Q4 2016 Real-Time Call Brief

Highlights

Our in-house titled Honour of Kings is the most of the popular mobile game in China, with DAU existing 50 million.

Weixin and WeChat combined MAU exceed 889 million, up 28% year-on-year.

Total MAU for QQ was almost 2% year-on-year to 868 million.

Within reach smart devices MAU was 652 million, up 2% year-on-year.

For Qzone smart devices MAU grew 4% year-on-year 595 million.

For the fourth quarter of 2016, total revenue was RMB43.9 billion and up 44% year-on-year and 9% quarter-on-quarter.

Non-GAAP operating profit was RMB14.9 billion and, up 30% year-on-year, or down 1% quarter-on-quarter.

Non-GAAP net profit attributable to shareholders was RMB12.3 billion, up 38% year-on-year, and 5% quarter-on-quarter.

For the full year of 2016, total revenue was RMB152 billion, up 48% year-on-year.

Non-GAAP operating profit was RMB58 billion, up 39% year-on-year.

Non-GAAP net profit attributable to shareholders was RMB45 billion up 40% year-on-year.

Staring with mobile payments.

We achieved over 600 million monthly active users asset at the end of 2016.

Our daily payment volume nearly doubled year-on-year to over 600 million transactions a day.

For social payments is during the 2017 Chinese New Year period, our users exchanged to over 46 billion Weixin loops up over a 40% year-on-year.

For example, Starbucks recently enabled Weixin pay in the 2,600 stores in China.

As a result of all these efforts our commercial payment volume tripled year-on-year.

To enrich the diversity of our content library, we launched an open platform in early 2016 to facilitate content creators publishing article.

This has benefited Kuaibao in particular, which DAU has grown to over 20 million, triple times of the beginning of the year in 12 months time.

In 2016, our mobile news advertising revenue grew more than 100% year-on-year.

As a result in the year of 2016, our cloud service customer base and revenue more than triple year-on-year.

In the fourth quarter of 2016, our revenue grew 44% year-on-year.

Value added services represented 66% in our revenue within which online games contributed 42%, and social networks 24%.

Online advertising was 19% of our total revenue and the other segments accounted 15% of total revenue, up from the 5% in the fourth quarter of last year.

For the full year, revenue grew 48%.

Looking into value added services, revenue in the fourth quarter was RMB29.2 billion, up 27% year-on-year and up 4% quarter-on-quarter.

Social network revenue was RMB10.7 billion, up 51% year-on-year and up 9% quarter-on-quarter.

In particular, digital content revenues more than tripled year-on-year.

Online games revenue was RMB18.5 billion, up 16% year-on-year and up 2% quarter-on-quarter.

For the full year, our VAS revenue was up 34%, our social networks revenue up 54% and online games revenue up 25%.

Over 250 million QQ users joined the 5-day event opening over 2 billion red envelopes.

For the full year 2016, our PC Client Game revenue increased 9%.

In 2015, our PC Game revenue was unseasonably strong in the fourth quarter, due to new item types in of our biggest games, but in 2016, the usual negative seasonality from 3Q to 4Q, itself, which resulted in a 2% quarter-on-quarter revenue decline, and rather modest 4% year-on-year revenue growth rate.

PC Game average daily active users decreased 13% year-on-year, reflecting first usage continuing to shift a portion of their gaming time from actual game play to engage with game concept and other mechanism such as forums, videos and sports events.

For smart phone games revenue in the fourth quarter was RMB10.7 billion, up 51% year-on-year and up 8% quarter-over-quarter and revenue for the full year was RMB38.4 billion, up 80% year-on-year.

Moving onto online advertising, segment revenue in fourth quarter was RMB8.3 billion, up 45% year-on-year and up 11% quarter-on-quarter.

Our brand advertising revenue was RMB3.1 billion, flat quarter-on-quarter and up 11% year-on-year.

Our performance advertising revenue is RMB5.2 billion, up 77% year-on-year, and up 18% quarter-on-quarter, benefiting from positive seasonality in ecommerce in the fourth quarter.

For the full year, our online advertising was RMB27 billion of revenue, up 54% year-on-year.

Original content has proven particularly effective with growing our videos subscription base, which increased over 300% year-on-year in the fourth quarter to over 20 million subscriptions.

For the fourth quarter of 2016, our total revenue was RMB43.9 billion, up 44% year-on-year or 9% quarter-on-quarter.

Gross profit was RMB23.6 billion, up 33% year-on-year or 8% sequentially.

Operating profit was RMB13.9 billion, up 28% year-on-year or down 4% quarter-on-quarter.

Share of losses of associates and joint venture was RMB522 million in the quarter, down from RMB1.3 billion year-on-year or RMB619 million sequentially.

On a non-GAAP basis, we generated profits of RMB391 million in the quarter, comparing to losses of RMB164 million year-on-year, or RMB107 million in the fourth quarter.

Income tax expense was RMB2.4 billion, up 20% year-on-year or down 2% quarter-on-quarter.

Effective tax rate was 18.6% for the fourth quarter and 19.7% for the full year.

Net profit attributable to shareholders was RMB10.5 billion, up 47% year-on-year or down 1% quarter-on-quarter.

For the full year of 2016, total revenue was RMB151.9 billion, up 48% from 2015.

Gross profit was RMB84.5 billion, up 38% from 2015.

Operating profit was RMB56.1 billion, up 38% from 2015.

Net profit attributable to shareholders was RMB41.1 billion, up 43% year-on-year.

For the fourth quarter, on a non-GAAP basis, operating profit was RMB14.9 billion up 30% year-on-year or down 1% quarter-on- quarter.

Net profit attributable to shareholders was RMB4.3 billion, up 38% year-on-year and up 5% quarter-on- quarter.

Operating margin was 34% down 4 percentage points year-on-year or 3 percentage point quarter-on-quarter.

Net margin was 28% down 1 percentage point year-on- year or 1 percentage point quarter-on-quarter as well.

For the full year of 2016, on a non- GAAP basis, operating profit was RMB38.2 billion, up 39% from 2015.

Operating margin was 38% down 3 percentage points.

Net profit attributable to shareholders was RMB45.4 billion, up 40%.

Net margin was 30% down 2 percentage points.

Gross margin for value added services was 63% for the stable year-on-year, or down 2 percentage points quarter-on-quarter.

Gross margin of online advertising was 47%, down 5 percentage point year-on-year, reflecting increased investment in video content.

Sequentially, it rose 10 percentage points as a result of event driven content cost in the fourth quarter.

For the full year 2016, gross margin for value added services was quite stable at 65% compared to last year.

Gross margin for online advertising decreased 6% points to 43%, mainly due to Tencent video content.

Selling and marketing expense was RMB4.5 billion, up 48% year-on-year or up 36% quarter-on-quarter.

Selling and marketing expense represented about 10% of quarterly revenue.

Included under G&A, research and development expense was RMB3.6 billion, up 45% year-on-year or 14% quarter-on-quarter.

Total G&A expense was RMB6.9 million, up 45% year-on-year or 17% up quarter-on-quarter.

R&D represented about 8% of quarterly revenue and total G&A was 16%.

Share based compensation was 4% of quarterly revenue.

In celebration of the company's 18th anniversary, we awarded 300 shares to every employee.

This first 100 shares was effected in November 2016 and the remaining 200 shares in the following two years.

In relations to this exercise, we booked stoke-based compensation expenses above the RMB500 million in the quarter.

On a full year basis, selling and marketing expense was RMB12.1 billion, up 52% from 2015 and represented 8% of revenue.

R&D expense was RMB11.9 billion, up 31% from 2015 and represented 8% of revenue.

Total G&A expense was RMB22.5 billion, up 33% over 2015 and represented 15% of revenue.

At the quarter end, we had approximately 39,000 employees, up 27% year-on-year or 2% quarter-on-quarter.

Gross margin at 4.5 percentage points year-on-year to 53.9% mainly due to increase in contribution from the other segments which carried lower margin, as well as continued increase in video content cost.

Non-GAAP operating margin was 34.1%, down 3.8 percentage points year-on-year.

Sequential decrease of 3.1 percentage points, was mainly due to seasonal increase in selling and marketing expenses.

Non-GAAP net margin was 28.3%, down 1.3 percentage points year-on-year, and 1.2 percentage points quarter-on-quarter.

On a full year basis, gross margin was 55.6%, down 3.9 percentage points.

Non-GAAP operating margin was 38.3% down 2.3 percentage points.

Non- GAAP net margin was 30.3%, down 1.6 percentage points.

GAAP basic EPS was RMB4.383 and diluted EPS was RMB4.329.

Non- GAAP basic EPS was RMB4.844 and diluted EPS was RMB4.784.

We are proposing an annual dividend of HKD0.61 per share.

For the fourth quarter, total CapEx was RMB2.8 billion, up 51% year-on-year or down 22% quarter-on-quarter.

Operating CapEx was RMB2.1 billion.

Non-operating CapEx RMB709 million.

For the full year of 2016, total CapEx increased 57% year-on-year to RMB12.1 billion.

Free cash flow reached RMB17.2 billion, up 6% year-on-year or 21% quarter-on-quarter.

On a full year basis, free cash flow was RMB55 billion, or US$8 billion, up 50% year-on-year.

As at year-end, our net cash position was about RMB18.1 billion, down 5% year-on-year and up 117% quarter-on-quarter.

The substantial increase mainly reflected approximately RMB7.8 billion.

The fair market value of our listed associates and available for sales financial as at were approximately RMB89 billion.