Tencent Hldgs Unsp/Adr

Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2024 First 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 group 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 includes four looping 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 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 the 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 Mao, will kick off with a short overview. President Martin Lau and 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 first quarter of 2024, several of our leading games in China and internationally started to benefit from the team organization we put in place, resulting in an increase in game growth receipts and creating a foundation for our games revenue to resume growth in future quarters. We continue to cultivate high-quality revenue streams, including advertising in video accounts and reaching search, mini games, platform service fees, and e-commerce technology service fees, contributing to our growth and operating profit growth, outpacing our revenue growth. Executing on our commitment to return access capital to shareholders, we stepped up our buyback plan and are on track to repurchase over 100 billion Hong Kong dollars of our shares in 2024, as well as paying an increased dividend while investing in AI technology, platform enhancements, and high production value content. Looking at our financial numbers for the quarter, total revenue was 160 billion RMB, up 6% year-on-year and 3% quarter-on-quarter. Gross profit was 84 billion RMB, up 23% year-on-year and 8% quarter-on-quarter. Non-IFRS operating profit was 59 billion RMB, up 30% year-on-year and 19% quarter-on-quarter. Non-IFRS net profit attributable to applicant holders was 50 billion RMB, up 54% year-on-year and 18% quarter-on-quarter. Turning to our key services for communication and social networks, combined MAU of WeChat and WeChat Group year-on-year and quarter-on-quarter to 1.36 billion. For digital content, we reinforced our leadership in long-form video and music streaming, as Tencent Video and TME subscriptions grew year-on-year. For games, we made proactive adjustments, driving initial recovery for our flagship games in China and international markets, while several games in our portfolio achieved record highs in gross receipts during the quarter. For cloud, international and domestic clients from media, entertainment, and live streaming industries increasingly use Tencent Cloud Media Services. Our enterprise SaaS products, Wecom and Tencent Meeting, add Hunyuan-powered functionalities and increase their adoption by enterprise customers. I will now hand over to Ma Jin for business review.

Thank you, Tony. Good evening and good morning to everybody. For the first quarter of 2024, our total revenue was up 6% year on year. That represented 49% of our total revenue, within which social networks subsegment was 19%, domestic games subsegment was 22%, and international games was 8%. Online advertising was 17% of total revenue and FinTech and business services was 33% of total revenue. Our overall gross profit growth, which we consider as a key proxy for our organic growth was 23% year on year in the first quarter, faster than first half of 2021 when our revenue growth rates were much higher. This was driven by the rapid growth of high margin revenue streams, including video accounts and vision search advertising, wealth management services, mini games, platform service fees, and e-commerce technology service fees. Improved cost efficiency in our long form video and cloud businesses also contributed to higher gross profit. By segment, VAS gross profit increased 5% year-on-year to 45 billion RMB, representing 54% of our total gross profit. Online advertising gross profit increased 66% year-on-year to 15 billion RMB, contributing 17% of total gross profit. And fintech and business services gross profit increased 42% year-on-year to 24 billion RMB, contributing 28% of total gross profit. For value-added services, segment revenue was 79 billion RMB, down 1% year-on-year. Social networks revenue was down 2% year-on-year to 31 billion RMB. revenue from music subscriptions, video accounts live streaming, mini games, and video subscriptions increased, while revenue from music and games related to live streaming services declined sharply. Long-form video subscription revenue increased 12% year-on-year. Average daily video subscriptions increased 8% year-on-year to 116 million, benefiting from popular self-commissioned drama series and animated series such as Blossom Shanghai, The Hunter, and Perfect World Season 4. Music subscription revenue increased 39% year-on-year, reflecting growth in subscriptions in April. TME strengthened collaboration with Tencent Video and released the original soundtrack of a popular drama series, The Legend of Shen Li. Domestic games revenue was down 2% year on year to 35 billion RMB. increased revenue from Valorant, fight up the Golden Spatula and Lost Ark was offset by decreased revenue from Honor of Kings and Peacekeeper Elite. As Honor of Kings faced a tough comparison against Chinese New Year of 2023 and Peacekeeper Elite revenue in the quarter reflected weak monetizable content releases in recent quarters. However, total gross receipts of domestic games in the first quarter increased 3% year-on-year, showing a general recovery trend. International games revenue increased 3% year-on-year to 14 billion RMB, or stable in constant currency terms. On the other hand, gross receipts increased by 34% year-on-year, driven by PUBG Mobile and Supercell Games contributions. The growth rate of revenue lagged behind gross receipts due to long deferral periods for supercells games. Moving on to communications and social networks. For Weixin, users are increasingly supplementing their stable consumption of social graph supplied content in chat and moments with consumption of algorithmically recommended content in official accounts and video accounts. and engagement with mini programs diverse range of services. This trend benefits from our heavy investment in AI, which makes the recommendation better and better over time. For official accounts, which enable creators to share text and images on chosen topics with interested followers, It achieved healthy year-on-year page view growth as AI-powered recommendation algorithms allow us to provide targeted high-quality content more effectively. Many programs have become an increasingly powerful platform for merchants and content providers to engage users online and offline. total user time spent on mini programs grew over 20% year on year in the first quarter. Among non-game use cases, daily activations increased at double digit rates year on year, particularly in the productivity tools, dining services and transportation. For mini games, gross receipts increased 30% year on year with notable growth from new releases, as well as games released for over three years. Video accounts user time spent grew 80% year on year in the first quarter. Time spent on video accounts is now over two times that of moments. We also strengthened our live streaming e-commerce ecosystem by diversifying merchandise categories and enabling more content creators to monetize through e-commerce activities. Now with that, I'll pass to James.

Thank you, Martin. Moving on to domestic games, for our two flagship games, we highlighted last quarter proactive adjustments we made, including spreading out the timing of high-value virtual item sales through the year and enhancing content design. While their revenues declined in the first quarter, we can see these adjustments are starting to yield results, with gross receipts for each of Honor of Kings and Peacekeeper Elite increasing year-on-year in March. Several of our other games achieved notable milestones during the first quarter. Fight of the Golden Spatula delivered record DAU and ranked third by gross receipts across all mobile games in China during the quarter, driven by popular content updates, including new chibi champions and a customizable arena. Crossfire Mobile achieved all-time highs in paying users and gross receipts this quarter, benefiting from new PBE content and an enhanced reward system. and Arena Breakout achieved new milestones in DAU, paying users and gross receipts as we released an enlarged map with vehicles and introduced armor and weapons inspired by ancient Chinese culture. We aim to release several high-production value games this year, including DNF Mobile next week, Taris Land, Need for Speed Mobile, One Piece Mobile, and Delta Force Hawk Operations. Among our international games, PUBG Mobile increased DAU and gross receipts by double-digit percentage rates year on year in the first quarter, benefiting from popular new modes and featured events, such as the Shadow Force mode and Golden Moon event. Notably, PUBG Mobile is evolving from a game product into a game platform, with increasing user time spent on new modes beyond the original Battle Royale, notably the extraction shooter mode Metro Royale. Brawl Stars averaged DAU more than doubled year on year and grossed receipts more than quadrupled year on year in the first quarter. The game ranked the third highest mobile game by DAU globally ex-China in March. Supercell expanded Brawl Stars development team, enabling the creation of a new five versus five mode, a simplified reward system and successful community events. Warframe achieved record high gross receipts in the first quarter with the introduction of a new faster moving Warframe, the Gauss Prime. For online advertising, our revenue was 26.5 billion renminbi in the quarter, up 26% year-on-year, benefiting from increased engagement and AI-powered ad targeting. Ad spend from all major categories except automotive increased year-on-year, particularly from games, internet services, and consumer goods sectors. During the quarter, we upgraded our ad tech platform to help advertisers manage ad campaigns more effectively, and we made generative AI-powered ad creation tools available to all advertisers. These initiatives enable advertisers to create ads more efficiently and to deliver better targeting. For Weixin, video accounts ad revenue grew over 100% year-on-year due to higher video views and click-through rates. Mini programs ad revenue grew over 40% year-on-year, benefiting among other features from minigames' closed-loop effect, whereby minigame developers both boost demand, being substantial advertisers themselves, but also create supply as the minigames provide high CPM rewarded video ad inventory. On content platforms, our long-form video ad revenue increased at a double-digit rate year-on-year as popular self-commissioned drama series attracted marketing budgets. Looking at FinTech and business services, segment revenue was 52 billion RMB, up 7% year-on-year. FinTech services revenue slowed to a single-digit year-on-year growth rate. For payments, commercial payment growth moderated due to slow offline consumption spending. Withdrawal fee revenue decreased year on year as consumers are increasingly funding commercial transactions with their wishing cash balances and placing these cash balances in money market funds rather than withdrawing the cash balances to bank accounts, which triggers the withdrawal fee revenue. For wealth management, revenue grew robustly year on year, with rapid increases in the number of users and average fund investments per user, primarily invested in low-risk money market funds. Turning to business services, revenue grew at a teens rate year on year in the first quarter, benefiting from higher cloud services revenue and increased technology service fee contribution due to rising video accounts e-commerce transactions. Business services gross profit more than doubled year-on-year due to increased contributions from higher margin revenue streams plus improved efficiency. Domestic and international clients, especially from the media, entertainment, and live streaming industries, are increasingly adopting our integrated audio and video cloud solution called Tencent Cloud Media Services, which achieved over 50% year-on-year revenue growth. IDC recognized Tencent Cloud Media Services as the market leader in its sector for the sixth consecutive year. Among our enterprise SaaS products, in WeCom, merchants are increasingly willing to pay for use of customer communication functionality. As a result, WeCom revenue tripled year on year. For Tencent Meeting, we're driving adoption and upselling among enterprise clients, and Tencent Meeting revenue doubled year on year. And for Hunyuan, the main model achieved significant progress as we've scaled up using the mixture of experts approach, and we're deploying Hunyuan in more of our services. Today, we announced that we're making a version of Hunyuan providing text-to-image generative AI available on an open source basis. And with that, I'll pass to John.

Thank you, James. Hi, everybody. For the first quarter of 2024, total revenue was R159.5 billion, up 6% year-on-year. Gross profit was R83.9 billion, up 23% year-on-year. Operating profit was 32.6 billion RMB, up 38% year-on-year. Interest income was 4.2 billion RMB, up 43% year-on-year, driven by growth in cash reserves and high interest yields. Finance costs were 2.8 billion RMB, up 7% year-on-year, due to higher interest expenses. Share of profit of associates and JVs was 2.2 billion RMB, up from profit of 0.1 billion RMB in the same period last year. On a non-IFRS basis, share of profit was 5.5 billion RMB versus loss of 0.1 billion RMB last year, driven by better profitability at certain domestic associates and reduced losses at certain overseas associates. Income tax expense rose by 24% year-on-year to 14.1 billion RMB, primarily driven by operating profit growth and higher provision for withholding tax. IFRS net profit attributable to equity holders was 41.9 billion RMB, up 62% year-on-year. Diluted EPS was 4.386 RMB, up 66% year-on-year. On non-IFRS financial figures, Operating profit was 58.6 billion RMB, up 30% year-on-year. Net profit attributable to equity holders was 50.3 billion RMB, up 54% year-on-year. The difference in year-on-year growth rates between operating profit and net profit was mainly due to non-IFRS share of profit from associates and JVs, which amounted to 5.5 billion RMB this quarter, compared to share of loss of 0.1 billion RMB in the same quarter last year. diluted EPS was 5.263 renminbi, up 57% year-on-year, outpacing non-Ivirus net profit growth, mainly due to reduced share count from share buybacks. For the first quarter of 2024, our weighted average number of shares for calculating diluted EPS decreased by 1.8% year-on-year. Moving on to gross margins. Overall gross margin was 53%, up 7 percentage points year-on-year. By segment, vast gross margin was 57%, up 3 percentage points year-on-year. This was due to growth in subscription revenues and increase in high margin mini game platform service fees and seven content cost and operating cost savings. Online advertising gross margin increased to 55% up 13% in 2020 on year, primarily driven by growth in our video accounts and Weixin Search advertising revenues. FinTech and business services gross margin increased to 46%, up 11 percentage points year-on-year. This was driven by higher contribution from high-margin wealth management services revenue and e-commerce technology service fee, improved monetization of Wecar and other business services, and increased cost efficiency in our businesses. of first quarter operating expenses. Selling and marketing expenses were 7.5 billion renminbi, up 7% year on year, driven by increased spending on promotion and advertising for new content release. The total represented 5% of revenues stable year on year. R&D expenses were 15.7 billion renminbi, up 3% year on year. G&A expenses excluding IMB were 9.1 billion RMB, down 3% year-on-year due to lower staff costs, including share-based compensation expenses and reduced operating lease and office expenses. At quarter-end, we had approximately 105,000 employees, down 1% both year-on-year and quarter-to-quarter. Let's look at our first quarter on IFRS margin ratios. The non-IA virus operating margin was 37% up 7 percentage points year on year. The non-IA virus net margin was 32% up 10 percentage points year on year. To conclude, I will highlight some key cash flow and balance sheet metrics. Operating CapEx was 6.6 billion RMB, up 557% year-on-year from a low base quarter last year, mainly driven by investment in GPUs and servers to support our Huan Yuan and AI app recommendation error reflips. On a quarter-and-quarter basis, operating CapEx was down 1%. Non-operating cap tax was 7.8 billion RMB up 127% year-on-year due to acquisition of land use rights during the quarter. As a result, total cap tax was 14.4 billion RMB up 226% year-on-year. Free cash flow was 51.9 billion RMB, largely stable year-on-year, or up 52% quarter-on-quarter, primarily due to higher gross receipts from games. Net cash position was 92.5 billion RMB, up 69% year-on-year, reflecting strong free cash generation, partially offset by 13.5 billion RMB cash outflow for share repurchase during the quarter. Thank you.

Thank you, John. We shall now open the floor for questions. If you are dialing in by phone, please press 5 to raise a question, then press 6 to unmute yourself. If you are accessing from the Tencent meeting or group meeting application, please click the Raise Hand button at the bottom. We will take one main question up to one follow-up question each time. The first question comes from from UBS.

Hi. Good evening, management. Thanks for taking my question. My first question is on the online game. In our last quarter, we highlight one of our key strategies to rejuvenate our key titles. This is showcasing the robust performance on the Supercell game, The Recovery of PUBG. Given our rich IP portfolio and strong experience in executing online games, can management share with us how to think about the potential and growth plan ahead and how we can replicate success to our other IPs and titles. And I have a follow-up question on the buyback side. In the last quarter, we have committed at least $100 billion of buyback last quarter. Given our share price has been going up very meaningfully since last quarter, how should we think about the pace of the buyback? Would it be more share price dependent or any other factors that we should consider? Thank you.

Hi, Kenneth. Thank you for the questions. Perhaps I'll take the one on games and Martin on flybacks. So for games, as you observe, we have been in the process of rejuvenating some of our key games. And we believe that process is well underway now. We're confident in the progress of that process. And There's a couple of learnings that we derive from our experience along this journey. One is that what we classify as evergreen games truly do appear to be capable of growing new shoots and, indeed, rejuvenating themselves as evergreen trees should. And a good example would be Brawl Stars, where we cited not only the quadrupling of gross receipts, but also the doubling, more than doubling, of daily active users. A second learning is that In the event that a game which we believe should be an evergreen title is stagnating, then the problem is usually not with the nature of the game. It's with the nature of the team running the game. And we need to make changes to the team. And sometimes the changes are changing mindsets. Sometimes the changes are changing people. And what we find is that when we make those changes, then we see positive results flow quite quickly. And if we don't see the positive results flow, then we make further changes. But the games themselves, these big competitive multiplayer games are inherently evergreen, just as key sports such as football, basketball are inherently evergreen. And with the right people running the games, then we get the right results.

In terms of the buyback, we have committed to buying back at least 100 billion Hong Kong dollars of our stock as we announced last time. And since then, the buyback has been done on a pretty consistent basis. At this point in time, I don't think the buyback is share price dependent because the It is true that the share price had come up quite a bit. But if you look at the share price when it was announced, it was pretty incredible. And so even today, we felt the share price is still attractive, given the fact that our profit has increased quite substantially, given the fact that the value of our investment portfolio has been increasing. And also given the fact that our long-term prospect is actually very good. So that's why we'll continue to pursue our share buyback at this point in time.

Thank you. And congrats on those very strong sales results. Thank you.

Thank you, Kenneth. Next, we will move to Thomas Chong from Jefferies.

Hi, good evening. Thanks management for taking my question and congratulations on a strong set of results. My first question is about our advertising business. We see a very good set of momentum in the first quarter. How should we think about our market share gain story and the ad tech upgrade on the back of macro recovery? How are we actually seeing the ad sentiment as we come to June 18th? And on video accounts, How should we envision the advertising growth momentum over the next few years and the strength of live streaming e-commerce GMV growth to drive our ad revenue? And my second question is about our high quality growth strategy. Given our high-quality growth strategy standout and our strong earnings growth momentum, how should we expect our earnings growth and margin trend over the next few years? Should we expect there might be some point that we need to go back to have more reinvestment? And in terms of OPEX, how should we think about S&M expenses over the next few quarters, given that we have more contents and new game releases? Thank you.

Hi, Thomas. So on your first question around advertising, I'd say that as you would expect, given the economy is mixed, advertiser sentiment is also quite mixed. And it's certainly a challenging environment in which to sell advertising. The first quarter for us is a slightly unusual quarter because it's a small quarter for advertising due to the Chinese New Year effect. And so sometimes the accelerations or the decelerations get magnified as a result. So, you know, we would expect our advertising growth to be significant. less rapid in subsequent quarters of the year than it was in the first quarter and more similar to consensus expectations for our advertising revenue growth for the rest of the year. But that said, we think that we are in a good position to continue taking share of the market at a rapid rate given we're very early in increasing our ad load on video accounts. which is currently around one quarter of the ad loads of our major competitors with short video products. And also given we're early in capturing the benefits of deploying AI to our ad tech stack. And we think that we are benefiting and will continue to benefit disproportionately from applying AI to our ad tech because historically as a social media platform, our click-through rates were low. And so starting from that lower base, we've seen we can double or triple click-through rates in a way that's not possible for ad services that are starting from much higher click-through rates. So overall, we remain quite constructive on our ability to grow our advertising revenue at a decent rate. And we believe we'll also continue to take market share irrespective of the overall advertising market conditions. Thank you.

In terms of the high quality growth strategy, I do want to clarify that we have always been pursuing a strategy and philosophy of investing in the platform and investing in our user experience and products and and monetize on a gradual basis. So the fact that we can now unleash a lot of these growth drivers is not because we are milking our platform or harvesting our platform. It's because of the fact that we have always been investing in our platform. And this is a continuous process. action. So I think, you know, that's actually very important. That the reason the high quality growth drivers become clearer is because we have we have actually pruned our business of the lower quality products and services and the distractions, if you will, in our businesses so that we can actually focus on our core platforms and at the same time make the growth drivers more obvious and apparent. And we do believe that these growth drivers, be it video accounts advertising or location search advertising or value-added services on top of our payment platform and over time, the e-commerce service fees, these sort of pretty long runway going forward. And we have always also been investing in new areas that can serve as growth drivers for the future, including AIs, including new games, including Weixin e-commerce and SaaS products, just name a few. So we felt over time, our gross margin should actually continue to benefit from the continued increase of these high quality revenues. And that has a pretty long runway. Now, in terms of sales and marketing, I'll pass to John to answer that question.

Yeah, this, well, to recap, the selling and marketing expenses grew by 17% year-on-year, and we expect that the year-on-year growth will be at a lower rate, but somewhere from low to mid-teens in 2024. Having said that, promotion advertising expense is something that we can adjust up and down dynamically according to our needs. And if we identify some services or products that we need to invest, we would definitely do it. But with the cost optimization culture and mechanism in mind, we would definitely assess the ROI rigorously.

Thank you. Next, we will take the question from Alicia Yap from CDB.

Hi, good evening, management. Thanks for taking my questions. Congrats on the solid quarter. Two questions. First is on the gaming. So with the positive growth in the grossing of HOK, Peacekeeper, and also several games also achieving record high grossing this quarter. So the strong growth in the defer should also work well for the upcoming revenue growth in the coming quarters. Is there any outstanding adjustment that is still ongoing or are there any risks or uncertainty on the gaming business that we need to be concerned or worry about? And second question is wondering if there's any chance the games application or the digital content application by Tencent or other developers in China could see an improvement in the app store revenue sharing arrangement in the coming quarter that might support further uptake in the gross margin for the VAS. Thank you.

Hi, Alicia. Thank you for your questions and for the Congratulations. So on the first question around the games, then, you know, yes, the deferred revenue growth is a positive leading indicator for game reported revenue growth. No, we don't see particular risks to call out. We believe with the structural changes we've made, we have somewhat de-risked the game business. And therefore, looking forward, our focus will be on execution of the new strategy for the existing games and successfully launching the several major new games we've identified in our pipeline. In terms of your second question around apps or revenue sharing ratios, then we do believe that app stores are currently overrunning at the expense of app providers, including ourselves, both in China and even more so internationally. But for the purposes of our business plan, we assume that those revenue sharing arrangements remain as they are today. Thank you.

Thank you, Alicia. We will take the next question from Gary from Morgan Stanley.

Thank you.

Thank you, management, for taking my question and congratulations on a solid set of results. I have follow-up questions on the game business and thank you for the earlier comment regarding what we learned from the Evergreen games. On the same note, what have we learned in terms of whenever we see a potential new games launch, what's the management strategy to try to kind of cultivate games into Our next ever game, I think, particularly on the domestic side, we have DNF Mobile coming up. And then on the international side, we may have more games coming up. So how should we look at the strategy for new games launch going forward? And my second question is also a follow-up question on margin upside. Across these business segments, how should we look at the sustainable kind of margin level going forward? Given it seems like the margin upside is across the board, across business segments. So how should we look at the kind of relative margin trend going forward for different segments? Thank you.

So on your question about new games, you know, the game industry is a challenging industry for new games because as the evergreen games become better and better, then every new game is competing not only against other new games released around the same time, but also against every existing game or the best of all the existing games that have been you know, survived and evolved to become evergreen games. And, you know, that's true on PC. It's true on mobile. It's true on console. It's true in China. It's increasingly true internationally as well, where you can see that, you know, the time spent on the big consoles is more and more centered around the gigantic evergreen games, you know, like Fortnite, like Call of Duty. And so, you know, our response to that is to continually raise the bar on the new games we actually bring to market and, you know, focus on fewer but bigger and better new games. And not every new game we bring to market has a high probability of becoming evergreen. There are some new games we'll bring to market which are more popular. consciously content-driven games which will have a cycle associated with them. And, you know, that's fine. They can still be, you know, successful, profitable games that, you know, players enjoy and love. But, you know, for those games that we do aspire to the status of evergreen games, then, you know, the metrics we focus on are not the metrics that you may expect find most visible externally, such as, you know, the hype, the excitement, the downloads, the first day revenues. Rather, we look at metrics of player engagement, you know, such as the retention rates. And, you know, it is those leading indicators that, you know, tell us when a game, you know, is a new game that has, you know, a moderate launch rate. and will fade away after a year or two versus when there's a new game that also has a moderate launch but goes from strength to strength, which is what we've seen with Fight for the Golden Spatula. As you mentioned, despite a fairly subdued start, it's now the third biggest mobile game in China behind two of our other games. So those are some of the thoughts we have and policies we have around new game launches. Gary, on your question around the sustainability of margins for each segment, it's really a number of factors that are at play, including competitive conditions, macroeconomic conditions, seasonality. But I think the most important factor over the longer term is the mix of products and businesses within that segment. And so you can see that for all three of our big segments, but particularly for advertising and fintech and business services, there's been positive mix shifts underway away from lower margin revenue streams and toward higher margin revenue streams. And as Martin articulated earlier, we see those positive mix shifts continuing for years to come for all three of our segments. And therefore, we believe that both the margins where they are and also the upward margin trends are sustainable.

Thank you, Gary. We will take the next question from Anna Zhang from Custom Securities.

Hi, management. Thanks for taking my question. My name is Anna Zhang from Guoxin Zhongquan. And it's actually my first time to ask the question. So the first question I want to ask management is we saw Meta improve their Advantage Plus advertising tool based on the large language models. And we wonder if management can share more on how Tencent plans to use AI to improve the ad business. And also in the future, do you think like under the AI developments, like our competitors, such as like ByteDance or Alibaba, they also applies AI to their ad business. So how do you think that AI will drive the ad market shares to change in the longer term? So this is my first question. Thank you.

Welcome to joining our Q&A, Anne. I'll take the first question, although it might be a supplement. But, you know, we believe that, you know, tools like Advantage Plus are but extremely important in terms of helping social media companies, whether it's Meta or ourselves, grow into being all that they can be on the advertising front because they simplify and automate the advertising, buying and advertising targeting processes so that the social media companies can deliver experiences to advertisers that are more competitive with those that had already been delivered by search engines and by e-commerce platforms, but with the advantage that the social media platforms have much greater time spent user engagements than search engines or e-commerce platforms. And so to the second part of your question around A number of competitors are obviously applying AI as well, and we believe that all of them will benefit from AI too. But we think that the biggest beneficiaries will be those companies, of which we're one, that have very substantial under-monetized time spent and are now able to monetize that time spent more effectively than by deploying AI, because the deployment of AI enables an upward structural shift in click-through rates, and that shift is most pronounced for those inventories where the click-through rates were lower to begin with, such as the social media inventory. Those tools also allow advertisers who previously were able to create advertisements for search, which are text in nature, but not to create advertisements for social media, which are image and video in nature, to now use generative AI to create advertisements for social media. So in general, we think there'll be a reallocation of advertising spend toward those services which have high time spent, high engagement, and are now able to deliver increasing click-through rates, increasing transaction volume, more commensurate with the time spent and engagement superiority. Thank you.

I see. Thank you so much. I do have a follow-up question towards that recently I noticed actually Meta, they announced their, the Meta AI function and they roll out to all the Meta products such as like WhatsApp and like Facebook Messenger, et cetera. And do you think that in the future Tencent, because we have such a great network product environment, will we have a similar product like Meta AI?

Well, I think we do believe that with the right product, then our WeChat platform and our other products, which have a lot of user engagement, would be great products. uh, will be great distribution channels for these, uh, AI products, you know, but, uh, I think at this point in time, everybody's actually trying out, uh, different, uh, products that may work. No one has really come up with the killer application yet with the exception of probably open AI, uh, that question and answer from it. So I think you should be confident that we have been developing the technology and we are having a best-in-class technology in Hunyuan. And at the same time, we are actively creating and testing out different products to see what would make sense for our existing products. And as the time comes, these products will be rolled out on our platform.

I see. Thank you so much. I'm sorry, can I just have one more additional question? Because we're really excited for Tencent.

And recently... Sorry, in the interest of time, we need to save the time. Okay, thank you. Only two for each end. Okay. Thank you. So we will take the next question from Joanne Choi from Daiwa.

Hey, well, thanks for taking my question and congratulations on a great set of results. I have a question about your business services on cloud. I realize that, you know, some of your new business at WeCom, revenue tripled, Tencent meeting also doubled. Are we seeing more of an acceleration trend in terms of adapting our services? And in terms of, you know, given that cloud business is also very sensitive to macro conditions, are your customers now aware opening up or more warmed up using our services as a result. Hopefully we should see this trend accelerated towards, you know, remaining part of the year. And I have a quick follow up question on your wealth management. I think, you know, this has been one of the key drivers of your growth and fintech services. Can you elaborate a bit more about our strategy here, where we need to invest and what kind of further areas in terms of margins where you could benefit from this part of the business, but also one kind of investments that is required to further cultivate further development here? Thank you.

Well, in terms of SaaS, I think what we have seen is our initial success in monetizing these products, which we have been offering as a free service for a long time. And that's actually off a relatively low base. So I think we... you know, look at it more as a validation and early validation of the fact that we can get paid for some SaaS services in China. So we really started from A base case of enterprises are not paying for software, which is very different from established markets like the US. And we're starting to monetize some value added services offered to enterprises. But I think this is still early stage. This is still not a big amount of money that we're talking about compared to what the enterprise softwares have been able to achieve in the US. And I think it will continue to be a very long way for us to grow such revenue. So I don't think it's an acceleration of... It's more of a validation of the initial case. And from their point on, we would grow it consistently, but we haven't really reached the inflection point yet. But we'll continue to invest in these SaaS services because we felt this is a great service in itself. It's actually providing great support. connection for us with the enterprise customers, which we can co-sell other of our cloud and enterprise services. And at the same time, we felt at some point in time, maybe in not the very near future, the inflection point would come and we want to be the most competitive and leading player at the time when the inflection point comes. Now, in terms of the wealth management service, mainly our customers putting their money into money market funds in which we offered alongside with fund management companies. And so instead of, you know, our customers withdrawing the money into their bank accounts or spending the money. They actually put these money in money market funds. And we have seen an increasing trend around that, partly because of the fact that there are many more use cases within our payment platform so that people are getting used to putting more money within the platform. And partly because there is a reduced willingness for consumers to spend. So they actually save more rather than spend more. And I think on this front, what we want to do is continue to build up our payment platform so that people are comfortable in entrusting us with more of their wealth. And they can have more use cases so that they can use it for different purposes. That would increase the propensity for people to park the money with us. And we'll continue to work with more fund management companies so that they can offer good services. money market as well as other wealth management products and services to our customers. But at the same time, we also want to make sure that we invest heavily in the risk management so that we really have a very close look and watch over the safety of the wealth for our customers. So all these things are being pursued at the same time. So, you know, if we can do all these right now, we believe this service will continue to grow on a consistent basis.

We will take the next question from Shelley Liu from HSBC. Shilin, your line's open. Shilin, can you hear us?

Okay, maybe we will move to the next question to Ronald Kong from Goldman Sachs.

Thank you, Wendy, and thank you, Tony, Martin, James, and John for the sharing. I have two questions. One is I asked about the video accounts and mini program last year on e-commerce. So I want to hear where do we see we are innovating most in terms of ad tech? We've read about you talking about ad tech upgrades. So will we leverage video accounts, live streaming, and mini program maybe on any ROI-based ad products? And I have a follow-up question.

Hi, Ronald. So on ad tech, we're innovating around the process of targeting the ads using artificial intelligence. We're innovating around helping advertisers manage their advertising campaigns. And then most recently, we are now deploying Hunyuan to facilitate advertisers creating their advertising content. So those are three areas where we're driving innovation that are contributing to the rapid revenue growth you're seeing for our advertising business.

Okay. And then my follow-up question is on our investment portfolio, given it's a very sizable, nearly $130 billion in value. So do we have any thinking on consistent or any distribution policies after the JD and Meituan distributions in the past? I think I'm thinking about any predictable policies so that the market will even more actively value this part of the value given the substantial market value within Tencent.

Well, on that front, we have been working with some of our investee companies, and many of them have been working unprompted by themselves to enhance their profitability. And so if you look at the non-IFRS associate income that we reported this quarter of a little over 5 billion renminbi, that's up very sharply year on year. And, you know, it annualizes to a number in the 20s of billions renminbi. So, you know, to the extent that investors are valuing 10 cents overall earnings at a certain multiple, then implicitly they're now valuing our investment portfolio at several hundred billion renminbi. There is still a gap between that implicit valuation through our multiple and the associated income contributing to our multiple of several hundred billion renminbi versus the sort of intrinsic value or the market value of the portfolio, which is substantially higher. But as the associates, as companies like Pinduoduo become steadily more profitable, then more and more that gap will narrow itself as the profitability of the associates gets directly reflected in our own net income.

And at this point in time, we don't really have a plan to distribute any stock for now. As a matter of fact, you can see in the past few years, we have been investing most of our cash flow into our investment portfolio. And that's at a time when the market was seeing very fast growth and there are new companies being formed and grow to very large size. And as a result, we actually benefited a lot from investing in these companies. And at the same time, the investment also helped us a lot in terms of building ecosystems on our core platforms. So if you look at, for example, games, we have been able to invest in a lot of game studios, which help us to get access to the international market as well as online. get a hold of a lot of evergreen and large titles. And in the music industry, for example, we have invested in Spotify and also upstream in order for us to establish a very strong position for TME in China. And in the payment side, we have actually invested in companies which actually contributed to a lot of use cases, right? So Both strategically and financially, the investment portfolio has actually generated a lot of return for the shareholders. But now it has reached a very... big size and some of the companies as mature as we actually distribute. And now given the size of the portfolio, we don't actually envision we're going to have to put additional money into it. If we need to pursue new initiatives, we can actually recycle some of the investments that within the portfolio. So the contribution to the shareholder value is that the free cash flow of the company can actually be used for shareholder enhancing activities such as dividend paying and share buyback. That's the way we think about it. Thank you.

Thank you very much. We have successfully reconnected with Charlene Liu from HSBC. Charlene, your line is open.

Thank you so much, Wendy. Really appreciate the opportunity. I have two questions.

I think first is about applications of Kunyuan. Management has spoken quite a bit.

We can't hear. Can you repeat that question?

Yes. Can you hear me okay? Yeah, so management has spoken quite extensively on how He Yuan can benefit the ad business. Can we talk about applications of AI onto the game business and how does management expect... So we can't hear her.

Sorry, we can't hear her.

Certainly your line is not stable. Maybe we will catch up offline. Is it better?

Sorry, is it better?

Yeah, one more try, maybe.

Okay, sorry. Thank you so much. Really appreciate this. Can we talk about Hui Yuan's potential application on the game business? And how does management expect that to play a larger role to help in game production? It doesn't... Okay, sorry. Thank you. Thank you for the opportunity.

I think for Hui Yuan, the... Game production. It can... be assisting game business in multiple ways. Right now, the best contributor is actually on the customer service front. When Huanyuan is actually deployed to answer questions and be a customer service bot for a lot of our games, it's actually achieving very high customer satisfaction. And AI in general has already been deployed in our games, but not necessarily the generative AI technology. Yet, in terms of when you and I think over time, when we actually sort of you can move when you're in into a multi model and especially if we can start creating really high quality high fidelity videos and then that would actually be helpful. Before that happens, then Hunyuan can actually be used in NPCs and create certain interactive experiences, but it's not going to be able to take over the very heavy role of content creation in gaming yet. I think it will probably be a couple more generations before it can be employed for game production.

Thank you, Shilin. We will follow up with you on your other questions. So next we will move to Alex Yao from JP Morgan.

Thank you, management team, for taking my question and congrats on a strong quarter. I have two questions. Number one is on the fintech business. Can you elaborate the slowdown of the fintech business, perhaps decompose the business into payment and non-payment business? And also, how should we think about the medium-term growth outlook for the fintech business as a whole? And the second question is on the WeChat search, which seems to be picking up monetization momentum in recent quarters. Can you discuss strategy to monetize WeChat search activities today? It would be great if you can share with us some of the operating metrics just to help us understand the length of the runway. Thank you.

In terms of FinTech, I think the most of the reason for the snowdown is actually the headwind on offline consumption. And we felt this is... a phenomenon which you probably see across many other industries as well. We felt, you know, as a whole, the government is actually putting in a lot of stimulus to revive the economy, to revive consumption confidence. And at some point in time, we believe this phenomenon headwind would actually turn. But before it turns, then I think our FinTech revenue on the payment side, which forms the bulk of the revenue of FinTech, would actually be slow in terms of its growth. And on the other hand, in terms of the withdrawal fee, I would say this is anyway a low quality revenue. The withdrawal fee is essentially people pulling money out of the system. And that would be one time revenue, but then the money actually leaves the system. When people... withdraw less, then the money would actually stay within our system for longer. It will not generate an immediate revenue point withdrawal, but it will be turned into an asset under management and will continue to generate wealth management fees over time. So that actually turns into a longer term, high value added revenue. And in terms of wealth management services, I think it will continue to grow for the reasons that I talked about earlier. Now, for for loan generation fees, I think, you know, we are getting a little bit more cautious, right? You know, as there is a macro headwind, then, you know, we want to be very, very vigilant on risk management. So that's sort of, you know, how we look at the different components of the FinTech revenue. And what was the other question? Oh, in terms of basic search, I think, It's a service which has been growing in terms of the usage and in terms of... the search volume on a very healthy rate. So the service itself is growing. And we have been monetizing that service on a relatively light basis. In fact, it just started last year that we started monetizing Weishun Search. So with a combination of the fact that there's a very large engagement with Weixin and the fact that Weixin Search itself is actually growing in volume and that there is an expanding content ecosystem within Weixin, be it official accounts, be it mini programs, and then be it video accounts. And relatively early in the monetization cycle, all these factors will contribute to a pretty long runway in terms of our continued growth of the search revenue on WeChat.

Thank you. In the interest time, we will take the last question from Robin Zhu from Bernstein. Robin, your line is open.

Thank you. Hi, management. Thanks for taking my question. I guess just two, please. One, James, I think at one point you said that you think video accounts monetization could be as big as moments. Now the video accounts engagement is two acts of moments. Could I get your thoughts on the intensity of ad revenue's per engagement, and is there any reason why the two couldn't equalize, meaning that actually total monetization of video accounts ends up being much larger than moments compared to what you said, I think, a year or two ago now. And then secondly, on games, I think different members of management have been critical about the internal game development process and just wanted to get your thoughts on We have a pretty full pipeline, it looks like, for the rest of the year. Does that mean, or in your mind, do you think that the issues of the last few years are now resolved and we should look forward to a more consistent launch pipeline in the second half and in future years? Thank you.

Hi, Robin. Thank you for your question. So on the first one, I mean, yes, I think objectively you can see from the results of companies like Meta that operate both traditional feed and also a short video feed that over time, the monetization of the short video feed converges with or overtakes the monetization of the traditional social feed. And we feel that's the trajectory we're on as well. With regard to the second question, Dan, we do feel we've debugged some of the more obvious challenges. No doubt that there's other challenges we haven't identified or other challenges that would arise in the future. And so it is an iterative debugging process that will never stop. But we feel we've resolved the big immediate challenges, and that is translating into both better engagement and monetization trends for our existing games, and also to greater confidence in our pipeline of new games. You made a reference to our internal game development process, and I think that it's easy for outsiders looking at Tencent to assume that there is one game development process. There is one game publishing process. There is one game operating mindset and so forth. And I can understand why that belief exists. But in reality, it's a little bit like looking at Disney and assuming that the Disney animation studio, the Pixar studio, the 20th Century Fox studio all operate in a homogenous way, which is not the case. If you look at Tencent's five biggest games, then one of them is created by a team in Chengdu. One of them is created by a team in Shenzhen. One of them is created by a team in Helsinki. Two of them are created by teams in Los Angeles. So It's a truly global business, globally distributed, globally different practices. And so there is no single unified internal game development process. Of course, we try to share best practices and learnings between the big development studios that have created these enormously successful games. But equally, each of those studios that I talked about, each in a different part of the country or the world, still has its own unique attributes. And that's part of their strength. And those strengths we aim to reinforce over time. So that's what I'd say on the game process debugging side.

Yeah, I just want to add, you actually used the word critical on the game teams. I don't think that's really true. I think... There are a lot of things our game teams have done right. But there's just no perfect teams or no perfect games. And we are continuously going through the process of debugging. And we're kind of more transparent and honest on those efforts. with the outside world. So that's the reason why we discuss about what are the changes that we have done to our game teams or to our games. And we also believe some of the major titles that we have are really evergreen titles such that we don't necessarily blame it on the life cycle of a game when it doesn't work, but rather look at what exactly are the bugs or are the untapped potentials that we can actually sort of make changes so that we can actually get the games to be really evergreen titles. And that's, I think, the reason why we have the largest number of evergreen titles and probably the most proportionate of evergreen titles in the industry. And we also... Just to reiterate on James' point, the diversity is actually very important. And so that's why if you look at the Tencent game family, we actually have probably the most diverse number of studios in the world. And all these studios would actually work in their own way to achieve success in their games. but at the same time, they can actually share experiences too. So hopefully, collectively, they can actually sort of progress much faster than the rest of the industry.

Thank you. Thank you, everyone. We are now ending the webinar, and thank you for joining our results webinar today. If you wish to check out our press release and other financial information, please visit the IR section of our company website at www.tencent.com. The replay of this webinar will also be available soon. Thank you, and see you next quarter.