Tencent Holdings Ltd

HKEX:700

Earnings Call Analysis

Strong Financial Growth and Operational Highlights

For the first quarter of 2024, the company reported a total revenue of RMB 159.5 billion, up 6% from the previous year. Gross profit increased by 23% to RMB 83.9 billion, and operating profit was up 38% to RMB 52.6 billion. Interest income grew 43% due to higher cash reserves. Income tax expense rose 24%, reflecting profit growth. IFRS net profit attributable to equity holders surged by 62% to RMB 41.9 billion, translating to a diluted EPS of RMB 4.386, up 66%. The gross margin improved to 53%, benefiting from efficiencies in video, cloud, and advertising sectors. The guidance suggests sustained revenue growth and margin expansions going forward.

Revenue and Profit Growth

Tencent saw robust growth in financial metrics this quarter. Total revenue reached RMB 160 billion, a 6% increase year-on-year and a 3% rise from the previous quarter. Gross profit surged by 23% year-on-year to RMB 84 billion and grew 8% quarter-on-quarter. Operating profit (non-IFRS) increased by 30% year-on-year, reaching RMB 59 billion. Net profit attributable to equity holders (non-IFRS) climbed by 54% year-on-year, amounting to RMB 50 billion. These gains were driven by the strong performance across multiple business segments, emphasizing Tencent's operational efficiencies and strategic adjustments.

Communication and Social Networks

User base expansion was notable, with the combined monthly active users (MAU) of Weixin and WeChat increasing to 1.36 billion. This growth reflected both year-on-year and quarter-on-quarter gains. Strong engagement levels were maintained through strategic investments in AI technologies, enhancing user experiences across Weixin’s various services including official accounts, video accounts, and mini programs. Additionally, Mini Programs exhibited over 20% year-on-year growth in user time spent, showcasing Tencent’s ability to retain and expand user engagement.

Digital Content and Games

Tencent’s digital content and gaming segments demonstrated resilience and strategic agility. Monthly active users for Tencent Video and TME subscriptions saw year-on-year growth. In the gaming sector, proactive measures led to an initial recovery for flagship titles within domestic and international markets. Despite a 2% decline in revenues from domestic games, there was a 3% year-on-year increase in total gross receipts, indicating a recovery trajectory. PUBG Mobile and Supercell games contributed to a 3% rise in international games revenue. Future growth was further supported by the introduction of new content and enhancements to popular titles.

Cloud Services and AI

Tencent Cloud continued to attract a diverse set of clients, with higher adoption rates in media, entertainment, and live streaming industries. The integrated audio and video cloud solution for Tencent Cloud Media Services achieved over 50% year-on-year revenue growth. Business Services revenue displayed strong momentum, growing at a double-digit rate due to increased contributions from high-margin segments and enhanced operational efficiency. The strategic deployment of AI within cloud services and ad technology contributed to these gains, facilitating better cost efficiency and advertiser engagement.

Advertising and FinTech

The advertising segment experienced significant growth, with revenues up by 26% year-on-year, driven by AI-powered ad targeting and improved click-through rates. This segment’s gains were primarily supported by video accounts and Weixin search advertising. Meanwhile, FinTech services revenue grew, despite a slowdown in payment services driven by changes in consumer behavior. The wealth management arm demonstrated robust growth year-on-year due to increased user numbers and average fund investments. The focus on low-risk money market funds has proven beneficial, contributing positively to the segment’s revenue.

Gross Margin Improvement

Overall gross margin improved to 53%, a climb of 7 percentage points compared to the previous year. This improvement was largely due to increased contribution from high-margin revenue streams such as video accounts, Weixin search advertising, and platform service fees. The VAS segment, contributing to 54% of the company’s total gross profit, saw an increase in gross margin to 57%. Similarly, online advertising and FinTech and Business Services segments experienced significant margin expansions, reaching 55% and 46%, respectively.

Earnings Per Share (EPS) and Share Buybacks

Tencent’s diluted EPS showed strong growth, increasing by 66% year-on-year to RMB 4.386. On a non-IFRS basis, diluted EPS was RMB 5.263, up 57% year-on-year. This growth outpaced net profit increases, helped by a decreased share count resulting from share buybacks. The company remains committed to its buyback plan, pledging over HKD 100 billion in share repurchases for 2024. This approach aims to return excess capital to shareholders while maintaining robust financial health and fostering long-term growth.

Earnings Call Transcript 2024-Q1

[Wendy Huang, executive]

Good day, and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2024 First Quarter Results Announcement webinar. I'm Wendy Huang from Tencent IR team. [Operator Instructions] And please advise today's webinar is being recorded. Before we start the presentation, we would 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 propelled in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IR section of our website.

Let me now introduce the management team on the webinar tonight. Our Chairman and CEO, Pony Ma, will kick off with a short overview. President, Martin Lau; and Chief Strategy Officer, James Mitchell, will provide a business review. Chief Financial Officer, John Lo, will conclude with financial discussion before we open the floor for questions. I will now pass it to Pony.

[Huateng Ma, executive]

Thank you, Wendy. Good evening. Thank you, everyone, for joining us. During the first quarter of several of our leading games in China and internationally start to benefit from team organization we put in place, resulting in an increase in game growth received and creating a foundation for our games revenue to resume growth in future quarters.

We continue to cultivate high-quality revenue streams, including advertising and video account and Weixin search, mini games, platform service fees and e-commerce technology service fees contributing to our growth and operating profit growth outpacing our revenue growth, executing on our commitment to return excess capital to shareholders we stepped up our buyback plan and are on track to repurchase over HKD 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 contracts.

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 communication and social networks. Combined MAU of Weixin and WeChat grew year-on-year and quarter-on-quarter to RMB 1.36 billion. For digital content where were reinforces our leadership in long form video and music streaming as Tencent Video and TME subscriptions grew year-on-year.

For games, we made proactive adjustments driving initial recovery for our flagship games in China and international markets. While several games in our portfolio achieved a record high in growth received during the quarter. For cloud, international and domestic clients from media, entertainment and live streaming industries increasingly use Tencent Cloud media services. Our enterprise SaaS products, WeCom and Tencent Meeting at [indiscernible] empowered functionalities and increase their adoption by enterprise customers. I will now hand over to Martin for business review.

[Chi Ping Lau, executive]

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 social networks subsegment was 19%, Domestic games 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 e-commerce technology service fees.

Improved cost efficiency in our long-form video and cloud businesses also contributed to higher gross profit. By segment, VAS gross profit increased 5% year-on-year to 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 116 million benefiting from popular self-commissioned drama series and animated series such as Blossom Shanghai, the Hunter and The Perfect World season 4.

Music subscription revenue increased 39% year-on-year, reflecting growth in subscriptions in ARPU. TME strengthened collaboration with Tencent Video and released original soundtrack of A 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 first -- in the quarter reflected weak monetizable content releases in recent quarters.

However, total gross receipts of domestic games in the first quarter increased 3% year-on-year, showing a general recovery trend. International games revenue increased 3% year-on-year to 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 rate of revenue lagged behind gross receipts due to long deferral periods for Supercell games.

Moving on to Communications and Social Networks. For Weixin, users are increasingly supplementing their stable consumption of social graph supply content in chat at 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 and chosen topics with interested followers, it achieved healthy year-on-year pageview growth. As AI-powered recommendation algorithms allow 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 nongame used 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 3 years. Video accounts user time spent grew 80% year-on-year in the first quarter. Time spent on video accounts is now over 2x that of Moments. We also strengthened our live streaming e-commerce ecosystem by diversifying merchandise categories and enabling more content creators to monetize to e-commerce activities. Now with that, I'll pass to James.

[James Mitchell, executive]

Thank you, Martin. Moving on to domestic 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 rewards system. And Arena Breakout achieved new milestones in DAU, paying users and gross receipts as we released an enlarged map with vehicles and introduced Armor and Weapons inspired by action 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 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 5 versus 5 mode, a simplified reward system and successful community events. Warframe achieved record high growth receipts in the first quarter with the introduction of a new faster-moving war frame the Gauss 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 ad tech platform to help advertisers manage ad campaigns more effectively, and we made generative AI-powered ad creation tools available to all advertisers. These initiatives enable advertisers to create ads more efficiently and to deliver better targeting.

For Weixin, video accounts ad revenue grew over 100% year-on-year due to higher video views and click-through rates. Mini Programs ad revenue grew over 40% year-on-year, benefiting among other features from mini games closed loop effect, whereby mini game 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 revenues slowed to a single-digit year-on-year growth rate.

For payments, commercial payment growth moderated due to slow off-line consumption spending withdraw 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 e-commerce transactions. Business Services gross profit more than doubled year-on-year due to increased contributions from higher-margin revenue streams, plus improved efficiency.

Domestic and international clients, especially from the media entertainment and live streaming industries are increasingly adopting our integrated audio and video cloud solution for Tencent Cloud Media Services, which achieved over 50% year-on-year revenue growth. IDC recognized Tencent Cloud Media Services as the market leader in its sector for the sixth consecutive year. Among our enterprise SaaS products in WeCom, merchants are increasingly willing to pay for use of customer communication functionality. As a result, WeCom revenue tripled year-on-year.

For Tencent Meeting, we're driving adoption and upselling among enterprise clients and Tencent Meeting revenue doubled year-on-year. And for Hunyuan, the main model achieved significant progress as we've scaled up using the mixture of experts approach, and we're deploying Hunyuan in more of our services. Today, we announced that we're making a version of Hunyuan providing text image generative AI available on an open source basis. And with that, I'll pass to John.

[Shek Hon Lo, executive]

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 reserves and high interest yields.

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 reporting 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 loss 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, weighted average number of shares for calculating diluted EPS decreased by 1.8% year-on-year.

Moving on to gross margins. Overall gross margin was 53%, up 7 percentage points year-on-year. By segment, VAS gross margin was 57%, up 3 percentage points year-on-year, this was due to growth in subscription revenues and increase in high-margin mini game platform service fees and 7 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 e-commerce technology service fee, improved monetization of WeCom and other business services and increased cost efficiency in our cloud businesses.

Our first quarter operating expenses. Selling and marketing expenses were RMB 7.5 billion, up 7% year-on-year, driven by increased spending on promotion and advertising for new content release. The total represented 5% of revenues, stable year-on-year. R&D expenses were 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 costs, including share-based compensation expenses and reduced operating lease and office expenses. At quarter end, we had approximately 105,000 employees, down 1% both year-on-year and quarter-on-quarter.

Let's look at our first quarter non-IFRS margin ratios. So non-IFRS operating margin was 37%, up 7 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 GPUs and servers to support our Hunyuan and AI ad 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 92.5 billion, up 69% year-on-year, reflecting strong free cash generation partially offset by RMB 13.5 billion cash outflow for share repurchase during the quarter. Thank you.

[Wendy Huang, executive]

Thank you, John. We shall now open the floor for questions. [Operator Instructions] The first question comes from Kenneth Fong from UBS.

[Kenneth Fong, analyst]

My first question is on online game. Last quarter, we highlighted one of our key strategy is to rejuvenate our key titles. That is showcasing the robust performance on the Supercell game, the recovery of PUBG, given our rich IP portfolio and strong experience in executing online game, can management share with us how to think about the potential and growth plan ahead and how we can replicate the success to our other IPs and titles? And I have a follow-up question on the buyback side.

In last quarter, we have completed at least HKD 100 billion of buyback last quarter, given our share price have has been going up very meaningfully since last quarter. How should we think about the pace of the buyback? Would it be more share price dependent or any other factors that we should consider?

[James Mitchell, executive]

Perhaps I'll take that one on Games and Martin on buyback. So for games, as you observed, we have been in the process of rejuvenating some of our key games. And we believe that process is well underway now. We are confident in the progress of that process. And there's a couple of learnings that we derive from our experience along this journey.

One is that what we classify as evergreen games truly do appear to be capable of growing new shoots and indeed, rejuvenating themselves as Evergreen Trees should. And a good example would be Brawl Stars where we cited not only the quadrupling of gross receipts, but also the doubling -- more than doubling of daily active users.

A second learning is that in the event that, again, which we believe should be an evergreen title is stagnating, then the problem is usually not with the nature of the game. It's with the nature of the team running the game, and we need to make changes to the team and sometimes the changes are changing mindsets, sometimes the changes are changing people. And what we find is that when we make those changes, then we see positive results flow quite quickly.

And if we don't see the positive results flow, then we make further changes. But the games themselves these big competitive multiplayer games are inherently Evergreen just as key sports, such as football, basketball, are inherently Evergreen and with the right people running the games, then we get the right results.

[Chi Ping Lau, executive]

In terms of the buyback, we have committed to buying back at least HKD 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, without the share price is still attractive, given the fact that our profit has increased quite substantially, given the fact that the value of our investment portfolio has been increasing. And also given the fact that our long-term prospect is actually very good. So that's why we'll continue to pursue our share buyback at this point of time.

[Kenneth Fong, analyst]

And congrats on those very strong set of results.

[Wendy Huang, executive]

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

[Thomas Chong, analyst]

Congratulations on a strong set of result. My first question is about our advertising business. We see a very good set of momentum in the first quarter. How should we think about our market share gain story and the APAC upgrade on the back of macro recovery, how are we actually seeing the ad sentiment as we come through June 18? And on video accounts, how should we ambition the advertising growth momentum over the next few years and the strength of live streaming e-commerce GMV both to drive our ad revenue?

And my second question is about our high-quality growth strategy. Given our high-quality growth strategy standout and our strong earnings growth momentum, how should we expect our earnings growth and margin trend over the next few years. Should we expect there might be some point that we need to go back to have more reinvestment? And in terms of OpEx how should we think about S&M expenses over the next few quarters given that we have more content and new game releases.

[James Mitchell, executive]

Thomas. So on your first question around advertising, I'd say that, as you would expect, given the economies mix, advertiser sentiment is also quite mixed and it's certainly a challenging environment in which to set advertising. The first quarter for us is a slightly unusual quarter because it's a small quarter for advertising due to the Chinese New Year effect.

And so sometimes the accelerations or the decelerations get magnified as a result. So we would expect our advertising growth to be less rapid in subsequent quarters of the year than it was in the first quarter and more similar to consensus expectations for our advertising revenue growth for the rest of the year. But that said, we think that we are in a good position to continue taking share of the market at a rapid rate, given we're very early in increasing our ad load on video accounts, which is currently around 1/4 of the ad loads of our major competitors with short video products.

And also given we're early in capturing the benefits of deploying AI to our ad tech stack. And we think that we will -- we are benefiting and will continue to benefit disproportionately from applying AI to our ad tech because historically, as a social media platform, our click-through rates were low.

And so starting from that lower base, we can -- we have seen we can double or triple kick-through rates in a way that's not possible for ad services that are starting from much higher click through rates. So overall, we remain quite constructive on our ability to grow our advertising revenue at a decent rate, and we believe we'll also continue to take market share irrespective of the overall advertising market conditions.

[Chi Ping Lau, executive]

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. So I think that's actually very important.

The reason the high-quality growth driver has 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. And 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 e-commerce service fees, this sort of a pretty long runway going forward. And we have always also been investing in new areas that can serve as growth drivers for the future, including AIs, including new games, including Weixin e-commerce and SaaS products to just name a few. So we felt over time, our gross margin should actually continue to benefit from the continued increase of these high-quality revenues and that has a pretty long runway. Now in terms of sales and marketing, I'll pass to John to answer that question.

[Shek Hon Lo, executive]

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

[Wendy Huang, executive]

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

[Alicis a Yap, analyst]

Congrats on the solid quarter. Two questions. First is on the gaming. So with the positive growth in the growing of HOK, Peacekeeper and also some other games also achieving record high growth in receipts this quarter. So the strong growth in the deferred should also work well for the upcoming revenue growth in the coming quarters. Is there any outstanding adjustment that is still ongoing? Or are there any risk or uncertainty on the gaming business that we need to be concerned or worry about?

And second question is wondering if there's any chance the games application or the digital content application by Tencent or other developers in China could see an improvement in the app store revenue sharing arrangement in the coming quarter that might support further uptake in the gross margin for the VAS.

[James Mitchell, executive]

Alicia, thank you for your questions and for the congratulations. So on the first question around the games then, 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 derisked the game business. And therefore, looking forward, our focus will be on execution of the new strategy for the existing games and successfully launching that the several major new games we've identified in our pipeline.

In terms of your second question around App Store revenue sharing ratios then we do believe that app stores are 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 assumed that those revenue-sharing arrangements remain as they are today.

[Wendy Huang, executive]

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

[Gary Yu, analyst]

Congratulations on the solid set of results. I have a follow-up questions on the game business, and thank you for the earlier comment regarding what we learned from the Evergreen games. On the same note, what have we learned in terms of whenever we see potential new games launch, what's the management strategy to try to kind of cultivate the games into our 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?

And my second question is also a follow-up question on margin upside. Across these business segments, how should we look at the sustainable kind of margin level going forward, given it seems like the margin upside is across the broader across business segments. So how should we look at the kind of relative margin trend going forward for different segments?

[James Mitchell, executive]

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. And 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 [ Gigante ] Green games like Fortnite, like Call of Duty. And so 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. And not every new game we bring to market has a high probability of becoming evergreen. There are some new games we will bring to market, which are more consciously content-driven games, which will 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, the downloads, the first day revenues, rather we look at metrics of their 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 2 versus when there's a new game that also has a moderate launch, but goes from strength to strength, which is what we've seen with Fight of the Golden Spatula. As you mentioned, despite a fairly secured start is now the third biggest mobile game in China behind 2 of our other games. So those are some of the thoughts we have and policies we have around new game launches.

[Chi Ping Lau, executive]

Gary, on your question around the sustainability of margins for each segment, it's really 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 for all 3 of our big segments, but particularly for advertising and FinTech and Business Services, there's been positive mix shifts underway away from lower margin revenue streams and toward higher-margin revenue streams. And as Martin articulated, we see those positive mix shifts continuing for years to come for all 3 of our segments. And therefore, we believe that both the margins where they are and also the upward margin trends are sustainable.

[Wendy Huang, executive]

Thank you. We will take the next question from Anna Zhang from Guosen Securities.

[Lunke Zhang, analyst]

My name is Anna Zhang from Guosen Securities. So the first question I want to ask management is we saw Meta improve their advantage plus advertising tool based on the large language models. And we wonder if management can share more on how Tencent plans to use AI to improve the ad business.

And also in the future, do you think like under the AI developments like our competitors such as like ByteDance or Alibaba, they also applies AI to their ad business so how do you think that AI will drive to add market share to change in the longer term? So this is my first question.

[Chi Ping Lau, executive]

Great. Welcome to joining our Q&A, Anna. I'll take the first question, although it might be a supplement. But we believe that tools like Advantage Plus, but extremely important in terms of helping social media companies, whether it's Meta or ourselves, grow into being although 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 by e-commerce platforms.

But with the advantage that the social media platforms have much greater time spent user engagements than search engines or e-commerce platforms.

And so to the second part of your question around a number of competitors are obviously applying AI as well. And we believe that all of them will benefit from AI, too. But we think that the biggest beneficiaries will be those companies, of which we are one that have very substantial under monetized time spent and now able to monetize that time spend more effectively by deploying AI because the deployment of AI enables an upward structural shift in click-through rates, and that shift is most pronounced for those inventories where the click-through rates were lower to begin with, such as the social media inventory.

Those tools also allow advertisers who previously were able to create advertisements for search, which are text in nature, but not to create advertisements for social media, which are image and video in nature, to now use generative AI to create advertisements to social media. So in general, we think there'll be a reallocation of advertising spend toward those services, which have high time spent, high engagement and are now able to deliver increasing click through rates, increasing transaction volume more commensurate with the time spent and engagement superiority.

[Lunke Zhang, analyst]

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 automate their products such as WhatsApp and like Facebook, Messenger, et cetera. And do you think that in the future Tencent, because we have such a great network product environment, will we have a similar product like Meta AI.

[Chi Ping Lau, executive]

Well, I think we do believe that with the right product than our WeChat platform and our other products, which have a lot of user engagement would be great -- 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, that question and answer from it so I think you should be confident that we have been developing the technology, and we are having a best-in-class technology in Hunyuan and at the same time, we are actively creating and testing out different products to see what would make sense for our existing products and as the time comes, these products will be rolled out on our platform.

[Lunke Zhang, analyst]

I'm sorry -- can I just have one more additional question because we're really excited for Tencent. And recently...

[Wendy Huang, executive]

Sorry, in the interest of time, we need to save the time. So we will take the next question from John Choi from Daiwa.

[John Choi, analyst]

Congratulations on a great set of results. I have a question about your business services on 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 our adopting our services? And in terms of -- given that Cloud business is also very sensitive to macro conditions, are your customers now opening up or more warmed up using our services as a result.

Hopefully, we should see this kind of 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 on FinTech services. Can you kind of elaborate a bit more about our strategy here, what we -- where we need to invest? And what kind of further areas in terms of margins where you could benefit from this part of the business, but also what kind of investments that is required to further cultivate further development here?

[Chi Ping Lau, executive]

Well, in terms of SaaS, I think what we have seen is our initial success in monetizing these products, which we have been offering as a free service for a long time. And that's actually off a relatively low base. So I think we look at it more as validation an early validation of the fact that we can get paid for some SaaS services in China.

So we really started from a base case of enterprises are not paying for software, which is very different from established markets like the U.S. And we're starting to monetize some value-added services offered to enterprises. But I think this is too early stage. This is still not a big amount of money that we're talking about compared to what enterprise softwares have 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. So I don't think it's an acceleration of monetization. It's more of a validation of the initial case. And from their point of view, 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 inflection point will come, and we want to be the most competitive and leading player at the time when the inflection point comes.

Now in terms of the Wealth Management service, mainly our customers putting their money into money market funds in which we offered alongside with fund management companies. And so instead of our customers withdrawing the money into their bank accounts or spending the money. They actually put these money in money market funds. And we have seen an increasing trend around that partly because of the fact that there are many more use cases within our payment platform so that people are getting used to putting more money within the platform and partly because there is reduced willingness for consumers to spend. So they actually save more rather than spend more.

And I think on this front, what we want to do is continue to build up our payment platform so that people are comfortable in entrusting us with more of their wealth and they can have more use cases so that they can use it for different purposes. That would increase the propensity for people to park the money with us and we'll continue to work with more fund management companies so that they can offer good 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. So all these things are being pursued at the same time. So if we can do all these right, we believe this service will continue to grow on a consistent basis.

[Wendy Huang, executive]

We will take the next question from Charlene Liu from HSBC. Charlene, can you hear us? Okay. Maybe we will move to the next question to Ronald Keung from Goldman Sachs.

[Ronald Keung, analyst]

Thank you Pony, Martin and thanks John for the sharing. I have 2 questions. One is I asked about the video account and mini program last year on e-commerce. So I want to hear where do we see -- we are innovating most in terms of ad tech. We've read about -- you just talked about ad tech upgrade. So will we leverage video accounts, live streaming and many program, maybe on any ROI-based ad products? And I have a follow-up question.

[Chi Ping Lau, executive]

Ronald, so on ad tech, we're innovating around the process of targeting the ads using artificial intelligence. We're innovating around helping advertisers manage their advertising campaigns. And then most recently, we've been -- we are now deploying Hunyuan to facilitate advertisers, creating the advertising content. So those are 3 areas where we're driving innovation that are contributing to the rapid revenue growth you're seeing for our advertising business.

[Ronald Keung, analyst]

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

[Chi Ping Lau, executive]

Well, on that front, we have been working with some of our investee companies, and many of them have been working and prompted 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 of RMB. So to the extent that investors are valuing Tencent's overall earnings at a certain multiple, then implicitly, they're now valuing our investment portfolio, 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 million renminbi versus the sort of intrinsic value or the market value of the portfolio, which is substantially higher but as the associates as companies like Pinduoduo become steadily more profitable then more and more, that gap will narrow itself as the profitability of the associates gets directly reflected in our own net income.

[Unknown Executive]

And at this point in time, we don't really have a plan to distribute any stock for now. And 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 a very fast growth and the new companies being formed and grow to a very large size. And as a result, we actually benefited a lot from investing in these companies. And at the same time, the investment also help us a lot in terms of building ecosystems on our core platforms.

So if you look at, for example, games, we have been able to invest in a lot of game studios, which help us to get access to the international market as well as get a hold of a lot of evergreen and large titles. And in the music industry, for example, we have invested in Spotify and also Upstream in order for us to establish a very strong position for TME in China and in the payment side, we have actually invested in companies which actually contributed to a lot of use cases, right? So both strategically and financially, the investment portfolio has actually generated a lot of return for the shareholders.

But now it has reached a very big size and some of the companies as 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.

[Wendy Huang, executive]

Thank you. We have successfully reconnected with Charlene Liu from HSBC.

[Charlene Liu, analyst]

Really appreciate the opportunity. I have 2 questions. I think first is about applications of Hunyuan and [indiscernible]

[Chi Ping Lau, executive]

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

[Charlene Liu, analyst]

Yes. So management has spoken quite extensively on how Hunyuan [indiscernible] can benefit ad business. Can we talk about applications of AI on to the game business and how [indiscernible]

[Wendy Huang, executive]

Charlene, your line is not stable. Maybe we will catch up off-line.

[Charlene Liu, analyst]

Sorry. Is it better?

[Chi Ping Lau, executive]

Yes, one more time, maybe.

[Charlene Liu, analyst]

Okay. Sorry. Really appreciate this. Can we talk [indiscernible] potential application on the game business and how does management expect that to play a larger role to help in game production. It doesn't...

[Chi Ping Lau, executive]

I think for Hunyuan -- it can be assisting game business in multiple ways. Right now, the best the best contributor is actually on the customer service front. When Hunyuan is actually deployed to answer questions and the customer service bought for a lot of our games is actually achieving very high customer satisfaction level. And AI, in general, has already been deployed in our games, but not necessarily the generative AI technology yet.

In terms of Hunyuan and, I think, over time, when we actually sort of 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, Hunyuan can actually sort of be using MPCs and create a certain sort of 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 you'll probably be a couple more generations before it can be for game production.

[Wendy Huang, executive]

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

[Alex Yao, analyst]

Congrats on a strong quarter. I have 2 questions. Number one is on the FinTech business. Can you elaborate the slowdown of the FinTech business, perhaps decompose the business into payment and nonpayment and also, how should we think about the medium-term growth outlook for the FinTech business as a whole?

And the second question is on the Weixin Search, which seems to be picking up monetization momentum in recent quarters. Can you discuss strategy to monetize Weixin search activities, it will be great if you can share with us some of the operating metrics just to help us understand the length of the runway.

[Chi Ping Lau, executive]

In terms of FinTech, I think the most of the reason for the slowdown is actually the headwind on off-line consumption. And we felt this is phenomena, 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 revise consumption confidence and at some point in time, we believe this headwind would actually turn. But before it turns, then I think our FinTech revenue on the payment side, which forms the bulk of the revenue of FinTech would actually be slow in terms of its growth.

And on the other hand, in terms of the withdrawal fee, I would say this is, anyway, a low-quality revenue, the withdrawable is essentially people pulling money out of the system, and that will be onetime revenue, but then the money actually leaves the system. When people withdraw less than the money would actually stay within our system for longer. It will not generate an immediate revenue, a point withdrawable but it will be turned into an asset under management, and we'll continue to generate wealth management fees over time. So that actually turns into a longer-term high value-added revenue. And in terms of wealth management services, I think it will continue to grow for the reasons that I talked about earlier.

Now for loan generation fees, I think we are getting a little bit more cautious, right, as there is a macro headwind, then we want to be very vigilant on risk management. So that's sort of how we look at the different components of the FinTech revenue. And what was the other question -- 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 and we have been monetizing that service on a relatively like basis. In fact, it just started last year that we started monetizing Weixin search so with the combination of the fact that there's a very large engagement with Weixin and the fact that Weixin search itself is actually growing in volume and there is an expanding content ecosystem within Weixin, be it official accounts, be it mini programs and then 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, executive]

Thank you. In the interest of time, we will take the last question from Robin Zhu from Bernstein.

[Robin Zhu, analyst]

I guess just 2, please. One, James, I think at one point, you said that you think video accounts monetization could be at the biggest moments. Now the video accounts engagement is 2x of moments. Could I get your thoughts on the intensity of ad revenues per engagement? And is there any reason why the 2 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 2 ago now.

And yes, so -- and then secondly, on games. I think different members of management have been critical about the internal game development process. And I just wanted to get your thoughts on, we have a pretty full pipeline, and 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 are now resolved, and we should look forward to a more consistent launch pipeline in the second half and in future years.

[James Mitchell, executive]

Robin, thank you for your questions. So on the first line, I mean, yes, I think objectively, you can see from the results of companies like Meta that operate both traditional feed and also a short video feed that over time, the monetization of the short video feed converges with or overtakes the monetization of the traditional social feed. And we feel that's the trajectory we're on as well.

With regard to the second question, and we do feel we've debugged some of the more obvious challenges. No doubt that there's other challenges. We haven't identified or other challenges that would arise in the future. And so it is an iterative debugging process 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 transfixed 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 in a 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 will operate in a homogeneous way, which is not the case. If you look at Tencent's biggest games and one of them is created by a team in Chengdu, one of them is created by a team in Shenzhen. One of them is created by our team in Helsinki, two of them are created by teams in Los Angeles. So it's a truly global business globally distributed, globally different practices. And so there is no single unified internal game development process.

Of course, we try to share best practices and learnings between the big development studios that have created these enormously successful games but equally, each of those studios that I talked about each in a different part of the country or the world still has its own unique attributes. And that's part of their strength and those strengths we aim to reinforce over time. So that's what I'd say on the game process debugging side?

[Chi Ping Lau, executive]

Yes. I just want to add, you actually used the word critical on the game team. I don't think that's really true. I think -- there are a lot of things that our game teams have done right, but there's just no perfect teams, no perfect games, and we are continuously going through the process of debugging and we are kind of more transparent and honest on those efforts with the outside world. So that's the reason why we discuss about what are the changes that we have done to our game teams or to our games.

And we also believe some of the major titles that we have are really evergreen titles such that we don't necessarily blame it on the life cycle of a game when it doesn't work, but rather look at what exactly the bugs or the untapped potentials that we can actually sort of make changes so that we can actually get the games to be really evergreen titles. And that's I think the reason why we have the largest number of evergreen titles and probably the most proportion of evergreen titles in the industry. And we also -- just to reiterate on James' point, right, the diversity is actually very important. And so that's why if you look at the Tencent Game family, we actually sort of 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, executive]

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