Tencent Holdings Ltd., Q4 2013 Earnings Call, Mar 19, 2014 - SEHK:700

SEHK:700

** Summary of Executive Speeches**

Catherine Chan (Executives)

• Introduction and Forward-Looking Statements:
  • Welcome to the annual results conference call for 2013.
  • Reminder of forward-looking statements and risks.
  • Introduction of the management team: Pony Ma (Chairman and CEO), Martin Lau (President), James Mitchell (Chief Strategy Officer), and John Lo (Chief Financial Officer).
  • Overview of the agenda: Pony will give a short overview, Martin will discuss strategic highlights, James will review the business, and John will go through the financials.

Huateng Ma (Executives)

• Business Achievements in 2013:
  • Rapid penetration of smartphones in China, deepening user engagement.
  • Solidified leadership in social platforms and established presence in international markets via WeChat.
  • Unlocked mobile monetization through games.
  • Largest PC client games platform globally, with 6 games surpassing 1 million PCU.
  • Largest display advertising platform in China by revenue.
  • Strategic partnership with Sogou to expand search presence.
  • More than doubled principal GMV in eCommerce through category and regional expansion.
  • Investment in digital content, mobile utilities, online payment, O2O, and Internet finance.
• Financial Highlights:
  • Q4 2013 total revenue: RMB 17 billion, up 40% year-on-year and 9% quarter-on-quarter.
  • VAS revenue: RMB 12 billion, up 27% year-on-year, 3% quarter-on-quarter.
  • Online advertising revenue: RMB 1.5 billion, up 58% year-on-year, 8% quarter-on-quarter.
  • eCommerce transactions revenue: RMB 3.3 billion, up 97% year-on-year, 41% quarter-on-quarter.
  • Full year 2013 total revenue: RMB 60 billion, up 38% from 2012.
  • VAS revenue: RMB 45 billion, up 26% year-on-year.
  • Online advertising revenue: RMB 5 billion, up 49% year-on-year.
  • eCommerce transactions revenue: RMB 9.8 billion, up 121% year-on-year.

Chi Ping Lau (Executives)

• Social Platforms:
  • Transitioned QQ from a PC-based to a mobile-first communication platform.
  • Weixin and WeChat have a combined MAU of 355 million, up 121% year-on-year.
  • Differentiation between QQ and Weixin:
    • QQ targets younger, entertainment-oriented users; Weixin targets white-collar users.
    • QQ's business model includes virtual services and games; Weixin explores O2O opportunities.
    • QQ connects users with an ecosystem of people and content; Weixin connects users with content and service providers.
  • Synergies and user stickiness through integrated services and third-party partnerships.
• O2O Experiments:
  • Successful experiments with Didi Dache (taxi booking), Licaitong (money market funds), and Red Packet (lucky money distribution).
  • Strategic investment in Dianping to enhance local life information and transaction services.
  • Partnership with JD.com to strengthen physical goods eCommerce.
• ECommerce Strategy:
  • Two-pronged strategy:
    • Managed physical goods eCommerce with JD.com.
    • Unmanaged distributed ecosystem for smaller merchants and retailers.
  • Market competition and opportunities in the mobile Internet.

James Mitchell (Executives)

• Revenue Growth:
  • Q4 2013 revenue growth of 40% year-on-year.
  • Online games contributed 50% of revenue, social networks 20%, eCommerce transactions 20%, and advertising 9%.
  • Full year 2013 total revenue grew 38% year-on-year.
• Value-Added Services:
  • VAS revenue: RMB 12 billion, up 27% year-on-year, 3% quarter-on-quarter.
  • Online game revenue: RMB 8.5 billion, up 35% year-on-year, 1% quarter-on-quarter.
  • Social networks revenue: RMB 3.5 billion, up 11% year-on-year, 8% quarter-on-quarter.
  • Monetization of popular games, expanded user base, and contributions from smartphone games.
• Online Advertising:
  • Revenue: RMB 1.5 billion, up 58% year-on-year, 8% quarter-on-year.
  • Brand advertising revenue: RMB 900 million, up 65% year-on-year, 12% quarter-on-quarter.
  • Performance advertising revenue: RMB 600 million, up 118% year-on-year, 21% quarter-on-year.
  • Focus on video content and mobile advertising.
• ECommerce:
  • Revenue: RMB 3.3 billion, up 97% year-on-year, 41% quarter-on-year.
  • Strong growth across product categories and increased sales due to promotional periods.
  • Full year 2013 eCommerce transaction revenue: RMB 9.8 billion, up 121%.

Shek Hon Lo (Executives)

• Financial Highlights:
  • Q4 2013 total revenue: RMB 17 billion, up 40% year-on-year, 9% quarter-on-quarter.
  • Operating profit: RMB 4.8 billion, up 28% year-on-year, down 1% quarter-on-quarter.
  • Net profit attributable to shareholders: RMB 3.9 billion, up 13% year-on-year, 1% quarter-on-quarter.
  • Full year 2013 total revenue: RMB 60.4 billion, up 38% from 2012.
  • Operating profit: RMB 19.2 billion, up 24% year-on-year.
  • Profit attributable to shareholders: RMB 15.5 billion, up 22% year-on-year.
• Segment Gross Margins:
  • VAS: 67%, up 1% year-on-year, 2% quarter-on-quarter.
  • Online advertising: 32%, down 17% year-on-year, 20% quarter-on-quarter.
  • eCommerce transactions: 5%, down 4% year-on-year, 1% quarter-on-quarter.
• Operating Expenses:
  • Selling and marketing expenses: RMB 2 billion, up 86% year-on-year, 39% sequentially.
  • G&A expenses: RMB 2.8 billion, up 30% year-on-year, 6% sequentially.
  • R&D expenses: RMB 1.3 billion, up 21% year-on-year, down 4% sequentially.
• CapEx and Cash Flow:
  • CapEx: RMB 1.7 billion, down 6% year-on-year, up 4% quarter-on-quarter.
  • Free cash flow: RMB 5.2 billion, up 20% year-on-year, 26% quarter-on-quarter.
  • Net cash position: RMB 36.2 billion, up 32% year-on-year, 5% quarter-on-quarter.
• Investments and Strategic Partnerships:

  • Equity accounting for Dianping and JD.com as associate companies.

  • Financial impact of investments in Dianping and JD.com.

  • Share split proposal for shareholders.