⌛ Did you miss ProPicks’ 13% gains in May? Subscribe now & catch June’s top AI-picked stocks early.Unlock Stocks

Earnings call: Tencent Holdings reports robust Q1 growth, plans buybacks

Published 2024-05-14, 02:52 p/m
© Reuters.
TCEHY
-

Tencent Holdings (OTC:TCEHY) Limited (0700.HK) has reported a solid start to the year 2024, with a 6% year-on-year increase in total revenue, reaching RMB 159.5 billion. The first quarter also saw a significant rise in gross profit by 23% to RMB 83.9 billion. Highlighting a successful period, the tech giant announced plans for a share buyback program valued at over HK 100 billion.

Tencent's key services, including Weixin and WeChat, experienced growth in monthly active users (MAU), while Tencent Video and TME subscriptions also saw an uptick. The gaming sector was particularly strong, with several titles reaching record high gross receipts, and Tencent Cloud media services reporting over 50% revenue growth year-on-year.

Key Takeaways

  • Tencent's total revenue rose to RMB 159.5 billion, a 6% increase year-on-year.
  • Gross profit surged by 23% to RMB 83.9 billion; operating profit grew by 38% to RMB 52.6 billion.
  • The company plans to repurchase over HK 100 billion of its shares.
  • Weixin and WeChat MAU, Tencent Video, and TME subscriptions all increased.
  • Gaming and Tencent Cloud media services experienced strong revenue growth.
  • Fintech and business services revenue grew by 7% year-on-year.
  • Tencent is focusing on future game releases and investments in AI technology and content.

Company Outlook

  • Tencent expects to continue taking market share in advertising, increasing ad load on video accounts, and applying AI to adtech.
  • The company plans to focus on core platforms and high-quality revenue streams for long-term gross margin benefits.
  • Management anticipates lower year-on-year growth in selling and marketing expenses.

Bearish Highlights

  • Growth in fintech services slowed due to reduced offline consumption spending.
  • Mixed advertiser sentiment acknowledged due to a challenging environment.
  • The company assumes the continuation of the current App Store revenue-sharing arrangement despite believing it over-earns at the expense of app providers.

Bullish Highlights

  • Tencent Cloud Media Services recognized as market leader with over 50% revenue growth year-on-year.
  • WeCom revenue tripled, and Tencent Meeting revenue doubled year-on-year.
  • Long-form video ad revenue increased at a double-digit rate.

Misses

  • No specific misses were discussed during the earnings call.

Q&A Highlights

  • Tencent's investment portfolio has generated significant returns; no plans to increase its size further.
  • AI, including Hunyuan, is currently used in customer service and interactive experiences, with potential future application in game production.
  • Monetization potential for Weixin Search is strong, with increasing usage and engagement.
  • The company acknowledges the diverse and global nature of its game development process.

Tencent's commitment to innovation and strategic investments in AI and content, coupled with a prudent approach to capital allocation, positions the company to navigate through market uncertainties and maintain a trajectory of growth. The company's diverse game development teams and their collaborative approach underline Tencent's ability to adapt and evolve in the dynamic gaming industry. With plans to enhance shareholder value through dividends and share buybacks, Tencent is setting a confident tone for the future.

InvestingPro Insights

Tencent Holdings Limited's recent earnings report showcases a company on the rise, with a strong start to 2024. The InvestingPro data and tips provide additional context and insights into Tencent's financial health and stock performance.

InvestingPro Data indicates that Tencent has a substantial market capitalization of $453.58 billion, reflecting its significant presence in the industry. The company's P/E ratio stands at 28.46, with a slight adjustment to 26.57 when looking at the last twelve months as of Q4 2023. This suggests a solid earnings base relative to the stock price. Additionally, Tencent has experienced a healthy revenue growth of 9.82% over the last twelve months, signaling continued business expansion.

InvestingPro Tips highlight that Tencent is a prominent player in the Interactive Media & Services industry, which is aligned with the bullish highlights of the article regarding Tencent Cloud Media Services and its market leadership. It's also worth noting that the company has been able to maintain dividend payments for 20 consecutive years, reinforcing its commitment to shareholder value, as mentioned in the article's conclusion. Furthermore, Tencent's stock has seen a strong return over the past month, with a 27.16% increase, and is trading near its 52-week high, indicating robust investor confidence.

For readers interested in deeper analysis and additional insights, there are over 10 more InvestingPro Tips available at https://www.investing.com/pro/TCEHY. These tips can provide a more comprehensive understanding of Tencent's market position and financial health. To access these insights, be sure to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

Tencent's strategic focus on AI technology, content, and its gaming sector aligns with the insights provided by InvestingPro, suggesting a company that is not only growing but is also well-positioned to manage market fluctuations and maintain a strong performance.

Full transcript - Tencent Holdings DRC VIE (TCEHY) Q1 2024:

Operator: Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2024 first quarter results announcement webinar. This is Wendy Huang from the Tencent IR team. At this time, all participants are in a listen-only mode. After management’s presentation, there will be a question and answer session. For participants who dial in by phone, if you wish to ask a question, please press 5 on your telephone to raise your hand. If you are accessing from the Tencent meeting or group meeting application, please click the Raise Hand button on the bottom left, and please be advised that today’s webinar is being recorded. Before we start the presentation, we will like to remind you that this includes forward-looking statements which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to but not as a substitute for measures of the group’s financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IR section of our website. Let me now introduce the management team on the webinar tonight. Our Chairman and CEO, Pony Ma will kick off with a short overview. President Martin Lau and Chief Strategy Officer James Mitchell will provide a business review. Chief Financial Officer John Lo will conclude with a financial discussion before we open the floor for questions. I will now pass it to Pony.

Pony Ma: 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 team organization we put in place, resulting in an increase in game gross receipts and creating a foundation for our games revenue to resume growth in future quarters. We continue to accommodate high quality revenue streams, including amortizing video accounts and Weixin search, mini games, platform service fees, and ecommerce technology service fees, contributing our growth and operating profit growth outpacing our revenue growth. Executing on our commitment to return excess capital to shareholders, we established our buyback plan and are on track to repurchase over HK 100 billion 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 RMB 160 billion, up 6% year-on-year and 3% quarter-on-quarter. Gross profit was RMB 84 billion, up 23% year-on-year and 8% quarter-on-quarter. Non-IFRS operating profit was RMB 59 billion, up 30% year-on-year and 19% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB 50 billion, up 54% year-on-year and 18% quarter-on-quarter. Turning to our key services, for our communications and social networks, combined MAU of Weixin and WeChat groups year-on-year and quarter-on-quarter grew RMB 1.36 billion. Our digital content reinforces our leadership in long form video and music streaming as Tencent Video and TME subscriptions grew year-on-year. For games, we have 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 for our media, entertainment and live streaming industries increasingly use Tencent Cloud media services. Our enterprise SaaS products, WeCom and Tencent Meeting add [indiscernible] powered functionalities and increased their adoption by enterprise customers. I will hand over to Martin for a business review.

Martin Lau: Thank you Pony. Good evening and good morning to everybody. For the first quarter of 2024, our total revenue was up 6% year-on-year. VAS represented 49% of our total revenue, within which the social networks sub-segment was 19%, domestic games sub-segment 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 Weixin Search advertising, wealth management services, mini games, platform service fees, and ecommerce technology service fees. Improved cost efficiency in our long form video and cloud-based business also contributed to higher gross profit. By segment, VAS gross profit increased 5% year-on-year to RMB 45 billion, representing 54% of our total gross profit. Online advertising gross profit increased 66% year-on-year to RMB 15 billion, contributing 17% of total gross profit, and fintech and business services gross profit increased 42% year-on-year to RMB 24 billion, contributing 28% of total gross profit. For value-added services, segment revenue was RMB 79 billion, down 1% year-on-year. Social networks revenue was down 2% year-on-year to RMB 31 billion. 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 RMB 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 and ARPU. TME strengthened collaboration with Tencent Video and released original soundtrack of the popular drama series, The Legend of Shen Li. Domestic games revenue was down 2% year-on-year to RMB 35 billion. Increased revenue from Valorant, Fight of 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 monetize both content releases in recent quarters. However, total gross receipts of total 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 RMB 14 billion, 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 rates of revenue lagged behind gross receipts due to long deferral periods for Supercell’s games. Moving onto 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 [indiscernible] growth as AI powered recommendation algorithms allows us to provide targeted high quality content more effectively. Mini 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 ecommerce ecosystem by diversifying merchandise categories and enabling more content creators to monetize through ecommerce activities. Now with that, I’ll pass to James.

James Mitchell: Thank you Martin. Moving onto 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 PVE content and an enhanced reward system. Arena Breakout achieved new milestones in DAU, [indiscernible] users and gross receipts as we released a new large 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, Tarisland, 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 (TSX:MRU) Royale. Brawl Stars average DAU more than doubled year-on-year and gross 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 5x5 mode, a simplified rewards system, and successful community events. Warframe achieved record high gross receipts in the first quarter with the introduction of a new faster moving Warframe, [indiscernible] prime. For online advertising, our revenue was RMB 26.5 billion in the quarter, up 26% year-on-year, benefiting from increased engagements in 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 adtech platform to help advertisers manage ad campaigns more effectively and we made generative AI-powered ad creation tools available to all advertisers. These initiatives enables 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-thru rates. Mini programs ad revenue grew over 40% year-on-year, benefiting among other features from mini games closed loop effect, whereby mini games developers both boost demand, being substantial advertisers themselves, but also creates supply as the mini games 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 RMB 52 billion, 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 Weixin 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 ecommerce 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 up-selling among enterprise clients and Tencent Meeting revenue doubled year-on-year. For Hunyuan, the main model achieved significant progress as we have scaled up using a 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. With that, I’ll pass to John.

John Lo: Thank you James. Hi everybody. For the first quarter of 2024, total revenue was RMB 159.5 billion, up 6% year-on-year. Gross profit was RMB 83.9 billion, up 23% year-on-year. Operating profit was RMB 52.6 billion, up 38% year-on-year. Interest income was RMB 4.2 billion, up 43% year-on-year, driven by growth in cash receipts and high interest yield. Finance costs were RMB 2.8 billion, up 7% year-on-year due to higher interest expenses. Share of profit of associates and JVs was RMB 2.2 billion, up from profit of RMB 0.1 billion in the same period last year. On a non-IFRS basis, share of profit was RMB 5.5 billion versus loss of RMB 0.1 billion 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 RMB 14.1 billion, primarily driven by operating profit growth and higher provision for withholding tax. IFRS net profit attributable to equity holders was RMB 41.9 billion, up 62% year-on-year. Diluted EPS was RMB 4.386, up 66% year-on-year. On non-IFRS financial figures, operating profit was RMB 58.6 billion, up 30% year-on-year. Net profit attributable to equity holders was RMB 50.3 billion, 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 profits from associates and JVs, which amounted to RMB 5.5 billion this quarter compared to share of loss of RMB 0.1 billion in the same quarter last year. Diluted EPS was RMB 5.263, up 57% year-on-year, outpacing non-IFRS 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 onto gross margins, overall gross margin was 53%, up seven percentage points year-on-year. By segment, VAS gross margin was 57%, up three percentage points year-on-year. This was due to growth in subscription revenues and increasing high margin mini game platform service fees, and [indiscernible] content cost and operating cost savings. Online advertising gross margin increased to 55%, up 13 percentage points year-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 ecommerce technology service fees, improved monetization of WeCom and other business services, and increased cost efficiency in our [indiscernible]. On first quarter operating and expenses, selling and marketing were RMB 7.5 billion, up 7% year-on-year driven by increased spending on promotion and advertising for new content releases. The total represented 5% of revenues, stable year-on-year. R&D expenses were RMB 15.7 billion, up 3% year-on-year. G&A expenses excluding R&D were RMB 9.1 billion, down 3% year-on-year due to lower staff cost, 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-on-quarter. Let’s look at our first quarter non-IFRS margin ratios. Non-IFRS operating margin was 37%, up seven percentage points year-on-year. Non-IFRS 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 RMB 6.6 billion, up 557% year-on-year from a low base quarter last year, mainly driven by investment in GBUs and servers to support our Hunyuan and AI recommendation algorithms. On a quarter-on-quarter basis, operating capex was down 1%. Non-operating capex was RMB 7.8 billion, up 127% year-on-year due to acquisition of land use rights during the quarter. As a result, total capex was RMB 14.4 billion, up 226% year-on-year. Free cash flow was RMB 51.9 billion, largely stable year-on-year or up 52% quarter-on-quarter, primarily due to higher gross receipts from games. Net cash position was RMB 32.5 billion, up 69% year-on-year, reflecting strong free cash generation partially offset by RMB 13.5 billion cash out for share repurchase during the quarter. Thank you.

A - Wendy Huang: Thank you John. We shall now open the call for questions. If you are dialing in by phone, please press five to raise a question, then press six to un-mute yourself. If you are accessing from the Tencent Meeting or group 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 Kenneth Fong with UBS.

Kenneth Fong: Hi, good evening management. Thanks for taking my question. My first question is on online games. Last quarter, we highlighted one of our key strategies is to rejuvenate our key titles. That is showcased in 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 IP and titles? I have a follow-up question on the buyback side. Last quarter, we completed at least RMB 100 billion of buybacks 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 factor that we should consider? Thank you.

James Mitchell: Hi Kenneth, thank you for the questions. Perhaps I’ll take the one on games and Martin on buybacks. 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 and we’re confident in the progress of that process. 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. A good example would be Brawl Stars, where we cited not only the quadrupling of gross receipts but also the 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 change in mindset, sometimes the changes are change in people. 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 game themselves, these big competitive multi-player games are inherently evergreen, just as key sports such as football, basketball are inherently evergreen. With the right people running the games, then we get the right results.

Martin Lau: In terms of the buyback, we have committed to buying back at least HK 100 billion 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--it is true that the share price has 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. That’s why we’ll continue to pursue our share buyback at this point in time.

Kenneth Fong: Thank you, and congrats on the very strong set of results.

Martin Lau: Thank you.

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

Thomas Chong: 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’ve seen a very good set of momentum in the first quarter. How should we think about our market share gain story and the adtech upgrade on the back of macro recovery? How are we actually seeing the ad sentiment as we come to June 18, and on video accounts, how should we envision the advertising growth momentum over the next few years and the strength of live streaming ecommerce GMB growth to drive our ad revenue? 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 three years? Should we expect there might be some point that we need to go back to more investment? In terms of opex, how should we think about S&M expenses over the next few quarters given that we have more content and new game releases? Thank you.

James Mitchell: 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. We would expect our advertising growth to be less rapid in subsequent quarters of the year than it was in the first quarter, 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 we’re early in capturing the benefits of deploying AI to our adtech stack, and we think that we will--we are benefiting and will continue to benefit disproportionately from applying AI to our adtech, because historically as a social media platform, our click-thru rates were low, and so starting from that lower base, we have seen we can double or triple click-thru rates in a way that’s not possible for ad services that are starting from much higher click-thru rates. 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.

Martin Lau: 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 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 action. I think that’s actually very important. The reason the high quality growth drivers become clearer is because 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. We do believe that these growth drivers, be it video accounts advertising or Weixin Search advertising, or value-added services on top of our payment platform, and over time the ecommerce service fees, that these have a pretty long runway going forward. We have always also been investing in new areas that can serve as growth drivers for the future, including AI, including new games, including Weixin ecommerce and SaaS products, just to name a few. 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 it to John to answer that question.

John Lo: 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, somewhere from low to mid-teens in 2024. Having said that, promotional advertising spend 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 will definitely do it; but with the cost optimization culture and mechanism in mind, we would definitely assess that vigorously.

Wendy Huang: Thank you. Next, we will take a question from Alicia Yap from Citigroup.

Alicia Yap: Hi. Good evening management. Thanks for taking my questions. Congrats on the solid quarter. Two questions. First is on the gaming. With the positive growth of HoK, Peacekeeper, and also several games also achieving record high growth in receipts this quarter, the strong growth in the deferred should also bode 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 uncertainties on the gaming business that we need to be concerned or worried about? Second question is wondering if there’s any chance on the games application or the digital content application by Tencent or other developers in China could seen an improvement in the App Store revenue-sharing arrangement in the coming quarter that might support further uptick in the gross margin for the VAS. Thank you.

James Mitchell: Hi Alicia, thank you for your questions and for the congratulations. On the first question around the games, 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 have 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 have identified in our pipeline. In terms of your second question around App Store revenue-sharing ratios, we do believe that App Store is currently over-earning 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.

Wendy Huang: Thank you Alicia. We will take the next question from Gary Yu from Morgan Stanley (NYSE:MS). Gary, your line is open.

Gary Yu: Thank you. Thank you management for taking my question, and congratulations on a solid set of results. I have a follow-up question 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 cultivate games into a next evergreen 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? My second question is also a follow-up question on margin upside. Across these business segments, how should we look at the sustainable 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 relative margin trend going forward for different segments? Thank you.

James Mitchell: Yes, so on your question about new games, 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 survived and evolved to become evergreen games. 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 the time spent on the big consoles is more and more centered around the gigantic evergreen games, like Fortnite, like Call of Duty. Our response to that is to continually raise the bar on the new games we actually bring to market and focus on fewer but bigger and better new games. Not every new game we bring to market has a high probability of becoming evergreen - there are some new games we bring to market which are more consciously content-driven games which have a cycle associated with them, and that’s fine, they can still be successful, profitable games that players enjoy and love. But for those games that we do aspire to the status of evergreen games, then the metrics we focus on are not the metrics that you may find most visible externally, such as the hype, the excitement, downloads, the first day revenues. Rather, we look at metrics of player engagement, such as the retention rates, and it is those leading indicators that tell us when a game is a new game that has a moderate launch 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 have seen with Fight for the Golden Spatula, that as we mentioned despite a fairly subdued start is now the third biggest mobile game in China behind two of our other games. 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 fairly--you know, a number of factors 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 all three of our big segments, but particularly for advertising and fintech and business services, there’s been a positive mix shift underway away from lower margin revenue streams and toward higher margin revenue streams. As Martin articulated, 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.

Wendy Huang: Thank you Gary. We will take the next question from Anna Jung [ph] from [Indiscernible] Securities.

Anna Jung: Hi management, thanks for taking my question. My name is Anna Jung from [indiscernible], and it’s actually my first time to ask a question. 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. Also, in the future, do you think under the AI development, our competitors such as Baidu (NASDAQ:BIDU) [indiscernible] or Alibaba (NYSE:BABA), they also apply AI to their ad business, so how do you think that AI will drive the ad market share to change in the longer term? This is my first question. Thank you.

James Mitchell: Welcome to joining our Q&A, Anna. I’ll take the first question, although Martin may supplement. We believe that tools like Advantage Plus are 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 ecommerce platforms. But with the advantage that the social media platforms have much greater time spent, user engagement than search engines or ecommerce 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 are one, that have very substantial under-monetized time spent and are now able to monetize that time spent more effectively by deploying AI, because the deployment of AI enables an upward structural shift in click-thru rates, and that shift is most pronounced for those inventories where the click-thru 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. In general, we think there will be a reallocation of advertising spend toward those services which have high time spent, high engagement, and are now able to deliver increasing click-thru rates, increasing transaction volume more commensurate with the time spent and engagement superiority. Thank you.

Anna Jung: 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 the rollout to automated products such as WhatsApp and Facebook (NASDAQ:META) Messenger, etc. 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?

Martin Lau: 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, will be great distribution channels for these AI products. But I think at this point in time, everybody is actually trying out different products that may work. No one has really come up with a killer application yet, with the exception of probably OpenAI, [indiscernible], so I think that 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.

Anna Jung: I see, thank you so much. I’m sorry, can I just have one more additional question, because we are really excited for Tencent, and recently there’s--

Wendy Huang: I’m sorry, in the interests of time, we need to save time for other--

Anna Jung: Okay, thank you. All right.

Wendy Huang: Only two for each analyst.

Anna Jung: Okay, thank you.

Wendy Huang: We will take the next question from John Choi from Daiwa.

John Choi: Hey, thanks for taking my question, and congratulations on a great set of results. I have a question about your business services and cloud. I realize that 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 opening up or more warmed up on using our services and as a result, hopefully we should see this trend accelerated towards the remaining part of the year? I have a quick follow-up question on your wealth management. I think this has been one of the key drivers of your growth of 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 we could benefit from this part of the business, but also what kind of investment that is required to further cultivate further development here? Thank you.

Martin Lau: 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 relative low base, so I think we look at it more as a validation, an early validation of the fact that we can get paid for some SaaS services in China. We really started from a base case of enterprises are not paying for software, which is very different from established markets like the U.S., and we are 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 enterprise software has been able to achieve in the U.S., and I think it will continue to be a very long way for us to grow such revenue. I don’t think it’s an acceleration of monetization, it’s more of a validation of the initial case, and from that 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 connection for us with the enterprise customers, which we can cross-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, that the inflection point would come, and we want to be the most competitive and leading player at the time the inflection point comes. Now in terms of the wealth management services, it’s mainly our customers putting their money into money market funds, which we offered alongside with fund management companies, so instead of our customers withdrawing the money into their bank accounts or spending the money, they actually put this 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. I think on this front, what we want to do is continue to build up our payment platform so that people are comfortable and trusting us with more of their wealth, and they can more use cases so that they can use it for different purposes, that would increase the propensity for people to park their money with us, and so we’ll continue to work with more fund management companies so that they can offer good 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 risk management, so that we really have a very close look and watch over the safety of the wealth for our customers. All these things are being pursued at the same time. If we can do all these, we believe this service will continue to grow on a consistent basis.

Wendy Huang: We will take the next question from Charlene Liu from HSBC. Charlene, your line is open. Charlene, can you hear us? Okay, maybe we will move to the next question, to Ronald Keung from Goldman Sachs (NYSE:GS).

Ronald Keung: Thank you Wendy, and thank you Pony, 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 ecommerce, so I want to hear, where do we see we are innovating most in terms of adtech? We’ve read about--you’ve talked about adtech upgrades, so will we leverage video accounts, live streaming and mini program, maybe on an ROI-based ad products? Then I have a follow-up question.

James Mitchell: Hi Ronald. On adtech, 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 have been--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.

Ronald Keung: Okay, and then my follow-up question is on our investment portfolio. Given it’s very sizeable, nearly US $130 billion in value, do we have any thinking on consistent or any distribution policies after the JV and Meituan distributions in the past? I’m thinking about any predictable policies so that the market will more actively value this part of the value, given the substantial market value within Tencent. Thank you.

James Mitchell: 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 RMB 5 billion, that’s up very sharply year-on-year and it annualizes to a number in the 20s of billions renminbi. To the extent that investors are valuing Tencent’s 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 associate income contributing to our multiple of several hundred billion renminbi, versus the intrinsic value or the market value of the portfolio, which is substantially higher, but as the associates--you know, as companies like Pinduoduo (NASDAQ:PDD) 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.

Martin Lau: 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 were new companies being formed and grew to very large size, and as a result, we actually benefited a lot from investing in these companies. At the same time, the investment also helped us a lot in terms of building ecosystems on our core platform, 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 international markets as well as get a hold of a lot of evergreen and large titles. In the music industry, for example, we have invested in Spotify (NYSE:SPOT) and also upstream in order for us to establish a very strong position for TME in China. On the payment side, we have actually invested in companies which actually contributed to a lot of use cases. 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 it matures, 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 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.

Ronald Keung: Got it. Thank you Martin.

Wendy Huang: Thank you Ronald. We have successfully reconnected with Charlene Liu from HSBC. Charlene, your line is open.

Charlene Liu: Thank you so much, Wendy. Really appreciate the opportunity. I have two questions. I think first [indiscernible] application of Hunyuan, management has--

Martin Lau: We can’t hear. Can you repeat that question?

Charlene Liu: Yes, can you hear me okay? Yes, so management has spoken quite extensively on how Hunyuan can benefit the ad business. Can we talk about application of AI onto the game business, and how does management expect--

Martin Lau: We can’t hear her. Sorry, we can’t hear her.

Wendy Huang: Sorry, Charlene, your line is not stable. Maybe we will catch up offline.

Charlene Liu: Is this better? Sorry, is it better?

Martin Lau: Yes, one more try, maybe.

Charlene Liu: Okay, sorry. Thank you so much, really appreciate this. Can we talk about Hunyuan’s potential application on the game business, and [indiscernible] how does management expect that to play a larger role to help in game production? Okay--sorry, thank you for the opportunity.

Martin Lau: I think for Hunyuan, the--

Charlene Liu: Game production--

Martin Lau: It can be assisting game business in multiple ways. Right now, the best contributor is actually on the customer service front, when Hunyuan is actually deployed to answer questions and be a customer service bot for a lot of our games, is actually achieving very high customer satisfaction level. AI in general has already been deployed in our games, but not necessarily the generative-AI technology yet. In terms of Hunyuan, I think over time when we actually can move Hunyuan into a multi-model, and especially if we can start creating really high quality, high fidelity videos, 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 growth of content creation in gaming yet. I think it probably will be a couple more generations before it can be deployed for gaming production.

Wendy Huang: Thank you Charlene, we will follow up with you on your other questions. Next, we will move to Alex Yao from JP Morgan (NYSE:JPM).

Alex Yao: Thank you, management team, for taking our 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, and also how should we think about the medium term growth outlook for the fintech business as a whole? The second question is on the Weixin Search, which seems to be picking up monetization momentum in recent quarters. Can you discuss strategy to monetize Weixin Search activities? It would be great if you could share with us some of the operating metrics, just to help us understand the length of the runway. Thank you.

Martin Lau: In terms of fintech, I think most of the reason for the slowdown is actually the headwind on offline consumption. We felt this is a phenomenon which you probably see across many other industries as well. We felt 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 headwind will 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. 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 will 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 upon withdrawal, but it will be turned into an asset under management and would continue to generate wealth management fees over time, so that actually turns into a longer term high value-added revenue. In terms of wealth management services, I think it will continue to grow for the reasons that I talked about earlier. For loan generation fees, I think we are getting a little bit more cautious as there is a macro headwind, and we want to be very vigilant on risk management, so that’s how we look at the different components of the fintech revenue. What was the other question?

Alex Yao: Weixin Search.

Martin Lau: Oh, in terms of Weixin 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. We have been monetizing that service on a relatively light basis - in fact, it just started last year that we started monetizing Weixin Search, so with the combination of the fact that there is 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, be it video accounts, and we’re 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 Weixin.

Wendy Huang: Thank you. In the interests of time, we will take the last question from Robin Zhu from Bernstein. Robin, your line is open.

Robin Zhu: Thank you. Hi management. Thanks for taking my questions. 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 that video accounts engagement is 2x of Moments’, could I get your thoughts on the intensity of ad revenue 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? 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 over the last few years have now resolved and we should look forward to a more consistent launch pipeline in the second half and in future years? Thank you.

James Mitchell: Hi Robin, thank you for your question. On the first one, yes, I think objectively you can see from the results of companies like Meta, that operate both traditional feel and also a short video feed, that over time that the monetization for 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 regards to the second question, we do feel we’ve debugged some of the more obvious challenges. No doubt 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 gone--we’ve resolved the big immediate challenges, and that is translating into both better engagement and monetization trends with 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, one of them is created by a team in Chungdu, 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. 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 enormous--these 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. Those strengths, we aim to reinforce over time. That’s what I’d say on the game process debugging side.

Martin Lau: Yes, 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 team, so no perfect games. We are continuously going through the process of debugging, and we are 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. 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 make changes, so that we can actually get the games to be really evergreen titles. That’s, I think, the reason why we have the largest number of evergreen titles and probably the most proportion of evergreen titles in the industry. Just to reiterate on James’ point, the diversity is actually very important, 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 progress much faster than the rest of the industry.

Wendy Huang: Thank you. Thank you everyone. We are now ending the webinar. Thank you all 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. A replay of this webinar will also be available soon. Thank you, and see you next quarter.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.