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Good day, and thank you for standing by. Welcome to Tencent Holdings Limited 2021 Fourth Quarter and Annual Results Announcement Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] And now I would like to turn the conference over to Ms. Wendy Huang from Tencent IR team. Thank you. Please go ahead.
Thank you, operator. Good evening, everyone. Welcome to our 2021 Fourth Quarter and Annual Results Conference Call. Before we start the presentation, we would like to remind you that it includes forward-looking statements which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for measures of the group's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IR section of our website. Now let me introduce our management team on the call tonight. Our Chairman and CEO, Pony Ma, will kick off with a short overview; President, Martin Lau, will discuss strategy review; Chief Strategy Officer, James Mitchell, will provide a business review; and Chief Financial Officer, John Lo, will conclude with financial discussion before we open the floor for questions. I will now turn the call over to Pony.
Thank you, Wendy. Good evening, everyone. Thank you for joining us. 2021 was a challenging year. During the year, we embraced change and implemented certain measures that reinforces the company's long-term sustainability, but had the effect of slowing our revenue growth. Despite financial headwinds, we have continued to make strategic headway. Our Weixin ecosystem grew increasingly while delivering more value to users and partners. Content diversity and video views increased significantly in Video Accounts. Mini Programs facilitated our independent merchants to thrive within their own private domain, doubling their physical goods fiscal GMV year-on-year. Our Health Code served 1.3 billion users with 180 billion total visits since its launch, becoming the most used new path for verifying health and travel figures during the pandemic.
For Tencent Cloud, we deepened integration amongst the fast-growing SaaS products. WeCom, Tencent Meeting and Tencent Box together facilitate more efficient collaborations and workflows, both within and between organizations. Our video cloud solutions ranked #1 in the domestic market by revenue. And we also provide other industry-leading PaaS services.
In games, we launched League of Legends Wild Rift and Fight of the Golden Spatula, the 2 highest-rank new mobile games by DAU in China. We also developed and operate 5 out of the top 10 mobile games outside China by DAU and increased international contribution to game revenue to 26%.
FinTech business was stable as we operate with prudence, cooperation and expertise. Looking forward, we believe the China Internet industry is structurally shifting to a healthier mode, characterized by a refocus on user value, technology innovation and social responsibility. We are proactively adapting to the new environment by optimizing costs, increasing efficiency, sharpening our focus on key strategic areas and repositioning our sales for sustainable long-term growth.
Summarizing our financial numbers. Our revenue growth loweredwhile our costs increased for the fourth quarter, resulting in a year-on-year revenue decline. Total revenue was RMB 144 billion, up 8% year-on-year and 1% quarter-on-quarter. Gross profit was RMB 58 billion, down 2% year-on-year and 8% quarter-on-quarter. Non-IFRS operating profit was RMB 33 billion, down 13% year-on-year or 19% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB 25 billion, down 25% year-on-year and 22% quarter-on-quarter.
For our key services, we generally retained our first place position in activities, including social, games, long-form video, music, literature, payment and mobile utilities. Combined MAU of Weixin and WeChat was 1.27 billion. Mobile devices MAU of QQ was 552 million. Now I will hand over to Martin for the strategy review.
Thank you, Pony, and good evening and good morning to everybody. As Pony discussed earlier, 2021 was a challenging year for the Internet industry in China and Tencent as well. Today, I would like to share with you how we see the industry has changed structurally and fundamentally and how we are repositioning ourselves for the new industry environment and why we remain confident in our future.
Following a long period of rapid development, the Internet industry in China has revolutionized many aspects of people's daily lives and contributed significantly to the digitization of industries. However, for several years, industry participants have overemphasized zero-sum competition, aggressive marketing reckless expansion, short-term growth and corporate benefits, overlooking the most important elements of sustainable growth. As a result, the industry's growth has become frothy and unhealthy.
Since early 2021, the Internet industry has faced fundamental changes and challenges. New regulations have been introduced to correct misbehavior by industry participants in multiple sectors and promote fair competition, user protection and data security. At the same time, the global macro environment has become more challenging. Amid these changes and challenges, we strongly believe that it is time for the Internet industry to return to its roots of creating sustainable value in a responsible way. In a new paradigm, the industry should focus on the more important and fundamental elements for healthy development, including: user value; technology and innovation; cost efficiency; long-term sustainability; and balanced benefits among corporations, industry and society. At Tencent, we believe we are already well positioned for the new industry paradigm, where the long-term oriented corporate culture that focuses us on user value, social responsibility, technology innovations and compliance, the key elements for sustainable and healthy growth. In addition, we are proactively embracing changes to better align ourselves with a new industry paradigm. We are progressively implementing initiatives to control marketing and staff costs and to rationalize our non core businesses. We expect results from these initiatives to become apparent from the second half of 2022 and onwards. We continue to invest in our strategic growth areas, namely SaaS, Video Accounts and International Games. We're confident that these repositioning initiatives will enable us to resume growth at a sustainable and healthier pace in the new industry paradigm. Over the course of 2021, our financial performance was under pressure amidst structural industry challenges. We experienced lower revenue growth during the year as we adjusted to the new environment. For advertising, our advertisers and our own ad services adapted to new economic and regulatory conditions. For our Domestic Games business, we implement industry-leading minor protection measures to ensure a healthy gameplay environment in China. The direct revenue impact of these measures was lower game spending from minors, which has always been very small. However, more importantly, there was indirect revenue impact arising from shifting of certain development resources away from new games and content development towards minor protection measures implementation.
Our margins reduced due to operating deleverage, reflecting 3 key factors: First, our investments in strategic growth areas, namely SaaS, Video Accounts and International Games; second, our increased costs in response to aggressive marketing activities and intense talent competition in the industry during the course of 2020 and 2021; third, higher revenue contribution from Business Services, which currently have lower gross margin.
At the nonoperating level, our financial performance was also affected by higher losses at several investees which increased investments in new businesses, such as community group buy, and incurred heavy expenditure on user acquisition. Although we faced financial pressure in 2021, we believe our underlying services and businesses are in good health. For advertising, as we adapt to the new environment and further upgrade our ad solutions, expect growth to resume in late 2020. For Domestic Games, we expect to fully digest the impact of minor protection measures in the second half of 2022. We'll benefit from more new game launches when there are new releases, BanHao. For IaaS and PaaS, we are repositioning our focus on revenue growth at all costs through customer value creation and quality of growth, which should benefit our customers and margins over the longer term. For long-term video, we are optimizing the cost structure to reduce losses while maintaining its leading position.
On the other hand, we also see compelling growth opportunities emerging in our strategic growth areas. For enterprise software, we are expanding the scale of our communication and collaboration SaaS. For Video Accounts, we are enriching user connection with creators, advertisers and merchants. For International Games, we have compelling pipeline backed by franchise expansions at our market-leading studios and consistent enhancement of our category-leading studios.
In the next few slides, I will discuss more on our latest operational progress in these 3 strategic growth areas. Let's start with our communications and collaboration SaaS.
SaaS adoption in China is experiencing rapid growth among large enterprises and SMEs. In particular , enterprises are increasingly focused on customer engagement, collaboration and productivity enhancements in their digitization process. During 2021, WeCom, Tencent Meeting and Tencent Docs achieved strong user growth and deepened penetration into key industry verticals, such as education, retail, health care and manufacturing. With the recent strategic product upgrades, we're strengthening our competitive edges by, firstly, positioning WeCom as the core platform for enhanced collaboration and productivity among employees and partners. The integration of Tencent Meeting and Tencent Docs, enterprises would benefit from reduced complexity, enhanced user experience and increased efficiency.
Secondly, enabling differentiated CRM functions in WeCom with deepened connection with Weixin. For instance, enterprises using WeCom can build customer engagement through multiple touch points within Weixin and enhanced services via the newly launched Weixin customer services. We're currently prioritizing scale expansion over significant revenue generation as we believe expanding the network effect of communications and collaboration tools is important for future value creation. Having said that, we are confident in unlocking the monetization potential ahead because, firstly, they are proven business models and significant market size for critical enterprise SaaS internationally. Secondly, in China, the significant size and fast growth of PaaS spending is a leading indicator for the monetization potential of critical enterprise SaaS. And thirdly, we can leverage our deep experience in monetizing premium 2C products, which share certain similarities with communication and collaboration SaaS.
Turning to Video Accounts, which has become a new core infrastructure operation ecosystem. Video Accounts time spent per DAU and total videos viewed both more than doubled year-on-year in the fourth quarter. The growth was supported by our successful expansion in creators and content diversity as well as our product enhancements. We achieved a significant breakthrough in our targeted content categories, such as news, music and knowledge-based content. The number of videos with over 100,000 likes increased robustly, demonstrating deepened user engagement. The proliferation of Video Accounts also enhanced the strength of Tencent's overall content ecosystem. Taking the Beijing Winter Olympics as an example. By leveraging Video Accounts and the capabilities of other properties within Tencent, including social sharing on Weixin Moments, professional sports content from Tencent Sports and editorial coverage from Tencent News, we achieved the highest user reach among Internet platforms in China for the global sports event.
We have been very focused on enriching user connections with creators and merchants in Video Accounts. An increasing number of media, retailers and brands recognize our strong differentiation of building private domain and are developing deep engagement with users through this means, nurturing more high-quality original content by leveraging official account created pools and upgrading our creator support scheme. We are also facilitating merchants' operations with enhanced shopping features and marketing tools.
As for monetization of Video Accounts, we're still in the early stage of development. For live streaming, we are ramping up our tipping revenue, which is already becoming quite sizable, but will pass most of the benefits to content creators. We're growing our live streaming e-commerce GMV as well. Later in 2022, we will kick off the testing and optimization of short video feed ads, which we believe will be the largest revenue opportunity within Video Accounts.
Finally, moving on to International Games. Many of you are aware of our highest-profile franchises and studios. League of Legends is among the top 3 PC games by MAU. After more than 12 years of its release, the franchise is still expanding, thanks to its excellent gameplay experiences; attractive new game mode; team fight tactics; high-quality linear content, Arcane; and the most popular eSports event in the world. PUBG Mobile is a top 5 mobile game by DAU. Clash is the only mobile game franchise with 2 out of top 10 most popular titles by DAU, namely Clash of Clans and Clash Royale. Valorant has grown into a leading title in tactical shooter, ranked #1 on Twitch in this hyper-competitive category. But you may be less aware of our success in acquiring and nurturing lower-profile studios that focus on a particular category of games and that have iterated their way to leadership within these categories while consistently increasing their revenue and earnings. For example, since we acquired Miniclip in 2015, it has steadily grown through new releases and bolt-on acquisitions to become a leader in mobile sports games. Since we acquired Grinding Gear Games in 2018, its game, Path of Exile, has become the global leader in the action role-playing genre. Since we acquired Digital Extremes in 2020, it has cemented Warframe's position as a leading cross-platform sci-fi shooter.
Based on our proven success, we have increased our pace in acquiring emerging studios with promising futures. We're confident that our game competencies in Game-as-a-Service model, in our extensions in PC and console games to mobile platform, as well as our game development publishing expertise, we'll be able to facilitate bigger hits with greater longevity for our category-leading studios.
We're already one of the key industry participants in the international markets with our revenue increasing to USD 7.1 billion in 2021. Going forward, we aim to grow further our existing titles via deepening market penetration, product enhancements and operational optimization. In addition, we'll continue to release new titles, which we expect to drive additional growth, particularly for 2023 and beyond. So with that, I'll pass to James to discuss business review.
Thank you, Martin. For the fourth quarter of 2021, our total revenue grew 8% year-on-year. VAS represented 50% of our revenue, within which, the Domestic Games subsegment was 21%, International Games 9% and Social Networks 20%. Online Advertising was 15% of our revenue, and FinTech and Business Services reached 33%. For Value Added Services, segment revenue was RMB 72 billion for the quarter, up 7% year-on-year. Social Network revenue was up 4% year-on-year to RMB 29 billion, reflecting more video subscriptions and revenue contributions from Video Accounts’ live streaming services. Our total VAS subscriptions grew 8% year-on-year to 236 million. Despite content regulations, our video subscriptions increased 1% year-on-year to 124 million benefiting from popular animated series, drama series and sports events. Music subscriptions increased 36% year-on-year to 76 million, thanks to expanded sales channels and high-quality content and services. Our Domestic Games revenue was up 1% year-on-year to RMB 30 billion as growth from Honour of Kings, plus new games, Fight of the Golden Spatula and League of Legends Wild Rift, was largely offset by softness from Moonlight Blade Mobile and Dungeon & Fighter. Revenue decreased quarter-on-quarter due to seasonality and to the direct and indirect effects of the controls on minors playing games. International Games revenue grew 34% year-on-year to RMB 13 billion. The increase reflected popular content updates in Valorant and Clash Royale, a true-up adjustment to Supercell's revenue upon periodic review of revenue deferral periods, as well as consolidation of Digital Extremes. In Weixin Video Accounts, we broadcast the 2022 CCTV Spring Festival Gala, incorporating unique features for sharing clips and moments. 120 million viewers watched this gala on Video Accounts. We exclusively carried the very popular online concert by boy band Westlife with 27 million viewers. And rock group, Mayday, live-streamed their New Year's Eve concert on Video Accounts, attracting 14 million viewers. For Q2, we're upgrading the services code base to facilitate more immersive social experiences. We're integrating Unreal Engine's graphics capabilities to enable advanced real-time rendering and physics simulation, providing more attractive visuals and life-like interactions. For example, we're testing an application of Unreal Engine in Super QQ Show where users can customize their 3D animated avatars for use in social scenarios. Turning to our games in China. We're cultivating our key IP franchises more deeply and broadly. For Honour of Kings, we're developing new games, animated series and a movie based on its popular characters. We're increasing and creating thematic game content that links to physical world experiences. For example, we provided events tied into the Winter Olympics in Peacekeeper Elite, QQ Speed Mobile and QQ Dancer mobile. In terms of minor protection implementation, during the fourth quarter, total time spent from users aged under 18 declined 88% year-on-year, contributing 0.9% of our Domestic Games total time spent. Total grossing receipts from these users decreased 73% year-on-year, contributing 1.5% of our Domestic Games total grossing receipts. Martin spoke about our International Game strategy earlier. Here, I just note some individual title highlights. Pokémon UNITE, jointly developed by TiMi Studio and the Pokémon Company, won Google Play's Best Game of the Year award for its dynamic gameplay and cross-platform experience. As of December, it had accumulated 50 million downloads. Supercell released one of the biggest updates in Clash Royale's history, materially boosting the game's DAU and grossing receipts. Valorant's new map and character drove user engagement and consumption, and Valorant's inaugural global eSports tournament enjoyed an enthusiastic response. Building on League of Legends' setting and characters, Riot released animated series, Arcane, which topped Netflix's English language TV series viewership chart during the week following its release and set a benchmark for high-quality video game adaptations. League of Legends World Championship Finals attracted a record 74 million peak concurrent viewers, consolidating its lead as the most popular and highest production value eSports tournaments in the world. Moving to Online Advertising. Segment revenue was RMB 22 billion in the fourth quarter, down 13% year-on-year and 4% quarter-on-quarter as lower bidding density reduced average CPMs. Weakness in education games and Internet services ad spend due to regulations on those sectors more than offset strength in consumer staples ad spending and consolidation of Sogou. Internally, we've incorporated regulatory changes which generally reduce our ad inventory, including limitations on [ long-between ] ads, restrictions on ads for the elderly and minors and the Personal Information Protection law. Our Social and Others Advertising revenue was RMB 18 billion, down 10% year-on-year and 4% quarter-on-quarter. While spending per advertiser declined for the reasons discussed, we expanded our advertiser coverage, and Weixin's daily active advertisers increased over 30% year-on-year. Over 1/3 of the Moments ad revenue was generated from ads using mini programs as landing pages and ads connecting users to customer service representatives via WeCom. Our Media Advertising revenue was RMB 3 billion, down 25% year-on-year and 8% quarter-on-quarter as video ad revenue declined due to fewer releases of top-tier drama series and variety shows. Looking at FinTech and Business Services. Segment revenue was RMB 48 billion, up 25% year-on-year and up 11% quarter-on-quarter. For FinTech Services, year-on-year revenue growth is primarily driven by increased commercial payment volume benefiting from an expanded merchant acquiring network and increased volume of mini programs transactions. We strengthened our payment ecosystem by enhancing user security, upgrading mini program-based transaction and customer management functions for SMEs and reducing transaction friction by tools, such as Weixin Pay Score. We now support digital yuan as an additional funding option within Weixin Pay as part of the PBOC's digital yuan pilot phase. For Business Services, revenue growth was mainly driven by increased usage by the Internet services, public transportation and retail industries. We have developed 3 proprietary chip designs for AI inference, smart network interface cards and video transcoding to enhance our product performance and cost efficiency. We released a distributed cloud-native operating system called Orca, which reduces costs for customers migrating from on-premise to on-cloud and enables consistent app deployment and information technology services management from the cloud. We're assisting leading manufacturers, such as Foxconn and Sany Heavy industry, in their digital transformations. Leveraging our AI, Internet of Things and proprietary cloud solutions, clients can automate their production and quality control processes and thereby increase productivity and cost efficiency. And I'll now pass to John to discuss the financials.
Thank you, James. Hello, everyone. For the fourth quarter of 2021, total revenue was RMB 144.2 billion, up 8% year-on-year or 1% quarter-on-quarter. Gross profit was RMB 57.8 billion, down 2% year-on-year or 8% quarter-on-quarter. Net other gains were RMB 86.2 billion, up 162% year-on-year or 275% quarter-on-quarter, which were primarily non-IFRS adjusted items, such as net gains on deemed or disposals of certain investee companies, including a one-off gain of RMB 78 billion arising from the cessation of JD.com as an associate. Operating profit was RMB 109.7 billion, up 72% year-on-year or 106% quarter-on-quarter. Net finance costs were RMB 1.9 billion, down 17% year-on-year or 4% quarter-on-quarter. Share of losses of associates and joint ventures were RMB 8.3 billion compared to share of profits of RMB 1.6 billion last year. Non-IFRS share of losses of associates and, JV were RMB 0.8 billion compared to non-IFRS share profits of RMB 2.7 billion last year, reflecting increased investment in community retail initiatives by certain associates and losses recognized from an associate in the transportation service vertical. Income tax expense was RMB 3.9 billion this quarter. IFRS net profit attributable to equity holders was RMB 95 billion, up 60% year-on-year or 140% quarter-on-quarter. Diluted EPS was RMB 9.788, up 60% year-on-year or 140% Q-on-Q. For the full year of 2021, total revenue was RMB 560.1 billion, up 16% year-on-year. Gross profit was RMB 245.9 billion, up 11% year-on-year. Operating profit was RMB 271.6 billion, up 47% year-on-year. IFRS net profit attributable to equity holders was RMB 224.8 billion, up 41% year-on-year. Effective tax rate for 2021 was 8.2%. The lower effective tax rate versus last year was mainly due to the recognition of big accounting profit from certain investment-related fair value markups of deemed disposals during the year, including JD.com step-down gain. Now I will share with you our non-IFRS financial figures. For the fourth quarter, operating profit was RMB 33.2 billion, down 13% year-on-year or 19% Q-on-Q. Net profit attributable to equityholders was RMB 24.9 billion, down 25% Y-o-Y and 22% quarter-on-quarter. Diluted EPS was RMB 2.547, down 25% year-on-year or 22% quarter-on-quarter. For the full year 2021, operating profit was RMB 159.5 billion, up 7% year-on-year. Net profit attributable to equityholders was RMB 123.8 billion, up 1% year-on-year. Moving on to gross margin. For the fourth quarter, the overall gross margin was 40.1%, down 3.9 percentage points year-on-year or 4 percentage points quarter-on-quarter, reflecting our continued investment in key strategic areas, declined margins in Domestic Games and advertising as well as the revenue mix shift towards lower-margin businesses. By segment, gross margin for VAS was 48.7%, down 2.8 percentage points year-on-year or 4.3 percentage points quarter-on-quarter. Both year-on-year and Q-on-Q decreases mainly reflected revenue-sharing costs associated with Video Account Services, content costs associated with eSports events and live streaming services as well as revenue mix shift within the [ segment ]. Gross margin for Online Advertising was 42.7%, down 10.6 percentage points year-on-year or 3.7 percentage points Q-on-Q. Both year-on-year and Q-on-Q decreases mainly reflected our continued investment in key strategic areas, most notably infrastructure and bandwidth to support the rapid growth of our Video Account Services as well as increased content costs. Whereas overall Online Advertising revenue faced headwinds from both regulatory changes in various advertising categories as well as in online advertising industry itself. Gross margin for FinTech and Business Services was 27.1%, down 1.4 percentage points year-on-year and quarter-on-quarter. Both year-on-year and quarter-on-quarter decreases were substantially driven by revenue mix shifts within the segment as well as our continued investment in cloud computing, talent and operations. On operating expenses, selling and marketing expenses were RMB 11.6 billion, up 16% Y-o-Y and 11% Q-on-Q. Both year-on-year and quarter-on-quarter increases were primarily driven by greater marketing spend on International Games, partly offset by decreased spending on digital content services. Selling and marketing expenses were 8.1% of revenues, broadly stable year-on-year. R&D expenses were RMB 14 billion, up 25% year-on-year or 2% Q-on-Q. The year-on-year increase was mainly due to greater [ staff costs ]. R&D expenses represented about 9.7% of revenues. G&A expenses, excluding R&D, were RMB 10.4 billion, up 20% year-on-year or 2% quarter-on-quarter. The year-on-year increase reflected greater staff costs and office-related expenses. Excluding share-based compensation, G&A expenses increased by 22% year-on-year or 15% quarter-on-quarter. As at quarter end, we had approximately [113,000] employees, up 31% year-on-year or 5% quarter-on-quarter. Let's take a look at operating and net margin ratios. For the fourth quarter, non-IFRS operating margin was 23%, down 5.5 percentage points year-on-year or 5.7 percentage points Q-on-Q. Non-IFRS net margin was 17.9%, down 7.9 percentage points year-on-year or 4.9 percentage points quarter-on-quarter due to the above-mentioned reasons as well as the negative impact from our associate earnings. Let's move on to earnings per share and dividends. For 2021, IFRS basic EPS was RMB 23.597 and diluted EPS was RMB 23.164. Non-IFRS basic EPS was RMB 4.992 and diluted EPS was RMB 12.698. On 23rd of December, 2021, we declared a special interim dividend in the form of distribution in specie of JD.com shares. Based on today's closing price of JD.com, the market value of this special interim dividend is about HKD 12 per share. Subject to the shareholders' approval as at 2022 AGM, we are proposing an annual dividend of HKD 1.6 per share payable to shareholders on the 6th of June 2022. This is stable when compared with last year. Finally, I will share some key financial metrics on the cash flow and balance sheet for the quarter. Total CapEx was RMB 11.7 billion, up 21% year-on-year or 65% quarter-on-quarter. Without -- within total CapEx, operating CapEx was RMB 8.1 billion, largely stable year-on-year. Non-operating CapEx increased 122% year-on-year to RMB 3.6 billion, mainly reflecting acquisition of land use rights during the quarter.
Free cash flow for the quarter was RMB 33.5 billion, up 21% year-on-year or 39% quarter-on-quarter. Net debt position was RMB 20.2 billion compared to RMB 26.1 billion last quarter, mainly reflecting free cash flow generation and on-market divestitures of certain listed securities, partially offset by a strategic investment in other companies. The fair value of our shareholdings in listed investee companies, excluding subsidiaries, was approximately RMB 983 billion or USD 154 billion as at the end of 2021. Thank you.
Thank you, John. Operator, we shall now open the floor for questions. [Operator Instructions]
Our first question comes from the line of Charlene Liu of HSBC.
I have a question and a follow-up on Online Advertising segment. In the press release, we understand the company is only expecting advertising business to resume growth in late 2022. Is that fair to assume that we could see negative growth sustained through at least the first 3 quarters?
And I guess in the context of ongoing challenges in macro and regulatory developments, how would you assess Tencent's advertising business outlook relative to the market at large for the coming year or 2? I have a follow-up on the regulations.
Charlene, thank you for the question. So, in terms of inferring the trends in the first few months of 2022, that seems to be a logical inference. In terms of Tencent's advertising trends versus the industry as a whole, for the last several quarters, there's been a pretty notable impact on us relative to the industry due to our advertiser mix, which has spilled over into certain categories of advertisers that are heavily regulated, sharply reducing their bidding, and therefore are pulling down our effective revenue per thousand impressions. So specifically, if you look at the online education sector, then a year ago, that was low to mid-teens percent of our total advertising revenue. And in the fourth quarter, that dropped to low single-digit percentage of our total advertising revenues. So in that sector, all by itself, largely explains the decline in advertising revenue year-on-year. There's obviously a number of additional factors at work around regulations for the advertising industry itself. But generally speaking, the greatest impact has been from the regulations on advertiser categories, such as education, games and insurance. And then there's been a lesser impact from measures that have the effect of reducing our ad inventory, such as the limitation on loading screen ads. And then measures that provide us with ongoing ad inventory but reduce the targeting around the ad inventory, such as the Personal Information Protection law, have had a smaller negative impact. So I hope that, that answers the advertising question.
Absolutely. My follow-up question is still related to Online Advertising. I would like to know, regarding the new laws on clear labeling of ads and one click to close features, how should we think about or potentially quantify the impact on our advertising business in terms of ROI, pricing and revenue?
Yes. I would refer back to the previous answer, meaning that if you look at the negative facts hurting our advertising revenue in the fourth quarter, then the biggest negatives were those related to regulations on specific advertiser industries. The regulations on us as an advertising media were the less impactful. And then within the regulations on us, the more impactful were those that completely removed inventory. Rather less impactful where those that adjusted how we used the inventory. So I think the changes that you referred to as looming in the future fit into that last category and historically have been less impactful for us.
Our next question comes from the line of Kenneth Fong of Credit Suisse.
I have a question on the investment side. Late last year, we distributed our JD shares as dividend, and we also disposed part of our stake in Sea. So given that we still have a very sizable investment on our balance sheet, so how should we think about, and what sort of criteria we would think, in terms of unlocking the value for our remaining investment? And for the proceeds, given that our share price is significantly undervalue, how should we also think about balancing between like share buyback, new investment and unlocking our investment on the balance sheet?
Portfolio distributions and exits, then there's a couple of perspectives to bear in mind. One perspective is a portfolio management perspective, that as an investor, we actively invest very largely in private companies that have not yet listed. Over 80% of our investments are typically in private companies. On the other hand, at any point in time, the majority of our portfolio by market value is in public companies. And that's because we have a long history of investing companies when they're private and then helping them grow until and beyond then becoming public companies. So that's where we play, so to speak. And as a consequence, it is incumbent on us to continually be divesting, reducing our stakes in publicly listed companies in order to fund continued investments in private companies and help them grow and become all that they can be. In addition, there's a capital perspective, which is that while we invest in other companies, we also look at the appeal of investing in our own stock price. And at times when we consider our own stock price highly attractive, then we may step up the investments in our own stock versus investments in other companies. So in reality, every year for the past several years, we have conducted billions of dollars of divestments. The last 4 months, we've conducted 2 divestments or distributions, which you referenced, JD and Sea, that were unusually high profile and has put the spotlight on the fact that we divest. That is not new news, and it's just part of a continual process, which has attracted more scrutiny than usual in the past few months. So that's on your first question. In terms of your second question, about how do we balance investments in the business versus investments in other companies versus buybacks and so forth. And our core business is highly cash flow generative. And our core business is very capable of funding the investments internally that we're making in areas, such as Video Accounts, enterprise software and International Game expansion. Beyond that, we do invest in other companies as well. And when we're considering the merits of investing in other companies versus conducting share buybacks or distributions directly to shareholders, then, of course, there's a number of variables we look at, one of which is the relative valuation of our own stock. And so you can see that in the past few months, we have been active in terms of the distribution in kind of the JD stock. We've been active in terms of buying back shares on the market, and we've also declared our regular dividend. So those are the 3 channels through which we have been returning capital to shareholders. Thank you.
Our next question is from the line of John Choi of Daiwa.
I have a question and probably a follow-up a bit later. First of all, about your headcount. I guess you guys are starting to kind of still, call it, rightsize headcount in some of the business areas. So I would like to know, how would this so called rightsizing headcount will have -- perhaps have an impact to our growth trajectory for some of the key growth areas that you guys mentioned, like SaaS, Video Accounts, International Games going forward? Are we -- in general, should we be expecting more of a reasonable growth, but with better profitability going forward? And a quick follow-up perhaps is on your investment side that you just mentioned, James. Given that the market volatility, a lot of the private and public valuations of these companies have come down a lot. Does this -- apart from your share buyback that you just discussed, are we -- is it a good opportunity to be more strategic on some of the opportunities that you guys have been doing in the past, such as small game studios and others? And what are some of the challenges and opportunities that you see in this area?
Thank you for the question, John. So I'll start with the investments question. So I would say that the valuations have become more volatile. And consequently, we have become more active. And you can see that with the JD and the Sea situations, but we've also been more active on divestments in a number of other situations as well. So year-to-date, our rate of divestments is running at approximately the same as our rate of investments, in many billions of dollars range. And there are investments we have made in public companies where the valuations have held up very well. And so, we have taken the opportunity to adjust our stakes in those public companies and free up capital to invest in situations where valuations have dropped very sharply because of macroeconomic or other reasons, including our own stock price. So that's on the investments front. And then I think Martin will address the question about headcounts and whether our control of headcount will result in us having slower growth in Video Accounts, enterprise software and International Games.
Well, in terms of controlling headcounts, the main background is that if you look at the headcount growth for the past 2 years, it has been actually quite rapid. And part of that is actually driven by the fact that we have been investing in strategic areas. But part of it is actually driven by increased competition within the industry and also expansion of our businesses into many different areas. And I think we have actually talked about a shift in terms of the overall industry paradigm. And now the entire industry is actually focused on core businesses and more efficiency and more cost rationalization. So along this, right, what we are going to be doing in terms of controlling headcount is that, in some of the noncore businesses, we will streamline; or in some cases, we may exit. And in certain areas where there's a very fast growth in terms of headcount, we would slow it down. And every year, we have natural turnover. And in some cases, we actually sort of slow down the replacement of the turnovers. But overall, what we will be seeing is that our headcount will still be higher by the end of the year than the previous year. We’ll continue to invest in the key strategic areas, and we'll continue to invest in our core businesses and we continue to hire people with special expertise and technology expertise. And we continue to hire outstanding fresh grads. But at the same time, it's really a rationalization of some of the noncore and underperforming businesses that would be more noticeable. So that's the way we think about it. So overall, we want to increase the muscle of the overall organization. So in terms of the key areas of growth, in terms of the core businesses that we want to grow for the long run, we'll continue to invest. So it's not going to have an impact on those businesses.
Our next question comes from the line of Elinor Leung of CLSA.
My question is on the gaming side. Previously, you mentioned that we direct the resources to handle the protection of minors. Wonder if that is done so we can reallocate the resources back to our game development. And how do you see the Domestic Game market growth for 2022 if there's no new game approval for the whole year?
Elinor, thank you for the question. So we can't be very helpful on the Domestic Game market growth because this is still a somewhat [ hot ] driven industry, and we don't have perfect visibility into what the rest of the industry is up to. But the generalization, there are a large number of games that have already received their BanHao but have not yet been published and we assume will be published in the course of 2022. It's also true, looking at history, that in periods when there's fewer new game releases, the existing games may grow faster than they otherwise would. Now I think that in the past few months, that hasn't happened because of the direct and more especially the indirect impacts of the minor protection measures. But at least for ourselves, and we think for our larger peers in the game industry, we've now collectively fully and completely implement those measures. And so the resources can be shifted back from implementing the new minor protection measures toward operating and enhancing the game content.
Our next question comes from the line of Gary Yu of Morgan Stanley.
I have one question regarding margin and cost and I may have a follow-up on regulation. So last year, we talked about strategic investment in 3 areas and therefore expecting a slower product growth. This year, in addition to continued focus in these areas, we also talk about other cost optimization and potentially margin enhancement from that perspective. So how should we look at margin outlook in 2022? And indirectly, how should we look at, kind of, profit growth relative to revenue going forward?
I would say -- those are transition years. I think 2020, '20 to '21, we faced an industry in which everybody was actually trying to grow and expand and there's a very tough competition across the board, ranging from talent competition to very aggressive marketing, and that's sort of driving a lot of the margin compression that you talk about. And that's not just for us, that's actually within the entire industry. And during the presentation, we actually talked about there is actually a fundamental shift in terms of the industry paradigm, from this growth at all cost; to a much more fundamental and value-based, efficiency-based and healthier and sustainable growth mode for the industry. And so that's why everybody is actually doing cost optimization and rationalization. So I would say that these 2 years are years in transition for different reasons. And once we have actually gone through the optimization across the board, on marketing costs, on staff cost and on operating costs, then we'll probably see more stable type of margin structure starting from 2023.
And I have a follow-up on regulations and specifically related to our FinTech business. So how should we look at the potential risk of separation of WeChat Pay from our main retail apps? Or at least some risk or potential limitation or sharing data between the FinTech business and retail core business, if there is any regulatory change on the corporate structure.
Well, I think these are different things, right? From a corporate structure perspective, you're probably referring to the financial holding company, and this is one exercise that we're doing. We are working very closely with the regulators in investigating our eligibility and our needs to establish a financial holding company. And very clearly, the regulatory body is actually trying to use the financial holding company to monitor systemic risk and to reduce systemic -- which we think is actually positive for both the industry as well as for the companies which have been given the license to be a financial holding company. And we actually have seen 2 financial holding company licenses being issued. So the framework and the criteria will become clearer over time. And we thought if we fulfill the criteria and we need to establish a financial company, then we embrace it. And we felt there needs to be some organizational change, but it should not impact the business in a material way. And so overall, it should be neutral, short term. And over the long run, we felt it would be positive because the regulators have always been supportive of the licensed entities. Based on the experience that we have seen on WeBank, it's very clear that the licensed entities would actually see more regulatory recognition and support.
Our next question is from the line of William Packer of BNP Paribas.
Two, please. On the Domestic Gaming front thus far, limitation...
William, you're a little bit quiet, at least for me.
All right. Can you hear me better now?
Yes, much better.
Great. Sorry about that. On the Domestic Gaming front, thus far, restrictions on time and spend have been focused on minors. Should we expect any restrictions on adult time or spend on games? And then as a follow-up, on the last call, you talked to some of the wider technological and cultural benefits of the Domestic Gaming industry. Do you think those arguments are gaining traction with the relevant stakeholders?
Well, we think that the vast majority of the tension is actually on minor protection. And this is something that we have been very focused on, the industry has been very focused on, and we know the regulators have been very focused on, and we're making good progress on that. We can speculate on whether there are additional regulations or not, right? But so far, we haven't heard. And in terms of the benefits of games, right? I think as -- number one, it's actually very clear, it's actually very factual, that the entire tech industry is actually a big ecosystem in which applications actually drive technology improvement and drive hardware and software improvement. And it's just factual. And I think as we are able to -- as we continue to demonstrate the fact, it should be more understand -- more understood by all kinds of stakeholders.
Our next question is from the line of Alicia Yap of Citigroup.
I have a first question on the broader value-added service outlook. So it seems like after the regulatory headwinds in games, the Domestic Gaming revenue could enter a new norm of the slower growth. And then we also see various digital content and community platform revenues also face a number of regulatory and competition headwinds. So could you help us to look beyond the short-term challengings? And how should we think about a longer-term sustainable growth profile for the broader value-added service revenue stream? Do you think we need some breakthrough of new business model or even some new infrastructure setting, such as the Metaverse or others, to revise the growth potential for this segment? And then I have a follow-up.
So Alicia, on your first question about whether we're entering a new normal of no growth of value-added services revenue. Then if you refer back to the 2018 period, there was a similar deceleration in game industry growth in China for comparable reasons. And at that time, there was a great deal of discussion around new normals and ex growth and so on and so forth. And of course, over the next couple of years, as new games came to market, those fears and concerns moved into the background. And I think that, that's the situation we're in now. The game industry is actually the youngest, it's the most vigorous and it's the most well positioned to benefit from technology change of all the entertainment industries. And the entertainment itself is a superset of industries that are generally growing faster than GDP growth due to the satisfaction of Maslow's Hierarchy of Needs. So our belief is that the China economy will grow rapidly over time. Entertainment and leisure spending will grow more rapidly. And then activity around games will also grow very rapidly. To the extent that Metaverses and other concepts layer on, on top, that's beneficial. And of course, we have our International Game business, which is subject to different regulatory cycles and hasn't experienced the deceleration that Domestic Game business has experienced. But I think overall, we have a pretty constructive view on the industry as a whole, both now and for the future.
I see. Second question is can you clarify a little bit on this, on Supercell true-up adjusted revenue that you mentioned in the press release? So is this a 1-quarter catch-up on some deferral? Should we see, on the next quarter, there will also be this catch up? So how should we think about that?
Yes. So from a quantification perspective, in our International Game revenue, excluding the Supercell catch-up, excluding FX changes, was 24% year-on-year. So that's, I think, a good reflection of the underlying growth trends. In terms of the nature of the catch-up, it was a recognition in the quarter of cash receipts that we had received in previous quarters but hadn't booked into the P&L in previous quarters. From time to time, the auditors for our various game subsidiaries review the assumptions under which they translate the cash receipts into revenue, and those assumptions can change because of changing player behavior, but they can also just change because of different theoretical assumptions, which was the case here. We previously calculated player life based on when players began playing the game. Now we're calculating the player life based on when players begin spending money in the game. So there hasn't been a change in the underlying player behavior, there's just been a change in how we think about quantifying the life from when they made a purchase within the game. Looking forward, we went through a similar exercise to Riot Games in the first quarter of 2022, and that will exert a small negative impact on our International Game revenue growth in the first quarter of 2022. So I think, for better or worse, there's a number of studios in a number of jurisdictions within our International Game business, that's a source of fundamental strength, but it's also a source of quarterly reporting noise. And over time, the noise will cancel out. But in any given quarter, the noise can be a negative factor or a positive factor. And so that's why we just wanted to mention that, in the fourth quarter, the headline number benefited from this positive adjustment. But the underlying recurring number was at the mid-20% revenue growth that I referenced. Thank you.
Our next question comes from the line of Robin Zhu of Bernstein.
I just have a couple of questions, please, if I may. One is on enterprise SaaS growth. I mean, you mentioned that you guys are growing this business. Firstly, could you comment on the state of the business and the impact from macro, from the Internet industry slowing down, whether you're seeing any disruptions on this front? And if you could go into a little bit more detail on -- you mentioned you're pulling back from growth at all cost. Which kind of projects are being cut? Or are you doing less of -- in order to realign the business? And then as a follow-up, if you could comment on the margin impact of enterprise SaaS. I presume, right now, Business Services as a whole is margin-dilutive to the overall business. Is there a time line where you'd expect that to change, where it becomes margin-accretive for FBS, or Business Services to grow much faster than average?
Okay. On the cloud business, what was in the past was actually that we have been, and also the entire industry has been, trying to grow the scale of the business so that you can actually sort of get into as many customer relationships as possible. And then in some cases, you would have to undertake very heavy discounts in terms of prices. Or in some cases, you have to develop very custom-made solutions for customer. In some cases, the revenue is actually involving hardware resale, in which you are going to be registering very low margin and -- or sometimes a negative margin. So this is an -- and then there's a very big marketing costs and sales channel costs you have to provide in order to get the business. So this is sort of what we meant by growth at all costs. And I think over time, what we felt would be happening is that we would be -- once we have reached the right kind of scale and also customer relationship, then we can actually start focusing on healthy growth, which include a provisioning of products which are self-developed and which are more standard products in which we can reuse over and over again for many different customers. And that's how we can actually defray the development cost over a much larger pool of revenue and pool of customers. And at the same time, we are going to be upselling our customers into PaaS. And this PaaS would actually carry a much higher margin than IaaS. And we'll be much more disciplined in terms of IaaS pricing and also in terms of not engaging in reselling of hardware and a loss. And in terms of the PaaS, we have called out a number of different PaaS which are actually registering a good margin, and at the same time, which are growing quite nicely, including security, including video cloud, including real-time communication, database, video on demand. And we felt that these PaaS services would continue to grow over time, and that would actually improve the quality of our business and as well as the margin profile of the business. And of course, within the enterprise, there's also the SaaS, which we actually also discussed in quite full length, right, in terms of communications and collaboration tools. And I think we have given a very full account for that, so I'm not going to repeat what we talked about. And overall, what you've seen is that the cloud business, including IaaS and PaaS, is not just margin-dilutive, right? It's actually registering net loss. And also for SaaS, it's incurring costs but not having any significant revenue right now. So these are actually loss-making businesses. But over time, we can actually improve the margin profile of the cloud business. And at the same time, if we can start to monetize it on the SaaS, then margin profile of these businesses would start to improve. So that's what we are assuming for over the mid to long term.
Our next question is from the line of Richard Kramer of Arete Research.
One, just to follow on with Martin from some of the comments you've made already. I know you've given some reasons in the mix and the backdrop, but Page 27 makes it clear that these are record-low margins for Tencent. And in this context of a transition from old to new paradigms and looking past what's obviously a difficult 2022, can you talk about whether the industry overall will see a lower level of medium-term structural profitability? And then I have a follow-up for James.
Well, I think the industry would see a structurally lower growth rate, right? In the past, if you look at the industry, the profitable business is actually engineered for 20-plus percent to 30% growth rate. And there are a lot of businesses which are actually registering losses, and in some cases, huge losses, and really relying on the capital markets for support of their business. And I think this overall industry structure has to change. And so overall, that heavy loss-making companies would actually need to start rationalizing costs in a much more significant way. And then we -- the profitable companies would actually have to cope with a lower revenue growth rate, but I think it's going to be a more sustainable growth rate. And if we can actually do that, right, then the margin profile coming out of this may be actually quite healthy. But we're really transitioning from a very abnormal industry structure for a couple of years.
Okay. And then maybe a second one for James. Just given the transition that you've laid out and the industry needing to go back to its roots. And clearly, around the world, there's a lot of scrutiny of what is thought of as big tech. Would you consider -- or might it make sense to devolve Tencent into a series of pure-play businesses? Beyond the financial holding company question, maybe spinning out the cloud and Business Services or other areas so that investors would have a choice of which elements of your business to own, and Tencent might not seem so large in the eyes of your regulators?
That's an interesting question, and I think more of a question for Pony than for me.
No I think -- let me answer this question, right? I think this is highly speculative. I think this is not something that we consider at this point in time. The most important thing is actually each one of the businesses have to be optimized for its own service and for its own sustainable and healthy growth. And I think that's actually more important than just sort of doing some reengineering on how you draw up the pieces. So I think that's what we're focused on.
Thank you, operator. Let's take the one last question.
Our final question comes from the line of Alex Yao of JPMorgan.
I have 2 questions. One is on the gaming side of the business. Given the sharp reduction in minor revenue contribution to Domestic Gaming revenue, should we expect the gaming revenue growth to remain weak in first half 2022? And then I have a follow-up for Martin to comment on financial holding company structure. Do you guys need to or do you guys not need to restructure the FinTech asset into a financial holding company structure?
Alex, on the first question, I mean, yes, mathematically, we made the changes that reduced the time spent and the revenue by minors during the course of the second half of 2021. And so there will be a negative impact on our year-on-year growth rate through the first half of 2022.
So on the financial holding company question, we are right now investigating our -- both the need as well as our eligibility to get the license for that. But what we're saying is that, without, this is not going to impact our business and it's going to be neutral. And over the longer term, once -- if we actually sort of receive the right license, it could be a positive.
Thank you, operator. 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.
Thank you. And this concludes today's conference call. Thank you for participating. You may now disconnect.