Tencent Holdings Limited (OTCPK:TCEHY) Q2 2019 Results Earnings Conference Call August 14, 2019 8:00 AM ET
Company Participants
Jane Yip - Assistant General Manager, Investor Relations & Global Communication
Huateng Ma - Co-Founder, Chairman & Chief Executive Officer
Chi Ping Lau - President
James Mitchell - Senior Executive Vice President & Chief Strategy Officer
Shek Lo - Senior Vice President and Chief Financial Officer
Conference Call Participants
Alex Yao - JPMorgan
Alicia Yap - Citigroup
Eddy Leung - Bank of America
Grace Chen - Morgan Stanley
John Choi - Daiwa Capital Markets
Binnie Wong - HSBC
Gregory Zhao - Barclays
Jerry Liu - UBS
Piyush Mubayi - Goldman Sachs
Thomas Chong - Jefferies
Operator
Thank you for standing by. And welcome to the Tencent Holdings Limited 2019 Second Quarter Results and Interim Results 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. [Operator Instructions] I must advise you that this conference is being recorded today.
I’ll now like to hand the conference over to your host today, Ms. Jane Yip from Tencent. Please go ahead, Ms. Yip.
Jane Yip
Thank you. And good evening. Welcome to our 2019 second quarter and interim results conference call. I’m Jane Yip from the IR team of Tencent.
Before we start the presentation, we would like to remind you that it includes forward-looking statements which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent.
This presentation also contains some unaudited non-GAAP financial measures that should be considered in addition to, but not as a substitute for, measures of the company’s financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-GAAP measures, please refer to our disclosure documents on the IR section of our website.
Let me introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma, will kick-off with a short overview. President, Martin Lau, will discuss strategic review. Chief Strategy Officer, James Mitchell, will speak to business review, and our Chief Financial Officer, John Lo, will conclude with financial review before we open the floor for questions.
I will now turn the call over to Pony.
Huateng Ma
Thank you, Jane. Good evening. Thank you for joining us. In the second quarter of 2019, we sustained solid year-on-year growth in users, revenues, and profits. In games, we released successful new titles in several genres and popularized innovative game experience, while promoting balanced game play for young players.
In payment, we widened merchant adoption and grew average transaction and total payment volume rapidly. In content, we deepened our exclusive relationship with NBA, the most watched professional sports league in China, and reinforcing our position as the leading digital entertainment platform.
Our diversified business portfolio has broadened our revenue streams and strengthened our base business in the current challenging business environment. We will continue to invest to enhance our platforms, services, and technologies to better support our users and enterprise customers.
I will now share a few highlight numbers. Total revenue RMB88.8 billion, up 21% year-on-year and 4% quarter-on-quarter. Gross profit was RMB39.1 billion, up 14% year-on-year or down 2% quarter-on-quarter.
Non-GAAP operating profit was RMB27.3 billion, up 23% year-on-year or down 4% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB23.5 billion, up 19% year-on-year or 12% quarter-on-quarter.
Moving to platform update, in social combined MAU of Weixin and WeChat increased 7% year-on-year to 1.133 billion benefiting from the wide adoption of Mini program and Weixin Pay. Smart devices MAU of QQ was largely stable at 707 million.
In Games, our new game Peacekeeper Elite has become one of the best performing games in China. User activity increased in our flagship titles, driven by new content and season passes. Internationally, PUBG Mobile grew our global user base.
In media, daily video views within Tencent video apps increased year-on-year due to our popular anime series and video clips from hit dramas. We are enhancing short and mini video distribution across Mobile QQ Browser, QQ KanDian, and Weixin top stories. In payment, we operate the largest mobile payment platform in China with the robust growth in users, merchants, and transaction volume.
In cloud, we are the number two public cloud service provider in China, steadily picking our market share amid intense competition. In utilities, QQ Browser is a key platform for distributing our content feeds. We applied our industry-leading security capabilities to enhance the offerings of our smart industry solutions with financial, healthcare, and retail sectors.
I will now invite Martin to discuss the strategic review.
Chi Ping Lau
Thank you, Pony. And good morning, good evening to everybody. Today, I will talk about our leadership in creating and providing high quality content, which is a key strategic asset and capability in our overall content business, and it has fueled the growth of our long video platform. We also provide differentiated content for our short video and mini video platforms going forward.
Many observers question the role of high quality content, given the recent boom in user generated content such as mini videos. We believe high quality content has enduring and persistent appeal providing users with education, lifelong bonding experiences, immersion, and stimulation in a way that is difficult for short form user-generated content to match.
While short and mini videos have captured significant time spent, we believe it was mostly additive to Internet time spent as opposed to taking time away from high quality content. The length of user time spent on high quality content such as professional sports, Esports, and popular drama series continues to show healthy growth trends.
Moreover, there are emerging synergies between long and short form content, and we can capture the growing opportunities of both. For example, we are repurposing our high quality content to produce video clips and highlights for mini videos contributing to rapid growth in short video consumption within our Tencent video application, as well as in our new feeds.
Our leading games are also sources of many popular short and mini videos. We believe we have un-rivalled capabilities in terms of producing, curating, and operating high quality content.
First, we source high quality content both internally and externally. On the one hand, we possess market leading in-house IP incubation platforms such as China Literature Group, Tencent Games, Tencent Video, and Tencent Comics.
On the other hand, we partner with global best-in-class content providers such as the NBA, Sony, Universal, Warner, and BBC to name a few to bring their content to targeted audiences in China.
Second, we have accumulated insights and expertise in content management. Our operations team manage, curate, and deliver content to target audiences in suitable formats, coupled with the right storytelling and packaging while our technology groups ensure smooth content delivery.
Third, we use our content platforms such as Tencent Games and Tencent Video as well as our communication social platforms, Weixin and QQ, to bring content to the widest possible user base with application - amplifications through social interactions. In turn, the users become enthusiastic fans of the content, creating resonance and loyalty to the IP.
In the next two pages, I’ll discuss two case studies to illustrate how we create, curate, and enhance high quality content using our platforms. The first one is our novels. With our subsidiary China Literature, we have become the market leader in terms of incubating online novels and converting them into hit entertainment formats in China.
For example, the King’s Avatar is a popular China literature novel about an e-sports player. We have created drama series and anime series based on the King’s Avatar IP with each ranked number one of its kind by video views during the broadcast periods. We are also about to release a movie and will develop and publish mobile games based on this IP.
The Master of Diabolism is another novel from a joint venture under China Literature and is especially popular amongst female readers. We produced two series of its anime and cumulated generated over 2.2 billion video views on our platform.
We also released a drama series based on the Master of Diabolism, which ranked the top costume drama by views in the heavily contested month of July of this year.
Our second case study illustrates our ability to ponder with the best content internationally and sharply upsize its China audience base. Since we signed our first exclusive contract with the NBA in 2015, we have helped the NBA to approximately triple its full season audience to 490 million viewers and its average per game live streaming audience to 3.7 million viewers. This growth both boosted the NBA’s brand power in China and substantially increased its monetization capability. On the other hand, it has also contributed to Tencent Sports becoming the top online destination for sports fans.
Based on the success of the first contract, we recently announced that we have successfully extended our partnership with NBA for five more years. Looking forward, we intend to deliver NBA content across high DAU platforms in live streaming, video on demand, short and mini video formats with even better innovative packaging.
We intend to enrich NBA VIP and member benefits, including club merchandise and online streaming privileges and at the same time, we intend to cooperate further with NBA in developing NBA-branded mobile games and eSports events.
So with that, I’ll pass to James to talk about the business review.
James Mitchell
Thank you, Huateng. So the second quarter of 2019 our total revenue grew 21% year-on-year, VAS remained our largest revenue segment, representing 54% our revenue, within which online games of 31% and social networks 23%. Online Advertising was 18% of our revenue and FinTech and Business Services represented 26%.
Looking at value added services, segment revenue was RMB 48.1 billion in the second quarter, up 14% year-on-year and down 2% quarter-on-quarter. Social networks revenue is RMB 20.8 billion, up 23% year-on-year and up 2% quarter-on-quarter. Virtual item sales and live streaming services and games contributed notably to the year-on-year and quarter-on-quarter growth rates.
Our VAS subscription counts increased 10% year-on-year to RMB 169 million due to the growth of online video and music subscription services, within which video subscription were RMB 97 million, up 30% year-on-year and up 9% quarter-on-quarter due to factors including joint membership promotions with our partners such as Tencent Holdings Ltd. Jd.com and Meituan-Dianping, as well as the popularity of our Chinese anime series.
So online games, total smartphone games revenue increased 26% year-on-year to RMB 22.2 billion benefiting from the popularity of key titles and new releases. Sequentially smartphone revenue grew 5% as we launched more games following the renewal of the ban how approval process upsetting weak seasonality.
PC client game revenue decreased 9% year-on-year, other cash receipts increased year-on-year. PC client game revenue decreased 15% quarter-on-quarter due to adverse seasonality.
Focusing on our social network, Weixin and QQ continue to enhanced their chat experience and content consumption subscription boosting user engagement and time spent. Weixin was successfully building out a uniquely vibrant Mini Programs ecosystem by providing development tools, access to consumers and monetization opportunities, Mini Programs helped developers and service providers efficiently expand that businesses online. The number mid and long-term Mini Programs more than doubled year-on-year.
Mini Programs are also becoming more diversified in nature. For example, content Mini Programs allow users to conveniently create, upload and share videos, music and news within Weixin. More than a dozen content Mini Programs have attained over 1 million DAUs.
Benefiting from the popularity of Mini Programs, Weixin broadened its use cases and grew it user time spent. In our latest upgrade from Mobile QQ, we introduced QQ Mini Programs within which entertainers and game categories are particularly popular among the QQ users.
We enriched the QQ chat experience by enhanced functionalities for video and voice messages and added an extended screen photo format boosting daily messages by use quarter-on-quarter. And we helped users expand their social graph to an upgraded algorithm to recommend connections based on common interests and shared contacts.
For smartphone games, existing titles and recent releases drove Weixin revenue growth. We launched 10 games this quarter, up from one game in the first quarter including an augmented reality game Catchya and role playing games such as Fairy Tail and Raziel.
Honour of Kings increased its revenues year-on-year benefiting from its season pass initiative. Other games that notably contributed to quarterly revenue included earlier releases such as new retail mobile and Red Alert Online as well as more recent titles such as Perfect World Mobile.
Peacekeeper Elite has now exceeded 50 million daily active users and is in early stage monetization, particularly via Season Passes. However, its revenue contribution this quarter was very small due to our revenue deferral policy.
In July, we released three games in different genres. KartRider Rush is a racing car game. Game of Thrones: Winter is Coming is a strategy game and Dragon Raja is a role playing game.
The fact that all three games have achieved top 10 in the iOS Grossing Chart in China is a positive sign for our industry, pointing to player demand for a range of experiences, which appear to compliment rather than cannibalize each other.
Internationally, PUBG MOBILE obtained over 50 million daily active users, while new game Speed Drifter and Chess Rush achieved initial popularity. Our PC client games, League of Legends new play mode, Teamfight Tactics has become the clear global leader in the auto-chess category since releasing internationally in June and in China in July benefiting its daily active user time spent.
League of Legends China cash receipts increased year-over-year due to popular eSports-themed skins. The Dungeon & Fighter were currently prioritizing enhancing the user experience and putting less emphasis on player spending initiatives for the next few months.
Moving to our Online Advertising business. Segment revenue increased 16% year-on-year to RMB 16.4 billion amidst challenging macro-economic conditions and increased short video ad inventory supply. We expect these negative factors may continue impacting the industry through the rest of the year.
Sequentially, our advertising revenue increased 23%, benefiting from seasonally high demand in categories such e-commerce and online education.
Our media advertising revenue was RMB 4.4 billion, down 7% or up 26% quarter-over-quarter. The year-on-year decrease was mainly due to the absence of the FIFA World Cup this year and the unexpected delay of certain top tier drama series.
Operationally, our mobile video DAU is stable year-on-year, as consumers continue to value the differentiated storytelling and immersive experiences that long form video can provide versus short form video. In April, we released Season 2 of Produce 101, a highly popular variety show, which achieved record ad billings for Tencent video program.
Our social and others advertising revenue is RMB 12 million, up 28% year-over-year and up 21% quarter-over-quarter. Growth benefited from more ad industry and impressions notably the third ad load in Weixin Moments and ad inventory in our QQ KanDian news feed
Looking at FinTech and Business Services, segment revenue is RMB 22.9 billion, up 37% year-over-year and up 5% quarter-over-quarter. Excluding the negative impact of reduced interest income on custodian cash balances, segment revenue was up 57% year-over-year and up 7% quarter-over-quarter.
Within FinTech services, commercial payment grew rapidly in terms of user, merchants, transaction volumes and revenue driving the year-to-year segment revenue growth. Our commercial payment volume grew over 10% quarter-over-quarter.
LiCaiTong grew its AUM over 30% in the past six months to RMB 800 billion as of June, indicating a trend that our users are increasingly keeping money within our payment system. This trend lowers the frictional cost for users to use Weixin pay and also has the effect of reducing our withdrawal fees and thus our revenue as well as our bank charge expenses. The overall impact should enhance the vitality of our FinTech business in the long run. We continue to focus on FinTech risk management to sustain long-term platform growth.
Within business services, expanding our industry-facing sales teams and enhancing our product offerings enabled us to sign up more key accounts and large contracts, which contributed to rapid cloud services revenue growth year-on-year. Through close partnerships with independent software vendors and resellers, we’ve also increased broadcast services penetration amongst small and medium businesses.
And with that, I’ll pass to John to discuss the financial review.
Shek Lo
Thank you, James. Hello, everyone. For the second quarter of 2019, total revenue was RMB 88.8 billion, up 21% year-on-year or 4% quarter-on-quarter. Gross profit was RMB 39.1 billion, up 14% year-on-year or down 2% quarter-on-quarter.
Net other gains was RMB 4 billion, down 64% sequentially, lower net gains from investees and high impairment provision gain serving investments, which are both non-GAAP adjustments were the reasons for sequential decrease.
Operating profit was RMB 27.5 billion, up 26% year-on-year or down 25% quarter-on-quarter. Net finance costs were RMB 2 billion, up 72% year-on-year and 77% quarter-on-quarter. The increase was primarily driven by greater interest expense as a result of recent fund issuance of ForEx loss.
Share profit of associated and joint venture was approximately RMB 2.4 billion, compared to share of losses of RMB 3 billion last quarter. On a non-GAAP basis, share profit of associated and JV was RMB 2.4 billion compare to share of losses of RMB 518 million last quarter due to improved performance of certain investees.
Income tax expense was RMB 3.2 billion, down 10% year-on-year and 33% quarter-on-quarter, mainly due to recognition of tax benefits. Effective tax rate for the quarter was 11.6%. GAAP net profit attributable to shareholders was RMB 24.1 million and GAAP diluted EPS was RMB 2.52, both metrics up 35% year-on-year or down 11% quarter-on-quarter. On a non-GAAP basis, net profit was RMB 23.5 billion and diluted EPS was RMB 2.46, both went up 19% year-on-year and 12% quarter-on-quarter.
Let me walk you through our non-GAAP financial numbers. Operating profit was RMB 27.3 billion, up 23% year-on-year or down 4% quarter-on-quarter. Operating margin was 30.7%, up 0.5 percentage points year-on-year or down 2.6 percentage points quarter-on-quarter. Net margin was 27.2%, down 0.6 percentage point year-on-year or up 1.8 percentage points quarter-on-quarter.
Turning to segment gross margin, gross margin for VAS was 52.6%, down 6.4 percentage points year-on-year and 5 percentage points quarter-on-quarter. The year-on-year decrease reflected revenue mix shift to low margin products, sequentially margin contraction was a result of higher video content costs and revenue mix shift to lower margin products such as flat boat cards and licensed games.
Gross margin for Online Advertising was 48.6%, up 11.2 percentage points year-on-year and 6.7 percentage points quarter-on-quarter. The year-over-year increase primarily reflected rapid growth of social apps. Sequentially, season low up-tick of China advertising market contributed to margin expansion.
Gross margins for FinTech and Business Services was 44%, down 2 percentage points year-over-year and 4.5 percentage points quarter-on-quarter. The absence of interest income, from the custodian accounts for BBOC guidelines since mid January, was the main reason behind a year-over-year decrease. The rapid growth of commercial payment business, accounts for, you know, the sequential decline.
On operating expenses, selling and marketing expenses were at RMB 4.7 billion down 26%, year-over-year or up 11% quarter-over-quarter. The year-over-year decrease reflected our cost prudent cost management initiatives sequentially.
Selling and marketing expenses increased, due to marketing activities for new game releases, following the resumption of banhao [ph] approval process. Selling and marketing expense represented 5.3% of quarterly revenue.
G&A expenses were RMB 12.6 billion, up 28% year-over-year and 11% quarter-over-quarter, primarily driven by increasing our R&D expenses and staff costs. Within G&A, RMB expenses were RMB 7.1 billion, up 24% year-over-year and 10% quarter-over-quarter. As a percentage of quarterly revenue, G&A was 14.2% and R&D was 8%. At quarter end, we had approximately 56,300 employees, up 15% year-over-year and 3% quarter-over-quarter.
Let’s take a look at the margin ratios. Gross margin was 44.1%, down 2% -- 2.7 percentage points year-over-year and 2.5 percentage quarter-over-quarter. Our branded gross margin contracted due to bonuses on reduced VAS Gross margin. And mixed shift to lower margin revenues.
Non-GAAP operating margin was 30.7%, roughly stable year-over-year and down 2.6 percentage points quarter-over-quarter. Non-GAAP net margin was 27.2%, probably stable year-over-year and up 1.8 percentage points quarter-over-quarter.
Before I close my remarks, I will share some key financial metrics for the second quarter. Total CapEx was RMB 4.4 million, down 38% year-over-year and 3% quarter-over-quarter, of which operating CapEx dropped 43% year-over-year to RMB 3.8 billion, because last year we purchased large quantity of service to support our cloud business expansion.
Non-operating operating CapEx increased, year-on-year to RMB 602 million. Free cash flow was RMB 20.7 billion, up 27% year-over-year or down 14% quarter-over-quarter. Net debt position was RMB 15.8 billion, which have improved 55% compared to last year.
In the second quarter, our total cash grew 6% quarter-over-quarter, following payments for annual dividends and M&A activities. While total debt grew 9% quarter-over-quarter, due to our recent bond issuance. As a result, our net debt position increased 64% from the previous quarter.
The fair value of our share holdings, listed invested companies, excluding subsidiaries was approximately RMB 302 billion or roughly $US48 billion, compared to RMB 310.7 billion, or roughly US$46 billion last quarter. Thank you. We shall open the floor for questions.
Jane Yip
Operator, shall we have our first question please.
Question-and-Answer Session
Operator
Thank you. We have the first question comes from the line of Alex Yao from JPMorgan. Please ask your question. Please note, you're allowed to ask one question each time.
Alex Yao
Thank you management for taking my question. Very quick one on the advertising outlook in the coming quarters. Can you talk about the macro environment as well as the oversupply situation? I think James, you mentioned that you expect this oversupply situation will persist into second half of this year. What are your strategies to address such a market condition and how do you think about the 2020 outlook? Do you think the current oversupply situation will be better? Would there be a new incremental advertising release over the next four quarters or so? Thank you.
James Mitchell
Thank you for the question, Alex. Our assumption is that the macro environment will remain difficult for the rest of the year, and that the situation of heavy supply advertising inventory will continue for the rest of the year, and potentially into next year, and that obviously flows through, to some extent, into our advertising revenue, particularly on the media side, particularly with industries such as automobiles, real estate, financial services.
In terms of what we can do, then some of these challenges around the macroeconomic situation, around the industry-wide inventory supply not within our direct control. What we can control are factors such as the rate of our own inventory growth, our ability to provide new tools to advertisers, our capabilities in terms of targeting ads to the right users.
And those factors also have an impact on our growth rate, and so we seek to use those factors to sustain what we view as a healthy, although not super rapid rate of advertising in the current challenging environment. Thank you.
Operator
Thank you. The next question comes from the line of Alicia Yap from Citigroup. Please ask the question.
Alicia Yap
Hi. Good evening management. Thanks for taking my questions. My question is regarding the online games. How should we reconcile this discrepancy between our expectation versus the reported games revenue and the deferred revenue growth this quarter? You noted in the press release that the Peacekeeper Elite, the game has seen some initial success, right, in monetization, but with limited reported revenues in the second quarter due to the deferred impact, but yet your sequential growth in the deferred revenue really didn't show a very strong number.
So we understand, it could be really the two different movement of contribution from different games and the timing. But, could you walk us through how we should be looking at the provided number to judge or estimate the trend for the third quarter and the second half gaming revenue growth?
James Mitchell
Thank you, Alicia. So in terms of the game revenue trends in the second quarter, as you're probably aware, the second quarter is seasonally a much slower quarter than the first quarter. And if you look at our history, then historically our game reported revenue and the deferred revenue associated with games have often declined quarter-on-quarter from the first quarter. If you look at some of our listed comparables, their deferred revenue associated with games declined at a double-digit rate quarter-on-quarter.
So I think the – on our side, the fact that this year's second quarter both our reported revenue and our deferred revenue increased quarter-on-quarter for the smartphone games is actually quite positive and encouraging. And zooming in on Peacekeeper Elite, then the game has launched strongly. It is generating healthy revenue now from its Season Passes.
However, the very large majority of Peacekeeper Elite's cash flow generation in the second quarter was deferred to subsequent quarters. So only a minority, a small minority was captured in our reported revenue line, and Peacekeeper Elite was not even among our top ten games in terms of reported revenue in the second quarter.
On the other hand, we saw pretty healthy quarter-over-quarter trends from a number of mobile games, including PUBG Mobile internationally including our new game Catchya, including Perfect World Mobile. So I think overall, we were quite happy with the recovery in smartphone game revenue.
Now obviously, it takes sometime for what we see to flow through fully into the reported financials because of the revenue cycle, but the fact that deferred revenue was up quarter-on-quarter and was seasonally a slow quarter for deferred revenue, I think, gives us some comfort on our side. Thank you.
Operator
Thank you. The next question comes from the line of Eddy Leung from Bank of America. Please ask your question.
Eddy Leung
Good evening. Thank you for taking my questions. Could you talk a little bit about your strategy in high quality content, especially how you decide on being an independent user platform versus investing in certain upstream content providers given your past experience in investing in games and videos for our information?
And then just a follow-up question on games, James, could you also give us your thought on the potential new entrants from the short video industry? Thank you.
James Mitchell
Yeah. In terms of the high quality content menu, I would say our platform strategy is actually to be an all-inclusive platform. We try to include as much content as possible. So that you can see with respect to our video platform as well as China literature. But at the same time, what we find is that -- and that applies to our music platform, as well. But what we find in becoming a strong, all-inclusive content platform, there’s actually a lot of synergies if we can work with the content providers more closely.
And as a result, when you look at our games platform for example, we have been very early on investing in games studios, so that we try to establish a very deep partnership as well as close partnership relationship with the content providers, because we felt that once we have that relationship, a lot of times what we can do is we can curate the content better, we can take a long term perspective and invest in the content better, and we can understand the content more and we can help the content developers to understand our platform more, so that as a whole we can actually help the content to be more popular within our user base and at the same time for our user base, we can contribute more traffic to the content developers.
So it's a win-win relationship that we can build once we have a deeper relationship as opposed to just a mercantile relationship. So in almost every single content platform, we have tried to find different ways to establish a stronger relationship with the content providers. And that is one of the reasons why we have very strong capability in creating, in curating as well as in popularizing the high quality content.
Now, I would say within the games segment, when you look at potential new entrants from mini video player, I think overall we felt there’s already a lot of competitors in the gaming sector, and throughout the history, the game industry actually thrive on having a lot of different competition.
And to some extent, I would say we welcome new entrants, to some extent, because when people bring in a new idea, this is exactly how we can actually expand the gaming industry. The gaming industry is actually driven by innovation. Now, we do believe that in order to be a very strong player in games, you actually require a lot of domain expertise, which took us many, many, many years to build.
And at the same time, I would also want to say that for our existing games, and especially the very large games, their extremely strong network effect in the games, especially when it's coupled with our social network. And that's a unique advantage that we have.
So I think overall we are not too concerned about having more and more players to be playing in the gaming market. And I would also want to point out that when you are already a player that's making a lot of revenue from apps, the incentive to move into gaming is actually not extremely obvious because to some extent you're already making a lot of revenue from the gaming industry as a whole. So that's certainly what my reaction is.
Operator
Thank you. The next question comes from the line of Grace Chen from Morgan Stanley. Please ask the question.
Grace Chen
Thank you. Thank you for taking my call. My question is about the cloud business. I notice that in the press release it said that Tencent did penetration in small and medium business due close partnerships with independent software vendors. So I'm wondering whether management can elaborate more about the partnerships with software vendors.
Are there – are these many international or domestic software partners, and in which type of software solutions? Also is Tencent interested in developing in-house software solutions and what type of software solutions that could be? Thank you very much.
James Mitchell
In terms of our cloud business, as you know, number one I would want to say our cloud business have actually registered very strong growth in the quarter. And we believe we have been consistently thinking of market share in the past few quarters.
Now, with respect to the mix of the cloud business, we have been traditionally quite strong in terms of getting businesses from Internet players. And more recently, we have also made pretty strong inroads into some of the enterprise sectors including financial verticals, including government verticals.
And the last piece of the puzzle is really building more exposure to the small and medium enterprises, which I think over the past couple of quarters, we have made good progress.
And that progress is mainly made with respect to what you have described, which is building relationships through the ISDs. And through the ISDs who have a lot of connection to the different SME where you can actually sell our cloud solutions to them. And these ISDs may be experts in the particular industries. So, for example, they may be experts in the restaurant industry. Some of them may be experts in the financial or retail industry.
And when we build relationships with them, we can actually, through them, cover a lot of smaller players and companies and customers within those sectors. There are also some companies who are bigger in size. And in some of these companies, we have actually invested in them in order to establish a stronger relationship. So take the example of Donghua software or beaming. There are number of ISDs larger ones that we have invested in them so that we can actually go through them in order for us to cover the small and medium enterprises.
I would also want to point out that another initiative that we have done with respect to the small and medium enterprises is increasing our toolkits for Mini Programs. When we can provide a set of tools for companies to connect their Mini Programs to our cloud services, then we have a much higher probability of picking them up as our cloud solutions.
Now, one more point to add is that in addition to all these initiatives, we have also been developing SaaS solutions both on our own as well as working with SaaS providers in China so that we had exposure to SaaS software solutions such as CRM, such as document processing as well as enterprise messaging. So we believe our staff initiative is also another way in which we can cover small and medium enterprises in the cloud market.
Jane Yip
Thank you. And the next question, please.
Operator
The next question comes from the line of John Choi from Daiwa Capital Markets. Please ask the question.
John Choi
Thank you for taking my question. I have a question on your marketing expense. This quarter we have seen pretty - it came down quite a bit on year-over-year. And I think on the press release, you said you guys have reduced less effective marketing campaigns.
Can you guys elaborate a bit more on these initiatives, and how should we think about the spending trend for marketing and also sales and marketing and also for other OpEx items toward the end of the year? Thank you.
James Mitchell
I think since the last quarter last year, we have very strong control on selling marketing expenses, in particular we will look at while they're spending, we will look at whether they have been spent effectively and efficiently.
And if it is - threshold, then we will cut the entire campaign completely. As opposed to in the past, we tend to an assign a budget and we just sort of let them finish all the marketing activities before doing full assessment OS.
And I know there are other ways in which we can measure effectiveness by comparing similar activities between different business groups and between different departments to ensure that we get the best year after the sale of those marketing activities.
Also, I think we do have - we do give out budget on a piecemeal basis as opposed to in the past in which we give our all budget at the same time and we do reviews on a monthly basis to ensure that the marketing objectives have been matched before assigning for months budget for that.
That's why I have been seeing sharp decline in selling and marketing expenses in the past two to three quarters on year-on-year basis. Going forward, of course, this initiative will continue, but at the same time, as you understand, those marketing activities can go down and down according to needs and the amount and according to how our competitors spent, in particular, in some areas just like payment.
Like a year ago we have been spending quite a lot in the payment side. But once we get to certain momentum and when compared with spending versus our peers, we tend to spend less and more wisely.
Huateng Ma
So I think to summarize, one is very strong cost controlled initiative at the company. Second, I would say there's some - because of the macro environment, we can get better deals in terms of advertising and promotions.
Thirdly, with respect to certain verticals, such as payment, when the revenue of the market get hit, when interest income were actually taken away, the marketing spent of the different players actually get rationalized a bit. So, it's a balancing act. But going forward, I think we believe a lot of fat has been cut already.
And then when we are ready to promote for new games, then the marketing expenses would probably go up. But I think overall, because of the cost control and the overall market environment, I think it's much healthier marketing environment now than before.
Jane Yip
Thank you. And the next question, please.
Operator
Your next question comes from the line of Binnie Wong from HSBC. Please ask your question.
Binnie Wong
Thank you management for taking the questions. My questions on the Video side. So on the software and video, thank you for highlighting the differentiation of your short video against your peers in your opening remark. And if you think about how to yield the maximum synergies from your unique advantages in your content creation platform.
I guess what it boils down is how effective and how targeted we can push the right format to a target audience. So I guess the question is how much data user insight is the short video team or your technology team can they share to do a better targeting than our peers?
And then the second question is on the long-form video side. How should we think about to mitigate the negative impact on the media as often expect drama delay, especially, when we are approaching the National Day and there might be more regulatory, I mean, in terms of the tightening on the content side?
And then how are you thinking about any operational measures, such as any product change in terms of the type of drama to drive a revenue growth on the media front? Thank you.
James Mitchell
Well, I think we do have a lot of data about our users. So over time, we have been building a lot of technologies in order for us to leverage these data renewal for feeding the right short and mini video to our users.
I think so far, the result has been encouraging, especially after the establishment of our PCG because, you know, consolidated our tech resources to create the tech platform that can support our long video, our short video, and our mini video.
I think more progress has been made on the short video front because if you look at the short video growth within our overall platform, it has actually grown very strongly across our QQ KanDian, our QQ Browser as well as Tencent Video. So that actually has made a very significant progress.
Now, with respect to mini videos, I think -- it would take some time before we really start to promote our way to share. On way share we actually viewed it as a very strategic product for us.
We will be building up the technology, the content curation capability as well as the ability for us to target the mini video to the different users through our recommended feed over the long run. And as and when our engagement and retention have reached our target, we will actually start promoting in a very big way.
Huateng Ma
In terms of your question about long form video and how we mitigate the impact of the unexpected delays to key drama series, then I think at a high level, we don't necessarily seek to mitigate fluctuations in individual business lines by doing things in adjacent business lines.
You saw last year that when our game revenue was a much bigger proportion of our total than video was under pressure, we didn't seek to accelerate monetization elsewhere. We believe we have a relatively - diversified broad revenue mix.
And - one of the strengths of the position we're in this is that we can afford to take -- some hits in the nature of the business and rely on the breadth and depth of our capabilities to move us forward. So that's a high level answer.
Now, getting a little bit more granular in terms of what the video team are doing in this environment, you know, clearly from a content perspective, given the difficulty putting drama series, especially, historical costume drama series, we have been doubling down our focus on some other content categories.
So we've talked a great deal about Chinese anime where we believe we're the clear market leader now in terms of both production and distribution and where we can leverage the competitive advantage that accrues to us from our relationship with China literature as the upstream inspiration for many of these animated TV series.
We have been an aggressive investor in documentaries. And then our Produce 101 variety show we think is the highest rating and highest grossing variety show in the market. So that's on the content side.
On the revenue side, the traditional 30-second spot advertising revenue is under pressure, because of macro factors and because of the delays to the drama series. That said, we continue to grow our subscription revenue at a reasonably fast rate.
And in the past 12 months, we have more than doubled, approximately tripled the advertising revenue on the new speed inside our Tencent Video app, which is less directly tied to individual hit content, and more broadly related to the daily active user base of the app, which remains healthy despite some of the challenges we are facing.
Jane Yip
Thank you. And next question, please.
Operator
Next question comes from the line of Gregory Zhao from Barclays. Please ask a question.
Gregory Zhao
Hi, management. Thank you for taking my question. As I think starting from September JD reported team by business towards Weixin level 1 entry and we also know QQ KanDian leverage your social network and launched a very unique team by business model in the past two years. So just want to check your expectation on JD’s new launch on the TIMY [ph] and also want to understand your strategies to balance your resources to your investment company?
And also very quick follow-up on the content cost, I think you mentioned you increased your costs in shorter video side. So, specifically I want to understand in which area will you spend the money to directly pay for some Mcent or some video studios to produce some short video contents? Thank you.
James Mitchell
In terms of JD, we did renew the contract. And they're going to launch a new user experience. We continue to believe that there's a lot of potential with respect to both building an e-commerce system within Weixin and the level 1 entry point for users.
Because I think as our experience shows, there are a lot of users who actually go into that entry point. And if the entry point is going to be able to provide a great user experience, and at the same time provide great products to the users and have a high retention rate for the individual users as well as create some additional leverage overall social network, there could be a lot of potential in the level one entry point. So we do believe there's potential. And we hope, the new product design will actually unleash some of these potential.
I think interestingly you have brought up [indiscernible] which for a long time – they did not have a level one entry point. And they have been able to leverage the social network to bring great benefits to their own business, which to some extent validates the point that I made, which is there's a lot of potential within Weixin to build a strong ecosystem around e-commerce.
And if you see now, we have provided a level two entry point for Weixin Duo [ph] and I think these two user experiences are actually quite different. And we do intend to provide help to both companies in order to generate the right user experience as well as the right user excitement according to their differentiated product experience and category management experience. Now on content, maybe John, do you want to answer that question?
Shek Lo
In terms of short video content, a lot of those contents are self generated. And there are not a lot of content cause in which Tencent [ph] or whatever is right now.
James Mitchell
Certainly. Due to the time constraint maybe we have last three questions, please.
Operator
The next question comes from the line of Jerry Liu from UBS. Please ask the question.
Jerry Liu
Hey. Thank you very much. My question is on FinTech. We've seen pretty good revenue growth and margin improvement in this business, but this quarter we also flagged the fact that users are not withdrawing the cash, actually slowed the revenue growth and margins a bit.
I just wanted to get an outlook for the next few quarters, maybe next couple of years as we develop more financial products marketplace as we do, new services and products in this area, how do we see the revenue growth in margins trending? Thanks.
James Mitchell
Well, number one as you have pointed out, the trend, the short-term trend is actually the user is actually keeping more money within our ecosystem. And as a result, the short-term impact is that it affects the revenue because the users are withdrawing less cash.
And since we have already paid for the cost, the banking cost of such cash, when they withdraw less, the margin also gets impacted negatively. The net, net it’s actually a very good trend from our perspective, because it helps the users to be transferring money and paying for services at zero cost when they keep the money within our system, right.
So the frictional cost has been reduced. So it's actually structurally a great and very healthy trend for the overall payment system, which then brings to the next question, which is over the long run, we do believe FinTech business has got a lot of potential, right. This is something which is, I would say, similar to our social and performance ad, right. We viewed it as a multi-year growth opportunity.
And there is already a very large user base. There is already a very large transaction volume, and a lot of merchants actually rely on the payment platform to actually conduct their businesses. So by and large, we have a lot of traffic and platform franchise to actually monetize.
But at the same time, what we want to do is actually monetize, do a value add, not to just keep increasing the charges because we felt that it's still a very competitive environment.
So in terms of going forward, FinTech services, particularly our micro loans could be quite important. But under the current environment, while there's still a lot of potential in terms of expanding our loan portfolio, we do want to make sure that it’s expanded in a measured way, so that our risk management is actually done in the proper way, especially under the current macro-environment.
We try to be erring even on the more conservative side to make sure that we are not exposing ourselves to too much risk. And at the same time, since clearly there is a lot of head room for us to grow, and we want to spread over multi-year period rather than try to draw in a short period of time. So that's how we look at our overall FinTech services.
Jane Yip
The next question, please?
Operator
The next question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.
Piyush Mubayi
Martin, could I just ask another question of FinTech? You talked about the broader direction. You talked about a few specifics. But could you also talk through what's going on with the payment in the competitive landscape at this point?
Any new strategies that you're deploying, and confirm whether there's been a change of guard from your side. And if I might ask about two quarters ago, you talked about commercial being more than 50%. I think that was in fourth quarter. Where are we on that number?
And lastly, the gross margins were down about 400 basis points on a sequential basis. Is that a new number we should go with? Or can we see that potentially bounce back to where we were a quarter ago? Thank you.
Chi Ping Lau
I think in terms of the overall competitive landscape, I think our positioning is still very strong, especially in terms of the frequency payment. I think, we are at the highest DAU as well as MAU payment platform in China. And I think number of transactions that we have is also highest.
And in terms of the overall transaction volume of our commercial transactions, it has been growing at a faster rate than the overall transactions too. So I think, the overall positioning is actually quite strong. In terms of - what was your second question? With respect to numbers, we missed that, sorry.
The payment margin. I think it is a function of many different numbers. So I think you asked the payment business is still in a flux of changes, particularly with the taking away of the interest and this new change, in which we were able to retain more of the cash within the overall system, which is having impact on both the revenue and the cost and the velocity of payment.
I think at this point it's hard to make a number at this point in time. Yeah, I think it will probably take a couple quarters for us to take a more stabilized view of the business. Then we can probably give you a better number.
Jane Yip
And the final question, please.
Operator
This is the last question, comes from the line of Thomas Chong from Jefferies. Please ask your question.
Thomas Chong
Hi. Thanks management for taking my questions. I have a question regarding our M&A strategies. Given you have talked a lot about content, should we expect our M&A strategies to focus more on music or short form video going forward or games [Indiscernible] And management give us some direction on how we use our cash? Thank you.
James Mitchell
So, thank you for the questions, Thomas. In general, if you look at the total amount of capital we're deploying in investments, then the rate of investment has slowed quite notably from the first half of 2018 to the second half of 2018 and the first half of 2019.
And that’s probably because the amount of capital we're deploying into investments is decelerated after an unusually rapid pace in the first half of 2018 when we were investing in smart retail and game broadcast sites.
And that partly also because of the rate of divestments has picked up pretty sharply. In recent months, some months our rate of divestments has matched our rate of investments.
In terms of where we are focusing, then historically for the past 10 years or so. We have been quite active investing in upstream contents. And that includes game studios. That includes TV production businesses, literature and music. And that continues.
But the greater change is that we have become more active in some of the sort of frontier opportunities, particularly enterprise software, also financial technology, education technology, to some extent health-related technology opportunities.
So overall, we’d be continue to invest, at a more measured pace than at the beginning of last year. And as the Internet transforms more aspects of everyday life, then we feel that Tencent has a role to play in helping that transformation.
And sometimes we can play that role entirely by ourselves and sometimes we want to play that role in tandem with partners. And with some of those partners, it makes sense for us to form an equity relationship to deepen an institutionalized relationship.
Operator
There are no more questions on the queue. Ms. Yip, please begin your closing remarks.
Jane Yip
Thank you. We are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website, replay of this webcast will also be available soon. And see you next quarter.
Operator
That does conclude our conference for today. Thank you for participating Tencent Holdings Limited 2019 second quarter and interim results conference call. You may all disconnect now.