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Thank you for standing by, and welcome to the Tencent Holdings Limited 2018 Fourth Quarter and Annual Results Presentation. [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 2018 fourth quarter and annual results conference call. I'm Jane Yip from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-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. Our Chairman and CEO, Pony Ma will kick off with a short overview; President Martin Lau will discuss strategic highlights; Chief Strategy Officer James Mitchell will speak to business overview; and Chief Financial Officer John Lo will go through the financials, followed by a Q&A session.
I will now turn the call over to Pony.
Okay. Thank you, Jane. Good evening, everyone. Thank you for joining us. 2018 marked the 20th anniversary of the founding of Tencent. Throughout our history, we embraced changes to stay at the forefront of the industry. Recently, we launch a strategic organizational upgrade to extend our strength in the consumer Internet and to embrace the opportunities of the industrial Internet. We will share key milestones with you in the future.
During the year, we strengthened our market leadership in key areas and built deeper connection with our users, advertisers, merchants and enterprise partners.
In social, Weixin becomes the way of life in China aided by Weixin Pay and Mini Programs penetrating more use cases. The sharing of mini videos within chat also drove rapid growth in user activities.
Mobile QQ continued to focus on young user engagement via social video sharing and news feeds. Benefiting from increased user traffic and advertiser demand, social and others advertising revenue rose 55% year-on-year.
In online games, we are the world's largest game platform by users, revenues with technical capabilities to operate multiple blockbusters simultaneously. By MAU, League of Legends continued to be the biggest PC game, and PUBG MOBILE becomes the most popular smartphone game globally.
In China, we sustained market leadership and also implemented the Healthy Gameplay System in our most popular mobile titles to encourage balanced game time for young users.
In media and content, we grew digital content subscriptions 50% year-on-year to over 100 million, thanks to our popular self-commissioned production. News feed, short video and mini video views increased rapidly across our media platforms, QQ Browser and WeiShi.
We grouped our content businesses to form a new platforms and content group, we call it PCG enabling us to focus resources on systematic content creation and management as well as algorithm enhancement. In ecosystem, our payment service expand users and merchant adoption, enabling us to grow commercial transactions rapidly and upsell FinTech products. We stepped up investment in Tencent Cloud, integrating AI and Big Data into the offering to drive organic growth of our own cloud business and assist the digital transformation of various industries. Our customized solutions for smart industries are equipped with tools leveraging our social and technical capabilities.
Now let me go through the headline number, and John will provide more detailed discussion in the financial section. For the fourth quarter of 2018, total revenue was RMB 84.9 billion, up 28% year-on-year, 5% quarter-on-quarter. Total games revenue, which includes platform revenue share booked under social networks, was 36% of total revenues compared to 45% for the fourth quarter of 2017.
Non-GAAP operating profit was RMB 22.4 billion, up 2% year-on-year, down 1% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB 19.7 billion, up 13% year-on-year and stable sequentially. For the full year of 2018, total revenue was RMB 312.7 billion, up 32% year-on-year. Non-GAAP operating profit was RMB 92.5 billion, up 13% year-on-year. Non-GAAP net profit attributable to shareholders was RMB 77.5 billion, up 19% year-on-year. For our key platforms. In social, combined MAU of Weixin and WeChat increased 11% year-on-year to 1.1 billion, driven by user communication needs as well as adoption of Mini Programs and Weixin Pay. Total MAU for QQ was over 807 million. Smart devices MAU increased 2% year-on-year to 700 million. For Qzone, smart devices MAU was 532 million, down 4% year-on-year. In online games, we expanded total user base benefiting from the popularity of tactical tournament games and action games on mobile.
In PC, we released several niche genre games and received encouraging feedback from players. In media, Tencent Video expanded market share in China in terms of mobile DAUs and paying subscriptions. We also use short and mini video to boost time spent in our media feeds business across Tencent News, QQ KanDian, QQ Browser and other news properties.
In payment, we further broadened use cases and grew total commercial payment volume rapidly despite intense market competition. We are now operating the largest mobile payment platform in China, measured by active users and the number of transactions.
In utilities, QQ Browser and our Android app store YingYongBao maintained market-leading positions. Our online security team expand their research to cover a range of new use cases, such as automobile security.
With that, I will pass to Martin to discuss strategic highlights.
Thank you, Pony, and good evening and good morning to everybody.
In this section, I would discuss some of our strategic initiatives that have firstly contributed to the growth of our social platforms as well as our core businesses in payment, advertising and cloud; and secondly, have formed our key proposition to help our enterprise partners to embark on their digital transformation.
Starting with this page on Mini Programs. The platform has become very popular among users. It benefited from a number of key drivers. Firstly, with users, given the ubiquity of Weixin Mini Programs enable us to further enhance user experience by providing easy access to a broad range of daily life services. Total active users in Mini Programs grew more than 250% year-on-year, and daily business per user also increased 54% year-on-year in the fourth quarter.
With service providers, they can connect with consumers via Mini Programs and drive transactions leveraging mobile payment, social sharing, data analytics and targeted advertising. Our Mini Programs are distinguished partly by the benefits they bring to long-tail service providers. Daily visit to long-tail Mini Program increased from 13% as of the end of 2017 to 43% as of the end of 2018.
For developers, our Mini Programs are designed to facilitate cross-platform development and instantaneous deployment, a unique advantage that increases development efficiency. On top of that, we also provide cloud-based development kits to make the development process even easier.
As an emerging platform, we are helping to develop the talent pool in the developers. On that front, we partnered with more than 100 universities to include Mini Programs in their curriculum and students now make up 24% of Mini Programs' developers in China.
Now turning to next page is Weixin Pay. That platform has grown from strength to strength. By the end of 2018, tens of millions of mom-and-pop stores can now accept mobile payment via our easy-to-deploy QR code solutions, which does not require expensive point-of-sales equipment. In total, the number of merchants actively transacting via Weixin Pay increased 80% year-on-year in the fourth quarter of 2018.
We also made significant progress in the food and retail categories with a well-executed strategy that leveraged Mini Programs, Scan-to-Pay (sic) [ Scan-to-Buy], customized management tools and partnership with investee companies such as Meituan-Dianping.
Merchants using Weixin Pay typically see fast customer adoption. Average daily commercial transactions on Weixin Pay more than doubled year-on-year in 2018, as did the accompanying merchant tick rate revenue to Tencent. On a daily basis, there are over 1 billion transactions on Weixin Pay, the majority being commercial transactions.
We believe Weixin Pay is the clear mobile payment leader in China in terms of daily users and the number of total as well as commercial transactions. Built upon our extensive user-rich and deep user engagement, we're able to upsell FinTech products to consumers at low acquisition cost.
Our wealth management platform, LiCaiTong accumulated over CNY 600 billion of customer assets as of year-end. We also helped WeBank distribute micro loan products WeiLiDai to individual consumers, which loan balance has been growing very rapidly. We also launched a new product called WeiYeDai to service small and micro businesses alongside with WeBank.
Now moving on to our advertising business. In our recent strategic organization upgrade, we have merged our ad sales teams to enable them to sell both brand advertising as well as performance advertising. Key advertising accounts now benefit from coordinated sales coverage and the ability to buy efficiently across all our ad inventories.
SME advertisers benefit from the ability to bid and place ads in a more timely and efficient fashion. We've also centralized our advertising data analysis platform greatly enhancing our ad targeting capabilities. And now we can optimize traffic value by dynamically allocating our partner -- our own inventories to the most suitable pricing models, including CPC, CPM and optimized CPA.
We continue to support our partners in achieving sales growth with our rich content partnership, smart retail solution as well as technology support. We have a broad portfolio of inventories, attracting a healthy mix of advertisers across industries and budget ranges. We continue to focus on enhancing ROI to deliver value to advertisers and this is particularly important amid headwinds in the current macroeconomic environment. Ad loads on our properties are generally lower than most peers in the market, and we'll continue to manage it conservatively to produce sustainable growth over the long term.
For our cloud business, we made good progress in 2018. For the full year, cloud revenues more than doubled to RMB 9.1 billion. In the fourth quarter, cloud paying customers also more than doubled year-on-year. Tencent Cloud has become a clear market leader catering to online games and video customers, leveraging our infrastructure and operational expertise.
In Internet services, by leveraging our strategic partnership in key verticals, we have quickly expanded customer base in categories including e-commerce, social media and community, handset manufacturers and smart transportation.
In financial, we are the partner of choice for top banks and that provides showcases to small- and medium-sized financial institutions. In retail, we assist retailers to execute in digital transformation. We help them strengthen customer engagement via CRM and data analytics, enhance marketing ROI using customer targeting and anti-fraud technologies, and also help them to upgrade their internal operations via smart solutions, integrating AI, LBS and Big Data technologies. We will continue to invest aggressively to enhance our cloud capabilities and offerings.
Finally, talking about our ecosystem, which continued to expand during the year, partly driven by our strategic investments. Making strategic investments brings benefits to our core business by leveraging best-of-breed category leaders to tap into new opportunities, allow us to focus our own attention and resources on our core platforms. Also through upstream investments, we've enriched our IP portfolio in games and our digital content. In addition to that, partnership with investee companies also enable us to capture emerging opportunities that help us to expand our offerings to meet evolving user needs, usually in different verticals where our investee companies have unique and domain expertise. It also helped to accelerate the adoption of our enterprise-facing services, such as payment, advertising and cloud. As a strategic investor, we are committed to creating value for investee companies by offering access to our large user base as well as supporting their business growth by providing with -- them with infrastructure, technology and capital. During the past decade, we have built a handpicked portfolio covering games, digital content, O2O services, FinTech and emerging tech areas to over 700 investee companies. More than 100 investee companies were over -- were valued over USD 1 billion each and over 60 are publicly listed already. Going forward, we'll continue to make strategic investments to strengthen our ecosystem and in the process bring benefits to our users, our partner companies as well as ourselves. Now with that, I'll pass to James to talk about our business review.
Thank you, Martin. Good evening or afternoon or morning, everyone. For the fourth quarter of 2018, our total revenue grew 28% year-on-year. As a percentage of revenues, VAS represents 51%, online advertising was 20% and the other segments accounted for 29%.
Starting with our VAS business. Segment revenue was CNY 43.7 billion in the fourth quarter, up 9% year-on-year, though down 1% sequentially. Social network revenue was up 25% year-on-year and up 7% quarter-on-quarter with growth coming from live streaming services and video subscriptions. Our total VAS subscriptions increased by 19% year-on-year to 160 million as our video and music subscriber bases grew rapidly due to self-commissioned video content and our music content library. Online game revenue in the quarter was down 1% year-on-year and down 6% quarter-on-quarter.
In our social networks, video interaction and consumption contributed substantially to activity growth in both QQ and Weixin. For Mobile QQ, AI-enhanced filming capabilities help young users create imagination-driven fun content to share with friends, boosting short and mini video uploads by over 50% year-on-year.
In QQ KanDian, we added new video categories and enhanced recommendation algorithms, introducing users to more relevant and interesting content, and saw significantly increasing daily video views. We also added bullet chatting within videos as a tool for users to interact.
In Weixin, the new function allows users to film and sharing some videos that are available for 24 hours, and Weixin is providing background music matching the context of these user-created videos.
Our enterprise app, WeChat Work is gaining popularity, especially among large enterprises. WeChat Work can assist productivity in several ways. First, through integration with Weixin and Mini Programs, WeChat Work helps enterprises deepen their customer engagements and strengthen their post-sales interactions. Second, WeChat Work supports customer database management allowing enterprises to more powerfully analyze their data. And third, WeChat Work facilitates office administration by plug-ins capabilities such as expense claim approvals.
The smartphone games total revenue for the quarter was CNY 19 billion, up 12% year-on-year due to new action in RPG titles, but down 2% quarter-on-quarter, as we generally prioritize user engagement and other measures of the monetization initiatives in a seasonally slow period. We released 9 new games in the quarter.
As many of you know, monetization approval for new games resumed in December. So far 7 new smartphone games for which we have publishing rights have received such approvals. These include titles in the role playing, strategy, casual and functional genres. Given the backlog, game releases both for ourselves and the industry as a whole likely to initially be slower than in previous years.
At our own initiative, we launched a pilot project to introduce a Healthy Gameplay System, promoting balanced gameplay for under 18 year olds. Starting with Honour of Kings, the system is now implemented in 39 of our smartphone games, covering a large majority of young players. As a result, playtime for minors reduced significantly, but adult players activity and consumption were not materially impacted.
Within China, our action games, such as QQ Speed Mobile and CrossFire Mobile grew users by seasonal initiative and the introduction of season passes. We released several role-playing games based on popular IPs, including Battle Through the Heavens. On mobile MOBA game, Honour of Kings held its flagship eSports event in December, attracting over 75 million unique viewers, an industry record for smartphone games, and we released an expansion pack for Honour of Kings in late January, which is being well received. In international markets, App Annie has ranked PUBG MOBILE the most popular game globally by MAUs iOS and Android since last November. Google Play named PUBG MOBILE its best game in 2018, citing its competitive and immersive game experience.
Following the release of its Royale Pass in January, we believe PUBG MOBILE became the highest grossing game developed and published by a Chinese company in international markets.
Several of our investees' mobile games also attained notable success. Supercell's new mobile game Brawl Stars is the most downloaded game in 50 markets. Epic's Fortnite ranked #1 in the U.S iOS Grossing Chart in the fourth quarter. Free Fire, Garena's first self-developed game, was the fourth most downloaded game globally in 2018. Our investee success benefits us financially, but also operationally in terms of shared insights into industry trends and user behavior, enabling us and our partners to influence the development of a healthy game industry globally.
For PC client games, revenue for the quarter was CNY 11.2 billion, down 13% year-on-year due to users shifting to mobile and down 10% sequentially due to seasonal unfavorability. The League of Legends user engagement trends have improved globally due to new game content and improved specifically in China with the additional benefit of a China team winning the World Championships in November, where 99 million viewers watched the live broadcast of the League of Legends finals in South Korea.
Our recently released NBA2K online 2 game has significantly expanded NBA2K franchise user base with a more powerful game engine, superior graphics and better balanced gameplay. And we launched 2 new PC games, Iris Fall and Bladed Fury to better serve niche audiences. Moving to online advertising. Fourth quarter revenue was CNY 17 billion, up 38% year-on-year and up 5% quarter-on-quarter. Media advertising revenue was CNY 5.2 billion, up 26% year-on-year and up 2% quarter-on-quarter. Within media, video advertising increased year-on-year, helped by a variety of documentary shows, but rescheduling several highly anticipated drama series out of the fourth quarter of 2018 and into later into 2019 led to a sequential revenue decline.
Our news advertising revenue on the other hand increased year-on-year as we added inventory following the rebound to our news feed ad system and increased quarter-on-quarter benefiting from sports events and news feed.
Media revenue generated from feed ads grew over 10x year-on-year, benefiting from traffic growth, the completion of our system revamp and rising fill rates.
Our social and other advertising revenue was CNY 11.8 billion, up 44% year-on-year and up 6% quarter-on-quarter. Advertiser demand and increased ad inventory, especially in Weixin Moments, Mini Programs and QQ KanDian drove the year-on-year revenue growth. Impressions growth in Mini Programs and positive e-commerce seasonality boosted revenues quarter-on-quarter, albeit to a lesser extent than in 4Q 2017 because the growth of Mini Programs advertising revenue in 3Q 2018 created an unusually high base for quarterly comparison.
During the quarter, we showed a second ad unit in Weixin Moments to approximately 50% of moments DAUs. Click-through rates remained high for both the first and second ad units.
Focusing on our Tencent Video business. We continue to lead the China online video market in terms of DAU, time spent and revenue. Driven by premium content, we had 89 million video subscriptions at quarter-end, up 58% year-on-year. Revenue from subscriptions increased 65% year-on-year. User engagement trends were healthy as video views per DAU increased over 40% year-on-year and contributed to advertising revenue growth of 21% year-on-year. Our operating losses remained lower than those of industry peers. We released sequels to several popular IPs, including Season 3 of our adventure drama, Candle in the Tomb and Season 2 of our animated series, the Land of Warriors. In December, we upgraded our video VIP loyalty program, enabling subscribers to access tiered benefits, including e-commerce and travel privileges.
We are the leading destination for viewing sports online in China with the richest portfolio of major sports rights. For example, we've helped expand the NBA's audience in the country leveraging our user base, communities, content curation and video streaming capabilities. Average unique visitors per our live-streamed NBA game in China has almost tripled over the past 3 years.
Moving onto our payments and FinTech services. Revenue sustained rapid growth powered by 3 engines. First, merchants paying us transaction fees for use of our payment services. Second, users, particularly heavy users, paying us cash withdrawal fees and credit card repayment charges. And third, financial institutions including our affiliate, WeBank, paying us service fees for making available wealth managements in micro loan products.
On the regulatory front, we completed the full transition of our payment rails to central clearing and settlement systems, and we moved all custodian cash to PBoC accounts in January this year.
On the product front, Weixin Pay saw continued growth in users and per-user transaction volume. We added new consumer features, such as virtual cards for dependents. And we enhanced account management tools to enterprises.
Our LiCaiTong wealth management platform has accumulated 100 million users who subscribe to money market funds paid by their bank cards. In parallel, our new LingQianTong service allows users to invest excess cash balance in their Weixin Pay accounts directly into money market funds.
And with that, I'll pass to John to talk to the financials.
Hello, everyone. For quarter 4, 2018, our total revenue was CYN 84.9 billion, up 28% Y-on-Y and 5% Q-on-Q. Gross profit was CNY 35.2 billion, up 12% year-on-year or down 1% quarter-on-quarter. Net other losses were CNY 2.1 billion, which mainly consist of one-off expenses relating to ordinary share issuance to strategic partners of TME and the impairment provisions for certain investees.
Share of profit of associates and joint ventures were CNY 16 million compared to share loss of RMB 120 million for the fourth quarter of 2017. On a non-GAAP basis, share of profit of associates and joint venture was CNY 1.9 billion versus CNY 495 million for quarter 4 2017.
Income tax expense was approximately CNY 1.9 billion, down 39% year-on-year or 41% Q-on-Q. The year-on-year decrease was mainly due to preferential tax benefit entitlements. This sequential decrease mainly reflected the reversals relating to the entitlements of preferential tax benefits, partially offset by higher withholding tax. The effective tax rate for the fourth quarter was 12%.
GAAP net profit attributable to shareholders was CNY 14.2 billion, down 32% Y-on-Y and 39% Q-on-Q. The Y-on-Y decrease in GAAP profit was greatly affected by noncash expenses relating to capital raising as mentioned above, coupled with substantial deemed disposal gains in relation to the capital activities of certain investee companies, such as the IPOs of Yixin, Sea and Sogou in quarter 4 2017. Let me walk you through the non-GAAP numbers. For the fourth quarter, operating profit was CNY 22.4 billion, up 2% Y-on-Y or down 1% Q-on-Q. Operating margin was 26.4%, down 6.5 percentage points Y-on-Y or 1.6 percentage points Q-on-Q. Net profit to shareholders was CNY 19.7 billion, up 13% Y-on-Y or broadly stable Q-on-Q. Net margin was 23.8%, down 3.9 percentage points Y-on-Y or 1.5 percentage points Q-on-Q.
Turning to gross margin. Gross margin for our Value Added Services was 53.4%, down 5.9 percentage points Y-on-Y or 3.1 percentage points Q-on-Q. The Y-on-Y decrease was mainly due to higher content cost for video and music services and lower revenue contribution of higher-margin PC client games. The quarter-on-quarter decrease was mainly due to lower proportion of revenues from our PC games, lower revenue contribution from sub-developed smartphone games and increased content cost for our live broadcast and music services. Gross margin for online advertising was 36.6%, broadly stable Y-on-Y and Q-on-Q. Gross margin for others was 23.1%, again broadly stable Y-on-Y and Q-on-Q.
On operating expenses, selling and marketing expenses was CNY 5.7 billion, down 5% Y-on-Y or 13% Q-on-Q. The year-on-year and quarter-on-quarter decrease were mainly driven by the reduction of advertising and promotion expenses due to cost control initiatives. Total G&A expenses was CNY 11.4 billion, up 29% Y-on-Y or 4% Q-on-Q.
On the G&A, R&D expenses were CNY 6 billion, up 24% year-on-year or down 5% Q-on-Q. The year-on-year increase of total G&A mainly reflected greater R&D and staff costs. The quarter-on-quarter increase was mainly reflecting quicker spending on staff fringe benefits and conference costs -- conveyance fees, sorry. At quarter-end, employee count increased to approximately 54,300, year-on-year increase of 21%, reflecting expansion of our business group.
Let's go through margin ratios for quarter 4. Gross margin was 41.4%, down 6 percentage points Y-on-Y or 2.6 percentage points Q-on-Q. Gross margin contraction and revenue mix shift to other segments, which carry a lower margin are the main reasons. Non-GAAP operating margin was 26.4%, down 6.5 percentage points year-on-year or 1.6 percentage points Q-on-Q.
Non-GAAP net margin was 23.8%, down 3.9 percentage points Y-on-Y and 1.5 percentage points Q-on-Q for 2018.
On GAAP basis, basic EPS was CNY 8.336 and diluted was CNY 8.228. Non-GAAP basis, basic EPS was CNY 8.203 and diluted EPS was CNY 8.097. Subject to shareholders' approval at our AGM to be held on 15th of May 2019, we are proposing an annual dividend of HKD 1 per share, payable on 31st of May 2019. Before I close my remarks, I will share a few key financial metrics for fourth quarter. Total CapEx was CNY 4.6 billion, down 8% year-on-year or 24% Q-on-Q. Operating CapEx was CNY 3.7 billion, down 29% Q-on-Q. Nonoperating CapEx was CNY 893 million.
As at quarter-end, free cash flow was CNY 28.6 billion, up 18% Y-on-Y or 9% Q-on-Q. For 2018, free cash flow was CNY 83.4 billion, down 11% year-on-year.
Our net debt position improved by 58% to CNY 12.2 billion quarter-on-quarter. Healthy operating cash flow plus the disposal of our shares in certain investee companies and capital raising from TME more than offset M&A cash outflows in the fourth quarter. The fair value of our shareholdings in the listed investee companies, excluding subsidiaries, was approximately CNY 238 billion or roughly USD 34.7 billion at year-end. I would like to let you know that following our strategy -- strategic upgrade from the consumer Internet to the industrial Internet, we will add a new revenue segment to better reflect our evolving business mix in this quarter. Thank you.
Thank you, John. We shall now open the floor for questions. Operator, we will take one main question and one follow-up question each time. Shall we invite the first question, please?
The first question comes from the line of Thomas Chong from Crédit Suisse.
I have a question related to advertising. Can management comment about the macro headwinds to our advertising, including social and others as well as media? And how should we think about the growth trend in Moments as well as Mini Programs? Should we expect to increase the ad loads in Moments in coming quarters?
Thomas, thank you for your question. In terms of macro headwinds, it does appear that the uncertainty late last year may have resulted in slower advertising spending, particularly in some high-ticket price categories, such as automobiles, reflecting a deceleration in sales of automobile. So I suppose here that's not desirable, but it's fairly natural. As far as Tencent was concerned, we believe we continue to grow substantially faster than the market in the fourth quarter and in turn we think that reflects the quality of the inventory that we bring, the targeting technology we provide around the inventory and the attractive prices that we charge. Looking forward then, you can see from our latest quarterly results that we still have ample room to increase ad load over time at a measured pace in some of our key inventories, such as Weixin Moments, where we're currently running 1 to 2 ad units per day versus global peers running around 10 ad units per day. And we're also starting to bring online news feed inventory where we've been focused on really increasing traffic first, and now that we're in a position where the traffic is growing nicely, you can see that in the fourth quarter, the revenue began to pick up as well on the news feed side. So that's how we see the advertising environment.
May I have a quick follow-up. Regarding the online video advertising, given the fact that we see some delay in terms of the launch of some of the drama programs, how should we think about the trend in Q1 and 2019?
Well, as you observed, there are some delays across the industry to launch in certain categories of content in online video, for example, costume drama series. And costume drama series are relatively important in terms of their ability both to drive advertising and also subscription revenue. So obviously, the subscription revenue reacts with a longer time lag to changes in the content, but the advertising revenue reacts relatively immediately. So yes, there may be some pressure for the overall online video industry's advertising revenue in coming months, as the industry waits to bring on stream some of the content.
Next question is from the line of Wendy Huang from Macquarie.
First, can you give us update on the games in the pipeline with approval considering that you launched the new titles in Q4, but additionally, you get 7 titles through the approval. And also can you clarify whether the 7 titles you mentioned you've got approval, that actually includes license to titles, which is actually developed by other companies? And also a very quick follow-up on the advertising questions that Thomas asked earlier. So how should we think about advertising margin trend going forward? It seems actually it stabilized a little bit this quarter. And also related to that, what will be the content cost in 2019?
So in terms of the new games, just to clarify, 7 new smartphone games have been approved since the BanHao resumed -- the issuance of BanHao resumed. But we've also had 1 PC game approved. So in total, 8 games approved since resumption of BanHao. And that includes licensed games. We have several dozen more games in the approval pipeline, awaiting approval. As we commented in the opening remarks, the fact that there is this backlog for approval will likely have some impact on the industry growth and our growth within the industry in next few months. But we're pleased that the situation is clearer now and that the backlog is being worked through at a fairly rapid pace. In terms of the margins for our advertising segment, as you know, historically, those depend to a great extent on the mix of different products. And so for example, when we grow the advertising within Weixin Moments, that's a relatively high-margin stream. If we grow the advertising around video entertainment content, that's a relatively low-margin stream. And then inventory where we share advertising with partners such as Official Accounts falls somewhere in the middle. In the near term, the flip side of not being able to show some of the video content one might otherwise show is the video content costs may not be as heavy as they would otherwise be for the industry and for us within the industry.
The next question comes from the line of Han Joon Kim from Deutsche Bank.
Another question on the margins. And if I'm reading this correctly, it seems like WeChat Pay gross margins improved sequentially. And we talked to a few factors that drove it, but as we think about 2019, could you walk us through some of the puts and takes and how much operating leverage we can kind of see here in terms of gross margins?
Well, I think for WeChat Pay, the gross margin, number one, I think is going to be driven by a number of different factors, which are actually quite dynamic, because we actually take in the revenue from the merchants as well as from consumers. But at the same time, we actually have to pay a very big chunk of that to the banks as bank charges. And at the same time, nowadays, we actually sort of have lost the interest income from the reserve cash, but we are now trying to compensate partly for that through cross-selling of our FinTech products. So it will be a pretty dynamic situation in the course of the year of 2019. A big swing factor would be the bank charges, and that is being factored as actually competitive dynamics and also our ability to cross-sell more financial products. And at the same time, what you see is the gross margin. But below the gross margin, there's actually a marketing cost, which is actually also very high, because despite the fact that we have positive gross margin on the growth side, we are actually engaged in a lot of marketing activities, including consumer subsidies, including some merchant rebates in order for us to continue to build market share and also make our payment mechanism -- I mean our payment platform more popular with merchants. So that actually is an added cost, which is quite dynamic as well. So I think all in all, what I want to say is it's a dynamic situation. We run our payment platform more as an infrastructure business for now. And over time, I think if we can achieve more success in cross-selling the financial products, then it may generate more revenue and more margin. But again, it's a long-term vision for our business. For the near term, I think we're very focused on making sure that we can continue to make WeChat payment even more popular among the users and merchants.
Got it. Understood. And if I just have a quick follow-up question. I noticed a pretty sharp spike in content costs in the cost breakdown. So I just wanted to understand the nature of that and if that happens to be more one-off in nature or something that's going to be recurring.
Sorry, again, just can you just repeat about your question for the content cost?
Yes. The cost breakdown actually shows a fairly sharp increase in the content cost in the fourth quarter relative to prior trends. So I just wanted to see if there was any particular one-offs included in there or if this is something that's going to be recurring.
I think it's something to be recurring due to the fact that there are a lot of things that are included. And the content costs, such as Interactive live video, if we have more revenue, then there would be more sharing. And also there has been more content costs in respective music being paid for. So we have more content costs. And on top of that, online games makes -- and things like that would affect the content cost we need to share with the developers.
Thank you. Next question, please.
Next question comes from the line of Alicia Yap from Citigroup.
I have questions on the online games. Given Perfect World just launched and the initial ranking was very strong, from the past record, usually, the MMO tends to spike in the first couple months and then drop out very quickly after that. Do you think Perfect World will be the similar case? Or do you think it will be different this time? And could you share with us the reasons that boost the strong games performance? Is that because of the game quality? Or is it because of the Tencent's successful promotional effort? And the follow-up questions I have is related to advertising. So just wondering, because of the Mini Programs advertising, if I remember correctly, was actually introduced late 2Q, so it actually benefited the 3Q. And just wonder how we reconcile 4Q that we didn't get much of that benefit, is it really because of the macro? Or is that we were too optimistic about the ramp of opportunity within the Mini Programs?
Alicia, so first of all, on the Perfect World game, it has been tremendously successful, and we obviously have remained so. I think in terms of the factors that contributed to its success, the game quality is obviously one. The long history of the intellectual property is another. Our ability to target the game to the right audience is the third. And then I think our publishing skills in general are up fourth. You made a comment that MMO RPG games sometimes have a big bang and then diminish quickly. I think if you actually look at our game portfolio, then you'll see that we have many MMO RPG games that have been successful and revenue-generative and profitable for many years, and that would include TLBB or the MT4 game or a new or a number of games. And yes -- and while it's true that compared to a game like Honour of Kings that starts monetization at the low level as it's building audience and then it gradually matures into higher and higher monetization over time. Role-playing games, you often see a burst of activity and spending in the first month and then it consolidates down to a lower level. A, that's something that's true across the industry; and b, the lower level to which the revenue consolidates down to can still be a very attractive level in absolute terms. So that's on the role-playing game side. On the advertising side, then the -- we've said in the past and we'll say again, you shouldn't read too much into changes in the rate of growth year-on-year from one quarter to the next. If you look back over the last 5 quarters, I think every quarter, we've either accelerated or decelerated, and then accelerated and then decelerated. And it's important not to overreact to those. As you observed, we did begin to put advertising to the Mini Programs from the middle of the year. And that resulted in a very strong advertising result for us in the third quarter, and the Mini Programs ad revenue continued to increase at a double digit rate from Q3 to Q4. But relative to previous years, I think that, a, we didn't have as much benefit on the video side because of the deferral of certain key content out of Q4 into the following year; and then, b, there may have been some macro impact in terms of the very high-ticket-price advertisings as well.
Next question comes from the line of John Choi from Daiwa Capital Markets.
I have a question on cloud. I think this quarter, you guys also have done a pretty good a job, I think CNY 9 billion for the full year, I thin fourth quarter roughly about CNY 3 billion. Could management give us more color, apart from games and video, I know that Internet services financial retail have been also stated. And I think Martin kind of emphasized these verticals, but could you kind of give us more color on the contribution of these verticals in terms of paying customers or revenue? That would be great. And how -- like what will be the growth drivers going forward? And if I have a follow-up quickly on advertising. Given that short-form video continues to be a pretty big success right now, are you seeing any behavior changes from our advertisers that is impacting our advertising business?
Well, in terms of cloud, I would say we have actually provided quite a bit of color around the cloud business, right. And, a, it's a combination of that we have more paying customers. And as we continue to serve the existing customers, right, they would actually increase the spending with us over time. So I think these are the drivers. And at the same time, we have been increasing our product portfolio from just the infrastructure to also paths. For example, we have been launching our online security cloud service, which has been pretty distinctive manage for us because we have been engaged in the online security industry for a long time. And that when we package these technologies and the capability into a product and into the paths for our users, right. They adopt it. So I think, a, it's a combination of more paying customers, higher spend with existing customers, and also -- and enriching portfolio of products. In terms of the growth for 2019, I think we'll continue to work on the areas in terms of signing more customers in terms of serving the existing customers better, so that we can increase their spend. Some of these customers have multiple cloud providers, including also their own IDC operation. So over time, we want to prove that we have cost competitiveness as well as our service level and the product portfolio, so that we can move more of their data center usage into our cloud. And at the same time, we'll continue to improve our product offerings, so that we can get into more revenue sources as well as high-margin areas. And finally, we want to build up our relationship with partners, both in terms of distribution as well as in terms of SaaS partners, right, so that we can actually distribute a larger portfolio of SaaS services, which are, in nature, of higher margin to our customers.
On the question around short-form video, it's certainly true to observe that services like Kuaishou and Douyu have grown their traffic very quickly in the last course of 2018 and grown their advertising revenue fairly quickly as well. I would observe that there is some advertiser overlap, but it's not complete advertiser overlap. Relative to Weixin Moments, for example, which attracts more brand-conscious advertisers, the short video sites tend to attract more -- purely performance-oriented advertisers. Also, if we look at the identities of the top 2 or 3 biggest advertisers on those platforms, they would generally be companies that don't advertise on Tencent inventory for competitive reasons anyway. And I think the bigger picture is that the China advertising market will always have multiple companies in growing share. There's never been a point in time and there probably will never be a point in time when we're the only company growing share. So what's important to us is not who are the other companies growing share at any point in time, but are we actually outgrowing the market. And I think that if you look at the data reported across the industry, there are some successful companies growing advertising revenue in the mid 20%s year-on-year, and there are others whose advertising revenue is growing in teens or flat or even down year-on-year. And we grew our advertising revenue about over 30% year-on-year -- 38% year-on-year in a season -- in a macro economically difficult quarter. So we feel that we're clearly outperforming the market, and we look forward to attempting to continue to do so, given that the tailwinds we enjoy in terms of substantial traffic growth, information about our users and ability to target the right ads to them and the technologies that we're increasingly bringing to bear around advertising.
Thank you. And the next question, please?
Next question comes from the line of Eddie Leung from Bank of America Merrill Lynch.
I have a question on industrial Internet strategy. Enterprise services seem to have long education and sales processes. So just curious on how you guys internally prioritize resource allocation among various, let's say industry verticals and use cases? I suppose at this early stage, it might be difficult to use a concrete ROI analysis or am I wrong? And then just a follow-up question, again, on industrial Internet strategy. For the upcoming quarter, you mentioned that there will be a separate segment. So should we assume most of that revenues at the moment are booked under the others segment?
In terms of industrial Internet revenue, I think, Eddie, you're right in saying that the sales cycle is typically long. And it varies across different industries, right. So I think what we do is actually taking a longer-term approach, which means that as we identify the industries that has the potential, then we will put our resources to target those industries, and knowing that it may take some time in order to break into the industry. And -- but this is not something that you can actually avoid, right. You can never allocate resources that you never bring into the vertical. So that's why what we try to do is we dedicate the resources. We actually create also the product, right, in order for us to demonstrate our technology as well as capability. And over time, once we can win certain showcase deals within the industry, right, then we can actually start to make much better sales within the company, so -- within the sector. So take an example. We know that in the financial sector, there's actually a big need for cloud services, right, but then the requirement for security, the requirement for service is actually very high, right. So in breaking into the financial sector, what we do is, one, we have a showcase around WeBank, which is very clearly from ground up build up through our Tencent cloud. And the other one is actually breaking into some of the very key banks, such as consortium banks, consortium Bank of China. And once we have been able to break into these very large accounts, right, we then -- a lot of the other financial institutions would take that as a point of comfort, and then they would come into using our services. So I think that's how we do it. What was the second question?
The new segment being carved out from [indiscernible].
Yes, that -- yes, I think that's true. Your understanding is true. The new segment will be carving out from others to provide more information around that.
Thank you. And next question, please?
Next question comes from Grace Chen from Morgan Stanley.
I just have a quick question about the gaming business, in particular cloud gaming. It will be great if the management can share with us your view about the market potential of cloud gaming in China, and how Tencent position itself to capitalize on cloud gaming.
Well, we think that over the medium term, the potential for cloud gaming is quite interesting because it will allow people to play more sophisticated, graphically immersive games on low-end devices, whether those be low-end PCs or PV screens or low-end smartphones. And I think that that's true globally. It may be, to some extent, disproportionally true in China, given China has an unusual combination of actually very good bandwidth, but a relatively low-end PC and smartphone mix compared to just some developed markets. In terms of whether this is an appropriate opportunity for Tencent, and I think it's actually a very appropriate opportunity for Tencent for a few reasons. One is that we are a fairly capable game company, and this is a natural evolution of games. The second is that we're a company that has increasingly substantial cloud resources. And one of the critical success factors providing cloud stream games, particularly cloud stream interactive games, is actually having servers in relatively close physical proximity to the users. Because if you're trying to enable people to play a competitive cloud stream game from a central server on the other side of the world or the other side of the country, then no matter how good the bandwidth is, the physical latency means that for fast-paced games involving bullets, it's actually impossible to provide an experience equivalent to what you would get from a client-processed game. So we have that distributed server infrastructure across China. We have the game expertise. It's something that we're naturally very excited about, both from an evolution of games perspective, but also from a deepening of our cloud services perspective. And so it's something that we're looking into closely. But it's also something that I think will take a few years to fully materialize. In the initial stage it may be more about supporting single-player games, where the latency is less of an issue, and then gradually upgrade to multiplayer games, which is obviously the bigger revenue opportunity over the course of a number of years.
The next question comes from Richard Kramer from Arete Research.
A couple of things. First of all, you mentioned in the release about more accurate targeting of advertising and having merged your platforms to allow for multiple charging modes. Can you comment a bit more specifically about how much of the Weixin data will be available to advertisers for targeting purposes maybe beyond products like WeChat Moments and how closely integrated Weixin will be with the rest of the content ads? And maybe my second question, if I'm looking across your portfolio of services, whether it's music, video, gaming content and others, what sort of prospects do you see for bundling those services into a sort of all-encompassing content bundle, where when someone is taking multiple services, they might be less prone to the churn that you very commonly see in China content services?
Yes. In terms of targeting, right, well, it's very important to note that we don't provide any data to outside parties. Within the targeting, basically, it's a process in which the advertiser would specify what they are looking for. And then we will, within our own rules, figure out who are the people to target for them within our own network. So there's absolutely no sharing or providing of data outside of our own service, not to advertisers and not to the other traffic partners. So I think that's very important to know. But because we have our mining algorithm that runs within our own firewall, right, so then we can actually provide the kind of advertising targeting and keep on iterating to make it better. So that's how we do it. And at the same time, as we have pointed out quite a few times, right, we do not subscribe to the notion that you need to have a sharing of data among all our different platforms. Because I think as a company, we actually put our user privacy at the forefront of our concern. So that's why we felt if you look at the ability for us to target, a lot of the benefit would actually come from the fact that we keep on improving our own technology. When we pool together -- our technical expertise is actually focused on improving our targeting and data analytics technology so that we can make every single platform better in terms of targeting end users. But it's not going to bluntly sharing of the different data across different platforms, even internally.
On the portfolio bundling question, it's an interesting topic, and certainly something that we think about. You link it to churn reduction. And actually, I'd say that on the churn reduction side, the industry and Tencent within the industry are making good progress anyway. And that's partly because we have more regular better content now instead of someone subscribing to watch a single Hollywood movie and then churning once they've watched that movie. Increasingly, it's built around drama series, TV series sort are more recurring, episodic in nature and people tend naturally to stay for longer. Also, as increasingly providing the subscription of billing through our mobile payment solution, then that tends to result in more convenience of payment. Therefore, higher stickiness, therefore, lower churn. So when we look at the portfolio of bundling opportunity, we're looking at it less from a churn reduction perspective and more from a sort of value enhancement perspective. Both -- Tencent is the recipient of the consumers' payments, but also to the consumer in terms of whether they're actually getting appropriate value and making full use of the content that's available. And I think that's something that is -- the jury has stood out globally. Amazon Prime is doing great bundling in video and music, but then Netflix and Spotify are also doing great providing video and music individually. In a China context, we have 160 million subscriptions now. The majority of them are digital content subscriptions. On the one hand, that's a gigantic number. It's bigger than the entire pay television industry in the United States in terms of subscriptions. But on the other hand, it's a small number because it's still only a teens percentage of the population. So for the immediate future, while we're doing some interesting experiments around bundling, the primary focus is on making each individual product, be it our video subscription service, our music subscription service, our literature services, be as strong as they can be and as fully satisfied their user bases as possible within that vertical domain rather than trying to provide a full horizontal solution at a higher price.
Thank you. And may we accept the last 2 questions.
The next question comes from the line of Natalie Wu from CICC.
I have 2 questions. First one is related to still mobile game. For your -- just wondering, for the strong performance of HoK during Chinese New Year, how much is related with the seasonality, and how much is related with the Battle Pass? Should we expect the part of the -- I mean a part of this chance to continue throughout this year if it was, to some extent, related with the Battle Pass system? And my second question's really with the e-commerce endeavor within WeChat ecosystem. For example, the function of shopping within WeChat based on a friend's recommendation, which is called Yihaodian, that has just been launched. What kind of the strategic resources you are planning to promote this function? And how big can that kind of the function grow?
In terms of Honour of Kings, I think we're actually quite happy to see the fact that this game has been actually able to not only sustain its user base, it has actually been able to attract a lot of users who have been paying less to come back to the game during the Chinese New Year period. And that's actually mostly due to the fact that we have done a very large upgrade, which improved the entire graphics to a new level. And at the same time, we have improved the matching mechanism. We have improved the tech behind it. So I think it's actually a testimony to the fact that when you have a PvP game that has been popular, that has reached such a large user base, whenever you provide a good upgrade, then a lot of people actually come back to play the game. So I think the most important thing in the pretty good uptick is actually because of this. And then there's the seasonality. And then the Battle Pass, I think is really a new trial. I don't think it has provided a lot of benefit yet. But over time, hopefully, the Battle Pass can become a more -- another addition to our continued revenue generation. In terms of the e-commerce, I think we are doing a lot of different trials within our platform. I think at this point in time, it's too early to tell. But if -- at the time when we have seen more insights, then we can provide an update to our investors.
Thank you. And the last question, please?
This is the last question. It comes from the line of Gregory Zhao from Barclays.
So my question is about the sales and the marketing expense. So the press release mentioned that you decreased some advertising and promotion expenses and reduced some less effective marketing campaign. So just want to have a better understanding of that. In which business category and in what kind of marketing campaigns you call your advertising budgets? And one quick follow-up on the content cost. So your industry peers, like IGE mentioned on their conference call they expected the overall online advertising -- sorry, online video content market to be more rational in 2019. So given the control of celebrities' income by the government, so just want to check what the implication to Tencent's video services, especially on cost and the margin.
All right. In terms of selling and marketing expenses, I must say that we have done a stringent sort of cost control on a number of measures. Number one, it's -- since we understand that there's a latency in the provisioning rights approval, so some of the games for the pre-launch promotion we have kept down. And number two, as you know, we have reviewed a lot of different products, and some of which are still under research and fine-tuning. And we have decided not to spend too much money at that point in time. But instead, we will look at the ROIs for some of the campaigns. While we are doing it, if we find out that if it is not as good as expected, we will have cut it -- we will cut it immediately. And there are a lot of different campaigns, including the offline as well as the online. Because selling and marketing cost is something that we can dial up or down easily according to how much we would like to spend that. So it's pretty easy for us to control. Say for instance, margin expansion earlier, in some circumstances, we can -- if you want to invest greater, we can spend more money on the payment platform side, whereas we feel like that's in good shape, we can lessen it to some sort of extent.
In terms of your question about content costs, then it is correct to observe that the content costs we would pay a top-tier drama series, for example, are a little bit lower than they have been in the past. Now -- and of course, there's some caveats attached to that, one, is the other format costs continue to increase. The second is that while the costs we'd be paying and capitalizing today are stabilizing or dipping, they wouldn't flow through to a P&L benefit for a year or more, given the relatively lengthy production cycle for these top-tier drama series. And I'd also refer back to a comment I made earlier that to the extent that the companies in the industry aren't showing some of the high-quality content that they've earlier commissioned or paid for, then they aren't expensing it either, which is good for costs. But they also aren't generating the advertising revenue they would otherwise have generated, which is not so good for revenues. So as usual with the online video industry, there's a lot of moving parts. And sometimes they cancel each other out a little bit.
Thank you. And 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 at www.tencent.com. The replay of this webcast will also be available soon. Thank you, and see you next quarter.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating in Tencent Holdings Limited 2018 Fourth Quarter and Annual Results Presentation. You may all disconnect now.