Q3 2021 Tencent Holdings Ltd Earnings Call

Good day and thank you for standing by welcome to Tencent Holdings Limited third quarter 2021 results announcement conference call.

Operator: Good day, and thank you for standing by. Welcome to Tencent Holdings limited's third quarter 2021 results announcement conference call.

Operator: At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to answer questions. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

If you require any further assistance please press star zero.

And now I'll like to turn the conference over to MS. Jane Yip from Tencent IR team. Thank you. Please go ahead.

Operator: And now, I'd like to turn the conference over to Ms. Jane Yip from the Tencent RIR team. Thank you. Please go ahead. Thank you.

Thank you.

Alicia Yap: Good evening, everyone. Welcome to our 2021 third quarter results conference call. Before we start the presentation, we would like to remind you that we use forward-looking statements, which are underpinned by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions comes from a variety of sources outside of Tencent. This presentation also contains some audited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures of a group's financial performance prepared in accordance with IFRM. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents in the IR section of our website.

The evening, everyone welcome to our two dozen in 'twenty, one first quarter results conference call before we start the presentation, we would like to remind you that.

Looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future.

Information about general market conditions is coming so that's not a key of filters.

A person.

This presentation also contains some unaudited non I S.

As 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 I R. S.

Quite detailed discussion of risk factors and I F O S mesh. It please refer to our disclosure documents on the IR section of our website.

Huateng Ma: Let me introduce the management team on the court. Our Chairman and CEO, Pony Ma, will kick off with a shout-out. 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.

Let me introduce the management team on the call Tonight.

Our chairman and C O Pony MA will kick off with a short overview.

President Martin Lau, and Chief Strategy Officer, James Mitchell, who will provide a business review chief.

Chief Financial Officer, John Lowe.

Conclude with financial discussion before we open the floor for questions.

I'll now turn the call over to Pony.

Huateng Ma: Thank you, Jane. Good evening. Thanks everyone for joining us. During the third quarter, the internet industry, including the domestic game industry, and certain advertiser categories, adapted to new regulatory and macroeconomic developments. We are proactively embracing the new regulatory environment, which we believe should contribute to a more sustainable development path for the industry in the domestic game market, our industry, including fully complying with new regulations significantly reduced miners' game time and spending, for putting a healthier game player environment.

Thank you James.

Good evening, thanks, everyone for joining us.

During the third quarter.

Industries, including.

Yes.

And certain advertiser categories adapting to a new.

Macroeconomic developments.

We are proactively.

After a thorough review of all of them, which would be should contribute to a more sustainable path for the industry.

In the domestic market our industry leading efforts.

40, compiling residual degradation.

Timing of spending.

Uh huh.

The environment.

We are also investing activities in key strategic areas.

Huateng Ma: We also invest actively in key strategic areas, as well as in Frontiers of Technologies, along with making new commitments in the Common Prosperity Initiative. Looking forward, we are committed to delivering superior experiences to users, assisting enterprises to digitalize their operations, and contributing to society a lot. Starting from this quarter, we disclose revenue from domestic and international games as new subsegments under VAR, reflecting the increasing scale of our international game business. Now, let me go through the headline number, the financial number for the quarter.

Okay.

Frontier is a technologist, along with making new commitments on the books.

Initiatives.

Looking forward, we are committed to delivering superior experiences to our users.

Enterprises to digitalize their operations and contributing to the society at large.

Starting from this quarter, which is gross revenue.

Domestic international games, both Newfield settlements on those off.

Reflecting the increasing scale of our international guests.

Now let me go through the headline number of admission number for the quarter.

Huateng Ma: Total revenue was 142 billion RMB, up 13% year and year and 3% quarter and quarter. Gross profit was $63 billion RMB, up 11% year-on-year and stable. Non-IFRS operating profit was 41 billion RMB, up 7% year-on-year or down 5%, quote-unquote. Non-IFIS net profit achievable to equity holders was 32 billion R&B, down 2% year-on-year and 7% quarter-on-gras. Moving to our key service, we focus on upgrading technologies and product innovation, maintaining our first or second place market position across key businesses.

Total revenue was 142 appear to be up 13% year on year and 3% quarter on quarter.

Gross profit was 63 billion.

11%.

Stable quarter on quarter.

Operating profit was 41 billion RMB.

Up 7%.

All about 5% quarter on quarter.

Net profit attributable to equity holders was $32 billion.

2%, 7% quarter on quarter.

Moving to our key services.

We focus on upgrading technologies and product innovation.

Maintaining our first or second place market position across key businesses, including social games.

Huateng Ma: Recruiting Social Gantt. Digital Content Payment and Public Cloud Services; combined MAU of Wishing and Wechess was 1.26-0. Mobile devices MAU of QQ was 574 meters. Now I will hand over to Martin and James for a brief review. Thank you, Pony, and good evening.

Digital content payment and public cloud services.

Combined <unk> of Louisiana, We trust was $1 two six theaters.

Mobile devices in the U of QQ was 574 needed.

I will hand over to James for the future.

Zero.

Thank you Paul.

Good evening and good morning, everybody for the third quarter of 2021, our total revenue grew 13% year on year Vas represented 53% of our total revenue within which domestic games segment revenue was 24% International game Subsegment was 8% and social.

Martin Lau: Good morning, everybody. For the third quarter of 2021, our total revenue grew 13% year on year. VAS represented 53% of our total revenue, within which domestic games subsegment revenue was 24%, international game subsegment revenue was 8%, and social networks subsegment revenue was 21%. Online advertising accounted for 16% of our total revenue, and fintech and business services accounted for 30% of total revenue for value-added services. Segment revenue was 75 billion RMB for the third quarter, up 8% year-on-year.

Martin Lau: Social networks segment revenue increased 7% year-on-year to 30 billion RMB, reflecting relatively rapid growth from video and music subscriptions and moderate growth from live streaming and in-game item sales. Total vast subscriptions grew 10% year-on-year to $235 million. Video subscriptions increased 8% year-on-year to $129 million, driven by popular drama series.

Networks segment revenue was 21% online advertising accounted for 16% of our total revenue.

Fintech and business services was 30% of total revenue.

For value added services.

Segment revenue was 75 billion RMB for the third quarter up 8% year on year, Social networks segment revenue increased 7% year on year to <unk> 30 billion RMB, reflecting relatively rapid growth from video and music subscriptions and moderate growth from live streaming and in game item sales.

Total vas subscriptions grew 10% year on year to $235 million.

Video subscriptions increased 8% year on year to $129 million driven by popular drama series. For example are self commissioned the TV drama crime crack down as well as honour of kings tie in.

Martin Lau: For example, our self-commissioned TV drama Crime Crackdown and the tie-in You Are My Glory ranked number one and number two by video views across all online platforms in China for the quarter, broadening our user mix in terms of gender and age. The success of these series demonstrated our progress in content production and cross-media IP extensions. Music subscriptions increased 38% year-on-year to 71 million as more users were attracted by TME's enhanced streaming experience.

Glory ranked number one and number two by video views across online platforms in China for the quarter.

Broadening our user mix in terms of gender and age.

The success of D series demonstrated our progress in content production and cross media IP extension.

Music subscriptions increased 38% year on year to $71 million as more users are attracted by T. M is enhanced streaming experience.

Martin Lau: Looking at our games business, revenue from domestic games grew 5% year on year to $34 billion RMB, primarily driven by Honor of Kings, Call of Duty Mobile, and Moonlight Blade Mobile. Additionally, revenue grew sequentially due to seasonal activities in Peacekeeper Elite and Dungeon and Fighter. For international games, revenue increased 20% year-on-year to $11 billion RMB, or 28% in constant currency terms, benefiting from the robust performance of Valorant and Clash of Clans. Moving to Weixin, we continue to strengthen its content and commerce ecosystem. In video accounts, we're fostering rich and diverse content. An increasing number of content creators from official accounts now express their ideas in video format, contributing to a differentiated set of content in video.

Looking at our games business for domestic games revenue grew 5% year on year to 34 billion RMB, primarily driven by order of Kings quota beauty mobile and Moonlight blade mobile revenue.

Yes.

Sequentially due to seasonal activities in peacekeeper elite and dungeon <unk> fighter.

For International games, the revenue increased 20% year on year to 11 billion RMB, 28% in constant currency terms benefiting from robust performance of Valeant and clash of clans.

Moving to <unk>, we continue to strengthen its content and commerce ecosystems.

And video account, we're fostering rich and diverse content and increasing number of content creators from official at Continental Express their ideas in video format contributing to a differentiated set of content and be doing hands on.

Martin Lau: Our strength in sports coverage, music, and games also enriched and diversified our content offering. Video consumption grew healthily as we proactively enhanced content and recommendation technology. For many programs, we're deepening penetration across industries, including restaurants, retailing, and transportation. The number of active mini programs increased by over 40% year on year, testifying to the vibrancy of the commerce ecosystem. By integrating Recom's enterprise communication tool with many programs, we are enabled to direct interactions between individual salespersons and customers in retail as a private domain environment.

Strength in sports coverage music and games also enriched and diversified content offerings.

Video consumption grew healthily as we proactively enhanced content and recommendation technology.

For mini programs, we're deepening penetration across industries, including restaurants retailing and transportation the number of active mini programs increased by over 40% year on year testifying to the vibrancy of the commerce ecosystem.

By integrating becomes enterprise communication tool with many programs.

<unk> the direct interactions between individual salesperson and customers and retailers private domain environment as a result with retailers can foster their own customer relationships and drive cells efficiently.

Martin Lau: As a result, retailers can foster their own customer relationships and drive sales efficiency for QQ in our last upgrade for QQ. We've been stepping up our efforts and technology on the interactive side. We enhanced video and AI technologies to facilitate creative and efficient content production, driving more UGC activities on our platform. We customized AR tools for festivals and national landmarks, adding more engaging experiences for users to interact with the physical world.

For QQ and are lost.

Upgrade for QQ whats been stepping up our effort.

And technology on the interactive side.

We enhanced video and AI technologies to facilitate its creative and efficient content production driving more UGC activities on our platform.

We customized <unk> festivals and national landmarks, adding more engaging experiences for users to interact with the physical world.

Martin Lau: We also provided cross screen interactive effects in video calls, offering a more entertaining shared experience. Through these upgrades, we make users' interaction in QQ more exciting and immersive. Turning to games first on domestic games, we believe fostering a healthy gameplay environment for the domestic market is of paramount importance. Since September 1st, we have implemented new measures to fully comply with the latest regulations on restricting minors' game time in China. Subsequently, users under 18 years old account for 0.7% of our domestic game time spent in September, a significant decrease from 6.4% in the same period last year.

We also provided cross screen interactive facts and video call offering more entertaining shared experiences through.

These upgrades will make users' interaction and QQ more exciting and immersive.

Turning to games first on domestic games, who believe fostering healthy gameplay environment.

For domestic market is of Paramount importance since September 1st we have implemented new measures to fully comply with the latest regulations on restricting minus game time in China. Subsequently users under 18 years old accounted for 7% of our.

Domestic games time spent in September reduced significantly from six 4% in the same period last year.

In addition, these users accounted for one 1% of our domestic games gross receipt in September down from four 8% in the same period last year.

Martin Lau: In addition, these users accounted for 1.1% of our domestic games gross receipt in September, down from 4.8% in the same period last year. We continue to lead the industry in combating minors' usage of adult accounts. For example, we upgrade our screening system to identify misused adult accounts around the clock. We also proactively assist authorities in cracking down on illegal account transactions. Looking at the highlights of our games business. For Honored Kings, we're bringing to life Chinese culture with a series of popular skins that successfully transmit provincial arts and traditions to a wider audience. We made significant progress in expanding our successful PC franchise to mobile. WowDrift successfully reactivated and enlarged the Elite to Legends user base by extending the authentic PC experience to mobile devices in October 2021.

We continue to lead the industry in comeback Ting minors usage.

For example, we upgraded our screening systems identify misused.

Accounts around the clock, we also proactively assist authorities in cracking down on illegal transactions.

Looking at the highlights of our games business.

400 Kings, we're bringing to life Chinese culture with a series of popular skins, which successfully transmitted provincial odds and traditions to a wider audience.

We made significant progress in expanding successful PC franchise to mobile Wow dripped successfully reactivated and launched lead to legends user base by extending the authentic piece experience to mobile devices.

In October 2021.

Martin Lau: It ranked second by DAU among all mobile games in China. We also invigorated the auto chess genre by introducing PvE and co-op gameplay in Fight of the Golden Spatula. It is the second most popular new game launch in China year to date by DAU, only behind Wild Rift. For international games, we have been developing our business for more than a decade now. And its scale relative to our domestic business has been increasing over the last few years.

It ranked second among.

Among all mobile games in China.

Also invigorated auto chess genre or by introducing <unk> and coop gameplay in fight Gordon Spatula.

It is the second most popular new game launch in China year to date <unk> only behind <unk>.

For International games, we have been developing our business for more than a decade now and its scale relative to our domestic business has been increasing over the last few years.

We do expect exciting opportunities ahead in the global games industry as we discussed in our investment strategy with you earlier this year.

Martin Lau: We do expect exciting opportunities ahead in the global games industry, as we discussed in our investment strategy with you earlier this year, in order to further develop this high-growth business. Firstly, we enhance our upstream game development capability. We're increasing investment in talent and leading studios. Our China-based studio groups, especially Timi and Lightspeed, are scaling up with new talent hires not only in China but also globally. Riot and Supercell, which have developed multiple hit games, are also ramping up their development teams.

In order to further develop this.

High growth business.

Martin Lau: In the meantime, we are acquiring and nurturing specialist genre-leading studios such as Digital Extremes, Grinding Gear Games, and Fatshark, to name a few, and we nurture them with our know-how, technology, and funding. Secondly, we're strengthening our global IP portfolio with multiple strategies. Internally, we are extending our globally recognized IPs, such as LiveLegends, Clash, as well as Honor of Kings, to mobile and to additional genres, expanding our address book market. We are also creating games with the potential to become new global IPs, such as Valorant and Brawl Stars. Externally, we partner with renowned IP owners to develop mobile games with global appeal, such as PUBG Mobile, Call of Duty Mobile, and Pokemon Unite. And there are more to come.

Lee.

Hence our upstream game development capabilities.

We're increasing investment in talent and leading studios.

China based studio groups, especially Tami and light speed are scaling up with new talent highest not only in China, but also globally.

Right and supercell, which had developed multiple hit games are also ramping up their development teams in the meantime, we are acquiring a nurturing specialist genre, leading studios such as ditch to extremes grinding gear games in fact shock to name a few.

And we nurture them with our Knowhow technology and funding.

Secondly, we are strengthening our global IP portfolio with multiple strategies internally, we extend our globally recognized IP such as Lyft legends clashes class as well as on our kings to mobile and two additional genres, expanding our addressable market.

We're also creating games with the potential to become new global IP, such as valent and brawl stars.

Externally, we partner with renowned IP owners to develop mobile games with global appeal, such as T mobile and call of duty mobile and pokemon unite and there are more to come.

Certainly to support our expansion in multiple regions, we're building up localized publishing and operational capabilities. We're also stepping up our marketing efforts in esports operations to foster our player communities.

James Gordon Mitchell: Thirdly, to support our expansion in multiple regions, we're building up localized publishing and operational capability. We're also stepping up our marketing efforts in esports operations to foster a player community, and we will continue to step up our investment in our international games. Now, with that, I'll pass to James to discuss other business. Thank you, Martin.

We'll continue to step up our investment in our international games business.

Now with that I'll pass to James to discuss other businesses. Thanks.

James Gordon Mitchell: Moving to online advertising, total revenue was R22.5 billion in the third quarter. Revenue growth slowed 5% year-on-year due to weakness from the education, insurance, and gaming sectors. Consumer Staples, Internet Services, and Automobile sectors remain resilient. Overall bidding density reduced. We expect advertising pricing industry-wide may remain soft for several quarters due to macro challenges and regulations affecting certain key advertising sectors.

Thank you Marc and moving to online advertising revenue was $22 5 billion renminbi in the third quarter revenue growth slowed to 5% year on year due to weakness from the education insurance and gaming sectors.

<unk> Internet services and automobile sectors remain resilient overall bidding density wood chips, we expect advertising pricing industry wide and they remained soft for several quarters due to macro challenges regulations effects in certain key advertising sector.

James Gordon Mitchell: We believe the advertising industry should adjust and rebase during 2022, then resume growth as secular growth drivers re-asert themselves. Our social and other advertising revenue increased 7% year-on-year to $19 billion, primarily driven by Weixin mini-programs and official accounts, although slowed by weaker eCPMs that are at net- We're enabling enterprises to connect users with salespeople via embedding WeCom chat salesperson functionality within their advertising, which is especially effective for lead-driven advertisers such as automobile dealers and an increasing number of transaction-driven advertisers Media advertising revenue declined 4% year on year due to less revenue from the 10 cent news.

The advertising industry should adjust rebates during 2022, and we're seeing the secular growth drivers.

<unk>.

Social and others advertising revenue increased 7% year on year to 19 billion renminbi, primarily driven by way shouldn't mini programs official accounts, although slowed by week CPM said our route network.

Unsurprisingly that uses with salespeople vive embedding <unk> com Chow salesperson functionality within there, but it's months, which is especially a flagship elite driven advertisers such as automobile dealers.

An increasing number of transaction driven advertisers such as for us and ecommerce merchants is mini programs is there a landing pages, which helps them better convert traffic into transactions.

Our media advertising revenue declined 4% year on year due to less revenue from the Tencent news App on the positive side, we stream top tier drama series variety shows in 2020 Olympics games generating improved sponsorship revenue on Tencent video App.

James Gordon Mitchell: On the positive side, we stream top-tier drama series and variety shows in the Tokyo 2020 Olympic Games, generating improved sponsorship revenue on Tencent Video App. Looking at FinTech and business services, segment revenue was $43 billion RMB, up 30% year-on-year and up, run away. With infintech services, year-on-year revenue growth was mainly driven by increased commercial payment volume, with healthy growth in categories such as groceries, apparel, and transportation. Commercial Payment, Daily Active Users, and Per User Transactions Program.

Looking at Fintech and business services segment revenue was 43 billion renminbi up 30% year on year and up 3% quarter on quarter within.

Within Fintech services year on year revenue growth was mainly driven by increased commercial payment volume with healthy growth in categories, such as groceries Apollo in transportation.

Commercial payment daily active users and user transactions, but increased.

Compared to the second quarter of 2021 offline commercial payment volume growth moderated on a year on year basis, Judah control measures against COVID-19, recessions in certain provinces.

James Gordon Mitchell: Compared to the second quarter of 2021, offline commercial payment volume growth moderated on a year-on-year basis due to control measures against COVID-19 resurgence in certain properties. We deepened our cooperation with Union Pay to develop new payment and service interconnection scenarios. Users can now scan Wayshin Pay QR codes via the Union Pay Cloud QuickPass app to make offline payments, and Cloud QuickPass also supports top-up purchases.

We deepened our cooperation with Union pace develop new payments and service interconnection scenarios users can now scan why shouldn't pay QR codes by the Union pay cloud quick toss that to make offline payments and cloud quick thoughts also supports.

The key points QQ music and Tencent video subscription services.

James Gordon Mitchell: QQ Coins, QQ Music, and Tencent Video Subscription Services. For business services, revenue grew at a healthier rate year on year benefiting from continued digitalization of traditional industries such as financial services, Association, as well as videoization of the Internet.

The business services revenue grew at a healthy rate year on year benefiting from continued digitalization of traditional industries, such as financial services and transportation.

Well as video monetization of the Internet industry.

We see substantial potential in China's underpenetrated customer relationship management market.

James Gordon Mitchell: We see substantial potential in China's underpenetrated customer relationship management market. Our CRM software as a service solution, Tencent GDN, has helped more than a million enterprises to enhance cost efficiency. Service, and is increasingly adopted by medium and large-scale enterprises. Inc., Dell, SF Express, and FEMA; clients can automate 80 to 90% of their customer service workloads via the virtual assistant, leveraging our AI-powered chat, voice, and other communications.

CRM software as a service solution Tencent GDN has helped more than a million enterprises to enhance cost efficiency and customer service and is increasingly adopted by medium and large enterprises, including Dell SF Express and Siemens.

That's kind of what's in that 80% to 90% of that customer service block classify the Bachelor system, leveraging our AI powered solutions across chat voice and other communications channels.

Tencent database structured query language platform as a substitution for Tds QL database SaaS more than 3000 clients and verticals, including financial services public services in telecom.

James Gordon Mitchell: Our Tencent Database Structured Query Language Platform as a service, TD SQL Database, has served more than 3,000 clients from verticals, including financial services, public. Within the financial vertical, we see increasing demand for upgrading database architecture with enhanced security. The CDSQL has served six out of the top ten banks in China and increased its penetration within financial institutions course-by-course due to their trust in our data security reliability. And I'll now pass to Jon to discuss the financial... And James. Hi everybody.

Within the financial vertical we see increasing demand upgrading database architecture with enhanced security protection TD SQL six out of the top 10 banks in China and increased its penetration within financial institutions core systems do you see that trusted data security reliability and consistency.

And I'll now pass to John to discuss the financial review and Jane Hi, everybody for the first quarter of 2021 total revenue was $142 4 billion renminbi up 13% year on year or 15% quarter on quarter gross profit was $62 7 billion renminbi up 11% year on year.

Shek Hon Lo: For the first quarter of 2021, total revenue was $142.4 billion RMB, up 13% year-on-year or 50% quarter-on-quarter. Gross profit was $62.7 billion RMB, up 11% year-on-year or broadly stable quarter-on-quarter. Net other gains were 23 billion revenue, up 99% year on year or 11% quarter and quarter. This mainly comprised non-IVIS adjustment relating to our investing companies, including, number one, dim disposal and disposal gains of our investing companies in sectors such as media, internet utility, and local services. Number two, the evaluation gains of certain investing companies in radicals such as e-commerce. Number three, impairment provisions for investing companies in radicals such as FinTech and social entertainment.

Or broadly stable quarter on quarter.

Net other gains were 23 billion renminbi up 19, 9% year on year or 11% quarter in quarter is mainly comprised more than I advised adjustment relating to our invested companies.

Including number one time disposal in disposal gains they'll probably invested companies and such as such as gay Internet utility and local services number two revaluation gains of certain invested companies in verticals such as E. Commerce number three impairment provisions for investing companies in verticals such as Fintech.

Sure Entertainment.

Shek Hon Lo: Operating profit was $53.1 billion RMB, up 21% year-on-year and 1% quarter-on-quarter. Net finance costs were $1.9 billion RMB, largely stable both year-on-year and quarter-on-quarter. Share of losses of associates in joint ventures were $5.7 billion RMB compared to share profit of $2.6 billion RMB last year. The movement reflected the impact of non-IFRS adjustments of certain associates, increased investment in community group buying initiatives by certain associates, as well as losses recognized from certain associates in the social media sector, partially offset by enhanced performance of certain associates in the e-commerce sector, On a non-Iovirus basis, we record a share of losses of 282 million RMB this quarter for Ashok Sheth and John Manchus compared to share profit of 3.2 billion RMB a year ago.

Operating profit was $53 1 billion renminbi up 21% year on year, and 1% quarter on quarter net finance costs were $1 9 billion renminbi largely stable both year on year and quarter on quarter.

Sure losses of Associates, and joint ventures were $5 7 billion renminbi compared to share of profit of $2 6 billion Renminbi last year. The movement reflected the impact of non I advise that just because of certain associates.

Increased investment in community group buy initiatives by certain associates.

Losses recognized force from certain associates in the social media sector.

Partially offset by enhanced performance of certain associates in the ecommerce sector.

On a non <unk> basis, we recorded a share of losses of 282 million renminbi this quarter for our associates and joint ventures compared to shift profit of $3 2 billion renminbi a year ago.

Income tax expense was $5 5 billion, then renminbi this quarter effective tax rate for the quarter was 12%.

Shek Hon Lo: Income tax expense was 5.5 billion RMB this quarter, and the effective tax rate for the quarter was 12, iVirus net profit attributable to equity holders was 39.5 billion RMB, 3% year-on-year or down 7% quarter-on-quarter. The looted EPS was 4.074 Remenb, up 3% year on year or down 7% quarter and quarter. Now I'll share with you our non-Ayavirus financial figures. Operating profit was RMB40.8 billion, up 7% year-on-year or down 5% quarter-on-quarter. Net profit of the NCI was $31.8 billion, down 2% year and 7% quarter in quarter. Diluted EPS was 3.269 renminbi, 31% year-on-year and 7% two-on-two.

I have IRS net profit attributable to equity holders was $39 5 billion renminbi up 3% year on year or down 7% quarter over quarter.

Diluted EPS was $4.

For renminbi up 3% year on year or down 7% quarter on quarter.

Now I'll share with you.

Non <unk> financial figures.

Operating profit was $40 8 billion renminbi up 7% year on year or down 5% quarter on quarter.

Net profit after NCI was $31 8 billion renminbi down 2%.

Yet at 7% quarter in quarter.

Diluted EPS was $3 269, renminbi down 1% year on year.

And 7% Q on Q.

Shek Hon Lo: Moving on to gross margin, the overall gross margin.

Moving on to gross margin.

Shek Hon Lo: The overall growth margin was 44.1%, down 1.1 percentage points year and year and 1.3 percentage points, quarter and quarter, breaking his statement. Gross margin for value-added services was 53%, up 0.4% year-on-year for last year's stable Q2. Rough margin for online advertising was 46.4%, down 4.5 percentage points year-on-year or 3.4 percentage points quarter-on-quarter. Both the year-on-year and quarter-on-quarter decreases reflected increased bandwidth and server costs, including those associated with our video account service. Gross margin for FinTech and business services was 28.5%, up 0.6% each year on year or down 3.5% each quarter on quarter.

Overall gross margin was 44, 1% down one one percentage points year on year, and one three percentage points quarter on quarter.

Breaking into the segments.

Gross margin for Battle as it says it was 33% up <unk> four percentage point year on year, largely stable Q on Q.

Gross margin for online advertising was 46, 4% down four five percentage points year on year or two four percentage points quarter on quarter.

Well year on year and quarter and caused the decrease reflected increased bandwidth as the COO.

Cost, including those associated with our video Thompson.

Gross margin for Fintech and business services was 28, 5% up 0.6 percentage point year on year or down <unk> five percentage points quarter on quarter the year on year increase.

Shek Hon Lo: The year-on-year increase was driven by reworking within FinTech services, partially offset by greater revenue contribution from lower-margin business services. The sequential dequire mainly restricted continuous investment in crowd computing, including taverns and operations, on Operating Expenses.

It's driven by mix shift within Fintech services, partially offset by greater revenue contribution from lower margin business.

Sequential decline, mainly reflected our continued investment in cloud computing, including televisions in operation.

On operating expenses.

Selling and marketing were 10, 4 billion renminbi up 17% year on year or 4% quarter on quarter the y on y increase.

Shek Hon Lo: Selling and marketing revenue was $10.4 billion RMB, up 17% year-on-year or 4% quarter-on-quarter. The Y&Y increase was primarily driven by increased marketing spending on games, as well as consolidation of BitOtto. As a percentage of revenue, selling and marketing expenses were broadly stable compared to the first quarter of 2020. R&D expenses will total 13.7 billion revenue, up 39% year on year or 7% on two on two. R&D expenses represent approximately 10% of revenue.

Driven by increased marketing spending on games as well as consolidation a bit also.

As a percentage of revenues.

Marketing expenses were 7% of revenues broadly stable compared to the third quarter of 2020.

R&D expenses were $13 7 billion renminbi up 39% year on year or 7% Q on Q.

<unk> expenses represented approximately 10% of revenues.

G&A expenses were $10 2 billion renminbi up 39% year on year or 3% quarter on quarter.

Shek Hon Lo: GNA expenses, including R&B, were 10.2 billion remandb of 39% year-on-year or 3% quarter-on-quarter. Both the year and quarter and quarter increase reflected greater SAC force; excluding share-based compensation, G&A expenses increased by 23% year-on-year and 7% quarter-on-quarter, as a quota, and we had approximately 107,000 employees, 38% year on year, Let's take a look at the operating and net margin ratio. For Pre-Q 2021, the non-Iovirus operating margin was 28.7%, down 1.7 percentage points Y&Y or 2.3 percentage points Q&Q. Non-alivarate net margin was 22.8%, down 3.8 percentage points year-on-year or 2.3%. Thank you. Thank you. Thank you.

Year on year and quarter liquidity.

It's just that for us.

Excluding share based compensation G&A expenses increased by 23% year on year and 7% quarter on quarter.

As of quarter end, we had approximately 107000 employees, 38% year on year.

14% quarter on quarter.

Primarily due to increased resources allocated to our strategic growth initiatives.

Let's take a look at the operating and net margin ratios.

Well free till 2021, non <unk> operating margin was 21, 7% down.

One seven percentage points y on y or two three percentage points Q on Q.

Non <unk> net margin was 22, 8% <unk> eight percentage points year on year or two six percentage points for the quarter.

Finally, I will share with you some key financial metrics for the quarter total Capex was $7 1 billion renminbi, so 11019% year on year or up 2% quarter in quarter.

Shek Hon Lo: Finally, I will share with you some key financial metrics for the quarter. Total cutbacks was RMB7.1 billion, down 19% year-on-year or up 2% quarter-on-quarter. Within total cutbacks, operating cutbacks were RMB5.6 billion, down 28% year-on-year. Non-operating capex increased 62% year-on-year to RMB1.5 billion, reflecting high spending on land-use rights and building construction.

Within total Capex operating have basketball is $5 6 billion I'd, rather than be down 28% year on year.

Non operating Capex increased 62% year on year to $1 5 billion renminbi, reflecting higher spending on menus RASM during construction.

Free cash flow for the quarter was 24 1 billion renminbi down 14% year on year or up 40% quarter on quarter.

Shek Hon Lo: Free cash flow for the quarter was 24.1 billion RMB, down 14% year-on-year or up 40% quarter-on-quarter. NASDAQ's position was 26.1 billion RMB compared to 21 billion RMB last quarter, mainly reflecting cash flow for M&A activities and payment for the repurchase of shares. Partly offset by free cash flow generation and on-market diversification of certain business securities. The fair market value of our shareholdings and listed investing companies, excluding subsidiaries, was approximately 1.2 trillion revenue B or 185 billion U.S. dollars as at the end of the quarter. We repurchase approximately 5.6 million shares with an aggregate cost of 2.2 billion M&B, or $334 million US dollars, for the third quarter of 2021. Thank you. We shall open the floor for questions.

Net debt position was $26 1 billion renminbi compared to 21 billion rather than the last quarter.

Mainly reflecting cash for M&A activity and payment for purchase of shares repurchase of shares.

Partly offset by free cash flow generation and on market that wishes of Citadel Securities.

The same at the value of our shareholdings in listed investment companies. Excluding subsidiaries was approximately $1 two trillion rather than be or 185 billion in U S dollars as at the end of the quarter.

We repurchased approximately $5 6 million shares with an aggregate cost of $2 2 billion, and then b or C.

334 million U S dollar for the third quarter 2021, Thank you Piyush I'll open it for questions.

Operator: Thank you. Thank you.

Operator, thank you.

Question.

Thank you ladies and gentlemen, we will now begin the question and answer session. If you wish you asked a question. Please press star one on your telephone like for your name to be announced if you wish to withdraw your request. Please press the pound or hash key please standby, while we compile the question and answer roster once again the star one.

Operator: Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to withdraw your request, please press the pound or hash key. Please stand by while we compile the question and answer roster. Once again, a star question one for questions. Your first question comes from the line of Piyush Mubai from Goldman Sachs. Please ask your question.

So question.

Your first question comes from the line of Piyush <unk> from Goldman Sachs. Please ask your question.

Good evening, Martin James John and Jane and Thank you for taking my question.

Piyush Mubai: Good evening, Martin, James, John, and Jane.

Martin Lau: My first question is about the buzzword that's floating around so many times nowadays. How would you assess your positioning in the metaverse, like the next iteration of the Internet? Do you see this as transformational or an extension of your current business models? And how would you...

My first question is about the buzzword that's floating around so many times nowadays how would you assess your positioning.

In the metal side. The next saturation of the Internet do you see this as transformational or an extension of your current business models and how would you size the opportunity versus the current estimates of the gaming industry that are north of 200 billion U S dollars.

Martin Lau: How would you size the opportunity versus the current estimates of the gaming industry, which are north of $200 billion US dollars?

Piyush Mubai: And if I may slip in a second, Juan, on advertising, in light of the pricing challenges that you talked about.

And if I may slip in a second one on advertising in light of the pricing challenges that you talked about.

Piyush Mubai: Where China Macro, PIPL, and regulations all appear to be headwinds, how do you rank these sets of risks? And with regard to your comment on a rebasement in

China macro P IPL and regulations all appear to be headwinds how would you rank. These these sets of risks and with regards to your comment on the Rebase meant in 2022.

Piyush Mubai: your comment on a rebastment in 2022. Could growth rates get back to double-digit growth rates sometime in 4Q, or would it be sometime in 2022, in your opinion? Thank you.

AD growth rates get back to double digit growth rates. Some time in <unk> would it be sometime in 2022 in your opinion. Thank you.

So on.

Martin Lau: So on Matterverse, I think this is actually sort of, you know, a very exciting but a little bit vague concept. The way we look at the metaverse in terms of sort of at a high level is that we feel anything that really makes the virtual world more real and makes the real world more rich with virtual experiences can actually sort of, you know, become part of the metaverse big world. And as a result, we felt, it's going to be an opportunity that really adds growth to the existing industries. For example, you know, it will be an addition to the gaming industry. It will also be an addition to the social networking industry.

On Matamoros.

I think this is actually sort of a very exciting.

Exciting but.

A little bit vague concept the way we look at <unk> in terms of sort of at a high level is that.

Martin Lau: And in some cases, when you have real-life applications, like business applications, it can actually also be a growth engine for that industry, too. The reason is that there are actually multiple pathways through which you can actually get into the metaverse, an opportunity.

We felt anything that really makes the virtual world more real and making the real world more rich with virtual experiences can actually sort of become part of the meta Bruce a big word.

And as a result, we felt.

It's going to be an opportunity to see that really add.

The growth to the existing industries. For example, it will be in addition to the gaming industry. It will also be an addition to the social networking industry and in some cases, when you have real life applications like business applications. It actually also it can be.

Our growth engine for four about industry too.

And the reason is we felt that there are actually multiple pathways through which you can actually get into the man hours.

Martin Lau: For example, you can have very interactive games, very high production values, and open world types of games. You can also have multiple games under a common worldview or an IP. You can have a gaming platform that provides the infrastructure for people to create a lot of different games within the gaming platform. You can have a social network that can be gamified and support much more programmable experiences. You can also have a real world experience but augmented by augmented reality and virtual reality.

Opportunity for example, you can have that.

Sorry.

Interactive games very high production.

Open what type of games.

You also can have multiple games under a common view or IP you can have a gaming platform that.

Provide.

And the infrastructure for people to create a lot of different games within became a platform you can have a social network, which can be gave me fight and.

Support much more programmable experiences.

Also can have a real world experience, but augmented by Oh.

Mental reality and virtual reality. So that's how we think about the different pathways through which you can get to members now in terms of our capabilities and our positioning right. We felt we actually have a lot of the.

Martin Lau: So that's sort of how we think about the different pathways through which you can get to the metaverse. Now, in terms of our capabilities and our positioning, right, we feel we actually have a lot of the technology and know-how building blocks for us to explore and develop for the metaverse opportunity. For example, we have a lot of gaming experiences. We also have very strong social networking experience. In addition to that, in terms of technological building blocks, we have engine capability, we have AI capability, and we have the capability to build a large server architecture that can serve a huge number of concurrent users.

Our technology and Knowhow building blocks for us too.

Splore and developed for the amount of risk opportunity for example.

A lot of gaming.

Experiences. We also have very strong social networking experience. In addition to that but in terms of technology building blocks that we have engine capability, we have AI capability, we have the capability to build a large.

Perfect architecture that can serve a huge number of concurrent users, we're very experienced in managing digital content economies as well as in real life.

Martin Lau: We are very experienced in managing digital content economies, as well as real-life digital assets. So, all in all, we feel that we have a lot of tech and capability building blocks that will allow us to approach the metaverse opportunity through the multiple pathways we talked about. Now, with advertising, I would, Pastor James.

Digital assets so.

All in all we felt that we have a lot of tech and capability building blocks.

Allowed us to approach the managers opportunities through the multiple pathways, we talked about.

Now with advertising I would pass through James Yes.

James Gordon Mitchell: Yeah, so thank you, Pia. She asked about the various challenges facing the Chinese advertising market and how we would rank them. So I think that in terms of size and immediacy, the regulations affect industries such as education, games, and insurance have the most substantial and fastest impact, and then the macro environment is also impactful in virtually. In a very robust macro environment, then one would expect certain categories to slow advertising spending; other categories will leap into the gap and sort of backfill and take advantage of the lower prices and higher ROIs.

So thank you Pierre she asked about.

Yes.

<unk>.

The China advertising market and how we would.

Ranked them, so I think that.

In terms of size and immediacy the regulations affecting industry.

Industries, such as education the games insurance.

Yes.

Our substantial and fastest impact.

And then the macro environment.

It is also impactful in that.

And a very robust macro environment and one would expect certain categories slow advertising spending other categories will lead into the gap and sort of that and take advantage of the lower prices and higher <unk>.

Of our lives and I think that will happen over time, but in a more challenging macro environment happens less quickly than in a more robust macro environment.

James Gordon Mitchell: And, you know, I think that will happen over time, but in a more challenging macro environment, it happens less quickly than in a more robust macro environment. Then, in terms of the personal information protection law, and you didn't mention it, but other people may wonder about Apple's IDFA changes, those have less impact on you. [inaudible] and we think that as a consequence, at least up till now, the opt-out rate has been very low.

Then in terms of the personal information protection law and also you Didnt mention it.

Other people may want.

Apples idea changes, although it's a recipe less impactful.

So the personal information protection goal, we implemented that.

As of November 1st.

It's important to remember that people, who choose to opt out still see ads is just the ads are less relevant to them.

Yes.

We think that as a consequence at least up till now the opt out rate has been quite low single.

<unk>.

James Gordon Mitchell: And then for IDFA, you may be aware that in the United States and Western markets, there were effectively two shoes that dropped. The first one was Impact Targeting Ability, and then the second, more impactful issue was impaired attribution ability. In China, we've been through the targeting challenge, and the attribution challenge appears less, partly because the industry has a variety of mechanisms for deriving attribution, and partly because Apple only represents the team's internet traffic in China versus a much higher proportion in the Western market.

And then for IVF Fei you might be aware that in the United States and western markets.

It's actually two shoes that drops to SaaS thrombosis.

Impact targeting epilepsy, and then the second more impactful shoe was in pad attribution ability.

In China.

We've been through the targeting challenge in the attribution shot in Japan is less partly because the theory.

Mechanisms deriving attribution and partly because apple only represents a teens percentage of internet traffic in China for us is a much higher proportion in western markets. So that's in terms of.

James Gordon Mitchell: So that's in terms of sizing and prioritizing the various challenges. In terms of timing when appetizing. And then secondly, while there are a number of categories that are weak, and they tend to be the categories that would normally react most quickly to lower pricing by increasing their volume, there are other categories that are still quite robust, including clothing, personal goods, healthcare, and so forth. Now, I believe, in general, these categories react more slowly.

Sort of sizing prioritizing your various challenges in terms of timing when advertising mail.

May resume a faster growth rate than you know obviously it depends very much on any future regulations that emerge as well as any future macro challenges that emerge and putting those to one side and a couple of observations one is that I think advertising comps.

Genuity.

Toughest in the first quarter of <unk>.

Next year.

In a normal yet the first quarter is seasonally a low quarter and then you see very strong sequential advertising revenue growth.

In the second and third quarters substitute up at 2021 that wasn't the case. So we have a tough comp in first quarter 'twenty two and he says.

And then secondly.

While there are a number of categories that are weak and they tend to be the categories with normally react most quickly to lower pricing by increasing that volume that's other categories.

Still quite robust, including clothing personal goods health care and so forth.

Now I believe in general these categories react more slowly.

Make more human being driven.

Not buying decisions rather than the algorithmic outlined decisions that a mobile game Aura online education company might thought.

James Gordon Mitchell: If they make more human being driven, add by decisions rather than the algorithmic ad buying decisions that a mobile game or an online education company might make, but you know it's a reality that because pricing has softened, the ROI from buying ads has improved, and so over time, we would expect some of those slower moving advertiser categories, [inaudible]

It's a reality that because pricing has softened therefore.

Our life and buying ads improved and so over time, we would expect some of those slow moving advertiser categories too.

Reassert themselves.

Thank you.

Alright. Thank you. Our next question comes from Shelley <unk> from HSBC. Please go ahead.

Operator: All right, thank you. Our next question comes from Charlene Liu from HSBC. Please go ahead.

Charlene Liu: Hi Management. Thank you very much for the opportunity and for taking my question. I guess I want to follow up on a point that James was making. I think earlier on you discussed some of the challenged verticals, such as education gains and insurance and whatnot. I was wondering if you can share a little bit more on how much these verticals contribute to the advertising business. You also mentioned that we're seeing some green shoots, perhaps in setting-like healthcare. How much can they really make up for, I guess, the weaknesses that we're seeing in some of the challenged verticals that you discussed earlier? I have a follow-up question for online games. Thank you.

Hi management. Thank you very much for the opportunity and for taking my question I guess I wanted to follow up on the point that James was making.

And.

I think earlier on you discussed some of the challenged verticals such as agitation gains and insurance and whatnot I was wondering if you can share a little bit more on how much do these verticals contribute to the advertising business.

I also mentioned that we're seeing some green shoots perhaps and then.

Then Mike Health care.

Or are these how much can they really make up for I guess the weaknesses.

We're seeing in some of the.

Challenged verticals that you discussed.

Discussed earlier and a follow up for online game. Thank you.

In terms of just making up for weakness we commented that we expect weakness to persist for several quarters I want to emphasize the adjective separately. This is not something that we believe will return to prior trends immediately.

James Gordon Mitchell: Well, in terms of making up for weakness, we commented that we expect weakness to persist for several quarters.

James Gordon Mitchell: Weakness to Persist for Several Quarters. So I want to emphasize the adjective several.

James Gordon Mitchell: This is not something that we believe will return to prior trends immediately. In terms of how much those categories contribute, then, you know, directionally speaking, gains would be in the low-to-mid teens, education has dropped to the low single digits now, and insurance would be in the low single digits. In terms of categories that are relatively healthier than financial services x insurance, personal care products, and clothing, food, and beverage. For us, our transportation-related advertising has been very strong, which partly reflects the reinvigoration of bid auto and the injection of video content from bid auto, which has increased our share of automobile-related advertising. And then healthcare. But, you know, as I mentioned, these categories tend to make their decisions on a sort of softening as it is done; they don't react immediately.

How much does categories contribute then.

The direction is speaking.

This would be in low to mid teens.

Education has dropped to the low single digits now and insurance is a subset of finance, but again low single digit percentage.

In terms of categories that are relatively healthier and financial services insurance.

And apart from air products.

Yes.

Food and beverage.

For us our transportation related advertising by strong partly reflects the reinvigoration of fit or when the injection of video content.

<unk> share of automobile related advertising.

And then health care, but as I mentioned these categories.

You make that decision on a sort of annual 40 basis, rather than a real time basis, and so when advertising pricing softens as it's done they don't react immediately.

Okay.

Great I think on the online games front in particular for overseas expansion can you discuss what are some of the challenges you may anticipate all our overseas expansion efforts for online game and can you also share some details on the pipeline. Thank you.

Charlene Liu: Okay, great. I think on the online game front, in particular for overseas expansion, can you discuss what are some of the challenges you may anticipate amid our overseas expansion efforts for online games? And can you also share some details on the pipeline? Thank you.

But in terms of the pipeline.

James Gordon Mitchell: Well, in terms of the pipeline, you know, both the domestic and the international business, we tend not to talk about games until they're launched, or at least until they're very close to launch. But, you know, just looking at the slide and thinking about what's been publicly announced, Timmy and Lightspeed both announced a number of titles which, you know, are global IPs, and you should expect to see released globally. They also have some other titles which are their own IPs, which we also hope will succeed globally, although time will tell whether that's the case or not. You know, Riot has announced a number of games, including the mobile version of Valorant. Supercell has announced three Clash-based games.

Domestic and the international business, we tend not to talk about.

James can sell that launch or at least until that right.

Close to launch just looking at the slide and thinking about what's been publicly announced in Etame and lightspeed.

Announced a number of titles.

Our global <unk>.

And you should expect to be released globally. They also have some other titles, which have their own Ips.

We also succeeded I believe.

Although time will tell whether that's the case or not.

Got it.

Has announced a number of games, including the mobile question about rent.

Supercell has announced three cash.

<unk> games.

James Gordon Mitchell: Grinding Gear Games has announced Path of Exile 2, Fatshark has announced Darktide, and, you know, so on and so forth. So, you know, none of our studios are sitting still. All of them have products in the pipeline, and some of them are announced products, some of them are unannounced products, and therefore a little bit further away. In terms of the challenges we face, I think that they're pretty similar to the challenges that, you know, other companies in the game industry face. You know, just to touch on two that are, you know, front of mind at the moment.

And to get games as announced path of XL to Fox shocks announce Dr tied and so on and so forth. So.

None of our studios are sitting still in all of them.

And our products in the pipeline and some of them are announced products some of them unannounced products and therefore I don't know if it's further away in terms of the challenges we face I think pretty similar to the challenges.

And the other companies in the game industry face just to touch on to that.

James Gordon Mitchell: One is the war for talent. Each situation is a little bit different, but in general, you know, we want our studios to be in a position where they can reward the people who contribute very handsomely. And, you know, we think we're there and we can remain in that good position going forward because it is something we spend a great deal of time and energy on. You know, another issue for the game industry globally that's front of mind is the fact that for the industry as a whole, in mobile games, the app stores take a bigger share of the profit pool than the game developers do.

Front of mind at the moment, one is the war for talent and we believe that.

The game industry is really a talent driven industry and so we spent a lot of time.

At our own studios and also working with.

Investing in Georgia Studios working on.

The most appropriate compensation.

Each situation is it a bit different.

But in general we want to ask you guys to be in a position where they can and reward the people who contribute handsomely.

And clear with that.

We can remain in that position going forward because it is something we spend a great deal of time and energy on.

Another issue for the game industry Tonight, but he does front of mind is the fact that for the industry as a whole and mobile games. The app stores take a big profit pool than the game developers do.

James Gordon Mitchell: And, you know, I think there's a number of pressures from a regulatory perspective, from a legal perspective, including some announcements today that, you know, have direct bearing on how that profit pool is split between app stores versus game developers, which should be helpful for game developers in general and especially for some of the smaller game developers. So those are two of the challenges that the game industry outside China faces.

And I think that's the number.

Pressures from a regulatory perspective from a legal perspective and getting some announcements today.

Have a direct bearing on how that profit pool is split between obstacles verses game developers.

Would be helpful.

You can't develop this in general and especially for some of the stuff smaller game developers.

So those are two of the challenges.

The game industry outside China faces.

Also face participants.

Alright. Thank you. All next question comes from Alex Yao from Jpmorgan. Please ask your question.

Operator: All right, thank you. The next question comes from Alex Yao from J.P. Morgan. Please ask your question. Thank you management for taking my question. My first question is a follow-up to James's comment that the opt-out ratio is quite low, perhaps around

Thank you management for taking my question I have a.

Operator: Thank you, management, for taking the question. I have a first question that is a follow-up on the implementation of PIPL.

First question is a follow up on the.

The instrumentation.

Jim you mentioned.

Operator: Jimson, you mentioned that the out ratio is quite low, perhaps around low single digits. So presumably, the impact on your own property advertising operation should be quite small. But how about the impact on your end networked business? Can you share some color?

We showed is quite small.

Perhaps around low single digit.

So presumably the impact on your own property, placing them appreciate it should be quite small.

About the impact.

Can you share some color.

James Gordon Mitchell: And then, secondly, regarding domestic gaming operations, how will the current game monetization approval suspension change your gaming operation in the product launch strategy in the next couple of quarters? Thank you. Better for the industry as a whole, as and when the Ban-Hao issuance resumes. [inaudible] In terms of bringing more innovation to the market, but I think you can see that, you know, between our big existing games, between some of the very high DAU new games we've recently launched, and our... Several dozen games with Banhao that we haven't yet launched.

And then secondly regarding domestic gaming operation.

The current game monetization.

Approvals in Spanish and intentional gaming accretion that product launch strategy.

Next couple of quarters. Thank you.

If you haven't yet published and given historically, we typically publish mid single digit number of new games.

Each quarter and you can see that we have a backlog.

To keep us busy.

The quarters to come obviously it would be.

Better for the industry as a whole.

If.

Some blend of the bond how issuance resumes.

In terms of bringing more innovation to market, but I think you can see that between our existing games between some of the.

Probably high <unk> games with recently.

Uh huh.

Several dozen games with bond how that we haven't yet launched we think we can navigate through this temporary period.

James Gordon Mitchell: We think we can navigate through this temporary period, get up, you know, move forward. So, you know, there I'd really emphasize the temporary nature. In terms of the question around the ad networks, so to clarify, our ad network pricing was weaker in the third quarter, but that was due to a combination of the demand factors that we've talked about in terms of regulations on certain sectors, macro challenges, and then on the supply side, the limitations on so-called flash screen advertising had a bigger negative impact on the ad network business than on our own owned and operated infants. PIPL didn't, and doesn't have, as substantial an impact.

Get a move forward so they're already emphasized the temporary nature in terms of.

The question around the App networks, so to clarify our avnet, what pricing was weaker in the third quarter.

But that was due to a combination of the demand factors that we've talked about in terms of regulations in certain sectors macro challenges and then on the supply side.

Limitations on cycled flash screen advertising had a bigger negative impact on the AD network business than on our owned and operated inventories PID.

<unk> didn't and doesn't have.

Substantially impact just those two factors.

Thank you. All next question comes from the line of Robin Zhu from Bernstein. Please ask your question.

Operator: Thank you. Our next question comes from the line of Robin Zhu from Bernstein. Please ask your question.

Okay.

Operator: AHAI Management, thank you for... Let me ask you a question. I guess I have two questions, please.

Hi management, Thank you for that.

Operator: One, on WeChat, many programs, and the e-commerce GMV growth there and the ads growth there. You guys very helpfully shared some data in the last couple of quarters. Did an update on what's going on there, how that's contributing to advertising growth, and whether you expect any of the, whether it's regulatory or PRPL or something else, to impact growth in the next couple of quarters, and second question just on the broader regulatory environment.

Let me ask the question just.

I guess two questions. Please one.

On Wechat mini program boot ecommerce Jeremy growth, there and the outgrowth or you guys very hopefully shared some data in the last couple of quarters.

Could get an update on what's going on there how that's contributing to the advertising growth and whether you expect when you complete well.

It's regulatory.

Or something else the impact growth.

In the next couple of quarters.

And the second question just on the border regulatory environment, I mean, it seems optically but.

Operator: I mean, it seems obviously that the rate of new announcements has slowed somewhat. You know, last quarter, I think, John, no, sorry, last quarter management. So look, there's still plenty of stuff to come on the regulatory front. I wonder if that view has changed as of this quarter.

The rest of it new announcements has slowed somewhat.

Last quarter, John Oh.

No sorry, Oh square management.

So there's.

There's still plenty of stuff to come.

On the regulatory front I wonder if that view has changed.

<unk>.

Quarter. Thank.

Operator: Thank you.

Thank you.

Yeah.

So on mini programs.

Martin Lau: So on mini programs, in terms of GMB and ads growth, I think, you know, the overall message we want to tell you is it remains healthy and strong. We don't want to make this a permanent item to disclose, and as long as the trends are intact, we don't talk about the specific numbers this time around.

In terms of <unk> and ads growth I think.

Yeah.

Overall, our message we want to tell you is it remains healthy and strong.

We don't want to make this a permanent item to disclose and as long as the trend is intact.

We don't talk about specific numbers this time around.

James Gordon Mitchell: In terms of the ecosystem, this time around, we actually tried to provide you with additional color regarding the diversity of the ecosystem. And you can see that the number of mini-programs has actually increased by 40%, which means that it's actually a very vibrant ecosystem covering an increasing number of different industries and types of applications. And this is exactly one of the key drivers behind the strong growth of GMB and AdSense. So that's sort of what we want to share with you this time. Now, on the second question, maybe James.

In terms of the ecosystem. This time around we actually tried to provide you with additional color regarding the diversity of the ecosystem.

And you can see the number of mini programs I think should increase 40%, which means that it's actually a very vibrant ecosystem covering.

Increasing number of different industries and types of applications and this is exactly one of the key drivers behind the strong growth of <unk> and <unk> growth. So that's sort of what would you want to share with you. This time around now on the second question, maybe James can answer.

And this was the question was around the overall regulatory environment and.

Martin Lau: And this question was around the overall regulatory environment, and I mean, actually, Martin's probably a better place. Oh, is it the overall? Yes, the overall regulatory environment. So the overall regulatory environment I would say last time we were asked about this question, and our answer was that there would be more regulations coming, and I think, you know, we have been proven to be right. And we have seen more regulatory developments over the last few months.

Actually Martin probably better.

Is it the overall, yes overall regulatory environment.

So the overall regulatory environment.

I would say last time, we were asked about this question right.

Sure I'm, sorry is that there'll be more regulations come in.

We have not been proven to be right.

And we have seen more regulatory development over the last few months.

Martin Lau: And we also believe that stricter regulation is a new normal for the entire industry, and that's not just for China but also globally. But we do want to emphasize that the rationale behind the regulatory push is actually, especially in China, the government trying to drive higher quality and sustainable and healthier growth for the entire industry with a focus on consumer rights and privacy protection. So that's the reason why we are proactively working with the regulators on implementing all the necessary changes.

And.

We also believe that a stricter regulation is a new normal for the entire industry and that's not just for China, but also globally.

But we do want to emphasize that the rationale.

Behind the regulatory push is actually especially in China is really the government trying to drive higher quality and sustainable and healthy growth for the entire industry with a focus on consumer rights and privacy protection. So.

That's the reason why we are.

Proactively working with the regulators on implementing all the.

Martin Lau: And we expect that once the industry has really complied with the new regulations, and has made all the adjustments, then even when new regulations come around in the future, which by nature, if there have been already a lot of regulations, then the regulations in the future, on an incremental basis, will be smaller in terms of percentage-wise. And as the industry adjusts further, then the impact on the industry will be less and less over time. That's what we hope.

Necessary changes and we expect once the industry has really complied with the new regulations have made all the adjustments then.

Even when new regulations come around in the future which by nature.

If if there has been already a lot of regulations in the regulations.

The future on an incremental basis will be.

Smaller in terms of percentage wise.

As the industry adapted a further than the impact on the industry will be less and less over time, that's what we felt.

Thank you. Our next question comes from Garik <unk> from Citic. Please go ahead.

Operator: Thank you. Our next question comes from Garrett Wong from Citix. Go ahead.

Operator: Hello. Thank you for taking my question. I have two questions. The first one is...

Thank you for taking my question I'll have to catch them. The first one is brought accounting develop a strategy of wechat, we do account.

Operator: Accounting Developers Strategy of WeChat WeDo Account. Just as you mentioned that the Tencent Cross-IP Strategy has achieved great success, so I think that Tencent has a barrier that its competitors can never surpass in a very short time. So...

Just as you mentioned that the tenants.

Tensions across the IP strategy.

She will agree to success also SaaS.

So I think that Tencent has the Belle River data as you can notice the processing.

Sure Todd.

Uh huh.

Operator: So, I mean, how the WeChat video account could benefit from TME or Canada Literature or the ESPOS, how this 10-cent-unit content advantage can empower the development of the video account. And on the other hand, how the video account distribution mechanism could affect Tencent's content system. And the second one is about the changing internet. Last week, the Tencent Digital Hecker System meeting was held, and Also, the Transient Internet was mentioned a lot. So, I mean, how is the Transient Internet strategy and how it's progressed, and the business model and the time note. So, I hope the management could share more about Transient Internet. Thank you.

I mean, how the wechat, we do account could benefit from <unk>.

<unk>.

China literature on the esports esports.

This test is a unique content advantage.

Empowered to develop yourself.

We do.

We do account.

On the other hand, how do we.

We do we do accounted distribution mechanism to feedback attendance count into the system.

So and the second one.

One is about the Tianjin in Tonight.

Weak.

Tencent digital ecosystem.

The meeting is held in.

Also the changing as you might.

I mentioned a lot so I mean.

How is the.

Changing to match our strategy and how is progress.

Our business model.

Understood.

The Tam node.

So I hope it does.

Maggie Madden to cuda share them all about the changing not thank you.

Okay on video accounts.

Martin Lau: Okay, on video accounts, I think the... key point I would like to make is that a video account is a product that has seen very healthy growth. And it started off to be from nothing right now and has gone to a relatively sizable product, but it's still relatively young.

The.

Uh huh.

Key point I would like to make is that our video accounts.

Is.

A product that has seen.

Healthy growth.

And it started off to be.

From from nothing right now and that is going through a relatively sizable.

But it's still.

Relatively young.

Martin Lau: And in terms of being a short video platform, it's actually much, much smaller than the market leaders at this point in time. But having said that, we are encouraged by the development of our video accounts because it has pretty unique content. There are a lot of official accounts, content creators who are now sharing their knowledge on video accounts. We are particularly strong in terms of knowledge-based short videos. And we also have a lot of other areas of content which are quite unique, for example, sports.

And in terms of being a short video platform, it's actually much much smaller than the market leaders at this point in time, but having said that right.

Encouraged by the development of a redo of concept because it has a pretty unique content.

There are a lot of official accounts content creators who are now.

But sharing their knowledge.

On video accounts, we are particularly strong in terms of knowledge based short video and we also have a lot of other areas of.

Content, which are quite unique for example sports win during the Olympics.

We are video accounts actually cross benefit with our with our sports channel and was able to generate a whole border.

Video views from users on.

The Olympic games.

Martin Lau: During the Olympics, our video accounts actually cross-benefit with our sports channel and were able to generate a lot of video views from users during the Olympic Games. So, so, you know, for now, we felt very encouraged by the development so far of our video accounts and also the trend of their growth. And we felt at this point in time, the most important thing for us is actually to continue to enrich the content ecosystem and also keep on improving our recommendation technology so that we can actually allow more users to come into contact with more content, and as a result, the amount of time that people actually spend on our video accounts would actually increase.

So for.

For now we felt they are encouraged by the.

Development, so far of the video accounts and also the trend of its growth and we felt at this point in time. The most important thing for US is actually to continue to enrich the content ecosystem and also keep on improving our recommendation technology. So that we can actually allow.

More users to come into contact with more content and as a result of that the amount of time that people actually spent on a video accounts would actually increase and once that's done right. When that has reached even further scale then.

Martin Lau: And once that's done, right, when that has reached an even further scale, then I felt a lot of the cross benefits that you talk about, for example, music, animation, comics, esports, would actually come into play even more. At this point in time, I think the key focus for us is actually to keep on scaling our video accounts in a sustainable, in a healthy way. Now, in terms of the Quanzhen Internet, I think it's partly using our technology to actually make the real world experience enriched with virtual experiences and also leveraging virtual technology to actually help real life simulations. So it's, I think a lot of the core logic is actually similar to what we answered in the metaverse. So I would refer you to the answers that we provide.

I felt a lot of the cross benefits that you talk about for example, with music animation Comex esports would actually come into play even more at this point in time I think the key focus.

Focus for us is actually keep on scaling.

Our video accounts in the in the sustainable in a healthy way.

Now in terms of the Tianjin insulin I think it's partly.

Uh huh.

Using our technology to actually make the real world experience.

Enriched with virtual experience.

And also leveraging virtual technology to actually help real life.

Simulations. So it's I think a lot of the Corelogic is actually similar to what we answered on the matter Bruce So I would refer you to the answers that we provide on there.

Yes.

Thank you. Our next question comes from the line of William Packer from Exane BNP Paribas. Please go ahead.

Operator: Thank you. Our next question comes from the line of William Packer from Exxon, a BNP Paribas company. Please go ahead.

Operator: Hi management, many thanks for taking my questions. Firstly, on the domestic gaming regulatory front, the key focus so far has been limitations on the gameplay spent by minors and gaming approval. As regulation evolves, do you think we should expect restrictions on adult time or spending on video games? And just as a quick follow-up, we're seeing an opening of the various platform ecosystems, including Tencent's increased interoperability. Could you talk through the key positives and negatives from a financial perspective of these developments? For example, increased adult payment revenue opportunities or increased competition for engagement?

Hi management, Thanks for taking my questions Firstly.

On the domestic gaming regulatory fronts. The key focus so far has been limitations on the gameplay and spend by miners are gaining approvals.

As regulation evolves do you think we should expect restrictions on time spent on video games.

Operator: Thank you.

Just as a quick follow up.

We're seeing an opening of the various platform ecosystem, including 10 seconds on increased interoperability could.

Could you talk through the key positives and negatives from a financial perspective all of these developments for example increased auto payment revenue should be.

Increased competition for engagement.

So on your first question.

James Gordon Mitchell: So William, on your first question,

James Gordon Mitchell: production. You know, we believe that up till now, public concern around the game industry has been very largely concentrated on the issue of whether children spend money on them. So, the short answer is no; we don't expect the scenario you envisage. The longer answer would be that we think it's actually very beneficial for a country to have a robust presence in the gaming industry, both from a technology perspective and also from a cultural perspective.

We believe that up till now the public concern around the game industry has been.

Very largely concentrated on the issue of why that children are spending.

Too much time in games.

The recent regulations and address that head on.

We believe very effectively.

So the short answer is no. We don't expect this scenario do you envisage the longer answer would be that we think it's actually right.

Quite beneficial for our country.

Have a robust presence in the gaming industry.

Both from a technology perspective, but also from a.

<unk> perspective from a technology perspective.

James Gordon Mitchell: Games have really been at the cutting edge, driving the cutting edge of some of the most interesting hardware innovation. You know, games are the reason why computers have dedicated graphics processing units separate from the CPU, and you know, it is the GPUs that are today being used for Training and Inference, and Artificial Intelligence. At a software level, games have capitalized on the utilization of services like Unreal Engine, which is today proliferating across enterprise and, of course, supporting it, as well.

In games being really the cutting edge be driving the cutting edge of some of the most interesting hardware innovation. So for example.

Gains are the reason why computers have dedicated graphics processing units separate from the CPU.

It is the Gpus that is today venues training and inference artificial intelligence at a software level.

Games have categorized that utilization of services like Unreal engine, which today are proliferating across enterprise and of course supporting the MFS of Internet as well and then at the talent level. Some of the highest profile most successful individuals in the technology industry globally.

James Gordon Mitchell: And then, at a talent level, some of the highest profile, most successful individuals in the technology industry globally, like Elon Musk or Mark Zuckerberg, have spoken about their enjoyment of games when they were young and how that set them on the path in the technology industry that they enjoy today. So that's from a technology industry perspective. From a cultural perspective, the United States is in a very happy position where, because of Hollywood, it can export American culture globally through attractive movies.

I need on Masimo amongst talk about spoken.

I've spoken about that that enjoyment as games when they were young and how you set them on the path.

In the technology industry.

Success that they enjoy today, so that's from a technology industry perspective from a cultural perspective.

The United States is in a very healthy position because of Hollywood The U S.

And export.

American culture.

James Gordon Mitchell: Korea is now in a similar position with TV series, and it is in a similar position with Manga and Anime. And so, you know, games represent one of the only opportunities for countries worldwide participants in the Intercultural Exchange to become that. And you can see that today, if you look at the top 100 games in Japan, I think 30 come from China for mobile games. If you look at the top 100 mobile games in the United States, a 20-something.

<unk> hundred three.

Tragic movie career, it's now in a similar position with TV series, Japan.

Similar position with a mango anatomy.

So in our games represent.

Beyond the opportunities are countries, which.

You start to see happen.

Global.

Participants in intelligence exchange just to become that.

You can see that today.

<unk> hundred games in Japan.

Come from China.

So you put it for the top 100 mobile games in the United States 20, something.

I'm from Chinese companies.

James Gordon Mitchell: So anyway, we think that it's advantageous to society on multiple levels for that to be a thriving and robust game industry, assuming that the game industry, and therefore, Control, adjacent issues such as children playing games. So in terms of the interoperability among different platforms, I think we actually provided a very long answer last time regarding our philosophy on the ecosystem consideration, but I would say a few things, right?

We think that it's advantageous to society on multiple levels.

That should be a thriving and robust game industry, assuming that the game industry can control.

Jason tissues, such as children games too much which we believe the Chinese game industry is now doing.

So in terms of the interoperability among different platforms.

I think we actually provided a very long answer last time regarding our philosophy on the ecosystem consideration, but I would say a few things one is as you said.

Martin Lau: One is, as you said, If there's more interoperability and more openness in terms of the different platforms, we feel it could be good for our business, in particular with respect to payment and advertising business. The reason is that we are the company that probably has the most engagement but the least monetized engagement. And if there are more other platforms sending more commercial activities to us, then there could be a financial benefit.

If there's more interoperability and.

More openness in terms of the different platforms, we felt it could be good for our business in particular with respect to payments and ads business and the reason is.

We are.

The company that probably has got the most engagement but.

Least monetize the engagement and if there are more other platform, sending us more commercial activities to us and that there could be financial benefits.

Martin Lau: But I think, you know, we look at this issue from more of the key considerations regarding one, user protection, two, information and content compliance, and three, the impact on the ecosystem. Now, in terms of user protection, if there is a very big platform with a lot of users, and there's also a commercial interest involved in sending messages to another platform's users, there could be spamming that could happen. And that's something we actually tried to protect quite carefully.

But I think we look at this issue from more of the key considerations regarding.

One user protection to information and content complains and three the impact on the ecosystem now in terms of use protection.

Martin Lau: And if there are people sending messages to another group of people, then you want to balance the interest for the sender versus the receiver. And especially if one sender actually sends it to many receivers, then it's typically called spamming. And it could actually cause a lot of user experience damage.

If there is a very big platform with a lot of users and there's also commercial interest involved.

Martin Lau: So that's one aspect. The second aspect is actually information and content compliance. When you have a platform that actually manages millions of messages, of suppliers on the other side, and when it sends a message or content over, then whose responsibility is it to ensure that the content and information is compliant with law and regulations? It may be regarding news and fictitious news.

In in sending to another platform its users.

There could be a spending that could happen.

That's something we actually tried to protect.

Protect.

Quite carefully.

And.

If there are people are sending messages to another group of people then.

You want to balance the interest for the center versus.

The receiver and especially if one center actually send that too. Many receivers are then it's.

It's typically called spamming and it could actually cause a lot of fun.

You said 1 billion damage. So that's one aspect the second aspect is actually information and content complains and when you have a platform which actually.

Manage millions of Av.

Suppliers on the other side and when when.

It sends a message or a content.

<unk>, whose responsibility is it a two to ensure that the content and information is compliance with law and regulations.

Martin Lau: It may be about counterfeit products. So these are very difficult problems. If you have a single merchant, then it's much easier to police. But if it's a platform with millions and tens of millions of merchants on the other side, then it's much harder to police. And finally, it's about the ecosystem, right? We kept on saying our ecosystem is fundamentally open, and we do prioritize providing support for SMEs and brands to succeed.

Maybe regarding NIE was in fat tissue news it may be about condensate products. So these are very <unk>.

Difficult issues, if you have a single a merchant and then it's much easier to police, but there if it's a platform with millions and tens of millions of.

Merchants on the other side and it's much harder to police.

And finally, it's on the ecosystem, we kept on saying our ecosystem is fundamentally open and we do prioritize to provide.

The port for Smbs and brands to succeed. So that's why when you have another platform with different platform regulations and economic models.

Martin Lau: So that's why when you have another platform with different platform regulations and economic models coming in, then it may be damaging to the ecosystem of a lot of the small and medium enterprises within our platform. And that's something that we pay a lot of attention to. So I would say we will continue to proactively exploit cooperation with the platforms, but it has to be in a manner that addresses the user protection point, that information and content compliance point, as well as that it has to be beneficial to the ecosystem, especially for the small and medium enterprises that are part of our ecosystem.

Coming in then.

It may be.

Damaging to the ecosystem of a lot of the small and medium enterprises within our platform and that's something that we pay a lot of attention to so.

I would say we.

We will continue to proactively explore cooperation of the platforms, but it has to be in a manner that addresses.

The user protection point that information and content compliance point as well as it has to be beneficial to the ecosystem, especially for the small and medium enterprises spin on our ecosystem.

Yeah.

Thank you. Our next question comes from Gary <unk> from Morgan Stanley. Please ask your question.

Operator: Thank you. Our next question comes from Gary Yu from Morgan Stanley. Please ask your question.

Hi, Thank you management for the opportunity to ask questions I have two questions.

Operator: Hi, thank you management for the opportunity to ask questions. I have two questions. The first one is regarding your strategic direction.

The first one is regarding your strategic investment, which you kind of bet shut at our first quarter earnings how should we look at the <unk>.

Operator: Strategic Investment, which you kind of mentioned in the first quarter earnings.

Operator: How should we look at the, you know, impact on SG&A trends going into next year? Should we continue to see an increasing level of investments, or will we be able to start to see kind of a normalized?

On the SG&A trend going into next year should we continue to see increasing.

Level investments or will be able to start to see kind of more normalized margin trend going forward. After this year I'll step up in investment.

Operator: and the Globalized Margin Trend going forward after this year of step-up in investment.

Second is a follow up.

Operator: Second, is a follow-up on Metaverse. You mentioned the opportunities and maybe Tencent's position in this space. How should we look at some of the key?

So you mentioned about the opportunities.

Maybe Ted said our position in this space.

How should we look at some of the key hurdle.

Operator: The next couple of years, you know; one area is on the technology front.

In the next couple of years.

One is from Paul did you front in terms of hardware. If there is something that we look into it.

Operator: In terms of hardware, is there something that we should look into investing in to accelerate hardware development? The second angle is on the regulatory front; how

Salary to hardware development, the second equities on record a tree front, how should we look at regulatory stance it turns on <unk>.

Operator: On the regulatory front, how should we look at the regulatory stance in terms of metaphors, given the heavy focus on the addiction issue on the game side of the world? Thank you.

At the half we focus all of them.

The issue on the gaming side of the world. Thank you.

Okay.

So I'll talk about strategic investment as well.

James Gordon Mitchell: So I'll talk about strategic investment as well. Martin answers that, the additional meta question. So, you know, I think that we are, you know, our company that invests aggressively for the future. And since we're optimistic about the future, we're investing optimistically and aggressively. And that's reflected in our rapid headcount growth. And that's also reflected in our rapid SG&A expense growth. Within the SG&A expense growth, it's worth, you know, separating the headline number, which includes stock-based [inaudible] Time will tell, but I think that the opportunities will only get bigger and brighter in the future and therefore we'll continue to invest in the future and therefore the variable is not, you know, do we slow our rate of investment, it's rather how quickly will our various investments translate into revenue and margin and, you know, going through the three specific strategic areas that we talked about at the first quarter results, then I think, you know, our investments in business services, for example, in enterprise software, you know, revenue on a measured basis, but there are some products we have, typically the smaller ones that are already monetized, but because they're subscale, they're low margin, there are other products we have, such as Wecom, such as Tencent Meeting, such as Tencent Documents, which are at very substantial scale, and we're not yet monetizing, but we're confident that when we do, they'll generate attractive margins.

Martin.

Since that time.

The additional met a question Sir.

And I think that we are a company that invests aggressively for the future since we're optimistic about the future we're investing.

Optimistically and aggressively and that's reflected in our rocket head count and that's also reflected in SG&A.

SG&A expense growth within the SG&A expense scribe fits well separating the headline number which is stock based compensation.

The cash number.

Now in terms of.

How this trend would evolve going forward, then I think we will.

Time will tell but I think the opportunities will only get bigger and brighter in the future and therefore, we will continue to invest in the future and therefore, the variable is not do we slow our rate of investments rather.

Quickly without various investments translate into revenue and margin.

Going through the three specific strategic areas that we talked about the first quarter results. Then I think our investments in business services for example, enterprise software translate into.

Revenue.

On a measured basis there are some products, we have typically the smaller ones.

Monetize but because of that sub scaled at lower margin than our other products, we have such as.

We call them, such as Tencent meeting such as Tencent documents, which are very substantial scale and we're not yet monetizing.

To that that when we do now generate attractive margins. So that's on the business services.

James Gordon Mitchell: So that's on the business services side. Then for the games, we have an increasing number of games released each year, and moving from 2022 into 2023, particularly an increase in AAA games, and that reflects the sizing up of headcount at a number of our key studios in the last two years and the development cycle for these AAA or high production value games. 3, well, to determine the margins for the game.

James.

We have.

An increasing number of games released each yeah.

It's moving from 2022 into 2023, particularly an increase in AAA games and that reflects the upsizing our head count at a number of our key studios in the last two yes.

The development cycle for these AAA or high production value games.

And the success of stars AAA bunch of games as you move through 'twenty two into 'twenty two 'twenty three.

To determine is it the.

Margins for the gaming industry to some extent.

Martin Lau: And then third, for short video, you know, our bandwidth costs have been increasing quite quickly this year, and one of the drivers for that has been a step up for video, particularly for us shipping out, and so currently, we monetize short video shipping out at a moderate rate through The Interactive Features, you know, as a brand. Inside Advertising, and so on. Then I think that will have an impact on the market. Now, in terms of Matterverse, I would say it's still early days. So there will be a lot of challenges. There's a lot of uncertainty.

And then third.

Short video.

Our bandwidth costs have been increasing quite tricky to see Monica drivers for that.

Being a step up in consumption of short videos.

Anyhow.

So currently we monetize short media shipping.

Moderate right through.

The interactive features.

And we.

Advertising and sufficiently and how all of that and I think that will have.

The impact on.

And margins in the profile of that investment cycle.

Now in terms of meta versus I would say.

It's still early days, so there will be a lot of challenges there's a lot of uncertainty so the.

Martin Lau: So the future would be very exciting. But the way through which it will be realized will probably take longer than people expect and would probably need a number of iterations. And I would say that the key challenge is really, As we discuss the multiple pathways to get to the metaverse, then it's really, what is the most attractive user experience in each of these pathways? And this is the most important question to answer.

The future would be.

Very exciting, but then the way through which you'll be realized will probably take longer than people expected and would probably.

Need a number of iterations.

I'd say the key challenge is really.

As we discussed about the multiple pathways to get to <unk>. Then it's really what is the most attractive use experience in each of the pathway.

And this is the most important question to answer if you don't answer that question and just try.

Martin Lau: If you don't answer that question and just try to take the word, then it's hard to come up with a product and crystallize a product that attracts people. And the other one is, really, in order to realize such a distinguishing and engaging user experience, what's the technology that's actually needed? But we do believe that the driving force will still be software-driven and the technology that really helps us to provide the user experience, be it engine technology, be it the ability to provide very real experiences, high-fidelity experiences across a large number of concurrent users, AI technology, for example, in order to customize the different experiences for different people.

Try to take the word.

Then then it's hard to come up with the product and crystallize the product they attract people and the other one is really in order to realize such disc.

Distinguishing and engaging user experience here whats the technology Thats actually needed.

But we do believe that.

The driving force will still be software driven.

And.

The technology that really help us to provide the user experience be it engine.

Technology be it.

The ability to to provide better real.

Ah.

Real experience.

Sit down with experience across many of our large number of concurrent users.

AI technology for example in order to customize at the different experiences with different people right. Now there are a lot of abuse ecologies, which are really software driven.

Martin Lau: There are a lot of these technologies which are really software-driven, so hardware will probably be an assisting condition, but not the necessary condition. We feel even in the mobile device right now, it will be quite sufficient in the first place. But of course, when the time when VR and other hardware become clearly necessary, I think the industry is actually ready to embrace them. And we actually have the technology to do it.

So hardware would probably be in assisting condition, but not the necessary condition.

<unk> fell to even in the mobile device right now.

It will be quite sufficient in the first place but of course.

If at the time, when VR and other hardware becomes clearly necessary I think the industry is actually ready to embrace it and we actually sort of you have the technology to do it so in a way it's.

Martin Lau: So, in a way, it's going to be like when people say, oh, mobile internet. What exactly is going to happen? There will be hardware developers who are developing mobile phones. But then, the actual driver will be the apps that actually make use of those mobile phones. And I think that's what would happen with the hardware as well in this case. In terms of regulatory compliance, I would say. You know, it's in terms of any service; you just have to be compliant in the different characteristics that you operate, right, you know. For the global market, there will be a set of regulations; for the Chinese market, there will be another set of regulations.

Can it be like.

When people say, Oh mobile Internet, what exactly it's going to happen and I know there will be hardware developers, who are developing mobile phones, but then.

The actual.

But it will be the apps that actually make use of those mobile phones and I think that's.

What happened with the hardware as well in this in this case.

In terms of regulatory I would say.

Uh huh.

In terms of any service you just have to be compliant.

The different territories that you operate right. So so for the global market there will be a set of regulations for the China market there'll be another set of regulations, but we felt it's not fundamentally.

Martin Lau: But we felt it's not fundamentally averse to the development of the metaverse. The metaverse in itself will be tech-driven, as James talked about. You know, there's a lot of technologies that are related to the development of games, as well as for the metaverse, and as a result, the Chinese government will be in support of the development of such technologies, as long as the user experience is actually provided under the regulatory framework.

Our birth to the development matter Bruce <unk> itself will be tech driven.

As James talked about.

A lot of technology, that's related to <unk> games as well as for the unit put amount of Bruce and as a result, with the Chinese government will be in support of the development of such technologies as long as the user experience is actually.

Provided under the regulatory framework.

Thank you. Our next question comes from John Choi from Daiwa capital markets. Please ask your question.

Operator: Thank you. The next question comes from John Cho from Daiwa Capital Markets.

Thanks for taking my questions just quickly two questions here on cloud computing I understand that.

Operator: Thanks for taking my question. Just quickly, I understand that, you know, we had pretty healthy growth, but right now, as you know, the overall macro, you know, is kind of slowing down. We've been seeing some little bit of delay in the so-called CapEx or IT budget being deployed. Are we likely seeing any of that?

Had a pretty healthy growth, but right now as you know the overall macro.

Kind of slowing down you can see some little bit of delay of so called the capex or Ikea budget being deployed on are we likely to are you seeing any of that or I mean, it could be 'twenty 'twenty. Two is the growth trend is still intact and secondly, just a quick follow up on your international game strategy.

Operator: Or, as we look into 2022, is the growth trend still intact? And secondly, just a quick follow-up on your international game strategy. If we look into your, you know, clearly, we've been doing a great job, but mostly, mostly from a mobile standpoint of view. But, you know, if we extend our platform, particularly on the console or more on the PC side, on the more casual side, what is our strategy there? And should we be expecting more, you know, strategic investments or M&A or deciding to acquire more IP? Thank you.

Look into your clearly we've been doing a great job, but most still mostly from a mobile standpoint of view, but you know if we extend our platform, particularly in console or more on the PC side on the on the more of a casual what is our strategy there and should we be expecting more strategic investments or M&A and decided to acquire more I see thank you.

Okay.

So on the cloud question our view is that.

James Gordon Mitchell: So, you know, on the cloud question, our view is that the dominant trend is companies in China increasingly adopting infrastructure in the cloud, platform in the cloud, and software in the cloud. And, you know, we think that trend will continue, with or without a fast or slow macroeconomic environment. Specifically on the point of CapEx bouncing around, I think that's true. And I think that reflects the fact that, in 2020, there was a high degree of uncertainty in the technology industry in China about the ability to continue purchasing, being in service, and so forth, and that caused some stockpileing, which I think has now been unwound in terms of the global supply chain, and is moving to a more normal basis, at So, I'd say that at this point in time, we think that... Business Service. And that's affected by regulation and macro-fluctuation, and then after. And then your question around. Consul-MTC.

The dominant trend as companies in China are increasingly adopting.

Infrastructure in the cloud platform in the cloud and software index out and we think that trend continues.

We don't without our phosphorous macroeconomic environment.

Specifically on the point of Capex bouncing around and I think that's true and I think that reflects the fact that.

In 2020 that was hydrating uncertainty in the technology industry in China about the ability to continue purchasing.

Some of us.

The Gpus.

Smart Nic cards and so forth.

And.

That for some stockpiling, which I think is now being unwound, James the global supply chain seems to be.

Moving to a more normal basis at least from a sort of a regulatory perspective vis vis the United States.

So.

I would say that at this point in time, we think that the.

Business services will be less affected by regulation and macro fluctuations have been advertising and then your question around.

Constant on PC.

I wasn't sure I caught the nuanced I mean, obviously, we've been creating PC games for many years more recently.

James Gordon Mitchell: I wasn't sure I caught the nuance; obviously, we've been creating PC games for many years, and more recently, as the x86 architecture has converged between PC and console, we've started releasing games on consoles as well, including Pokemon Unite most recently. And if you look at a number of what we refer to as sort of genre-leading... Specialist Studios outside China, then the majority of them are actually in consulates and PC centers, and you know that they've developed a reputation and a reality for operating particularly good games within a particular genre on console and PC, and we're now supporting them to do that at a bigger scale than before.

It's the X 86 architectures converge between PC and console with started releasing games on pumps. So that's why I think hitting pokemon unite.

Most recently.

And if you look at a number of.

What we refer to as sort of genre leading.

Specialty studios outside China than majority of them are actually in a constant on PC centric.

And.

<unk> reputation and a reality.

60, good games within a particular genre on console and PC and went out supporting them to do that at a bigger scale than before.

James Gordon Mitchell: In terms of IP, then, generally speaking, IP matters more for mobile and perhaps a little bit less for PC. The non-China PC gaming audience is a relatively engaged, sophisticated audience that looks at reviews on Steam and Epic Games Store. It collects feedback from other players, and so you can often see situations where a development team who works on one particular IP very successfully actually separate from that IP and create something else that is a brand new IP but ends up being bigger and better.

In terms of.

I T then generally speaking.

Matt as more mobile.

And perhaps a little bit less a P C.

Outside China.

Non China PC gaming audience is a relatively.

Engaged sophisticated audience.

It looks it refused on steam and epic games store range.

And collects feedback from other players and so you.

You can often see situations, where our development team to what's on one particular IP very successfully.

Actually separate from that IP.

Right.

Yes that is a brand new IP, but it ends up being bigger and better rent steps.

Stereotypically Classic example, the epic games.

James Gordon Mitchell: Stereotypically, a classic example would be Epic Games, where for a decade they were associated exclusively with the Gears of War IP, but subsequently, they sold Gears of War, and they focused on creating the Fortnite IP, even bigger and better than Gears of War.

For decades, they were associated excuses.

Right.

But subsequently you guys sells gas before and she is focused on creating fortnite IP, which is.

Even bigger and better.

Yeah.

Yeah.

Thank you. Our next question comes from Alicia Yapp from Citigroup. Please ask your question.

Operator: Thank you. Our next question comes from Alicia Yap from CT Group. Please ask your question. Hi. Good evening, management. Thanks for taking my questions. I have two questions.

Hi, Good evening management, Thanks for taking my questions.

Operator: The first one is regarding your new versions of the CRM, SARS-TDN. It seems like you will be launching a new version by the end of this year to provide a deeper integration between the Tencent meeting and also WECOM. So how should we think about this upcoming online advertising opportunity within WeChat that could further expand and penetrate into other traditional industry verticals? And then, second question, I guess there are a lot of metaverse questions tonight, so I guess just to follow up a little bit on this as related to your international games development and expansion, just wondering if management could share the opportunity that you see in the global context of this metaverse opportunity.

I have two questions. The first one is regarding your new version of the CRM Asaf TD Ed. It seems like you will be launching a new version by the end of this year could provide a deeper integration between depends on need and also the week. So how should we think about these upcoming.

My advertising opportunity BBB chat that could further expand and penetrate into auto traditional industry vertical.

And then second question I guess, so that's a lot of metal bars question Tonight. So I guess just a follow up on this <unk> related to your international games development that expansion just wondering if management could share the opportunity that you see.

In the global context of things, Matt I'll first opportunity.

What do we need to be prepare.

Operator: What do we need to prepare in terms of capturing this evolving trend, especially whether we need to prepare a separate global infrastructure or some social network infrastructure to capture this opportunity in a global context? Thank you.

It comes off a capturing these evolving trends, especially.

Whether we need to prepare a separate global infrastructure or some social network infrastructure to capture this opportunity in the global context. Thank you.

Yeah.

So.

I think when she then it is.

Martin Lau: I think on GDN it is a good observation that we are actually starting to integrate more among our different enterprise facing sides. And, you know, there will be more integration between WECOM and Tencent Meeting and Tencent Docs and TDN and potentially other SaaS as well. And WECOM also provides a link into the WeChat ecosystem. So yeah, I would say there's fundamental benefits for these different SaaS apps to be talking to each other, and that actually sort of provides a more unified experience for anyone, any enterprise customer who wants to use one or two or many of our SaaS applications.

A good observation that we actually.

Starting to integrate more.

Among our different.

Enterprise facing SaaS.

And there.

There will be more integration between <unk> com, and Tencent meeting and Tencent dogs, and CDN and potentially other SaaS as well and and.

<unk> also provides a link into the <unk>.

Chet <unk> ecosystem. So yeah, I would say there is fundamental benefits for these different.

SAS.

Apps to be talking to each other.

And that actually sort of provide a more unified experience for anyone any enterprise customer who wants to use one or two or many of our SaaS applications and then in terms of being able to connect these SaaS to the consumers with innovation in a controlled and secured way is actually very.

Martin Lau: And then, in terms of being able to connect these SaaS to the consumers within WeChat in a controlled and secured way, it is actually very helpful both for the enterprises as well as for the consumers so that they can actually get served by the different businesses in a well-protected manner. And when that happens, right, you know, in our prepared comment, we also talk about when an enterprise can use this to foster a selling or serving relationship with their customers; then it can provide additional GMV for our mini programs, for example, and it can also provide a reason for them to advertise more within Weixin. So, Yeah, the metaverse. I've answered enough questions.

Helpful.

Both for the enterprise as well as for the consumers so that they can actually get served.

At the different businesses in the in the.

And the well protected.

Or.

And when that happens right here in our prepared comment we also talk about.

When when enterprise can use this to foster selling or serving relationship with their customers then it can provide.

<unk> <unk> mini programs for example, so we can provide.

A reason for them to advertise more with inflation.

So yeah.

James Gordon Mitchell: So, James, maybe you can take a crack at that. Okay, I mean, I actually hadn't heard Martin's tagline of making the virtual world more real and making the physical world more rich before, but it's very good, so I repeated it. So, I think that's the destination. Now, in terms of, you know, the pathways to the destination, you know, it's not necessarily in our interest to talk, you know, at great length about our specific plans, whether inside or outside China, but maybe just to, you know, elaborate on what Martin was saying a little bit and, you know, what, different pathways they are, what capabilities they need to aggregate, then I think that the most, the pathway that most closely resembles the metaverse today is games, virtual world, open world games, and for games, they already have many of the components in place, and I think the challenge is aggregating more and more virtual experiences, virtual game experiences together, so it's, you know, Fortnite, you know, together with Rocket League, in the Epic example, or multiple different so-called game experiences within the Roblox example.

<unk> members.

Okay.

You can take a crack at that.

I actually Havent had Martin's hotline, and making the virtual work more rather than making a physical lot more rich before but its breakouts that might repeat it.

I think that the destination now in terms of the pathway to the destination.

And it's not necessarily in our interest.

Great Lakes about specific plans, whether inside or outside China, but maybe just elaborate on what matson was saying a little bit.

What.

Different pathway, they all what capabilities they need to aggregate then I think that.

The most that the pathway that most closely resembles the amount of us today is games virtual World Open World game and.

Our games are they already have many of the components in place.

And I think the challenge is aggregating more and more thought should experience is such a game experiences together. So it lets you know fortnite together with rocky.

India example.

Hospital different.

So quick game experiences within the roadblocks for example, and also providing.

James Gordon Mitchell: And also providing more and more powerful tools so that other amateur but also professional content creators can create experiences, including non-game experiences, within these virtual worlds. You know, a second path that is less well understood is taking user-operated communities that already have a high degree of functionality, technology, bots, and then moving them from text and image-based to more of an immersive video base. And I think that's an area where companies like Discord have an opportunity.

More and more powerful tools, so that other amateur but also professional content creators can create experiences including non gaming experiences within these virtual worlds.

Hum.

That's what I understood is taking use of operating communities.

Does that already have a high degree of functionality technology thoughts.

And then moving them from a text and image basis to more of an immersive video basis.

It's an area where.

Companies like <unk> have opportunity and then the third is I am taking a preexisting social network, but with the social network one needs to.

James Gordon Mitchell: And then the third is in taking a pre-existing social network, but with the social network, one needs to both provide the 3D graphics capabilities that one would..., server-based community, and also provide the UGC and PGC tools that the game company, Thank you. Companies such as Metta itself and SNAP have the most capital resources, but they also have a good amount of work to do. So anyway, I think that doesn't answer your question directly, but I hope it sheds some light on how we think about pathways and the future and why we're doing some of the things that we're doing.

But provide the three D graphics capabilities.

In blood.

With that sort of a base community and also provides the UGC.

UGC and PTC tools the.

The game companies need to do so while the social networks, such as a matter of itself and snap.

The most capital resources.

A good amount of work to do so anyway I think.

That doesn't answer your question directly, but I hope that sheds some light on how we think about.

The pathway and in the future and why we are doing some of the things that we're doing.

Thank you and in the interest of time, we will take the last question.

Thank you. Our final question comes from Eddie Leung from Bank of America. Please go ahead.

Operator: Thank you, and in the interest of time, we will take the last question. Our final question comes from Eddie Leung from Bank of America. Please go ahead.

Good evening, guys, probably a bit more boring.

Operator: Good evening, guys. Probably a bit more boring.

So two questions. The first one is regarding <unk>.

Operator: So two questions. The first one is regarding clouds. I'd be curious if the growth we are seeing right now is primarily driven by new clients or increased spending by existing clients, because we know that may have some implications on the margins. And then, secondly, just a follow-up question on headcount. I understand James has talked a bit about that, but if we look at the increase in headcount this year, we are even considering the additions from some of the acquisitions, companies like Bitauto and Sogo. We are still looking at 20,000-30,000 more people. So if we look into next year, what areas can we think about that still require more headcount, I think?

Al.

I'd be curious if the growth we are seeing right now is primarily driven by new clients or increasing spending opportunities being clients. Because we know that may have some indications on the margins.

And then secondly.

Just a follow up question on the headcount I understand Youre James.

All of that but if we look at the increase in headcount this year, we're looking at.

Even including the additions from <unk>.

Some of the AG acquisitions, our company, so well still look at 20 30000 more options right. So if we look into next year.

What areas can we think about steel.

More pumps.

So in terms of cloud I would say both.

Martin Lau: So in terms of cloud, I would say, both indicators are actually quite important, right, you know, and, and In terms of existing clients, I would say, If it's just volume growth on low-margin products, then it's less valuable. But then if we can actually cross-sell our SAAS and pass products to existing customers, then that will be much better for our overall margin. And in terms of the number of clients, it's It's mainly happening in the long tail, right? You know, that the medium and small, especially small companies, would be the key driver for the number of clients. And typically, they don't really drive sales and revenue that much.

Indicators are actually quite important right.

And.

In terms of existing clients I would say.

It's just volume growth.

On low margin products and then it's less valuable, but then if we can actually cross sell.

<unk> and paas products to exist.

The existing customers then that would be much.

Better for our overall margin and in terms of number of clients.

It's.

It's mainly happening at the at the long tail right.

Medium and small, especially with small companies will be the key driver for the number of clients and typically they don't really drive sales and revenue that much. So even if you have a high percentage growth.

Martin Lau: So even if you have a high percentage growth, the impact is actually lowering the output of the customers but not really driving the overall business volume. But the important thing is that, you know, these smaller companies will grow over time, and when they grow without the cloud, then it will be very profitable for us over time, over their lifetime. So that's why our cloud business actually focuses on both ends, basically growing the number of customers that we have on the long tail. And at the same time, supporting our existing customers so that they can grow their business volume, especially cross-selling them from ice to path. So on the second question.

The impact is actually lowering the <unk> off the cuff.

Customers, but not really driving the overall business volume, but the important thing is that these smaller companies would grow over time and when they grow over time as they grow with him clouds.

It will be.

Very profitable for us overtime over their lifetime. So that's why our cloud business actually focus on both and basically growing the number of custom.

Customers that we have on the long tail and at the same time.

Supporting our existing customers so that they can grow their business volume, especially cross selling them from highest to path to SaaS.

So on the second question.

I think in terms of the head count growth as yet.

Martin Lau: I think in terms of the headcount growth, as you have mentioned clearly earlier, some of it is related to the new subsidiaries, and this accounts for roughly, you know, 9000 people. And on top of that, we do recruit new graduates from time to time, and there will be another, you know, 5-6000 people on an annual basis. In respect of the areas in which we will spend more, or we have spent more on basically, you know, the business-facing, you know, services, including crowds, including maps, including a lot of, you know, different businesses within the CSIG. We also do have some organic growth in our online gaming division. As James mentioned earlier, it's very hard to fight for talent, especially in the online games area.

Earlier.

All of them are related to the acquired.

Quiet, new subsidiary and it accounts for roughly 9000 people and until we do.

New graduates from time to time and they will be.

Slide 6000 on an annual basis.

In respect of the areas in which we will expense you know more or we have spent basically.

Yeah.

The phasing eagle surfaces.

Crowd, including that including a lot of.

Yeah.

Is.

At this point.

<unk>.

We also do have some.

Organic growth on an.

And then gaming Division is.

James attention.

Hi, Paul.

For talent, especially in the northern Gaines area and so we.

Martin Lau: And so we will invest furthermore in the online games part. And the other thing is we will invest in, you know, the content part, because beforehand, a lot of headman power was subcontracted out. But now we are trying to build our own team of people, you know, in this area. So, as you know, to content, well, sort of, you know, control the content, you know, as well as, you know, doing a bit of content creation and things like that in order to control the overall quality of the content. Going forward, you know, I think we're not talking about growth of about 30-40%, you know, headcount growth on an annual basis, but it will be more moderate, you know, in 2022.

We will invest more on the on engine parts.

And the other thing is.

Got it.

And you know the content part because beforehand.

<unk>.

Head manpower.

Contract it out.

Now we are trying to do our own team of.

People you know in this area.

<unk> set up.

Until the content as well as you know.

<unk>.

Doing a bit of content creation and things like that in order to control the overall quality of the content.

Going forward.

I think we end up talking about globally.

40%.

Headcount will go on an annual basis, but it will be more moderate in 2022 at east.

Okay. Thank you.

Operator: Thank you. We are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website.

And we of course are closing the call now if you wish to check out our press release and other financial information. Please visit the IR section of our company wide.

The replay of this webcast will also be available.

Operator: The replay of this webcast will also be available soon. Thank you, and see you next quarter. Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating.

Thank you and see you next quarter.

Thank you, ladies and gentlemen that does conclude our conference for today. Thank you for participating.

You may all disconnect.

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