Q1 2022 Tencent Holdings Ltd Earnings Call

Operator: Standing by, welcome to Tencent Holdings Limited's 2020 First Quarter Results Announcement Conference Call. At this time, I would like to welcome you to the Tencent Holdings Conference

Good day and thank you for standing by welcome to Tencent Holdings Limited 2022 first quarter results announcement conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Operator: All participants are in the listen-only mode. After the speaker's presentation, there will be a question.

Operator: Announcement Session. To ask a question during the session, you will need to press star 1 on your telephone.

Do you ask the question during the session you will need to press star one on your telephone and please be advised that today's conference is being recorded.

Operator: Allison, and please be advised that today's conference is being recorded. If you require any assistance,

Operator: If you require any further assistance, please press star zero. Now, I would like to turn the conference over to Ms. Wendy Huang from Tencent IRT. Thank you. Please go ahead.

If you recall you require any further assistance please press star zero.

And now I'll like to turn the conference over to MS. Wendy Huang from Tencent IR team.

Wendy Huang: Thank you, operator. Good evening. Welcome to our 2022 first quarter result conference call. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underpinned by a number of risks and uncertainties. They may not be realized in the future for various reasons.

Thank you. Please go ahead.

Thank you operator.

Good evening.

Welcome to our 22 first quarter results conference call.

Before we start the presentation, we would like to remind you that it includes forward looking statements, which are underlined by a number of risks and uncertainties.

May not be realized in the future for various reasons.

Wendy Huang: Information about general market conditions comes from a variety of sources outside of Tencent. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures of the group's financial performance calculated in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents in the IR section of our website.

Information about the general market conditions is coming from variety of sources outside of Tencent.

This presentation also contains some oh, what did you know as far 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 <unk>.

For a detailed discussion of the risk factors in the Niobrara just measures. Please refer to our disclosure documents on the IR section of our website.

Wendy Huang: Let me introduce the management team on the call tonight. Our chairman and CEO, Paul Neymar, will kick off with a short overview. President Martin Lau and Chief Strategy Officer, James Mitchell, will provide a business review. Chief Financial Officer, Joan Lo, will conclude with a financial discussion. Before we open the floor for questions, I will now turn the call over to Tony.

Let me introduce the management team on the call Tonight are.

Chairman and CEO Pony MA will kick off with a short overview pressed.

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

Chief Financial Officer of Jumbo will conclude with financial discussion before we open the floor for questions.

I'll now turn the call over to Pony.

Huateng Ma: Good evening. Thanks, everyone, for joining us.

Thank you Wendy.

Huateng Ma: During the challenging first quarter of 2022, we implemented cost control initiatives and rationalized a certain non-core business, which will enable us to achieve a more optimized cost structure going forward; we utilize tools such as mini programs, Tencent Meeting, and WECOM to help enterprises and consumers weather the resurgence of COVID-19 in China and continue investing in strategic growth areas including enterprise software, video accounts, and international games. Looking forward, we will sharpen our focus and sustain our innovation through challenges and cycles and continue to create value for our users, partners, and society.

Good evening, thanks, everyone for joining us.

It was a challenging first quarter of 'twenty to 'twenty, two we implement cost control initiatives.

Rationalize certain noncore businesses, which enabled us to achieve a more optimized cost structure going forward.

We utilize tools such as mini programs.

Since that meeting and we call them to help kinds of classes and consumers, where I thought the resurgence of COVID-19 trial.

And continue investing in strategic growth areas, including enterprise software video calls and information DAU games.

Okay.

Sharpen our focus and.

This thing our innovations through challenges and cycles.

And continue to create value for our users partners and society.

Huateng Ma: Now let me go through the headline financial numbers for the company. Total revenue was 135 billion RMB, largely stable year-on-year, all down 6%. Gross profit was 57 billion RMB, down 9% year-on-year and 1%. Non-IFRS operating profit was 37 billion RMB, down 15% year-on-year or up 10%, quote unquote; non-ISR net profit attributable to equity holders was 26 billion RMB, down 23% year-on-year or up 3% quarter-on-quarter. For our key services, we generally retain our workplace positions in activities including social, games, long-form video, news, music, literature, payment, and mobile browsers.

Now let me go through the headline financial numbers.

Total revenue was 135 feet on.

The margin is stable year on year or six.

Next question quote unquote.

Gross profit was 57 billion RMB all night.

1% quarter on quarter.

Operating.

Operating profit was 37 billion RMB.

15%.

Up 10% quarter on quarter.

No.

Net profit attributable to equity holders was <unk>.

Six feet on B.

23% year on year or up to sleep I can't quote unquote.

Well, our key activities in each one of them.

I'll start with those positions in activities, including.

Social games long form video news music.

Huateng Ma: Combined MAU of leasing and retail was $1.29 billion. Mobile devices in the U of QP were 564 million. Now I will hand over to Martin and James for the business review. Thank you, Pony, and good evening and good morning to everybody.

Payment and mobile Plaza.

Combined.

<unk> was one two.

Food might be doing.

Mobile devices in the U K was 564 need it now.

Now I will hand over to Montana jumps for the business to meet you.

Thank you Pony and good.

Martin Lau: For the first quarter of 2022, our total revenue was largely stable year-on-year. That represented 54% of our total revenue, within which social network subsegment revenue was 22%, domestic games subsegment revenue was 24%, and international games subsegment revenue was 8%. Online advertising was 13%, and FinTech and business services represented 32% of total revenue.

Even ann good morning to everybody.

For the first quarter of 2022, our total revenue was largely stable year on year Vas represented 54% of our total revenue within which social networks sub segment revenue was 22% domestic games segment revenue was 24% and international games Subsegment was.

8%.

Advertising was 13% and Fintech and business services was 32% of total revenue.

Martin Lau: For value-added services, the segment revenue was $73 billion RMB for the quarter, broadly stable year-on-year. Social networks revenue was up 1% year-on-year to $29 billion RMB, reflecting increased revenue from video accounts live streaming service, which was largely offset by decreased revenue from music and games-related live streaming services. Total vast subscriptions grew 6% year-on-year to $239 million. For Tencent Video, we extended long video market leadership with 124 million subscribers. Our popular content, such as drama series Sword Snow Strike and animated series Perfect World Season 2, demonstrate our strength in IP adaptation of comics and novels.

Okay.

For value added services segment revenue was 73 billion RMB for the quarter brought these stable year on year.

Social networks revenue was up 1%.

At 229 billion RMB, reflecting increased revenue from beauty concept like streaming service, which was largely offset by decreased revenue from music and games related live streaming services.

Bass, and subscriptions grew 6% year on year to $239 million.

Tencent video, we extended long BDO market leadership with 124 million subscribers.

A popular content such as drama series stored snow stride and animated series perfect well, we see some two demonstrated our strength in IP adaptation of comics and novels.

Martin Lau: Music subscriptions increased 32% year-on-year to $80 million, driven by high-quality content, as well as increased consumer willingness to subscribe to music services. Domestic games revenue was down 1% year-on-year to 33 billion RMB as direct and indirect effects of minor protection measures impacted active users and paying user accounts. Recently released games, League of Legends Wild Rift and Fight of the Golden Spatula generated incremental revenue, while revenue from Moonlight Blade Mobile and Call of Duty Mobile decreased.

Music subscriptions increased 32% year on year to $80 million driven by high quality content as well as increased consumer willingness to subscribe for music services.

Domestic games revenue was down 1% year on year to 33 billion RMB as direct and indirect effects of minor protection measures impacted active user and paying user accounts.

Recently released games League of legend Wildwood in spite of the Golden Spatula generated incremental revenue while revenue from one like mobile and call of duty mobile decreased.

Martin Lau: International games revenue grew 4% year-on-year to 11 billion RMB. However, year-on-year growth was slower than in recent quarters, reflecting lower PUBG mobile revenue as user spending normalized post-COVID industry-wide, as well as the timing of content upgrade in League of Legends and Clash of Clans. Revenue declined sequentially from a high base in the fourth quarter last year when there was a chewed-up adjustment to super sales revenue and more consumption during the year-end holiday.

International Games revenue grew 4% year on year to 11 billion RMB.

Year on year growth was slower than in recent quarters, reflecting lower pet T mobile revenue as user spending normalized post COVID-19 industrywide.

As far as timing of content upgrade.

In <unk> and classroom Clinton's.

Revenue declined sequentially from a high base in the fourth quarter last year. When there was a true up adjustment to super sales revenue and more consumption during the year end holidays.

Martin Lau: With respect to Weixin, video accounts continue to enjoy strong growth momentum with a significant year-on-year increase in beauty viewers and time spent. This is supported by expansion in news, knowledge-based, and entertainment content, as well as better recommendation technologies. We also enhanced enterprise messaging and shopping features in video accounts to facilitate user engagement and monetization for creators, driving a more vibrant content ecosystem. Many programs exceeded 500 million DAUs and sustained rapid growth in GMB year-on-year, with particularly notable growth in retail and restaurant categories as we enhanced the functionalities for customer services and operational analysis, with more public services, such as health and municipal services, available through mini-programs. We're able to cultivate user habits for accessing essential services through mini-programs.

With respect to Asian video accounts continued its strong growth momentum with significant year on year increase in beauty views and time spent.

This was supported by expansion in use knowledge based and entertainment content as well as better recommendation technologies.

We also enhanced enterprise messaging and shopping features in beauty outcomes could facilitate user engagement and monetization for creators.

I think a more vibrant content ecosystem.

Mini programs exceeded 500 million Teus and sustained rapid growth in <unk> year on year with particularly notable growth in retail and restaurant categories. As we enhanced the functionality is customer services and operational analysis.

With more public service, such as health and municipal services available through mini programs, we're able to cultivate user habits in accessing essential services to many programs.

Martin Lau: For QQ, we are enriching features for young users to better create, share, and connect with each other. We provide advertising tools for users to create interesting short videos featuring their own customized QQ show characters. Through status updates, users can share videos and music they are consuming so that their friends can access and stream the same content without leaving the QQ app via mini programs, enhancing social interaction and content consumption.

For QQ.

We are enriching features for young users to better create share and connect with each other.

Provide attitude towards the users create interesting short videos featuring their own customized stupid QQ show characters.

Through status update users can share videos and music. They are consuming so that their friends can access and stream the same content without leaving the QQ app via media programs, enhancing social interaction and content consumption.

Martin Lau: Turning to domestic games, we extended our long-standing leadership among the highest DAU games while also penetrating new and new to Tencent game genres. In Battle Arena Games, Order of Kings grossing receipts decreased year-on-year during the Chinese New Year holidays due to fewer commercially successful items. However, the game's adult user base has been stable, and grossing receipts resumed year-on-year growth in March on more commercially successful items. Peacekeeper Elite, the number one shooter game in China, enhanced its user engagement by introducing new combat items and battlefield design in its third anniversary content update in April.

Yeah.

Turning to domestic games, we extended our long standing leadership, among the highest videogames, while also penetrating new and new to Tencent game genres.

In Battle Arena games.

Honour of Kings closings receipts decreased year on year during the Chinese new year holidays due to fewer commercially successful items.

However, the games about user base has been stable and closing receipt, we assumed you're on mute growth in much more commercially successful items.

Peacekeeper elite the number one shooter game in China, and hence its user engagement by introducing new combat items and battlefield design.

Martin Lau: Among new genres, in auto-battler games, Spider-Big Golden Spatula released new champions and game mechanics that enriched players' competitive experience. The game ranked number one in its genre and number six in all mobile games by DAU in the first quarter. It is currently the most successful new game release across the industry from 2021 in real-time strategy games. We launched TME Studios' Return to Empire in late March.

Third anniversary content update in April .

Among new genres in auto basketball games.

The Golden Spatula released the new champions and game mechanics, and enriched players competitive experience.

Became ranked number one in their genre and number six in all mobile games by <unk> in the first quarter it.

It is currently the most successful new game release across the industry from 2021.

In real time strategy games.

We launched <unk> Studios returned to Empire in late March.

Martin Lau: Leveraging its partnership with Xbox Game Studios, the game offers high-quality graphics and content to gamers. It was the second most revenue-generating game in the genre industry-wide measured by grossing receipts in April. Moving on to international games.

Leveraging partnership with Xbox Game Studios.

<unk> offers high quality graphics and contents to gamers.

It was the second most revenue generated game in the genre industry wide measured by growth in receipts in April .

Martin Lau: The mobile game industry outside of China generally experienced slower growth or declines in early 2022 versus the COVID-19 impact period in early 2021. PUBG Mobile, as a result, experienced a year-on-year gross receipt decline in the first quarter. However, we're confident in the game's longer-term trends as they move beyond the COVID comparison. The Spider-Man-themed PVD game mode launched in January was successful in driving user engagement, while Lamborghini Taisen's, released in March, became the game's top selling costumes ever.

Moving onto international games, the mobile game industry outside of China, generally experienced slower growth or declines in early 2022 versus COVID-19 impacted period in early 2021.

T mobile as a result experienced at year on year growth and we see decline in the first quarter.

We're confident in the games longer term trends as they move beyond the COVID-19 comparisons.

The Spider man themed PBT cable to launch in January it was successful in driving user engagement, while Lamborghini typhoons.

Released in March became the game's top selling costs gives us ever.

Martin Lau: Our PC game, Valorant, continued its robust performance. A scrolling user base, paying propensity, and attractive content drove growth in receipts up significantly year on year. Valorant has become the sixth most popular PC game by MAU across all genres, and it's the highest ranked new PC game title released in the last four years. Besides our existing titles, we're releasing compelling new games via partnership with globally renowned IPs. One example is Dune Spice Wars, a real-time strategy PC game based on the sci-fi IP Dune.

Our PC game <unk> continued its robust performance.

User base paying propensity and attractive content drove growth and received up significantly year on year salary.

<unk> has become the sixth most popular PC game by Amin you across all genres and has the highest ranked the new PC game titles released in the last four years.

Besides our existing titles were released and compelling new games, the partnership with globally renowned Ips.

One example is doing space was a real time strategy PC game based on Wi Fi IP.

Martin Lau: Published by our subsidiary studio Funcom, the game achieved initial success since its early access launch on April 26. Funcom, which has game rights to notable IPs such as Dune and Conan the Barbarian, is also developing an open world survival game based on Dune.

Published by our subsidiaries studio fund come the game achieved initial success since its early access launch.

On April 26.

Hong Kong, which has gained rights to notable IP, such as steward and colon Goodbye buried it also developing an open world survival game based on June .

James Gordon Mitchell: Another example is Apex Legends Mobile, a hero shooter battle royale game jointly developed by our Lightspeed and Quantum studios and EA's Respawn studio, which was launched yesterday globally. The mobile game is based on one of the most successful new PC console IPs in recent years. Looking forward, we aim to grow further our existing titles and release multiple big-budget new titles, especially from 2023 onwards. With that, I'll pass to James to talk about other business. Thank you, Martin.

Another example is apex legends mobile a hero shooter Battle Royale game shortly developed by our Lightspeed in quantum studio <unk> respond studio was launched yesterday globally.

The mobile games based on one of the most successful new PC console eyepiece in recent years.

Looking forward, we aim to grow further our existing titles and release multiple big budget, new titles, especially from 2023 onward.

With that I'll pass to James to talk about other businesses.

James Gordon Mitchell: Coming to online advertising, revenue was 18 billion renminbi in the first quarter, down 18% year-on-year and down 16% quarter-on-quarter, as subdued bidding density results in lower eCPM. Social and other advertising revenue was $16 billion RMB, down 15% year-on-year. Innovation, Moments Advertising, and Revenue Gifts, Slightly Year-on-Year as Weakness in Education and Real Estate outweighed growth. However, Official Accounts advertising revenue increased notably year on year, as we enabled advertisers to better target young users via notification feedback, to run their apps within an environment of high quality and relevance.

Thank you Mark and thanks to all.

Advertising revenue was 18 billion renminbi in the first quarter down, 18% and down 16% quarter on quarter as subdued bidding against the results in lower EPS.

And others advertising revenue was 16 billion renminbi down 15% year on year.

Quarter on quarter within which our mobile AD network revenue declined sharply.

Due to the weak demand and regulatory changes such as restrictions on flat screen ads.

Lutz advertising that need dipped slightly year on year as weakness in education real estate AD spend outweighed from FMC and games.

Hey, good accounts advertising revenue increased year on year.

As we enabled advertisers to better target young users via notification.

And to run their apps within an environment of high quality and benefit concepts have a 20% sufficient accounts AD revenue comes from click to purchase and click to messenger ads, which are powered by mini programs and <unk>.

James Gordon Mitchell: Over 20% of official accounts add revenue, and Message Ads, which are powered by many programs. Media Advertising Revenue is a two-bit environment, down 30% year-on-year in 2017, within which our video ad revenue declined double digits year on year, the Winter Olympics and popular dramas. The Oath of Love generated incremental video ad revenue but was more than offset by fewer releases of top-tier variety in the first quarter of last year

Thanks.

Our media advertising.

And 30% year on year.

Thankfully quota.

Within which our video AD.

Declined double digits year on year.

Some popular drama series, such as love generated incremental video AD revenue more than offset by fewer releases of top tier variety shows when compared to the first quarter of last year.

James Gordon Mitchell: For the second quarter to date, advertisers in categories such as FMCG, e-commerce, and travel... Scout Fact Desk, due to the COVID situation attended supply, continue to invest in our advertising, and are upgrading our machine learning infrastructure to process data more efficiently. The upgrade should ultimately enable us to achieve what we are targeting, and that's conversion. Looking at FinTech and business services, segment revenue was 43 billion renminbi, up 10% year-on-year and down 11%, and Fintech, the Year-on-Year Revenue Growth Moderator.

For the second quarter to date advertising categories, such as FMC G E Commerce and travel of Scott Baxter.

Spending due to the COVID-19 situation attendant supply chain disruptions.

We continue to invest in our advertising system.

We are upgrading our machine learning and infrastructure to process data more efficiently.

Brexit ultimately enable us to enhance targeting and thus conversion rates for advertisers.

Looking at Fintech and business services segment revenue was 43 billion renminbi up 10% year on year.

In essence, the same quarter on quarter.

James Gordon Mitchell: Slow Growth in Commercial Payment Volume Reflecting Multiple Cities Taking Measures to Combat the COVID-19 Resurgence, resulting in less consumption of both everyday items and beverages, as well as big ticket items such as travel. Our payment volume correspondingly is saturated, especially in categories such as transportation. Services. The business services revenue dipped slightly year on year as we shifted our focus from prioritizing revenue. Award Customer Value Creation and Quality, proactively scaled back certain losses, such as projects that carry substantial headline revenue but also substantial costs that we needed to pay to subcontractors. As far as DC discounts are concerned, infrastructure only, and basic services such as Calgary.

In fact, the year on year revenue growth moderated.

It's not a pricing commercial payment volume, reflecting multiple cities taking measures to combat. The COVID-19 research in say March resulting in less consumption, but everyday items such as <unk>.

That's why it is big ticket items, such as travel booking.

Our payment volume correspondingly decelerate, especially in categories, such as transportation dining surfaces and apparel.

Business services revenue dipped slightly year on year as we shifted our focus from prioritizing investment to.

What customer value creation and quality is great.

We proactively scaled back certain loss, making activities such as projects that carry substantial headline revenue, but also substantial cost that we needed to pay to subcontractors as well as seeking discounts of infrastructure on the contracts.

James Gordon Mitchell: However, we've increased our healthier margin capacity, especially in video, cloud, and Skype. The Video Cloud is taking advantage of our accumulated experience providing in-house interactive entertainment and video chat, as well as our lowly. We're increasingly migrating our clients from the basic content delivery network to more sophisticated video-on-demand live streaming and real-time communication. Real-time communication, the growing demand for interactive videos. Online Meetings, Customer Service, and by Gartner ranked Tencent first among all their, In cybersecurity, we expanded our client base across network, endpoints, and business operations to position for the fast-growing demand for next... Security, we're enhancing our zero trust. EZero Trust, leverage our accumulated internal experience in that, and I'll now pass to John.

Services, such as cloud computing on sensitive arena.

However, with increased that healthier margin tax revenue, especially in PDF now cyber security.

The video cloud taking advantage of our accumulated experience providing in house interactive entertainment and video chat services as well as our low latency network infrastructure.

We've seen migrating clients from the basic content delivery network to more sophisticated video on demand and live streaming and real time Communications solutions real time communication service to meet growing demand interactive video services and <unk>.

Hi, guys, such as online meetings customer service and live streaming e-commerce and gotten that right.

Among all the communication has revenues in China 2020.

Wow.

The cyber security, we expanded our client base across the network endpoint and business operations security solutions defending enterprises need for protection against cyber as well as for cyber security compliance.

To position for the fast growing demand for next generation Enterprise security auditing, a zero Trust security solutions.

Zero Trust security solutions leverage our accumulated and channel experience and network security management.

Shek Hon Lo: For the first quarter of 2022, total revenue was R135.5 billion RMB, stable year-on-year or down 6% quarter-on-quarter.

And I'll now pass to John .

Thank you Jamie.

For the first quarter of 2022 total revenue was $135 5 billion renminbi stable year on year or down 6% quarter on quarter. Gross profit was 57 1 billion renminbi down 9% year on year or 1% quarter on quarter net other gains were $13 1 billion renminbi.

Shek Hon Lo: Gross profit was $57.1 billion RMB, down 9% year-on-year or 1% quarter-on-quarter. Net other gains were $13.1 billion RMB, down 33% year-on-year or 85% quarter-on-quarter, which were primarily non-Iovirus adjustment items, including a $18.5 billion RMB gain arising from our partial divestment of Sea Limited. Partly offset by impairment provisions against investing companies in verticals such as transportation services and online media.

So 33% year on year, or 85% quarter on quarter, which were primarily non <unk> adjustment items, including the $18 5 billion renminbi gain arising from a partial divestment of <unk> limited.

Partly offset by impairment provisions against investing companies in verticals, such as transportation services and online media.

Shek Hon Lo: Operating profit was RMB37.2 billion, down from the previous year.

Shek Hon Lo: and the Renminbi down 34% year on year and 66% quarter on quarter. Net finance costs were RMB1.9 billion, up 42% year-on-year or 4% quarter-on-quarter, reflecting greater interest expenses due to increased inductiveness as well as lower foreign exchange gains over year-on-year and quarter-on-quarter.

Operating profit was 37 2 billion renminbi down 34% year on year at 66% quarter on quarter.

Net finance costs were $1 9 billion, rather than the up 42% year on year or 4% quarter on quarter.

<unk> greater interest expenses due to the increase in depth as well as lower foreign exchange gains of year on year and quarter in water.

Shek Hon Lo: The share of losses of Associates and JVs was $6.3 billion renminbi.

Share of losses of associates, and JV with $6 3 billion renminbi compared to share of profits of $1 3 billion rather than the last year.

Shek Hon Lo: Non-IVRS share of losses was 2.2 billion RMB compared to non-IVRS share of profits of 0.5 billion RMB a year ago, reflecting revenue decline at certain overseas game associates due to post-COVID user spending normalization.

No not a virus shelf losses were $2 2 billion renminbi compared to share of profits up zero point thought that I'd, rather be a year ago, reflecting revenue declines at certain overseas gained associate with Youtube post COVID-19.

Shek Hon Lo: Losses recognized from associates in the transportation industry.

Shek Hon Lo: Associates in the Transportation Services, WERCO, and Impact from JAD.com seized to be an associate. Income tax expense decreased by 27% to 5.3 billion renminbi for the first quarter of 2022 on a year-on-year basis. The effective tax rate was 18.2%. I have our ResNet profit attributable to equity holders for 23.4 billion RMB, down 51% year-on-year or 75% quarter-on-quarter. Diluted EPS was 2.404, down 51% year-on-year or 75% quarter-on-quarter. Now I'll share with you our non-Iovirus financial figures. Operating profit was $36.5 billion RMB, down 15% year-on-year or up 10% quarter-on-quarter, reflecting lower marketing expenses as a result of our cost optimization measures.

Pending normalization.

Losses recognized from associates in their transportation services vertical.

And the impact from J D dot com ceasing to be an associate.

Income tax expense decreased by 27% to $5 3 billion renminbi for the first quarter.

Oh 2022 on year on year basis.

The effective tax rate was 18 two.

Yeah.

I have a rest of that profit attributable to equity holders was $23 4 billion, Randy down, 51% year on year or 75% quarter on quarter.

Diluted EPS was two plus 404, rather than the 51% year on year or 75% quarter on quarter.

No I'll share it with you.

<unk> financial figures.

Operating profit was 46 point in fact, the lead rather than be down 15% year on year or up 10% quarter in quarter.

<unk> lower marketing expenses as a result of our cost optimization measures.

Shek Hon Lo: The net profit attributable to equity holders was $25,000.

Shek Hon Lo: was 25.5 billion RMB, down 23% year-on-year or up 3% quarter-on-quarter. Diluted EPS was 2.62 RMB, down 23% year-on-year or up 3% quarter-on-quarter.

Net profit attributable to equity holders was $25 five rather than be down 23% year on year or up 3% quota quota.

Diluted EPS was $2 six to renminbi down, 23% year on year or up 3% quarter on quarter.

Shek Hon Lo: Moving on to gross margin, the overall gross margin was 42.1%, down 4.3%.

Moving onto gross margin. The overall gross margin was 42, 1% down four two percentage points year on year or up two percentage points quarter on quarter the year.

Shek Hon Lo: full on two percentage points year-on-year or up two percentage points quarter-and-quarter. The year-on-year decrease reflected the result of stable revenue with increased operating costs, making shifts towards lower-margin products, and our continued investments in key strategic initiatives. The quarter-on-quarter increase was due to seasonal revenue makeshift towards...

And year decrease reflected the result of stable revenue with increased operating cost mix shift towards lower margin products and our continued investments in key strategic initiatives.

Shek Hon Lo: and other high-margin businesses such as Skain. By segment, gross margin for VAS was 50.4%, down 4.7 percentage points year-on-year or up 1.7 percentage points.

Quarter on quarter increase was due to seasonal revenue mix shift to what hi.

High margin businesses such as games.

By segment gross margin for Vas was 54% down four seven percentage points year on year or up one seven percentage points quarter on quarter.

Shek Hon Lo: Co. Co. Co. The year-on-year decrease refracted stable segment revenue with increased costs, including content costs for games, server, and bandwidth costs, in addition to our investment in strategic initiatives, in particular video accounts.

The year on year decrease reflected stable segment revenue with increased costs, including content costs for games seven bandwidth costs. In addition to our investing and strategic initiatives in particular that video accounts.

Shek Hon Lo: The quarter-on-quarter increase was driven by seasonal revenue makeshift towards higher margin businesses within the sector. Gross margin for online advertising was 36.7%, down 8.4 percentage points year-on-year, or 6 percentage points quarter-on-quarter. The year-on-year decrease was due to revenue decrease

The quarter on quarter increase was driven by seasonal revenue mix shift towards higher margin businesses within the segments.

Gross margin for our advertising was 36, 7% down eight.

Eight four percentage points year on year, or 6% insurance quota and quota.

Shek Hon Lo: due to revenue decline and an increase in operating costs, including those associated with our video accounts and the content costs of the Beijing Winter Olympics, as well as the fact that the full exemption from the cultural construction fee was no longer available this year, which was also the main reason for the quarter and quarter decrease.

Year on year decrease was due to a revenue decline and increase in operating costs, including those associated with our video accounts and the content cost of Paging Winter Olympics.

As far as the fact that the sway exemption from cultural construction fee was no longer available. This year, which was also the main reason for quarter over quarter decrease.

Shek Hon Lo: Gross Margin for FinTech and Business Services was 31.6%.

Gross margin for Fintech and business services was 31, 6%.

Shek Hon Lo: Broadly stable year-on-year or up 4.5%

Shek Hon Lo: Quota and Quota. The quarter-on-quarter increase was driven by revenue makeshift towards higher-margin FinTech businesses within the sector, as well as our recent initiative to reduce loss-making crowd service contracts on Operating Expenses.

Roughly stable year on year or up four five percentage points quarter on quarter.

Quarter on quarter increase was driven by revenue mix shift towards higher margin and test businesses within this segment.

Well as our recent initiative to reduce the making crowds service contracts.

Shek Hon Lo: Selling and marketing expenses were 8.1 billion renminbi, down 6% year-on-year or 31% quarter-on-quarter.

On operating expenses, selling and marketing expenses were $8 1 billion renminbi down 6% year on year or 31% quarter on quarter, excluding stock based compensation.

Shek Hon Lo: including stock-based compensation. Selling and marketing expenses decreased by 7%.

Selling and marketing expenses decreased by 7%.

Shek Hon Lo: [inaudible] Y&Y Decrease Reflected Marketing Expense Optimization, Quarter-on-quarter decrease reflected lower marketing spending on games and business services due to bulk seasonality in expense optimization measures. Selling and marketing expenses were 5.9% of revenues, broadly stable year-on-year.

At year at 32% quarter on quarter.

Y on Y decrease reflected a mother expense optimization measures.

Quarter on quarter decrease reflected lower marketing spending on games that business surfaces due to both seasonality in expense optimization measures.

Selling and marketing expenses were $5, 9% of revenues broadly stable year on year.

Shek Hon Lo: R&D expenses were a $15.4 billion liability, up 36% year-on-year or 10% quarter-on-quarter. Excluding share-based compensation, R&D expenses increased by 27% year-on-year or 6% quarter-on-quarter. The year-on-year and quarter-on-quarter increases were mainly due to a greater staff force, reflecting our ongoing investment in key strategic initiatives, as well as the impact of the recent acquisition of subsidiaries. R&D expenses were 11.4% of revenue. G&A expenses excluding R&D were $11.3 billion RMB, up 47% Y&Y or 9% Q&A, excluding share-based compensation and GNA expenses. Shooting R&D increased 25%. GRICTA expenses incurred by our overseas subsidiaries, as well as expenses from recently acquired subsidiaries. At quarter end, we had

R&D expenses were $15 4 billion renminbi up 36% year on year or 10% quarter over quarter.

Excluding share based compensation R&D expenses increased by 27% year on year or 6% quarter on quarter.

The year on year and quarter over quarter increases were mainly due to greater staff cost reflect ongoing investment in key strategic initiatives.

What is the impact of recent acquisition of subsidiaries.

R&D expenses were 11, 4% of revenues.

G&A expenses, excluding R&D were 11.

$11 3 billion renminbi up 47% y on y or 9% Q on Q.

Excluding share based compensation G&A expenses.

Excluding R&D increased 25%.

And year on year or decreased 7% quarter over quarter.

The year on year increase reflected greater staff costs, driven by head count increase to support our ongoing investment in key strategic areas.

Quick to expenses incurred by our overseas subsidiaries as well as expenses from recently acquired subsidiaries.

Shek Hon Lo: Approximately 116,000 employees, up 38%.

At quarter end, we had approximately.

Shek Hon Lo: 30% year-on-year or 3% quarter-on-quarter. Let's take a look at the Operating and Net Margin Ratio. Due to the combined reasons I mentioned earlier, the non-Iovirus operating margin was 27%, down 4.6 percentage points year-on-year or up 4 percentage points quarter-on-quarter.

116000 employees up 40% year on year or 3% quarter on quarter.

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

Due to the combined reasons I mentioned earlier no nizar S. Operating margin was 27% down six percentage points year on year or up four percentage points quarter on quarter.

Shek Hon Lo: The non-IR virus net margin was 19.4%, down 6.1 percentage points year-on-year due to lower operating costs.

No and I have hours that margin was 19, 4% down six one percentage points year on year due to lower operating margin and returning from profit to loss of share from the associated that's our hope.

Shek Hon Lo: [inaudible] Non-IVRS net margin increased by 1.5 percentage points, quarter and quarter, due to seasonal revenue makeshifts to higher margin businesses, as well as marketing expenses optimization. Finally, I'll share some key financial metrics on the cash flow and balance sheet for the quarter.

No neither arrest that margin increased by one five percentage points quarter on quarter due to seasonal revenue mix shift to higher margin businesses as far as marketing expenses optimization measures.

Finally, I'll share some key financial metrics on the cash flow and balance sheet for the quarter.

Shek Hon Lo: Total CapEx was 7 billion renminbi, down 10% year-on-year or 40% quarter-on-quarter. Operating CapEx was 5.2 billion renminbi, down 21% year-on-year. Non-operating CapEx increased by 54% year-on-year to 1.8 billion renminbi.

Total Capex was 7 billion renminbi down 10% year on year or 40% quarter on quarter within total Capex operating Capex was $5 2 billion renminbi down 21% year on year non operating capex increased by 54% year on year to $1 8 billion renminbi.

Shek Hon Lo: Operating cash flow for the quarter was 33.8 billion RMB, down 34% both year-on-year and queue-on-queue. The year-on-year decline amongst normal working capital change was partly due to lower cash receipts from games and online advertising, while our R&D and staff costs continued to grow. The quarterly decline was primarily due to our annual bonus payment recorded in the first quarter each year.

Operating cash flow for the quarter was $33 8 billion, Randy down 34%, both year on year and Q on Q year on year decline in non stable working capital change was partly due to lower cash receipts from games and on advertising well all R&D is staff costs continue to grow.

Quarter on quarter decline was primarily due to our annual bonus payment recorded in the first quarter each year.

Shek Hon Lo: Free cash flow for the quarter was $15.2 billion RMB, down 54% year-on-year and 55% quarter-on-quarter. That position was $11 billion RMB compared to $20.2 billion RMB last quarter, the fair value of our shareholdings in listed investing companies excluding subsidiaries. What's that person with the $660,000 RMB or $95,000 USD as at the end of the quarter? We repurchased approximately 8.9 million shares for about 3 billion RMB for the quarter.

Free cash flow for the quarter was $15 2 billion renminbi down 54% year on year, and 54% 55% quarter on quarter.

That position was 11 billion renminbi compared to 22 billion renminbi last quarter.

The value of our shareholdings in this study investing companies excluding subsidiaries was.

Is that principally the 606 billion renminbi or 995 billion U S dollars at the end of the quarter.

We repurchased approximately $8 9 million shares was about 3 billion renminbi for the quarter. Thank you.

Operator: Thank you. Let's open the floor for questions. Thank you. Your first question comes from the line of Alicia Yap from CT Group. Your line is now open. Please go ahead. Hi, thank you. Good evening, management. Thanks for taking my question. My first question is, you know, in light of the latest situation in Singapore.

Operator.

Let's open the total question now.

Thank you.

First question comes from the lineup Alicia Yap from Citigroup. Your line is now open. Please go ahead.

Hi, Thank you good evening management. Thanks for taking my questions. My first question is that.

Alicia Yap: China. So, can management share with us your insight on China?

In light of the latest situation in China, So can management share with us your insight on what you have been able to observe over the past two months in terms of any change of consumer behavior, all your business partner sentiment.

Alicia Yap: and what you have been able to observe over the past two months in terms of any change in consumer behavior or your business partner's sentiment as related.

Alicia Yap: to your digital content consumption,

Alicia Yap: consumer willingness to spend, and then your business partner on the online ad budget spend and also the cloud infrastructure migration timing, you know, given the latest lockdown. So how will the latest macro affect your gaming, payment, advertising, or even your cloud business outlook into the second half? And then my second question is, can management elaborate a little bit on your prepared remarks related to your video on demand, live streaming, and also the real-time communication solution? So how will that, you know, this advanced solution translate to better prices, eventually, that also will help you optimize your operating costs that could potentially support future business revenue?

Related to your digital content consumption.

Consumer willingness to spend and then your business partner on the online spend.

Spend and also the cloud infrastructure migration timing.

Given the latest lockdown, so how will the latest macro having a fact youll gaming payment advertising or even your cloud business outlook into the second half.

And then my second question is.

Can management elaborate a little bit on your prepared remarks related to your video on demand.

<unk> demand also the real time communication solution, so how will that.

Advance solution translate to a better pricing eventually that also will help you optimizing your operating costs that could potentially support future business revenue business service revenue growth and also the margin profile for this segment.

Alicia Yap: Business Service Revenue

Alicia Yap: Group, and also the margin profile for this segment. You mentioned some customer adoption rates. Any color that you can share on this on-demand service,

You mentioned some customer adoption rate any color that you can share on these on demand so far thank you.

Alicia Yap: and Service. So far, thank you.

James Gordon Mitchell: Alicia, thank you for the two questions, and there are a number of sub-questions within them, but I'll try to cover most of the topics you raised. So, in terms of observations on changing consumer and enterprise sentiment, then at a high level of generalization, you know, the behavior is very tied to the COVID situation in different cities around China. So, as you're probably all aware, you know, Shanghai has experienced a very severely unfortunate COVID outbreak.

Alicia Thank you.

Good questions and there are a number of sub questions within them, but I'll try to cover all.

Most of the topics you right. So in terms of observations on changing consumer and enterprise sentiment then.

At a high level of generalization.

The.

Behavior is tied to.

Covid situation in different.

Cities around China, so as you're probably all aware.

James Gordon Mitchell: And we've seen on the consumer side that the commercial payment volume has remained below trend and down year on year for many weeks in Shanghai. You know, the trend is gently improving now, but it's still below where it would otherwise be.

<unk> has experienced.

Severely unfortunate.

With the outbreak and we have seen.

On the consumer side.

The.

Commercial payment volume.

Bank below trend.

Down year on year for many weeks.

In Shanghai the trend is generally improving now.

James Gordon Mitchell: On the other hand, Shenzhen provides a case study of a city that had a small-scale COVID outbreak in March and got on top of it very quickly. And if we look at the consumer commercial payment volume in Shenzhen, there was a sharp leg down in March with the lockdowns, and then a fairly rapid recovery in April. And in May, the commercial payment volume was largely back to the previous trend rate and growing year-on-year in Shenzhen.

But it's still.

Where it would otherwise be on the other hand Shenzhen provides the case study of a city that had a small scale COVID-19 outbreak in March and got on top of it very quickly and if we look at the consumer.

Commercial payment volume in Shenzhen Debits, a sharp leg down in March with the Lockdowns.

And then a fairly rapid recovery in April .

The commercial payment volume and mix largely back to the previous trend rates and growing year on year.

James Gordon Mitchell: So in terms of, you know, how will the latest macro headwind affect our businesses, it's really a question primarily of, you know, how COVID-19 will play out and behave in different cities across the country. Drilling into some of your sub-questions, on the digital content side, then if I were to differentiate the COVID outbreaks in 2022 versus those we previously experienced in 2020, what we saw in early 2020 was that because the COVID outbreaks happened straight after the Chinese New Year period, many people were in a vacation mindset, or a holiday mindset, and they remained in a holiday mindset during the lockdown.

In Shenzhen.

So in terms of how well the latest macro headwinds.

Our business is it's really a question primarily.

Covid.

<unk> in different cities across the country.

Drilling into some of your sub questions on that digital content side than if I were to differentiate the two.

Covid outbreaks and <unk>.

2022 versus <unk> previously experienced in 2020.

What we saw in early 2020 was that because.

Covid outbreaks happen straight after the Chinese new year period.

Many people were in a patient mindset holiday mindset and stay remains in a holiday mindsets during the lockdown and so that is relatively fast upturn in.

James Gordon Mitchell: And so there was a relatively fast upturn in usage of entertainment-related applications. On the other hand, it took consumers and enterprises, and teachers and students several weeks to become comfortable with productivity-related applications. At this time round, the COVID outbreaks happened several weeks after the Chinese New Year holiday.

Usage of entertainment related applications.

On the other hand, it took consumers and enterprises and teaches students several weeks to become comfortable with productivity related applications. This time round.

James Gordon Mitchell: And so people were generally back at work back at school, and they sought to continue working or studying but from home. And so we saw a slower uptake of entertainment-related applications but a much faster uptake of productivity-related applications such as Tencent. And I think that this accelerated uptake of productivity applications reflects, first of all, the fact that many more enterprises, consumers, and educational establishments are now familiar with how to use Tencent Meeting and Tencent documents.

Covid outbreak happened.

Several weeks after the Chinese new year holiday and so people will generally back at what back to school and they saw to continue working or studying from home.

So we saw.

Sure.

Uptake of entertainment related applications, but.

Much faster uptake of productivity related applications, such as Tencent meeting and I think that that et cetera uptake of productivity applications reflects festival with a fact yet.

Any more enterprises and consumers.

Education establishments and now.

James Gordon Mitchell: And secondly, the fact that a number of enterprise software services, in particular Tencent Meeting, have boosted their market share substantially over the past two years. So that's on digital content. In terms of how the macro headwind will affect specific businesses, then, unfortunately, COVID is negatively affecting most people in China, particularly in the affected cities. And we're not exempt from that.

Media with how she use Tencent meeting.

And he comments Tencent documents and secondly, the fact that a number of.

Enterprise software services in particular.

If the Tencent meeting.

Is it that market share substantially over the past two years.

So that's on the digital content.

In terms of.

How would that macro headwinds affect specific businesses then unfortunately COVID-19 is.

Affecting negatively.

People in China, particularly in the affected cities.

James Gordon Mitchell: So I think that the negative impact is particularly notable on advertising, partly because of the overall pressure on GDP, partly because many companies, especially multinationals, run their marketing budgets out of Shanghai. And then there's some impact on our payment volumes, as I mentioned, although that's more differentiated city-by-city rather than universal nationwide. Some negative impact on cloud project launches, and then it is harder to see the impact on the game. So I hope that covers off your first question.

We're not exempt from that so I think that.

The negative impact is.

But on the advertising, partly because of the overall.

Pressure on GDP, partly because many companies, especially multinationals around that marketing budgets out of Shanghai.

And then there's some impact on payment volumes as I mentioned or there that's more differentiated city by city Robinson.

No vessel nationwide.

Some negative impact on our cloud project launches.

Harder to see the impact on the game business. So I hope that covers all your first question on the <unk>.

James Gordon Mitchell: On the second question around the video on demand opportunity, in general, our belief is that over time, customers are migrating from bare-bones content delivery networks toward more sophisticated real-time video communications and ultimately toward integrated communications platform as a service solutions. And as they migrate, the competitive barriers to entry become higher, and the margins correspondingly become healthier.

Second question around the.

The PD.

On demand opportunity then.

In general.

Our belief is that over time customers are migrating from.

Baboons content delivery network toward.

Most sophisticated real time video communications and ultimately toward integrated communications platform as a service solutions and as they migrate.

James Gordon Mitchell: So starting with content delivery networks, there are many companies in China that are reselling telco bandwidth for CDN. We have some competitive advantage in that we have very substantial in-house infrastructure, including lease lines that we actually own and operate. But frankly, it is a somewhat commoditized business that's prone to price wars and margin compression.

Competitive barriers to entry become higher and the <unk>.

Margins correspondingly become healthier so starting with content delivery network.

There are many companies in China that are reselling telco bandwidth.

<unk>.

Some competitive advantage that we have.

Quite substantial in house infrastructure, including lease lines to be actually own and operate but frankly it is somewhat commoditized business is trying to price for some margin compression.

James Gordon Mitchell: As you move to real-time video, then there's only a handful of companies that have the algorithms in order to provide low-latency video solutions, and we're one of them because we have the unique advantage of having supported billions of video chats for Weixin and QQ users for many years. And then as you move into communication platform as a service... I think we're somewhat uniquely advantaged in that there are many enterprises where the salespeople are individually using Weixin anyway to communicate with their customers.

As you move to real time video then there's only a handful of companies that have the algorithms in order to provide low latency video solutions.

One of them because we have the unique advantage of having supported.

Billions of video chats.

<unk> and QQ users for many years.

And then as you move into communication platform as a service.

I think we're somewhat uniquely advantaged in that there are many enterprises, where the salespeople are individually using equation anyway to communicate with.

James Gordon Mitchell: And so it's very natural for enterprises to then aggregate those salesperson-to-customer relationships through the Wecom software and ultimately systematize them with the provision of video chat and video communication within Wecom. In terms of the customer adoption rate, then I think both globally and in China, we're very optimistic about the trends we see and the trends we expect to see in the future. If you think about how corporations interact with consumers online, initially, they did it just by operating a website that included a telephone number, then they facilitated email within the website, then consumers wanted to move to live chat, and in the future, I think it's an inevitability that many consumers for many products will want to move from message chat to video chat.

Our customers and so it's very natural for the enterprises to then aggregates does sales passage customer relationships.

The <unk> software and ultimately systematize.

Provision of video chat video communication within become in terms of the customer adoption rates than I think both globally and in China.

Are you optimistic about the trends we see in the trends, we expect to see in the future. If you think about how corporations interact with consumers online.

Initially that you did just by operating a website that would include a telephone number then they facilitated email within the website 10 consumers wanted to move chit chat live chat.

In the future I think it's in an effort to ability to many consumers for many products.

James Gordon Mitchell: And so companies being able to provide low-latency, real-time video interaction with consumers will just become a necessary cost of doing business and a key competitive factor. So we're optimistic about communication platforms as a service and about low latency, real-time communications now and for the future. Great, thank you. Our next question comes from Eddie Leung from Bank of America. Please ask your question.

Once you move from message chats to video chat.

And so if the company is being able to provide low latency real time video interaction with consumers will just become accustomed a necessary cost of getting business and a key competitive tool.

So we're optimistic about communication platform as a service center.

I can see real time communications.

And for the future.

Great. Thank you. Our next question comes from Eddie Leung from Bank of America. Please ask your question.

Unknown Executive: Good evening, guys. I have a question about your new cloud strategy. Just wondering if the changes will have any indication on the mix of your clients going forward. Will that change the mix of clients in terms of vertical industries, the size of your clients, as well as the sophistication of your clients?

James Gordon Mitchell: Thank you.

Good evening guys.

I have a question on your new cloud strategy, just wondering if that changes we will have any indication on the mix of your clients going forward.

Would that change the mix of clients in tons of vertical industries.

You talked about clients as well as on the surface.

James Gordon Mitchell: Well, I think that, you know, cloud services in China are a little bit dissimilar from cloud services in the Western world in that, historically and currently, about 50% of revenue industry-wide is from other internet companies, and 50% is from old school, primarily initially offline businesses such as financial services, such as manufacturing, such as government, and local services.

Patient of your clients. Thank you.

Well I think that in our cloud services in China or is it a little bit just similar from cloud services in the west and bought into historically and currently about 50% of revenue industry wide is from other internet companies.

And 50% as strength from all sources.

Primarily initially offline businesses, such as financial services, such as manufacturing such as Kelvin mentioned local services and.

James Gordon Mitchell: And, you know, our shift is not intended, you know, to necessarily change that current reality. But I think that, you know, the shift is necessary in order to provide services cost-effectively and, therefore, attractively to the market. Offline first businesses that are moving online because, you know, at the moment, in China, and this was true in the West a few years ago, there's a propensity for companies, cloud vendors, to provide very customized, very cost-heavy solutions or really to act as more as system solution providers or IT Consultancy Services.

Our shift is not intended.

Two two.

Necessarily change that current demand from the Odyssey, but I think that the shift is necessary in order to provide services cost effectively and therefore attractively series.

<unk>.

Offline bus businesses that are moving online because at the moment.

In China.

As true in the West a few years ago.

As a propensity.

Companies are cloud Ventas should provide.

And if I can customize very cost heavy solutions already swatches Morris.

James Gordon Mitchell: And while that is achievable in an environment of infinite capital, it's not scalable, and it's not sustainable, and therefore it's not where the long-term growth will come from. So we've made a proactive decision that we are focusing on, you know, scalable, and therefore sustainable and profitable opportunities. And, you know, I think if you look at the West, it's been very hard for companies that try to do both to be successful in both.

Some solution.

Providers or it consultancy services.

While that is achievable in an environment of kind of infinite capital, it's not scalable and it's not sustainable and therefore, it's not where the long term growth will come from so we have made a proactive decision that we have.

We're focusing on.

<unk>.

Scalable and therefore sustainable and profitable opportunities and I think if you look at the west has been very hot to companies.

James Gordon Mitchell: You know, generally, if you're still in the project deployment industry, then that remains your bread and butter versus those companies that have gone, you know, all in on, you know, truly cloud-based solutions have been the ones that have benefited most. I'm a senior fellow at the University of Melbourne, and I'm going to be talking about the changing industry profile. So, we have a big chunk of our revenue from other internet companies, and that will continue, but in the long term, greater growth will come from a whole range of other industries, and we have roughly half of our revenue within that segment from infrastructure, and the other half, platform software, and industry solutions. We aspire to grow both, but particularly the latter. Thank you. Our next question comes from Ronald Keung from Goldman Sachs.

But it should be success for them, but generally are you still in the.

Project appointment industry that then that remains Youll, Brad and Barca, thus those companies that have gone all in on it.

Truly cloud based solutions are being the ones that have benefited most from them.

Changing industry profile.

So we we have a big chunk of our revenue from other internet companies and that will continue but in the long term take rate of growth will come from a whole range of other industries.

And we have roughly half of our.

Revenue within that segment from infrastructure and the other half.

Platform software and industry solutions.

We aspire to.

Both but particularly for the ASO.

Ronald Keung: Please ask your questions.

Thank you next question comes from Ron <unk> from Goldman Sachs. Please ask your question.

Ronald Keung: Thank you, Tony, Martin, James, and John. I want to ask you something about our online advertising. With the COVID lockdowns and consumption worsened into the second quarter, I just want to hear how management thinks about the online advertising growth and maybe potential timing for stabilization or some forms of inflection. I think taking into account different drivers like macro across different verticals, an easier base for some of the verticals, and any potential video account monetization in that. Thank you. Yeah, thank you.

Thank you. Thank you your pone molten James and John wanted to ask about online advertising so with the Covid lockdowns in consumption worse into second quarter, just wanted to hear how management thinks about the advertising growth and maybe potential timing for stabilization or some forms of <unk>.

Inflection I think taking into different drivers like macro across different.

So that's of course easier base or some of the verticals and any potential video account monetization in that thank you.

James Gordon Mitchell: So what we've said on previous calls was that as we moved into the second half of 2022, then all our SQL advertising trends should be positive. First of all, we'll see a number of discrete regulatory changes, both affecting our advertisers and also affecting our own advertising media. And then secondly, because, over time, we will bring on stream additions.

Yeah. Thank you Sir you know what we have said in previous calls was that as we moved into the second half of 2022, then all else equal advertising trends should inflect positively because festival will lap a number of.

Discrete regulatory changes.

<unk>, our appetizers and also affecting alright.

Advertising media.

And then secondly, because.

William Henry Packer: The New Factor since we last spoke has been the outbreak of COVID in a number of locations. And, you know, depending on how quickly COVID is brought under control, we'll determine whether our previous comments still hold true or whether the time... I'm going to get pushed back because, again... COVID is hurting consumption, which is unhealthy. It's also hurting, you know, the just..., especially in logistics through Shanghai. Hub, which is more unhelpful, and then finally, impact: actually have their headquarters and make their mark, and others. Thank you. Thank you. Thank you. Our next question comes from William Packer from BNP Paribas. Please go ahead.

The time, we will bring on stream of additional inventory.

Oh accounts.

<unk>.

New fact, since we last spoke has been the outbreak.

Covid and a number of locations.

Depending how quickly Covid is brought under control.

Well at the time and what the previous comment still holds true whether the timetable.

It gets pushed back because.

Again, the Covid it's hunting.

Consumption, which is unhelpful, it's also worth highlighting there.

Sticks.

Actually through logistics to Shanghai, which synergistic hub, which is more on helpful. And then finally.

It is impacting the city in China, where most small finance channels actually have their headquarters in Jamaica that marketing decisions wishes thought around a helpful.

Thank you. Our next question comes from William Packer from BNP Paribas. Please go ahead.

Martin Lau: Hi Management, many thanks for taking my questions. Firstly, we've had lots of comments recently from various authorities talking about both the healthy development of the platform economy and, in addition, the completion of rectification in recent weeks. Could you help us understand how you think those two important objectives and the implications for Tencent? And then, secondly, operating cost growth slowed in Q1 relative to recent quarters, demonstrating good cost control. Could you help us think through the destruction of cost growth over the rest of the year and the key puts and takes? Many thanks. Okay, I'll take the first question.

Hi management, Thanks for taking my questions Firstly.

Lots of Cummins recently from various so far as he's talking to both the healthy development of the platform economy. In addition to completion the rectification in recent weeks could you help us understand how you think those two impulsive objectives.

And the implications for Tencent.

Secondly, operating cost growth slowed in Q1 relative to recent quarters, demonstrating good cost control could you help us think through the construction of cost growth over the rest of the year on the key puts and takes many things.

Martin Lau: It is true that in the past two months, the Chinese government has actually released quite a bit of support signals toward the digital economy and platform economy, at the top level. In particular, I would point to yesterday. In a PCC meeting, Chairman Wang Yang stated very clearly that to support a stronger and higher quality as well as a larger scale digital economy, and Vice Premier Liu He also reiterated the intention to firmly support platform economy as well as private economy.

Okay.

Okay I'll take the first question.

It is true that in the past two months the Chinese government has actually reduced quite a bit supported signals towards digital economy and platform economy.

At the top level.

In particular, I would point to yesterday.

In the CPP PCC meeting Chairman Wang Yung.

State it clearly.

To support a stronger in high quality as well as larger scale digital economy.

And our vice Premier also.

Martin Lau: And I think, you know, that's consistent with last month. At the end of last month, April 29, when the Politburo meeting convened, and it stated the intention to foster a healthy development of the platform economy and to complete ratification actions on the platform economy, implement and normalize the regulation, and also to introduce specific measures to support healthy and compliant growth of the platform economy. So we can clearly see that from the senior most level, there is pretty clear support for the signals released.

Iterate the intention to firmly support platform economy, as well as private economy.

And I think that's.

It could.

<unk>.

Last month at the end of last month April 29, the Poly Bureau meeting.

Convenient and it stayed at the intention to foster a healthy development of the platform the economy.

And to complete rectification actions on the platform the economy.

To implement to normalized directly <unk> and also to introduce specific measures to support healthy and compliance growth of the platform economy.

So we can play do you see that from the senior most level there is.

Pretty clear supportive SYGMA was released.

But.

I think for this to translate into a real impact on our business.

He is going to be a time lag and process.

I would say it would take time for the specific correct liters ministries to translate this direction into real actions and I think in the Poly Bureau direction, it's pretty clear to speak the sequence right. There is.

Martin Lau: But I think for this to translate into a real impact on our business, there is going to be a time lag and a process. I would say it would take time for the specific regulators and ministries to translate this direction into real actions. And I think, you know, in the Politburo's direction, it's pretty clear to state the sequence, right, you know, there is a completion of the rectification actions, and then implementation, normalize the regulation, and then introduce specific measures to support. While we would not be expecting these three actions to be specifically sequential, I would say that the sequence is pretty much in that order.

Completion of the rectification actions and then implemented normalized deregulation and then introduce specific measures to support.

While we would not be expecting.

Reactions to be.

To be specifically sequential.

Martin Lau: So it would take some time for the corrective measures to turn into normalized regulation, and then the specific supportive measures would be introduced. We would be working closely with the regulators and hope to see this transition happen. And I think, you know, a positive development is that in April, the Publishing Bureau started to approve Ban Hao, the publishing licenses for games. And it's definitely an encouraging sign. And we felt that when the transition continued to happen, then compliance and also well-behaving companies would start to benefit. Hi Will.

I would say.

The sequence is pretty much in that order.

So.

It would take some time.

Four.

Colorectal measures to be turning into normalized to regulation and then the specific supportive measures.

Be introduced.

So we would be.

Working closely with the regulators and hope to see.

This transition to happen and I think.

The positive development is that in April .

The publishing be able to start ex U.

Proof.

How with the publishing licenses for games.

<unk>.

It's definitely encouraging sign I don't know what we felt.

The transition continue to happen then the compliance and also well behaving companies would start to benefit.

James Gordon Mitchell: On cost growth, let me break it into four categories. So, first of all, you can see in the first quarter that our sales and marketing expense growth slowed, which is good for us. It's a little bit of a double-edged sword in that a number of other internet companies have also slowed their sales and marketing spend. [inaudible] and others.

Hi, well on the tough described let me break it into four categories first of all you can see in the first quarter that our sales and marketing expense drive slowed.

Which is good for us, it's a little bit of a double edged sword in that a number of other internet companies have also slowed.

Sales and marketing spend which has impact on our advertising revenue, but it is something that we can control relatively quickly and we are at.

James Gordon Mitchell: We have controlled these relatively quickly. A second bucket is around our general and admin expenses, which are largely tied to headcount and cost per head. In the first quarter, for a number of reasons, those general and admin expenses continued to grow at a rapid rate.

We have controlled relatively quickly a second bucket is around general and admin expenses, which are largely tied to head counts and cost per head.

James Gordon Mitchell: However, you can see that our headcount growth is slowing down. The heads we're adding are, generally speaking, often lower cost heads, in general, and our cost per head is also decelerating. So as we work through this year, we should expect the G&A expenses to decelerate. The third bucket is around the cost of sales. [inaudible] Now within this bucket, there are some actions we're taking. You know, for example...

In the first quarter for a number of reasons, both general and admin expenses continued to grow at a rapid rate. However, you can see that our head count.

It is slowing down.

We're adding out generally speaking often lower cost heads and in general our cost per head is also deceleration. So as you walk through I guess yeah.

We should expect the G&A expenses decided right.

Third pockets around the cost of sales and the impact on gross margin.

James Gordon Mitchell: Managing costs within a Tencent video that may take a few months to flow through, there's other actions we're taking, such as... a lower margin business services activity where we see the benefit. And then finally, and easy to forget, is that to get to our net income, you run through our associate item and associate contribution. Profit to a loss year-on-year, and one of the biggest reasons for that is simply that a number of our biggest associates, in which we have substantial stakes, ramped up their buying initiatives in the last year. So if you add it all up,

Within the <unk>.

This pocket there were some actions we're taking.

For example.

Managing costs within within our Tencent video that you might take a few months.

Through that the other actions, we're taking such as exiting some of the lower margin business services activity.

We see the benefits sooner.

And then finally on <unk>.

Z to forget is that to get to our net income you run through.

Associate ICM and associate contributions have moved from a profit to a loss year on year and one of the biggest reasons for that is simply that.

A number of.

Biggest southsea cemetery have substantial states Ram chop that community.

James Gordon Mitchell: You know, InvestEA spent X billion renminbi on community group buying, and we're equity accounts and 15% of that. InvestEB spam. XBit and Renminbi on community group buying, and where our associate accounts for 12% of that loss and so on and so on, then in a way, our associate income line effectively..., and it is a community group buying business all by itself, to add up multiple companies in a 10-day period, stakes.

Buying.

Initiatives in the last year. So if you add it all up.

Invest.

<unk> spent X video in renminbi on community group buying and where equity accounts for 15% of that loss and invest CPE spend.

X billion Renminbi on community group buying and warehouse associate accounting for 12% of that market and so on and so on then in a way of associate income line.

Effectively it's a community group buying business all by itself because you add up multiple companies 10 15, 20%.

James Gordon Mitchell: Thank you, like, our own community group by And, as you may be aware, I, those companies who were investing very aggressively, buying in the last 12 months, have now fairly sharply slowed down that investment. That will start flowing, that P&L, and that for a and Alfa. Bye.

Stakes.

Get to something that looks like.

Our own community group buying business and as you might be aware.

It does come.

Companies, who are investing very aggressively in community group buying in the last 12 months up now are.

Fatty shop, these slow down that investment and engines that will start flowing through that P&L and therefore, all stay true to our P&L, but via the associate income line.

Charlene Liu: So those are the four buckets within the cost. Thank you. Our next question comes from Charlene Liu from HSBC. Please go ahead.

So those.

Four buckets within the cost discussion to think about thank you.

Charlene Liu: Thank you. Thank you very much for the opportunity. I would like to ask a question regarding the growth margin for the advertising business. We saw that – I just wanted to get a sense of, you know, are we seeing, based on the various ad products, are we seeing – sorry, sorry. I apologize.

Thank you Amit Scotsman comes from Shelley Liu from HSBC. Please go ahead. Thank you all right. Thank you very much what their virginity.

I would like to ask a question regarding the.

The gross margin for the advertising business we.

Charlene Liu: I think across various ad products, we wanted to get a sense of which one was going to see maybe a faster or slower recovery, and how would that shift, you know, affect the online advertising TPM going forward? Because, you know, I think it came in a bit slower versus our expectations. I apologize for the noise again.

We saw that.

I just wanted to get a sense.

We see based on the various products are we seeing.

Judy.

Sorry, sorry.

Josh.

Oh, I think across various AD products, we wanted to get a sense on which I'll be going to see maybe faster or slowly slower recovery and how would that shift.

Effective online advertising TPM right, because you know I think it came in a bit slower Bryce.

Charlene Liu: I think in terms of the advertising results, for the quarter, then it's worth being aware that the Olympics, the Winter Olympics. It costs us. Ramon B.

That lower versus our expectations I apologize for the noise again.

And there's no troubled about the noise.

I think in terms of the advertising results for the quarter. It then it's worth being aware of that.

James Gordon Mitchell: Broadcast Rights and the actual operating expenses around it, and that's a low-margin activity, have a negative impact on the blended advertising growth. And then, as we spoke about in Q4, the video accounts growth translates at the moment into more costs than revenue impact, and for better or worse, video accounts continue to grow, video views very quickly in Q1, and so some of that flowed into the Advertising Sector and Kong. So, you know, looking forward to what happens with video accounts monetization.

The Olympics Winter Olympics.

Cost us hundreds of millions of renminbi aimed.

And sort of broadcast rights and any of the actual.

Operating expenses around it and that's a low margin activity that.

It has a negative impact on the blended advertising gross margin and then as we spoke about in Q4.

Video accounts growth.

Translates at the moment kinship more cost than revenue impact.

For better or worse video accounts continued to grow.

Video views right quickly in Q1.

So some of that flows through into the <unk>.

Advertising costs.

James Gordon Mitchell: And it will be an important driver of how incremental margins behave for the adverse. Beyond that, within advertising, we have a mix of owned and operated properties that are inherently high margin, like moments and video accounts, and owned and operated properties that are lower margins, such as our media, and then AdNet. So, you know, depending on how growth pans out, those three categories have a big impact on the blended gross margin.

Cost.

So looking forward.

What happens with video accounts monetization and it will be an important driver of how incremental margins behave.

The advertising business beyond that.

Within advertising, we have a mix of.

I haven't been operated properties that are inherent in the high margin like moments in video accounts.

Owned and operated properties that are lower margin such as media services and then the AD network business that is inherently lower margin and so depending.

James Gordon Mitchell: And that, in turn, is a function of which advertiser categories rebound fastest because certain advertiser categories, luxury goods, for example, skew toward the high-margin owned and operated properties; certain other categories, such as e-commerce, may skew toward third-margin advertising. It also depends on the impact of. Advertising system changes we're putting in may show up at different times with different inventories. Thank you. Our next question comes from Jerry Lear from UBS. Please ask your question.

How our growth pans out between those two categories.

On the blended gross margin.

And that in turn is a function of which appetizer category rebound fastest speed sub types of categories.

Sri goods for example, a skew towards the high margin owned and operated properties and other categories.

Such as e-commerce, nice skew towards lower margin on that one.

It also depends on.

The impact of the.

Advertising system changes with what we're putting through which.

I show up at different times for different inventories.

Thank you.

Charlene Liu: Hi, good evening. Thank you. I would like to just ask a question.

Thank you. Our next question comes from Jerry <unk> from UBS. Please ask your question.

Charlene Liu: Just ask a couple of things on gaming, maybe separating domestic and international. First on domestic, with the Bauhaus restarting, I'm wondering if we can be a little bit more positive on growth, on either grossing or revenue growth later this year, or should we have a little bit more patience given some of the titles might be coming later. And then on the international side, first of all, I was wondering if we did have that accounting adjustment that was discussed last quarter, if we had that in the first quarter at all. And then, secondarily, can we see the international grossing accelerate, or will the normalization from COVID take a bit longer to play out? Thank you.

Hi, good evening. Thank you.

Two one.

A couple of things on gaming.

Maybe separating domestic and international.

First time domestic with the bond house restarting.

I'm wondering if we can be a little bit more positive in a falling on.

Growth.

Either grow single revenue growth later, this year or should.

We have a little bit more patients given some of the hurdles might be coming later and then on the international side.

First of all I was wondering if we did have that.

Hunting adjustment that was discussed last quarter.

If we had that in the first quarter at all and then secondarily.

Can we can we see it.

International growth will accelerate or will the normalization.

James Gordon Mitchell: Thank you for the game questions. International Games, then, yes, we had a... There was a catch-up of revenue in Q4 related to one of our subsidiaries, Supercell. And then there was an accounting catch-down of revenue in Q1 related to Riot. I think the catch-down was smaller in Magpie, cash.

Sure.

Colgate take a bit longer to play out thank you.

Thank you for the game questions on.

The.

International game.

Yes, we had a.

That's sort of catch up of revenue in Q4 related to one of.

Subsidiaries.

So and then that was a yes.

So the accounting catch down in revenue in Q1 related to <unk>.

James Gordon Mitchell: In terms of, you know, the outlook, then... You know, we don't have a crystal ball, but generally speaking, The Game Business Outside China, particularly for popular mobile games, had a very buoyant period from late 2020 through late 2021, and now it's facing a tough comparison against that period. And when I say it, I mean the industry as a whole, and there are a number of listed companies with big mobile games that have reported a similar phenomenon.

Catch down was smaller in magnitude than the catch up.

In terms of the outlook then.

We don't have a crystal ball, but generally speaking.

Okay.

The game business outside China, particularly for.

Popular mobile games.

Had a very buoyant periods from late 2023 late 2021.

Now it is.

<unk>, a tough comparison against that period, and when I say it I mean, the industry has a hold them to that is the number of listed companies with big mobile games that have reported a similar phenomenon. So I think its recent.

James Gordon Mitchell: So I think it's reasonable to expect that for PUBG Mobile, there'll be tough comparatives for another few months before the year-on-year trends normalize toward the end of this year. Apart from PUBG Mobile, then, most of our big... PC games are doing fine, you know, as they didn't benefit from COVID as much necessarily, and they aren't hurt by a COVID hangover. And then, you know, we have..................... [inaudible] So that's, and then as we look into 2023 and beyond, that's when we expect more sort of big budget games that we've been ramping up in the last two years to be released and start meaningfully impacting the international gay and revenue position on the domestic game business.

Reasonable to expect that.

So pop T mobile.

That will be a tough comparable comparative for another few months before the year, one yet trends normalize towards the end of this year.

And a separate from Hep T mobile than most about big.

PC games are doing fine you know that they want as they didn't benefit from COVID-19 as much necessarily.

But by a kind of a hangover.

And then we have.

Very kind of long life mobile games like clashed plans, which are also doing fine directly bounces around a bit quarter on quarter, depending on the content. What are you seeing a different quarter, but use of trends.

You should have it should be stable to growing over time.

So that's and then as we look into 2023 and beyond.

We expect more sort of big budgets games that we have been ramping.

We're ramping up in the last two yes, it should be released.

James Gordon Mitchell: I think that, as Martin suggested, the Ban Howe approval is positive for a number of reasons. One being that more games can be published. Another effect is that it appears that the regulators are now much happier with where the industry is, and therefore it's a more stable environment where people don't need to sort of look over their shoulder and try to second guess whether there's other regulatory changes looming on the horizon. So, you know, overall, we're very happy with... The Van Howe Approvals, we ourselves didn't get.

Stop meaningfully impacting the international game revenue positively.

On the domestic game business then.

I think that as margin suggests that the band how approval is positive for a number of reasons one being that.

More games can be pop issue than other things.

Signaling effect and that it appears that.

The regulators are now much happier with where the industry is and therefore, it's a more stable environment, where people don't need to sort of look over their shoulder around them and try to second guess whether this.

The regulatory changes looming on the horizon.

James Gordon Mitchell: A game on that approval list this time, which, you know, is fine, period with no ban how approvals obviously hurt most those start-up companies which don't have any games and therefore don't have any cash flow versus, The big and more established companies already have games, already enjoy cash flow, and could ride out that period more comfortably. So we think that it would be great, very rational, that the ban house starts with, you know, the smaller game company, and will move up to the bigger games, ourselves in the future.

So overall, we're very happy with.

The band how approvals.

We ourselves didn't get.

And our game on Dot approval list this time with which is fine.

<unk> period with no bond how approvals, obviously hubs most those startup companies, which doesn't have any games and therefore don't have any cash flow versus if they can more established companies already have games already enjoy cash flow could write out that period.

More comfortably so.

It was great.

Great rational.

James Gordon Mitchell: I think in terms of the outlook, then, yes, there are more banhal bills being issued, and with the industry now on a more stable regulatory footing, then it's reasonable to expect that the industry's grossing trends will begin to improve as we move through the year, and over time, that will then translate into reported revenue trends, but it's not an immediate process, and it will take several months to play out.

The band how stops with smaller game companies and then we'll move up to the big again executing ourselves in the future.

I think in terms of the outlook then yes with.

Mobile, how being issued and with the industry.

Now on a more stable regulatory footing, then it's reasonable to expect that the industry grossing trends will be.

Begin to improve as we move through the year and overtime that will that translate into reported revenue trends, but its not a immediate process.

Hyungwook Choi: Thank you. Our next question comes from John Choi from Daiwa. Please ask your question.

It will take.

For months to play out.

Hyungwook Choi: Thank you very much for taking my question. I have two questions.

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

Hyungwook Choi: So first of all, I think raising video accounts has continued to gain good traction. Can management, you know, elaborate a bit more about the potential of this, you know, advertising business in the longer run? I know that we are still focusing on user engagement and, you know, carefully trying to grow the business. But eventually, would it be fair for us to see a similar advertising business, ad loads, or business potential, such as Pierce in this area? That's my first question.

Thank you very much for taking my question I have two questions. So first of all I think we shouldn't video accounts has continued to gain good traction.

Can management.

The hybrid a bit more about the potential of this adverts.

Advertising business in the longer run I know that we are still focusing on user engagement.

Carefully and try to grow the business, but eventually would it be fair for us to see a similar advertising business and those are businesses such as our peers. In this area. That's my first question. My second question is we noticed that the investees the value has come up a lot this quarter given the market volatility how does this mean.

Hyungwook Choi: My second question is, we noticed that the investees' value has come up a lot this quarter given the market volatility. Has this made us rethink our investment strategy going forward? And what would be our key focus? I think, you know, management did mention previously that there would be more of a balanced approach. But I was wondering if this might be a more opportunity for us to play aggressive offense or a bit more conservative going forward. Thank you. So I'll take the first question.

Aid us to rethink of our investment strategy going forward and what would be our key focus I think management did mentioned previously there will be more of a balanced approach, but I was wondering if we.

This might be a more opportunity for us too.

Martin Lau: In terms of video accounts, it is true that we are very encouraged by the strong growth of momentum of video accounts in terms of video views as well as time spent. And I think, If you want to think about the monetization potential, I would say, eventually, right, you know, it should have similar monetization per time spent with similar products in the market, but it will take time to get there, and along the way, we'll continue to improve the user So occasion point is like our moments advertising; we would be probably releasing inventories into the market on a more gradual basis than the industry peers. And along the way, we'll continue to make improvements. And our ad load may or may not be the same. Most likely, I would say our ad load probably will not be the same.

<unk> offense or a bit more conservative going forward. Thank you.

So I'll take the first question in terms of your accounts. It is true that we are very encouraged by the strong growth momentum will be doing.

In terms of video.

Video has to be as well as time spent and I think.

If you wanted to think about the.

Monetization potential I would say eventually right.

Should have.

Miller.

Monetization per time spend.

With similar products in the market.

But.

It would take time to get there.

Along the way.

We will continue to improve the.

User experience. So we tried to strike a better balance between monetization and user experience.

So a case in point is.

Like our moments advertising that we would be.

Probably we'll be using.

Inventories into the market on a more gradual basis then.

Industry peers, and along the way, we'll continue to make improvements.

<unk>.

Our app node may or may not be the same most likely I would say probably will not be the same.

Martin Lau: We'll probably be more self-restrained in terms of the ad load. But we felt we could actually achieve potentially a higher CPM eventually by continuously improving the technology by, leveraging the fact that both the user base as well as the content are actually high-end in nature, and leveraging the fact that there's a better connection with the overall operations ecosystem, including official accounts and the social graph as well as the social communication infrastructure and the connection to many programs, so that the conversion can actually increase.

Probably be more salvage screens in terms of the <unk>.

Load, but we felt we could we can actually achieve.

Potentially higher.

CPM eventually.

Continuously improving the technology buy.

Leveraging the fact that.

Both the user base as well as the content actually hind of any nature and leveraging the fact that there is a better connection with.

Overall ablation ecosystem, including.

Appreciate it comes and the social graph as long as the social communications infrastructure.

Martin Lau: And the fact that I would say, you know, when you have a shorter total amount of time spent on a platform versus a longer time, the more of a diminishing marginal return actually starts coming. So the first 20 minutes is probably going to be worth more than the last 20 minutes.

And the connection to mini programs. So that the conversion you can actually increase.

And the fact that.

I would say when you have a shorter total amount of time spent on the platform.

Versus a longer time.

Martin Lau: So, you know, that's sort of the overall way through which you would think about this. And over time, I will always try to strike a better balance between monetization and user experience but also try to unleash the full potential of the monetization of this platform. And on your second question around the portfolio of investments in other listed companies and the reduction in the value thereof quarter on quarter, then, you know, as a first point, if you look at the reduction in value, actually, a very big percentage of that reduction was due to proactive steps we took that I think are very good for investors, meaning...

More of a diminishing marginal return actually start to come into the first.

20 minutes is probably going to be worth more than the last 20 minutes. So that's sort of the overall way to which you would think.

Think about this.

Overtime was trying to strike a better balance between.

Monetization.

This experience.

Also try to.

Unleash the full potential of the monetization of this platform.

And on your second question around.

Paul.

Investments in other listed companies and the reduction in the value they're off quarter on quarter than as a first point. If you look at the reduction in value actually a very big sensitive of that reduction was achieved.

Martin Lau: We distributed the stake in JD worth about $16 billion directly to investors. We disposed of three billion U.S. dollars' stake in another company, buybacks of our own stock, and we also disposed of a couple of billion dollars and other companies. Thank you. Thank you.

Proactive steps, we took that I think are very good for investors, meaning we.

Distributed.

<unk> J D with about $16 billion directly to investors.

We disposed of $3 billion stake in another company and the proceeds of that damn Porsche can use.

James Gordon Mitchell: So all in, during the first quarter, if you compare the capital we sort of raised from divestments and distributions, it was about four times bigger. The capital we put to work investing in other companies. So, of course...

<unk> of our own stock and we also disposed of a couple of billion dollars of stakes in other companies.

So all in during the first quarter.

If you compare the capital.

We should've raised from.

Divestments and distributions it was about four times bigger than the capital we put to work invest in other companies and so of course.

James Gordon Mitchell: When we do those divestments and distributions, then it's inevitable, and natural, and desirable. The value of our portfolio that remains is diminished by the diversity. You know, looking forward, we continue to be, you know, active in divesting, and we're very cognizant of the multiple macro risks out there, particularly the fact that central banks in the developed world are generally increasing interest rates at very rapid rates. This is something that hasn't been seen for decades, and it has implications for how investors value them, you know, high growth, low margin, high duration, about the portfolio.

We do those divestments and distributions, then it's inevitable and natural and desirable.

And the value of our portfolio remains is diminished by the divestments and distributions.

Looking forward, we continue to be active in divestments.

And we're a REIT tech nice sense of that.

Multiple macro risks out there.

Particularly the fact that central banks in the developed world generally increasing interest rates at very rapid rates.

It is something that hasnt been seen for decades, and it has implications for how investors value some of the high <unk> low <unk>.

James Gordon Mitchell: So we are very thoughtful about, you know, those risks and managing those risks. And one of the ways that we do manage those risks, But that said, we also... are a company that generates very substantial free cash flow. We're a company. By virtue of our position, we have insight into emerging... Technology Trends. Enterprise. And, you know, we see new opportunities, interesting opportunities emerging or sometimes not. [inaudible] So, you know, we're being very selective, we're being very disciplined both in terms of investing carefully and also divesting when necessary, but we continue to find opportunities. Capital to work again. Right, thank you. Our next question comes from Gary Yu from Morgan Stanley. The line is open, so please ask a question.

Hi duration.

Tech companies, which represent a portion of our portfolio.

So we are very thoughtful about those risks and managing those risks and one of the ways that we do manage those risks is through the <unk>.

And the pace.

Divestments distributions and so forth.

But that said we also.

Our company.

When rates are quite substantial free cash flow for our company by virtue of our position we have insight into emerging technology trends among consumers among enterprises, and we see new opportunities interesting opportunities emerging or sometimes we see all the opportunities, which we're familiar with from.

Previous investments we are notching.

Valuations decline.

We're being very selective we're being quite disciplined about two times.

Investing gasoline also divesting.

When necessary thoughts, we'd be continuing to find opportunities.

We continue.

Capital to work against those opportunities.

Gary Yu: Hi, good evening. Thank you for the opportunity to ask questions. I actually have two follow-up questions to the prior questions. The first one is on advertising margin. I understand that there are multiple factors affecting the margin. Could management help us to kind of quantify or rank the different factors in terms of their level of impact, be it, you know, lower ECPM from our more profitable inventory? And also, you know, some of the COVID impact is video account investment.

Alright. Thank you. All next question comes from Gary Yu from Morgan Stanley . Your line is open. Please ask your question.

Hi, good evening, Thank you for the opportunity to ask questions.

The two follow up question to the prior question.

First one is on advertising margin.

I understand that there are multiple factors affecting the margin could management help us to kind of.

Quantified or rank different factors in terms of level of impact.

Lower <unk> from our more profitable inventory.

And also some of the Covid impact some of it is so Vito account investment. So how should we look at kind of market trend going forward based on these drivers.

Gary Yu: So how should we look at the kind of margin trend going forward based on these various impacts? The second question is regarding the comment on cost optimization. Is there any room for, you know, more aggressive control in terms of headcount related, you know, G&A or R&D expenses? I, you know, understand that there is a slight increase in headcount still in the first quarter. Is there any further room for, you know, more optimization either from non-core business or any other areas where we can see more aggressive cost cutting from this area? Thank you.

Drivers impact.

The second question is regarding to comment on cost optimization.

Is there any room for more.

More aggressive control in terms of headcount related.

R&D.

Expenses.

I understand that there was a slight increase in head count still in the first quarter.

Is there any further room for optimization.

From noncore business.

James Gordon Mitchell: Yeah, so on the advertising margins, you know, I think that last quarter we tried to Prioritize or rank, force rank the various factors that were affecting our advertising business. The top factor was really regulations impacting demand, regulations, categories such as education, and Games and reducing that demand for IP, of lesser facts. Regulations impacting supplies, such as flash screen ads, and you know that those have some negative impact on our ad network business, but less so on moments or official accounts where the challenge was more of a demand problem. Refreshing that framework this quarter, then, you know, the paramount driver is COVID-19.

Or any other areas, where we can see more aggressive.

Cost cutting.

This area. Thank you.

Yeah. So on the advertising margins I think that last quarter I reach by two.

Prioritize or rank force rank the various factors that were.

Affecting our advertising business.

The top fatuous ready regulations impacting demand regulations impacting category, such as education and.

Gangs and reducing debt at demand for advertising, that's a fact to us.

Regulations impacting supply such as the flash screen ads.

Those.

Have some negative impact on our AD network business, but less so on amendment, so efficient accounts by the Chinese was more of a demand problem.

James Gordon Mitchell: You know, the COVID situation is tragic, and it has... uh... negative consequences for advertising spend for the multiple three different reasons that I talked about earlier. And, you know, for us, and while the current COVID outbreaks are very, it's a great challenge for advertising. Again, the good news is that, while it took a period of time for COVID-19 to be brought under control in Shanghai, it was brought under control very quickly in Shenzhen.

Refreshing that framework this quarter, then the Paramount drive.

Right.

The COVID-19 situation is tragic.

Yes.

<unk> consequences for advertising spend for the multiple to three different reasons that I talked about earlier.

And for Us.

And.

While the current Covid outbreaks.

Being brought onto control then.

Therefore.

It's a great challenge for the advertising industry again, the good news is that you know what it's taken.

James Gordon Mitchell: So there is a precedent in the very recent past for successfully bringing COVID under control. You know, the less good news for our advertising business is that, you know, Shanghai is... So capital, if you will, for media advertising marketing decisions in China, particularly multinational companies and Shenzhen, it's not, and so with the situation in Shanghai, it has a disproportionate impact nationwide.

A period of time.

<unk>.

Perfect to be brought under control in Shanghai. It was brought under control very quickly in Shenzhen.

There is a precedent in the very recent past.

<unk> successfully bringing COVID-19 onto control.

That's good news for our advertising business is the Shanghai.

Is the sort of capital if you will for a media advertising marketing decisions in China up to keep the multinational companies and Shenzhen his knowledge and so.

James Gordon Mitchell: In terms of cost control, I'll answer the second question. In terms of cost control, I think for cost items in relation to the organization and staff, our principle is that the optimization is done based on structural changes and structural needs. So we're not likely gonna react to temporary factors which will go away in the short to medium term. So, if we look at the current situation, the incremental negative impact is actually largely related to COVID.

With the situation in Shanghai, It has a disproportionate impact on advertising nationwide.

Kim.

Yeah.

Alright.

Okay.

In terms of cost control I'll answer the second question, which is from cost control.

I think before.

Cost items in relation to the organization and staff.

Our principle is that optimization is done based on structural changes and structural needs.

So we are not likely to kind of react to temporary factors.

Which will go away.

In the short to medium term so.

James Gordon Mitchell: So that's why we felt we weren't going to react to this by optimizing our organization and staff further. But we may pursue other cost controls, such as reducing marketing costs. If there's further lockdown, then there's probably not that much need to do as much marketing, for example. So that would be the route that we'll be looking at. But I think organization and staff are going to be much more based on structure. Right? Our next question comes from Eleanor Leung from CLSA. Please have your question.

If we look at the current situation, but the incremental negative impact is actually largely related to COVID-19.

So thats why we thought it would.

We're not going to react to this by optimizing our organization and stock further.

We may.

Pursue other cost.

Control such as.

The reduction in marketing costs.

If there's further lockdown than theirs.

Not that much we need to do as much marketing for example, so that would be the routes that we'll be looking at.

I think organizations and stuff is going to be much more based on structural factors.

Eleanor Leung: Please ask your questions.

Eleanor Leung: Hey, thank you very much management for the opportunity to ask questions.

Great question, Ken the SRAM leaner now from CLSA. Please ask your question.

Eleanor Leung: The first question is regarding the resumption of game approval. Given that in the first month, there were only 45 new games approved, do you think that is a...

Yes, thank you very much.

Management approach.

To ask questions. The first question is regarding the resumption of the approval.

Eleanor Leung: Do you think there is a structural change in the market that the government is going to approve fewer games than before the suspension? If that's the case, how is that going to affect our future game growth if we get fewer new games in the future? And the second question is regarding the mobile app network. We saw a sharp decline in the quarter because of the regulatory change. And what do you think the future of these mobile app networks will be? Thank you.

In the system and that's only <unk>.

45, <unk> is approved do you think that is a structural change in the market that the company is going to have lasting than that before this distinction. If that's the case, how is that going to affect our future.

Well, if we get a new.

In the future and the second question is regarding the mobile at what we see a sharp decline.

James Gordon Mitchell: I think mobile ad networks, you know, it's an industry that is prevalent globally. It's an industry that's sort of necessary for the economic survival of smaller and medium-sized apps and websites. And so, you know, it's an industry that's here to stay in China. It's been through, you know, many previous shocks.

Because of the regulatory change and what do you think that future updates mobile at that point in the future.

I think on mobile AD network.

Say industry that is prevalent locally.

An industry that sort of necessary for the economic survive smaller and medium sized.

Apps and websites since it's an industry that's here to stay in China, it's been through many previous shocks, but we haven't talked about it.

James Gordon Mitchell: But, you know, we haven't talked about it as much in the past because, you know, during the PC Internet era, Tencent was really a laggard or not present in a PC ad network. And it was only with the boom in mobile Internet that we became a substantial participant in the Mobile Ad Network. So, you know, this cycle, the two big participants in Mobile Ad Network, us and ByteDance, are different from the big participants in prior cycles.

Much in the past because.

During the PC Internet era, Tencent, but it was really.

Lack auto not precedence in PC AD network and it was certainly with the booming mobile instant ACH.

We became a substantial participant.

And mobile AD networks.

This cycle too.

James Gordon Mitchell: But, you know, Ad Network has rebounded from prior cycles. And, you know, I'm sure it will rebound from this cycle because, on the supply side, there's, Thank you. So, there's an enormous amount of inventory sitting in these small and medium-sized apps that needs to be monetized for the apps to survive. And on the demand side, there are always advertisers who are looking for incremental traffic, even if it's from less branded media sites. On the game ban, how then, the answer is yes.

Two big participants in mobile AD network and bite Don so different from the big participants in prior cycles, but at network has rebounded from prior cycles and I'm sure. It will rebound from this cycle because on the supply side.

Enormous amount of inventory sitting in these small and medium sized apps and it needs to be monetized for the apps to survive and on the demand side. That's always advertisers who are looking for incremental traffic and even if its from less branded media media sites on the game and how.

James Gordon Mitchell: We believe that, generally speaking, there will be fewer game approvals in the future than there were in the pre-2018 period. And we've held that belief now, you know, for a couple of years. And it's a big part of the reason why, in the last two years, we've reconfigured our game business from top to bottom to focus on releasing and usually developing fewer games, with a bigger budget and hopefully better profits. And, you know, we think that we've been, we are really the pioneer in the industry in terms of doing that.

Then the answer is yes, we believe that generally speaking that will be a few a game approvals.

In the future and that wire in the pre 2018 period.

And we've held that belief now for a couple of years and it's a big part of the reason why in the last two years with reconfigured our game business from top to bottom.

Focus on.

Leasing an unusually developing.

Few a bigger budget in <unk>.

James Gordon Mitchell: At any point in time, we generally have, you know, a similar or smaller pipeline than some of our competitors who have much fewer headcount. And the reason is that we're putting more heads against each game in the belief that only a limited number of games will secure the banhao in the future. And therefore, we want to make that limited number of games be all that they can be.

Hopefully better games.

And we think that we have been.

We are really a pioneer in the industry in terms of doing that at any point in time, we generally have.

Similar or smaller pipeline and some of our competitors who have much fewer head count and the reason is because were putting more head count against each game and belief on the limited number of games will.

James Gordon Mitchell: And, you know, I think that while we're very early on this, the results so far are quite positive if you look at... In 2021, then two of the games that we released were the two most successful games in the industry measured by users, and this year, the Return to Empires game is now number two in the strategy genre, that's a small user but high-RPG genre. And then, more importantly, looking ahead, we're pretty excited about the quality of the content that we have in our pipeline.

Secured about how in the future and therefore, we want to make that limited number of games that they can be.

I think that.

While we're very early in this you know the results so far are quite positive.

2021, and then two if the games that we released whether its two most successful games in the industry by a measured by users.

And this year with the return to Empire's game is now the number two and strategy genre. That's a small use of at high off you're showing Roe.

James Gordon Mitchell: And again, it's a narrower pipeline with fewer, but we think, bigger, better titles than would have been the case three years ago because of this change in the regulatory environment, as well as the change in user tastes. Even without the regulatory change, users are becoming more sophisticated and more informed about the quality of games, and therefore, it makes sense to focus more resources on fewer, bigger bets.

And then more importantly, looking forward, we're pretty excited about.

Quality of the content that we have in our pipeline and again, it's a narrow our pipeline with a few up but we think they get better titles than would've been the case three years ago because of this change in the regulatory environment as well as the change in user tastes, even without the regulatory change users are becoming more sophisticated.

Operator: Operator, let's take one last question. Thank you. Our last question comes from the line of Alex Yao from J.P. Morgan. Please ask your question.

More informed about the quantity of those games and therefore, it makes sense to focus more resources on fewer bigger bets.

Operator lets take one last question.

Alex C. Yao: Thank you, management, for taking my question. There are a couple of follow-up questions.

Alex C. Yao: Thank you so much for taking my question. A couple of follow-up questions. Number one, on crowds. In this quarter, we have seen the revenue impact of crowds, given the strategy of the transition. Can you share with us the modern trends since the transition? So that's the first one.

Thank you last question comes from the line of Alex Yao from J P. Morgan. Please ask your question.

Thank you management for taking my question a couple of follow up questions.

Questions number one on crops in this quarter, we have seen the revenue impact on Q.

Alex C. Yao: The second one is on the long-form video business. I understand you guys are sharply focusing on cost optimization and margin improvement this year. Does this also apply to the video business? Is improving margin and achieving breakeven one of your key priorities in this line of business? Thank you.

Given the strategy of the transition can you share with us.

Margin trends things to transition.

So that's the first one second one is.

The video the long form video business.

I understand you guys are sharply focusing on.

Cost optimization and the margin improvement this year.

Does this also apply to the video business is.

James Gordon Mitchell: In terms of, you know, the impact on the crowd in respect of the growth margin, it actually improved a bit because of, you know, the fact that we have mentioned of getting away from loss-suffering, you know, contracts. So it did help us in this quarter. In terms of your question about Tencent Video, then, you know, people use the word healthy a great deal, probably too much in connection with the China Internet.

Improving margin achieving breakeven went up your key priority in this line of business. Thank you.

In terms of you know.

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Impact from the crowd in respect of the gross margin.

It actually improve a bit you know because of the fact that we have mentioned.

Getting away from lost suffering contracts.

So it did help us in this quarter.

James Gordon Mitchell: But, you know, our aspiration is not to get our video business to a temporary break-even situation. It is to, you know, over time, move our video business to a structurally healthy and sustainable position. And, you know, in reality, there have been quarters in the past when Tencent Video has already achieved break-even, but, you know, we didn't sustain that. And, you know, what's critical is really sustaining it. Achieving one-quarter break-even is not difficult in the video industry.

In terms of your question about Tencent video then.

People use the word healthy a great deal probably.

Too much in connection with China Internet, but.

Our aspiration is not to get our video business to a temporary breakeven.

Situation.

Is too.

Over time move out video business to a structurally healthy and sustainable position.

And in reality that there have been quarters in the past when Tencent video has already achieved breakeven, but we didn't sustain that.

James Gordon Mitchell: You know, you can choose not to commission expensive content. You can choose, even though you've already commissioned expensive content, not to air the content in that quarter because then the reported P&L for that quarter is flattered. You can choose in the current quarter to write off capitalized video content, so you have a big loss this quarter, and then, you know, the next quarter you air that content, it still picks up some traffic and revenue.

What's critical is really sustaining at achieving one quarter at breakeven is not difficult in the video industry. You can choose not to commission expensive content you can choose even though you have already commissioned expensive content not to add the content.

In that quarter, because stand our reported P&L that quota is flooded you can choose in the current quarter to write off capitalized video content. So you have a big loss. This quarter and then the next quarter you add that contact is still picks up some traffic and revenue. So the incremental margin optically is very high even though the true economic return is not attractive.

James Gordon Mitchell: So the incremental margin, obviously, is very high even though the true economics are not attractive. And, you know, those are all things that one can do if one wants to be break-even next quarter. But, you know, that's not what we're aspiring to achieve.

James Gordon Mitchell: We're aspiring to just move the business into a structurally healthy position, and you know, I think we've already done that. What I hope is the most challenging part, which is that, you know, Tencent Video was the eighth or ninth company to enter the space in China, and it's now the clear leader in terms of subscribers, in terms of subscription revenue, and in terms of advertising revenue. As I mentioned, it has already achieved break-even in some past quarters, and, you know, now we want to move toward a sustainably profitable position.

And you know those are the things that one can do if I'm honest to be breakeven next quarter, but that's not what we're at.

With aspiring to achieve where Australia. So you just moved the business to us.

Structurally healthy position and you know I think we have already done.

I hope it's the most challenging part which is that you know Tencent video was the eighth or ninth company to enter the space in China is now the clear leader in terms of our subscribers in terms of subscription revenue in terms of advertising revenue as I mentioned it has already achieved breakeven in some past quarters and can now be launcher.

James Gordon Mitchell: And, you know, part of that is continuing to optimize revenue through, you know, price rationalization and so forth. Another part of it is being continually selective about the content that we air. When we were moving from 9th place to 7th place to 5th place, we had to compete with every kind of content because we didn't know which content really mattered.

Move toward a sustainably profitable position and.

Part of that is continuing to optimize the revenue.

Through.

Price rationalization and so forth.

Part of it is being continually selective about the content.

James Gordon Mitchell: Now that we're in 1st place, we have much greater clarity on what content counts and what content doesn't. And finally, and somewhat differentiated, we also have the opportunity that we're seizing to benefit from the vertical integration with upstream IP, over which we already have influence, whether that's because the upstream IP is a web novel within Chinese literature, or it's content produced by New Classic Media, or it's a mobile game from the Tencent Game Portfolio. So the long-form video industry in China has been an extremely challenging industry for many years, and now it's as difficult as it's ever been, but the industry has also now moved terms of operation.

That we average when we were moving from ninth place to seventh place to fifth place. We had to compete in every kind of concept because we didn't know which content really manage now that were in first place we have much greater clarity on what content counts what content Dawson and so we can be more selective about allocating off spending to the content of the accounts and then finally.

And you know somewhat differentiated.

Also have the opportunity that we're seizing suite to benefit from vertical integration.

Upstream IP.

Which we already have influence whether that's because the upstream IP it's a.

Weapon awful within within China literature, or content produced by new Classics media or it's a mobile game from Tencent games pool side yet.

So.

The long form video industry in China has been an extremely challenging industry for many years and.

And now it's as difficult as it is ethylene.

James Gordon Mitchell: And, you know, we're speaking to, you know, continue that shift and, you know, ultimately make this... A good return business just as long-form video elsewhere in the world is a good return business. Thanks, James. Thank you, everyone, for joining the call today. We are closing the call now. If you wish to check out our press release and other financial information, please visit the R section of our company website at www.tencent.com.

But the industry has also now move toward a much more rational stance in terms of costs in terms of op ads.

And what we are seeking.

She came to continue that shift.

Operator: The replay of this webcast will also be available soon. Thank you, and see you next time. Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.

So what do you make this.

Operator: [inaudible] ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ??

A good return business just as long form video elsewhere in the world.

Good return business. Thank you.

Thanks, James Thank you everyone for joining our call today, 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 at Www Dot com.

Play up this webcast will also be available as soon thank you and see you next quarter.

Thank you that does conclude our conference for today. Thank you for participating you may all of this.

Disconnect.

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