Jane Yip - IR Pony Ma - Chairman and CEO Martin Lau - President James Mitchell - Chief Strategy Officer John Lo - CFO

Wendy Huang - Macquarie John Choi - Daiwa Gregory Zhao - Barclays Eddie Leung - Merrill Lynch Alex Yao - JP Morgan Alicia Yap - Citigroup Natalie Wu - CICC Jin Yoon - Mizuho Securities Chi Tsang - HSBC Thomas Chong - Credit Suisse

Welcome to the Tencent Holdings Limited 2017 Third Quarter Results Announcement Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions]. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Ms. Jane Yip from Tencent. Please go ahead, Ms. Yip.

Thank you. Good evening. Welcome to our third quarter results 2017 conference call. I’m Jane Yip from the IR team of Tencent. Before we start the presentations, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties, and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company’s financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-GAAP measures, please refer to our disclosure documents on the IR section of our website. Let me introduce the management team on the call tonight. We have our Chairman and CEO, Pony Ma; President, Martin Lau; Chief Strategy Officer, James Mitchell; and Chief Financial Officer, John Lo. Pony will kick off with a short overview. Martin will discuss strategic highlights. James will speak to business overview. And John will go through the financials, before we take your questions. I would now turn the call over to Pony Ma.

Okay. Thank you, Jane. Good evening, everyone. Thank you for joining us. During the third quarter of 2017, we recorded strong user traction and revenue growth across games, digital content, online advertising and payment businesses. Our video platform gained audience and revenue market share, becoming China’s top online video platform in terms of mobile daily active users and monthly subscriptions. In November, we released our online literature platform in Hong Kong. The successful listing reflects the value of our years of investment in the business. We believe our multifaceted digital content businesses are synergistic with each other, and allow us to deliver unique content to our users. We will continue to invest in our platforms and technologies to strengthen our content ecosystem. Now let me highlight the key financial numbers for you. John will provide more details in the financial section. Our revenue was RMB65.2 billion, up 61% year-on-year. Non-GAAP operating profit was RMB21.6 billion, up 44% year-on-year. Non-GAAP net profit to shareholders was RMB17.1 billion, up 45% year-on-year. Moving on to our online platforms. Combined MAU of Weixin and WeChat increased 16% year-on-year to 980 million. Daily text messages increased 25% year-on-year, indicating increased engagement. Total MAU for QQ was 843 million, within which, smart devices MAU was 653 million, down 3% year-on-year due to fewer casual users, while engagement with core users increased. Smart device MAU for users below 21 years old was up year-on-year. PCU, including PC and mobile, increased 9% year-on-year to 272 million. Popular features within QQ, such as KanDian newsfeed, increased average user time spent within QQ. For social network, Qzone smart device MAU was 552 million. In games, we maintained our leadership in mobile and PC, as measured by users and revenues. We expand our game genres, strengthened into strategic games. On our media business grew users and traffic at healthy rates, and we sustained leadership in the news, video, music and literature categories, while developing new verticals, such as live streaming and comics. In mobile utilities, we remain the China industry leader in mobile security and mobile browser in Android App Store. With that, I will pass to Martin to discuss strategic highlight.

Thank you, Pony. Good evening and good morning, everybody. In this section, I would like to give you an update on our video business, which has consistently gained audience market share over the past few quarters. As of September, we believe Tencent Video has achieved leadership in terms of average daily active mobile users. We have achieved this by leveraging our large and highly engaged user base, which are active in consuming content and, at the same time, making progress in 2 important areas: firstly, we have a comprehensive content strategy, which I’ll elaborate in a minute. Secondly, our expertise in content curation, program scheduling and content recommendation allowed us to make users engaged on a continuous basis on our platform. Driven by traffic growth, our online video revenue increased more than 100% year-on-year in the third quarter of 2017, within which, our video advertising revenue grew over 70% year-on-year. Our video subscriber base more than doubled year-on-year to exceed 43 million, driving equally strong subscription revenue growth. As you can see, recently, App Annie ranked Tencent Video number 1 in terms of China’s iOS top grossing chart for the entertainment category. In terms of our video content strategy, we do have a comprehensive video content strategy, which I would like to summarize in a succinct way as follows. For drama, which is the most popular and revenue-generating type of content, we invest in exclusivity that elevates our brand as well as drives subscription and add revenue. We target the content to right users within a large user base and have successfully expanded young female user base in recent quarters. For variety show, we have accumulated expertise in co-producing differentiated shows tailored to young audience. For example, we produced a very popular singing contest called The Coming One, which is the most viewed talent show in our platform during the third quarter. For animation, we cooperated with leading domestic studios and also commissioned top tier anime studios to create anime based on Chinese online literature IP. This anime, in turn, can support our game business. For example, we’re creating a game based on a famous literature IP called the Fighter of Destiny. And later, we created a Tencent-commissioned anime and over time, we’re going to turn it into a TV drama series. For movie, we have a rich library comprised of domestic and Hollywood studio productions. Leveraging our locked-in user base and data analytics, we can target and alert potential viewers when a new movie become available in our platform. For documentary, we partner with leading studios globally and, in some cases, co-finance their productions. Recently, we released Blue Planet II, a highly acclaimed and exclusively licensed documentary from BBC. We believe we are increasingly recognized as a preferred online partner for publishing niche, but highly influential content in China. Within our expanding content catalog, we are optimizing the proportion of licensed and original content, especially in the past few quarters. We have invested quite heavily in original content. For example, our original content Candle in the Tomb Season 1 and 2 were ranked most watched drama series by video views and attracted over 10 million monthly subscriptions. To succeed in original content, we invest heavily to expand our talent pool and accumulate key IP collection. Internally, we established production teams comprising producers, screenwriters and editors, and introduced a review mechanism to better manage the selection and production of original content. Externally, we have invested in a number of leading studios which are specialized in producing different content genres. We draw on our other businesses, especially China Literature, to source differentiated IPs. And in turn, we amplified user exposure to popular video content by creating several media formats, in particular, games developed out of the same video IP. Our investment in original content generates benefits for us in a number of ways: first, we can tailor content to cater to our online audience whose preferences often differ from traditional TV audience; second, we have total control over the content on a long-term basis; third, it allows us to have a share in the upstream profit pool of content production; and fourth, we can use high-quality exclusive original content to educate our users to pay for monthly subscriptions. While the online video sector as a whole is still making losses, we will continue to invest for the long run. We view online video business as a strategic priority, given it is a high engagement product. In terms of time spent, it is second only to social. Online video is an important component of our cross-media IP strategy. And also, our investments has generated positive traction in terms of market share and revenue growth. So with that, I’ll pass to James to talk about our business review.

Good evening and good morning. In the third quarter of 2017, our total revenue grew 61% year-on-year. VAS represented 65% of total revenue, of which online games contributed 41% and social networks 24%. Online advertising was 17% of total revenue. And the other segment accounted for 18% of total revenue, within which, payment-related services and cloud services delivered triple-digit year-on-year revenue growth rates. The other segment revenue in aggregate increased 143% year-on-year and increased 25% quarter-on-quarter. For value-added services, segment revenue was RMB42.1 billion in the third quarter, up 51% year-on-year and up 14% quarter-on-quarter. Social networks revenue was RMB15.3 billion, up 56% year-on-year and up 18% quarter-on-quarter. Video streaming subscriptions, music live broadcast activities revenue and game-related items sales were the main contributors to the year-on-year and the quarter-on-quarter growth rates. Total VAS subscriptions, including our VIP products, our video products, our music products and so forth, increased by 19% year-on-year to 125 million subscriptions. Online games revenue was RMB26.8 billion, up 48% year-on-year and up 13% quarter-on-quarter. Increased users and monetization for our key smartphone games and new smartphone game releases as well as expansion packs for our major PC games drove the year-on-year and quarter-on-quarter growth. Turning to social networks. We introduced the smart transport solution for Weixin users. By generating a mini program QR code in their phones to be scanned at the point of transaction, users can instantly pay for public transport fares even in areas where they don’t have Internet access. In mini programs, we continued to enrich functionalities, most recently adding new tools that empower retailers to integrate off-line and online resources to grow their businesses more efficiently. According to our latest survey, the top 5 mini program categories by monthly visits include transportation, online shopping, tools, lifestyle services and IT services. For QQ, we’re strengthening content curation, particularly for our younger user base. Daily active users and time spent in our newsfeed service, KanDian, continued to increase. Recently, we introduced a pop-up feature, Topics, to help users discover trending content more easily. Our eSports and our Penguin e-Sports is also seeing rapid growth in live broadcast views and exceeded 10 million daily active users. This app leverages Tencent’s leadership in games and eSports tournaments, facilitating interactions among gamers and promoting the development of eSports. Looking at PC client games. Revenue grew 27% year-on-year and grew 7% quarter-on-quarter to RMB14.6 billion. Active users declined year-on-year for our overall PC game portfolio due to users increasing time spent on smartphone games. However, ARPUs generally increased year-on-year and quarter-on-quarter, driven by key titles, including League of Legends, Dungeon & Fighter and CrossFire. Touching on a few of these important titles, League of Legends for the first time held its League of Legends World Championship in China. The finale in Beijing in early November attracted over 60 million unique viewers, placing it amongst the most watched live sports events of any kind this year in China. FIFA Online 3 recorded solid revenue growth as its paying ratio increased, benefiting from synchronization between in-game events and offline activities, such as the China national team’s World Cup qualifying games and the European league season kickoffs. Dungeon & Fighter received enthusiastic user feedback for its latest content update and gift packs. And we’ve commissioned a cartoon series based on Dungeon & Fighter, which accumulated over 500 million video views since launch. Our new game, Maple Story 2, began open beta testing in September. For smartphone games, revenue was RMB18.2 billion, up 84% year-on-year and up 23% quarter-on-quarter. Active users and ARPU grew year-on-year and quarter-on-quarter, driven particularly by our mid-core games. During the period, we released 6 games, 3 developed in-house and 3 licensed. Within the competitive player-versus-player genre of games, Honour of Kings eSports continued to gain popularity; and Contra Return recorded its first full quarter of monetization. In the strategy genre, we released Kings of Chaos during the quarter, which brought us to leadership in the category. Kings of Chaos ranked number 8 in iOS China’s top grossing chart in September. In the role-playing game genre, we released 2 games based on originally PC intellectual properties, Legend of XuanYuan Mobile and Journey to Fairyland Mobile during the quarter, and both received strong responses from gamers. We have recently seen very strong user interest in an emerging genre of games, survival shooters. Overnight, we released a survival shooter expansion pack called Deserted Island through our CrossFire Mobile game. And later this month, we’ll release a new survival shooter game, Glorious Mission. Each of these titles has already accumulated over 20 million registrations within their first week of availability. For online advertising, our revenue was RMB11 billion, up 48% year-on-year and up 9% quarter-on-quarter. Mobile contributed about 90% of our advertising revenue. Our media advertising revenue was RMB4.1 billion, up 29% year-on-year and broadly stable quarter-on-quarter. Our video platform contributed most to this year-on-year and quarter-to-quarter revenue growth. Popular drama series, such as Nothing Gold Can Stay and our self-commissioned variety shows such as, talk show, drove substantial increases in video traffic and revenue. However, our news ad revenue declined year-on-year versus the high base from the Olympics last year, and it was also soft quarter-on-quarter, as we reduced advertising inventory in our KuaiBao newsfeed product while we revamped its advertising system. We have several of the leading newsfeed products in China, but we’re currently focused on optimizing their user experience, which should in turn increase long-term user and revenue market share. Our social and others advertising revenue was RMB6.9 billion, up 63% year-on-year and up 14% quarter-on-quarter, contributed primarily by Weixin properties, our Android-based app store YingYongBao and our ad network. The ad fill rate in Weixin Moments increased, benefiting from stronger advertising demand from existing and new advertisers, as the number of Weixin Moments advertisers grew over 30% quarter-on-quarter. And with that, I’ll pass on to John.

Hello, everyone. For the third quarter of 2017, our total revenue was RMB65.2 billion, up 61% year-on-year or 15% quarter-on-quarter. Cost of revenues increased by 81% to RMB33.5 billion for the third quarter of 2017 on a year-on-year basis. The increase primarily reflected broadcast sharing and content costs, costs of payment-related services as well as channel costs. Gross profit was RMB31.7 billion, up 45% year-on-year or 12% quarter-on-quarter. Net other games were RMB3.9 billion, which primary consists of deemed disposal games arising from the capital activities of certain investee companies, including the IPO of ZhongAn Insurance; fair value gains of certain investments in verticals, such as health care as well as subsidies and tax rebates. Share of profit of associates and joint venture was RMB818 million for the quarter compared to share of losses of RMB619 million for the third quarter of 2016. Some of our investee companies registered profits, including one-off gains, for the third quarter of 2017 compared to losses for the third quarter of 2016. Income tax expense was approximately RMB5 billion, up 103% year-on-year or 26% quarter-on-quarter. The increase was mainly due to greater profit before income tax and withholding tax. Effective tax rate for the quarter was 21.7%. Net profit attributable to shareholders was RMB18 billion, up 69% year-on-year or down 1% quarter-on-quarter. I’ll walk you through our non-GAAP financial numbers. After adjustment to non-GAAP, operating profit for the quarter was RMB21.6 billion, up 44% year-on-year or 8% quarter-on-quarter. Operating margin was 33%, down 4 percentage points year-on-year and 2 percentage points quarter-on-quarter. Net profit to shareholders was RMB17.1 billion, up 45% year-on-year or 4% quarter-on-quarter. Net margin was 26%, down 3 percentage points year-on-year and 3 percentage points quarter-on-quarter as well. Let’s turn to segment gross margin. Gross margin for Value Added Services was 59.9%, down 5.3 percentage points year-on-year and broadly stable quarter-on-quarter. The year-on-year decrease was mainly due to higher channel cost of smartphone games paid to third-party app stores, including Tencent manufacturers and iOS, and revenue mix change to lower-margin products, such as digital content services. Gross margin for online advertising was 36.3%, stable year-on-year and down 1.5 percentage points quarter-on-quarter. This sequential change was mainly due to reduced inventory as we revamped KuaiBao advertising system. Gross margin for others was 20.3%, up 2.2 percentage points year-on-year and down 2.1 percentage points sequentially. The year-on-year increase was mainly due to gross margin improvement of payment-related services as a result of larger base. This sequential decrease was because of mix shift in funding channels, as some funding channels incurred higher handling fee rates. Moving on to operating expenses. Selling and marketing expenses were RMB4.8 billion, up 47% year-on-year or 31% quarter-on-quarter. The year-on-year increase mainly reflected greater spending on products and platforms, such as online games and online media, as well as higher staff costs. The sequential increase was primary driven by greater marketing spending on our mobile apps and seasonal promotional activities launched during summer holiday. As a percentage of revenue, selling and marketing expenses decreased to 7% for the third quarter of 2017 from 8% for the third quarter of 2016. Total G&A expenses were RMB9.1 billion, up 54% year-on-year or 11% quarter-on-quarter. Under G&A, R&D expenses were RMB4.8 billion, up 53% year-on-year or 14% quarter-on-quarter. The year-on-year increase mainly reflected higher staff costs. As a percentage of revenue, total G&A was 14% and R&D was 7%. At the end of the quarter, we had about 43,500 employees. The quarter-on-quarter increase of 7% was mainly due to enrollment of over 1,500 graduates. Looking at the margin ratios for the third quarter. Gross margin was 48.6%, down 5.4 percentage points year-on-year or 1.4 percentage points quarter-on-quarter, mainly due to decrease in the segment gross margin and increasing contribution from low-margin other segments. Non-GAAP operating margin was 33.1%, down 4.1 percentage points year-on-year, primarily reflecting lower gross margin. Sequential decrease of 2.3 percentage points was mainly due to lower gross margin and higher selling and marketing expenses. Non-GAAP net margin was 26.3%, down 3.2 percentage points year-on-year and 2.8 percentage points quarter-on-quarter. Year-on-year decrease was mainly due to lower operating margin, partially offset by the improving share of profit of associates. Quarter-on-quarter decrease was mainly due to lower operating margins. For the third quarter, total CapEx was RMB3.5 billion, down 4% year-on-year or up 16% quarter-on-quarter. Operating CapEx was RMB2.3 billion, up 11% year-on-year and down 2% quarter-on-quarter. And it represented 3% of the total revenue. Non-operating CapEx was RMB1.2 billion, down 24% year-on-year and up 78% quarter-on-quarter. Free cash flow was RMB27.5 billion, up 94% year-on-year and 57% quarter-on-quarter. Year-on-year and quarter-on-quarter increases were mainly contributed by higher cash flow generated from online games and on advertising business. Our net cash position at quarter-end was RMB18.9 billion or US$2.8 billion, up 125% year-on-year or down 11% quarter-on-quarter. The sequential decline was mainly due to payments for M&A initiatives and investment as well as license content purchases, partly offset by free cash flow generation. Fair market value of our listed associates and available-for-sale financial assets was approximately US$25.8 billion as at quarter end compared to US$21.5 billion as at last quarter end. Thank you. We shall open the floor for questions.

[Operator Instructions] Your first question comes from the line of Wendy Huang from Macquarie.

First, congratulations on very strong game revenue growth. So given that you have launched the survival type of game recently as well, we saw those games are gaining very strong traction, can you also comment on the impacts on business relations on this type of new games? And secondly, I think this year is a very fruitful year for Tencent because you started to, seeing lots of your investees, such as the China Literature, Sogou as well as [indiscernible]. So can you maybe comment on your strategy on the investees in the longer term?

Wendy, question, what was the game that you referred to?

The survival type of games.

Okay. I think survival game is definitely a very popular category and an important category. And we have been tracking it from the PC side already, and we have a constant dialogue with the original IP of the survival game producer and have been trying to establish relationship. At the same time, what we have seen is there have been mobile survival games that have been launched in China. And we have our own set of games which are in the pipeline. It will be a whole series of survival games. And the most immediate ones are going to be, one, within our CrossFire Mobile, there’s going to be a survival mode. And as James also mentioned in the prepared remarks, we have licensed a game called Glorious Mission, which is of a survival nature. And both of these games have actually achieved more than 20 million pre-registrations, each one of them, so that indicates there’s a lot of player enthusiasm toward this type of title. Now over the long run, I think what we are seeing is just the beginning of this genre. And we felt this genre, in itself, it’s more of a resemblance to the shooters genre. And if you look at the shooter genre, it has remained, the most dominant games have remained more or less the same for about 10 years. So I think that points to why there is a lot of enthusiasm when you have a new interpretation of the genre that comes up, and we felt there’s a long latent demand for some kind of innovation in the genre. And what we felt is, over time, obviously, we would like to work with the original IP in this genre. But at the same time, there will be adaptations and differentiated gameplays coming out of this bigger survival concept, and we’re going to have a whole pipeline of games that we’ll be targeting these broader genres. In terms of our investment strategy, right, I would say, Tencent actually pursue an open platform collaboration strategy. And as a result, since 2010, we have been continuously stepping up our effort in investing in different companies, which can have synergistic operation with our own business. And at the same time, because we have our traffic, we have our whole set of infrastructure services, we also have the mindset of helping these investee companies, right? So over the past few years, we have seen many of these investee companies benefited from the industry growth from their own effort as well as from a collaboration with us. And some of these companies now have reached the stage that they can actually pursue an IPO. So we are very glad to see that. And we felt, over time, there will be more and more of our investee companies which reach that kind of maturity that they can be IPOed in the market. In addition to that, right, China Literature is a slightly different story. This is a company which is a spinoff. We do control a majority stake in the company. But at the same time, if you look at its history, right, it is a company that has been formed outside of Tencent despite of our controlling stake. And we have also made acquisitions and merger along the process. So that’s why it is a company that has a more specific situation that supports a case for IPO, a spin-off and an IPO. I would say, for the majority of our businesses which have been home grown and organic, there’s actually more reason for them to stay together so that they can reinforce each other in a synergistic way. So I don’t think a spinoff is going to be, especially in any of our 100% owned business is going to be a norm for us going forward.

Your next questions come from the line of John Choi from Daiwa.

I have 2 questions here. Could you, first of all, elaborate on your recently launched content platform unified into your Penguin accounts? And how this basically will kind of fold into your content creation strategy that you guys just mentioned? And should we be expecting more or less unified account in terms of add-on infrastructure system going forward? And secondly, could management also give us some more details about the recent investment into Snapchat? That will be very helpful.

Yes. In terms of the content creation platform, yes, I think the starting point is that we do have quite a number of newsfeed products within our overall group. And that the first and the most foremost one is actually the Official Account system within WeChat. And in addition to that, we have a newsfeed product within QQ, which is called KanDian, which has seen significant growth. We have newsfeed products in our News, which is the leading news app, and as well as our newly, as well our KuaiBao product, which is based on interest-based recommendation engine. And we also have a browser which has newsfeed as well. So we have multiple newsfeed products. And I would say, on one hand, the Official Account is actually quite a self-sufficient and a unique platform in itself. A lot of content providers who want to operate their own Official Account and has their own spend system, that would continue to stay. But at the same time, there’s a whole host of information sources that we have been using for different newsfeed products within our group, and we want to consolidate all of these into a common content platform, which is the Penguin content platform, so that we can maintain a one-stop shop user experience as well as interface and management system with the content providers. And I think that’s essentially the idea. Now the ad system is a different story, right? As John has talked about, we have been also consolidating our advertising platform attached to different feeds products into a common social and performance ad platform, and that has led to some disruption in terms of the ad business, in some part of that, the newsfeed. But over time, we believe when we consolidate that advertising system, it’ll be much more efficient, it will be much more convenient for the advertisers to be using it. The second one is on Snap. Yes, I think if you look at Snap, right, we have actually invested in Snap in the very early days of its growth, right? So I think there’s a long history in terms of our engagement with the company. And along the years, we have always been very impressed with the progress and with the innovative nature of the company and the founders. And we have a very good relationship with them. And as a result, right, we have been a long-term shareholder. And recently, as we can see, there is an opportunity for us to acquire shares at a pretty attractive price in our mind. And when we look at Snap’s business, we continue to feel that there’s a lot of engagement with the young users. There’s a lot of innovativeness in the company’s product. And there’s a lot of potential for them to build its business further. So that’s why we have taken up more share and tried to establish closer relationship. And over time, we’ll try to see whether we can do something more strategic with them.

Thank you. And the next question please?

Your next questions come from the line of Gregory Zhao from Barclays. Please ask the question.

Hi, gentlemen. Thanks for taking my question. Congratulations on a strong quarter. So my first question about AI. Recently, Tencent announced the AI IN ALL strategy, so can you help us better understand how AI can help improve our existing business, so specifically like gaming, advertising and the social network? And what other business you think AI can help potentially like improve the efficiency? And my second question is about our financial services. So we saw our financial services, such as payment, wealth management and the insurance all show very strong momentum in the domestic market. So my question is about our expansion into oversea market. Do we have any plan to compete with international players, such as Visa, MasterCard and PayPal, to expand in the -- like the U.S. and European markets, targeting those domestic users? And if the answer is yes, what’s our plan to acquire these local users? Thank you.

Yes, I think for AI IN ALL, the concept is really a number of forward, right? Number one is it’s we believe AI can actually help our various businesses. And I think in the last quarter, we have actually sort of walked through the multiple examples in which AI can help. I think it can help, for example, our content business by providing a better recommendation to our users. It can help our advertising business because it can help on the targeting of the ads. It can help our financial business because it can help us to cater our offers to our users and, at the same time, analyze credit worthiness of our users in a better way. So it’s really sort of across the board. Many of our products and services can actually benefit from AI. But at the same time, I think it’s also a concept that we want to make our AI technology available to all of our partners and all of our industry costumers through cloud services. Because we see AI as an enabling service that can help multiple industries to get more efficiency, to understand their users, understand their data better. So that’s why we would like to offer AI capability through our cloud business to a lot of our own partners, customers, so that they would also enjoy the benefit of our AI investment as well as advancement. Now in terms of overseas business, I think for our payment business, the initial growth on the overseas front will be serving the Chinese users that are going increasingly abroad. There are many, many Chinese users who are going on travel or going on business. And we felt by following their footstep, we can actually establish a presence in the different countries and serve them better. In terms of globally, right, I think we much more pursue a partnership strategy. We felt each one of the market for financial businesses is actually quite heavily locally regulated, and there’s a lot of expertise that local players have already built. So it would be much rather, instead of saying we’re going to go out and compete with them, it’s much better if we can go out and cooperate with them and form partnerships so that we can leverage their expertise, we can bring in our own expertise as well as our flow from China, and bring to a mutually beneficial outcome.

Your next questions come from the line of Eddie Leung from Merrill Lynch.

Firstly, about time spend of users, you have been sharing user trends with us for a long time. Could you also talk about the development of time spend of users across various applications of Tencent in the past year or 2, especially given your investment in digital content? And then, secondly, just a quick follow-up question on the inactive users on QQ and Qzone. How much of the decrease was due to migration to Weixin?

Well, in terms of time spend of users, right, I think the short and quick answer is it has been going up in, across the board pretty much. And I think the key factor has been, I think, people are using their handsets more, right? And especially when we look at, for example, platform like products, such as Weixin, such as QQ, such as our browser, when you have a platform-oriented business, which can provide more and more content, as well as different types of services to the users, right, then there’s a tendency for people to spend more time. I think the Official Account system within Weixin is a very important example. And I think the other thing is really about as we, as the content format turn into more video oriented, people tend to spend more time on it. And then thirdly is as recommendations technology keeps on improving, right, then there’s a better chance that you can actually provide a better content to the users and, as a result, you can keep them longer. So I think it’s a number of these factors. And of course, right, within our games, there has been a very strong increase in terms of both the DAU as well as time spent on our very successful titles. In terms of the inactive users on QQ, I would say, it’s a combination of certain factors, right? There are people who have been relatively inactive, and then they have switched over to Weixin. A lot of them were spending time on both products, right? And certain users would gravitate toward a platform more. So in this case, as people get a little bit older, then they may be spending more time on Weixin. Whereas, what we have seen is for QQ, the positioning among younger users have really been strengthened over time, and there’s more engagement with the young users.

Thank you. And the next question please.

Your next questions come from the line of Alex Yao from JP Morgan. Please ask the question.

Hi, thank you management for taking my question and congrats on very solid question. First of all, I would like to follow up on the survivor shooter game, because in some of game genres on both PC and mobile, it could form a winner takes all situation, for example, mobile in both PC and the mobile, mobile are winner takes all. Even the shooter game is pretty much a winner takes all. Do you think there’s a mobile survivor shooter game driver that also become a winner takes all market structure in China? And then how do you think about the current competitive landscape with some of the industry peers all around your shooter, mobile shooter game in the past few days? And second question is about Weixin Moments fill rate. Is the improvement all driven by technology? Or is it driven by your efforts to penetrate into different demographic or geographic that doesn’t have advertiser demand in the past? Thank you.

So on your first question about whether the survival shooter games would be winner take all or not, I think the short answer is it’s too soon to say. I mean, even for the traditional first-person shooter games on PC, you’re right that in China, our CrossFire game has a very good market share. But then, our niche end game and our Call of Duty Online game, also have decent market share. And if you look outside China, then Call of Duty, Battlefield, Grand Theft Auto, to some extent, Titanfall, there’s a whole range of successful first-person shooter games on the PC and console outside China. I think that if you look at the history of this survival shooter genre, then it’s actually a recipe on history that we’ve been following through Arma 3 days through a number of predecessor games. And the most recent iteration is PlayerUnknown’s Battlegrounds on PC, and that’s very successful. But there’s also a game from one of our investee companies, Epic, called Fortnite Battle Royale, that’s proven popular on both PC and on consoles. So I think with PC games, it’s too soon to say. It may be that in the future, the traditional first-person shooter games incorporate these battle arena, battle royal activities as a mode of operation within the game. It may be that stand-alone games are triumphant. It may be that they both prosper at the same time. That’s on the PC. With mobile, I think that the industry is in a much earlier stage of development, partly because there isn’t the same history of first-person shooter games on mobile for the survival shooter games to grow out of and partly because it’s harder to get the controls right, get the ability to look around or hear things behind you on mobile than it is on PC today. So the short answer is it’s too soon to say. The second question that you asked was with regard to the advertising?

Moments, right? So on Moments ads, well, there’s a combination of both, right? There is improved technology in terms of targeting. We have also increased our presence within local markets, right, to allow smaller, but more local advertisers to leverage our system to reach the smaller catchment of users. And I would say it goes hand in hand, right? Because of the better targeting technology, you can actually allow smaller advertisers to target a smaller group of users and still deliver a good result. So I think it goes both hand in hand, as we said.

Your next questions come from the line of Alicia Yap from Citigroup.

I have 2 questions. First is related, a follow-up on the smartphone games. Just curious, do some of the newly launched games, such as Contra and King of Chaos, have a shorter defer schedule? Just try to reconcile the 84% growth in the smartphone games revenue this quarter. Is that due to a lot of the defer got released from the past quarter, together with some of the shorter defer cycle for these newly launched games? And then internally, in terms of the survival games, what type of monetization that you guys are expecting? Second question is related to the, in your press release, you noted that related to the cloud and AI, you will be looking for collaborations and investment opportunity in the technology area that could complement to your cloud service. So just can you elaborate a little bit? Because I thought Tencent already have very strong technology and won a lot of awards, [indiscernible] world standard previously. Are you referring to specific industry know-how or more collaborations with like application software developers? So in other words, what are the areas that you hope to strengthen in your current AI area? Thank you.

Regarding the drivers of smartphone game growth, this quarter, of course, we have new games which have a shorter life cycle because they haven’t got a track record and history to have longer deferral. But at the same time, most importantly, it’s Honour of Kings, for this quarter, they are more instant-consumption items rather than deferral items. So as a result, you can see that while the smartphone games grew by quite a lot, at the same time, the deferral, deferred revenue didn’t grow a lot this quarter, only a few percent quarter-over-quarter.

On the survival game monetization, I think if you look at the successful PC products in the market, initially, they monetize by selling the software upfront to the users and in tens of millions of people globally, including in China, who pay to download those games. And then more recently, they have begun layering in loot boxes. In looking forward, I think that a key element of the survival games is that they are intended to be relatively fair and competitive experiences. And so I think it’s reasonable to assume that the natural monetization will be more of an upfront or decorative nature, rather than more of a pay for in-game advantage nature. And that’s something that we’re quite accustomed to because that’s largely true of the battle arena games as well.

On cloud and AI, I think you have touched a point the right idea, right? I think in terms of core technology, we do have a lot of investment, and we felt we were very strong. But as we try to leverage this technology to adapt them for the benefit of different industries, we actually require a lot of different partners. So that’s the kind of investment, I think, we are mostly referring to.

Thank you. And the next question please.

Your next questions come from the line of Natalie Wu from CICC. Please ask the question.

Hi, good evening management. Thanks for taking my questions and congratulations on very solid quarter. My question is regarding the survival shooter game, Glorious Mission. Just wondering, given Tencent’s very strong app game R&D capability, why do you still license this game to another domestic studio? And also, for the mini program in Weixin, was there any consideration for monetization given the eCommerce category have already been the top vertical for that function, as you just mentioned? Thank you.

So as far as in Glorious Mission being a licensed game, I think if you look at our history, what we really seek to serve the players with, the content that’s most appropriate to them and most attractive to them, and different players will have slightly different needs. So if you take, again, looking back at the first-person shooter genre, out of which survival shooters have grown, then we published CrossFire that serves a certain user need. We published [indiscernible] that serves a slightly different user need. We published Call of Duty Online that’s a more sophisticated game, involving more tactics and more aiming down the scope and so forth. So you should assume that within this survival shooter genre, we have a number of titles in the pipeline, some of those will be licensed, some of those will be developed. But more importantly, different games will serve different audiences in different ways. And hopefully, in doing that, we can seek to please the aggregate player base as much as possible. Your second question was about mini programs and monetization of mini programs within eCommerce. I mean, I think that as you probably know, there’s a number of eCommerce companies that have embraced the Weixin ecosystem through Official Accounts, through mini programs, through viral marketing and so forth. Some of those have grown extremely swiftly, that includes well-known incumbent companies such as JD.com, also some emerging companies that have enjoyed dramatic growth rates, such as DODO. So at this stage, our focus is really about facilitating those companies being able to reach out to users and to facilitate new users being able to find the products that are attractive to them.

Your next questions come from the line of Jin Yoon from Mizuho Securities.

I think, James, in your prepared remark, I think you said that newsfeed revenues were down year-over-year. If you could give us some color behind that. And then how much of that is just kind of a one-quarter impact versus kind of a long-lasting into the fourth quarter and perhaps the early part of next year? And second of all, with that news, potential revenues from newsfeed going away, have you seen that kind of revenues going to other aspects of performance based?

Well, I think that, what I said was that if you look at our media advertising revenue, then we have seen very strong growth in video. Video was up over 70% year-on-year, but we have seen weaker trends, both year-on-year and quarter-on-quarter for the news category. And within that, one reason for the weak year-on-year growth for the news was that, a year ago, we had the Olympics, so that always brings in substantial revenue and substantial associated costs. And this year, there’s no Olympics. And then the second factor is that we had run some moderate amount of monetization within our newsfeed products, including KanDian, including KuaiBao, including Tencent news. And as Martin mentioned, in the last few months, we have really decided to focus our resources on getting the underlying infrastructure and user experience right. One part of that focus is the Penguin accounts we talked about, whereby we encourage and nurture the creation of interesting content by small professional content generators and then we find the most effective means to distribute that content to users through our various channels. And in the course of focusing on the content side of the equation, we have chosen to deemphasize temporarily the revenue generation side of the equation. And on the revenue generation side, what we’re more looking at how to optimize the back end to create a scalable platform that can really build something impressive and sustainable in the future. All of which means that, yes, our newsfeed advertising revenue has been adversely affected as a result. I don’t think that we would necessarily see other categories of our advertising benefiting instead. I don’t think we can really see that substitution effect.

Got it. And do you expect that to linger into the fourth quarter as well, any significant revenue impact in the fourth quarter?

Yes, that would linger into the fourth quarter. This is a multi-quarter initiative. And if I, it’s actually a number of initiatives. One initiative is really getting the content equation right, so that there’s proprietary or fresh content that appears on our platforms before it appears elsewhere. And another set of initiatives is around building out the core advertising platform. If you look back in the past, you may remember we went through a similar process with the advertising inside our social networks, where we actually took the Guang Dian Tong platform that we built for QQ and applied that progressively to Weixin Official Accounts, Weixin Moments and elsewhere. So that’s where we are right now, we’re in the process of building that advertising infrastructure back end. And again, looking back at the Guang Dian Tong experience, that was a multiquarter construction, if you will. But once the construction had reached a certain level of stability and maturity, then we’re able to grow our revenue much more sustainably than if we just rushed into it.

Thank you. And the next question please?

Your next questions come from the line of Chi Tsang from HSBC. Please ask the question.

Great, good evening. Congratulations on a very nice set of results. I wanted to ask you about 2 things. Firstly, in finance, what sort of progress are you making in terms of consumer loans and also selling other financial services to your users? And secondly, as it relates to AI, there has been some sort of press announcements about you guys working on autonomous driving. Can you give us a sense of what sort of progress you’re making? And I know you’re working on a number of AI projects, how does autonomous driving stack up in terms of priority? Thank you.

In terms of our fintech products, I would say, the initiatives can be summarized in 2 different categories. The first one is WeBank, and I think WeBank has been operating quite well and the loan outstanding has been growing on a pretty nice trajectory. The second one is our online wealth management platform, Licaitong, and I think we are seeing quite a strong traction in Licaitong and we have been able to offer both the more standardized money market products as well as other type of fixed income products to our users. And I think both the number of users and as well as the average ticket size AUM per person has been growing nicely. In the recent month, we have launched WeSure, which is an online insurance gateway. And what it does have is an insurance distribution license. And what we intend to do is actually leverage that gateway to work with other insurance companies, such as leading companies within the sector as well as our investee company, for example, ZhongAn Insurance, right, because they are the insurance companies making original products and our gateway is actually a distribution platform, so that we can actually help our partners to sell their insurance products better and customize their products better to our users. In terms of autonomous driving, I think it’s very, very early days for us. We do have an overall initiative working with the auto companies, and we have strategic partnership with them. And we have maps, we have our in-car solutions, which include also entertainment and speech recognition services that we can install within cars. And autonomous driving, I would say, as a starter, right, will be, assisted driving would be a system that we’ll be developing as an option for our automobile company’s partners to choose from.

Last questions come from the line of Thomas Chong from Credit Suisse.

I have 2 quick questions. The first one is about the ARPU for PC and mobile games. And my second question is about cloud. Can management provide some color about the number of paying customers, if any?

All right. In respect of the ARPUs for MMOG, it’s from RMB350 to RMB670. And for advanced casual games, it’s RMB110 to RMB500. And for the smartphone games, it’s between RMB170 to RMB180 for the quarter.

And I’m sorry, your second question was about the number of paying customers for which product?

For cloud.

Yes, unfortunately, we don’t disclose that number at this point in time.

Thank you. We are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website. The replay of this webcast will also be available soon. Thank you, and see you next quarter.

That does conclude our conference for today. Thank you for participating Tencent Holdings Limited 2017 Third Quarter Results Announcement Conference Call. You may all disconnect now.