Tencent Holdings Limited

Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2022 second quarter results announcement webinar. I'm Wendy Huang from Tencent IR team. At this time, all participants are in a listen-only mode. After management's presentation, there will be a question and answer session. For participants who dial in by phone, if you wish to ask a question... Please press 5 on your telephone to raise your hand. If you are accessing from the Tencent Meeting or VU Meeting application, please click the Raise Hand button at the bottom left. And please be advised that today's webinar is being recorded. 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 group's financial performance propelled in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IR section of our website. Now, let me introduce the management team on the webinar tonight. Our chairman and CEO, Pony Ma, will kick off with a short overview. President Martin Lau will discuss strategy review. Chief Strategy Officer James Mitchell will provide a business review. Chief Financial Officer John Lowe will conclude with financial discussion. Before we open the floor for questions, I will now pass it to Pony.

Thank you, Wendy. Good evening. Thanks, everyone, for joining us. During the second quarter, we actually exit non-core businesses, tightening our marketing spending and changing the operating expenses. This enabled us to sequentially increase our earnings despite difficult revenue conditions. Total revenue was 134 billion RMB, down 3% year-on-year and 1% quarter-on-quarter. Gross profit was 58 billion RMB, down 8% year-on-year, but up 1% quarter-to-quarter. Non-IFRS operating profit was 37 billion RMB, down 14% year-on-year, but up 0.4% quarter-to-quarter. Non-IFRS net profit attributable to equity holders was 28 billion RMB, down 17% year-on-year, but up 10% quarter-and-quarter. For our key services, we generally became our first-place positions in activities, including social, games, long-form video, news, music, literature, payment, and mobile browsers. Combined MAU of WeChat was 1.3 billion. Mobile devices MAU of QQ was 569 million. Before I hand over to Martin, I would like to welcome Professor Zhang Xiulan as a new director and a member of corporate governance committee. Broadening our board's independence, gender diversity and areas of expertise. With that, I hand over to Martin for strategy review.

Thank you, Pony, and good evening and good morning to everybody. The Internet industry in China has really faced significant changes and challenges since early 2021. And as a result, our revenue conditions have become difficult and financial performance was under pressure over the last few quarters. When we announced our results for the fourth quarter of 2021 in March, we laid out our strategic plan to proactively embrace changes and reposition our businesses to align with the new industry paradigm. So today in this section, I would like to share with you the encouraging progress that we've made so far. To start with, let me walk you through efficiency initiatives that we have implemented that reduced our costs and are stabilizing our earnings. First of all, we closed down certain non-core or redundant businesses in areas such as online education, e-commerce, and game live streaming. Second, we rationalized underperforming businesses, including loss-making digital content services and subscale social media products. Third, we tightened our control measures for marketing programs and cut down spending with low return on investments, especially in the area of user acquisition. As a result, we reduced our selling and marketing expenses for the second quarter significantly by 21% year-on-year. Fourth, we migrated all domestic in-house services to Tencent Cloud for higher productivity and enhanced cost efficiency. Fifth, we controlled our headcount by optimizing our workforce and controlled growth in staff costs. At the end of the second quarter, our total headcount was down by over 5,000 sequentially. While our second quarter results reflected the initial cost savings from these efficiency initiatives, we expect to benefit more from them in the coming quarters. So in addition to the aforesaid efficiency initiatives that help us stabilizing earnings, we have been and will be implementing additional efficiency initiatives at business level to support our earnings recovery, even while the microenvironment remains challenging. For cloud services, We have been scaling back loss-making activities and shifting focus from customization and subcontracting heavy projects to more rapidly growing out internally developed products, driving margin improvements. For commercial payment, we're proactively managing our funding channels to lower our unit transaction costs. And we're targeting our development and operational efforts on higher value services, such as industry-specific use cases, which will enhance our unit economics and margins. For long-form video, we are introducing more discipline in our content spending and putting a strong focus on return on investments. We're reducing discounts on Tencent Video subscriptions, which has the effect of raising our effective video output. For video accounts, with our ecosystem reaching a virtual cycle stage of critical mass, where more viewers attract more content creators and vice versa, we can reduce our content procurement spendings. and with the product reaching scale, we can also devote our engineering resource to optimize bandwidth and service utilization associated with the service, bringing down our unit costs per video view. So in addition to the last two stages, if you will, We have also been developing new and high-quality revenue streams that will drive earnings growth in this period. Today, I will discuss the most immediate of these revenue initiatives, and that is advertising within video accounts. Video accounts has become one of the most popular short video services in China with substantial user engagement. In the second quarter, its total time spent exceeded 80% of moments level. Its total video views increased robustly by over 200% year-on-year. In addition, several features of the Weixin ecosystem amplify the effectiveness of video accounts ads for advertisers, Firstly, we provide transactional functionalities within Weixin, such as mini programs where advertisers can create powerful landing pages and facilitate transactions, and WeCom, where advertised salespeople can interact with interested consumers. So advertisers can drive sales and leads conversion seamlessly within the Weixin ecosystem. Secondly, the range of interactions with our users enable us to help advertisers better target their audiences. And thirdly, our social graph enables advertisers to reach a broad audience base and build deep user engagement. We believe that video accounts infeed ads represent a very significant value creation opportunity for us because strategically they allow us to expand our ad market share. As advertisers have already been spending aggressively on multiple short-form video platforms, we should be able to capture more advertising budgets. And financially, they layer a new revenue stream with high incremental margin onto our existing cost base. In terms of schedule, we launched in-feed ads in mid-July, initially selling the ads on a contract basis. And we will be making additional inventory available on a bidding basis by the end of August. Our monetization framework for video accounts ads is similar to that of wasting moments in terms of a progressive climb over time. For your reference, Wayshawn Moments took five quarters to reach 1 billion RMB in quarterly ad revenue. We expect to surpass that level more quickly with video accounts, given the current size of traffic and already strong advertiser demand for short-form video ads. Video accounts will eventually grow into a substantial revenue source for us over time. Before closing my strategy review section, I would like to share with you how we are positioned to enhance and broaden our revenue growth when the macro environment improves. On top of driving a near-term earnings bottoming out, as well as recovery through efficiency and revenue initiatives that I just talked about. Firstly, we believe that the regulatory environment in China is progressing from rectification to normalization gradually, which should bode well for the industry over time. Specifically, the platform economy, we saw recent regulatory direction trending more positive and supportive, supporting well-regulated, healthy, and sustainable development of industry. For games, we believe the issuance of new banhao should help the overall industry renew growth over time. We expect to receive banhao in the future, which should benefit our domestic game business. Secondly, several of our businesses were adversely affected by COVID-19 resurgence and economic deceleration, but are significantly geared toward a future economic upturn. Approximately half of our revenues are from activities that closely contribute to and benefit from China's economic activity in the form of FBS and advertising. As an example, our commercial payment volume slowed to low single-digit growth in April as major cities locked down, but recovered to high teens growth in June. For advertising business, the revenue decline rate stabilized in the second quarter before the benefit of launching video accounts in feed ads and under the current macro environment. So in conclusion, we remain confident about our resilience in navigating through challenges and our ability to capture opportunities when they arise. Now with that, I'll pass to James to talk about the business review.