Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Tencent Holdings Limited 2012 Fourth Quarter and Annual Results Announcement Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. 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. Catherine Chan from Tencent. Please go ahead, Ms. Chan.
Catherine Chan - IR: Thank you, operator. Good evening. Welcome to our annual results conference call for 2012. I'm Catherine Chan 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 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 the risk factors and our non-GAAP measures, please refer to our disclosure documents downloadable on www.tencent.com/ir.
Having said that, let me introduce the management team today on the call. They are our Chairman and CEO, Pony Ma; President, Martin Lau; Chief Strategy Officer, James Mitchell; and CFO, John Lo.
Pony will kick off with a short overview of the financials and performance update. Martin will discuss our mobile Internet strategy, James will review our business performance, and John will go through the financials, and then we'll open the floor for questions.
Now let me turn the call over to Pony.
Huateng Ma - Core Founder and CEO: Thank you, Catherine. Good evening, everyone. Thank you for joining us. We are pleased to report another year of solid growth in revenues and earnings, and let me quickly (line) some of these numbers for you.
For the fourth quarter of 2012, total revenue was RMB12.2 billion, up 53% year-on-year and 5% quarter-on-quarter. IVAS revenue was RMB8.5 billion up 32% year-on-year and 1% quarter-on-quarter. MVAS revenue was RMB934 million up 9% year-on-year or about 1% quarter-on-quarter. Online advertising revenue was RMB947 million up 58% year-on-year, or down 7% quarter-on-quarter. e-Commerce transactions revenue was RMB1.7 billion up 48% quarter-on-quarter. Non-GAAP operating profit was RMB4.3 billion up 23% year-on-year or down 3% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB4.1 billion up 40% year-on-year and 15% quarter-on-quarter.
For the full year of 2012 total revenue was RMB43.9 billion up 54% from 2011. IVAS revenue was RMB32.0 billion up 39% year-on-year. MVAS revenue was RMB3.7 billion up 14% year-on-year. Online advertising revenue was RMB3.4 billion up 70% year-on-year. e-Commerce transactions revenue was RMB4.4 billion. Non-GAAP operating profit was RMB17.1 billion up 29% year-on-year. Non-GAAP profit attributable to shareholders was RMB14.3 billion up 31% year-on-year.
During 2012 we made substantial achievement in five key areas that cemented our existing leadership and enhanced our competitive position in the evolving Internet space.
First, it reinforces our social leadership via the wireless QQ and Weixin. We built a vibrant ecosystem through our open platforms, bringing value to consumers and developers and our WeChat app has begun to expand internationally in key Asian markets.
Second, we expanded our market leadership from current games to browser web games. We believe our game publishing platform made us like the preferred parlor for domestic and international developers and our game user base is growing internationally.
Third, we emerged as the largest display advertising platform in China by revenue; two new engines contributing to our above-industry growth, mainly targeted at on our social networks and display ads on our video platform.
Fourth, we grew e-Commerce transaction volume and revenue substantially as we expanded coverage from Eastern to Sothern China. Fifth, we made significant investment in technology and infrastructure. Our mobile security software, Mobile Manager registered over 140 million activate users on smartphones. We developed a sophisticated call computing infrastructure which support our open platform parlors and we pioneered China's first street view mapping service, which we will integrate with the other location based services.
I will now give you an update on our platforms, which underpinned the strong performance of our operations and financials. For Communications, QQ IM monthly active user accounts increased 11% year-on-year to 798 million and PCU increased 16% year-on-year to 176 million. Our smartphone business, social communication service, we have seen achieved 300 million registered user accounts with 119 million MAUs globally. For social network, Qzone monthly active user accounts grew 9% year-on-year to 603 million and Pengyou MAU grew 22% year-on-year to 247 million.
Looking at our media portfolio, QQ platform further gained immediate influence and maintained a lead position as the most popular portal in China. We expanded our vertical channels such as news and finance to smartphone apps.
Our video platform ranked number two in China outpacing our peers, and soft growth in MUV and video views. Tencent Microblog registered 87 million DAU at year-end. On QQ game platform, PCU grew 5% year-on-year to 8.8 million. On wireless, our mobile security and browser products achieved significant scale during the year.
2012 was a year of challenges and a change, during which Tencent sharpened its focus on mobile internet experiences. We made significant investment in product and marketing to view our mobile user base and to replicate our existing leadership on PC, which will better position us to capture the emerging business opportunities.
I will now invite Martin to give you an update on our mobile internet strategy.
Chi Ping Lau - President: Thank you, Pony, and good morning, good evening, everybody. I'm going to give you a bit more on our mobile internet positioning as a part of this strategic highlight. As we all know, the mobile internet is really transforming our industry, but the pace of change actually varies by the different segments within the industry. I'd like to share on this chart three insights we observed from our own operations which were also reflected in market data.
First of all, instant messaging is the most popular online activity among mobile internet users in China and that's followed by search. Second, while consumption of digital content such as games and videos is growing on mobile platform penetration rates are still lower than IM and search as quite a number of consumers may still prefer larger screen and more immersive experience for media consumption. Thirdly, e-Commerce is growing rapidly on mobile from a very low base which represents opportunities for the longer-term future.
Now, in this context I would like to introduce our application portfolio and we believe it's actually well-positioned for the future.
First of all, we believe that most smartphone users interact most often with communications and social apps. Our communications apps, Wireless, QQ and Weixin are most pervasive apps, and also we believe the most pervasive apps in high market, each with daily active users in the neighborhood of 100 million. Our social network app mobile Qzone, has over 50 million daily active users.
Second, in China many smartphone users install utility tools to customize and enhance the performance of their mobile devices. Our mobile browser app and our online security app mobile manager, each exceeds 20 million in terms of daily active users.
Thirdly, in addition to communications and utility needs, smartphone users are also consumer content. As different consumers have different content requirements, any single content app tends to have less of the rich of a social or utility app. Nonetheless, we're very pleased to operate several popular vertical specific applications such as QQ Music, QQ Games, Tencent Microblog and Tencent News, each with multimillion (pulse of) daily active users.
Because of the popularity of our mobile apps, we see mobile internet has provided Tencent with a number of opportunities over time. Now first of all, mobile apps expand our communications platform reach. Wireless QQ caters to the same China user base from QQ served on the desktop as they moved on to the mobile platform. Whereas Weixin brings us high end smartphone users in China, who might not have been frequent users of QQ chat service in the past.
WeChat is starting to reach users outside of Mainland China. Secondly, apps enable us to build a mobile ecosystem around digital content. Just as on the desktop we're in the early stages in leveraging our social leadership to provide users with an enhanced experience in adjacent areas such as games, membership subscriptions, news, music, and video content on the smartphone platform. Thirdly, apps allowed us to extend our presence to utility tools. Tencent was a latecomer in online security and browser services on PC, but a much stronger player now in mobile security and browser. And finally, we can use apps over the longer term to explore mobile-specific user experiences such as offline to online services as well as some location-based services.
Having talked about the opportunities, we also need to recognize that mobile Internet is also highly disruptive and also brings certain challenges to both the industry at large and to Tencent specifically. First of all, limited advertising monetization put a moment on mobile platform right now. On the small mobile screen we need to balance creating advertiser inventory versus protecting user experience and also bandwidth to actually cost something to the users.
Second, intense competition in the market. The mobile Internet landscape is fragmented and evolving. Apps which can fulfill the evolving needs of users will be able to breakout, so we need to be on our toes. Thirdly, high marketing costs needs to be incurred during the land grab phase.
Despite the disruptions and challenges, we are committed to invest aggressively in products and marketing to build our user base on the smartphone platform. As users, as we observe, are spending increasing amount of time on smartphones, and as we are excited about the opportunities over the long run as we have described earlier in this section.
So with that I will pass to James to talk about our business review and outlook.
James Mitchell - SEVP and Chief Strategy Officer: Thank you, Martin and good evening. In 2012 our total revenue grew 54% year-on-year as we sustained growth through games, open platform applications and advertising while broadening our revenue-base to include e-Commerce. For the fourth quarter our total revenue grew 53% year-on-year with games representing just under half of our revenue, community and open platforms 20%, e-Commerce 14% and Mobile VAS and online advertising 8% each. Excluding the new e-Commerce segment our quarterly revenue grew 32% year-on-year.
I will now talk you through some of the major business segments. Starting with IVAS, segment revenue was RMB8.5 billion up 32% year-on-year and 1% quarter-on-quarter, within which online game revenue was RMB6 billion up 34% year-on-year and stable quarter-on-quarter. New games, better monetization of existing titles and revenue from international markets drove the year-on-year growth. The stable quarter-on-quarter performance reflected growth from international markets and new game contributions offset by weak seasonality in China and by several of our major game teams focusing on enhancing the whole product and future expansion packs.
Community and open platform revenue was RMB2.5 billion up 27% year-on-year and 3% quarter-on-quarter. In-App item sales on our open platform, and QQ Membership subscriptions contributed to both the year-on-year and the quarter-on-quarter growth. For the full year IVAS revenue increased 39%.
Taking a closer look at community and open platforms, Qzone MAU use grew to 9% year-on-year and Pengyou has increased 22%. In December, we relaunched our Mobile Qzone app for smartphones and it's rapidly exceeded 50 million DAUs. Weixin has achieved 300 million user accounts globally with over 190 million MAUs. We believe the product's popularity increases mobile users' propensity to consume 3G data and therefore to subscribe to the carrier's monthly data plans creating a win-win for the industry. In December, we launched a BlackBerry version of Weixin. Our Microblog DAUs increased 27% year-on-year and daily process increased 54% year-on-year. As we expect user activity growth to decelerate, we are exploring ways to better integrate Tencent Microblog and Weixin in order to enhance user interaction across both platforms.
Our open platform is the largest in China and it's generated gross revenue of over RMB2 billion for third-party developers since its launch. Third-party apps MAUs exceeded 200 million in 2012 as we added more non-game apps and as the variety of games broadened out. To help non-game app developers monetize better, we're starting to include their ad inventory in our Guan Dian Tong performance ad system.
Digging into each category under online games, on the QQ game platform, we are preparing to integrate the desktop game open platform with our mobile game platform in order to provide a unified product experience. Combined PCU increased 5% year-on-year and decreased 6% quarter-on-quarter due to seasonality. Combined ACU was stable year-on-year to up 2% quarter-on-quarter. In advanced casual games, combined PCU and ACU grew over 40% year-on-year primarily due to our in-house titles. League of Legends expanded its global franchise recently exceeding 5 million picking current users.
Quarter-to-quarter, ACU and PCU dipped due to seasonality and due to some of our internal teams refocusing on future expansion packs and content rather than on near term monetization. ARPU within each game generally increased year-on-year. For MMOs, we launched four new games during the year and then during the quarter, combined ACU increased 31% year-on-year and 5% quarter-on-quarter, as new title contribution offset negative seasonality.
Moving on to MVAS, segment revenue was RMB934 million, up 9% year-on-year, down 1% sequentially. The year-on-year growth was driven by mobile games and bundled subscription packages, the quarter-on-quarter drop was mainly due to our clean up active bundled SMS subscriptions, offsetting growth in mobile games. For the full year, the segment revenue grew 14%.
Martin has discussed our mobile internet investments, but certain key services including QQ, Qzone and games we historically managed the mobile versions of these products separately from PC versions. We're now realigning product developments and managements of these services, so as to deliver a unified user experience across PC and smartphone platforms.
In addition for financial reporting purposes we're going to reclassify mobile VAS revenue into the appropriate categories, starting the first quarter of 2013. In practice this means we'll be moving on mobile games revenue into online games and on mobile subscriptions revenue into community value-added services.
Our mobile advertising and mobile e-Commerce revenue are already reported in the online advertising and e-Commerce categories respectively. We believe these changes better reflect the reality that mobile is increasingly embedded in all of our business lines. For our online advertising business segment revenue was RMB947 million in the quarter, up 58% year-on-year, down 7% quarter-on-quarter. Display advertising was RMB823 million, up 54% year-on-year, down 10% quarter-on-quarter, and search revenue was RMB124 million, up 92% year-on-year and up 20% quarter-on-quarter. For the full year, advertising revenue grew 70%.
Within brand display, we delivered healthy year-on-year growth despite the challenging macro environment. Revenue declined quarter-on-quarter due to negative seasonality and also to the absence of Olympics-related advertising, boosted our third quarter results. Video ad revenue grew significantly year-on-year on increased traffic and higher in-country utilization. Our top five brand display ad categories were automobiles, online services, food and beverage, personal care and real estate. The growth of our region city portals has helped our presence in the real estate category where we were historically weaker.
In performance display, we saw continued quarter-on-quarter revenue growth for pretty much the same reason as in previous quarters, basically increased click-through rates due to both advertisers and Tencent continually optimizing audience targeting mechanisms. In search, revenue increased year-on-year and quarter-on-quarter due to increased ad spend from e-Commerce advertisers and to early contributions from mobile search.
Turning finally to e-Commerce transactions, segment revenue was RMB1.7 billion, up 48% quarter-on-quarter. Principal revenue increased due to seasonal year-end promotions and to new contributions from our recent expansion in Southern China. Agency revenue grew off a small base on higher transaction volumes and on collecting commission fees from more merchants.
Given our team's successful progress first in Shanghai and more recently in Southern China, we are now in the process of expanding our principal business footprint further into Beijing and Northern China.
With that, I'll hand over to John.
John Lo - SVP and CFO: Thank you, James. Good evening. For the fourth quarter of 2012, total revenue was RMB12.15 billion, up 53% year-on-year or 5% quarter-on-quarter. Operating profit was RMB3.73 billion, up 21% year-on-year or down 10% quarter-on-quarter.
Net profit was RMB3.47 billion, up 36% year-on-year or 7% quarter-on-quarter. We recorded net other losses of RMB202 million versus RMB50 million last quarter. This mainly represented an impairment portion of RMB251 million made for the (active) investing companies in the fourth quarter.
Income tax expense decreased to RMB151 million, mainly due to a reversal of income tax expense for subsidiary in China which qualify for lower corporate income tax rate this quarter, partially offset by higher deferred tax liabilities relating to withholding tax.
The effective tax rate for the quarter was 4.2% compared to 18.9% in the last quarter. Profit attributable to shareholders was RMB3.46 billion, up 37% year-on-year or 8% quarter-on-quarter. For the full year of 2012, total revenue was RMB43.89 billion, an increase of 54% from 2011.
Operating profit was RMB15.48 billion, an increase of 26% year-on-year. Profit attributable to shareholders was RMB12.73 billion, an increase of 25% year-on-year.
On non-GAAP basis, operating profit for quarter four was RMB4.32 billion, up 23% year-on-year or down 3% quarter-on-quarter. Operating margin dipped 2 percentage points to 36%. Net profit attributable to shareholders was RMB4.07 billion, up 40% year-on-year or 15% quarter-on-quarter.
For the full year of 2012, non-GAAP operating profit was RMB17.05 billion, up 29% year-on-year. Non-GAAP operating margin was 39%, down 7 percentage points from last year. Non-GAAP profit attributable to shareholders was RMB14.29 billion, up 31% year-on-year.
Total cost was RMB5.27 billion for the fourth quarter, up 10% quarter-on-quarter. The sequential trend primarily reflected an increased cost of merchandise sold, higher bandwidth and server custody fee, partially offset by lower sharing and content cost. As a percentage of revenues, total comps increased by 2 percentage points to 43%. IVAS gross margin and MVAS gross margin were partly stable at 67% and 59% respectively.
Gross margin for online advertising decreased 1 percentage point to 49%, mainly due to lower revenue generated during weak season and increase in bandwidth and server custody fees, partially offset by the absence of Olympics-related content cost.
Gross margin for e-Commerce transactions increased 5 percentages points to 9%, mainly due to contribution from certain seasonal high-margin products. Otherwise, gross margin would be around last quarter's levels.
For the full year of 2012, gross margin ratios for IVAS were stable at 67% and by 1 percentage point to 61%. Online advertising declined from 60% to 49% due to the reclassification of a significant portion of video content cost from IVAS to online advertising since fourth quarter 2011.
Moving on to operating expenses for the fourth quarter, selling and marketing expenses was RMB1.09 billion, up 34% quarter-on-quarter. This mainly reflected seasonal e-Commerce promotional activities, online games marketing, as well as marketing to promote WeChat in Asian markets partly offset by reducing marketing expense for our online media platform for the Olympics. It represented 9% of quarterly revenue compared to 7% last quarter.
G&A expenses was RMB2.12 billion up 5% quarter-on-quarter. This primarily reflected an increase in staff costs and administrative expenses with business expansion. It represented 17% of quarterly revenue compared to 18% last quarter. Under G&A, research and development expenses was RMB1.08 billion down 4% quarter-on-quarter as we (clear) up employee's year-end bonus. It represented 51% of G&A on 9% of quarterly revenue.
On full year basis selling and marketing cost was RMB2.99 billion up 56% over 2011 and represented 7% of annual revenues. G&A was RMB7.77 billion up 47% year-on-year and represented 18% of annual revenue. R&D expenses was RMB4.18 billion up 56% over 2011 and represented 10% of annual revenue. As of quarter end, we had over 24,000 employees up 3% quarter-on-quarter or 38% over 2011.
Let's look at margin ratios for quarter four; gross margin decreased 2 percentage points to 56.6%, excluding e-Commerce revenue and costs gross margin was 64.3%. Non-GAAP operating margin was 35.5%, down from 38.4% last quarter, excluding e-Commerce revenue and costs, it would be 29.9%. Non-GAAP net margin was 33.7%, up from 31% last quarter. Excluding e-Commerce revenue and comps, it would be 37.7%.
During the fourth quarter, we did not buyback any shares. For the full year, we repurchased about 150,000 shares for approximately HKD25 million. The total number of shares outstanding at year end was 1.85 billion. For 2012, basic EPS was RMB6.965 and diluted EPS was RMB6.833, both increased roughly 24% from last year. Non-GAAP basic EPS was RMB7.816 and diluted EPS was RMB7.667. Both increased by 30% from last year.
Subject to the approval of shareholders at the Annual General Meeting to be held on 15th of May, we are proposing an annual dividend of HKD1 per share, which is 33% higher than last year. The final dividend will be payable on 30th of May 2013.
We will provide you a few key financial numbers for your reference. Total CapEx for the quarter was RMB1.78 billion, up 58% quarter-on-quarter. Operating CapEx was RMB590 million, down 40% quarter-on-quarter as we purchased fewer service in the quarter. Non-operating CapEx was RMB1.19 billion, a big jump from last quarter as we acquired new office spaces and manage right to support future business.
Share based compensation for the quarter was RMB303 million, about 2% of revenue. Free cash flow for the quarter amounted to RMB4.35 billion, up 42% from 2011 and free cash flow for the year amounted to RMB15.2 billion, up 67% year-on-year. Our net cash position at year-end remained strong at RMB27.4 billion, up 55% from 2011. Total debt to adjusted EBITDA for 2012 was 0.58 times compared to 0.84 times for 2011. This concludes our presentation. Thank you.
Catherine Chan - IR: Operator, shall we open the call for questions.
Operator: Dick Wei, JPMorgan.
Dick Wei - JPMorgan: I have a question on the games side of the business. Can you give more color on a dynamics for the game revenue for 2013? Maybe some of the current trend for the larger games such as DNF, Cross Fire, the pipeline for this year? Also maybe some of the casual game impacts on mobile transition?
Chi Ping Lau - President: If you look at the games that we have, we actually have a pretty healthy portfolio of games I would say. In the sense that we have very strong casual game platform, which has diversified into that game platform and that has been quite successful. We have been able to make League of Legends a very successful game in the advanced casual game category while Cross Fire as a very large FPS platform continues to register growth in terms of revenue. And on the MMOG side the D&F acquisition is quite strong, but at the same time we also have been able to complement that with our self-developed game YuLong, the Legend of YuLong as well as the Legend of Xuanyuan. So, these are two in-house developed games which achieved quite good results. So, we continue to say in the gaming sector and especially (so that you know) in this PC gaming sector we are actually well-positioned. We have been to build a very diversified portfolio that consists of ACG, MMOG casual games as well as web games. And looking into the future without – the important thing is actually for us to be able to capture the emergence genres in this market and that's why we have been quite active in terms of signing up big titles and very clearly you can see it played in, so quite a few of the online. These are in our portfolio and we are also going to introduce our self-developed MMOGs in the course of next two years. So, I think that's sort of on the client game side. Now, in terms of mobile gaming, I think this is an area of opportunity. I think as we look into the future, as everybody is going to basically carry a smartphone that's to some extent equivalent to a game console alongside with them walking everywhere. That's actually a good opportunity for us to get on to. Now, of course, I think this market takes time to emerge and we need to actually build both the platform as well as develop the capability to develop games as well as build an ecosystem of game developer partners, who will work with us both on the open platform, as well as on the license model. So, there's a lot of work to be done, but I think as we look into the mobile gaming as a new opportunity, we fell that there are opportunities that we ought to be getting on.
Dick Wei - JPMorgan: Maybe if you can also share just the ARPU for the various segment that would be helpful?
Chi Ping Lau - President: John will actually give you the ARPU.
John Lo - SVP and CFO: I think in terms of online games for MMOG was within (120) to (175) per quarter and for advanced casual games it would be (60) to (125) per quarter. In relation to other subscription base revenue, just (slight), QQ Show just slight membership to (slight) IP or basically RMB10 per month.
Operator: Jin Yoon, Nomura.
Jin Yoon - Nomura: Just couple of questions. First of all, just a big picture structural kind of question that I have is that, we're seeing kind of slowdown in the gaming side and at the same time where on the PC use where a lot of the metrics on the PC side, and WeChat is growing very significantly over the last few quarters. Now, you talk about the paradigm shift going from PC to mobile, but is that also kind of taking away the time share where people are using less applications on the PC because they're spending more time on mobile, hence that the mix is going towards much more lower margin business? Or do you just blame the recent slowdown in the last couple of quarters just on the base effect alone? That's the first question. The second question is just on the gaming side. So, just the pure online gaming business, I think exited the year at 35% year-over-year growth. Is there any reason to believe that that 35% could reaccelerate next year, or should we expect to see a slowdown from that 35% which will probably bring down margins a little bit more given the fact that's a higher margin business? I'll stop there.
James Mitchell - SEVP and Chief Strategy Officer: With regard to the activity on desktop and smartphone, we think certain behaviors are related perhaps communications and such, as Martin mentioned in his introductory remarks, that the rate of growth on smartphone of communications activity and such activity likely means there is some incremental contribution, but also some substitution. With regard to games, we think that there is relatively more incremental and relatively less substitution. If an Internet user enjoys going online and playing a shooting gaming against their friends, he generally enjoys doing it on a big screen in an (immersive) environment with a very powerful processor. And we haven't seen first-person shooter games, as an example, or battle arena games like League of Legends take off on the mobile phone at this stage. And I think that sort of reflected in the fact that if you look at our game metrics, then League of Legends is now 5 million current users globally, which is a big number for a PC game. So that's with regard to the time spent. With regard to the revenue outlook, I see we are really going to give any guidance for revenue. The one thing I would say is that I think the game revenue you quoted was our game revenue within the segment that's disclosed as games and that's primarily desktop client games. We also – we think we are China's biggest web game publisher through our open platform and that's reflected in community and open platforms and we also think we are China's biggest mobile game publisher by revenue share and that's historically been reflected in our mobile games. So there is different segments of games and if desktop client games are growing slower we think that that's still growing and meanwhile that the mobile games and the web games they are feeding in as to some extent incremental for that desktop client growth.
Chi Ping Lau - President: Yes. I also want to emphasize that we tend to look at our business from a longer term perspective and in terms of sort of the interim period where there are hurdles in terms of monetization, there are sort of hurdles in terms of payments and sort of the platforms are not being built yet and sort of the games – the popular games have not really emerged yet on mobile platform. I think these are things which are sort of problems of the interim and even so on the PC side, if there is a period where there are no blockbusters, then the entire industry will suffer. But I think – our job is actually to be able to sort of find the right games so that people would enjoy and that would actually sort of helps you expand the industry as a whole. If we look at sort of the entertainment industry launch right now, online game is still the type of entertainment that actually has the lowest cost per unit time of entertainment. So that sort of we look at it as a new positive for the entire industry. In the interim, a lot of that industry growth will be determined by whether there is a hit or not. So, hopefully that's going to address your question.
Operator: Timothy Chan, Morgan Stanley.
Timothy Chan - Morgan Stanley: My question actually related to e-Commerce. Firstly, with the e-Commerce sales continue to grow strongly, will you expect the scale benefit becomes more apparent and the operating loss of the segment can narrow this year? Secondly, how would your total CapEx this year look like compared to last year as you have a larger strength in your logistics ability capabilities in the e-Commerce side?
Chi Ping Lau - President: Yeah. I think on e-Commerce yes we are encouraged by the fact that the business volume has actually increased quite significantly. Bear in mind that the fourth quarter is actually a peak season in terms of sort of e-Commerce promotions. So that's that – we tried to – it's sort of when add that to the caveat, but I think as a general trend, the business is actually growing. But I think we just have to also recognize that e-Commerce is such a big market and there is still a big distance between us and some of the bigger players in the market. So, I think we – I don't think we have reached the kind of scale that we're happy with yet. So, there is still going to be a lot of work to build this business. For example, right now – a few quarters back, this business was mainly sort of Eastern China oriented and in the past few quarters we have actually built a presence, expanding presence in the Southern part of China, and over time we will still have quite a bit of geographic expansion to do. Also, right now most of the volumes actually on the first party business and over time we actually need to enrich our collection merchandise by opening up the platform and invite more third-party merchants to provide products in our platform. There is still a long way to go, so we are in a very early stage of developing our e-Commerce business, but we will do it step-by-step. So I think it's too early to talk about the profitability at this point of time. We are very focused on doing business at this point of time. In terms of the e-Commerce CapEx rate, I think we as you can see from our approach we actually sort of use a pretty systematic way in terms of approaching geographic expansion. So, I don't think we would just pluck in a very big amount of money, and say we're going to be able to warehouses around the country. At the same time I think the actual cost, associated was e-Commerce is really sort of in the delivery in terms of being able to manage the efficiency of that part of the business rather than you put in a very big capital expenditure on warehouses. So, I think it's a long way of saying we'll be relatively prudent in terms of putting in e-Commerce CapEx.
Operator: Chi Tsang, HSBC.
Chi Tsang - The Hongkong and Shanghai Banking Corporation Limited: Just a couple of questions. First. in terms of online gaming, League of Legends is obviously doing very well. Can you give us a sense of sort of the contribution from League of Legends and what maybe sort of what you think about it is essentially of your online gaming revenue that's coming from international please?
James Mitchell - SEVP and Chief Strategy Officer: Unfortunately, we haven't historically disclosed that number or those percentages, so I apologize for that.
Chi Tsang - The Hongkong and Shanghai Banking Corporation Limited: Let me ask you about something else then. Just in terms of WeChat, thanks for giving us sort of the strategic update in terms of the real potential for WeChat Weixin. But I'm wondering what else needs to sort of happen near term before we can actually see monetization from that platform? Also, we should start expecting some monetization to begin sometime this year?
John Lo - SVP and CFO: Well, I think in terms of the philosophy around monetization, we are not in a rush to monetize. So, I think the key thing that we want to see is one, we continue to build out the WeChat platform and basically make sure that the entire communication then. So, the experience is actually well honed. That's actually sort of offer very high priority on our list. Now, in terms of the trials around monetization, we do believe that if we actually sort of have a very strong Weixin platform we would be able to monetize over the longer run. That is something that we have learned through our entire QQ experience and also sort of we've have seen other players in other markets who have been able to do that. But having said that, I think, we still view user experience as the number one priority, and as Pony has said recently, we are in the process of designing game platform for Weixin and it will be entering into sort of a testing mode in the next six months. But exactly when we are going to launch it in a full scale commercially, I think that really depends on whether we can achieve the kind of experience that we feel is good for the users. So that will take some time.
Operator: Eddie Leung, Bank of America Merrill Lynch.
Eddie Leung - Bank of America Merrill Lynch: Just a couple of quick questions. The first one is about your e-Commerce gross margins. It increased a bit quarter-over-quarter in the fourth quarter. Could you share more colors on the reasons behind it? Was it because of certain product mix shift or was it mainly because of a proportion from your marketplace revenue going up? Then secondly, just a housekeeping question on your IVAS subscription business; I understand that from third quarter you tightened up the policies for tighter communications subscriptions. So I was just wondering how long the transitions could take.
John Lo - SVP and CFO: In relation to the gross margins for e-Commerce, they increased significantly in this quarter as a result of seasonal promotional activities for some of the low-end products. You can see that the gross margin is somewhat like 9% this quarter. Without this type of promotion it will become normalized which will be pretty much similar with last quarter. On IVAS, we have actually sort of tightened up the cleanup and that will continue, right. So, basically, we took a hit, and in terms of newly adds or in terms of the continued sort of elimination of certain accounts which are sort of non-paying and which are not coming in sort of through the right channel, I think that we'll continue to do.
Operator: Cynthia Meng, Jefferies.
Cynthia Meng - Jefferies: I have two questions. One is on Tencent online video strategy. Management gave some color on your plan to invest in content and how to compete with TE and Youku and Tudou. Second question is a follow-up on e-Commerce. Recently there was a lot of domestic news reporting Tencent management talking about e-Commerce. Is it true that management will focus more on printable business, or the platform and marketplace business?
James Mitchell - SEVP and Chief Strategy Officer: The online video; I think that's a short-term answer and longer-term answer. The short-term answer is we need to be competitive in buying content, and I think the good news there is that during 2012 when several of our competitors really slowed down their content acquisition, we actually fairly drastically accelerated our content acquisitions. So, much of the content we kind of locked in during 2012 actually has begun coming on air or will come on air during 2013. So we feel that as we entered 2013 our content portfolio on January the 1st, is much, much stronger than it was on January 1, 2012. We feel we will continue to invest aggressively in content but we are starting from a relatively good place in 2013 versus our library entering prior years. The longer term strategy for competing in Video is we feel that because of our long term relationship with hundreds of millions of users because of our access to what those users are doing around the web, what they are reading, what music they are listening to, what news they are consuming and because of our access to our users' social graph we are in really a unique position to figure out what is the content that's most appropriate to our users. What is the videos that are most suitable for a specific user, and then target that content to them. This is something that we have begun to implement in other areas of Tencent. If you look at Guang Dian Tong on the advertising side, that's an example that's really bringing our targeting technology to bear in a way that's sort of unique to Tencent. We think that – we have started to do the same thing with Video targeting over the longer term. But in the short term it's really about buying the right content.
Cynthia Meng - Jefferies: One last question is on the tax rate. Should we still continue to model tax rate at about 15%, 18%, or is the blended tax rate going to be much lower this year?
John Lo - SVP and CFO: For both 2011 and 2012, the effective tax rate were about 15%. I would estimate that in 2013, without the effect of deferred tax, the effective tax rate would be from 15% to 20%.
Operator: Alex Yao, Deutsche Bank.
Alex Yao - Deutsche Bank: This quarter, the gaming revenue was flattish over the previous quarter. We have seen other larger online gaming companies report flattish gaming revenue growth because of (indiscernible) game aging and a decline in revenue. So, can you guys can comment on the lifecycle of Dungeon and Fighter and the Cross Fire? How do you think about the organic growth of these two games in 2013? If we look at the entire portfolio, obviously, you guys have relatively new games such as League of Legends, YuLong, Xuanyuan and (indiscernible) is gaining a lot of momentum. How should we think about that the growth in 2013?
Chi Ping Lau - President: I think for the particular gaming business in the sector, I think we actually said we have explained in our prepared remarks that it was a quarter in which one is seasonally low and two a lot of our expansion tax were in the preparation mode. So, it's kind of a flat quarter. Now, as we look at the gaming business, I think we very much look at it as an entire portfolio. We continue to operate some of these long standing games we believe that these games has got a pretty loyal following of users and over time these games while (indiscernible) operation, we definitely sort of leave them the stage of very high user growth. But over time some of these games can actually generate slightly higher ARPU over time. So, that's the state of the existing games. If we can sort of – we will have good expansion packs then that would bring some of the users back. I think that's the dynamics around the existing games. But I think at the same time as we operate these existing games and try to bring new excitements to the existing users we also actually try to come up with new titles which sort expand the user base which can attract new users. So, that's the reason why we have been signing up potential large titles as well as we have been sort of developing our own games in-house and we are also very sensitive to the new trends within the gaming business and as we can see, sort of in the past two years when web game actually sort of became popular we were able to sort of capture it using our open platform strategy and as we sort of have established pretty good first stage fundamentals on the mobile platform we are also sort of turning our eyes to the mobile gaming business and try to see whether we can actually capitalize on the growth within the industry. So, I think that's sort of how we look at the gaming business as an overall portfolio.
Alex Yao - Deutsche Bank: The second question is on the (self-monitoring) efficiency in 2013. I believe the WeChat global expansion is part of the priority in this year. So, how should we think about the marketing efficiency? Will you be able to leverage League of Legends global gamer base at all or will there be hardly any Tencent asset to leverage in the global market?
Chi Ping Lau - President: Yeah, I think, WeChat will be a pretty standalone product from a leveraging perspective and in terms of League of Legends, it actually sort of operated pretty separately by the founders of the company and I don't think a chat service and exciting mobile game actually has got a lot of synergies between the two.
Operator: Catherine Leung, Arete Research.
Catherine Leung - Arete Research: First thing I was wondering if you could discuss any changes in Desktop QQ instant messaging, usage behavior for those QQ users that have started to use Weixin or Mobile QQ on smartphones and whether this could affect some of the dynamics of promoting other businesses. Secondly if you could comment on the e-Commerce principle transactions, business growth which I assume is driven by user growth, is the user growth driven by sort of traffic within the Tencent platform or are you spending to acquire the traffic externally?
Operator: Wendy Huang, CIMB.
Wendy Huang - CIMB: First, can you maybe clarify one comment you made regarding the game deals, did you just mention that you already the biggest publisher in both mobile games and web game in China?
James Mitchell - SEVP and Chief Strategy Officer: I think in terms of web games yes and it's not the traditional publishing model but we very much said to you we use the open platform model and sort of we invite game developers to put their games on our platform and then sort of we generate revenue. From the revenue generate a perspective. We believe that we are the largest web game platform in China. Now in terms of mobile games I think it's a very new market, relatively sort of emerging, so I think we have been doing this mobile game for quite a while and we have a pretty big size within the market. But I think you are right that we are number one or not sort of is not that relevant because what we see is over time this market is going to grow. I think here the more important thing is actually being able to build a platform and build the partnership so that we can actually be able – we are able to sort of get the new opportunities. That's more the important thing.
Wendy Huang - CIMB: What kind of revenue share are you getting from the mobile game right now? Is it very similar to the global peers and also for WeChat besides mobile game is there any other business models you're exploring to monetize from the Weixin say advertising or maybe e-Commerce?
Chi Ping Lau - President: Yeah, in terms of the revenue share, I think this is something which we will come up with at the time when we actually sort of have the platform. So, I prefer not to sort of talk about at this point in time. In terms of additional business models, we believe over time, we do want to explore O2O offline to online type of business model, location-based type of services, as well as a location-based e-Commerce that can actually leverage the unique mobile features of Weixin and frankly, mobile QQ over time. Both of them sort of have got a lot of users using them on a daily basis. So, the same business model can actually apply to both. I think advertising is actually more trickiest for the reasons I talked about which is you have the very small screen and the advertising when it comes up, it actually sort of consume bandwidth which in most cases the users are actually paying for. So, I think that would take a longer time to develop. I think we would be testing out the gaming platform first, but we also will explore the O2O and location-based e-Commerce type of model over time.
Wendy Huang - CIMB: Lastly, maybe to get more color on your e-Commerce business. You repeatedly mentioned that you are going to expand geographic coverage and also to do some investment in the logistics and fulfillment infrastructure. So, can you give us some color what kind of price are you waiting to pay for those efforts? Also, compared to other big players in the market, you seem to be a late mover in those fronts. So, how are you going to maybe differentiate yourself from those existing deep players in the market?
James Mitchell - SEVP and Chief Strategy Officer: I think with regard to expansion. We put it in the context that we already expanded from Eastern China to Southern China, that's reflected in our P&L, cash flow and balance sheet for 2012 and reflected in the numbers you have seen for 2012. If we now expand from Southern China into Northern China, then you should be look at continuation of the gradient through investment we've seen in previous quarter. So, the whole point was we're not talking about dramatic changes above and beyond the pace of change that we've already experienced. We've been continually growing the business through the course of 2012. We'll continue to grow the business. We're not talking about sudden transformation. With regard to competitive position, we feel that we are enormous traffic aggregator, once again, our traffic is somewhat unusual traffic and that is locked in traffic. It's traffic we can track around the net, where we have ability to help users based on that social graph, and big part of the reason why our e-Commerce business is growing as quickly as it has during 2012 without substantial external marketing is that as Martin has mentioned, we're being putting to use (on-cell data) inventory our excess resources within our own platform and using those to support our e-Commerce business. So we believe that we have a competitive advantage on the marketing side. We believe that the team who are running our principal e-Commerce business are an extremely sharp, extremely talented team, gone very well despite a late start, first of all, in Eastern China subsequently in Southern China and we hope that they can continue to execute well in the future.
Chi Ping Lau - President: I think the other thing is that unlike the marketplace, especially the small business marketplace type of business which has very big network effort, right, so in those areas when you have a first mover advantage, you really have the advantages. That's part of the reason why we just like the fact that we have been growing our (indiscernible) business for a long time. It grows consistently but not sort of exponentially. But I think if you look at the principal business, there is not as much of a first mover advantage. There is not that much of a network effect. So, it really depends on how good you are as you continue to build up the operations and how efficient you are in terms of marketing, how efficient you are in terms of sourcing and sort of delivering and making sure that your merchandising is great. So, I think that's less of a first mover advantage.
Operator: Alicia Yap, Barclays.
Alicia Yap - Barclays: My first question is regarding to follow up on the WeChat. Just now Martin mentioned about the location base and (indiscernible) business. So, we actually understand that we have been testing with some local vendors over the past few months. So, can management provide some feedback or traction so far from both the user experience and vendors and any visibility on when we can actually start to charge some of these vendors?
Chi Ping Lau - President: Yeah, I think we have to disappoint you in the sense, we take a very long-term view on (indiscernible) opportunity. I think it's actually sort of a big opportunity, but at the same time there are lot of existing hurdles to pass in terms of the level of IT sophistication of a lot of vendors and lack of standardization of the products and services and the physical limitation on sort of actually have to be there in order to enjoy the service. So, I would say sort of it's something of experiment that we're taking a lot of interest in, but it will take quite a long time before we can be caught back on sort of what the in-size and what exactly needs to be done in order for a business model to be built around it. But based on some very initial feedback of the merchants, right, who are using some of these services; they think it's an interesting way to sort of help them to build a more lasting relationship with their customers. So, I think that's sort of based on the feedback of a set of the first sort of (adopters) of the merchants, but in order to sort of continue to developing, we need to sort of building a lot of new systems and new functionalities within which we have to do it and I think it's way too early to talk about revenue opportunities at this point of time.
Operator: Elinor Leung, CLSA.
Elinor Leung - CLSA: My question is regarding your marketing expenses. You do highlight that this year you continue to spend a lot of marketing in terms of promoting your new mobile products. And can you give us what will be the marketing trend this year? And also, WeChat is expanding into the U.S. and just wondering how you think you can grab market share there and how much expenses you're going to invest in that market.
Chi Ping Lau - President: Yeah, I think in terms of marketing, we do see mobile products as an important portfolio for us going forward. So, I think we would be spending actually quite a bit in terms of marketing. Now, exactly how much it is, I think it will depend on a lot of analysis around what's effective and what will be sort of the competitive spending in different segments that we operate. So, I think it's hard to give you a quantitative number, but all I have to say is we would want to spend enough in order to weighing in, in those markets. Now, I think for WeChat at this point of time, it's still mainly addressing sort of the Asian markets, and I think we would be testing the markets out in developed markets such as the U.S. and Europe. But again, these are markets that we are not very familiar with. So, we'll have to take time to figure out so what's the approach. I don't think it's a net off sort of just filling a lot of marketing resources and try to see whether it works or not. We need to sort of have, I would say, more sophisticated plan than that. And it's sort of right now being made.
Catherine Chan - IR: Thank you. I think that's the last question operator, right?
Operator: Yes. That's right. That's the last question. Ms. Chan you may begin your closing remarks. Thank you.
Catherine Chan - IR: Thank you very much for turning in for the call. If you wish to check our press release and other financial information, please visit our IR website under www.tencent.com/ir. We will also post a replay of this webcast on the site shortly. Thank you and see you next quarter.
Operator: Thank you very much. That does conclude our conference for today. Thank you for participating in Tencent Holdings Limited 2012 fourth quarter annual results announcement conference call. You may all disconnect now.