Tencent Holdings Limited (OTCPK:TCEHY) Q1 2021 Earnings Conference Call May 20, 2021 8:00 AM ET
Company Participants
Wendy Huang - IR
Pony Ma - Chairman and CEO
Martin Lau - President
James Mitchell - Chief Strategy Officer
John Lo - Chief Financial Officer
Conference Call Participants
Alicia Yap - Citigroup
William Packer - BNP Paribas
John Choi - Daiwa Capital Markets
Han Joon Kim - Macquarie
Eddie Leung - Bank of America Merrill Lynch
Gary Yu - Morgan Stanley
Robin Zhu - Bernstein
Jerry Liu - UBS
Operator
Good day and thank you for standing by. Welcome to Tencent Holdings Limited 2021 First Quarter Results Announcement Conference Call. Well, at this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
Now I would like to hand the conference over to Ms. Wendy Huang from Tencent IR team. Thank you. Please go ahead ma'am.
Wendy Huang
Thank you and good evening. Welcome to our 2021 first quarter 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 company'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.
Let me introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma, will kick off with a short overview. President, Martin Lau, will discuss strategy review. Chief Strategy Officer, James Mitchell, will speak to business review; and the Chief Financial Officer, John Lo, will conclude with financial discussions before we open the floor for questions.
I will now turn the call over to Pony.
Pony Ma
Thank you, Wendy. Good evening. Thanks everyone for joining us. During the first quarter we achieved solid growth across our businesses, in particular, in our FinTech and Business Services and advertising revenue streams. We are also setting up investment in [indiscernible] including Business Services and enterprise software, high production value games and short-form video, which will be covered in more details in the strategy section.
Now let me go through the highlight financial numbers for the quarter. Total revenue was RMB 135 billion, up 25% year-on-year and 1% quarter-on-quarter. Gross profit was RMB 63 billion up 19% year-on-year and 6% quarter-on-quarter. Non-IFRS operating profit was RMB 43 billion, up 20% year-on-year and 12% quarter-on-quarter. Non-IFRS net profit attributable to FD holders were RMB 33 billion up 22% year-on-year and stable quarter-on-quarter.
For our key services despite intense competition across the China Internet industry, we generally became expand our first-place position in activities, including social, games, long-form video, news, music, literature, payment, and mobile utilities. And we believe we gained market share in cloud services. Combined MAU of Weixin and WeChat was 1.24 billion. Mobile devices Mau of QQ was 606 million.
Martin and James will discuss our future strategy and progress across some of these activities in detail, and I will hand over to Martin for the strategy review.
Martin Lau
Thank you, Pony, and good evening and good morning to everybody. Today I will walk you through a few strategic investment areas that we believe will support our long-term growth. In the course of 2020 we saw exciting new market opportunities emerging. Now first, businesses are accelerating their movement online and industries are speeding up digitization across their value chains. Second, the audience for games structurally expanded due to the stay at home period. We believe emerging genres and advanced technologies will drive further game audience growth.
Third, as the short video market matures, we believe users will seek more diverse and nutritious short-form video content. At the same time, the entire Internet industry is undergoing a new round of additional investment in which investors and companies are prioritizing growth over profit. We can see this in our own investee portfolio where heavy investments are made in areas such as community group buy electric vehicles, and user acquisition. On the other hand, these initiatives boost market valuation with the market value of stakes in listed investees investees exceeding $200 billion as of quarter end.
On the other hand, our top-five loss-making associates reduced our non-IFRS net profit by 7% in the first quarter. As for Tencent, we see opportunities to proactively invest in several areas where we can be an early mover and a shaper of the industry evolution, rather than playing catch-up later. First of all, Business Services, we're adding headcount and infrastructure to assist the digitization of various industries. Second, games, we're investing in high production value games with global appeal.
Third, short-form video content, we're cultivating multiple ecosystems to meet users' emerging needs for more interesting content. Fourth, sustainable social value, we announced the establishment of new SSV Org to bring technology benefits to the society. Funding these investments, we will absorb a portion of our incremental profits from existing businesses for 2021. We expect such investment would deliver very high return over the longer run.
In the next few slides, I will discuss the specific opportunities, the progress and achievements we have made so far and the initiatives that we are funding going forward.
Now let's start with Business Services. Since we upgraded our strategy to embrace industrial Internet in 2018 we have seen products and service providers and customers aspiring to optimize their connection with consumers digitally. Various industries are deepening digitalization across customer engagement, operations, production and supply chain, particularly after COVID-19. Meanwhile, enterprises widely adopted online collaboration tools internally to improve their efficiency.
We have achieved some structural strength in this area. For example, on the skill front, we believe that across our internal usage and external customers, our cloud service now run the largest number of servers in China. And on the platform and software front, we provide the leading CRM collaboration and productivity solutions in the market where those services are highly valued by enterprises. After a period of destruction due to COVID-19 our cloud services moved back to an above industry revenue growth rate in the first quarter.
So double down on these trends we're increasing headcounts for product development to enhance our service offering and also expanding our sales team selves to facilitate client acquisitions and service. We're strengthening the capabilities and interconnections of our productivity SaaS products and security software to extend their leadership positions. At the same time, we're growing the networks of independent software vendors and SaaS partner through strategic operations and investments. We are also deepening our smart industry strategy by expanding coverage and enhancing up-selling cross-sell competences in key verticals such as healthcare, retail, education and transportation.
Turning to games, we believe the global industry opportunities and the resources required to capture the opportunities are larger than ever. First, mobile devices are extending the total addressable market for games, which was further boosted by the stay-at-home period. We believe emerging genres and development with developers will further expand the market.
Second, game players are becoming more discerning and quality sensitive. High production value, innovative and cross-platform games can attract and retain large audiences to an extent not previously possible.
Thirdly, Chinese game developers are attaining early success in global markets. We believe we are already in the early stages of capitalizing on these trends. Our high DAU franchise games, such as Honour of Kings, PUBG Mobile, Peacekeeper Elite and League of Legends uphold our leadership in major genres. Each one of them consistently deliver large, loyal audiences, as well as solid monetization. On top of that, our internal and investee studios are working on a large and diverse game pipeline.
International revenues now also account for a substantial portion of our game revenues and titles such as PUBG Mobile, League of Legends, and Valorant have achieved sustained player recognition globally.
Looking forward, we aspire to lead the industry and are committing the necessary additional resources. We are making long-term investments in developing large-scale, high-production value games to attract players globally. We are funding development of innovative games in emerging verticals. We are building up IP franchises suitable for games and expanding across media. We'll step up marketing expenditures and attract a bigger audience to new games and we are investing in emerging areas, such as our cloud gaming services.
Next, we'll talk about our investment in the short-form video arena. China consumers have shown great appetite for watching short-form video and we're investing to address how we see that appetite evolving going forward. First, we are positioning video accounts as a new infrastructure invasion, connecting users with real life content and bridging high-quality content creators with consumers.
We'll provide resources as well as handy creation and monetization tools to attract diverse content creators, thus incubating a unique content portfolio. We optimized technology to unlock potential of social plus algorithmic recommendations, leveraging the strengths to increase exposure of knowledge based content. Besides, we are adding service and bandwidth to support the solid organic growth in video accounts. We're confident that these investments will benefit the ecosystem and engage greater audience over time.
Second, we recently merged Tencent Video and WeiShi, our short-form video app in PCG, seeking to bring integrated viewing experiences to users and rich content offerings, as well as sharpen algorithmic recommendation. Along with this internal business reorg, we are escalating self commissioned production to further expand our IP content library, which can facilitate creation of more video clips, greater network, and better serve users emerging needs for high-quality short content. We'll also leverage our capabilities acquired through building up WeiShi to empower our long-form video business in terms of content creation, recommendation, user acquisition and operations.
Finally, we announced our aspiration to promote sustainable innovations for social value. We seek to bring sustainable benefits and value to society by leveraging our technology and products and to elevate the importance of sustainable social value when making decisions in all our products and services.
By integrating our existing corporate social responsibility and charitable activities into a new, Sustainable, Social Value Organization, SSV Org, we created a dedicated team to deploy social value initiatives in a professional and entrepreneurial way. We incubate projects in various areas, such as basic science, education, innovation, rural revitalization, carbon neutrality and food energy and water provision. Where appropriate, we'll link these projects with our existing businesses.
In addition to making charitable donations, we'll seek to promote the development of self-sustainable operations, which could create new value from related industries and for society. Throughout the process, we'll pursue long-term social value, rather than economic profits. We are committing an initial capital of RMB 50 billion to be funded by our investment gains. We believe that our strategic upgrade and the new initiatives will allow us to make an even more positive impact to the society and usher in a new phase of development for Tencent.
Now with that, I'll pass to James, to talk about our business review.
James Mitchell
Thank you very much, Martin. For the first quarter of 2021, our total revenue grew 25% year-on-year. VAS represented 54% of our revenue within which Games were 32% and Social Networks 22%. Online advertising was 16% and FinTech and Business Services represented 29% of total revenue. The Value Added Services segment revenue was RMB 72 billion, up 16% year-on-year and up 8% quarter-on-quarter.
Social Networks revenue increased 15% year-on-year to RMB 29 billion on moderate growth of digital content subscriptions and in-game items sales. Total VAS subscriptions increased 14% year-on-year to 226 million. Video subscriptions grew 12% to 125 million benefiting from adaptation of IPs such as the Land of Warriors, is animated and live action drama series.
Music subscriptions expanded 43% to 61 million due to better content, effective marketing campaigns, and an improved retention rate. Games revenue grew 17% year-on-year to RMB 44 billion against the high base stay at home period, which started in China in the first quarter of 2020. Growth was primarily driven by mobile games in China and by mobile and PC games in international markets. Sequentially game revenue increased 12% due to Chinese New Year seasonality.
For Mobile Games, total revenue increased 19% year-on-year to RMB 41 billion, benefiting from robust performance of existing games, such as Honor of Kings, PUBG Mobile and Peacekeeper Elite, as well as contributions from new games such as Moonlight Blade Mobile and Call of Duty Mobile in China. The PC client games revenue increased 1% year-on-year to RMB 12 billion as contributions from Valorant and Warframe as well growth from Cross Fire offset the decline from Dungeon & Fighter.
For Weixin, we provided more support for our partners and are together building a vibrant content and service ecosystem. On the content front, we attract and cultivate video accounts creators by providing customized onboarding services, favorable traffic allocation to build their initial audiences and training in video production best practices.
On the services front we provide capabilities to increase penetration of Mini Programs, particularly among SMEs. Our low code development platform enables smaller businesses to create Mini Programs in a more cost effective way. And we launched new tools to assist system integrators. The number of active Mini Programs served by system integrators more than tripled year-on-year.
For QQ we are leveraging technology to better integrate social and content consumption experiences, such as seamless connection between instant messaging and games. Users can team up with QQ friends to start multi-player game battle with one click. And QQ Mini Programs facilitate users staying up to date with in-game events. Looking forward QQ's new leadership team will seek to upgrade the products technology, operations and content, to better serve the social and entertainment needs of younger users.
Turning to Games, aggregate user engagements and user spending increased year on year despite the high 1Q 2020 comparison period. We released Honour of Kings' biggest update in January to improve graphics and game experiences and then launched an appealing marketing campaign with top-tier skins during the Chinese New Year, which drove the game's DUA and tank users to record high levels in February. We reduced the application file size of PUBG Mobile and enhanced our local market operating capabilities, boosting PUBG Mobile's DAU in countries, including Turkey, Egypt, and Russia.
For League of Legends, we distributed bigger and better Lunar Revel content for the core game mode, as well as for Teamfight Tactics, contributing to higher global revenue year on year. Beyond these large audience games, we're also cultivating emerging genres. For example, new releases Komori Life and the Walnut Diary ranked among China's top 10 life simulation mobile games by DAU in April.
Our pipeline includes action-packed arena, role playing, simulation, strategy, and survival games. For China many of these new games are adapted from popular existing game and literature IPs. Internationally we expect out substantial prior investments, investing class, PC console and mobile studios to begin contributing a range of genre innovating games in the quarters to come.
Moving to online advertising, total revenue was RMB 22 billion in the quarter, up 23% year-on-year, assisted by three factors beyond our ongoing product innovation and Ad Tech improvements. First, higher ad spend from the eCommerce and education verticals. Second, FMCG an automobile related advertising revenue benefiting from economic growth and third, full quarter consolidation of the Bitauto automobile vertical side. We enhanced the transaction capabilities of our ad properties and customized marketing solutions for key verticals including games, retail and automobiles, delivering higher ROIs for advertisers.
Looking forward, IDFA deprecation on iOS devices appears to have limited impacts on the Chinese ad markets so far, while other potential uncertainties include possible regulatory headwinds for K12 education and potential delays to the video content release schedule. Our Social and Others advertising revenue expanded 27% year-on-year to RMB 19 billion, driven by moments in mobile ad network within which moments, impressions and revenue increased as we added inventory and as more advertisers adopted Mini Programs as landing pages.
Our Mobile Ad network revenue grew rapidly, reflecting increased video ad inventories primarily within games, online reading and tool applications. Our Media advertising revenue rose 7% year-on-year to RMB 3 billion largely due to increased ad inventory and eCPM within our music Apps. During the quarter we released several popular self-commissioned variety shows including Chuang 2021 and Roast Season 5, driving our sponsorship ad revenue.
Looking at FinTech and Business Services segment revenue was RMB 39 billion, up 47% year-on-year and up 1% quarter-on-quarter. Within FinTech Services, year-on-year revenue growth rates higher than in prior quarters benefiting from an easy base period of stay at home activity reduced offline consumption in 1Q 2020.
Our payment business is also structurally benefiting from the broader digitalization, consumer habits and of the economy. Payment volume and revenue increased slightly quarter-on-quarter despite seasonally reduced eCommerce activity. Offline spending picked up as many people stayed in the cities in which they work during the Chinese New Year holiday which boosted local spending on retail and dining services.
The Business Services revenue grew at a healthy rate year-on-year benefiting from resumed project deployment and robust demand from industries including enterprise software and online video provision. Increased customer uptake of our security communication and CRM solutions drove notable growth in our PaaS and SaaS revenue, both absolutely and is proportionate of our overall Business Services revenue. Our PaaS marketplace now includes thousands of partners, Software-as-a-Service products. We launched Enterprise App Connector with unified login accounts and data flows across different SaaS products, allowing SaaS providers to develop and deliver their products more efficiently while facilitating enterprise clients to better integrate multiple software solutions.
And with that, I'll pass it to John to discuss the financials.
John Lo
Thank you, James. For the first quarter of 2021 total revenue was RMB 135.3 billion, up 25% year-on-year or 1% quarter-on-quarter. Gross profit was RMB 62.6 billion, up 19% year-on-year or 6% quarter-on-quarter.Net other gains were RMB 19.5 billion, up 384% year-on-year or down 41% quarter-on-quarter. This mainly comprised non-IFRS adjustment items including fair value gains reflecting increased valuation of the investee companies and verticals such as FinTech and Social Media, as well as net gains on DIM disposal and disposals of certain investee companies.
Operating profit was RMB 56.3 billion, up 51% year-on-year or down 12% quarter-on-quarter. Net finance costs were RMB 1.4 billion, down 19% year-on-year or 39% quarter-on-quarter. The year-on-year decrease was mainly driven by reduced interest rate as we captured favorable interest environment in our treasury exercise. The Q-on-Q decrease was primarily caused by ForEx gain this quarter while we recorded ForEx loss a quarter ago.
Share profits of associates and joint ventures was RMB 1.3 billion compared to share profits for first quarter last year as we benefited from non-IFRS adjustment items including a non-recurring fair value gain on investment of an associate, as well as improved performance of certain associates. On a non-IFRS basis we recorded a share profit of RMB 100 billion for the first quarter of 2021 comparing to RMB 164 million a year ago.
Income tax expense was RMB 7.2 billion this quarter. Effective tax rate for the quarter was 12.9%. IFRS net profit attributable to equity holders was RMB 47.8 billion, up 55% percent year-on-year or down 19% quarter-on-quarter. Diluted EPS was RMB 4.917 up 64% year-on-year or down 20% quarter-on-quarter.
Now I'll share with you non-IFRS financial figures. For the first quarter operating profit was RMB 42.8 billion, up 20% year-on-year or 12% quarter-on-quarter. Net profit after NCI was RMB 33.1 billion, up 22% year-on-year or actually [ph] stable quarter-on-quarter. Diluted EPS was RMB 3.415, up 21% year-on-year or lastly stable quarter-on-quarter.
Moving on to gross margin, the overall gross margin was 46.3%, down 2.6 percentage points year-on-year or up 2.3 percentage points quarter-on-quarter. Analyzed by segment, gross margin for VAS was 55.1%, down 3.9 percentage points year-on-year or up 3.6 percentage points quarter-on-quarter. The year-on-year decline was mainly due to number 1, increased content costs for more airing of dramas and variety [ph] shows versus a year ago. Number 2, as revenue mix shift from high margin PC client games and QQ subscriptions to lower margin digital content services.
The sequential increase relatively to -- from revenue mix shift toward higher-margin mobile games amid favorable year-on-year gain. Gross margin for Online Advertising was 45.1%, down 4.1 percentage point year on year and 8.2 percentage points quarter on quarter. The year-on-year decrease was mainly due to higher revenue contributions from mobile and network businesses, which carries lower margins sequentially.
The decline mainly reflected seasonality and increase the content cost for more airing of drama series and sports events. Gross margins for fintech and business services was 32.3%, up 4.4% each point year on year and 3.8% each point quarter on quarter. Both year-on-year and quarter-on-quarter margin growth was mainly due to revenue mix shift toward merchant payment and wealth management services, which carry relatively higher profit margins. In addition, the operational efficiency of business services hub on our sequential margin growth.
On operating expenses, selling and marketing expenses were RMB 8.5 billion, up 21% year-on-year or down 15% quarter-on-quarter. The year on year increase was mainly due to increased marketing spending, particularly on Business Services and Games and a consolidation of newly acquired subsidiaries such as Bitauto as well as Huya stocks and welfare expenses. Sequentially marketing expense was lower because of seasonality. As a percentage of revenues selling and marketing expenses was 6.3% of revenues plus this April and compared to first quarter of 2020.
G&A expense were RMB 19 billion, up 34% year-on-year or down 4% quarter-on-quarter. The year-on-year increase mainly reflected greater R&D cost. The Q-on-Q decline was mainly driven by seasonally lower office travel and entertainment expenses. Within G&A R&D expenses were RMB 11.3 billion up 41% year-on-year and 1% quarter-on-quarter. G&A and R&D represented 14% and 8.4% of revenues respectively. At the quarter-end we have approximately 89,000 employees, an increase of 39% year-on-year and 4% quarter-on-quarter.
Let's take a look at the operating and net margin ratios. For the first quarter 2021 non-IFRS operating margin was 31.6% down 1.3 percentage points year-on-year or up 3.1 percentage points quarter-on-quarter. Non-IFRS net margin was 25.5%. That should be stable both year-on-year and quarter-on-quarter.
Finally I'll share some key financial metrics for the quarter. Total CapEx was RMB 7.7 billion an increase of 26% year-on-year or decrease of 20% quarter-on-quarter. Within which operating CapEx grew 20% year-on-year to RMB 6.6 billion due to more spending on servers and network equipment to open a new business growth. Non-operating CapEx increased 69% year-on-year to RMB 1.1 billion, mainly driven by increased expenditure on Cloud, SaaS expenses, and office properties. Free cash flow for the quarter was RMB 33.2 billion, down 15% year-on-year or up 20% quarter-on-quarter.
Net cash position declined sequentially to RMB 5.6 billion mainly due to net cash outflow for M&A activities partially offset by free cash flow generation. The fair value of our shareholding in listed investee companies excluding subsidiaries was approximately RMB1.4 trillion or $207 billion as at the end of first quarter.
Thank you. We shall now open the call for questions.
Wendy Huang
Operator, we will take one question to one follow up question each time. Please invite the first question.
Question-and-Answer Session
Operator
Thank you.[Operator Instructions] Our first question comes from the line of Alicia Yap from Citigroup. Please go ahead.
Alicia Yap
Hi, good evening management. Thanks for taking my questions. Congrats on the solid results. I have two questions. The first one is regarding your comment about stepping up the investment in game development. When you say the large scale and high production value games, do you plan to invest games that will turn into strong global IP that the gamers will play and maybe remember for their lifetime or does that mean we could take multiple years of development before we see any final product? And is this rational also because of we are seeing growing gamers tractions in markets such as like India, LatAm, EMEA or even in the U.S. that we look into penetrate further, that we can leverage our experience in mobile game developments to grow our global share?
The second question is on the cloud business, we are seeing or hearing from peers, some a little bit slowdown in the industry. So is Tencent Cloud also experience some industry transition, where the existing infrastructure cloud customer, which is already quite sizable, and maybe facing industry slowdown and making some penetration effort into new industry vertical, or is fair to say, we actually already envision this transition better and already started to move more proactively in strengthening these on the higher margin SaaS capability that we actually could start to see the cloud revenue to further reaccelerate in the coming quarters? Thank you.
James Mitchell
Alicia, thank you for the questions and I'll take a shot at both of them and then Martin will likely supplement. So the short answer to the first question is yes. We absolutely would aspire to make games that players enjoy, and ideally play for life. But of course, it's easier to express that aspiration and realize that aspiration.
Now, you're right to say that creating those in a lifelong game experiences requires many years of game development, but this is a trend that we've identified many years ago and we have a number of products that have indeed, already been in development for many years. And some of those are games that we're creating in China in our big internal studios, like, to TiMi and QUANTUM and MoreFun and Aurora and some of those games that we're creating outside China are at studios which we invest in around the world. And over the coming quarters and years, we hope to bring, some of those big budget, long production cycle games to market.
Now, as to why we're focused on this now, and what changes now versus the past, then we are indeed seeing that the global audience for games has grown, both before, during and after COVID and we're seeing particular growth in emerging markets, such as the ones you highlight, but also in developed markets. And we're also seeing that game players are increasingly willing to form longer term relationships with games that they particularly enjoy, such as the League of Legends or Fortnite or Honor of Kings, which have very high retention rates. And then as gamers, even if they churn, they come back to and enjoy again.
And, on our side, while historically our focus was primarily on the China market, as in recent quarters we've had some hits globally that were developed in China, including PUBG Mobile, including Call of Duty Mobile, all of which gives us more confidence to step up our rate of investment and step up our rate of investment means fund bigger, better games, if necessary for longer periods of time.
It also means to fund more experimental games. It also means invest more in game marketing and game publishing capabilities. And then finally, it means investing in Frontier Technologies, such as cloud based gaming. So we'll further grow the game industry in the future. So that's on your game question.
With regard to your cloud question, I think that we don't necessarily see a sudden transition in the industry this year versus previous years. Rather, our belief is that when you're in the cloud business, it is inevitable that if you're renting infrastructure to very big companies, then those big companies will use their negotiating power to protect their own economics.
And as a result, the path to long-term economic returns in cloud is not to get big fast, or infrastructure, but actually it's cultivate Platform as a Service and Software as a Service and that's something that we've been doing now for several years. Perhaps as a service in particular is a substantial percentage of our total cloud revenues now and that's an important underlying reason why we believe that we're able to outgrow the industry in the first quarter this year.
Martin Lau
Just one point to add. On the gaming side, I think you emphasized one is like new creation of IPs and two is many years before you can see final product. I think, if you look at our recent pipeline of games, which we have announced of more than 40 of them, I think it's a combination. Some odd original IPs, which would take a very long time to develop, some are actually existing IPs that we're going to take existing assets, pretty proven Gameplay, and we would add our innovation for mobile, and then we'll developed it for launch.
And then there are also some smaller trial titles, the niche titles, which would have multiple innovations, probably something new will be developed and released within a shorter period of time and then iterated over time in order to make them bigger. So it's a combination of these different types of titles that constitute our pipeline.
Operator
Great, thank you. Our next question comes from William Packer from BNP Paribas. Please go ahead.
William Packer
Hi management. Congrats on the strong numbers and thanks for taking my questions. First question is, in your update today, you've presented investment plans to explore the growth opportunities for the future. In Q1 2021, you invested and delivered a 25% profit drop through on your 25% revenue growth. Should we think of Q1 as a relevant benchmark for the rest of the year?
And my second question is around regulation. The news flow has continued to be intense. Last quarter, you provided a helpful update on regulation of FinTech and your minority investments. Is there any incremental update to share today? Thank you.
Pony Ma
In terms of the incremental investment plan, I will not say the first quarter is the right benchmark, I think our investment plan is actually a stepping up from the first quarter level. So if you look at the first quarter results, I would say the benchmark is that our non-IFRS profit grew by 22% year-on-year. And what we're saying is that we're going to be investing a portion of the incremental profit into new areas and so, that means it's somewhere between 0% and 22% from a quantitative basis. I think that that's the quantification.
Now, in terms of the regulatory news, well I think that the most significant one is basically after the first quarter results, there was a meeting in which the financial regulator asked 15 FinTech companies to have a meeting and also announced certain principles, as well as asked the FinTech companies to have an internal review of their own business and practices.
And I think, that the principles largely a public revenue, and they are largely focused on all businesses have to be conducted through licensed entities and they ask for transparency. And at the same time, I think there's quite a bit of focus on making sure that there's not going to be systemic risk. And my understanding is, it's quite focused on the size of lending business, and making sure that there's no over lending or over borrowing by consumers right now and toward that front, I would say, as we have emphasized in our last conference call, we are very focused on compliance. We're very focused on risk management. We're very self restrained in terms of the size of our non-payment, financial products, especially on the lending side.
So when we look into that internal review, and when we look into what are the things that need to be done in order to make sure that we are compliant with the spirit of the regulator's, I think, it's actually relatively manageable. So that's sort of the update I have on the regulatory side.
Operator
All right, thank you. Our next question comes from John Choi from Daiwa Capital Markets. Please ask your question.
John Choi
Good evening and thank you for taking my question. I have two questions here. So on the reinvesting of profits, I think Martin just mentioned that maybe by 0% to 20%. But if you look at it, can you kind of walk us through like what are going to be the pecking order of the three that you guys did mention of business services, and games and not sure for video? And also, is it going to be a combination of your, like equity investments or through actually investment in operation that will have a P&L impact? And that's my first question.
And the second question is a follow up to your game business. I think, it's interesting to see that we're seeing a lot of the Jungle games, that Tencent probably has seen strong exposure, but also at the same time, there are new genres, like Metaverse, et cetera, that Tencent doesn't have that much exposure in your market. So how do you see the opportunities here and what kind of relevant investments and strategic decisions that you have to make in order to take advantage of these new genres emerging throughout the world? Thank you.
James Mitchell
So why don't I start on the second question. There are continually new genres emerging and some of them are best left to our partners are invest - companies to address. But others are genres that we think we can bring some value to the table, bring some innovation to users, and therefore, we will address ourselves. Now I wouldn't say that Metaverse is a genre, Metaverse is more of an overarching opportunity in which different kinds of games are played within a single sort of social graph and software suite. So if you look at Roblox then Roblox is arguably a Metaverse for younger gamers. But over time, as graphical fidelity improves, then we believe it's highly probable that you'll see similar Metaverses emerge that are consistent with the demands and expectations of older users.
And, that's a wide open field at the moment. No one has realized that vision yet, or there's some people are closer than others and we certainly believe that we're in a good position to be one of the companies that realize that vision, given our expertise at creating and operating games, given our history of facilitating social interactions, and also given our cloud infrastructure at the back end, because the Metaverse will be very infrastructure intensive. So I think that's on the games question.
In terms of the reinvestments question, then, I'll let Martin speak to it. But I would just say that, from when we talk about reinvestment in this situation, we're talking about owned and operated businesses primarily. I think that in each of these three verticals, we've already been active for a number of years in terms of investing in successful game studios, both in China and globally, in terms of investing in successful short video companies, such as Kuaishou in China and investing in a very wide range now of early stage enterprise software companies.
Martin Lau
And in terms of the areas of investment, I would say, mostly as James talked about, it's on the operating side. So a big part of it is actually sort of people right now. These are engineers that we're going to hire additionally to create the products, perfect the products, and develop better services. And some of these new employees are higher paid, because they are essentially experts and professionals in their respective areas. And to a lesser extent, it will be bandwidth and infrastructure costs. And to some extent, maybe delayed monetization on the video side, for example, right? And so these are sort of the investments that we're talking about, which are actually having a bottom line impact. And in terms of the magnitude, I would say business services, games and video in that pecking order.
And the nature is slightly different. Business Services would actually take a longer time and it's a larger strategy of building scale first, and then over time monetizing games. Basically, you can monetize relatively quickly once you've launch a game and achieve success. But the investment was actually in the development phase in which there is no revenue, but then you have incurred cost, versus video, as I said, right now there's a continuous increase in the number of people in order for us to improve the product, improve the operations, improve the tools, and at the same time in some cases as some extent of delayed monetization on the advertising front.
Operator
Thank you. Our next question comes from Han Joon Kim from Macquarie. Please go ahead.
Han Joon Kim
Great. Thank you for your time today. I have a two-part question on advertisement. You guys have talked about a lot of different things and confluence of events going on there. I was wondering if you can kind of help us repackage that into sort of ad inventory growth versus kind of eCPM growth, and kind of where we're seeing the extract for you there in before that?
And that leads us to the second part of that question, which is, as we go more visualization and then the bottom of the industry is going towards video theory, I think the ad inventory for video ad in the up market does increase. How does that sort of impact the overall market rates, eCPM rates and sort of where ad pricing can go from here? Thank you.
James Mitchell
Thank you for the question Han Joon. Actually, it wasn't completely clear, so I apologize if we miss heard sections of it, but we'll try to answer. So on the first part, around inventory versus pricing growth, then both are increasing. I think on the inventory side. Sometimes the outside world oversimplifies that into looking at what's happening with Weixin Moments. In reality, Weixin Moments is a pretty small fraction of the inventory of the number of daily impressions we bring to bear. And our ad network, for example, is a much bigger source of raw impressions. And our ad network continues to grow impressions quite quickly, as we see over China Internet expands and diversifies and there is more media owners join our ad network.
So ad inventory, expanding both internal reasons like unlocking more inventory in Weixin Moments as well as sort of more market driven reasons such as the growth of our ad network, and then eCPM growth. I think that over time, given increasing advertiser demand, it's natural, the pricing trend sideways to upwards that there was a disruption period when there was a sort of supply shock from the short video companies in 2019. But that's been somewhat digested by the industry as a whole now, and in general, what we see as the pricing is, flattish for non-video and then increases as videolization occurs. And in terms of videolization in the eCPMs, around video, in general, as you would expect, video eCPMs are high, but there are an interesting sort of discrepancies between the different video formats.
So actually the highest eCPM is often the promotional video ads within the ad networks. And those are typically be for game companies, education companies, perhaps e-commerce companies. And, there you could be looking at RMB 40 plus in revenue per 1000 impressions. So, and then the short video eCPMs are also quite high and fairly stable, just because there's so much short video inventory now in China. And then interestingly, the long-form video eCPMs are actually very low.
And so, whereas in the rest of the world, you would expect that, let's say hoodoo eCPMs would be higher than YouTube eCPMS. In China, it's the other way around and the eCPMs, drama series and movies and so forth, are about half of that for the eCPMs for short video. And, I think that's because advertisers currently find it easier to create five second commercials so they are suitable for short video and 15 second commercials that are suitable for long video and also because users have a higher propensity to click through ads within a short video site, where they're constantly clicking through short videos they do and don't like, versus a lower propensity to click through ads on a long video site, which is more of a lean back experience.
But it's a sort of challenge for the Chinese Internet industry as a whole and that is forcing monetization and therefore, investment toward short video at the expense of long video, eventually will probably sort of mean revert as consumers and advertisers recognize the distinctive, professionally generated quality of long-form video, but that processes isn't yet happening today. So anyway, overall videolization results in higher eCPMs which is good for the industry and good for us within the industry.
Operator
All right. Thank you. Our next question comes from Eddie Leung from Bank of America Merrill Lynch. Please go ahead.
Eddie Leung
Hi, good evening. I think about taking my questions, just as a follow up to Alicia and Han Joon Kim's questions on games, I understand our change upon our developing large scale and high production value chains, which could last a long-term, but for example, you mentioned that there have been some success of other tiny studios in overseas markets recently, but when we look at quite a number of them, actually not those traditional blockbuster games, right we are looking at let's say cards games, make over games, costume changing games. So it seems like they are actually quite clear for the find the games, but not necessarily those like large scale and high consumption value games, so that's our own interpretation. So just wondering if you could share your thoughts on this one, between your investment strategy and what we have observed recently?
And then secondly, just an accounting question on the sustainable social value organization, wondering about the timing of the funding, will it be funded within a short period of time, or over a long period of time? And in terms of accounting, will it be treated as a contra [ph] item to the investment games or to be under other expenses? Thank you.
Martin Lau
Eddie, so you raised a good question on game industry trends, and if you take a step back, the game industry globally is a really big industry, it's about $150 billion in revenue a year which means it's bigger than movies and music and literature and so forth put together. And when an industry is that big, then you can actually have different and apparently contradictory trends playing out at the same time. If you look at linear video then, on the one hand, there's an explosion in short video consumption globally, but on the other hand there's an explosion in the number of people paying for Netflix and Disney Plus and Paramount Plus and HBO Plus globally.
So those are sort of two apparently contradictory trends. People are watching more ad funded short video, they're also watching more subscription funded long video but the industry is big enough to accommodate both. And I think the same thing is true in the game industry, that there is a very clear trend toward very casual games where the innovation is around quirky [ph] game play and where these games are able to onboard large numbers of users very quickly. And the challenge with these games will be establishing competitive modes and also retaining users over the much longer term, and that is a trend or as you say a number of sort of casual Chinese game developers are now doing very well.
On the other hand, there's also a trend high production value games often made by studios who have been focused on these games for 10 years or more, often studios with 1000 plus employees, to really catch the attention of a global audience in a way that wasn't possible before and there I'm thinking about a game like Genshin Impact, where miHoYo has been making this kind of game for 10 years. It has over 1000 employees. It spent many years on the game. I'm thinking about games like our own PUBG Mobile and Call of Duty Mobile which exhibit similar characteristics.
So I think that the industry is big enough that both those trends are playing out, and there are certain studios of Tencent that are more focused on the first approach little more casual, quirky innovative games and there are other studios in Tencent that are more focused on high production value, but when we talk about our desire to step up our rate of investments, then we're referring primarily to the second group, in addition to the desire to take games that we've already conceptualized or have already begun development, and really double down on the development process increase development resources, lengthen the development cycle, and then invest heavily in the marketing when we launch the game, so that we get the games the best possible shot to global audiences when we do release them.
Pony Ma
Yes, while we are still in the midst of working on the proper accounting treatment with our auditors, ideally, the treatment will be similar to that of donation, that is expends upon contribution to a separate pool. However, it hasn't been finalized yet. The other point I would like to make is most likely to be treated as non-IFRS adjustment as its funding sources basically are investment gains which Martin has talked about earlier. And those investment gains also recorded a non-IFRS adjustment.
All this, you know, type of contribution will be captured under EBIT [ph] gains in our financial statements. And in terms of the funding timing, I think once the infrastructure has been set up, we will contribute the first set of funding into the pool. And I think usually we might find one once or twice you know in a year, in respect of the other three initiatives.
Operator
Right, thank you. Our next question comes from Alex Yell from JP Morgan. Please ask a question.
Unidentified Analyst
Thank you, operator and good evening management. Thank you for taking my question. The first one is to follow up, the question on your investment strategy this year. You guys have been investing consistently for future growth in the past several years, particularly for the three year risk that you plan to step up investments, all these has been around for quite some time. What makes you to decide to further step up the investment in this year? What are the new opportunities and the challenges you are seeing that we are not aware of.
And then the second question is regarding your, the social organization you just established. We understand that you guys will further pursue social responsibility. As a public company, how do you plan to align value creation to the society and the vale creation to the shareholder? Thank you.
Martin Lau
So, in terms of the stepped up investment, I think it's a bit of both, that most important driver is that we have seen an acceleration of market trends, as we have detailed in our strategy section, which include expanding business around the businesses moving online, and we have seen an expansion in terms of the game users, and we also seen the next stage of the short video content growth.
So I think that's the main driver of our decision to step up, because of COVID, because of new trends emerging quickly we want to put in additional resources so that we can actually stay ahead of the curve. Part of that is also the fact that the industry is actually moving faster ahead. So if you look at the history of Tencent, we have always tried to stay ahead of the curve, invest ahead of the curve, and be a shaper in terms of industry trends. But if the entire industry is actually moving faster, then we actually sort of have to step up that gas pedal in order to stay even more ahead of the others. So I know that's sort of the secondary reason in terms of why we are stepping up the overall investment.
Now, in terms of social responsibility, I'll answer it partly from a philosophical perspective. Running a company, building a company is like building a person right? So you try to do the right things, and over time you believe that good things will happen to that person. You don't really sort of -- at every step of your way calculate, what is the individual gain in some of the movement that you make, so I think, that's sort of our overall belief and when you build up an organization if you do the right things, good things will happen.
On a more granular basis, I would say, if we actually sort of leverage our technology and leverage our products to deliver bigger social good, I think overall we will be better received by our users, by our customers, by the governments, and by our employees, and when that happened I think it's going to be good for the shareholders over the long run.
Operator
Thank you. Our next question comes from Gary Yu from Morgan Stanley. Please go ahead.
Gary Yu
Hi, good evening management and thank you for the opportunity to ask question. I have one more followup question on the investment strategy. So in the statement it is specifically mentioned that we intend to invest a portion of 2021, incremental profits for these investments. Should we assume that beyond 2021, then we probably expected normal growth trend to go back to organic growth, and then hopefully some of these investment will start to bear fruits in the form of faster growth in the future.
And when we do look at kind of management, how to evaluate the potential returns of these investments, what are keys that management usually follow to evaluate the investment in business surface, video accounts and games respectively, and what kind of rate of return should we expect from these investments? Thank you.
John Lo
Well, I have to disappoint you in saying there is no specific quantitative metrics. I think a lot of times in our industry you actually sort of look at the trend, you look at the right things to do and then you put in the resources and over time, if you actually, sort of you are right and if you do it well, the return is usually so much greater than what you can anticipate, but if you do all the calculations and say, oh this is actually the rate of investment, and you invest according to that calculative mode, then usually you won't be able to deliver over and beyond what the users want, and you will not be able to be a leader at the trend and usually that means you're not going to even reap that return.
So, I think that's sort of essentially what it is. I think what we are saying is, like this year we admit stepping up the investment, that's a strategic move, and that increase in investment will actually continue. We will start to see some benefits over time. Now exactly what's the timing, I think it's hard to predict, but I think it's fair to say at least at this point in time the financial impact will probably be biggest as we start stepping into the investment.
Operator
Thank you. Our next question comes from Robin Zhu from Bernstein. Please go ahead.
Robin Zhu
Thank you. Thanks management and thanks for taking my question. I guess two questions, please. The first one is, could we get an update on WeChat e-commerce? You very helpfully provided us with some numbers for 2020, I just wanted to get your thoughts on how that's trended so far in 2021, your growth expectations for e-commerce growth, especially independent merchant growth for this year? And whether the company is doing anything proactively to drive growth or is it mainly just the organic process?
The second thing, on WeChat video accounts, I'm wondering if you could share some metrics in terms of the progress so far, whether it's time spent or video views? And again, strategically longer term do you envision this being more of a TGT versus UGC type of ecosystem? And yes, how do you -- any specific sort of examples of how you're trying to improve content there? Thank you.
Martin Lau
Robin, so on the e-commerce within Weixin we're very pleased with the progress. I think we said last quarter that the GMB was growing at a triple digit rate year-on-year last year and the GMB continued to grow at a triple digit rate, year-on-year in the first quarter of this year, despite a challenging base period because of people staying at home and conducting more e-commerce transactions last year.
In terms of the specific initiatives we're undertaking to stimulate growth, we talked about some of them earlier in facilitating companies, smaller companies making mini programs, building an ecosystem for intermediaries to assist offline merchants in opening and operating that Mini Program experiences. So I don't think there's necessarily single silver bullet at this point.
We have the traffic we have the payment solution. We have increasingly user trust and confidence and merchant processing confidence, and so it's more just an ongoing process of organically assisting all of the participants in what's becoming an increasingly vibrant ecosystem and one that's very differentiated from the other platforms or retailers in the market.
John Lo
Now in terms of video accounts, I would say, both the number of users using it as well as the user time spent on average has been growing on organic basis and solid basis. Now in terms of further cultivating the content ecosystem, I think what we want it to be able to do is actually a funnel right in which it would include as many UGC's as possible. But then, we will also provide all the tools, and all the operating procedures, and guidelines, as well as the monetization tools.
So in order to help these UGC's to really leverage our tools and make themselves into more professional providers of video content. And as a result they will become PUGC's over time and these UGC's would be offering very differentiated, as well as high quality content. And because these users a lot of times have got certain expertise and professional knowledge in different areas, so their content will be more nutritious, and will be differentiated from the pure entertainment related contents, which are now in the other platforms. So that's sort of the way that we are trying to curate the ecosystem for video accounts.
Operator
All right, thank you. Our next question comes from Thomas Charles of Jefferies. Please go ahead.
Unidentified Analyst
Hi, good evening. Thanks management from taking my questions. My first question relating to the payment side, given that digital currency is getting increasingly popular in China, what is our strategy on this one? And in terms of the monetization on payment, are there any other new business model that we can tap into these opportunities? And then my second question is relating to the advertiser side, given that management has talked about more stringent rules in the education sector, as well as a special event, how should we think about the trend on the advertising in the next couple of courses? Thank you.
James Mitchell
I think in terms of digital currency, I think we have already talked about it before in that WeBank is actually a participant within the trial for digital currency, and we will be developing in order to get WeBank to be supporting that. And over time, as we continue to develop our payment, as well as our other platforms, would actually sort of try to see whether we can provide more support for digital currency.
The main reason is because digital currency is essentially a substitution for cash, and as a result, you can actually look at it as another form of cash that will be running through the banking system and then eventually running through the third payment system and getting into the merchants. So, from that front, we are very clear that it will be quite conducive for our overall payment platform as well as for WeBank. So that's why we'll be participating very actively in the continuous rollout of digital currency.
Now in terms of the payment business, I think we have a very solid payment business and the business model is actually multifold, in that, for the large merchants who actually started, had a take rate on the payment for the online players. In particular, new ads were very solid payment take rates and at the same time, there will also be multiple value added services that will provide to the different merchants, such that we can actually sort of capture some kind of economics, and I think that business model is actually quite solid and will continue to build on.
Martin Lau
On the advertising side then, given the size and scale of the China advertising market, I think it would be naive to assume that that would be a period going forward when every industry is a green light and over performing and you know all cylinders firing all across the Chinese economy.
And so, when we look at the landscape today of course that there are uncertainties. The impact of IDFA depreciation has actually been less than widely feared for a number of reasons. We are in a period when there's some content airing uncertainty, but that should begin to clarify from July 1 onwards. So we're in the latter stages of that period, and then.
And then we also mentioned in the prepared remarks that there's some uncertainty around the K-12, after school tuition, education, and that education sector has become one of the top five advertiser categories online. So, what happens in that section could have some moderate consequences industry wide. But if you take a step back and look at the broader picture, then I think that, all of us would agree that we might rather be in a world where, that the primary challenges, K-12, after school education regulations in a world where the primary challenge is, a COVID-19 pandemic, ripping out of controls that appear to be the case, this time last year. So while they'll always be challenges, I think that in the grand scheme of things, the ad industry is in a much better place now than it was a year ago.
Wendy Huang
Operator, let's take the last question from the queue.
Operator
Certainly. Our last question comes from Jerry Liu from UBS. Please ask your question.
Jerry Liu
Hey, yes, thank you for squeezing me in. Yes, I just have two quick ones up first, on the Yes, if I look at the gross margins, this quarter was a little lower than the last two first quarters. So just wanted to dig a little bit more into the drivers and, what's the implication for margins here the rest of the year. I assume maybe the video mix is up a little bit, but curious about what the drivers look like within especially the gaming business.
And then secondarily on, going back, again, to the incremental investments, where we're laying out this year, is the focus here for us is more engineers and long-term development of games, et cetera versus some of the other peers in the sector. Really, a lot of what they're spending is on users and near term promotions, et cetera. It just feels like our spend the pace and the magnitude, maybe a little smoother. I just want to see if that is the right understanding. Thank you.
Pony Ma
Yes, I think in terms of the drive margin, the couple, few reasons. Number one is, hiring or live forecasts proportion, this due to the consolidation of the various apps and the organic growth of some our live broadcasting services. At the same time, that mix shift of, PC versus, mobile games as PC, sort of have a higher margin profile. And in terms of, other low margin products, just by, this digital subscription services, also, foods are dragged down, the profit or gross margin.
Martin Lau
In terms of the investment, I would say your observation is correct, right. That's the reason why we say we will be investing a portion of our incremental profits as opposed to other more e-commerce and transaction related peers in the market in which it may be auditor incremental profit, in some cases, and in some cases, you may be audit their profits.
And so I think that that's a correct observation. I also want to point out that we do pick up some of the incremental investments industry wide, because as you look at our investment, associate losses right now, in the prepared remarks did point out that it actually has a 7% hit to our non-IFRS profits. So we have already to some extent, whether in the current quarter.
A - Wendy Huang
Thank you, operator, I think, Operator?
Operator
Yes. I'll now hand the call back to Ms. Wendy Huang for closing remarks.
Wendy Huang
Thank you. 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 there soon. Thank you and see you next quarter.
Operator
Thank you. So that does conclude our conference for today. Thank you for participating. You may all disconnect.