Tencent Hldgs Unsp/Adr

Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 25 for 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 or raise your hand. If you are accessing from the Tencent 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 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 repelled 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 introduce the team on the webinar tonight. Our chairman and the CEO Pony Ma will kick off with a short overview. President Martin Lau and the Chief Strategy Officer James Mitchell will provide a business review. Chief Financial Officer John Lau will conclude with financial discussions before we open up for questions. I will now pass it to Pony.

Great. Thank you, Wendy. Good evening. Thank you everyone for joining us. Our second quarter 2024 results demonstrate the strength of our platform plus content strategy. Our domestic games revenue assumed growth and our international game revenue accelerated growth due to increased user engagement as several of our evergreen titles. And the successful launch of certain new games Tencent Video achieved a notable audience and subscriber growth with drama series developed from China literature, IP and produced internationally. Looking forward, we continue to invest in our platforms and technologies, including AI, enabling us to create new business value and better serve youth needs. Looking at our financial number for the quarter, total revenue was 161 billion RMB, up 8% year-on-year and 1% quarter-on-quarter. Gross profit was 86 billion RMB, up 21% year-on-year and 2% quarter-on-quarter. Non-IFRS operating profit was 58 billion RMB, up 27% year-on-year, all flat quarter-on-quarter. Turning to our key services, For communication and social networks, combine MAU of WeChat, WeChat year-on-year and quarter-on-quarter to 1.37 billion. For digital content, Tencent Video led the industry in terms of audience and subscriptions. For games, our proactive judgment to several of our leading games earlier in the year yielding positive results with healthy user chain for our evergreen games and substantial popularity for several new games. For cloud enterprise SaaS, we count an intensive meeting, increase their penetration in major industry verticals, and absorb more pay functionalities. I will now hand over to Martin and James for business review.

Thank you, Pony, and good evening and good morning to everybody. For the second quarter of 2024, our total revenue was up 8% year on year. VAS represented 49% of our total revenue, within which social network subsegment was 19%, domestic games subsegment was 21%, and international games was 9%. Online advertising was 19% of total revenue. And fintech and business services was 31% of total revenue. Turning to gross profit, our overall gross profit growth was 21% year-on-year in the second quarter, driven by growth in high-margin revenue streams, such as domestic games revenues, video accounts advertising revenues, mini games platform service fees, and e-commerce technology service fees within video accounts, as well as cost-saving initiatives. By segment, vast gross profit increased 12% year-on-year to 45 billion RMB, representing 52% of our total gross profit. Online advertising gross profit increased 36% year-on-year to 17 billion RMB, contributing 19% of total gross profit. And FinTech and business services gross profit increased 29% year-on-year to 24 billion RMB, contributing 28% of total gross profit. Moving into business by segment, for value added services, segment revenue was 79 billion RMB, up 6% year on year. Social network revenue returned to positive growth, up 2% year on year, driven by increased revenue from music and video subscriptions, mini games platform service fees, and app-based game item sales, which was partially offset by decreased revenue from music and games related live streaming services. Long form video subscription revenue increased 12% year on year as average daily video subscriptions increased 13% year on year to 117 million. Consumers are increasingly seeking out high quality IP and high production value in drama series. Our novel comics and games platforms nurture high quality IPs while our studios, including New Classic Media, create high production value video content. During the first half of 2024, out of the top three most watched drama series on China's online video platforms, the first and second were produced by New Classic Media and broadcast by Tencent Video, and all three were based on China literature web novel IPs. Music subscription revenue increased 29% year on year, supported by growth in subscriptions in Apple. TMU strengthened cooperation with labels and artists, releasing original soundtracks for Tencent Video popular drama series, and provided live music experiences through offline events and concert tours. Domestic games revenue resumed growth up by 9% year on year to 35 billion RMB, mainly driven by Valorant and new title DNF Mobile. Total gross receipts of domestic games grew faster than revenue in the second quarter. International games revenue increased by 9% year-on-year in both reported and constant currency terms to 14 billion RMB, benefiting from the robust performance of PUBG Mobile, as well as contributions from Supercell Games. Total gross receipts of international games grew substantially faster than revenue in the second quarter. For communications and social network, we enhanced functionalities and enriched content across our platforms, including video accounts, mini programs, and Tencent channels. For video accounts, the user time spent increased significantly year on year in the second quarter, benefiting from enhanced algorithms and more local content. Our thriving content ecosystem enabled creators to reach a wider audience and generate increased revenue. The number of creators that generate closed-loop revenue from their video accounts more than tripled year on year, showing a much more vibrant content ecosystem. To facilitate e-commerce activity, we're enhancing transaction capabilities in a systematic way to deliver a seamless shopping experience to users and drive sales for merchants. Mini programs have become an increasingly powerful platform for users to connect with merchants and content providers offline and online. Total user time spent on mini programs increased over 20% year-on-year in the second quarter. GME facilitated by mini programs grew a double-digit percentage year-on-year. For mini games, total gross receipts increased over 30% year-on-year. And as a testimony to the diversity of the games, more than 140 mini games each achieved total gross receipts of over 10 million RMB during the quarter. Lastly, Tencent Channels served as a community-based platform in which moderators can manage and present content and events via customizable tools, while users can interact via text, image, and live streaming. We recently upgraded and rebranded Tencent channels, previously known as QQ channels, and now users can join channels from Weixin and from game apps in addition to QQ. Tencent channels have gained notable popularity among game players and university students, who are early adopters and promoters of channels' advanced functionalities. With that, I'll pass to James.

Thank you, Martin. Moving on to domestic games, Peacekeeper Elite grew its gross receipts by a double-digit percentage year-on-year in the second quarter with popular Egyptian-themed and anime-themed outfits. We introduced Metro Royale, an extraction shooter game mode that's already proven attractive in PUBG Mobile and which resulted in Peacekeeper Elite's DAU resuming year-on-year growth in July. Honor of Kings also increased its post receipts year-on-year in the second quarter, benefiting from adjustments we made that spread out the timing of high-value virtual item sales throughout the year, as well as from enhanced content design. And Naruto Mobile achieved a new milestone of 10 million average daily active users in May, as marketing activities have boosted its new player acquisition, while enriched themed content has re-engaged its existing user base. Among new releases, DNF Mobile has emerged as one of the most successful mobile games in China. The game reactivated millions of DNF IP fans, and more importantly, for long-term success, we're seeing high user retention rates due to proven gameplay, abundant content, and active local publishing, which together positioned the game to become our next evergreen major hit. Need for Speed Mobile, launched in July, is attracting millions of DAUs by providing a range of driving-centric activities within an open-world city experience. Among our international games, PUBG Mobile's DAU and gross receipts achieve double-digit growth year-on-year, driven by the new Mecha Fusion mode, the Golden Moon event, and a Lion-themed top-tier outfit. Brawl Stars gross receipts grew more than tenfold year on year. Average DAU achieved a historical high and ranked Brawl as the third highest mobile game across the entire industry by DAU in international markets in the quarter. These achievements flowed from frequent content updates, such as an IP collaboration with Godzilla, and social features such as the thumbs up for Brawl event. Valorant's MAUs grew year on year, benefiting from high-quality content updates such as new Agent Clove and new map Abyss, the first Valorant map with no outer boundaries. Two international esports events, Masters Madrid and Masters Shanghai, expanded Valorant's global IP influence. Squad Busters, a casual PVP-PVE action game with real-time strategy elements and Supercell character collection, launched on May 29th. Squad Busters has established critical mass in the key North America and Western Europe regions, and Supercell will be adding new game modes and social features to the game to further expand its fan base worldwide. For online advertising, revenue grew 19% year-on-year, driven by increased ad spend for most categories, particularly games, e-commerce, and education. The deceleration in consumption spending in China is a headwind to advertising eCPM pricing, and thus to our brand advertising and ad network trends. But we believe we'll continue improving our advertising market share, and our advertising business should benefit once consumer spending improves. For our ad tech, we upgraded our machine learning platform to analyze user interests over a longer time horizon of years rather than months, while processing signals more frequently. These changes enable us to gain deeper user insights and provide more relevant ad recommendations, thus boosting click-through rates and revenue. By property, video accounts ad revenue increased over 80% year on year, fueled by rising short video engagement, as well as demand for live streaming promotions. Tencent video ad revenue grew over 30% year on year, despite weak branded ad spend market wide, as our popular self-commissioned drama series, such as Joy of Life 2 and The Tale of Rose, attracted sponsorship spend. However, our mobile ad network revenue dropped year-on-year as certain internet services companies reduced their overall advertising spend. Looking at fintech and business services, segment revenue was $50 billion, revenue being up 4% year-on-year. Our fintech services revenue growths go to a low single-digit year-on-year growth rate. The number of commercial payment transactions continued to increase at a healthy rate year on year, but the average value per payment transaction declined year on year due to slow consumer spending, causing further moderation in our commercial payment revenue growth. But given the continuing growth in number of transactions, we believe that our market share is quite stable, and we therefore expect our commercial payment revenue to improve once consumer spending picks up. Our consumer loan services revenue decreased year on year as WeBank and Tencent proactively adopted more cautious credit extension policies in light of subdued consumption trends. Our wealth management revenue grew at a double digit year on year due to increases in the number of users and in aggregated customer assets as consumers generally save more and spend less. Turning to business services, revenue grew at a teens rate year on year in the second quarter, benefiting from higher cloud services revenue and increased technology service fees generated from rising video accounts, e-commerce transaction volumes. Business services gross profit rose significantly year on year due to the increased contribution of higher margin revenue streams, as well as improved efficiency. In WeCom, merchants are increasingly willing to pay for advanced communication functionalities, such as customer service chat groups, and WeCom revenue accordingly increased significantly year on year. Tencent Meeting deepened its adoption and monetization, especially in the pharmaceutical, manufacturing, and retail sectors. We're generating increasing AI related external revenue from customers utilizing our high performance computing infrastructure, such as GPUs and our model library services. We recently launched three AI powered platform solutions for enterprises. image generation engine and video generation engine, which are particularly useful for advertisers creating ad content, as well as knowledge engine, which is particularly useful for finance, education, and retail-related services, deploying customer service chatbots. And now I'll pass to John for the financial review.

Thank you, James. Hello, everyone. For the second quarter of 2024, total revenue was 161.1 billion RMB, up 8% year-on-year. Gross profit was 85.9 billion RMB, up 21% year-on-year. Operating profit was 50.7 billion RMB, up 40% year-on-year. Interest income was 3.9 billion RMB, up 13% year-on-year, driven by growth in cash reserves. Finance costs were 3.1 billion RMB down 5% year-on-year due to a reduced cap level. Share of profit of Associates and JV was 7.7 billion RMB compared to profit of 1.2 billion RMB in the same period last year. On a non-IVRS basis, share of profit was 9.9 billion RMB up from profit of 3.9 billion RMB last year, driven by improved performance at certain domestic associates and at certain overseas game studio associates. Income tax expense declined by 9% year-on-year to R10.1 billion, primarily due to the high base in the same quarter last year, resulting from an overseas subsidiary's deferred tax adjustment. Domestic corporate income tax expense in the second quarter of 2024 increased year-on-year. On non-IVRS financial figures, operating profit was 58.4 billion RMB, up 27% year-on-year. Net profit attributable to equity holders was 57.3 billion RMB, up 53% year-on-year. The difference in year-on-year growth rates between operating profit and net profit was due to higher non-IFR share of profit from Associates and JV, which increased to RM9.9 billion this quarter from RM3.9 billion same quarter last year, as well as lower income tax due to previously mentioned high base impact. Diluted EPS was 6.014 RMB, up 55% year-on-year, outpacing non-IA virus net profit growth due to reduced share count from share buybacks. For the second quarter of 2024, our weighted average number of shares for calculating diluted EPS decreased by 1.9% year-on-year. Moving on to gross margin, overall gross margin was 53% up 6 percentage points year-on-year by segment. Value added services gross margin was 57% up 3 percentage points year-on-year due to improved margins in long-form redo and gains businesses alongside our effective control of operating costs. Online advertising gross margin increased to 56%, up 7 percentage points year-on-year, primarily driven by growth in high-margin video accounts advertising revenue and margin improvement in long-form video advertising. FinTech and business services cross-login increased to 48%, up 9% points year-on-year. This was driven by enhanced cost efficiency in our proud business, higher contribution from high-margin wealth management services revenues and e-commerce technology service fees within video account, and improved monetization of WeCom and other business services. On operating expenses, selling and marketing expenses were 9.2 billion RMB up 10% year-on-year, driven by increased spending on promotion and advertising for new content release. Selling and marketing expenses represented 6% of revenue stable year-on-year. R&D expenses were 17.43 billion RMB, up 8% year-on-year. G&A expenses excluding R&D were 10.2 billion RMB, up 9% year-on-year, usually an increase in staff force, including performance-based rewards. At quarter end, we had approximately 106,000 employees, up about 1% both year-on-year and quarter-on-quarter. Non-IFRS operating margin was 36%, up 5 percentage points year-on-year, in line with cross-margin expansion. To conclude, I will highlight some key cash flow and balance sheet metrics. Operating CapEx was 7.2 billion RMB, up 144% year-on-year, driven by investment in GPU and CPU servers. On a quarter-on-quarter basis, operating CapEx was up 8%. Non-operating CapEx was 1.5 billion RMB, up 3% year-on-year, driven by construction and progress. On a quarter-on-quarter basis, non-operating CapEx was down 80% from the high base in the prior quarter. As a result, total CapEx was 8.7 billion RMB up 121% year-on-year. Free cash flow was 40.4 billion RMB up 35% year-on-year due to higher gross receipts from games. On a quarter-on-quarter basis, free cash flow was down 22% due to a seasonal decline in games gross receipts for Chinese New Year holiday period. Net cash position was 71.8 billion renminbi, down 22% quarter to quarter, primarily due to 34.2 billion renminbi share repurchase and 28.9 billion renminbi dividend payment for year 2020 to be made during this quarter. Both were largely funded by our free cash flow generation. Thank you.

Thank you, John. We now open the floor for questions. If you are dialing in by phone, reminder, please press five to raise a question and then press six to unmute yourself. If you are accessing from the Tencent meeting or room meeting application, please click the raise hand button at the bottom. We will take one main question and up to one follow-up question each time. The first question comes from Alicia Yap from Citigroup.

Hi, thank you. Good evening, management. Thanks for taking my questions and congrats on the solid result. First questions, can management elaborate a little bit on your recent upgrade of the advertising technology platform? When management noted under Prepared Remark, the upgraded technology will analyze the user interest over a longer time horizon. Does that mean you are thinking back into the longer historical usage pattern to form more precise targeting attribute and to capture the potential change of the user habits over the years. Maybe can you share a little bit the details and also how will these upgraded ad platform attract higher ad spend and maybe support the future ad revenue growth potential? Second question, given there's a recent supportive comments from the State Council on the digital content, including gaming and others, will that change any of the company R&D resource deployment in the coming future in order to help boost more entertainment-related content consumption opportunity? Thank you.

Hi, Alicia. Thank you very much for your questions. And I'll attempt to take the first one. So, yes, indeed, we are looking further back at actions over years rather than months. And the main benefit is to form a more comprehensive user interest graph. On the other hand, we're also looking with greater frequency at the most recent actions. And the main benefit of the most recent actions is to have a more precise and timely view on users' current commercial intent. And so, you know, looking further back and also looking more frequently at the most recent data are both beneficial, but for different reasons. And in terms of how the processes then attract more advertising spend, by understanding the user's interest graph better, by having more precision around their current commercial intent, we can improve the click-through rate. And today in China and worldwide, as you boost the click-through rate, then the majority of advertisers automatically allocate more advertising spend to you because you're delivering more clicks with the higher click-through rate.

In terms of your second question, I would say, obviously, the comments is actually supportive and very encouraging to us and our content business, especially the narrative around gaming, which is yet another approval factor. and affirmation of the value of the industry in addition to the continued issuance of Banhao. And we felt this is definitely incrementally positive to the overall content industry. But having said that, we have already been making very long-term investments and strategic investments in the content industry. And the nature of the content industry, be it games or be it drama series which originate from novels is that they are actually very long-term in nature. So if you look at the recent revival of our gaming business, as well as the success of our drama series, they really originate from investments that we made years ago. So from that perspective, rest assured that as a major player in the content industry, we have been making very strategic and long-term investments in the content industry, even when the industry was actually in turmoil. And that's the reason why we are now reaping the benefit of our investments. So- we're not going to be sort of that short-term oriented, just reacting to one piece of news. But as an important player, we have been making very strategic investments all along the way, and we'll continue to do that.

Thank you. Thank you, Alicia. We will take the next question from Kenneth Hong from VBS.

Hi, good evening, management. Thank you for taking my question. I have two questions. First is on the live streaming e-commerce. We noticed that there have been a meaningful slowdown in the GMV growth in the short video platform live streaming e-commerce for the competitor in the recent quarter. Can management share with us the e-commerce strategy for our video accounts? My second question is on the accounting side, specifically digging into two items. First of all, the GNA, which is up 8% on a year-on-year basis. Understand that the headcount is rather flattish on a year-on-year basis. So how much of this 8% increase is one-off in nature? and secondly on tax um how should we model the effective tax break over the next few quarter as it has come down a lot uh in the uh this quarter uh thank you hi i'll take the first question uh in terms of at the e-commerce activity uh in our uh

ecosystem. So apart from the mini programs, e-commerce, just on what you would call the live streaming e-commerce, our growth in the quarter has still been very solid, very significant growth. So we're not seeing a slowdown in terms of TME growth relative to the other short video platforms. And the main reason is because, you know, the size of our e-commerce GME is actually very small compared to the size of theirs. So, you know, there's still a lot of headroom for us to grow. But having said that, we have recently repositioned our live streaming e-commerce to make it more of a Weixian e-commerce platform. In the sense that we are going to build that ecosystem, not just to base a point at the video accounts and live streaming channel. Instead, we are going to build our e-commerce ecosystem within Weixian. tying to the entire Weixin ecosystem. And that would obviously still draw a lot of strength from our official, from our video accounts, as well as our live streaming. but at the same time, it will be connected to all the elements of the Weixin ecosystem, including official accounts, including mini programs, including enterprise Weixin, including all the social and group activities that are happening within Weixin, so that we would want to build an ecosystem in a very patient but systematic way so that it will be differentiated from just live streaming e-commerce. And it will be much more valuable to the merchants and the users. And we also hope to solve the problem that you are seeing, right? You know, there's a material slowdown in terms of GMB growth because live streaming e-commerce can grow very fast, but then there is a natural slitting. But if we can build the... e-commerce ecosystem within Weixin in the systematic way, leveraging all the sources of strength within Weixin, then hopefully we can actually build a much bigger and meaningful and high ceiling ecosystem. e-commerce ecosystem. And to some extent, this is similar to the way we build our mini programs. For quite a few years, we built the ecosystem patiently. And it doesn't seem like it's generating a lot of revenue. But when it actually unleashes power, it generates a lot of user engagement. It becomes extremely valuable to merchants and content providers online and offline. And it becomes a significant source of revenue in many different areas, including mini games as well. So that's the way we approach the waste in e-commerce.

In relation to G&A expenses, I will speak into two parts to explain. R&D expenses increased by 8% year-on-year in Q2, while G&A excluding R&D increased by about 8% to 9% also year-on-year in Q2 2024. In 2012 of 2024, we expect R&D to increase by high single digit, while GNA excluding R&D also will increase by single digit as well on IFRS basis. So as a result, we expect that, you know, for the full year of 2024 full year, based on the latest estimate, it will increase by high single digit as well. In relation to the income tax, the non-IFRS, we should really look at the non-IFRS profits. You know, we can see that the decrease in income tax expense was due to deferred tax asset reversal in OVC subsidiary in Q2 last year, which formed a lower base for this year comparison. And it was, of course, offset by the increase by domestic income tax. The non-IRS effective tax rate for last year, full year was 22%. And we expect that the non-IRS effective tax rate for 2024 will be within the range of 18 to 20%.

Thank you very much.

Next, the question from the.

So maybe. Take the.

Okay, Miranda, can you hear us? Maybe we move to the next question.

Yes, I can hear you now. Okay, thank you. Thank you. Thanks for the patience. So my questions are about the profit. My key question is about, so the new higher margin revenue streams have been driving a strong profit beat for the several quarters. Can management update us about matrix of these higher margin streams? For example, what are the mix for them in revenue or gross profit? How fast are they growing? How much do they contribute to the gross profit growth rate? And then looking ahead, how to think about the room of further upside to your gross margins of the key business segments. And then my follow-up question about the profit is that we have seen that the share of profit from associates and JVs increased significantly quarter of a quarter and also year over year. contributing to a significant portion of companies adjusted profit. So can management help us understand what are the drivers? And then as your investees are generally in a profit-improving trend, I'm sure we expect this line item to contribute to more profit upside and to continue to trend up going forward. Thank you.

Hi, Miranda. Thank you for the questions. I'll take the first one in terms of the impact of the mixed shift toward higher margin revenue streams. So we don't quantify each one of them individually or the aggregate collectively. But one way of visualizing the trend is that in recent periods, gross profit has grown 2.X times as fast as our revenue. And that's been for two reasons. The primary reason has been the mixed shift toward these higher margin revenue streams that you talked about. And then the secondary reason has been efficiency initiatives, cost management initiatives, etc. And together, those have resulted in the multiplier from revenue growth to 2.X times faster gross profit growth. Looking forward, then we do assume at some point some of the efficiency initiatives will have yielded the efficiencies that we sought to capture. And therefore, that driver of gross profit growth exceeding multiplying revenue growth will decelerate. On the other hand, we believe that the mixed shift to higher margin revenue streams is a phenomenon that has many years to run. And therefore, we think that our gross profit will continue to increase faster than our revenue, but potentially at a 1.x times multiplier rather than at a 2.x times multiplier looking forward. Thank you.

Yeah, in terms of the share of profit of associates on a non-GAAP basis, it increased from 3.9 billion a year ago to 9.9 billion due to contribution from associates like PDD and to a lesser extent, Kuaishou and Epic. As the share of associate profit started to pick up from Q2 2023 and further accelerated in the later quarters of 2023, due to the rule of large numbers, we expect that the year-on-year growth will reduce to a lower level in the second half of the year.

Thank you. Next, we will take the question from Lauren McComb from Goldman Sachs.

Thank you, Pony, Martin, James, John, and Wendy. I want to ask two questions. One is on games, that very big contrast versus last year. This year, we're seeing your reacceleration in domestic international games, your proactive adjusted evergreen existing games, launch of new titles, and then strong supercell grossing. So how are we planning ahead, I think, to smooth, maybe partially smooth this hyper growth trends that we're seeing in the gross receipts momentum? for investors to see this into a sustained multi-year gains revenue growth. Just looking at it from an overall portfolio basis, how do we want to manage and smooth this very strong trend that we're seeing recently. Second, on the investment portfolio, as we talked about, this will be a self-sustaining portfolio for the time being. What are the likely methods of divestment for more mature assets? Some may not be large enough to distribute or some may not be that liquid to sell. How are we thinking on the methods of divestment and then what are the new areas of investment that we are working on? Thank you.

So starting with the second question, if you look at the second quarter of this year, then divestitures were substantially in excess of our gross new investments. So if you take divestitures plus dividends received plus fund distributions received, then that was over 50% greater than the capital we deployed in new investments. So the portfolio is indeed self-funding. In terms of our ability to conduct divestitures, then The majority of our portfolio value is in listed companies and much of it is in relatively large and liquid listed securities. And so in the second quarter, we divested well over a billion dollars by securities. selling shares on the market. And I think that trend can continue. On the first question about games. So we don't aspire to smooth out our game gross receipts growth necessarily. And from a reported perspective, our financial results smooth themselves out because we defer the gross receipts into our profit and loss in some cases over the course of several years. And so that in and of itself exerts a naturally smoothing ability. But that's an accounting necessity. It's not a business choice on our part. But I think in terms of the underlying question behind your question, that we are experiencing a step up because of Dungeon and Fighter Mobile. And so how do we sustain the underlying step up? I'd make a few points. One is that Dungeon and Fighter Mobile is one contributor, but we also had other contributors. If you look purely at the China revenue, then actually the launch of Valorant in China contributed almost as much to our year-on-year revenue growth as the launch of dnf mobile this quarter so it's not dnf mobile in isolation and then you know looking forward we have the rebooting that we've done with two of our biggest games that we talked about yielding positive results this quarter which we expect to continue yielding positive results going forward as those two big games become more and more platform like and the injection of new game modes such as metro royale or extraction shooter into those platforms drives further user and gross receipts growth. We have the ongoing growth that we've talked about in some of our newer evergreen games, such as League of Legends Wild Rift. We have a fight for the Golden Spatula. And then, of course, we have a number of games in the pipeline that that we're optimistic about, whether that's a Delta Force or a Path of Exile 2 or One Piece, that we believe have the potential to become evergreen games in their own right going forward as well. So that's how we think about driving continued growth for our game business over the long term.

Yeah, I would just add to that and basically saying we did have a good quarter and the traction is actually quite nice. But let's not lose sight of the fact that we have seen very challenging business environment in the past couple of years. And that's really the nature of the gaming business, right? Which is, number one, it's increasingly difficult to come up with very successful new titles these days because the quality of the game and the expectation of the gamers are very high. And at the same time, the quality and the franchise value of existing titles are very strong so that, you know, if you want to launch a new game, you actually sort of, you have to come up with really good quality or very differentiated gameplay in order to attract users. And as such, we just need to work very hard to come up with good new titles. While at the same time, we do think that existing franchises are actually becoming more and more sustainable. But having said that, in order to grow existing franchises, we also have to keep on innovating. And as a result, getting our users involved excited and overall I would say the gaming industry is still have got a lot of potential but then it's to some extent cyclical because you know when there's a dearth in innovation or new supply or new excitement then it seems to be in doldrum. And then when there is a new wave of innovation, then the gaming business suddenly sort of, and the industry suddenly expand, right? And we just have to continue to work very, very hard in order to drive innovation. And we felt if we can do that, we can actually grow this business over a longer period of time. But, you know, ourselves as well as investors probably need to recognize the fact that there's going to be some cyclicality in the gaming business. When there's smaller years, when there's less innovation, then it grows less. When there's suddenly a big emergence of innovation, then it will grow faster.

Got it. Thank you, Martin and James.

Thank you. We will take the next question from Ellie Zhang from Macquarie.

Thank you so much, management, for taking my questions. I have two. Number one is really on the advertising segment. So second quarter, we've delivered 19% growth, seemed much more resilient versus the prior expectations, especially considering, you know, in the opening remark, management, you pointed out the impact on the advertising pricing under the current environment. Just wondering what we have done differently, both with video accounts and the other ad formats and how we have observed the advertisers behaviors shift under the current dynamics and how we're planning to defend the macro volatilities. The second one is really on the AI integration progress within our ecosystem. We already heard some exciting upgrades with the advertising segment. Just wondering if anything else you could share, such as the large language model training progress, application explorations, opportunities, and how we plan to strategize to further bump up the efficiency adoption. Thank you.

So I'll take the advertising question. And we haven't made dramatic changes. We're just continuing to execute along our path. And we are benefiting from deployment of neural network artificial intelligence on a GPU infrastructure to boost the click-through rate on our advertising inventory. We are benefiting from a mixed shift of advertising within Weixin increasingly being of a closed loop nature and all else equal, as you can see from the big e-commerce marketplaces and short video services, closed loop advertising tends to achieve higher, both higher CPM, but also higher click-through rate versus non-closed loop advertising. And then we have the potential to benefit from releasing more inventory, especially in video accounts. But in reality, in the first half of the year, we didn't release incremental inventory. So the growth that we experienced was more a function of the first two features.

In terms of AI, I would say we look at AI as... you know, more complete suite than just large language model. You know, there are neural networks, machine learning based recommendation engines, which we use for content recommendation, video recommendation, as well as at talking in the ads and content recommendations. use case, which is already delivering very good results. If you take video accounts as an example, by using AI, we actually are able to deliver better content and that generates more use time and a pretty big part of the growth in terms of the video accounts. user time is actually driven by better targeting, better recommendation, and that's in turn driven by AI. And at the same time, on the ad recommendation end, if we can actually increase conversion by Right. You know, that that's sort of, you know, pretty modest improvement than the revenue actually grows quite a bit. Right. So I think, you know, that's areas in which we are leveraging AI to deliver material and tangible commercial results. In addition, in the area of games, we're actually using AI to bridge the gap between PvE and PvP. When you have games which allow people to play against other players, but at the same time, sometimes you actually want to create a game mode in which a player actually play against the machine, then In the past, the machine is actually quite dumb, right? And with AI, we can actually make the machine play like... real player, and we can actually have it play at varying levels of skills and make the user experience and the gameplay very fun. So I think those are the areas which are not LLM, but generating very tangible results for our businesses. Now, in terms of LLM, the Key thing for us is actually improving the technology. And as we shared before, we have already built an MOE architecture model, which is performing as one of the top models in China. And when compared with international models on Chinese language, I think we're at the top of the pack. And we are deploying... our LLM in Yuanbao, which is an app that we have launched, which allowed users to interact with our large language model in multiple ways. And one a way is enhanced search functionality so that users can actually ask a question. And based on search results, we can actually provide very direct answer to the questions that our users pose. And so we have rolled it out to a large enough sample size to get user feedback. And the feedback so far has been quite positive. But of course, at the same time, we're also receiving a lot of constructive feedbacks and then we're using that to keep improving our product as well as our model. And over time, Yuanbao, when it gets to a certain level of quality, then we're going to increase our promotional resources and try to get more users into the app. And at the same time, when it gets to an even better level of expertise, then we can actually start incorporating it into services. different parts of our ecosystem. We have a lot of apps, which actually has got, you know, interaction use cases, which can leverage our generative AI technology. And, you know, we would be incorporating our tool into those use cases at the time when the quality of our product is good. And at the same time, as we continue to improve the efficiency of the model so that, you know, these, these products can be delivered to the users at a cost effective way.

Thank you very much. Thank you. We will take the next question from Alex Yao from JC Morgan.

Thank you management for taking my question and congrats on a strong quarter. My first question is regarding DNF Mobile. The game has achieved a strong initial momentum since the launch in late May. How do you guys think about the sustainability of this game? I'm asking because this is not a typical tactical esports game such as Honor King or Peacekeeper Elite that we have a lot of expertise, domain knowledge and execution track records. So given the jar of nature of the game, what's the strategy and outlook for the game's sustainability? And the second question is regarding FinTech. The growth rate of the FinTech business was negatively affected by a slow consumption environment and also high price sensitivity among consumers. Have you observed consumption behavior change in terms of financial product transaction on WeChat platform? If so, are these changes structural or cyclical? Thank you.

Hi, Alex. Thank you. On Dungeon & Fighter Mobile, we're very optimistic about the sustainability. The first reason is that there is the Dungeon & Fighter PC game that has sustained at a high level, a very high level, for 16 years. And so I think that we believe we do have expertise in operating this kind of game. We've done it for 16 years successfully with Dungeon & Fighter PC, and now we're extending it to a new platform. Secondly, we can see that in the 60-odd days since launch, Dungeon & Fighter Mobile has very good retention rates. And, of course, retention rates can fluctuate over time, but actually the first 30 days of the game's life those first 30-day retention rates are historically very good leading indicators for which games would enjoy the greatest longevity. And so whether it's League of Legends or Teamfight Tactics or Peacekeeper Elite or Honor of Kings, what marked them out in their first 30 days was not how many users downloaded the games, was not how much revenue they generated, it was the high retention rates that they were displaying among those users who had installed and begun playing the game. And we're also seeing very good retention rates for DNF Mobile. And of course, because the DNF Mobile game has been in development for an unusually long period. There's a very heavy content pipeline over the next two to three years that's already set up that will be progressively released. And of course, during those two to three years in an Exxon, we will be working on a content pipeline for subsequent years. But the game is in an unusual situation where because of its unusually long development pipeline, there's now an unusually long post-release content pipeline that's already released. ready to release as and when we choose to do so. So that's on DNF mobile.

So on FinTech, if we... it dissecting to different businesses, right? The payment business is definitely very tied to consumption growth. And as you can see in the official data, consumption growth in China is actually kind of weak. And we also clearly see that in our payment business in the sense that we saw a continued growth in terms of the number of transactions. So the number of transactions on the commercial side continue to grow double digit. But on the other hand, the average transaction value has decreased, which is contrary to before in which we have seen a pretty consistent growth in terms of average transaction value over a very long period of time. So we felt this is a clear demonstration of the fact that consumers are getting much more budget conscious. And... So that's on the payment side. In terms of the credit, we do see consumers actually wanting to borrow more at this point in time, but then the revenue actually decreased because we proactively control the amount that we lend out and we then lend out because we want to tighten the credit at this point in time when the macro... And consumption is kind of weak. And on the other hand, wealth management actually increased because a lot of consumers, instead of spending, they actually save more during uncertain times. So these are the dynamics that's happening across the different product areas within fintech. We felt this is more cyclical rather than structural because it's somewhat tied to the weak consumption pattern that's happening in the overall market. And as a result of that, we have seen the government actually rolling out very proactive policies to encourage consumption And we felt with these rollouts of such policies, at some point in time, the consumer sentiment, as well as the economy, will start turning. Because as evidenced in the Wealth Management Service, it's not as if people don't have money. People actually sort of have money, but they choose to save rather than spend. And if the government policies can actually induce more confidence among the consumers and start revitalizing different parts of the economy, then we felt at some point in time, consumer sentiment would turn and that would be good for our FinTech business.

Thank you. Next, we will take the question from Xiaoling Liu from HSBC.

Thank you very much. Martin mentioned that the bar for game quality and expectations have only gone up and turned more demanding. Can management discuss where we are in the investment cycle for AAA titles? And can you please give us an update on latest progress and whatnot? That's the first question. And separately, we have seen that cross-pollination of literature or existing PC games IP has played quite a vital role for driving growth in long videos as well as for mobile games. Honor of King World is obviously a highly anticipated title. What is the progress there? And can management also discuss what other IPs in the reserve would you expect to see similar potential in capable of driving more revenue potential across digital content segments? Thank you.

I think the second question, we've talked about some of the other IP-based games that we're excited about earlier in this call and also at length at the fourth quarter results call. So I would refer back to that. But you can also look at... what games we have that have become dramatically successful on PC, such as, you know, Valorant, which is now the biggest PC game in China. And, you know, of course, we'd like to bring that to mobile and that recently secured its Van Howell publishing license in China. And you can look, if you're so inclined, at some of the interesting games IP being generated by China literature and being generated by Tencent Comics and speculators, you know, whether that IP would make sense as the basis for games as well. So that's on the second question. In terms of the First question. I'm not sure that there's a cycle per se in AAA game development. I think there's more of a relentless trend where the game industry is only becoming bigger. And therefore, the budgets associated with the best games are also only becoming bigger. And we need to play in that arena. And that's what we're doing. been continually creating a large number of gains. As you know, we expense those costs through our P&L. We don't capitalize them. And so what you see is sort of what you get in terms of the income statement in attracting the cash flow quite closely. And, you know, we are indeed investing in a large number of, you know, what we believe will be very high quality games. You know, as to defining which ones, you know, AAA versus which ones are more... systems-based, then I think the boundaries are becoming increasingly blurred. If you look at our game Delta Force, that's now available for alpha testing on Steam, and it is quite popular. One of the reasons for the popularity is that within Delta Force, there's a mode that is very cinematic, classic AAA experience that's modeled on the Black Hawk Down incident. And then there's two other modes which are much more system-based, an extraction shooter mode and a 30 versus 30 mode that are much more akin to some of our competitive PvP games. And so Delta Force is an example of something that incorporates both the cinematic AAA experience as well as the competitive PVP experience.

If I can add right now, I think AAA is more like a means, not an end, right? So you can have... a play mode driven game, you can have sort of, you know, content driven game and AAA sort of, you know, it's probably more geared toward content driven. But I think, you know, for us, you know, we really want to, the end is actually building game titles to become evergreen titles and over time building, you know, big enough over evergreen titles into platforms. And within the platform, you would have, you know, you have play mode driven games content, you also have content-driven play modes. So it will be interlaced within a game, overall game world. So that's sort of what we felt will be happening. And we see a big opportunity in the future, of course, it would take some time to develop, to put more content-driven content playing experience into our competitive games. And we felt that it could be a pretty good opportunity for us to get our users within our competitive games to be exciting. And over time, with the advent of AI, as I said earlier, when we can actually blur the line between PVP and PVE, then there's actually more opportunity for us along that.

Thank you. Thank you. We will take the next question from William Packer from BNP Paribas.

Hi, management. Thanks for taking my question. There's been some press speculation around tensions with app store owners in China regarding several factors, for example, fees and external payment systems. This is parallel to what we're seeing in Europe and elsewhere. Could you help us think through the challenges and opportunities across the portfolio? For example, do you still see upside for the gaming business gross margin from reducing payments? Or in contrast, should we be more cautious for elements of the WeChat ecosystem? Any kind of appreciated. Thank you.

So that's quite a dense question. And, you know, my answer may or may not sort of reflect all of the density, but let me attempt to answer. So, you know, there are indeed, you know, naturally tensions between the game industry or the digital content industry versus app stores. And, you know, the root cause of the tensions is that, you what the game industry feels is a very onerous burden of 30% on games and other forms of digital content. Of course, the app stores would argue that they provide a beneficial ecosystem that is supportive of this digital content. But then the game industry would reply that that ecosystem, if it benefits digital content, also benefits all sorts of other goods and services. And so why is it the case that... you know, the burden of funding the ecosystem falls disproportionately entirely onto the digital content providers and, you know, not at all onto all of the other goods and services providers who we could ecosystem. So, you know, I think that's, you know, the general backdrop. And, you know, over time, you know, both for regulatory reasons and, you know, business reasons, you know, there is a trend towards the App Store take rate, you know, reducing over time. In terms of, you know, our position here, then as you're aware for the Dungeon and Fighter mobile game, given the strength of the IP, given the fact we knew that the most enthusiastic players will seek out the game and download it from a URL, whether it's in an Android app store or not, We made the decision for that specific game to work mostly with internal channels rather than with the onerous Android App Store channels. And we're very happy with that decision. It's beneficial for our returns. And we think it's fine in terms of user experience. But there will be other games we release in the future with different characteristics where we're seeking to build an audience from scratch. where we look forward to continue to cooperate with the App Store operators. So that's in terms of... new game releases. Your question, I think, also was touching on some of the press commentary around minigames on iOS. And I think there's been some misunderstandings there about the nature of the current situation, which is that today we don't monetize minigames on iOS through in-app transactions. I think it would be in our interests, in Apple's interests, but, you know, more so for the game developers and the users' interests if that monetization were made available. But, you know, we want to make it available on terms that we think are economically sustainable and that are also sustainable. fair. And so, you know, that's a discussion that's underway and we hope that the discussion leads to a positive outcome because, you know, it'd be a win, win, win. But in the event that, you know, the discussion doesn't progress, then the current status quo continues. In the event that the discussion does progress, then, you know, that's, you know, incremental revenue, you know, for us, incremental revenue for game developers is potentially incremental revenue for Apple and certainly a better experience for Apple users.

Thank you. We will take the next question from Thomas Chong from Jefferies.

Hi, good evening. Thanks, management, for taking my question. My first question is about our cloud business. Given that, I think in the prepared remarks, we talked about the AI-related revenue from high computing infrastructure, model library service, and also our AI solution for enterprise. I just want to get some more color with regard to our cloud revenue. What are our thoughts about the contribution from AI going forward. And my second question is about capital return. Considering the macro uncertainties these days, any thoughts about upsizing our share repurchase program? Thank you.

So on the first question, you know, clearly for the US hyperscale cloud providers, you know, renting out GPUs to, you know, other companies with AI requirements has become a very big business. In China, the same trend is evident, but to a lesser extent, you know, to a lesser extent, because you don't have the same multitude of, you know, extremely well funded startups trying to build large language models on their own in China. There are many small companies, but they're capitalized at a billion dollars, two billion dollars. They're not capitalized at $10 billion or $90 billion, the way that some of the giant U.S. VC-funded startups are now capitalized in the space. And it's also a somewhat challenging economic environment. Now, that said, we have seen that within our cloud, the demand from customers for renting GPUs for their own AI needs has been growing very swiftly. The percentage growth rates are very fast, but they're very fast partly because it's a low base, and also partly because while some of that demand for renting GPUs in the cloud is incremental, some of it is replacing demands that would otherwise have existed anyway for renting CPUs in the cloud. And so while the business of GPU provision is doing very well, the business of CPU processing is more flat because the incremental demand is for GPU, not CPU.

Well, in terms of share buyback, at this point in time, we are continuing with our previously communicated share buyback program, and there's no update for now.

Thank you.

Thank you, Thomas. We will take the last question from Gary Yu from Morgan Stanley.

Hi, thank you for the opportunity to ask questions. My first question is regarding domestic games. Again, a follow-up on DNF. I think management mentioned that we expect this to be the next evergreen major hit. how should we look at the longevity and scale on a sustainable basis versus the other two evergreen games in terms of, you know, amount of DAU or revenue potential in a kind of longer term relative to kind of all of cane and peacekeeper elites. And my second question is related to macro. I think management indicated that we have started to see some negative impact on payment. How has the recent trend been looking like? So have we seen a stabilized trend or things are getting worse? And also, we noticed that games and the Tencent-owned ad property seems to be very resilient under this kind of macro environment. How sustainable do we think we can kind of keep up the current resiliency in the games and advertising business in particular? Thank you.

Hi, Gary. On Dungeon and Fighter Mobile and triangulating it versus our historically two biggest games, as well as other games that are in the market, then this is probably stating the obvious, so I apologize. But as a narrative rather than systems-based game, one would naturally expect a lower price daily active user base for DNF mobile than one would for more systems-based games such as Honor of Kings or Peacekeeper Elite. On the other hand, as a narrative, not system-based games, one would expect a substantially higher ARP for Dungeon Fighter mobile. than for those system-based games. In addition, because Dungeon and Fighter Mobile is sort of building on 16 years of legacy and specifically of many people who played Dungeon and Fighter PC 16 years ago when they were in college and now working and they're quite affluent, but only have time to play games on mobile phones. The spending power of those users is also greater than it would be for new games that appeal to more of a 20-something user base. And so both the nature of the game being more narrative-based, as well as the nature of the audience being a more mature audience, are conducive to higher ARPU. Now, that said, if you compare Dungeon & Fighter Mobile With other narrative-based games in the China market, then the user base, the number of DAUs is dramatically larger. The game actually has a big audience for a narrative-based experience. And we believe that will continue given the nature of the game, given the high retention rates I talked about earlier. And while the ARPU is higher than it is for our biggest systems-based games, it's lower than for many narrative-based games in China. We think the monetization is fair and sustainable, again, especially in light of the nature of the audience for Dungeon and Fighter Mobile.

In terms of macro, I would say what we saw is actually pretty consistent with the official consumption number, which is... The second quarter is actually a slowdown from the first quarter. So I think that's the current trend. We felt with the government rolling out more proactive policies and more expansionary policies, then over time, given the resilience of the overall population, industry as well as entrepreneurial environment in China, then we should over time see recovery in terms of the economy as well as consumer consumption. So that's what we believe in. But, you know, it's not a matter of whether, right? It's a matter of when, you know, and we just sort of have to wait a little bit to see when the... Inducive policies would actually start yielding results. Now, in terms of games, I would say for our games, which are essentially large DAU long engagement games, we have pretty low spending per unit of time. And as a result, we felt this is actually quite resilient in the overall macro environment. And, you know, if we are to see any issue, it probably will be in the low DAU, high ARPU games, which are not necessarily Tencent games. And you might want to look at those games as proxies. And overall, we found, you know, of course, part of the gaming industry is actually driven by macro environments, which we felt given sort of the low spending per unit time, there probably is still some headroom before we hit that. The more important driver is actually innovation, as I've continually repeated a couple of times. So when there is continued innovation in the gaming industry, then we felt the market would expand, even if the macro environment is actually challenging.

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