Tencent Holdings Limited (OTCPK:TCEHY) Q3 2019 Earnings Conference Call November 13, 2019 7:00 AM ET
Company Participants
Jane Yip - Investor Relations
Pony Ma - Chairman &Chief Executive Officer
Martin Lau - President
James Mitchell - Chief Strategy Officer
John Lo - Chief Financial Officer
Conference Call Participants
Alicia Yap - Citigroup
Eddy Leung - Bank of America
Han Joon Kim - Macquarie
John Choi - Daiwa
Grace Chen - Morgan Stanley
Gregory Zhao - Barclays
Binnie Wong - HSBC
James Lee - Mizuho Securities
Alex Yao - JPMorgan
Piyush Mubayi - Goldman Sachs
Operator
Thank you for standing by. And welcome to the Tencent Holdings Limited 2019 Third Quarter Results Announcement conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that, this conference is being recorded today.
I would now like to hand the conference over to your host today, Ms. Jane Yip from Tencent. Please go ahead Ms. Yip.
Jane Yip
Thank you. Good evening. Welcome to our 2019 Third Quarter 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. Non-IFRS measures formerly referred as non-GAAP measures are intended to reflect our core earnings by excluding certain one-time and non-cash items. 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 the strategic review. Chief Strategy Officer, James Mitchell, will speak to business review, and Chief Financial Officer, John Lo, will conclude with financial review, before we open the floor for questions.
I would now turn the call over to Pony.
Pony Ma
Okay. Thank you, Jane. Good evening, everyone. Thank you for joining us. During the third quarter, we experienced sustained a healthy growth rate in our operating and financial measures. Notably, our FinTech and Business Services and Advertising segment revenues each increased at double-digit percentage rates from the second quarter. Thanks to rising user activities and improved advertising technology. This growth demonstrated the strength of our new business and our diversified business mix. Our non-IFRS operating net profit grew at a faster year-on-year rate versus the prior quarter.
Looking forward, we will continue investing in our products, technology and services as we seek to provide value to our users and to do good for society. I will now share a few highlight numbers from the third quarter.
Total revenue was RMB97.2 billion, up 21% year-on-year, and 9% quarter-on-quarter. Gross profit was RMB42.5 billion, up 20% year-on-year, and 9% quarter-on-quarter. Our non-IFRS operating profit was RMB28.5 billion, up 27% year-on-year, and 5% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB24.4 billion, up 24% year-on-year and 4% quarter-on-quarter.
Moving to platform update, in social combined MAU of Weixin and WeChat increased 6% year-on-year to RMB1.15 billion. Smart devices MAU of QQ, declined 6% year-on-year to RMB653 million as we proactively cleaned up spamming and bot accounts.
In games, we have solidified our number one position in China with Peacekeeper Elite's popularity and extended our international success with Call of Duty Mobile and Teamfight Tactics. In FinTech, we operate the largest mobile payment platform in China by DAU, and payment models, which increasing user engagement.
In media, daily video views within Tencent Video App increased both year-on-year and quarter-on-quarter, despite our challenging content approval environment. Live streaming services and music subscriptions also grew strongly.
In Cloud, we continue to outgrow peers and have achieved significant scale in our business. In utilities, our App store and mobile browser App remain category leader in China.
I will invite Martin to discuss strategic review.
Martin Lau
Thank you, Pony, and good evening and good morning to everybody. This quarter marks the first anniversary of our strategic organization upgrade, which strengthens our franchise in consumer internet and extends our footprint to industrial internet. While we believe that the upgrade will generate its desired results over the next few years, we're pleased to share some initial achievements both quantitatively and qualitatively.
From a quantitative perspective, our non-IFRS earnings growth has accelerated from 19% in the second quarter to 24% in the third quarter. This growth is driven by first FinTech services and second social ads and third international games, which are all relatively new business areas, and each one of them had large growth potential in our view.
Over the past year as a result, we have improved the quality, diversity, and headroom of our growth profile in these tangible business areas, while at the same time pursuing emerging growth in enterprise businesses and short content industry.
From a qualitative perspective, first we have consolidated our enterprise facing activities into the Cloud and Smart Industries Business Group to assist various industries in reaping the benefits of digitization. Second, we established the platforms and content business group to execute a more focused content strategy leveraging our strengths in high DAU platforms and premium content. Third, we have proliferated our mini Programs ecosystem enabling service providers to efficiently connect with their customers.
Fourth, we have made encourage progress toward globalizing our business, particularly for online games where we created published and operated some of the most popular mobile games outside of China. Fifth, we have streamlined our operations to be more agile. For example, we merged our App sales teams and simplified our inventory format. We set up a technology committee to drive the use of the common software code base and we are more efficiently prioritizing our sales and marketing activities. In the same spirit of continuing innovation, we upgraded our corporate mission and vision to Value for Users Tech for Good.
Now, diving into the progress we have made in serving enterprises with CSIG, we have rapidly expanded our client base and locked in key contracts, driving fast growth in our Cloud revenue and more importantly achieving substantial scale. We have integrated our proprietary technologies in areas such as security software, streaming, AI and big data analytics into smart industry solutions. For example, our security software to facilitate anti-fraud identity authentication and data protection and it's increasingly adopted by internet financial and municipal services customers.
Operationally, we have optimized our supply chain for hardware such as servers and networking equipment, enabling us to offer more cost competitive products and services. We have also unified our enterprise sales teams to increase customer acquisition efficiencies.
During the year, we've built several industry leading cases and made great progress in different sectors. For example, our Digital Guangdong project, it's regarded as the benchmark for digitizing municipal services in China and we're leveraging that success by implementing WeCity solutions in other cities such as Changsha and Chongqing.
Our travel has been then on mobile projects, pioneered digitizing tourism, facilitating tourist access to scenic spots, transportation and public facilities, while supporting businesses and administrators to increase touch points and overall efficiency. Our smart retail solutions provide digital tools to help retailers keep a consumer insight and streamline processes, the flow of the initiatives to facilitate merchant on boarding process and are penetrating more subsectors.
Moving onto our content business and the progress in PCG. We are increasing the interaction between our content Apps, traffic Apps and social platforms, so as to understand our users better, identify users trends earlier and provide the right content to a broader audience in a more timely manner. In premium content, we are reinforcing our content creation capabilities in areas such as drama series, variety shows anime and literature. We're also benefiting from synergies between different content formats. For example, we're developing popular online literature IPs into drama and anime series and success examples such as The Untamed and The Kings Avatar emerged.
We're using variety shows to identify new artists, who then contribute content and talent to our music platform. R1SE, a band selected from participants in the Tencent video variety show, sold almost 1.5 million copies of its first digital album on the debut of its released on Tencent music platforms. In the area of short form content, we've built a strong presence in newsfeeds via QQ KanDian, QQ browser, Weibo and Weixin top stories and are now increasing our advertising revenue from these services.
We believe the newsfeeds competitive landscape has largely stabilized with our products holding a significant market share. In short and mini video, which emerged more recently, we already have over 10 billion video views per day and we're building out our content curation and distribution system, focused on our Weixin application. We believe the short and mini video market will eventually settle down around several successful Apps, similar to the case in the newsfeed market.
In terms of mini program, mini Programs in our view present a vibrant ecosystem that facilitates service and transaction delivery, offline and online integration and benefits our performance Apps and payments business. We are the global pioneer for mini programs and a clear China market leader with mini programs having over 300 million DAU and the number of mid to long tail mini programs grew 60% year-on-year in the third quarter.
To further our ability to serve vertical industries through smart solutions, we're now pilot testing vertical mini programs via three new gateways in our Weixin Pay main interface. First, healthcare, our healthcare gateway integrates services such as medical content from Tencent Medipedia for information, direct connections to hospitals for registration and consultations and electronic social security card for efficient payment.
Second, mobility, our mobility gateway allows users to check bus schedules, plan routes ahead, pay for public transportation and pay for traffic fines and parking if they are car owners. Thirdly, smart retail, our smart retail gateway is a decentralized marketplace for retailers. Users can browse recommended products from nearby franchise stores, brands and also communicate with seller's representatives.
In terms of globalization, we have made good progress to increase our global presence and we believe we are making particularly a breakthrough in our games business. As a first step, if you remember, we have invested in and partnered with many of the best game companies in the world, we have business cooperation or equity investment in eight out of the 10 game companies worldwide.
More recently, we have proven that we can ourselves develop games that achieve global success. For example, PUBG Mobile has become the top game in terms of DAU globally excluding China, according to F&E.
In the most recent quarter, the Call of Duty Mobile, which we co-developed with Activision Blizzard gained over 4 million five star reviews on Google Play and a 4.9 rating on iOS, following its October launch, which has become one of the most successful mobile game launch in the past couple of years.
International markets now contribute a teens percentage of our games revenue. Looking forward, we will focus on strengthening our capabilities in serving international markets by firstly, incubating our own IPs that are suitable for global audiences and broadening our partnerships with international IP owners.
Secondly, pioneering new types of game plays that can resonate worldwide and thirdly, localizing our game publishing and operational capabilities for multiple regional markets. We believe we have a tail wind on our back, because A, gamers globally are increasingly active on smartphones and B, gamers globally are increasingly excited about multiplayer action games both of which are areas of strength for Tencent.
So finally I want to close this section by talking about something that is very important for us long term. This week on the 21st Anniversary of Tencent, we upgraded our corporate culture and announced our new corporate mission and vision, which is Value for Users Tech for Good.
Throughout our history, users and responsibilities have always been at the heart of everything we do. Whenever we face challenges at crossroads, we abide by the user oriented approach as our guiding principle. The 99 giving day program is the implementation of our parental guidance platform and our use of AI technology in healthcare are a few examples illustrating our conviction and commitment to the cause of Tech for Good.
In order to fulfill our commitments we'll continue to priorities the needs of our users and to incorporate social responsibilities into our products and services. We support various industries to upgrade digitally and we'll assist to promote the sustainable development of society. We'd like to have all of you our investors and friends to keep giving us suggestions to help us achieve this mission.
With that I'll pass to James to talk about our business review.
James Mitchell
Thank you, Martin and hello, everyone. For the first quarter of 2019, our total revenue grew 21% year-on-year. VAS remained our largest revenue segment, representing 52% of revenue within which online games were 29% and social networks 23%. FinTech and Business Services represent 28% of our revenue and online advertising was 19%.
For value added services, segment revenue was RMB50.6 million in the quarter, up 15% year-on-year and up 5% quarter-on-quarter. Social network's revenue was RMB22 million, up 21% year-on-year and up 6% quarter-on-quarter. Year-on-year growth benefited, particularly from live streaming and in game item sales. Our quarter-on-quarter growth benefited from the same factors as well as more streaming music subscriptions.
Our total VAS subscription count increased 11% year-on-year to 171 million due to the growth of online video and music streaming services. Video subscriptions reached 100 million, up to 22% year-on-year while music subscriptions reached 35 million, up 42% year-on-year.
Our online games revenue grew 11% year-on-year and 5% quarter-on-quarter to RMB28.6 million. Total smartphone game revenue increased 25% year-on-year to RMB24.3 million due to key game performance in China and increasing contributions from international markets.
New role playing and strategy games contributed to the quarter-on-quarter growth along with Peacekeeper Elite, although there was a substantial gap between Peacekeeper Elite's cash receipts versus is reported revenues due to that games long revenue amortization cycle. PC client game revenue decreased 7% year-on-year and 2% quarter-on-quarter to RMB11.5 million due to fewer paying users just a part driven sales.
Moving to social networks, in Weixin we introduced initiatives to advance our partners development skills and help them participate in our Mini Programs ecosystem. The systems integrates our growth program provides training and development tools to help them better assist Mini program owners.
The Mini program owners seeking to enhance the performance of their Mini program we launched Industry Assistant, a dashboard providing analytical insights, such as comparing their customer acquisition and monetization capabilities against industry benchmarks.
In Q2, we added functionalities that enrich users social and entertainment experience. We released a feature providing ice breaking topics and five minute chat rooms to inspire conversations. We enable users to dedicate songs to their friends and we allowed users to listen to synchronized music streams together.
During the quarter, our game business accelerated its year-on-year revenue growth and more importantly improves its underlying vitality and longevity. We're increasingly developing games that become global hits such as Punch Mobile and Call of Duty Mobile, establishing leadership in the most competitive genres globally such as first person action games and operating high DAU games that can themselves become platforms for new modes, such as League of Legends with Teamfight Tactics.
As a result, we in our majority owned subsidiaries operated six of the top 10 smartphone games by monthly active users globally during the third quarter. For smartphone games in China, Peacekeeper Elite released a summer content update which enhanced user engagement. We introduced a map editor for Honour of Kings, which encourages user generated content and users are increasingly buying season passes in Honour of Kings.
For smartphone games internationally, PUBG Mobile doubled its monthly active user base year-on-year and released successful royale passes in July and September. Call of Duty Mobile exceeded 100 million downloads in the month after its launch, making this game one of the highest-impact mobile game launches in recent history.
For PC games in China, DnF revenues decreased sharply year-on-year, as its 11th anniversary expansion pack in June underperformed last year's 10th anniversary expansion pack and we're focused on enhancing DnF's user engagement.
For PC games internationally League of Legends' Teamfight Tactics mode has established global leadership in the emerging auto-chess genre with over 30 million monthly users and is starting to contribute to revenue by League of Legends.
Last week, China's government announced a regulatory policy limiting game play time for children and teenage players. We have already implemented a healthy game play system in our games with similar or stricter limits to those now being announced and consequently we expect very limited additional impact from this regulation on our games business.
Moving to Online Advertising, we grew our advertising revenue by 13% year-on-year and 12% quarter-on-quarter to RMB18.4 billion in the third quarter. We saw a strong advertising demand from the games education and e-commerce verticals, offsetting weakness through the automobile sector. We believe our advertising business enjoys a long runway for profitable growth ahead as we make use of our rich datasets to target the right advertisements to our uniquely large user base across our broad range of social media and affiliate properties.
Our media advertising revenue was RMB3.7 billion, down 28% year-on-year and down 17% quarter-on-quarter. Our mobile video DAU was stable year-on-year, but the uncertainty of content schedule materially reduced our video sponsorship advertising revenue. However, we believe the worst of this trend is now appears to be behind us.
Our social and other advertising revenue increased 32% year-on-year and 23% quarter-on-quarter to RMB14.7 billion. Key drivers of the accelerated growth rate included first, more inventory and more impressions in Weixin Moments, which remains the premium wide-reach online advertising venue in China providing advertisers with multiple times more DAUs than they can access through competing properties.
Second, streamlined ad formats and new video ad formats in our ad network, resulting in our ad network revenue growing twice as fast year-on-year as our overall social and other advertising revenue. We believe the success of our ad network, which competes head-to-head with our biggest peers for advertiser budgets in real time speaks to our increasingly competitive ad-tech product following our 930 ad-tech unification.
And third, increased DAU and new interstitial and pre-roll video ads, within our Mini Programs, which we view as key properties for future advertising revenue for us given the increasingly high volume of consumer transactions taking place within Mini Programs.
Looking at FinTech and Business Services segment revenue was RMB26.8 billion, up 36% year-on-year and up 17% quarter-on-quarter. Within FinTech services, our payment ecosystem hosted more user activity and money flow, deepening consumer and merchant engagement.
Our commercial payment revenues grew robustly year-on-year and quarter-on-quarter, benefitting from increased daily active consumers and per-consumer transactions as Weixin Pay becomes more widely available, especially among high transaction value merchants. Our wealth management platform more than doubled its active customer base year-on-year, contributing to rapid growth in aggregated assets under management.
Users are increasingly retaining cash in their Weixin balance and LiCaiTong accounts. This trend hurts our revenue in the short-term by reducing our withdrawal fees, but helps our margins as we don't incur funding costs on transactions funded from Weixin Pay and LiCaiTong balances, and speaks to deepening consumer confidence in our payment services.
Our FinTech business generated a double-digit operating profit margin in the third quarter, benefitting from increased commercial payment volumes as well as fees associated with lending and asset management activities. We believe our FinTech business also enjoys a long runway for profitable growth, given the value our mobile payment service contributes to the economy and to society together with the convenience and innovation of our lending and asset management services.
Within Business Services, our cloud services revenue grew 80% year-on-year to RMB4.7 billion as we expanded our customer base in the education financial municipal services and retail sectors as well as increasing revenue from existing customers. We're enhancing the operating efficiency of our cloud services as we expand our business scale and optimise our supply chain. For example, we're shifting from OEM to ODM procurement, which enables us to provide more tailored services and pass lower costs onto our customers.
And with that, I'll pass on to John to discuss the financial review.
John Lo
Thanks, James. Hello, everyone. For the third quarter of 2019, total revenue was RMB97.2 billion, up 21% year-on-year or 9% quarter-on-quarter. Gross profit was RMB42.5 billion, up 20% year-on-year or 9% quarter-on-quarter.
Net other gains were RMB932 million, down 89% year-on-year, or 77% quarter-on-quarter. The year-on-year decrease was primarily due to non-IFRS items, including net gains from Meituan-Dianping upon this IPO in the same quarter last year, partially offset by greater impairment provision against investment. Sequentially, the decrease was mainly due to the decrease in net fair value gains of certain investees, which are also non-IFRS adjusted.
Operating profit was RMB25.8 billion, down 7% year-on-year or 6% quarter-on-quarter. Net finance costs were RMB1.7 billion, up 17% year-on-year or down 12% quarter-on-quarter. The year-on-year increase was primarily down to greater increased expense resulting from the increase in indebtedness, partially offset by the recognition of foreign exchange gains.
Share of profit of associates and joint ventures was down 90% quarter-on-quarter to approximately RMB234 million, mainly reflecting certain associates booking non-cash fair value changes of their investment portfolios.
On a non-IFRS basis, share of profit of associates and joint ventures decreased by 14% quarter-on-quarter. Income tax expense was RMB3.3 billion, up 3% year-on-year or 4% quarter-on-quarter, mainly reflecting higher taxable income. The effective tax rate for the quarter was 13.7%.
Net profit attributable to equity holders was RMB20.4 billion and diluted EPS was RMB2.127, both down 13% year-on-year and 16% quarter-on-quarter. The year-on-year decrease was mainly due to high base last year as a result of recognition of fair value gains from Meituan-Dianping IPO. The Q-on-Q decrease was mainly due to decrease in fair value gains from investment as mentioned earlier.
On a non-IFRS basis, net profit attributable to equity holders was RMB24.4 billion and diluted EPS was RMB2.548, both up 24% year-on-year and 4% quarter-on-quarter.
Let me walk you through our non-IFRS financial numbers. Operating profit was RMB28.5 billion, up 27% year-on-year or 5% quarter-on-quarter. Operating margin was 29.4%, up 1.4 percentage points year-on-year or down 1.3 percentage points quarter-on-quarter. Net profit attributable to equity holders were RMB24.4 billion, up 24% year-on-year and 4% quarter-on-quarter.
Turning to segment gross margin. Gross margin for value-added services was 51.8%, down 4.7 percentage points year-on-year or 0.8 percentage points quarter-on-quarter. The year-on-year decrease was primarily due to revenue mixture from higher margin products such as PC client games to digital content services including music, video streaming subscriptions and live streaming services, as well as high content costs for smartphone games. Sequentially margin was broadly stable.
Gross margin for online advertising was 48.8%, up 12.1 percentage points year-on-year or 0.2 percentage points quarter-on-quarter. The year-on-year increase primarily reflected revenue mix shift from media advertising to social and other advertising, which has a higher margin. Sequentially margin was broadly stable.
Gross margin for FinTech and Business Services was 27.7%, up 2.6 percentage points year-on-year and 3.7 percentage points quarter-on-quarter. The year-on-year increase reflected growth in merchant payment transaction volumes and increased service fee income of various payment related services and lending purposes [ph].
In addition the increase in margin also resulted from differ revenue contribution from cloud services and includes cost efficiency from economies of scale. The Q-on-Q increase reflected higher merchant payment transaction volumes as well as contributing from higher margin activities within business services.
On operating expenses, selling and marketing expenses were RMB5.7 billion, down 13% year-on-year or up 21% quarter-on-quarter. The year-on-year decrease reflected our prudent cost management initiatives. Sequentially, selling and marketing expenses increased due to seasonally higher marketing spending on digital content FinTech services and smartphone games.
Selling and marketing expense represented 5.9% of the quarterly revenue. G&A expenses were RMB13.5 billion, up 24% year-on-year and 8% quarter-on-quarter, primarily driven by increasing R&D expenses and staff costs within G&A. R&D expenses were RMB7.9 billion, up 27% year-on-year and 11% quarter-on-quarter. As a percentage of quarterly revenue, G&A was 13.9% and R&D was 8.1%. At quarter end, we have approximately 60,000 employees, up 16% year-on-year or 8% quarter-on-quarter.
Let's take a look at the margin ratios. Gross margin was 43.7%, down 0.3 percentage points year-on-year and 0.4 percentage points quarter-on-quarter. Non-IFRS operating margin was 29.4%, up 1.4 percentage points year-on-year or down 1.3 percentage points quarter-on-quarter. Non-IFRS debt margin was 25.8%, up 0.5 percentage points year-on-year or down 1.4 percentage points quarter-on-quarter.
Before I close my remarks, I will share several key financial metrics for the first quarter. Total CapEx was RMB6.6 billion, up 11% year-on-year and 52% quarter-on-quarter, of which operating CapEx increased 12% year-on-year to RMB5.8 billion. The increase mainly reflected more spending on servers to support expansion of our cloud business.
Non-operating CapEx increased 3% year-on-year to RMB804 million. Free cash flow was RMB37.7 billion up 36% year-on-year or 82% quarter-on-quarter. This was the result of net cash flow generated from operating activities of RMB44.2 billion offset by payments for capital expenditure of RMB6.5 billion.
Net debt position was RMB7.2 billion, which has improved 75% compared to last year. The sequential decrease mainly reflects the strong free cash flow generation partially offset by payments for M&A initiatives and media content.
The fair value of our shareholdings in listed investment companies excluding subsidiaries was approximately US$49.9 billion compared to US$47.9 billion last quarter. During the period from 28th of August to 11th of October 2019, we repurchased 3.5 million shares with an equity cost of approximately US$148 million. Thank you.
We shall now open the floor for questions.
Jane Yip
Operator, we will take one main question and a follow-up question each time. Please shall we invite to accept questions now?
Question-and-Answer Session
Operator
The first questions come from the line of Alicia Yap from Citigroup. Please ask your questions.
Alicia Yap
Hi, good evening management. Thanks for taking my questions. I have a question related to games development and game publishing opportunity. With the success of Call of Duty Mobile, it seems that Tencent has further stepped up the development capability to win more well-known console IP to help global studios to transform their games into mobile gameplay. In selecting the titles or partners, what are the criteria that you will be looking when you decide to license for the IP?
On domestic publishing, since there has been some noises about a new competitor, maybe eyeing on games distribution and publishing, will this affect Tencent's publishing market share in the coming future? Thank you.
James Mitchell
In terms of game development and game publishing I think the fact that our game development capability is now well recognized in the global market by consumers through the success of PUBG Mobile and more recently, the Call of Duty Mobile, I think it's a very big breakthrough for us and we're very pleased to see that.
Now, I think we have established ourselves as the preeminent mobile games developer for not only China, but also the global market and when you add that to the fact that over the past many years, we have actually already established a very strong relationship through strong partnership as well as equity investment relationship with many top game companies in the world.
I think when you add those together; it's actually opening up a significant opportunity for us. Of course when we choose the titles I think consumers and gamers needs are the most important criteria that we look at. If the game title has got a very large followership and consumers and gamers are expecting to see an exciting title and we can develop that and deliver that for the users, I think that's the most important criteria and I think that philosophy also resonates with a lot of our partners.
When we develop these games it's not only games that open up commercial markets but also it retains the original creativity for the game developers and our partners which is very important too.
In terms of domestic publishing, I think we feel very good about our position and the fact that we have strong operational as well as development capability as well as very strong relationships around the world with the IP and game owners and at the same time the fact that we have very strong leverage over our social platforms I think gives us a preeminent position in the industry which I think it's very difficult to shake up. Thanks.
Jane Yip
The next question please.
Operator
Thank you. The next question comes from the line of Eddy Leung from Bank of America. Please ask your question.
Eddy Leung
Hi guys good evening. Thank you for taking my questions. Starting with short and mini video strategy, you've mentioned about strong growth of video views within some of your large user platforms while you also run several independent short and mini video apps. So, just wondering is there any priority when you think about allocation of resources for example marketing resources to grow the content consumption of video?
And related to that if we have the traffic spread across different channels and platforms, would that affect the budget allocation for some of the advertisers? Thank you.
Martin Lau
Yes, I think the way we look at the short and mini video landscape is very similar to the way we look at newsfeed with one additional tweak. If you look at short and mini video, I think the overall portfolio that we have created is in our social platform we continue to create social short and mini video which is not counted in the 10 billion video views. That is really a video -- short video and mini video that are sent among the different users. We think that's actually part of social network and that we have a very, very strong lead in. That's number one.
Number two, in terms of the media side of the mini videos and short videos, i.e. when people watch the video for content purposes, then it's actually very similar in our view to the newsfeed market in which you have people who just want to watch it for a light experience within the traffic platforms. And we offer that within our social platform within our browser and within even our newsfeed.
But at the same time, when you look at a very dedicated short and mini video experience, then the flagship product that we have is actually WeiShi. And a lot of marketing dollars and content dollars will be dedicated to that application.
And in terms of advertising, I think as long as the video format is actually quite similar, then the ad format will be very similar and as a result the pool of ad dollars that are in the pool for competitive pricing would be actually quite similar too. So, it should not be a problem.
Eddy Leung
Got that Martin. Thank you.
Jane Yip
The next question please.
Operator
Thank you the next question comes from the line of Han Joon Kim from Macquarie. Please ask your question.
Han Joon Kim
Great thank you for the chance to ask a question. I wanted to get management's perspective on how you look at blended consolidated margin trajectory between all the puts and takes. I feel like we've started to see some slowdown in the second derivative of that so just some perspective from your end would be great thank you.
James Mitchell
Hi, Han Joon, thank you for the question. I'm not sure that I completely understood the slowdown you're alluding to. I think in general though one broad observation to make is, if you look at our gross profit growth year-on-year this quarter then the very large majority was driven by first of all FinTech and Business Services segment, and secondly, our advertising segment. And in fact, in each of those through their gross profit dollars roughly 50% year-on-year, which we think speaks to the fact that our business is actually diversifying and incubating new growth drivers quite quickly.
And obviously, there has been times in the early days of those new growth drivers, when they generated low or negative margins. But you can see now, if you look at both our advertising and our FinTech and business services that the gross profits are growing very substantially, and that's translating into improved operating profitability, as well for both of those segments. Did you have a second question?
Han Joon Kim
No, that was it. Thank you for answering the question.
Jane Yip
Thank you. And the next question please.
Operator
Thank you. The next question comes from the line of John Choi from Daiwa. Please ask the question.
John Choi
Good evening and thank you for taking my question. I have kind of a follow-up question from after Alicia. On your recent success on PUBG MOBILE and Call of Duty Mobile, it seems like Tencent has been really positioned as a global powerhouse in game development particularly in mobile. But now, if we think of like in the longer perspective where does the management think that Tencent has to further invest or strengthen its capability? Is there like any area where just infrastructure is in place or any new areas that Tencent has to really consider to become more of a true global player? And second just quickly, on the media ads I know the third quarter is very challenging. Any color to the fourth quarter and 2020 will be very helpful thank you.
James Mitchell
Thank you for the questions, John. So on the media advertising, while we generally don't give detailed forward-looking guidance, we do believe that the work that's behind us now and our media advertising trends will improve. In terms of the question about, where we need to enhance our capabilities to further strengthen our game globalization strategy then there is a few areas where we believe we have more work to do and room to further improve.
One is incubating, nurturing and developing our own intellectual properties. That's something that, I think we've achieved quite successfully within the China market, and we would like to extent that IP management capability globally. A second area of focus is extending into more genres of games, so to-date we've been most successful in the biggest most competitive genre which is first person action games. And the fact that, we can be successful in the biggest most competitive genre it gives us some confidence that, if we put our minds to it we ought to be successful in some other genres, but clearly, that requires further effort.
And then thirdly, on the game operations, when we began our globalization we largely operated the games from China. Subsequently, we've discovered that there's enormous value to actually having an international game operation platform. But if you look at the success of some of our peers, such as for example Garena with FreeFire then above and beyond the global platform there's also increasingly value in having regional live operations and regional publishing capabilities, particularly in some of the emerging markets around the world that historically monetize very poorly for mobile games but are now starting to monetise more substantially. So those are a few of the areas, where we believe there's further room for us to improve as we globalize our game business.
Jane Yip
And the next question please.
Operator
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 question. The question is about the gross margin. We can see Tencent making really good progress to extend game business overseas. I'm wondering, how the rising revenue mix for an overseas gaming business will affect the VAS margin trend going forward. Is there any difference in terms of margin profile? The follow-up question is about 5G. It would be great, if the management can share your view about the opportunities for undertaking 5G in China in your business. Like, which segments in your business will benefit more from 5G and how? Thank you.
Pony Ma
I think in terms of the overseas games, it will carry normally a lower margin due to the fact that some of the games have been operated by other partners. And so as a result it would be a little bit lower than that of growth in China.
Martin Lau
Well, on the other hand, if you look at – it depends on the different models too, right? In some cases, we co-developed the game and the game is actually operated by our partner then we book the development revenue which is higher margin in itself. So either it drives higher revenue growth, but then the margin will be lower or the revenue growth is not as much but its higher margin. So it depends on the model.
Now in terms of 5G, I think, obviously, we had an early stage of the development of 5G and we feel that when speed increases, it's going to be enabling for the bandwidth consuming services. So video, I think, will definitely be quite an interesting opportunity.
And at the same time, I think, it would allow a lot of new applications that can be delivered over the network instantaneously. So one area that we have been looking into is cloud gaming and if you look at the current version of the cloud gaming, the most successful cloud gaming is actually our mini games within WeChat. And by and large, it's actually a relatively narrow band type of gaming very simple.
But in the future, if very large amounts of data can be transmitted within a very short period of time then, the game experience of these cloud gaming models could be very, very interesting and different. And in addition, I would also say, that if you look at mini programs, mini programs is essentially an application that trades the flexibility for bandwidth.
So when you have almost unlimited bandwidth and flash speed, then mini programs will become very, very exciting, where there will be a lot other opportunities that will be opened up by mini programs. So these are the kind of things which I think will be tangible for us.
Jane Yip
Thank you and the next question please.
Grace Chen
Okay. Thanks.
Operator
The next question comes from the line of Gregory Zhao from Barclays. Please ask your question.
Gregory Zhao
Hi, management. Thanks for taking my question. So my question is about your fintech business. So just wanted to understand a bit more about overall the industry, the TPV, the growth trend and then your market share gain. So given your dominant market position, shall we expect some initiatives to expand the payment take rate in the next couple of years?
And also, if you can share some commercial payment TPV and the revenue growth trend will be very helpful. And a quick follow-up on the mini program, so in the press release you mentioned the mini program, the MAU exceeded 300 million. And we expand into some vertical areas like healthcare and the smart retail. So just want to understand a bit more about the monetization progress, especially in healthcare and the smart retail and whether contribution to a social advertising revenue. Thank you.
Martin Lau
In terms of fintech, I would say, number one, it is -- the TPV is actually growing quite rapidly, because of -- both the number of merchants adopting the solution and the increasing payment habit created by the users. And also the increase in average ticket size.
And secondly, I think, if you look at the overall industry there has been improving economics and that's mainly driven by, one, there are actually less subsidies offered by our peer and as a result it actually improved the overall industry dynamics.
And two, we actually cross-sell fintech solutions, fintech services such as loan products and money market and wealth management products. I think, in terms of the overall payment itself, it's still infrastructure type of business. There are monetization and a thin margin related to commercial payment and I think the mobile payment solutions companies, including ourselves, are still adopting an approach that we are not making a lot of profit from the payment itself. But trying to expand the use case and expand the market share of mobile payment vis-à-vis other forms of payment.
Now in terms of mini programs, I would say, at this point of time number one, right, what we've disclosed is actually a DAU, so there's a huge difference between DAU and MAU. So I think that's number one in our view. Number two is, there's a big difference between whether the mini programs are used for mid tail and long tail type of mini programs, or they are actually just changing functionality into mini program and as a result, that's called a mini program. So we focus much more on the mid to long tail ecosystem and I think that's actually growing very vibrantly and that's definitely by far industry leading in China. And in terms of Mini Programs monetization, I think we actually said Mini Programs actually help to increase the ecosystem of transactions within our WeChat ecosystem. And as a result it helps on our performance and it helps on our payment business.
Now it's a little bit hard to quantify this because the fact is our advertisers would advertise on our performance ad and sometimes they get exposure on their services and sometimes they actually try to bring the transaction onto their Mini Programs. So it's hard to quantify that, but I think Mini Programs is definitely a very important part of the value chain when we try to monetize through advertising when there's traffic and then when the brand and the content - the merchants actually try to advertise. Mini Programs actually help them to execute the transactions faster and so it's our WeChat payment.
So the two added together actually helps transactions slow and as a result it helps more and more advertisers to advertise. So when people look at a WeChat performance ad solution, they look at there's a lot of traffic, they also look at the ease of transactions registered so they can have the Mini Programs. So I think it's actually helping the entire social ads business.
Jane Yip
And the next question please.
Operator
Thank you the next question comes from the line of Binnie Wong from HSBC. Please ask your question.
Binnie Wong
Good evening management. A quick follow-up on the Mini Program given the high frequency DAU that we saw. And considering that many of our key strategic investments like Matong and Pinduoduo, those guys are also spending quite aggressively on use acquisition. What is our strategy to incentivise more of these transactions also shifted to Mini Program and also maybe within the WeChat ecosystem?
And then second question is on the media advertising. I think management made a comment that the worst is likely behind us. I just want to understand, is that more coming from the newsfeed or is this from the video properties we have? And also how do we see the advertising inflection point? Are we there already? And then how should we see the outlook? Thank you.
James Mitchell
Binnie, thank you for the two questions. On the first question we may need you to ask that again a different way as we didn't really catch the meaning behind it unfortunately. On the second question about advertising the macro environment will be whatever it will be and we don't aspire to control that. But what we can control is our competitive position and we believe that since the 930 reorganization and the combination of our ad-sales and ad-tech and combined advertising and marketing services group that we have sharply improved our competitive position.
And I think that's manifest already in the acceleration you are seeing in our social and other advertising revenue. It's particularly apparent in for example the ad network business where we're competing head-to-head with the other big online advertising companies in China. But we have experienced very strong growth as we undertake measures like standardizing and unifying the different ad formats, which makes it a much larger more liquid call in which the media buying trading desks find it easier and more efficient to transact than was the case before.
So we believe that we've become sharply more competitive in the social and other advertising as a result, and we're also seeking to extend that competitiveness to the media advertising business, which we believe is well underway. And once again, when you're looking at a business like advertising, because of the intricacies of net versus growth it's important to really focus on the gross profit growth as well as the revenue growth in our advertising gross profit, what we think is a very rapid rate year-on-year reflecting the benefits of the technology changes we're putting in place. Now could I just ask the first question again?
Binnie Wong
Okay. Sorry. My first question is on the Mini Program side, given that there's a high frequency DAU application, DAU, there you see the frequency there. So how are you thinking because we have a lot of investments and then say like Matong and Pinduoduo, these guys are also spending a lot in use acquisition, right? And then also in your cloud conference you also hear that some of the merchants Uniqlo, I think they're talking about the improving conversation on Mini Program is actually better than the other app. So these improving conversation rates in ecommerce is that something that we can actually see that is a major driver to get more and more of the Mini Program adoption the rising adoption?
And what are the other things that management is expecting to see to drive the adoption in Mini Programs from here? Because I think it's the increase - the DAU is high. And then I guess the next step is what is the next step in terms of going into monetization for this? Thank you.
Martin Lau
I think you touched upon a lot of different points, so I wouldn't try to say number one. Mini programs is actually adopted by a lot of different merchants and it's driven by the fact that it is a high frequency usage scenario. And at the same time, it facilitates offline and online interactions there are a lot of offline players now that can actually establish an online presence through mini programs. And they also benefit from the fact that there is a better ecosystem around mini programs including the performance ads ecosystem including the payment.
And as Mini programs providers actually get better in terms of their programming capability and operational capability, it actually helps Mini programs to be more conversional as you have identified in some of the offline merchants. The conversion rates have been improving continuously, because they are leveraging our tools to make their Mini programs better and better in serving enterprise customers. So all these are drivers right now, which would benefit the Mini Program owners and as a result benefit our ecosystem.
And I think then what comes will be quite natural, right. There will be more traffic being created by the Mini Programs and the Mini Program owners will be spending more time into curating their Mini Programs. So that would actually create a virtual cycle and when that happens, it will benefit our performance ads business it will benefit our payment business and it will create actually a stronger transactional culture within our social platform and that will actually benefit the entire Mini Program ecosystem further. So I hope that answers your question.
Binnie Wong
Yes that does. Thank you. Very helpful. Thank you.
Jane Yip
Thank you. Due to the time constraints, we will take the last three questions. Shall we have the next question please?
Operator
Thank you. The next question comes from the line of James Lee from Mizuho Securities. Please ask the question.
James Lee
Thanks for taking my questions. My question regarding advertising. It seems like when we talk to advertising agencies in general, it seems like social advertising in general is gravitating towards influencer in KOL advertising and it's moving pretty quick to top tier influencers. I was wondering -- and the same thing for ecommerce as well I was thinking how you guys are responding to that specifically? And also secondly the NBA content, just curious of what the status on that, is that still suspended indefinitely? Thanks.
Martin Lau
Well I think to be honest what you have identified is probably at the top of the fund, but frankly what we have seen is that by and large the ad dollars are still in the programmatic side. People who actually advertise with standardised content or standardised ad format and through AI and through data crunching and targeting, trying to find the right audience and eventually resulting in action and click as well as eventually transaction. I think that's still by and large the way through which performance ads work. Now there is a pretty visible trend towards KOLs, but I think in terms of total ad dollars, it's still relatively small.
In terms of NBA, I would say we have built a very strong relationship with NBA over the years and we actually have a lot of users who are very positive on NBA content. I think what has happened in the market should not really be prohibiting the engagement between the users who like the NBA content and NBA as a franchise. So what we are trying to do is actually to work through this difficult period and to maintain the positive engagement of sport between the users and the sports franchise and over time hope the problem will solve itself.
James Lee
If I can ask...
Jane Yip
Thank you the next question please.
Martin Lau
Yes sure. Please go ahead.
Jane Yip
James do you have another question?
James Lee
Yes. I was going to ask revenue contribution from Supercell in 4Q? Thanks.
James Mitchell
Well you know we will report the fourth quarter when we report the fourth quarter results, but I think Supercell has filed financials historically in Finland. So I guess you can guess use those as a base just for modeling purposes.
James Lee
Okay, thanks.
Jane Yip
Thank you. The next question please.
Operator
The next question comes from the line of Alex Yao from JPMorgan. Please ask your question.
Alex Yao
Hi. Thank you, management for taking my question. First question is regarding the international mobile gaming opportunity. What do you think about the size of the TAM addressable market for international gaming relative to the domestic gaming market? Secondly, I'd like to follow up on the FinTech and the business segment gross margin trend. It seems to me that the gross margin has improved pretty meaningfully quarter-over-quarter and also your view in this quarter. Can you elaborate the driver behind the margin improvement and help us understand to what extent can we extrapolate the margin improvement trend into the future quarters? Thank you.
James Mitchell
So, the question on the international versus domestic game TAM, I mean quantitatively the game software market globally is about $100 billion, which China it's about 30% and other countries are about 70%. So, from that very top down perspective, then the TAM is a little bit more than twice as big outside China as it is inside China. That's roughly true as well for the mobile game market, which is you know, I think where we have our most competitive advantage at this point in time.
But obviously there's total addressable market and then there's actually addressable market and the actually addressable market depends on some of the initiatives that I talked about earlier in terms of us extending our footprint from action games to what other popular genres of mobile games in terms of further regionalizing our publishing and live operation skills and in terms of our ability to nurture and cultivate intellectual property.
On the second question around the FBS gross margin then, there's a number of factors that contribute to the gross margin. One is the extent to which we aggregate financial services around the core payment platform and as you're aware on the asset management side, we've been growing quickly the number of users. Our asset management services more than doubled year on year. On the lending side, our WeiLiDai loan product has enjoyed rapid growth as it's extremely convenient and popular with users due partly to its convenience. In the most recent quarter, we've also begun to see some contributions from insurance. So that's on the FinTech.
On the payments itself, then there's a margin tailwind first of all from the increase in propensity of consumers to fund with LiCaiTong or Weixin Pay accounts. And that impacts the cost side of the equation. And then secondly, on the revenue side of the equation, to the extent that the commercial payment volume outgrows the remittance volume then the commercial payment volume generates a merchant discount rate for us.
And then thirdly on the business services component of FBS, the original infrastructure as a service tends to be low on margin, but as we deliver solutions such as the smart retail solution, then we're aggregating in software as a service on top of the infrastructure of the service and the software of the service generates higher margins. So, those are some of the structural tailwinds.
Now, in addition, in any given financial period, there can be tailwinds or headwinds based on factors such as competitive intensity, particularly the subsidies around merchant adoption. And as Martin mentioned, now that many merchants do accept mobile payments already, some of that - you know merchant acquisitions subsidy activity has decelerated which has contributed to the improvement in margins that we've seen.
Jane Yip
Thank you. The next question please.
Operator
Thank you. The last question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.
Piyush Mubayi
Thank you for taking my question. This is quick. I just wanted to understand the weakness in the media advertising revenue line for the quarter, which seems to be pretty sharp and if there is any color you can give us or provide how quickly this could bounce back? Thank you.
James Mitchell
Well, you know we've already provided color that we believe it is bouncing back and by our standards that's much more forward-looking commentary than we would normally give. So unfortunately, we're not going to provide further details as to exact timing and obviously to some extent, it's a function of macro-environmental factors as well. But in terms of the sharp pace of decline in the third quarter then, one of the key factors was really the uncertainty as to when we would be able to air certain key drama series.
Now in the end, we did air many of the drama series that we hoped to air during the quarter, but because there was uncertainty as to the timing, it meant it was more difficult to sell sponsorships than it would normally be. For those big budget drama series, the sponsorships historically contributed a very substantial double-digit percentage of the total revenue. So, even if we air the drama series, even if the drama series achieves the exact number of audience that we were hoping it would achieve, if we lose that sponsorship opportunity because the timing of the airing of the drama serial is volatile, then that has a meaningful negative impact on our media advertising revenue.
But you know again, I want to emphasize that there are many drivers in our business and media advertising revenue important as it is, is now less than one-third of our advertising revenue which in turn is smaller than our FinTech and business services revenue. So, it's important to keep in mind we have a broad portfolio and when we have a broad portfolio, it's almost inevitable that at any point in time there will be activities that are underperforming and there will be other activities that are over performing. But I think, we are pleased that this quarter, our FinTech and business services, our social advertising and our mobile games globally, which we view as key drivers for the future, overall are performing very well.
Piyush Mubayi
Thank you, James.
A - 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. The replay of this webcast will also be available soon. Thank you and see you next quarter.
Operator
That does conclude our conference for today. Thank you for participating in Tencent Holdings Limited 2019 third quarter results announcement conference call. You may all disconnect.