Tencent Holdings Limited

Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2025 Fourth 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 rule 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 in a non-IFRS measures, please refer to our disclosure documents on the IR section of our websites. 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 provide a strategy review. Chief Strategy Officer James Mitchell will provide a business review and Chief Financial Officer John Lau will conclude a 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. In 2025, we achieved high-quality growth through our evergreen products and services, increasingly supported by applying AI capabilities. We expanded our evergreen game portfolio with the breakout success of Delta Force and re-enforced our existing evergreen games such as Honor of Kings and Peacekeeper Elite. AI contributes meaningfully to game content development, user engagement, and marketing efficiency. Video accounts total time spent increase over 20% on upgrade the recommendation algorithm and enrich content ecosystem. Our marketing services revenue growth outperforms the industry. Starting from our upgraded ad tech model and newly introduced automatic campaign solution, AI Marketing Plus. For FinTech, we sustained healthy revenue growth by deepening cooperation with the licensed financial institutions while maintaining a prudent risk management. In cloud, we achieved profit at scale due to increase the enterprise demand for our industry leading test and SaaS products and supply chain optimization. Internationally, our international games business surpassed 10 billion US dollars in annual revenue for the first time. Driven by sustained growth of evergreen games and rapid expansion of content-driven games, Our cloud revenue accelerated in international market as we expand partnership with key clients and drove a higher adoption of our flagship cloud product. The robust operating leverage and cash flow generated by our core businesses enable us to set up investment in AI. During the year, we upgrade our team with top tier AI talent and build processes for improving foundation model intelligence in a systematic way. We began deploy new AI capabilities in services, including Yuanbao and Weixin and core type products. Looking at our financial numbers for the first quarter, total revenue was 194 million RMB, up 13% year-on-year. Gross profit was 108 billion RMB, up 19% year-on-year. Non-IFRS operating profit was 70 billion RMB, up 17% year-on-year. And non-IFRS debt profit attributable to equity holders was 65 billion RMB, up 17% year-on-year. Now I will hand over to Martin.

Thank you, Pony, and good. Evening and good morning to everybody on the call. I will share with you in this coming section on how we think about AI as a transformational force, starting with how resilient our existing businesses are in the context of AI, moving on to how we are deploying AI in our existing businesses to strengthen them, then discussing brand new products and opportunities made possible by AI and how we are investing in order to capture them. So first of all, I would like to talk about our key franchises are very resilient in the age of AI. As we know, AI will affect every part of the technology industry, but some products and services are inherently more resilient than others. will believe that some of the characteristics of resilience would include network effects arising from consumer to consumer, consumer to content creator, and consumer to business interactions in descending order of strength. That's number one. Number two, deep supply chain integration linking the worlds of bits with the world of atoms. Number three, stringent regulatory and licensing requirements. Number four, scarce or unique resources, including physical and intellectual properties. Number five, tick rates that are low compared to value provider or cost of switching. And number six, private data that is closed and interactive in nature. Using these criteria, then we look across our major existing businesses. Our conclusion, which is supported by usage trends, is that each one of them has got a high degree of inherent resistance. In particular, for our communication services, including Weixin, QQ, and Tencent Meeting, people use them to connect and interact with other people, largely their families, friends, and colleagues, and business partners. We believe this need for human interaction, together with the network effects and closed nature of the data arising from these interactions, have resulted in communication services being extremely sticky. in the face of competing non-AI services in the past and will continue to be resilient versus AI-based services in the future. Then moving on to our games, They are also very resilient as our multiplayer games, especially PVP games, also enjoy network effects. And similar to sports, they are team-based in nature and players play with and against other players. And just as people prefer to participate themselves or watch the teams they support compete in sports rather than watching AI sports, game players continue to enjoy the interaction with other humans that our games provide. Our games also cultivate strong IPs. While AI will enable more games to be made faster, the game industry is already in a position of access supply with 200,000 new games on mobile and 18,000 new games released on Steam every year. The limiting factor is that new games need to be high quality and more innovative than the best existing games, which in turn requires human creativity on top of cutting edge technology. Game is a natural beneficiary of AI proliferation. Also, when people have more time at hand. Our FinTech services is also resilient as it depends on difficult to secure and retain licenses, which are limited in nature, and also set the boundary on how innovations can be introduced in an industry. We've also invested decades building a payment network of difficult to replicate rails into partner banks, merchants, and connecting them with more than a billion consumers, which brings its own network effects. And our mobile payment tick rates are already among the lowest in the world, which we believe makes competing with us on price highly economical. Then we want to demonstrate that we are a leader in strengthening our core businesses with AI. When generative AI first emerged, we prioritized leveraging AI to reinforce our core businesses on the view that if we can strengthen them, we will be in a better position to invest in new products made possible by AI. And we believe that in each of our core businesses, we are now at the forefront of their respective industries in China and often globally in utilizing AI with positive initial results demonstrated by user engagement and revenue trends. In games, we are deploying generative AI to accelerate in-game content production. enabling us to produce more content within our big games. We're using generative AI to facilitate new user acquisition and existing user retention through measures such as targeted ads and personalized daily highlight reels. We're enriching the core gameplay experience with AI features such as virtual teammates in PVP games and realistic non-player characters in PVE games. These initiatives are one reason why Tencent's games are more and more evergreen and our revenue growth of 22% in 2025 outperformed the 7% growth of the global games industry. For marketing services, we scaled up our advertising foundation model to provide more relevant ads to more targeted users. boosting ad conversions for advertisers and providing better user experiences at the same time. We provide generative AI powered ad creative solutions, enabling advertisers to create more ads, which are more relevant to smaller set of users and more efficiently. We introduced our automated ad campaign solution, AimPlus, under which advertisers can automate targeting, bidding, and placement, improving their return on marketing investments, and increasing their budget allocation to us. These initiatives contributed substantially to Tencent's marketing services' revenue growth of 19% in 2025, outstripping the overall China ad industry growth of 14%. For video accounts, deploying a longer sequence AI model which captures more of a user's signals to enhance content recommendation is boosting user growth, engagement, and content distribution. Total time spent on video accounts increased more than 20% in 2025, and video accounts is now the second largest short video service by DAU in China. For digital contents, we utilize AI in content production, improving production workflow efficiency, and providing visually compelling special effects. AI also helps in content distribution through more intelligent content recommendations across music videos and literature. We're using AI in enterprise software to provide features such as AI agents that can take notes on and summarize concurrent meetings for users and AI agents that generate intelligent summaries of customer service history for merchants. Our enterprise software products, WeCom and Tencent Meeting are leaders in their categories in China in terms of usage and revenue. For FinTech, we utilize lightweight AI models to enhance credit scoring processes and facilitate fraud detection, contributing to us sustaining better than industry non-performing loan rates. Now that our core businesses are benefiting operationally and financially from integrating AI, we believe we are in a position of strength to add development of new AI products to our priorities. At the foundation model layer, we see substantial opportunities from combining a strong foundation model with configuration for core user cases, such as chatbot, coding, multimodal and agentic applications. Although we're not the first mover in large language models, having already revamped our team, improved our data quality and rebuild our AI infrastructure for pre-training and reinforcement learning. We're now iterating more intelligent models at a faster pace. Huan Yuan 3.0 is in internal testing and currently represents a bigger step in capabilities versus Huan Yuan 2.0. Then 2.0 was versus 1.0. For multimodal capabilities, our 3D text-to-image and word models are early category leaders and will increasingly benefit from leveraging our proprietary data and abundant use cases. Some observers in China Tech are single-mindedly focused on AI chatbots as the only means for bringing AI to users. We believe this mindset is overly simplistic because AI can help people in a multitude of ways beyond powering an information advice app. We believe that AI chatbot applications are largely competing with search applications rather than with every other application. For Yuanbao, our own AI chatbot app, we're focused on finding product market fit and use cases which belong in chatbot AI app. We're rapidly iterating Yuanbao to enhance its user experience by providing better search integration, improved speech recognition, easier access to multimodal capabilities, and exploration around group chat, which we believe will increase usage and user retention. of the app. In the coming months, as we deploy Huan Yuan 3.0 in Yuanbao, we believe the core user experience will step up further. In addition, we have also integrated AI to enhance a range of existing user experiences within Weixin, including content consumption, information retrieval, and merchandise recommendation and customer service. We're building AI agents, which autonomously interact on behalf of users within Weixin functionalities, especially mini programs. The excitement around claw bots illustrates that people recognize AI can unlock computer use capabilities to improve their daily lives, but also illustrate the risks around unleashing unsupervised AI. We want AI agents in Weixin to deliver AI productivity that's beneficial to the general public, as well as early adopters, and which will boost ecosystem activity and naturally generate revenue. AI agents are currently powered by a multiplicity of foundation models, and we expect that users at the application level will continue to have access to range models. However, improving the performance of Huanyuan will enable us to offer new, unique to Weixin agent capabilities. So the Weixin and Huanyuan teams will work increasingly closely together going forward. Speaking of claw bots, we have introduced a number of AI tools for enhancing productivity, including WorkBuddy, QClaw, and Tencent Cloud Lighthouse. And we provide downloadable skills to easily put these tools to use from our skill hub. CloudBots are upgrading AI from thinking to doing via autonomous workflows and continuous task execution. Users control this new generation of AI tools through command line interfaces in their existing communication apps, which generally means Weixin and QQ in China is the efficient for users to interact with digital agents in a place and format where they are already interacting with human contacts. The new AI products that I described above require substantial and increasing investment, which we believe will generate significant return for us over the long run. Our spending on our two biggest new AI products, Huanyuan and Yuanbao, was 7 billion RMB in the fourth quarter of 2025 and 18 billion RMB for the full year. These figures are only for Huanyuan and Yuanbao and exclude AI initiatives supporting our existing products and services, as well as exclude costs arising from providing GPUs to external customers via Tencent Cloud. We expect to more than double these investments in Huanyuan, Yuanbao and other new AI products in 2026, which we intend to fund from increasing earnings from our core businesses. In this transformational period, We are breaking out our investment in new AI products because we view these strategic investment conceptually similar to investment in affiliates or to CapEx. These are upfront investments required to build the necessary foundation to unlock new value as opposed to ongoing operating expenses. As such, we believe the impact of these investments should be viewed separately from the profits generated by our existing businesses. Over time, we're confident that monetization will follow usage for these new AI products. Lastly, I would like to present a case study on Tencent Cloud as the latest example on how we develop our services into market leaders with economic returns over time. And that would follow games, payments and long form video. And we expect it will be the same for our new AI products. Tencent Cloud was a relative late entrant in cloud services. However, we committed to a patient and long-term investment strategy, believing that it had scale from the start due to Tencent itself being the biggest single end user for a range of technology infrastructure in China, and that it could provide differentiated services arising from Tencent's unique insights, ecosystem, and capabilities. For example, we believe that we were the first cloud service provider in China to fully recognize the stepped up capabilities of AMD's recent generations of CPUs, becoming AMD's largest partner in the country, and that our cloud video streaming service is the industry leader in terms of streaming quality. After a period where Tencent Cloud prioritized the revenue growth somewhat misguided by other industry participants, in 2022, we aggressively restructured Tencent Cloud to focus on high quality services rather than chasing high revenue, but low value added activities such as reselling and customizing projects. This pivot cost us several quarters of revenue growth, but it enabled Tencent Cloud to achieve operating profit, break even in 2024, up from significant losses in prior years. During 2025, although Tencent Cloud continued to face revenue headwinds due to limited availability of GPU for external customers, as we prioritize our internal needs, it grew revenue and sharply improved earnings, achieving 5 billion RMB adjusted operating profit. In recent months, we're seeing a better pricing environment, especially for memory and CPU, which, along with robust AI demand and overseas expansion, are allowing Tencent Cloud to grow revenue at a faster rate. Moving through the year, we have ordered a substantially higher volume of compute, which should also facilitate revenue growth. Overall, we think Tencent Cloud is becoming another example of how Tencent competes on our own terms and pace and how our incubation investment cycle works. We view the initial losses in Tencent Cloud as a fixed sum of cash investment necessary to incubate a successful new business, but ultimately generating good economic returns. And we view the initial investment in new AI products, codenamed NAP, in the same way. With that, let me pass to James.