Tencent Holding Ltd. (TCEHY) Q3 2020 Earnings Call Transcript

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Tencent Holding Ltd. (OTC:TCEHY)
Q3 2020 Earnings Call
Nov 12, 2020, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to the Tencent Holdings Limited 2020 third-quarter results announcement conference call. [Operator instructions] I would now like to hand the conference over to your host today, Ms. Wendy Huang from Tencent. Please go ahead, Ms.

Huang.

Wendy HuangHead of Asian Internet and Media, Managing Director

Good evening. Welcome to our third-quarter 2020 results conference call. I’m Wendy Huang from Tencent IR team. Before we start the presentation, we would like to remind you that it includes forward-looking statements which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons.

Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures of the company’s financial performance prepared in accordance with IFRS. Non-IFRS measures are intended to reflect our core earnings by excluding certain one-time and/or noncash 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 and Chief Strategy Officer James Mitchell will provide a business review. 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.

Pony MaChairman and Chief Executive Officer

Thank you, Wendy. Good evening. Thank you for joining us tonight. This quarter marked the second anniversary of our strategic organization upgrade which was intended to enhance our strength in consumer Internet and extend our presence to industrial industry — Internet.

While the upgrade was designed to bear fruit over the long run, we are already seeing initial benefits in areas such as consolidating our advertising services, rejuvenating our product and content platforms, growing our cloud and SaaS businesses and building an internal open source code base. In the face of public healthy, macroeconomic and geopolitical challenges, we will seek to sharpen our focus, innovate and collaborate with our partners in order to better serve our users, customers and the society at large. Now, I will highlight the results we achieved in the third quarter of 2020. Total revenue was RMB 125 billion, up 29% year on year and 9% quarter on quarter.

Gross profit was RMB 57 billion, up 33% year on year and 6% quarter on quarter. Our non-IFRS operating profit was RMB 38 billion, up 34% year on year and 1% quarter on quarter. Non-IFRS net profit attributable to equity holders was RMB 32 billion, up 32% year on year and 7% quarter on quarter. Moving to our online platforms.

In social, combined MAU of Weixin and WeChat was 1.2 billion. Smart devices MAU of QQ was 617 million. In games, we expand our leadership via extended popularity of established franchises and success of new release in both China and international markets. In media, video and music subscriptions increased as we released the top-tier content and added songs to the paid library.

In FinTech, commercial payment transactions maintained robust growth, and our wealth management platform expanded its aggregated customer assets. In public cloud, we saw a rising demand for PaaS solution and upgrade our SaaS enterprise productivity to capture opportunities in emerging sectors. In utilities, we maintained our industry leadership in mobile security and mobile browser in China. I will invite Martin and James to discuss business review.

Martin LauPresident

Thank you, Pony. Good evening and good morning. For the third quarter of 2020, our total revenue grew 29% year on year. VAS represented 56% of our total revenue, within which social networks was 23% and online games was 33%.

online advertising was 17% of total revenue. FinTech and business services represented 26% of our total revenue. For value-added services, segment revenue was RMB 70 billion in the third quarter, up 38% year on year and 7% quarter on quarter. Social networks revenue was RMB 28 billion, representing 29% year on year and 6% quarter-on-quarter growth, mainly driven by in-game item sales and live streaming services.

Total VAS subscriptions grew 25% year on year to 213 million, benefiting from digital content subscriptions. Total video subscriptions increased 20% year on year to 120 million primarily due to our popular drama and animated series, such as Nothing But Thirty and The Land of Warriors Season 3. We successfully converted trial users acquired during summer promotions to regular video subscribers. Total music subscriptions grew 46% year on year to 52 million on an expanded paid library and a higher retention rate.

Online games revenue increased 45% year on year and 8% quarter on quarter to RMB 41 billion driven by growth in paying users and ARPU. Total smartphone games revenue grew 61% year on year to RMB 39 billion, benefiting from robust growth of existing titles as well as recognition of deferred revenue from the stay-at-home period. Sequentially, revenue grew 9%, but cash receipts slightly decreased as users returned to their offices and in-game activities normalized. PC client games revenue was stable year on year at RMB 12 billion as increased revenue from League of Legends globally and new game Valorant in Western markets offset decreased revenue from Dungeon & Fighter in China.

Revenue increased 7% quarter on quarter due to CrossFire and full quarter contribution from Valorant. Now, I’ll talk more about our social networks. For Weixin, we are focused on delivering convenience and efficiency for users. To facilitate access to high-frequency services within the Weixin Pay interface, we grouped the list of services into four key verticals, namely: financial services, daily services, transportation and travel as well as shopping and entertainment.

For the trave and transportation vertical, we expanded geographic coverage of mobility services to 10 provinces and municipalities in China. Mobility services connect auto owners with car services, such as carwashes and car insurance, as well as general users with public transportation services including transit codes and bus schedule checking. To enhance the efficiency of content and service delivery, we enabled more cross-referencing within Weixin properties. For example, in a check box, users can press to search words and phrases that appear in messages, after which Weixin will provide related content and services from Mini Programs, Official Accounts, Moments and other sources.

In Moments, whenever users create hashtags and posts, readers of the posts who click these hashtags can then see related content from Official Accounts, video feeds and H5 pages. Moving on to QQ. We keep on creating new experiences to strengthen stickiness of the youth community on the QQ platform. We enable more shared experiences among young users.

For example, we allow them to watch Tencent Video together while video chatting, to compete with friends in battle mode Mini Games and to co-edit classwork via Tencent Docs. We have been testing Mini World, a video and image feed service within QQ, since April. Contributors within Mini World can create images and videos shared beyond their existing friend circle, and users can explore content through recommendation. Mini World resonates well with young audience and has enjoyed increasing popularity.

These initiatives and growing adoption of real-time video chatting drove daily time spent per user within QQ up by a teens percentage year on year. Now, turning to our gaming business. For smartphone games, we leveraged our industry expertise, user insight and execution to deliver engaging experiences to large-scale audiences, enhancing the vitality and longevity of our existing titles including blockbusters as well as the lesser known games. We recently celebrated the fifth anniversary of Honour of Kings which exceeded 100 million average DAU for the first 10 months of 2020.

We have expanded Honour of King’s user base through constant innovation, user-centric operation and robust technology infrastructure. We’re realizing the potential of its IP by developing new games, animated series and a live-action drama series. Investors are quite familiar with titles such as Honour of Kings and Peacekeeper Elite, but we applied similar capabilities to lesser known, vertically specialized titles as well. For example, our self-developed game, Naruto Mobile, despite being released four years ago has recently achieved all-time high in DAU and revenue driven by operational enhancements we have made over the years, such as an improved PvP mode.

Naruto Mobile is now one of the most popular and revenue generative games in the fighting genre in China. With respect to key PC games, we continue to view the sector fairly favorably. While the PC game market has not experienced the same revenue growth as the mobile game market, PC games are highly influential. There is plenty of room for IP and product innovation within the PC platform to drive direct revenue contributions or broader platform benefits.

For example, League of Legends launched a major thematic event, Spirit Blossom Festival, in the quarter, coordinating the release of new champions, skins and event pass which was popular both with users as well as revenue generative. The recent League of Legends World Championship in Shanghai attracted a large and sizable global audience too. We adapted CrossFire into a highly rated drama series and released a tied-in new game mode and skins, reviving the game’s popularity and monetization. In addition, new game Valorant has become a breakout hit in the tactical shooter genre in Western markets with a wide audience on Twitch.

Besides sustaining and expanding existing game success, we continue releasing impactful, new games. Moonlight Blade Mobile, a self-developed game based on the renowned novel, became the most successful MMORPG launched in China this year by iOS Grossing. League of Legends Wild Rift, a mobile battle arena game based on LL IP, is currently among the most downloaded mobile games across its available markets in Asia. With that, I’ll pass on to James to talk about the rest of the business review.

James MitchellChief Strategy Officer — Analyst

Thank you, Martin. Moving on to advertising, revenue increased year on year and 15% quarter on quarter to RMB 21 billion. We believe the China advertising has now largely recovered from the COVID-19 shock. Advertising categories that have been experiencing rapid secular growth, such as education, Internet services and e-commerce, continued to grow quickly year on year on our platform during the third quarter.

Ad spend from some cyclical advertising categories, such as automobiles and real estate, picked up year on year. And certain categories where ad spend dipped due to COVID, such as financial services and consumer staples, were flattish year on year in the quarter. Internally, we executed on initiatives including upgrading our algorithmic ad buying solutions which delivered higher conversion for advertisers and attracted increased share of budgets toward our services. We also provided incremental advertising inventory in casual game apps, eSports events and live streaming platforms.

For social and others advertising, Weixin properties achieved solid revenue growth year on year driven by higher impressions and eCPM. Our mobile ad network revenue grew rapidly year on year as advertisers responded favorably to video formats such as our rewarded video ads. For media advertising, after four quarters of steep year-on-year revenue declines, the rate of revenue decrease moderated to minus 1% year on year. We captured sponsorship advertising demand via our self-commissioned variety shows such as The Coming One Season 4 and drama series such as Nothing But Thirty.

We upgraded the staff screen ads in Tencent Video driving higher eCPMs and sequential revenue growth for our video advertising service. Looking now at FinTech and business services. Segment revenue was RMB 33 billion, up 24% year on year and up 11% quarter on quarter. FinTech services revenue grew healthily year on year and quarter on quarter, led by the continued robust expansion of our commercial payments and wealth management businesses, while our social payments and micro-lending activities grew at more moderate rates.

For payment services, growth momentum continued through the quarter, and total payment volume increased over 30% year on year. Our commercial payment daily active users and spending per user both increased at a rapid rate. Online transaction growth benefited from an accelerated shift from off-line to online purchases due to the pandemic as well as greater usage of Mini Programs for transactions in categories such as groceries and apparel. Payment operating margins remained stable.

For our wealth management business, the number of active customers increased over 50% year on year, driving a similar growth rate in aggregate customer assets. The business services year-on-year revenue growth rate slowed down due to the lingering impact from the pandemic on project deployment and new contract sign-ups as well as nonrecurring adjustments to certain infrastructure as a service contracts. However, we saw rising demand for platform as a service, in particular security PaaS, from the financial, healthcare and Internet service clients. During the period, we upgraded our software-as-a-service enterprise productivity toolkit which consists of three signature products: WeCom, Tencent Meeting and Tencent Docs.

Customers increasingly adopt WeCom, previously known as Enterprise Weixin, for workplace communication and management. Despite most people returning to their workplaces, WeCom’s DAU grew over 100% year on year during the quarter. Tencent Meeting now has over 100 million registered users. In September, we released an enterprise version of Tencent Meeting to meet growing needs for customization.

We integrated Tencent Docs, our cloud-based document processing tool, with other Tencent products including QQ, QQ Browser and our customer relationship management SaaS, to further expand its use cases. And with that, I’ll pass to John to go through the financials.

John LoChief Financial Officer

Thank you, James. For the third quarter, total revenue was RMB 125.4 billion, increasing 29% year on year or 9% quarter on quarter. Gross profit was RMB 56.6 billion, up 33% year on year or 6% quarter on quarter. Net other gains was RMB 11.6 billion.

This was mainly due to non-IFRS adjusted items, representing increased valuations of certain investees in verticals, such as electric vehicle, online games and local services, as well as net gains on deemed disposal of certain investees. Operating profit was RMB 44 billion, up 70% year on year or 12% quarter on quarter. Net finance costs were RMB 1.9 billion, up 11% year on year or down 3% quarter on quarter. Year-on-year increase reflected recognition of foreign exchange loss during the quarter versus the foreign exchange gain a year ago.

Q-on-Q remained broadly stable. Share of profit of associates and joint venture was RMB 2.6 billion. Both year on year and quarter-on-quarter increase benefited from enhanced performance of certain investees in verticals such as e-commerce and online games. Year-on-year growth also reflected non-IFRS adjustment items of certain associates.

On a non-IFRS basis, we recorded share of profit of RMB 3.2 billion for the quarter. Income tax expense was RMB 5.7 billion for quarter 3 2020, and the effective tax rate was 4.9%. IFRS net profit attributable to equity holders was RMB 38.5 billion, up 89% year on year or 16% quarter on quarter. Diluted EPS was RMB 3.964, up 86% year on year or 15% quarter on quarter.

Now, I’ll share with you some of our non-IFRS financial figures. For the third quarter, operating profit was RMB 38.1 billion, up 34% year on year or 1% quarter on quarter. Net profit after NCI was RMB 32.3 billion, up 32% year on year or 7% quarter on quarter. Diluted EPS was RMB 3.314, up 30% year on year or 6% quarter on quarter.

Moving to segment gross margins. Gross margin for VAS was 52.6%, slightly up 0.8 percentage point year on year or down 1.1 percentage points quarter on quarter. On a year-on-year basis, we continue to benefit from the mix shift to higher-margin, self-developed smartphone games. Sequentially, VAS margin decreased due to greater content costs associated with our online video business.

Gross margin for online advertising was 50.9%, up 21 — up 2.1 percentage points year on year and was stable quarter on quarter. Year-on-year increase was mainly contributed by the industrywide exemption of cultural construction fee for this year. Gross margin for FinTech and business services was 27.9%, largely stable year on year or down 1 percentage point quarter on quarter. Sequential decrease was mainly due to greater channel costs for payment-related services as offline merchants resumed their businesses amid the pandemic.

On operating expenses, selling and marketing expenses were RMB 8.9 billion, up 56% year on year or 15% quarter on quarter. On a year-on-year basis, marketing spending increased particularly on online games, Weixin as well as business services. Sequential increase was primarily driven by online games and business services. As a percentage of revenues, selling and marketing expense was 7.1% for the quarter.

G&A expenses were RMB 17.2 billion, up 27% year on year or 4% quarter on quarter mainly due to greater R&D and staff costs. Within G&A, R&D expenses were RMB 9.9 billion, up 25% year on year or stable quarter on quarter. G&A and R&D represented 13.7% and 7.9% of revenues, respectively. As at quarter-end, we had approximately 77,600 employees, up 27% year on year or 10% quarter on quarter.

For the third-quarter 2020, gross margin was 45.2%, up 1.5 percentage points year on year or down 1.1 percentage points quarter on quarter. On a year-on-year basis, segment gross margin improvement flowed through the increased blended gross margin in particular from value-added services. Sequentially, margin decreased, mainly reflecting lower VAS gross margin compared to the last quarter. Non-IFRS operating margin was 30.4%, up 1 percentage point year on year or down 2.4 percentage points quarter on quarter.

Non-IFRS net margin was 26.6%, up 0.8 percentage point year on year or down 0.6 percentage point quarter on quarter. Finally, let me share with you several key financial metrics before we close our remarks. Total capex was RMB 8.7 billion, up 31% year on year or down 8% quarter on quarter. Operating capex increased by 34% year on year to RMB 7.8 billion reflecting more expenditures on servers and network equipment to open our business growth.

Nonoperating capex increased 4% year on year to RMB 901 million driven by planning on data centers constructions. For the current quarter, free cash flow was RMB 28.1 billion, broadly stable both year on year and quarter on quarter. Net cash position was at RMB 6.4 billion which decreased sequentially due to payments for M&A initiatives, partly offset by operating cash flow generation. Fair value of our shareholdings in listed investees excluding subsidiaries, was approximately RMB 891 billion or USD 131 billion as at the end of the quarter compared to RMB 726 billion or USD 103 billion last quarter.

Thank you.

Wendy HuangHead of Asian Internet and Media, Managing Director

Thank you, John. Operator, let’s open the floor for questions now.

Questions & Answers:

Operator

[Operator instructions] The first question comes from the line of Kenneth Fong from Credit Suisse. Please go ahead.

Kenneth FongCredit Suisse — Analyst

Thank you. Congratulation on a very strong set of results. And thank you, management for taking my question. I have two questions on the game, please.

So on game, we noticed that recent new games like Genshin Impact, Rise of Kingdoms are launching through some like game community platform like Bili and TapTap to reach out to more like a target user base to avoid a high revenue sharing of Android. I remember that last year, we said we have been negotiating with the Android platform to lower the channel fee on a game-by-game basis. Do you think the successful launch of these recent titles as well as the more like a mobile cloud platform like HUYA or Yowa would open us up with more game distribution channel and that would tilt the negotiation power toward us as a major game developer? So in the other words, we will see more rooms for margin improvement by lowering the channel fee over time? Thank you.

James MitchellChief Strategy Officer — Analyst

Thank you for that question. So we had commented in the past that we felt the game industry economics were not ideal for the game studios and that in many cases, the channels were capturing a bigger share of the profits than the studios themselves. And we’re a big enough company that we can survive that, but there are many smaller companies which couldn’t survive. And so we have been advocates of resetting the revenue share with the channels to more reasonable levels.

And as you observed, there’s a number of midsized game studios in China that have recently bypassed some of the traditional channels altogether and yet still brought their games to a high degree of popularity which is impressive and commendable. For our part, as you know, we have been in the process of negotiating the kind of revenue shares to what we think are more sustainable levels, and that has and will continue to flow through over time into our game margins. We believe that there’s room for many different participants to be successful including small studios, large studios as well as traditional channels and new channels. And so the fact that there are these different players who experiment with different channels, it’s healthy for the industry.

But as far as we ourselves are concerned, we have a good relationship with the big traditional channels. And following some of the adjustments to the relationships with those big channels, we think that we’re in a sort of healthy and sustainable position.

Martin LauPresident

And one thing I do want to add is I think it’s not just in terms of one figure, right, in terms of the revenue share. I think the important thing is actually structuring in such a way that it’s a fair relationship. At the same time, the channel is actually incentivized to provide value, right? And so I think that’s the more important and the slight intricate part of a negotiation. For example, if you really can deliver a promotion of new users, that’s highly valued.

If somebody else actually sort of is signing up users through other channels but just going through an app store, then I think the value will be sort of lower. So I think we’re moving to an industry in which there’s going to be a more delicate division of the value brought by different parties. And I think overall then, it’s going to be fairer economics and it’s going to be more healthy for everybody.

Kenneth FongCredit Suisse — Analyst

Thank you. My follow-up question is on the overseas game. So what is the revenue contribution by percentage now? And except for like U.S., Japan which our Chinese operator have been focusing on, so which market you see have the biggest potential next? And then what are the challenge that we face so far that prevent us from replicating our success into these countries? Thank you.

James MitchellChief Strategy Officer — Analyst

Sure. So we don’t disclose that percentage on a quarter-by-quarter basis. But I believe the last quarter where we gave a point figure, it was the fourth quarter of last year when we disclosed 23% of our games segment revenue was international. And because on the one hand our international games have progressed very well in the last nine months, but, on the other hand, our domestic game business is also growing nicely, the ratio in the third quarter was very similar to the ratio in the fourth quarter last year.

In terms of geographies then, you — the global game business is truly global, and that’s certainly true of our portfolio, meaning that aside from the U.S. and Japan and China which you sort of called out, there are very sizable game markets in other regions, and we have certain games that clearly overperform in certain markets. And so for example, the Supercell and Mini Games tend to overperform in Continental Europe: League of Legends and Brawl Stars. For example, have overperformed in Korea, the big market.

And PUBG Mobile has overperformed in certain Middle East and in emerging markets and Call of Duty Mobile has overperformed in South America. So we’re actually quite fortunate in that with the range of games in and around our portfolio, in which we have experience now of successful publishing or cooperation in many different geographies.

Kenneth FongCredit Suisse — Analyst

Got it. Very clear. Thank you and congrats again.

Martin LauPresident

Thank you.

Operator

Thank you. The next question comes from the line of Alex Yao from JP Morgan. Please go ahead.

Alex YaoJ.P. Morgan — Analyst

Thank you, management for taking my question and congratulations on a strong quarter. My question is regarding the change in the operating environment due to the policy introduction in the past one to two weeks including both online micro lenders and the guideline for antitrust. What are the potential change in operation that you guys are likely to introduce in light of those policy introductions? And my follow-up question is, can you give us an update on the FinTech growth strategy in light of this regulatory environment change? Thank you.

Martin LauPresident

Well, thank you for your question. I think with respect to FinTech, I think the answer is that we’ll be — there will not be a lot of changes in our strategy. I think you’ll — what we have been doing is steadily driving our FinTech business, and this will be a strategy that we will continue. If you look at the principles that we have adhered to in our FinTech business, number one is really compliance with the regulations, and this is something that we have done very methodically in the past.

And if you look at the micro loan regulation, it actually does not really impact our flagship micro loan service, WeiLiDai, because WeiLiDai is actually offered by WeBank which is a fully licensed bank, and it has been in full compliance with the banking regulations which is the regulated part of the entire industry. We have a lot of respect for risk management, and we prudently manage risk. And that includes deliberately controlling the scale of some of our financial products including loans, wealth management products and insurance, so that we optimize for quality rather than just going for scale. We focus on collaborating with industry partners within the financial industry.

And for example, in the micro loan business, we actually work with more than 60 banks so that we actually bring in our expertise in originating loans. But at the same time, we actually work with them so that they bring in their expertise to the business and together we have a win-win outcome. I think we also put a lot of focus on diversified revenue source. If you look at our revenue, it’s actually quite diversified between payment and the lending business as well as wealth management and the emerging product under insurance.

And finally, I would say we focus a lot on creating a unique value for users as well as for our industry partners. We bring in technology solutions so that we reduce the frictional cost, we increase engagement for our industry partners with the users. And as a result, we have been growing our FinTech business in measured speeds. And also, we control the size while, at the same time, developing our capabilities and improving our value proposition for both our users and industry partners.

So if you look at this entire strategy, I think it’s — it actually fits very well with the credit — regulatory environment, and I think we will be steadily continuing driving our FinTech business forward.

Operator

Thank you. The next question comes from the line of Gary Yu from Morgan Stanley. Please ask the question.

Gary YuMorgan Stanley — Analyst

Hi. Thank you for the opportunity to ask the question and congratulation on the strong set of results. I have one question related to the gaming business. Given the fact that we are currently under a normalization of COVID from first half which probably may see some slowdown in momentum, but then, at the same time, we are also seeing quite strong in terms of new games in the pipeline, so how should we look at the sustainability of the gaming revenue growth momentum going forward particularly when we go into 2021? Thank you.

James MitchellChief Strategy Officer — Analyst

Thank you for the congratulations and the questions. So we mentioned in the prepared remarks that while our reported revenue from games increased quarter on quarter, that, to some extent, reflects the very conservative deferral and amortization policy of cash receipts. So during the third quarter, we saw sort of the full benefit of the surge in cash receipts that we experienced in the first half of 2020. However, our cash receipts did decline slightly quarter on quarter.

So looking at the third quarter, we’ve already experienced a degree of normalization in the cash receipts, and we assume that that will continue going forward with implications for the rate of growth of the reported revenue as well over time. Now more broadly, I would say that we remain optimistic about the game business on a short- and medium- and long-term perspective because, first of all, we continue to enhance our live operations. And as we talked about in the prepared remarks, I think that many investors are now aware of some of the live operations initiatives we’ve put into our really flagship, our highest-profile games like Honour of Kings, but they may be less aware of the extent to which we’re also deploying those in more vertical niche or genre games such as Naruto. So that’s in terms of live operations in existing games.

And then in terms of new games, we have a number of very high-profile, widely discussed titles in the pipeline, some of which already have been developed and already have that BanHao and are pending launch, such as D&F Mobile and Call of Duty Mobile; some of which have been developed and released in other markets but pending a BanHao and launch in China such as Wild Rift and Valorant; and then a large number of games, both own IP and licensed IP, from our big internal studios including TiMi, Quantum MoreFun and Aurora, that we’d be — generally attract less external attention until the time of their launch. But as you can see with the success of Moonlight Blade in the last few weeks, those games can be very impactful and successful as well. So that’s our view on the game business looking forward.

Gary YuMorgan Stanley — Analyst

OK. That’s very clear. My follow-up question is related to your online video businesses. We have observed some of the industry players have announced increase in the monthly fee.

How do we look at potential for further price hike from outside going forward? And broadly speaking, how should we look at competition? Thank you.

James MitchellChief Strategy Officer — Analyst

Well, I remember this must have been seven or eight years ago, when we launched what at the time was called our Hollywood VIP video subscription service. And it was called Hollywood VIP because 100% of the paid content was Hollywood movies. Literally every content was either Warner Bros. or Viacom or Disney.

And I thought it was one of the best products we had ever launched, but the general user base didn’t seem to agree with me. And we set the price at RMB 20 per month and we got to a certain subscriber base, but we realized that in order to grow the subscriber base, we should add more content. And that’s what we’ve been progressively doing, initially adding a drama series that were also available on terrestrial television, and then layering on domestic films and then creating our own drama series, more recently creating our own variety shows, creating our own animated TV program which have been very impactful. And anyway, the net result is that the amount we invest in content now for our subscription video service is many magnitudes greater than it was when we set the RMB 20 price point.

The range of the high-quality content that’s available, in many cases uniquely available, is infinitely larger than it was when we set the RMB 20 price point. And of course, over time, consumer price inflation in China means that that RMB 20 price point has become steadily more and more affordable. So we’re very much of the view that the subscription video services in China are sort of underpriced. And at the right circumstances then, we’re happy to look at the opportunity to adjust pricing in a way that it’s fair to consumers as well as to the content industry.

Operator

Thank you. The next questions comes from the line of John Choi from Daiwa. Please go ahead.

John ChoiDaiwa Capital Markets — Analyst

Good evening and thank you for taking my question. And congratulations on a very strong set of results this quarter. I think my question is on your online advertising. I think on your prepared remarks, management did mention that we’re seeing gradually normalizing spending.

But you also mentioned that you’re seeing some increasing adopting of some of your algorithm and buying solutions. So I was wondering, like how much have this really helped us when it comes to capturing more ad dollar spending on our platform? Is this like, I mean primarily the reason why we’re seeing the strong growth or is it also a mix of the higher impressions on eCPM from the other inventories that you have? And a quick follow-up here is on your cloud. We noticed that your cloud revenue growth was a little bit softer than expected, and you mentioned like IaaS has been delayed or postponed. But if you look at the industrywide right now, we’re seeing a bit of a still relatively healthy growth.

So I was wondering, what are the challenges that we’re facing? And how — what kind of growth should we be expecting going forward? Thank you.

James MitchellChief Strategy Officer — Analyst

So why don’t I answer on the advertising and Martin will pick up on the cloud? I think with the advertising industry, if you look globally, then there’s an enormous shift in how advertisers are spending online. And generally speaking, there’s a shift toward video format, and there’s a shift toward retargeting. Well, if you look at let’s say Google’s results for the third quarter, then I think that their search revenue grew $1-point-something billion year on year which is great, but their YouTube revenue also grew $1-point-something billion year on year which is amazing given YouTube is from a much smaller base than search. And that speaks to both of those phenomena that YouTube is a natural home for video advertising.

And in the last two years, Google has allowed advertisers to retarget from prior search queries and other sort of intent-based activities into advertising within YouTube. And if you think about it and look at our platforms, then I believe that we’re in a good position to benefit from video advertising, and you can see that very clearly in some of our feed products, you can see that very clearly in Tencent Video itself, and you can see that particularly clearly in recent quarters in our ad network where there’s been a big shift to video. And then I think we’re also well positioned to benefit from retargeting. In the past, there was an enormous gulf between so-called intent-based advertising eCPMs versus every other eCPM, but the emergence of retargeting has really converged those price points, and we’ve naturally been a big beneficiary of that because we were structurally short intent-based opportunities versus some of our peers with structurally long aggregate traffic.

And of course, we’re not the only company to benefit from those trends. I think ByteDance has very clearly been a beneficiary as well, but ByteDance and we are probably the two that most naturally benefit from the shift to video and the shift to retargeting.

Martin LauPresident

Yeah. In terms of the cloud business right now, I would say there are a number of reasons for the softer quarter, especially compared to peers. One is actually more specific on a few projects and contracts. So this is going to go away in the next quarter.

So it’s more of a one-time nonrecurring event on the delay of certain projects and the restructuring of certain contracts. Now the second one is, I would say when we are playing catch-up, then we actually rely more on new projects. So during the pandemic, some of these new projects get delayed and, as a result, the catch-up process was kind of disrupted. And another reason is if you look at the growth that’s driving the cloud business, especially sort of during the pandemic and after that, it’s quite a bit of short video as well as games.

And I would say in games, it seems a lot of the games revenue is actually from our own games, right? So it’s — despite we’re providing the cloud service to our own games, it’s not booked as revenue. And then on the short video front, there is a competitive reason for that. So these are all the factors why the growth is softer than peers’. But I think that the one-time adjustment would actually sort of end after this quarter, and we’re catching up in terms of new projects too.

Wendy HuangHead of Asian Internet and Media, Managing Director

Operator, let’s move to the next.

Operator

Thank you. The next questions comes from the line of Han Joon Kim from Macquarie. Please ask the question.

Han Joon KimMacquarie Research — Analyst

Thank you. Thank you for the opportunity to be recognized today. I wanted to ask you guys about the Wild Rift for League of Legends and how that is interplaying with the PC version. So what kind of dynamic system that you’re seeing in terms of kind of monetization on either the size or kind of user behavior? And how do we think about the eventual role — or commercial launch of it, official commercial launch of it from the current beta phase into kind of a more official status and then the rollout into the other regions that it’s not been introduced into? And then I’ll have a follow-up question I guess after that.

James MitchellChief Strategy Officer — Analyst

So thank you for the question. And in terms of Wild Rift and the user behavior then, as you might expect, it’s sort of a shorter, sharper experience than the full League of Legends. A full game takes roughly half as long as a full game on the PC League of Legends, but the quality of the experience is extremely high. And while of course Riot and we are biased, both Riot and we are extremely pleased with — while it’s taken a good amount of time to release a mobile incarnation of League of Legends, the final product is something that everyone is extremely satisfied with at least internally.

And based on the data we see from the previous beta tests in Philippines and Brazil as well as the more recent full launches across Southeast Asia and Japan, it appears that the users feel the same way. From a monetization perspective then, as with League of Legends itself and, in fact, as with every Riot game, the monetization is relatively back-end loaded, meaning that I think there’ll be a relatively lengthier period of time between Wild Rift aggregating users versus Wild Rift converting those users into monetization compared to a game such as Moonlight Blade, where the users and the monetization arrive simultaneously. But that’s fine. I think we have a broad portfolio of games and it’s healthy that different games have different monetization behaviors.

And we know that from League of Legends experience, that over the long long term, the monetization is not a problem for this kind of game.

Han Joon KimMacquarie Research — Analyst

Great. Thank you. In terms of — just following up on that, like in terms of the roll-up to the other regions and when — how should we think about the phased introduction of just kind of global commercial release of it?

James MitchellChief Strategy Officer — Analyst

Well, I think that Riot has disclosed some of its intent. Clearly, for the China market, it depends on the BanHao issuance. But for other markets, it’s under Riot’s control. And from what I recall, they felt it was important to stagger the launches because this is the first time that Riot’s released a major mobile game.

And given the number of current League of Legends PC players, lapsed League of Legends PC players, people who want to play League of Legends but don’t have a PC, then the initial and ongoing user surge for Wild Rift is quite substantial, and that puts enormous pressure on bandwidth and server capacity. So it makes sense to stagger the launch in different geographies over time. But having successfully launched the game in different parts of Asia in the last couple of weeks, we’re now — or Riot’s now gearing up to launch the game in Europe which is a very big market for League of Legends PC, and progressively in Korea and the Americas and elsewhere.

Han Joon KimMacquarie Research — Analyst

Got it. And selfishly, I do hope Hong Kong comes soon. My second question is really just on the FinTech part. We talked about 30%-plus growth on the TPV and 30% growth on the wealth management.

So I presume revenue growth is above that, and I just want to confirm that. And as a function of that, I would presume that our profitability has improved as well. So perhaps just commentary on the profit improvement on the FinTech part will be appreciated. Thank you.

James MitchellChief Strategy Officer — Analyst

Well, we don’t give a lot of breakdown on that. We did say in the remarks — I think if you look in the MD&A, we said that the revenue growth from FinTech as a whole was quite similar to the previous quarter. So the deceleration you saw in the segment was due to business services, not to FinTech services. And we did say that the profit margin on the payment business itself was relatively stable as well.

So no great change in growth rates or margins.

Martin LauPresident

Yes. And also, as we said, right now, we have actually a pretty diversified streams of FinTech revenues, so it’s probably not correct to tie the FinTech revenue directly to the TPV. So we don’t separately disclose that. But just as an indication, I would like to point that out.

Operator

Thank you. The next questions comes from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas ChongJefferies — Analyst

Hi. Good everning. Thanks management for taking my question and congratulations on a strong set of results. My question is about our Mini Program.

Given that we saw the GMV experience very strong growth momentum during the year and, well, digitization is the key industry trend, what are our strategies in digitization across different industries such as smart retail and smart catering? And how our payments and cloud infrastructure can further speed up the migration? Thank you.

Martin LauPresident

Yeah, we are actually quite excited about the GMV growth on Mini Programs, and we actually put as one of our strategic focus to increase our support within the Weixin ecosystem for transactions and for particularly Mini Program transactions. So if you look at the kind of things that we are doing, right, so one part is actually increasing our support within Weixin for Mini Programs, and all the new content discovery as well as the rearranging of our wallet entry point as well as the launching of, for example, like broadcast, right, all of them actually are the infrastructure that actually allows Mini Programs to be more powerful in facilitating transactions. So that’s within the Weixin ecosystem. On the other hand, I think the other part of the equation is really helping industry partners, helping different businesses, right, to improve and upgrade their digitization, upgrade their tech infrastructure so that they can actually embrace the Mini Programs in a bigger way.

And on that front, we obviously have got our smart retail team. We have our cloud service team, sales team who are helping these industry partners. But at the same time, we are also empowering a lot of ecosystem partners, for example the SaaS providers which can help these industry partners to embrace technology in a bigger way. So I think it’s a process that’s ongoing.

It’s actually progressing nicely, and it’s also speeded up by the fact that there was a pandemic. So that — between improving our own ecosystem, between having our own team helping our industry partners and also empowering ecosystem partners to help the industry partners, I think all of them would contribute to our continued growth in terms of the Mini Programs as a way for people to conduct transactions.

Thomas ChongJefferies — Analyst

Thank you. My follow-up question is on social advertising in particular for Moments and Mobile Advertising Network. Should we expect there will be further increase in ad loads for Moments in coming quarters? And how should we think about the competition with short-form video payers in video advertising?

James MitchellChief Strategy Officer — Analyst

So in terms of ad load in Moments then, I mean, I think that we have been increasing inventory at a gradual and measured rate, and that will remain true. And as you’re probably aware, Weixin Moments has a dramatically lower ad load percentage than many other highly popular Internet services in China including the short video sites you alluded to. With regard to the competition between short video and some of our inventory then, I think we’ve talked about this a little bit before, but in general, I would say that both the short video sites and much of our inventory benefit from the trend toward videolization, both of them benefit from the trend toward retargeting. From a price point perspective, short video sort of aggregates around the mid-RMB 20s eCPM, and that is somewhat directly competitive with, for example, the Tencent Video advertising.

And so that’s part of the reason our media advertising was under pressure for four quarters. On the other hand, Weixin delivers a different, more affluent audience than short video and therefore come on to higher eCPM. Our ad network and many of our other properties offer a much lower eCPM than short video which is disproportionately appealing to very performance-based direct response advertisers. So we have a range of different products, some of which compete relatively head-on with short video from a price perspective but most of which operate at different price points.

Thank you.

Martin LauPresident

Just one point to add with respect to this differentiated inventory on Weixin, right? I think it’s actually quite connected to what your first question was. When you look at the Mini Programs and the GMV growth on Mini Programs, I would say our Weixin inventories are differentiated in such a way that it’s — actually, because of the ecosystem benefits, right, it increases the conversion ratio for a lot of the services that advertise on the Weixin inventory. And two is, when advertisers think about advertising on Weixin, they also think about not only in terms of the direct conversion on transactions but also think about how much users they can actually convert into their private domain user pool. And that is also valuable for them.

So that’s part of the reason why the eCPM is actually higher for Weixin compared to other forms of performance-based advertising. And as we continue to grow the infrastructure to support transactions within Weixin, I think that trend and that differentiation will continue to improve. Thank you.

Operator

Thank you. The next questions comes from the line of Gregory Zhao from Barclays. Please go ahead.

Gregory ZhaoBarclays — Analyst

Hi, management. Thanks for taking my question and congratulation on a strong quarter. I have only one question about your mobile gaming business. So if we look at the top 10 mobile games right, ranking in the past two to three years ago, we can see actually Tencent and NetEase mostly dominated the top 10 games in China with about eight or nine games.

But today, if we take a look at the top 10 games in China, so actually several smaller studios also launched some very successful games. So meanwhile, with Tencent and NetEase, wiki — the top 10 games declined to around four to five games. And China is a bit different from The Street expectation of further market consolidation. So I just want to understand, how shall we think about this kind of market dynamics and this market competition going forward? Thank you.

James MitchellChief Strategy Officer — Analyst

Yeah, thank you for the questions. So how we think about the market dynamic is that it’s a very healthy development. Our aspiration is not domination. And while the number of studios represented in the top 10 has diversified, you can see from our results that despite that, we’ve been able to maintain very healthy revenue and earnings trends in our game business.

We think that the diversification is good because it shows the market is becoming more dynamic and users are becoming more sophisticated. And there are new genres of games that are becoming popular and monetizable that Tencent historically didn’t focus on but we can now focus on and that represent new opportunities for us. So that’s at a general level. If I try to get a degree more granular and look at individual games then, earlier in the call, someone brought up the MiHoYo game Genshin Impact’s success.

And I think that has — many of that for the industry as a whole, all of them positive, one being that China games are increasingly capable of expanding beyond China and capturing not only the wallets but also the sort of eyes or the hearts of users around the world which is a good development. Another one is just how malleable, flexible, plastic the game industry still is in terms of different models. If you look at the Western world then, one of the really big trends has been games that were built around a single-player campaign mode like Call of Duty, moving over time into more of a multiplayer virtual item mode like Call of Duty: Warzone. In China, we’re seeing a progression sort of in the opposite direction where a game like Genshin Impact historically with a focus completely on the virtual item/monetized endgame/PvP experience, but MiHoYo created a very attractive single-player campaign more into traditional Japanese RPG that has the effect of drawing players in and preparing them for the endgame experience.

So in terms of lessons for Tencent, particularly for our big four domestic game studios then, we continue to seek to innovate, we continue to seek to develop new genres and to mix and match different genres, different business models to create something exciting and compelling. And we continue to increase our investment in games because the player expectations, again quality, are rising and, to some extent, converging globally, and it’s incumbent on us to really invest in the people, invest in the tools to create games that can cut through the clutter through innovation and through quality. And that’s what we’re seeking to do both for China and the international markets as well.

Gregory ZhaoBarclays — Analyst

Thanks. Really helpful.

Operator

Thank you. The next questions comes from the line of William Packer from Exane BNP Paribas. Please go ahead.

William PackerExane BNP Paribas — Analyst

Hi, management. Thank you very much for taking my question and congratulations on the very strong numbers. Regulatory news flow has been significant in recent weeks. Could you make any initial comments on the draft antitrust rules and how they can impact your business? Is it right to think that your video games and digital entertainment businesses are not likely to be a focus? Thank you.

Martin LauPresident

Yeah. William, thanks for your question. And as you had pointed out, right, the regulation — the consultation paper just came out not too long ago. Obviously, we have reviewed the consultation paper regarding the platform economy.

We would take some time to communicate with the regulatory authority to understand what they want to achieve fully, but our initial thoughts — I would like to share a few thoughts. Number one is, from our reading, the document emphasized the principles of fair competition and regulatory oversight as well as the promotion of innovation and industry development, ensuring a balance of interest is achieved for all stakeholders. That’s sort of the spirit of the paper. Secondly, our observation is that such regulation is not new and it’s also not unique to China.

As technology companies become bigger and more important to the economy, I would say more regulations to reflect the new reality are needed. It’s not just the case for China, but it’s also the case globally. Thirdly, we believe that the government is still supportive of the Internet and technology industry, especially the innovation that’s driven by the industry. But the intention is to prevent misconduct and also ensure long-term healthy growth for the industries.

Fourthly, I would like to reflect on Tencent’s business and strategy and philosophy, right? I would say it actually fits very well with the spirit of the regulatory framework. As you can see, our platforms are open in nature. We work with a lot of partners. We focus on providing great products and user value rather than very calculated business operations as well as monetization.

And we also embrace competition. And as a matter of fact, we thrive on competition. And sometimes, even internally, we compete — have multiple products competing with each other. So finally, I would say we’ll work very constructively with the regulators to ensure our compliance with the paper.

So these are initial thoughts. Of course, as we interact with the regulators, we’ll have more to add in the future, and we have more insights. Now, with respect to the different sectors, right, I can’t comment fully right now, but it looks like, right, from the paper that it’s more related to transaction platforms. So for games which are essentially individual products rather than platforms, I think they are less of the focus.

And in terms of the digital entertainment industry, I look at the video platform as an example. And as we talked about the video platform earlier, right, it’s actually quite a bit of money-losing business right now. So it probably doesn’t really fit into the focus of the regulator at this point in time for — as far as the consultation paper is concerned.

William PackerExane BNP Paribas — Analyst

Thank you very much for the detailed answer. Just my follow-up question on a slightly different topic. You’ve got a significant and strong footprint in e-commerce via Mini Programs and enterprise software via Tencent Meeting and related products. Thus far, it feels like monetization has lagged international peers.

How should we think about the cadence of monetization going forward?

Martin LauPresident

Well, I think these are really businesses which are at the initial phase of development. We are really excited about the potential market that’s ahead of us. And as a result, we — it’s actually quite a bit that in the philosophy of Tencent, right, when there is a market potential, when there’s a user need that has a lot of potential, we tend to focus a lot on unlocking that potential and providing amazing products and user value first before moving into monetization. So at this point of time — I think both for Mini Programs and for our enterprise software at this point in time, I think the focus is really delivering great products to increase the user base and to unlock the potential in the user market first before we really think about monetization.

Now on the Mini Programs, I think we do derive quite a bit of commercial benefit already through the fact that the Mini Programs actually enable a lot of payment transactions within our system and also the Mini Program owners which want to get traffic also doing advertising in our Weixin ecosystem. And that’s part of the reason why our eCPM on Weixin advertising is actually higher than a lot of the industry standard. So we are deriving the benefits but somewhat indirectly.

Operator

Thank you. The next questions comes from the line of Saiyi He from Huatai Securities. Please go ahead.

Saiyi HeHuatai Securities — Analyst

Thank you, management for taking my questions. My first question is on our FinTech business. I want to discuss from a pure payment perspective, as our transaction volume continues to rise in the offline channel, in the medium term, would that increase our pure payments costs going forward as a lot of payment expenses and the service expense are going through in the off-line channel? And also in terms of monetization improvement on the pure payment business, can you — in view of the current competition and also costs from the banking channels, could you give us some color in terms of the pure payments business margin in the medium to long term? Thanks.

Martin LauPresident

Yeah. Well, on the off-line payment side, it’s actually generating revenue, and the major cost component is banking charges as well as promotional expenses, right? So I would say when we look into the future, it should be relatively stable in the sense that it does generate revenue for us and the banking charges are relatively stable for now. And of course, it depends on our collaboration with the banks. So it is an unknown, but, so far, it has been relatively stable.

And the promotional expenses have gone through ups and downs through the years. And a big part of it is really about how much the industry peers are excited about the opportunity and how much money they are putting into the system. A lot of times, we are the market follower in terms of promotional resources spending. But so far, it looks like this year, it has normalized to a more rational level compared to previous periods where some of the spending are very, very high.

Saiyi HeHuatai Securities — Analyst

OK. I have a follow-up question on our FinTech business. We have seen 50% wealth management consumer growth this quarter, 50% year-over-year growth, and yet our — LiCaitong’s user base is still — penetration rate versus our payment user base is still very low. Can you share with us what are the new features that led to such a strong growth in our wealth management consumer base? And what are the strategies we’re implementing to ensure there will be a — still maintain a very rapid growth in terms of LiCaitong’s consumers versus penetration rate versus our payment users?

Martin LauPresident

Well, I think we want to grow this penetration steadily, right? We — and typically, wealth management business is a long-term business. You try to establish a relationship for the long run with the users. What we typically do is the [Foreign language] right? So when people deposit certain money into money market funds, that’s actually sort of the lead-in of a relationship. And over time, we offer more wealth management products to the users.

I think so far, we have been again right — consistent with our prudent and measured way of growing our FinTech business, we have been quite a bit self-constrained in terms of offering wealth management products that carries a slightly higher risk because we do want to make sure that the consumers, the users are actually well educated first before they know exactly what they’re buying in terms of the wealth management products. So again, this will be a longer-term cultivation of user education. And over time, we’ll start offering more differentiated wealth management products to our users. And we are not in a rush to sell a lot of wealth management products to users because we felt that it has to come along with the education of the users with the further development of the financial markets so that they are good wealth management products that we actually would choose and offer to our users.

So it would take a process through which it will grow. But then, I think the fact that we have the payment platform actually really help us to establish the initial relationship. And as we continue to build our expertise in choosing products and educating our users, then this will also grow naturally.

Operator

We have reached the end of question-and-answer session. I would like to hand the conference back to Ms. Huang for closing remarks.

Wendy HuangHead of Asian Internet and Media, Managing Director

Thank you, operator. We are closing the call now. If you wish to check out the press release and other financial information, please visit the IR section of our company website at www.tencent.com. A replay of this webcast will also be available in a few hours.

Thank you and see you next quarter.

Operator

[Operator signoff]

Duration: 76 minutes

Call participants:

Wendy HuangHead of Asian Internet and Media, Managing Director

Pony MaChairman and Chief Executive Officer

Martin LauPresident

James MitchellChief Strategy Officer — Analyst

John LoChief Financial Officer

Kenneth FongCredit Suisse — Analyst

Alex YaoJ.P. Morgan — Analyst

Gary YuMorgan Stanley — Analyst

John ChoiDaiwa Capital Markets — Analyst

Han Joon KimMacquarie Research — Analyst

Thomas ChongJefferies — Analyst

Gregory ZhaoBarclays — Analyst

William PackerExane BNP Paribas — Analyst

Saiyi HeHuatai Securities — Analyst

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