, we attract and cultivate video of accounts creators by providing customized on boarding services favorable traffic allocation to fill their initial audiences and training and video production best practices on the <unk>.
It is from people capabilities to increase penetration of mini programs, particularly among smbs on low code development platform in April of smaller businesses to create many programs in a more cost effective way and we launched new tools to assist system integrators. The number of active mini programs set by system integrators more than tripled year on year.
For Q2 of leveraging technology to better integrate social and content consumption experiences such as seamless connection between the instant messaging and games users can team up with QQ friends to start of multiplayer game Bachelor of with 1 click and QQ Mini program specific uses of staying up to date from the in game events.
For <unk>, the new leadership team will seek to upgrade the products technology operations and content to better assess the social and entertainment needs of younger users.
Turning to games aggregate user engagements and use of spending increased year on year. Despite the high ones through 2020 comparison period.
We released honour of Kings biggest update in January to improved graphics and game experiences and then the launched of PD marketing campaigns with top tier skins during the Chinese new year, which drive the games <unk> and tank uses to record high levels in February.
We reduced the application of false size T mobile it enhance our local market operating capabilities boosting put him up on da you in countries, including Turkey, Egypt and Russia.
The league of legends, we distributed bigger and better lunar rattling the content for the cold game mode as well as the team 5 tactics contributing to higher total revenue year on year.
Beyond these larger audience games, we're also concentrating and marching genres of for example, your releases come more rely from the Walnut diary ranked among China's top 10 lakh simulation mobile games by D of you in April.
Our pipeline includes action back the arena of roll things stimulation strategy and survival games for China in many of these new games set of adapted from popular of existing game in Detroit or of Ip's internationally, we expect on substantial prior investments in best in class PC console and mobile studios to begin contributing a range of genre of innovating games in the quarters to come.
Moving to online advertising total revenue was 22 billion renminbi in the quarter up 23% year on year assisted by 3 factors beyond our ongoing product innovation and AD Tech improvements first higher AD spend from the E Commerce and education verticals.
FMC Chi in automobile related advertising revenue benefiting from economic growth and third full quarter consolidation of the bureau of samples from the real budget from site.
We enhanced the transaction capabilities of our on properties and customized marketing solutions for key verticals, including games re tenant automobiles delivering high out of all very wise for advertisers.
Looking forward the idea of Fei deprecation on iOS devices appears to have limited impact on the China market. So far on what other potential of uncertainties include possible regulatory headwinds the K 12 education and potential delays to the video content release schedule.
Searched on others advertising revenue expanded to 27% year on year to 19 billion renminbi driven by moments of mobile network within which moments impressions from revenue increase to be out of inventory and its more appetizers adopted many programs as 90 pages.
On my part out of network revenue grew rapidly, reflecting the increased video AD inventories primarily within the games online reading on tool applications.
On media advertising revenue rose, 7% year on the <unk> 3 billion renminbi, largely due to increased AD inventory in the CPM within on music apps during the quarter. We released several popular self commissioned from Rocky shot of securing trunk of 2021 and processes from 5 driving us once the bad revenue.
Looking at things that from business services segment revenue was 39 billion renminbi up 47% year on year on up 1% quarter on quarter.
Within Fintech services the year on year revenue growth rate was higher than in prior quarters benefiting from an easy base period of stay at home activity reduced off time consumption of inbound Q2 thousand 20 per.
Payment business is also structurally benefiting from the broader digitalization of consumer habits, and if the economy.
Payment volume and revenue increased slightly quarter on quarter. Despite the seasonally which is e-commerce activity offline spending picked up as many people stayed in the cities in which they work during the Chinese new year holiday, which boosted the local spending on retail and dining services.
The business services revenue grew at a healthy rate year on year benefiting from regime prototype deployment and robust demand from industries, including enterprise software and online video provision increased customer uptake of our security communication and CRM solutions drive notable growth.
Paas and SaaS revenue, both absolutely and as the proportion of our overall business services revenue.
Our cloud marketplace now includes thousands of partners software as a service products, we launched enterprise App connected with unified logging accounts of data flows across the different SaaS products, allowing SaaS providers to develop and deliver their products more efficiently all of facilitating enterprise clients to better integrate multiple software solutions.
And with that I'll pass the Johns discusses the financials.
Hey, Jay for the first quarter of 2021 total revenue was $135.3 billion renminbi up 25% year on year or 1% quarter on quarter.
Gross profit was $62.6 billion renminbi up 19% year on year or 6% quarter on quarter net other gains were $19.5 billion renminbi up 384% year on year or down 41% quarter on quarter.
This is mainly compressed on eye of ours, such as non of items, including fair value gains, reflecting increased valuation of the investment.
Unless the companies in verticals, such as Fintech on social media.
That's why the net gains on deemed disposal and disposals of certain index the companies.
Operating profit was $56.3 billion renminbi up 51% year on year or down 12% quarter on quarter net.
Net finance costs were $1.4 per day, rather than be down 19% year on year or 39% quarter on quota.
The year on year decrease was mainly driven by reduced the interest rate as we capture favorable interest environment in all of interest rates the size.
The cumulative decrease was primarily caused by Forex gain this quarter, while we record the forex loss a quarter ago share of profit of associates and joint ventures was 1 of untreated in renminbi compared of share of losses for the force first quarter last year.
We benefited from non of our of such as the items, including a non recurring fair value gain on investment of an associate.
Well as the improved performance of certain associates on.
On a non antivirus basis free recall the share of profit of hover Dillon renminbi for the first quarter of 2021, comparing to 164 million renminbi a year ago.
Income tax expense was $7.2 billion renminbi this quarter the effective tax rate for the quarter was 12, 9%.
I have a net profit attributable to equity holders was $47.8 dividend remedy of 65.
5% year on year or down 19% quarter on quarter.
That said the EPS loss for the 9 months 7 rather than be up 64% quarter you're on.
The year or down 20% quarter on quarter.
Now I'll share with you.
No and I of Irish financial figures for the first quarter operating profit was $42.8 billion renminbi up 20 per cent year on year on a 12% quarter in quarter.
Net profit of the NCI was $53.1 billion renminbi up 22% year on year or luxury the stable quarter on quarter diluted EPS was $3.415 per M b up 21% year on year or largely stable quarter on quarter.
Moving on to growth margin the Ob.
<unk> gross margin was 46, 3% zone, 2.6 percentage points year on year or up 2.3 percentage points quarter on quarter.
And then of lives by segment gross margin for Boswell of 55, 1% South of 3.9 percentage points year on year or up 3.6 percentage points quarter on quarter the.
The year on year decline was mainly due to the number 1 increased content costs from more erring of dramas and variety shows, whereas as the year ago now the 2.
Its revenue mix shift from higher margin PC client games, and <unk> subscriptions to lower margin digital content services.
The sequential increase benefit from revenue mix shift towards higher margin mobile games the amidst the verbal.
The people gain.
Gross margin for on the advertising was 45 from 1% down 4.1 percentage points year on year at 8.2 percentage points quarter on quarter the.
Year on year decrease was mainly due to higher revenue contribution from mobile AD network business, which carry a lower.
Margin sequentially.
The decline mainly reflected the seasonal.
Seasonality and increased content cost per of more airing of.
Drama series and sports events.
Gross margin for Fintech and business out of this was 32, 3% up 4 percentage points year on year, and 3.8 percentage points quarter on quarter.
Both year on year on quarter on quarter volume growth of the mainly due to revenue mix shift towards merchant payment in wealth management, San Francis which carry rather than the higher profit margin.
In addition.
The operating efficiency of business services hub on <unk>.
All of sequential margin growth.
On operating expenses, selling and marketing expenses were $8.5 the line rather than the up 21% year on year or down 15% quarter on quarter. The year on year increase was mainly due to increased marketing spending, particularly the on business services on games and the consolidation of Muni.
The series such as the auto as well as high as task force on welfare expenses sequentially month of day extends the slower because of seasonality.
As a percentage of revenues selling lots of expenses was 6.3% of revenue loss.
The simple heartland compared to first quarter of 2020.
G&A expense was 19 billion renminbi of 34% of year on year or down 4% quarter on quarter. The.
Year on year increase mainly reflected greater R&D costs. The Q on Q decline was mainly driven by seasonally in the office travel and entertainment expenses.
Within G&A R&D expenses were.
$11.3 billion, Randy of 41% year on year, and 1% quarter on quarter, G&A and R&D represented 14% at $8.4 per cent of revenue respectively.
At quarter end, we had a program of the.
89000 employees, an increase of 39% year on year and 4% quarter on quarter.
Let's take a look at the operating and net margin ratios.
The first quarter 2021, non <unk> operating margin was 31, 6%.
On a 1.3 percentage points year on year or up 3 from 1 percentage points quarter on quarter.
And I of our at that volume was 25, 5% that should be stable both year on year of an important quarter.
Finally, I will share some key financial metrics for the quarter total Capex was $7.7 billion renminbi and increase of 26% year on year or a decrease of 20% quarter on quarter.
Within which operating Capex grew 20% year on year to $6.6 billion renminbi due to more spending on servers and network equipment to open the net business growth.
Non operating Capex increased 69% year on year to 1.1 billion renminbi, mainly driven by increased expenditure on crown.
Centers.
Office properties free.
Free cash flow for the quarter was $33.2 billion renminbi down 15% year on year of 20% quarter on quarter.
Net cash position decreased sequentially to $5.6 billion renminbi, mainly due to net cash outflow from M&A activities, partially offset by free cash flow generation.
The fair value of our shareholdings in listed investment companies, excluding subsidiaries where of course somebody the 1 portrayed on Randy on 200, and southern but then you went on.
At the end of the first quarter.
Thank you we shall now open the floor for questions. Operator, we will take 1 question 1 follow up question each time invites the.
The first question.
Thank you as a reminder, ladies and gentlemen to ask a question. Please press star 1 on your telephone on like for your name to be announced if you wish you can see request you may press the pound.
<unk>.
Our first question comes from the line of Alicia Yap from Citigroup. Please go ahead.
Hi, Good evening management, Thanks for taking my questions. Congrats on the solid results.
2 questions. The first 1 is regarding your comment of stepping up the investment in.
Development of <unk>.
Let's say the lack of scale and high production volume games do you plan to invest gains that will turn into.
The strong global IP that the game on if you will play and maybe remember for the lifetime, what does that mean.
We could take multiple years of develop on before we see any final product and if this rationale also because of we are seeing growing gain most traction of.
In markets, such as India, Latam EMEA or even in the U S debt.
To kind of trade, Florida that we can elaborate on about stealing from mobile game developments took all of our global share.
The second question is on the cloud business.
Seeing or hearing from peers.
A little bit slow down on the industry. So if tencent cloud also SBU in some industries, the transition where the existing infrastructure cloud customer, which is already quite sizable and may be facing industry throw down.
And making some penetration into new industry vertical.
Is that fair to say, we actually are already ambition.
Transition better and already started to move more proactively in strengthening based on the higher margin fast type of entity that we actually could start to see the cloud revenue to further accelerate in the coming quarters. Thank you.
Alicia Thank you for the questions and I'll take a shot at both of them on their Martin, but will likely supplement so you know the.
The short answer to the first kind of says yes.
The way.
We absolutely would aspire to make games the players enjoy and ITD place of life, but of course, it's easier to express that aspiration and realize that aspiration now youre right to say the creating those lifelong game experiences.
Clients and many years of game development.
This is a trend that with <unk>.
<unk> many years ago, and we have a number of products the have indeed beat alright.
<unk> already been in development for many years and some of the games that we're creating in China or in a big internal studios slide to me on and content and more fun and Aurora and some of those the games that we're creating outside China are at the studios, which we invest in around the world.
So you know over the coming quarters, and yes, we hope to bring some of those big budget long production cycle games.
The market now.
Why were focused on this now.
What changes now versus the past that we are indeed seeing that the global audience. The games has grown quite a bit.
Full of during and after Covid.
And we're seeing 6 of the growth in emerging markets such as the balance you highlights but also in developed markets and we're also seeing debt game players are increasingly willing to film longer term relationships with the games that they particularly enjoy such as the league of legends or fortnite or on honour of Kings, which.
Have a very high retention rates in the game of us even if they can they come back to and enjoy again.
And Oh on all sides.
While historically, our focus was primarily on the China market as you know in recent quarters, we've had some hits globally that would develop from China or including.
T mobile on including quota of Judy mobile all of which and it gives us more confidence to step off of our rate of investment and step up our rate of investment means.
The fund a big of better games, if necessary for longer periods of time. It also means fund more experimental games. It also means invest more in our game marketing and game publishing capabilities and then finally it means investing in frontier of technologies, such as cloud based gaming.
What we'll try to grow out of the game industry in the future.
So that's on your game question.
With regards to your cloud question, then I think.
We don't necessarily see of sudden transition in the industry this year versus previous years, rather of our belief is that.
When you're in the cloud business it is inevitable debt.
The <unk> infrastructure sort of big companies.
The Endo is big companies will use that the negotiating.
Negotiating power.
To protect their own economics, and as the result, the path to long term economic returns in cloud is not to get big fast on infrastructure, but actually to cultivate.
That form is the service and software as the service.
That's something that might be doing now for several years.
The service in particular was a substantial percentage of our total cloud revenues now on Sina Dot.
The important underlying reason why every belief that we are able to outgrow the industry in the first quarter this year.
Just want to have the revenue on on the gaming side.
You emphasized some of these like new creation of Ips and choose.
You know many years before you can see from the product I think if you look at our recent.
The pipeline of games, which where the mouth of more than 40 of them.
It's a combination of some odd the original Ips, which would take away of a long time to develop some of the extra existing Ips that we're going to take existing assets are pretty proven gameplay and we add our innovation from mobile and then we've developed it for full launch and then there are also some smaller.
Ah trial.
Travel titles right in the niche titles, which would have multiple iterations of it probably sort of it would be.
<unk> developed and released within the short period of time, and then iterate it overtime in order to make them bigger.
It's a combination of these different types of titles that constitute the pipeline.
Great. Thank you. Our next question comes from William Packer from BNP Paribas. Please go ahead.
Hi management, congrats on the strong numbers and thanks for taking my questions first question is.
In your update today, you presented investment plans to exploit the growth opportunities for the future of.
In Q1 'twenty 1.
Adjusted and delivered a 25 per cent.
Profit drop through on your 25% revenue growth should we think of Q1 of the relevant benchmark for the rest of the year.
And my second question is around regulation of the news flow of has continued to be intense.
The last quarter you provided a helpful update on regulation of Fintech annual minority investments.
And the incremental update to share today. Thank you.
In terms of the incremental investment plan right now I would not say the first quarter is the right benchmark.
Our investment plans actually stepping up.
From the first quarter level. So if you look at the first quarter of results I would say the benchmark is debt non profit grew by 22% year on year and what we're seeing is that until we kind of be investing a portion of the incremental profit into new.
The new areas and so.
That means it's somewhere between zero percent and 22% from a quantitative basis.
I think that's the the quantification now in terms of the regulatory news worthy of the most.
Significantly this basically after the.
The fifth quarter of results there was a meeting in which the financial regulator.
As the <unk>.
Fintech companies to true.
The meeting and also.
Non certain principal balance.
On the Fintech.
To have an internal review of the home business and practices and I think.
The principal was largely a public radio and they're largely focused on.
All businesses have to have to be conducted through license entities and the ASP of transparency and at the same time.
Quite a bit of focus on making sure that theres kind of not gonna be of systemic risk and my understanding is it's quite focused on the size of.
Lending business, and making sure that there's no overlapping or over borrowing by consumers right.
What the front I would say.
As we have emphasized in our last conference call. We are very focused on complaints the way better focus on risk management, we're very self restraint in terms of the size of our.
The.
Of our non payment financial products, especially on the lending side.
So when we look into.
On the internal review and when we're looking to what are the things that need to be done in order to make sure that the complaint with the spirit of the regulators right.
It's actually <unk>.
Relatively manageable so that's sort of the the update on half on the regulatory side.
Great. Thank you next question comes from John Choi from <unk> capital markets. Please ask the question.
Good evening and thank you for taking my question I have 2 questions here. So on the reinvesting our profits I think Martin you just mentioned that it seems like nearly 22%, but if you look at it can.
Can you kind of walk us through like what are they going to be the pecking order of the 3 that you guys did mentioned of business services.
Gains on natural for video and also is it going to be a combination of your equity investments or actually investment in operation that will have a P&L impact and that's not that's my first question and the second question and the follow up to your game business I think you know.
Just need to see that we're seeing a lot of these young regains.
No that Tencent, probably has been strong exposure, but also at the same time there are new younger members et cetera that you Tencent doesn't have that much of exposure.
Market. So how do you see the opportunities here on what kind of the relevant investments and strategic.
Strategic decisions that you have to make the in order to take advantage of these new young with emerging on throughout the world.
So why don't I start on the second question.
There are continuing the unusual on rates and matching and some of them.
Best left to our partners, our Investor day companies to address.
But you know others genres that we think we can.
Bring some value to the table bring some innovation to use us and therefore.
We would address ourselves now I wouldn't say the met of us as shown on or a matter of us as more of an overarching opportunity.
Which of different kinds of games the plate.
Within a single set of social graph and southwest suite. So.
Okay broke blocks than you know growth loss geography of met of us the younger gamers, but over time as graphical fidelity improves then we believe it is highly probable that youll see similar net of us and much of that are consistent with the the demands and expectations of older users and.
You know that's a wide open field at the moment no..1 has realized that vision, yet or there is some people are closer than others and we certainly believe debt.
We're in a good position to be 1 of the companies that realize that vision given of expertise.
Expertise of creating an operating games given Uh huh.
History of of facilitating social interactions and also given our cloud infrastructure at the backend because.
Of the amount of us will be a very infrastructure intensive. So I think that's on the games question in terms of the Reinvestments question then.
I'll, let martin speak to it but I would just say that.
From.
When we talk about Reinvestments in this situation, but talking about the owned and operated business is primarily and I think that in each of these 3 verticals with already been actually for a number of years in terms of investing in successful game studios in China and globally in terms of investing in <unk>.
Excess or short video companies, such as quite show and in China.
On investing in a very wide range now of early stage enterprise software companies.
And in terms of.
The areas of investment and I would say, mostly as James talked about it on the operating side. So a big part of it is actually sort of people right now Joe the.
These are engineers.
We can on high additional need to create the products perfect the products and develop better services.
And some of these.
The new employees.
Of a higher higher paid because.
The the power.
Essentially the experts and professionals in their respective areas.
And.
2 of lesser extent, it will be a bandwidth and infrastructure costs.
And to some extent maybe delayed.
The monetization on the on the BDO side for example.
So these are sort of deal with the the.
The.
Investments that we're talking about which of them actually they are having the bottom line impact and in terms of the magnitude of I would say business services games and video in debt pecking order.
And the nature of it is slightly different business services would actually take a longer time and it's a.
Larger strategy of building scale first and then over time monetizing games basically the can monetize relative to quickly once you can launch the game and achieve success.
But the investment was actually said in the.
Development phase in which there is no revenue, but then you have incurred the cost versus video as I said revenue of theirs.
Continuous increase of interest the number of people in order for us to improve the product improve the operations and improve the tools and at the same time in some cases some <unk>.
Extend of delayed monetization on the advertising from them.
Thank you. Our next question comes from Han Joon Kim from Macquarie. Please go ahead.
Great. Thank you for your time today.
I have a 2 part question on advertisement you guys have talked about a lot of different things on.
So the events going on there I was wondering if you can kind of help us repack of static 2 set of AD inventory for a price there's kind of GDP growth.
Where we're seeing the true.
Greg for you there in the for that.
That leads into the second part of that question, which is as we go on with utilization.
Of the industry is going towards.
Okay.
So the theory I think the headwind created any added the on market does increase.
How does that sort of impact the overall.
The market rate cap rates and sort of where.
Our AD pricing in particular.
Yeah. Thank you.
Thank you for the question of hand journey actually it wasn't completely clear so I apologize if we misheard sections of it but we'll try to answer so on the first part around the inventory versus pricing growth. Then you know both the are increasing I think on the inventory side, sometimes the outside world Oversimplifies that into looking.
What's happening with way should moments in reality the way she moments, it's a pretty small fraction of the inventory of the number of day to impressions, which brings you back on right.
Network for example is a much bigger source of real of impressions.
Network continues to grow out of impressions quite quickly as we see over with China International expands and Diversifies <unk>.
The more media runners join on route network.
So no AD inventory expanding both of internal reasons like on unlocking more inventory inflation moments as well as the sort of more market driven reasons, such as the growth of our out of network and then CPM growth.
Yeah, I think that does it over time given increasing.
The increasing at the types of demand, it's naturally the pricing trend sideways upwards that that was the.
Disruption periodic when there was a sort of supply shop from the short video of companies in 2019, but that's been somewhat digested by the industry as a whole now and in general what we see as the pricing is flattish the non video and then increases video realization of cost.
In terms of video monetization of the EC Pms around video in general.
As you would expect video CPM is of high but there are.
And the interesting sort of discrepancies between the different video formats. So actually the the highest CPM itself and the promotional video ads within the AD networks.
Certificate of game companies education companies, perhaps ecommerce companies.
And you know day, you could be the can't 40 renminbi plus in.
Revenue per thousand impressions.
Then.
The short video CPM.
So quite high.
And a fairly stable just because there's so much short video inventory now in China, and then interestingly the long form video CPM, so actually very long answer.
Whereas in the rest of the world.
You would expect the let's.
Let's say, who do we CPM should be higher than Youtube. The CPM. So in China of its the other way around.
And.
The EC Pms drama series, and the movie some social or about half of the method of the ECP EMS for short video.
And I think that's because advertisers currently find it easier to create in a.
<unk> second commercials.
Commercial so the suitable for the short videos on 15 second commercials that are suitable for long video and also because users have a higher propensity to click through ads within a short video side.
On the clicking through short videos, they do and don't like versus the lower propensity to click through ads on our long video site, which is more of the lean back experience, but it's the sort of challenge for the China interest the industry as a whole index.
Forcing monetization and therefore investment toward short video at the expense of long video.
Eventually it will probably sort of mean revert as consumers and advertisers recognize the distinctive professionally generated quality of long form video, but that process as of yet happening today. So anyway overall video realization results in high Res CPM, which is good for the industry and good for us within the industry.
Great. Thank you. Our next question comes from Eddie Leung from Bank of America Merrill Lynch. Please go ahead.
Good evening, Thank you for taking my questions.
So just the phone.
Total up to Alicia.
Huntington.
Huntington's questions on guidance.
Understood I understand that change of pulling up all day.
The operating large scale and high production value chains of which could last a long time.
For example, you mentioned that there have been some signs off on.
The timing of studio we see now.
With these markets in.
But when we look at why the number of them.
Surely not dose traditional guidance right now looking at let's say costumes make all of our dunes costumed changing things.
It looks like day, they didn't they are actually quite a clear thought the sign that things are not necessarily at all.
Large scale and high production volume.
With the possibility of mine.
<unk>. So just wondering if you could share your thoughts.
On the east 1 pill between all the investment strategy and what we have observed that probably you can.
And then most of the mutually took on a condom question on the on something that both social value of organization I'm wondering about the timing of the funding.
From the.
Within the shop purely on time or.
And the long period of time and in terms of accounting of the written treated as a contra.
2 of the investment includes ought to be on.
Thank you.
So you're right. It's a good question on game industry trends.
If you take a step back the game industry globally is a really big industry, it's about $150 billion from revenue of yet, which means it's bigger than movies and music and literature, and so forth put together and when an industry is that big then you can actually have.
The difference in the patent contradictory trends.
Playing out at the same time.
Uh huh.
Linear video than on the 1 hand, that's an explosion in short video consumption globally, but on the other hand as the explosion in the number of people paying for Netflix and Disney plus and Paramount plus HBO plus globally. So those are sort of 2 of how many contradictory trends people are watching more AD funded short video there also.
Of what she more subscription funded lung video, but you know the industry is big enough to accommodate the antenna.
I think the same thing is true in the gaming industry that there is a very clear trend toward.
The casual games, where you know the unit.
<unk> surround the quality game play and where the these games are able to onboard large numbers of users very quickly on the.
For these gains will be establishing a competitive months and also retaining users are over the over the much longer term.
That is the trend, whereas you say of number of sort.
Sort of the casual Chinese game developers are now doing very well on the other hand, that's also a trend of high production value of games often made by studios have been focused on these games you know 10 years on more often studios with.
<unk> plus employees sits really catch the attention of the clause of the audience in a way that wasn't possible before and you know Dara on thinking about a game like against an impact of higher.
It's been making this kind of game from 10, yes. It has over 1000 employees.
<unk>.
Yes on the game on thinking about games and I kind of on a puck she might have bought on call of duty mobile which exhibit similar characteristics. So I think that the industry is big enough that both of those trends of playing out as you know there are certain studios of Tencent the debt.
On a more focused on the first approach of the more casual cookie innovative games and there are other studios from Tencent that are more focused on high production value, but when we talk about our desire to step up on our rate of investment in stem of referring primarily.
The second true.
The desire to take games that we have already conceptualized it we've already begun development and really double down on the development process.
Greece development resources length of the development cycle, and then invest heavily in the marketing when we launched the game so the.
We get the games the best possible shot a true global audience on when we do release them.
While we are still in the midst of working on the proper accounting treatment with auditors ideally the.
Treatment will be similar to debt of donation that as you know expense upon contribution to a separate pool. However, it hasn't been finalized yet.
The point out where that can make as the most likely to be treated as non <unk> adjustment.
Just the.
The funding sources are basically our investment gain which Martin has talked about earlier.
On the always investment gains also recorded a non ISR as such as the plan.
All of this type of contribution will be captured on the other games in our financial statements.
And in terms of the funding timing I think once the infrastructure has been set up.
Once you build the first set of.
Funding.
Into the pool.
I think usually we might.
Fund 1.
Once or twice in the.
The year.
In respect of off net as I see the initiatives.
Great. Thank you. Our next question comes from Alex Yao from Jpmorgan. Please ask your question.
Can you kind of a printer and good evening management, thank him focusing on.
From my question.
First of all I have to follow up.
The question on your investment strategy of this year.
You guys kind of thing in Baskin consistency for future growth in the past several years, particularly for the 3 years that you plan to step up investments all of these accounts being around for quite some time.
What makes you to decide to further step up the investment in this year 1.
1 of the new opportunities and the challenges you are seeing that we are not aware of.
And then the second question is on regarding your.
The social organization you just published we understand that you guys group president of pursue social responsibility.
Public the company, how do you plan to align very accretion to the society and the value accretion to the shareholder. Thank you.
So on.
In terms of the on it.
Stepped up investment.
A bit of both right near the.
Most important driver is that new way of seeing an acceleration of market trends as we have detailed in the strategy section which include.
Expanding business.
Around.
Around the businesses are moving online and we've seen an expansion in terms of the game users and we also see in the next stage of the short video content growth.
So I think that's the main driver of our decision to step up because of Covid because of new trends emerging quickly and we want to.
And the additional resources, so that we can actually stay at the Beacon.
Part of that is also.
The fact that the industry is actually moving faster ahead right. So.
If you look at the history of Tencent, we have always tried to stay ahead of the curve invest ahead of the curve and should be of shape of in terms of the industry trend but.
If the entire industry is actually moving faster than we actually sort of have to step up debt.
Gas pedal in order to stay even more ahead of the others. So I think that's sort of the secondary reason in terms of why we are stepping up the overall investment now in terms of social responsibility.
Sorry, it from them.
Partly from the philosophical perspective.
We're running the company building the company is like building the person. So so you try to do the right things and over time, how do you believe that good things will happen to that person you don't really sort of view.
At every step of the way to calculate it.
Is that individual gain in some of the movement that you make so I think that's sort of of our overall I believe from when you build up from the organization. If you do the right things good things will happen.
On the more granular basis, I would say, if we actually sort of leverage our technology leverage of our products to deliver big of social good I think overall will be.
Better received by our users of by our customers by the government and by our employees and when that happened I think it's going to be good for the shareholders over the long range.
Thank you Scott.
The next question comes from Gary You from Morgan Stanley. Please go ahead.
Hi, Good evening management I'm thinking of for the opportunity to ask question.
I have 1 more follow up question on the investment strategy.
So in the state of Monday, specifically mentioned that we intend to invest a portion of 2021.
Incremental profits for the EZ pass months.
Should we assume debt beyond 2021, then we probably expect the normal growth trend to go back to organic growth and then hopefully of some of these investment will start to pay efforts in the form of faster growth.
In the future.
And when we look at kind of the.
Management, how do we evaluate.
The potential returns of these investments what are the metrics that matter the management usually follow.
To evaluate the investment in business suffers video accounts and games, respectively, and what kind of rate of return.
Should we expect from these investments thank you.
Well I have to disappoint, you in saying Theres no.
Specific.
The quantitative metrics.
A lot of times, you know industry of you actually sort of look at the trend and you look at the right things from 2 and then you put into resources and overtime. If you actually sort of you are right.
If you do it well the.
The return on these usually is a much greater than what you can anticipate but if you do all of the calculation and say Oh This is actually.
The rate of the investment and you.
Invest according to that calculated mode, then usually you won't be able to deliver over and beyond what the users want and you would not be able to be a leader at the trend and usually that means youre not going to even net returns so.
That's sort of you know essentially what it is I think what we're saying is like this year, we are stepping up the investment that's a strategic move.
And that increase.
The increase in investment will actually continue.
We will start to see some benefits over time not exactly what's the timing I think it's hard to predict but I think the.
The it's fair to say at least at this point inside of it the financial impact will probably be biggest as we start stepping into.
The investment.
Thank you.
Our next question comes from Robin Zhu from Bernstein. Please go ahead.
Thank you thanks Manish.
Thanks for taking my question I guess 2 questions. Please the first 1 is.
Could we get an update on Wechat E Commerce, you've very helpfully provided us with some numbers for 2020 I just wanted to get your thoughts on how that's trended so far on 2021.
Your growth expectations for the.
e-commerce growth, especially independent merchant growth.
For this year.
And whether whether the company is doing anything proactively to drive growth or is it mainly just the organic growth.
The second thing on on Vita video accounts I'm wondering if you could share some metrics in terms of the progress so far whether it's the time span sort of video views.
And again.
The longer term do you envision this being more of the P. G to the versus you do see the type of ecosystem.
Yes.
How do you have any.
Any specific sort of examples of how you're trying to improve concept. The thank you.
Robin so on the.
E Commerce within.
We're very pleased with the progress I think we said last quarter that the <unk> was growing at a triple digit rate on.
Year on year last year, and the <unk> continue to grow at a triple digit rate of year on year of the first quarter of <unk>. Despite.
In a challenging base period because of people staying at home and can talk to you more ecommerce transactions last year in terms of the specific initiatives.
Undertaking to stimulate growth, we talked about some of them.
In facilitating.
Companies smaller companies.
Mini programs.
Building an ecosystem.
Intermediaries, who assist.
Much in offline much in <unk> and in our opening and operating debt that mini program experiences.
So I don't think that's necessarily.
Sales of the bullet at this point, we have the traffic we have the payment solution. We have increasingly use the trust and confidence in much of trust and confidence in so it's more just the ongoing process of of organically assisting all of the participants in lots of becoming an increasingly cyber incident.
Ecosystem and 1 that's very differentiated from the at the.
Platforms or retail that's in the market.
Now in terms of video accounts I would say both the number of users using it as well as the user time spent on average share has been growing on organic.
And so on the basis now in terms of 2 of the cultivating the.
Our content ecosystem I think.
What we want it.
To be able to do is actually a funnel right you're in which.
It would include as many of UGC as possible, but then we would also provide all the tools and all the.
Operating procedures and guidelines.
<unk>.
As well as the monetization true so in order to help these UGC is to really leverage out of tools and make themselves into more professional providers of of video content and as a result, they would become P. Ugc's overtime and <unk> would be on.
Offering a very differentiated as well as higher quality content and because of these users a lot of times have got certain expertise and professional knowledge in different areas. So their content will be more nutritious.
And we will be differentiated from the pure.
The entertainment related content to wish on now in.
The other platforms. So that's sort of the way that we are trying to curate the ecosystem for video accounts.
Alright. Thank you. Our next question comes from Thomas Chong from Jefferies. Please go ahead.
Yes.
Hi, Good evening, Thanks management for taking on my question.
A question relating to the payment side given that this is the requirement that the inquiry.
Recently, the popular in China.
Our strategy on this 1.
Terms of the monetization on <unk>.
Payment.
Any other new piece on this model.
You can put in.
<unk> is on opportunities.
And my second question just relating to the.
At the price of Assai, keeping debt management has talked about most of the engine.
In the education of Sac costs, that's why that's a special event.
Should we think about.
The trend on the advertising in the next couple of quarters. Thank you.
I think in terms of the tissue of currency I think we have already talked.
Talk about it before in that we bank is actually a participant within the.
Trial for 4 of digital currency and we.
We will be developing in order to cash we bank to be supporting that and overtime as we continue to develop our payment as well as out of other platforms would actually sort of trying to see whether we can provide more support for digital currency.
The main reason is because of digital currency is essentially.
Essentially of substitution for cash and as a result, which you can actually look at it as another form of cash that will be running through the banking system and then eventually running through the third party payment system and getting into the merchant so from that trend.
Free.
The clear that it would be.
So quite.
Right.
Conducive for our overall.
Payment platform as well as for our we bank. So that's why we'll be participating very actively in the continuous drove it out of debt you can see now in terms of the payments business I think.
We had a very solid payment business and the.
The business model is actually multi fold in in.
In that 4 of the large merchants, who actually sort of if you don't have the take rate on the payments for for the.
Online players in particular on your web various on the payment tick rate.
At the same time, there will also be multiple value added services that we provide to the different emergence of such.
Debt, we can actually sort of capture some kind of economics and I think that business model is actually quite small on it and we'll continue to build on it.
On the advertising side and given the size the scan if the China of advertising market I think it would be naive to assume that after the period going forward in every industry is.
Green lights and over performing an in and out of all the cylinders firing of it across the Chinese economy.
And so when we look at the the landscape today of course, the terror uncertainties the impact of our idea of SA deprecation has actually been I think less than.
Widely feared for number of reasons.
Hum.
Are in a period when the.
That's some of the content airing uncertainty that should begin to clarify from July of the first on but so we're in the latest day because of that period and then we also mentioned in the prepared remarks that there's some uncertainty around the K 12 after school tuition education on <unk>.
That education sector has become 1 of the top 5 appetites of categories online so.
You know what happens in that sector could have some moderate consequences industry wide, but if you take a step back and look at the broader picture then I think the.
All of US would agree that we much rather be in a world where the primary challenges K 12. After school of Education regulations, then the world who are the primary challenge as you know the COVID-19 pandemic ripping out of control the.
Appeared to be the case this time last year, so while the out they'll always be challenges I think the in the Grand scheme of things. The AD industry is in a much better place now it was the Erica.
Operator, let's take the last question from the queue.
Certainly our last question comes from Jerry Liu from UBS. Please ask your question.
Hey, yes. Thank you for squeezing me in.
Yes.
Once the first on the.
Yes, if I look at the gross margin this quarter of its a little lower than from the last 2 first quarters. So so just wanted to dig a little bit more into the drivers and what's the implication from margins here the rest of the year on.
I assume maybe maybe the video mix is up a little bit but.
Curious about what the drivers look like within the especially the gaming business.
And then secondarily on going back again to the incremental investments we're laying out this year.
If the focus here for US is more engineers and long term development of gains et cetera versus some of the other 2.
Tiers in the sector are really a lot of what they're spending is on users of near term promotions et cetera.
It just feels like our spend.
The pace of the magnitude maybe a little smoother.
I just wanted to see if that is the right understand thank you.
Yeah, I think in terms of the probably in the past margin did a couple of few reasons number 1 that's you know of day.
Hiring the lifeblood past.
A portion of it is due.
Due to the consolidation of <unk>.
The E.
Various.
Yeah, and as you know.
The oil.
Organic growth of some of all that.
Of that forecasting so the tests at the same time you know it is.
The shift of.
<unk>.
PC versus mobile games SBC.
Sort of have a higher margin.
Margin profile.
And in terms of other little module plus its just that you know.
Total subscription sentences you know.
Also for the dropdown the probe.
The gross margin.
In terms of the investment I would say your observation is correct right. Yeah. That's the reason why we say we will be investing a portion of our incremental profits as opposed to other more e-commerce and transaction related peers in the market in which.
It may be all of their incremental profit in some cases and in some cases it may be all of their profit.
And so so I think that's.
A correct observation I also want to point out of that.
We do pick up some of the incremental investments industry wide because as you look at our.
Investment.
Associate losses right.
In the prepared remarks at the pointed out of that it actually has the 7% hit the 2 out of non.
Profit so we have already to some extent, whether it's in the current quarter.
Thank you operator I think.
Operator.
Yes.
Hand call back to Ms. Wendy Huang for closing remarks.
Thank you.
If you wish to check all of our press release and other financial information. Please visit the the IR section of the company website at Www Dot Tencent Dot com. The replay of this webcast will also be available. There soon thank you and the next quarter.
Thank you Sir that does conclude our conference for today. Thank you for waiting you may now disconnect.
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