Tencent Holdings Limited

Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2023 Third Quarter Results Announcement Webinar. I'm Wendy Huang from Tencent IR team. At this time, all participants are in a listen-only mode. After the 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 five on your telephone to raise your hand. If you are accessing from the Tencent meeting or Vue 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 a presentation, we would like to remind you that it includes four looking statements, which are underlined by a number of risks and uncertainties, and it may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of reasons 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. Let me now 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, thank you everyone for joining us. During the third quarter of 2023, we achieved a solid and high quality revenue growth, notable margin expansion and structural operating leverage. Relatively new services such as video accounts and mini games contribute high margin revenue streams while we leave focuses away from less scalable activities. We are increasing investment in our AI models, providing new features to our products and enhancing our targeting capabilities for both content and advertising. We aspire to position our leading AI capability not only as a growth multiplier for ourselves, but also as a value provider to our enterprise customers. and the society at large. Now let me go through the headline financial for the third quarter. Total revenue was 155 billion RMB up 10% year on year and 4% quarter on quarter. Gross profit was 77 billion RMB up 23% year-on-year and 8% quarter-and-quarter. Non IFRS operating profit was 56 billion RMB up 36% year-on-year and 11% quarter-and-quarter. Non IFRS net profit attributable to equity holders was 45 billion RMB up 39% year-on-year and 20% quarter-and-quarter. Turning to our key services, for communication and social networks, combined MAU of WeChat and WeChat grew both year-on-year and quarter-on-quarter to 1.3 billion. For games, we reinforced our leadership in competitive multiplayer games while investing to develop future hits in content-driven and casual games. For cloud, we upgrade the size and capabilities of our proprietary foundation model, Tencent Hunyuan. We are making Hunyuan available on a limited basis to the public and to customers, and deploying Hunyuan in Tencent Meeting and Tencent Docs. I will now hand over to Martin for strategic review.

Thank you, Pony, and good evening, everybody. In the past few years, the internet industry in China has gone through structural challenges leading to strategic changes. A major strategic change is a shift away from seeking to maximize revenue at all costs toward delivering high quality and sustainable growth. Today, I would like to share with you the progress we have made toward high-quality revenue streams and how this shift is translating into improved operating leverage and strategic position. To start with, let me walk you through the evolution of our WayShin platform and how it continues to improve its position by enhancing its value to users. The original Weixin experience was messaging, and the franchise is stronger than ever, as messaging remains the highest daily user frequency service in China. Weixin chat, DAU, and daily messages sent per user are consistently increasing. driven by the evergreen need for communications among friends, family members, and colleagues. Meanwhile, WeishenChat meets social networking needs through group functionalities and moments, and also enables new forms of connections, such as customer support services. Subsequently, we supplemented messaging with open platforms, which connect users with a range of external services. These include official accounts, which enable brands and content creators to reach their followers with text and image content, and mini programs, which allow users to transact with merchants and service providers offline and online. Each day, several hundred million unique user visits and interact with over a million unique mini programs. Mini programs facilitated over 1.5 trillion RMB of GMV in the third quarter. Merchants and service providers developing and managing their own mini programs provides growth and innovation for our ecosystem. Mini games, which is a successful vertical use case for mini programs, has become the largest casual game community in China. We monetize these open platforms primarily through payment tick rates and a very light advertising load, resulting in a wide gap between the value we deliver to participants versus the revenue we generate ourselves. More recently, Weixin launched Video Accounts, which is a major new addition to the Weixin ecosystem. Video accounts are growing usage fast, and that usage is incremental to our messaging and open platform time spent, uplifting Weixin's overall time spent. Video accounts also differ from chat and open platforms in that they enable us to participate in high margin monetization activities, such as in-feed advertising and e-commerce technology service fees. Going into Weixin's new services monetization a bit more, our newest services in Weixin are generating revenues at higher incremental margins than our company average, specifically for video accounts. Monetization generates high incremental margins because, first, we're already incurring video accounts platform costs during the build-up phase prior to monetization. Second, Once video accounts attain critical mass, our developers can start streamlining operating costs such as bandwidth, servers, and content costs. Consequently, video accounts advertising revenue is high margin and offers a long runway for growth ahead, given increasing video views, low ad load compared to peers, and continued deployment of AI technology to enhance ad click-through rates. Video accounts, e-commerce technology service fees, which we book on a net basis are also high margins in nature for similar reasons. Additionally, we're cultivating more high quality revenue stream opportunities within Weixin. For example, Minigames, which we discussed last quarter at quite a bit of length, contribute platform fees and advertising revenues to Tencent. From a reporting perspective, we also book platform fees on an app basis, such that minigames revenue carries higher margins than app-based games. And for WayShin Search, the increasing volume of transactions within WayShin is driving rapid growth in our commercial query volume and marketing search keywords on our own existing traffic generates high margin inherently. As a result, we believe we have moved into a high quality revenue growth model. Under this model, we can now deliver greater operating leverage than in the past. Prior to 2021, our gross and operating profit typically grew at similar or slower rates versus our revenue. while in 2021 and 22, slowing revenue growth translated into even slower profit growth or in some certain quarters, profit declines. However, entering 2023, solid revenue growth rates have translated into substantially faster growth and operating profit growth rates. There are three drivers in this significant change, two sustainable ones colored in blue on the right, and one one-time driver colored in gray. The biggest driver of this change, which we view as structural in nature, is a positive revenue mix shift. i.e. the growth of new high-quality revenue streams and the scale back of certain low-quality activities. This positive mix shift is the primary reason for gross profit growth exceeding revenue growth. A second driver, which we view as less recurring, is that we optimize costs by exiting certain non-core business and cut back excessive spending on operations, subsidies, and marketing activities during the tough time. This driver helps explain why operating profit growth has succeeded gross profit growth, partly, and we view it as a lever for pulling at certain times, but not at all times. The third driver, which we view as ongoing, is our heightened focus on cost discipline. We're seeking to continuously improve operational efficiency, thoughtfully allocate headcount, and effectively manage marketing expenses so as to maintain a focused organization and lean cost structure for the future. Lastly, I will also share with you how we think about our position in the games market. We maintain a strong and defensible franchise in competitive multiplayer games due to the ongoing popularity and performance of our flagship evergreen games such as Honor of Kings, League of Legends and Peacekeeper Elite. but we also supplement our success by cultivating new competitive multiplayer games, such as Fights of Golden Spatula, Arena Breakout, and Valorant, which have the potential of becoming evergreen titles in the future. Looking across the market, we've seen increased interest in casual games and renewed excitement around content-driven games. These trends have not negatively impacted our competitive multiplayer games in terms of audience and monetization. But on the other hand, we see these as new opportunities for us to capture, and we are investing to benefit from these trends. For content-driven games, we have attained some success including Naruto Mobile, Lost Ark, and Decay, but we aspire to create even bigger hits in the future. For casual games, we already operate the largest casual game platform in the model of minigames. We are also seeking to operate blockbuster app-based casual games with user-generated content capabilities. Looking forward, we have a substantial pipeline of new games in development, including games that expand our own game IPs, such as Honor of King World, Valorant Mobile, and Delta Force. mobile games that utilize well-loved licensed IPs, such as Monster Hunter Mobile, Assassin's Creed Mobile, and One Piece Mobile, and new games with new IPs in high-potential genres, such as Dream Stars in casual games, Nightingale in survival open-world crafting, and Ash Echoes in RPGs. We're taking more time than before in developing these games because we want to ensure the quality of these games and because our improved financial structure described in the previous slides offer us the ability to do so. Now with that, I will pass to James to talk about business review.