Q2 2022 Tencent Holdings Ltd Earnings Call

3% year on year, and 1% quarter on quarter.

Gross profit was 58 billion RMB down 8% year on year, but up 1% quarter on quarter.

Non <unk> operating profit was 37 period, RMB, 14% year on year, but up 0.4% quarter on quarter.

Non <unk> net profit attributable to equity holders was 28 billion RMB.

17% year on year, but up 10% quarter on quarter.

For our key services.

We generally became our first place positions in activities, including social.

And long form video news music literature payment and mobile browser.

Combined <unk> and Wechat was one 3 billion.

Mobile devices <unk> of <unk> was $569 million.

Huateng Ma: The combined MAU of WeChat was $1.3 billion, and the mobile devices MAU of QQ was 569 million. Before I hand over to Martin, I would like to welcome Professor Zhang Xiulan as a new director and a member of the Public Governance Committee, broadening our board's independence, gender diversity, and areas of expertise. With that, I hand over to Martin for the strategy review. Thank you, Pony, and good evening

Before I hand over to Martin I would like to welcome Professor Townes shoreline as a new director.

And remember our corporate governance Committee.

Broadening our board independence.

Gender diversity and areas of expertise.

With that I hand over to Martin for strategy review.

Thank you Pony and good evening and good morning to everybody.

Martin Lau: The internet industry in China has really faced significant changes and challenges since early 2021. And as a result, our revenue conditions have become difficult, and our financial performance has been under pressure over the last few quarters. When we announced our results for the fourth quarter of 2021 in March, we laid out our strategic plan to proactively embrace changes and reposition our businesses to align with the new industry paradigm. So today, in this section, I would like to share with you the encouraging progress that we've made so far.

The Internet industry in China has really faced a significant changes and challenges since early 2021 and as a result, our revenue conditions have become difficult and financial performance was under pressure over the last few quarters.

We announced our results for the fourth quarter of 2020 when in March we laid out our strategic plan to proactively embrace changes and reposition our businesses to align with the new industry paradigm. So today in this section I would like to share with you the encouraging progress that we've made so far.

Martin Lau: To start with, let me walk you through efficiency initiatives that we have implemented that have reduced our costs and are stabilizing our earnings. First of all, we closed down certain non-core or redundant businesses in areas such as online education, e-commerce, and game live streaming. Second, we rationalized underperforming businesses, including loss-making digital content services and subscale social media products. Third, we tightened our control measures for marketing programs and kept down spending with a low return on investments, especially in the area of user acquisition.

To start with let me walk you through efficiency initiatives that we have implemented that reduced our costs and as stabilizing our earnings.

First of all we closed out two non core or redundant businesses in areas such as online education E Commerce and game live streaming.

We rationalized underperforming businesses, including loss, making digital content services and subscale social media products third we tightened our control measures for marketing programs and capital spending with low return on investments, especially in the area of user acquisition as a result.

Martin Lau: As a result, we reduced our selling and marketing expenses for the second quarter significantly by 21% year-on-year. Fourth, we migrated all domestic in-house services to Tencent Cloud for higher productivity and enhanced cost efficiency. Fifth, we controlled our headcount by optimizing our workforce and controlling growth in staff costs. At the end of the second quarter, our total headcount was down by over 5,000 sequentially.

We reduced our selling and marketing expenses for the second quarter significantly by 21% year on year.

Fourth we migrated all domestic in health services to Tencent cloud for higher productivity and enhanced cost efficiency fifth we controlled our head count by optimizing our workforce and controlled growth in staff costs at the end of the second quarter. Our total head count was down by over 5000 sequentially.

Martin Lau: While our second quarter results reflected the initial cost savings from these efficiency initiatives, we expect to benefit more from them in the coming quarters. So, in addition to the aforesaid efficiency initiatives that help us stabilize earnings, we have been and will be implementing additional efficiency initiatives at the business level to support our earnings recovery, even while the macro environment remains challenging for cloud services. We have been scaling back loss-making activities and shifting focus from customization and subcontracting heavy projects to more rapidly growing our internally developed products, driving margin improvement. For commercial payment, we're proactively managing our funding channels to lower our unit transaction costs.

While our second quarter results reflected the initial cost savings from these efficiency initiatives, we expect to benefit more from them in the coming quarters.

Yeah.

So in addition to the aforesaid.

Efficiency initiatives that help us stabilizing earnings we have been and will be implementing additional efficiency initiatives ads business level to support our earnings recovery, even while the macro environment remains challenging.

For cloud services.

We have been scaling back loss, making activities and shifting focus on customization and sub contracting heavy projects to more rapidly growing our internally developed products driving margin improvements.

For commercial payment, we're proactively managing our funding channels to lower our unit transaction costs, and we're targeting our development and operational efforts on higher value services, such as industry specific use cases, which will enhance our unit economics and margins.

Martin Lau: And we're targeting our development and operational efforts on higher-value services, such as industry-specific use cases, which will enhance our unit economics and margins. For long-form video, we are introducing more discipline in our content spending and putting a strong focus on return on investment by reducing discounts on Tencent Video subscriptions, which has the effect of raising our effective video output. So did you account for our ecosystem reaching a virtual cycle stage of Critical Mass?

But long form video, we are introducing more disciplined in our content spending and putting a strong focus on return on investments.

We're reducing discounts on Tencent video subscriptions, which has the effect of raising our effective BD.

For video accounts with our ecosystem, reaching a virtuous cycle stage.

A critical mass.

Martin Lau: When more viewers attract more content creators and vice versa, we can reduce our content-procuring spending. And with the product-reaching scale, we can also devote our engineering resources to optimize bandwidth and service utilization associated with the service, bringing down our unit costs per video view. So in addition to the last two stages, if you will, we have also been developing new and high-quality revenue streams that will drive earnings growth during this period.

We're more viewers attract more content creators and vice versa, we can reduce our content procurement spendings.

With the product reaching scale, we can also devote our engineering resources to optimize bandwidth and surface utilization associated with the service, bringing down our unit cost per video view.

So in addition to the loss two stages, if you will.

We have.

So <unk>.

Developing we have been developing new and high quality revenue streams that will drive earnings growth.

In this period.

Martin Lau: Today I will discuss the most immediate of these revenue initiatives, and that is advertising within video accounts. Video Accounts has become one of the most popular short video services in China with substantial user engagement. In the second quarter, its total time spent exceeded 80% of the moment level.

I will discuss the most immediate of these revenue initiatives that is advertising within BDO accounts.

Video accounts has become one of the most popular short video services in China with substantial user engagement.

In the second quarter.

It's total time spend exceeded 80% of moments level.

Martin Lau: Its total video views increased robustly by over 200% year-on-year. In addition, several features of the Weixin ecosystem amplify the effectiveness of video account ads for advertisers. Firstly, we provide transactional functionalities within Weixin such as mini-programs where advertisers can create powerful lending pages and facilitate transactions, and Wecom, where advertisers and salespeople can interact with interested consumers.

Its total video views increased robustly by over 200% year on year.

In addition, several features of the <unk> ecosystem amplify the effectiveness of video accounts ads for advertisers.

Firstly, we provide transactional functionalities with inflation, such as mini programs, where advertisers can create powerful lending pages.

And facilitate transactions and we come where advertisers salespeople can interact with interested consumers.

Martin Lau: So advertisers can drive sales and lead conversion seamlessly within the WeChat ecosystem. Secondly, the range of interactions with our users enable us to help advertisers better target their audiences. And thirdly, our social graph enables advertisers to reach a broad audience base and build deep user engagement.

So advertisers can drive sales and leads conversion seamlessly within the <unk> ecosystem.

Secondly, the range of interactions with our users and enable us to help advertisers better target their audiences and therapy or social graph enables advertisers to reach a broad audience base and build deep user engagement.

Martin Lau: I believe that video accounts in feed ads represent a very significant value creation opportunity for us because, strategically, they allow us to expand our end market share. As advertisers have already been spending aggressively on multiple short-form video platforms, we should be able to capture more advertising budgets. And financially, they layer a new revenue stream with high incremental margin onto our existing cost base. In terms of schedule, we launched in-feed ads in mid-July, initially selling the ads on a contract basis, and we will be making additional inventory available on a bidding basis by the end of August.

We believe that video accounts in feed ads represent a very significant value creation opportunity for us because strategically they allow us to expand our market share as advertisers have already been spending aggressively on multiple with short form video platforms, we should be able to capture more advertising budgets and.

<unk> financially the layer, a new revenue stream with high incremental margin onto our existing cost base.

In terms of schedule, we launched in feed ads in mid July initially selling the ads on a contract basis.

And we will be making additional inventory available on a bidding basis by the end of August .

Martin Lau: Our monetization framework for video account ads is similar to that of wasting moments in terms of a progressive climb over time. For your reference, WeChat Moments took five quarters to reach 1 billion RMB in quarterly ad revenue. We expect to surpass that level more quickly with video accounts, given the current size of traffic and already strong advertiser demand for short-form video ads. We expect video accounts to eventually grow into a substantial revenue source for us over time.

Our monetization framework for BDO account ads is similar to that of waste in moments.

In terms of a progressive climb over time.

For your reference wasted moments took five quarters to reach 1 billion RMB in quarterly AD revenue, we expect to surpass that level more quickly with video accounts given the current size of traffic and already strong advertiser demand for short form video apps.

Q2 accounts will eventually grow into a substantial revenue source for us overtime.

Martin Lau: Before closing my strategy review section, I would like to share with you how we are positioned to enhance and broaden our revenue growth when the macro environment improves, on top of driving near-term earnings, bottoming out, as well as recovery through efficiency and revenue initiatives that I just talked about. Firstly, we believe that the regulatory environment in China is progressing from rectification to normalization gradually, which should bode well for the industry over time.

But before closing my strategy review section I would like to share with you. How we are positioned to enhance and broaden our revenue growth.

When the macro environment improves.

On top of driving our near term earnings.

Bottoming out as well as recovery through efficiency and revenue initiatives that I've just talked about.

Firstly, we believe that the regulatory environment in China is progressing from rectification to normalization gradually which should bode well for the industry over time.

Martin Lau: Specifically, for platform economy, we saw recent regulatory direction trending more positive and supportive, supporting well-regulated, healthy, and sustainable development of the industry. For Games, we believe the issuance of new banhao should help the overall industry renew growth over time. We expect to receive banhao in the future, which should benefit our domestic game business.

Specifically the platform economy, we saw recent regulatory direction trending more positive and supportive supporting well regulated healthy and sustainable development of the industry.

For games, we believe the issuance of new bonds, how should help the overall industry renew growth overtime.

We expect to receive ban how in the future, which should benefit our domestic game business.

James Gordon Mitchell: Secondly, several of our businesses were adversely affected by COVID-19 resurgence and economic deceleration but are significantly geared toward a future economic upturn. Approximately half of our revenues are from activities that closely contribute to and benefit from China's economic activity in the form of FBS and advertising. As an example, our commercial payment volume slowed to low single-digit growth in April as major cities locked down, but it recovered to heightened growth in June. For the advertising business, the revenue decline rate stabilized in the second quarter before the benefit of launching video accounts in feed ads and under the current macro environment.

Secondly, several of our businesses were adversely affected by Covid, 19, resurgence and economic deceleration, but a significantly geared toward a future economic upturn.

Approximately half of our revenues are from activities that close be contribute to and benefit from China's economic activity in the form of FBS and advertising.

As an example, our commercial payment volume slowed to low single digit growth in April as major cities Lockdown.

But recovered to high teens growth in June .

For advertising business the revenue decline rates stabilized in the second quarter before the benefit of launching video accounts in feed ads and under the current macro environment.

James Gordon Mitchell: So, in conclusion, we remain confident about our resilience in navigating through challenges and our ability to capture opportunities when they arise. Now, with that, I'll pass to James to talk about the business review. Thank you, Martin.

So in conclusion, we remain confident about our resilience and navigating through challenges and our ability to capture opportunities when they arise now with that I'll pass to James to talk about the business review.

James Gordon Mitchell: For the second quarter of 2022, our total revenue was down 3% year on year. The AS represented 53% of our total revenue, within which the social network sub-segment was 21%, domestic games 24%, and international games 8%. Online advertising was 14%, and FinTech and business services were 32% of total revenue. For value-added services, segment revenue was 72 billion renminbi, broadly flat year-on-year.

Martin for the second quarter of 2020, our title revenue was down 3% year on year Piaf's represents a 53% of our total revenue within which the social networks Subsegment was 21% domestic games, 24% and international games, 8% online advertising was 14% with Fintech and business services.

This was 32% of total revenue.

The value added services segment revenue was 72 billion renminbi broadly flat year on year, Social network revenue was up 1% year on year to $29 2 billion Renminbi increased revenue from video accounts slide streaming services were largely offset by decreased revenue from music and games related live streaming services.

James Gordon Mitchell: Increased revenue from video accounts' live streaming services was largely offset by decreased revenue from music- and games-related live streaming services. However, video subscription revenue increased year-on-year as less promotional activity resulted in subscriptions dipping to $122 million, but higher afterwards. We launched several popular self-commissioned drama series, such as The Dream of Splendor, which ranked first by video views across all online platforms in China in June.

Video subscription revenue increased year on year as less promotional activity resulted in subscriptions dipping to a $122 million, but higher opportunities. We launched several popular self commissioned drama series, such as a dream of splendor, which ranked first by video views across all online platforms in China in June .

James Gordon Mitchell: Perquest Mobile Tencent Video widened its audience lead with its mobile DAU more than 20% higher than that of its closest peer in June. Meanwhile, our music subscription count and subscription revenue increased year-on-year. In July, Tencent Music sold over 6 million units of Jay Chou's digital album, reflecting pent-up demand for user engagement with artists.

Quest mobile Tencent video widened its audience fleet with its mobile <unk> more than 20% higher than that of its closest peer in June .

Our music subscription count and subscription revenue increased year on year in July Tencent music over 6 million units of <unk> digital album reflect some pent up demand for user engagement with artists.

James Gordon Mitchell: Domestic game revenue was down 1% year-on-year to $31.8 billion RMB, reflecting transitional industry-wide challenges, including fewer big game releases, lower user spending, and minor protection measures. Revenue from existing games, Honor of Kings, League of Legends, and Moonlight Blade Mobile decreased, while recently launched games, Fight of the Golden Spatula, Wild Rift, and Return to Empire contributed incremental revenue. International game revenue decreased 1% year-on-year to 10.7 billion renminbi due to an industry-wide normalization of user spending on mobile games post-COVID.

Domestic game revenue was down 1% year on year to $31 8 billion renminbi, reflecting transitional industry wide challenges computing fewer big game releases lower use of spending and minor protection matches revenue from existing games honour of Kings League of legends and Moonlight Blade mobile decreased recently launched games fight of the Dolphins.

Such.

Risks and return to Empire contributed incremental revenue.

International game revenue decreased 1% year on year to $10 7 billion renminbi due to an industry wide normalization and user spending on mobile games are scope at Tc.

James Gordon Mitchell: PC game revenue increased, benefiting from robust growth in Valorant and the launch of VRising. On the consumer side, total video views increased over 200% year-on-year, benefiting from increased social sharing and improved AI recommendation algorithms, with video views for AI-recommended content increasing over 400% year-on-year. On the producer side, daily active creators and video uploads in video accounts grew over 100% year-on-year, providing additional content breadth and depth to support future consumer engagement.

PC game revenue increased benefiting from robust growth in <unk> and the launch of <unk>.

<unk> video accounts on the consumer side total video views increased by about 200% year on year benefiting from increased social sharing and improved AI recommendation algorithms with video views for AI recommended content, increasing over 400% year on year.

On the producer side daily active creators and video uploads <unk> accounts grew by over 100% year on year, providing additional content breadth and depth to support future consumer engagement.

James Gordon Mitchell: We increased Video Accounts Mindshare among live streaming fans with a series of live concerts, each attracting tens of millions of viewers, as well as top-tier sponsors. On QQ, we enrich virtual experiences where users interact using their Super QQ Show avatars.

We increased video accounts mindshare, among live streaming patents with a serious life concepts each attracting tens of millions of viewers as well as top tier sponsors.

On <unk>, we enriched virtual experiences by users interact using vascepa acute show avatars.

James Gordon Mitchell: We introduced shared virtual spaces where users can make friends and engage in community activities, such as holding virtual beach parties and graduation ceremonies. And we enabled users to chat over live audio using their avatars. Turning to domestic games, we're using the current digestion periods to develop our technical capabilities and sustain up-layer engagement, which should position us well once conditions normalize. For measuring engagement, one can look at the time spent on our games in the most popular and fastest-growing game categories relative to competing titles in those categories and relative to the past.

We introduced chat virtual spaces, where users can make France, and engaging community activities such as housing virtual each party's congratulations ceremonies.

We enabled users to chat overlie 40, I'm using their avatars.

Turning to domestic games, we are using the current digestion periods to develop our technical capabilities and sustain a player engagement, which should position us well once conditions normalize the measuring engagement. One can look at the time spent on our games in the most popular and fastest growing game categories relative to competing titles in those categories.

Relative to the past.

James Gordon Mitchell: The most popular game categories in China are battle arena and action shooter games, of which our flagship Honor of Kings battle arena game was the first place game by total time spent across all games in China in the second quarter.

The most popular game categories in China passed arena in action shooter games within which our flagship honour of Kings faster Arena again was the first place game by total time spent across all games in China in the second quarter.

James Gordon Mitchell: While its monetization decreased year on year, its total time spent by adult players slightly increased, and our newer battle arena game, Wild Rift, ranked sixth by total time spent. Our action shooter game, Peacekeeper Elite, was the second place game by Total Time Spent industry-wide and also increased its total time spent by adult players year on year. Among the fastest-growing genres, we entered the management simulation category with the July release of League of Legends Esports Manager, which is currently the highest-grossing simulation game yet to date.

Its monetization decreased year on year. It's total time spent by adult players' slightly increased and our newer faster Arena game Board risk ranked sixth by total time spent.

Our action shooter game Peacekeeper elite was the second place gained by total time spent industry wide and also increased its adult player total time spend year on year.

Among the fastest growing genres, we entered the management simulation category with the July release of League of Legends esports manager, which is currently the highest grossing simulation game yet to date.

James Gordon Mitchell: We entered the extraction shooter category with Arena Breakout, which ranked eighth by total time spent among all games in July. And our auto battle game, Fight of the Golden Spatula, released late last year, climbed to the fourth highest time spent game industry-wide in the second quarter.

We entered the extraction shooter category with arena breakout, which ranked eighth by total time spent among all banks in July .

And I'll also pass that game fight of the Golden Spatula released late last year as clients the fourth highest spec game industry wide in the second quarter.

James Gordon Mitchell: The international games industry is also experiencing a digestion period, but we're progressing on some key strategic initiatives, which we view as positive signposts for the future. Illustrating our studio's game operation capabilities, Riot's two-year-old Valorant achieved record-high MAU when Quartet grossed in receipts during the second quarter. Valorant has broken into and grown the crowded tactical shooter category through super-serving unmet player needs, prioritizing fairness over monetization, and varying highly professional esports activities on top of their core compelling competitive experience.

International games industry is also experiencing a digestion period, but we're progressing on some key strategic initiatives, which we view as positive sign post for the future illustrating.

Illustrating our studios game operation capabilities riots treat <unk> achieved record high.

<unk> second quarter.

<unk> is broken into and through the crowd of tactical shooter category through Super serving unmet client needs prioritizing Spanish cyber monetization and Larry and highly professional esports activities on top of the core compelling competitive experience.

James Gordon Mitchell: On the acquisition front, our European mobile game studio, Miniclip, recently acquired Saibo, developer of the endless runner game Subway Surfers. Subway Surfers is the most downloaded mobile game globally over the past decade and boosts Miniclip's daily active user base by 30 million to a total of 70 million, positioning Miniclip as one of the biggest developers by DAU worldwide.

On the acquisition for anti European Mobile games studio recently acquired cyber developer of the endless runner games subway surface sub surface is the most downloaded mobile game globally over the past decade, and boots. Many clips daily active user base by 30 million to a total of $17 million positioning <unk> as one of the biggest developed.

<unk> worldwide.

James Gordon Mitchell: On the new game front, our Swedish studio Stunlocks, the rising game, sold over 2 million copies in its first month of early access on Steam, showcasing our competitiveness in the increasingly important genre of survival open world crafting games. Moving to online advertising, our advertising revenue was R19 billion in the second quarter, down 18% year-on-year, reflecting weakness, particularly in the internet services, education, and finance sectors. However, this quarter marked our first sequential revenue growth since the second quarter of 2021, with a tailwind from positive seasonality and a headwind from comparing against the Winter Olympics in the first quarter this year.

On the new game front, our Swedish studio <unk> be rising games sold over 2 million copies in its first month.

The access on steam showcasing our competitiveness in the increasingly important genre of survival open world Crofting games.

Moving to online advertising or advertising revenue was 19 billion renminbi in the second quarter down 18% year on year, reflecting weakness, particularly in the Internet services education and finance sectors. However, this quarter marked our first sequential revenue growth since the second quarter of 2021 with a tailwind from positive <unk>.

<unk> and the headwind from comparing against the Winter Olympics in the first quarter this year.

James Gordon Mitchell: Ad spending on our platform was impacted in April and May by the pandemic resurgence and logistics disruptions. In June, the year-on-year decline rate narrowed as large e-commerce platforms increased ad spend with us for the 618 promotions, as year-on-year comparisons began to ease, and as underlying advertising demand slightly improved. In moments, we introduce frame-breaking ads, which are popular with brand advertisers.

AD spending on our platform was impacted in April and May by the pandemic resurgence and logistics disruptions in June the year on year decline rate narrowed as large e-commerce platforms increased AD spend with us for the <unk> hundred 18 promotions as year on year comparisons began to ease and as underlying advertising demand slightly improved.

In moments, we introduced framed breaking ads, which are popular with brand advertisers.

James Gordon Mitchell: We began rolling out video accounts in feed ads on a contract basis in July with influential brands such as BMW, Armani, and Louis Vuitton. For media advertising, our long-form video ad revenue increased quarter-on-quarter due to stronger content releases and positive seasonality, despite a tough comparison against the Winter Olympics. Looking at FinTech and business services, segment revenue is 42 billion RMB, up 1% year-on-year and down 1% quarter-on-quarter. However, the FinTech services revenue growth paused in April and May as disruptive COVID-19 resurgences impacted commercial payment activities. Nationally, our commercial payment volumes slowed to low single-digit growth in April but bounced back to high teens growth in June.

We began rolling out video accounts in feed ads on a contract basis July to influential brands, such as BMW Armani and Louis Vuitton.

For media advertising, our long form video AD revenue increased quarter on quarter due to stronger content releases and positive seasonality. Despite a tough comparison against the Winter Olympics.

Looking at things like business services segment revenue was 42 billion renminbi up 1% year on year and down bumps around quarter on quarter.

The Fintech services revenue growth cost in April and May as disruptive COVID-19 research has impacted commercial payments activities now.

<unk> wide, our commercial payment volume slowed to low single digit growth in April bounced back to high teens growth in June .

James Gordon Mitchell: On a regional basis, payment volume for every province and tier one city in mainland China has now returned to positive 20-year growth rates. For business services, our revenue declined slightly year on year as we continued to scale back loss-making activities, in particular projects with a high proportion of subcontracting. Our own products' revenue grew sequentially, especially in areas such as database, big data, and AI. Hence, our business services gross margin increased quarter-on-quarter, benefiting from the improved revenue mix and reduced cost base.

On a regional basis payment volumes every province since here one sitting in Maine that China has now returned to positive growth rates.

The business services, our revenue declined slightly year on year as we continued to scale back loss, making activities in particular projects with a high proportion of subcontracting our own products revenue grew sequentially, especially in areas such as database big data and AI, Hence our business services gross margin increased quarter on quarter benefiting from the improved revenue.

Mix and reduced cost space.

James Gordon Mitchell: In Platform as a Service, our TDSQL database revenue grew over 30% year-on-year, contributing over 5% of our cloud revenue. Furthermore, key financial institutions increasingly adopted our database for their core systems. We released a new version of our cloud-native solution, TDSQLC, with comprehensive upgrades in product architecture, hardware capabilities, and engine kernels. Frost and Sullivan named TD SQL the leader in distributed databases in China, citing our strengths in areas such as scalability and industry solution service support.

And platform as a service or Tds throughout database revenue grew up 30% year on year contributing over 5% of our cloud revenue.

Key financial Institutions' increasingly adopted our database for that core systems.

The new version of our cloud native solution Tds, <unk> LLC with comprehensive upgrades and product architecture hardware capabilities and engine carnivals Frost <unk> Sullivan named <unk>. The leader in distributed database in China, citing our strengths in areas such as sustainability and industry solution service support.

James Gordon Mitchell: For software as a service, Tencent Meeting launched a marketplace of plug-ins in June. Examples of plug-ins include Tencent eSignature, which enables users and enterprises to sign agreements in a secure manner anywhere, Evernote, which provides a convenient way for participants to create notes during meetings, and NeoCRM's plug-in, which simplifies scheduling before a call, database access during a call, and maintaining meeting records after a call.

The software as a service Tencent meeting launched a marketplace plug ins in June example, supply chain Cengage, Tencent E signature, which enables users and enterprise sign agreements in a secure manner anywhere.

<unk>, which provides a convenient way for participants to create notes during meetings and neo CRM plugging, which simplifies scheduling before database access during our call and maintaining leasing record software call.

Shek Hon Lo: I'll now pass to Jon to discuss the financial review. Hi everyone. For the second quarter of 2022, total revenue was $134 billion RMB, down 3% year-on-year or 1% quarter-on-quarter. Gross profit was $57.9 billion RMB, down 8% year-on-year or up 1.4% quarter-on-quarter. Net other gains were $4.4 billion RMB, down 79% year-on-year, or 66% Q-on-Q, which were primarily non-IVA-rich assets and items such as net gains on STEM disposals and the valuation of certain investments, partly offset by impairment provisions against certain domestic investors. Operating profit was RMB30.1 billion, down 43% year-on-year or 19% year-on-year. Net finance costs were $1.8 billion RMB, down 7% year-on-year and quarter-on-quarter.

And I will now pass to John to discuss the financial review.

Hi, everyone for the second quarter of 2022 total revenue was 134 than renminbi down 3% year on year or 1% quarter on quarter gross profit was $57 9 billion renminbi down 8% year on year or up one 4% quarter on quarter net other gains were.

$4 4 billion renminbi down, 79% year on year or 66% Q on Q.

We're primarily non <unk> items, such as net gains on disposals disposals, and the valuation of certain investments, partly offset by impairment provisions against certain domestic investees.

Operating profit was $30 1 billion renminbi down 43% year on year on 19% Q on Q.

Net finance costs were $1 8 billion renminbi down 7% year on year and quarter on quarter the year.

Shek Hon Lo: The year-on-year change was mainly due to Forex gains recognized this quarter compared to losses for the same period last year, but partly offset by the increase in interest expenses due to the increase in vaccinated. Share of losses of Associates and JV were RMB4.5 billion compared to RMB3.9 billion last year. Non-IFRS share of losses was $1.0 billion or $1 billion RMB compared to $0.4 billion RMB last year, mainly reflecting the impact of JD.com ceasing to be an associate.

Year on year change was mainly due to forex gains recognized this quarter compared to losses for the same period last year.

Partly offset by the increase in interest expenses due to increase in depth and it's <unk>.

Share of losses of associates, and JV were $4 5 billion renminbi compared to $3 9 billion renminbi last year.

<unk> share of losses were <unk> <unk>, four 1 billion renminbi compared to $7 4 billion renminbi last year, mainly reflecting the impact from J D Dot com <unk> <unk> associate.

Shek Hon Lo: Income tax expense increased by 25% year-on-year to 4.6% in RMB, primarily driven by a low base effect resulted from a one-off deferred tax adjustment associated with an investee last year, as well as the provision of withholding tax during the quarter.

Income tax expense increased by 25% year on year to $4 6 billion renminbi, primarily driven by low base effect resulted from one off deferred tax adjustment associated with them in that the last year as.

As well as the provision of withholding tax during the quarter.

Shek Hon Lo: The effective tax rate was 19.2%. IVRS Net Profit Attributable to Equity Holders was 18.6% RMB, down 56% year-on-year or 20% Q1Q. Diluted EPS was 1.915 RMB, down 56% Y&Y and 20% Q1Q. On a non-IFRS basis, operating profit was R$36.7 billion, down 14% Y&Y or up 0.4% quarter-in-quarter.

Effective tax rate was 19, 2%.

<unk> net profit attributable to equity holders was $18 6 billion renminbi.

<unk>, 6% year on year or 20% Q on Q.

Diluted EPS was $1 nine when <unk> down, 56% Y O y and 20% Q on Q.

On non <unk> basis operating profit was $36 7 billion renminbi down 14% y on y or up 0.4% quarter on quarter net profit attributable to equity holders was $28 1 billion renminbi down 17% year on.

Shek Hon Lo: Net profit attributable to equity holders was R$28.1 billion, down 17% year-on-year, or up 10% QOQ. Valuated EPS was 2.896 RMB, down 17% Y&Y, or up 11% Q2. Moving on to gross margins, the overall gross margin was 43.2%, down 2.2 percentage points year-on-year, or 1.1 percentage points queue-on-queue, by segment.

On year, or 10% or up 10% Q on Q.

Diluted EPS was $2 896, renminbi down 17% y on y or up 11% Q on Q.

Moving on to gross margins.

Overall gross margin was 43, 2% down two two percentage points year on year or one one percentage points Q on Q.

Shek Hon Lo: Gross margin for VAS was 50.6%, down 2.3 percentage points y-on-y or up 0.2 percentage points on tier two. The year-on-year margin decrease was the result of revenue makeshift within the segment, particularly more revenue contribution from lower-margin video accounts, live streaming, etc., as well as high staff costs with feeble revenue. Gross margin for online advertising was 40.6%, down 8.2 percentage points year-on-year or up 3.9 percentage points year-on-year. The year-on-year margin decrease reflected higher operating costs, in particular costs associated with retail accounts, staff work, as well as the fact that full exemptions from cultural construction fees are no longer available this year.

By segment gross margin for Vas was 51, 6% down two three percentage points y on y or.

<unk> two percentage point Q on Q.

Year on year margin decrease was a result of revenue mix shifts within the segment, particularly more revenue contribution from lower margin video accounts live streaming services.

As well as higher staff cost with stable revenue.

Gross margin for online advertising was 46% down eight.

Eight two percentage points year on year or up three nine.

<unk> nine percentage points Q on Q.

The year on year margin decrease reflected higher operating cost in particular.

<unk>, we deal counts stop for us as well as the fact that full exemption from cultural construction fee no longer available this year.

Shek Hon Lo: Q1-Q2 Margin Improvement was presented by the 618 E-Commerce Festival, Video Content Cost Optimization as well as the Absence of Content Cost from the Winter Olympics. Ross Margin for Fintech and Business Services was 33.3% at 1.3 percentage points year-on-year or 1.7 percentage points year-on-year. The year-on-year margin improvement was due to favorable makeshift within fintech services and lower revenue proportion from business services, which carry a lower margin. The Q&Q Margin Improvement was driven by cost optimization and reduction of loss-making activities of crowd services. On Operating Expenses, Charlene Marketing Expense was 7.9 billion renminbi, down 21% Y&Y or 2% Q&Q, reflecting more disciplined marketing activities, Standard market expense was 5.9% of revenues, down 1.3 percentage points year-on-year. R&D expenses were RMB$15 billion, up 17% year-on-year, or down 2% year-on-year.

The Q on Q margin improvement was driven by six 1% E. Commerce Festival video content cost optimization as well as the absence of content costs warm winter.

Olympics.

Gross margin for Fintech and business services was 33, 3% up one three percentage points year on year or one seven percentage points Q on Q. The year on year margin improvement was due to favorable mix shift within Fintech services and lower revenue proportion from business surfaces.

Each carry a lower margin.

The Q on Q margin improvement was driven by cost optimization and reduction of loss, making activities of processes.

On operating expenses, selling and marketing expense was $7 9 billion renminbi down 21% y on y or 2% Q on Q, reflecting more disciplined marketing activities, particularly for digital content services.

Selling and marketing expense was $5 9% of revenues.

One three percentage points year on year.

R&D expenses were 15 billion renminbi up 17% year on year or down 2% Q on Q.

Shek Hon Lo: The year-on-year increase was mainly due to higher staff costs, and the year-on-year decline reflected our efforts to optimize workforce and control growth in the staff force and The Extent Disclosed. 11.2% of revenue. DNA expenses excluding R&D were $11.2 billion RMB, up 14% in Y&Y or down 0.6% in Q2.

Year on year increase was mainly due to higher staff costs and.

Q on Q decline reflected our efforts to optimize workforce and quicker growth in SaaS for us.

R&D expenses growth.

11, 2% of revenues.

G&A expenses, excluding R&D were.

$11 2 billion renminbi up 14% y on y or.

Or down <unk>, 6% Q on Q.

Shek Hon Lo: The year-on-year increase was mainly due to higher staff numbers and office expenses. As I quoted, we had approximately 111,000 employees, up 18% year-on-year or down 5% quarter-on-quarter. Let's take a look at the operating and net margin ratios. So now our net margin was 27.4%, down 3.6 percentage points year-on-year or up 0.4 percentage points quarter-on-quarter. On IFRS, that margin was 21.6%, down 3.8 percentage points year-on-year or up 2.2 percentage points queue-on-queue.

Year on year increase was mainly due to higher staff costs and office expenses.

At quarter end, we had approximately one.

1000 employees up 18% year on year or down 5% quarter on quarter.

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

<unk> net margin was 27, 4% down three six percentage points year on year.

<unk> four percentage point quarter over quarter.

Non <unk> net margin was.

21, 6% down three eight percentage points year on year or up two two percentage points Q on Q.

Shek Hon Lo: This sequential improvement reflects our business rationalization and cost optimisation initiatives as well as lower associates costs. Finally, I will summarize some key cash flow and balance sheet metrics. Total capex was RM3 billion, down 57% year-on-year and quarter-on-quarter.

The sequential improvement reflects our business rationalization and cost optimization initiatives as well as lower associates.

Finally, I will summarize some key cash flow and balance sheet metrics.

Total Capex was <unk> 3 billion renminbi down, 57%, both year on year and quarter over quarter.

Shek Hon Lo: Within CapEx, Operating CapEx of 2.1 billion RMB was down 65% year-on-year as Ripple actively reassessed and tightened our spending plan for the year. Non-operating capex decreased by 8% year-on-year to 0.9 bits of RAM-MB. Operating cash flow for the quarter was 35.7 billion renminbi, up 12% year-on-year and 6% quarter-on-quarter.

Within Capex operating Capex was $2 1 billion renminbi down 65% year on year, as we proactively reassessed and tighten our spending plan for the year.

Nonoperating capex decreased by 8% year on year, two 0.9 billion renminbi.

Operating cash flow for the quarter was.

$35 7 billion renminbi up 11 up 12% year on year, and 6% for the quarter free cash flow for the quarter was $22 5 billion renminbi up 30% year on year or 47%.

Shek Hon Lo: Re-cash flow for the quarter was 22.5 billion renminbi, up 30% year-on-year or 47% quarter-on-quarter. Reflecting Operating Cash Flow Generation and More Disappearance Pending towards CapEx and Median Content, the debt position was RMB20.4 billion compared to RMB11 billion last quarter. In addition to the currency translation difference, the sequential increase was mainly due to payment of cash dividend by the company amounting to RMB13 billion and repurchase of shares by the company amounting to RMB3 billion, largely funded by free cash flow generation during the quarter. The fair value of our shareholdings and listed investing companies excluding subsidiaries was approximately RM602 billion as of 30th June 2022.

Reflecting operating cash flow generation and more disciplined spending towards capex on media and content.

Net debt position was $20 4 billion renminbi compared to 11 billion Renminbi last quarter. In addition to currency translation difference that sequential increase was mainly due to payment of cash dividend by the company amounting to 13 billion renminbi and repurchase of shares by the company amounted to $3 billion.

That would be largely funded by free cash flow generation during the quarter.

The fair value of our shareholdings in listed <unk> companies, excluding subsidiaries was <unk> 602 billion renminbi.

As of 30 June 2022.

Operator: Management. Again, if you are dialing in by phone, please press 5 to raise a question. If you are accessing from a Tencent meeting or WooMeeting application, please click the raise hand button at the bottom left.

Management.

Again, if youre dialing in by phone.

To raise the question if youre accessing the meeting a whole meeting application click.

Take the raising button at the bottom left.

We will take one question up two last follow up question each time.

Operator: We will take one main question and up to one follow-up question each time. Our first question comes from Ronald Keung of Goldman Sachs. Bernard, your line is open.

Our first question comes now runoff from Goldman Sachs.

Your line is open.

Yeah.

Unknown Executive: Thank you. Thank you, Pony, Martin, James, and John. Hearing all the impressive user and time spent growth of video accounts, I want to hear what management's expectation is of the potential room for advertising revenues from this video account if we benchmark with other shops on video platforms. How do we see e-commerce as a potential within that? And would there be any time spent cannibalization within WeChat as video accounts continue to grow? Thank you.

Thank you. Thank you Tony Martin Jameson Dawn.

Hearing all the impressive user and time spent growth of video accounts. So what they hear what is management's expectation of the potential room for advertising revenues from this video.

If we benchmark with other short form video platforms, how do we see e-commerce as a potential within that and.

Would there be any time spent cannibalization within wechat.

Video accounts continue to grow thank you.

Unknown Executive: Thank you very much for the question, Ronald. So in terms of benchmarking the long-term revenue opportunity for video accounts, we provided a couple of references. One is that video accounts now represent roughly 80% of the time spent as waste in moments, and that ratio has, of course, been rapidly climbing. All else equal, the eCPM on video accounts will likely be slightly lower than on moments, but the advertising intensity will be higher, and so net-net, the revenue potential per minute of user time spent will be higher. Another way of benchmarking is against the incumbent short-form video services.

Yes. Thank you very much for the question Ronald Santana benchmarking to the long term revenue opportunity for video accounts than we provided a couple of references what is that media accounts now represent roughly 80% is much time spent situation moments in that ratio.

As of course being rapidly climbing all else equal.

E. CPM on video accounts will likely be slightly lower than moments, but the advertising intensity will be higher and so net net the revenue potential shelf minute of user time spent will be higher another way a benchmark can use against the incumbent short form video services.

Unknown Executive: Currently, video accounts have lower aggregate time spent, but the CPM appears competitive with those incumbent services or superior to those incumbent services, and I think if you take the two together, they actually tie out fairly similar outcomes to each other. In terms of the risk of video accounts cannibalizing waste in moments, we have not seen such cannibalization, and we do not expect to see such cannibalization, because the different services provide different user needs.

Currently video accounts have.

Lower aggregate time spent.

Sure.

The CPM appears competitive with those incumbent services superior so those incumbent services.

And I think if you take the two together I actually tie out.

Fairly similar.

Outcomes to each other.

Terms of the risk of video accounts cannibalizing <unk> moments than we have not seen such cannibalization and we do not expect to see such cannibalization because the different services provides different user needs adjustments the growth of moments.

Unknown Executive: Just as the growth of moments did not cannibalize waste in chat, we believe the chat experience, the experience of sharing photos and articles with your friends, and the experience of watching short-form videos provided by AI algorithms are three discrete internet use cases. In terms of e-commerce, right, you know, I would say... We do see e-commerce live streaming to be an opportunity potential, but that would take some time. I think in terms of staging, right, you know, we actually have to go from short form video to live streaming. As you can see, we have actually been building the user habit of live streaming over time, including the very successful launch of some live concerts.

<unk> did not cannibalize <unk> chat.

Sleeve, the chat experience or the experience of sharing photos and articles with your friends and the experience of watching short form video is provided by AI algorithms three discrete internet use cases.

Thank you.

E Commerce right.

I would say.

We do see.

Commerce like streaming too.

To.

Opportunity potential, but that would take some time.

In terms of stage right.

We have to go from the short form video to live streaming as you can see we actually have been building.

Usually a habit of live streaming.

Over time, including the very successful launch of some of the.

Live concerts and once we have.

Unknown Executive: And once we have built a habit of people watching live streaming, then we actually need to have an ad system, right, which can allow some of the merchants to bring traffic, not just from organic sources, but also by throwing ad dollars to attract users into their live streaming commerce. And then when that happens, we need to recruit merchants to be doing live streaming for the purpose of commerce. After all this is done, right, I think, you know, our ecosystem will eventually start coming into play because our mini programs can actually very easily help the merchants to conclude transactions.

Build a habit of people watching live streaming.

Then we actually need to have.

The App system, right, which can allow us to some of the merchants too.

Bring traffic.

Not just from organic.

Basis, but also by throwing at dollars to attracted users to into their life streaming commerce and then.

When that happens then.

Need to recruit.

<unk> to be doing live streaming for the purpose of commerce.

After all is done right.

Our ecosystem events, you would start coming into play because many programs can actually very easily help.

The merchants to conclude transactions and our private domain advantage can actually help merchants to accumulate customers of their own and establish a longer term relationship than just a one time transaction. So I think that those will be sort of the <unk>.

Unknown Executive: And our private domain advantage can actually help merchants to accumulate customers of their own and establish a longer-term relationship than just a one-time transaction. So I think, you know, that this will be sort of the progression of live streaming e-commerce, and we'll try to do it on a stage by stage basis. Got it. Thanks much. Thank you, Ronald. The next question comes from William Packer of Exxon. Okay, your line is open now.

Question of the live streaming E Commerce, and we've tried to do it on a state by state basis.

Got it thanks, so much.

Thank you run up next.

Our next question comes now the weekend Packer of Exane.

Okay.

Okay now.

Unknown Executive: Hi, management. Many thanks for taking my questions. Firstly, could you update us on any developments in the regulatory backdrop following the recent commentary from the authorities around the healthy development of the platform economy and completion rectification? Last quarter, you provided some helpful observations arguing it would likely take time for these high-level directives to filter through to specific regulators, and I'd also like to thank you for those. Are there any developments to highlight? and secondly Operating cost growth slowed further in Q2 relative to recent quarters, demonstrating good cost control.

Hi management, Thanks for taking my questions.

Firstly could you update us on any development and the regulatory backdrop. Following the recent commentary from the authorities around the healthy development of the platform economy and completion rectification.

Last quarter, you provided some helpful observations, arguing it would likely take time for these high level directives to filter fruit specific regulators.

And it also will likely follow the sequence.

Are there any developments to highlight.

Then secondly.

Operating cost growth slowed further in Q2 relative to recent quarters, demonstrating good cost control could you help us think through the trajectory of cost growth over the rest of the year and the <unk>.

Key puts and takes many things.

Unknown Executive: Could you help us think through the trajectory of cost growth over the rest of the year and the key puts and takes? Many thanks. Okay, well, in terms of your first question on the regulatory front, I think, you know, we have given some of the highlights in our strategy section. But I think, as you have observed right now, the recent regulatory direction is actually trending toward a more positive tone for platform economy.

Okay, well in terms of your first question on the regulatory.

I think we have given some of.

The highlights and our strategy section, but.

I think as you have observed the recent regulatory direction is actually trending towards more positive tone for platform economy and.

Unknown Executive: And the key message is, you know, one, to promote well-regulated, healthy, and sustainable development, two, to complete the ratification, and three, to carry out regular supervision. And that was reiterated at both the State Council meetings as well as the Politburo meetings in late July.

The key messages like no one from a well regulated healthy and sustainable development two to complete.

The ratification and three to carry out regular supervision and Thats reiterated in both the state Council meetings as well as the Poly Bureau meetings in late July .

Unknown Executive: And I would say along that guiding principle, right, we have seen a number of observations. Number one is that there's actually no new regulation this year that is materially detrimental to the industry. And the second one is, you know, there is a resumption of the issuance of Banhao, and there are multiple batches that have been issued. And in addition to that, thirdly, we also have seen initiatives to formulate more supportive policies for the platform economy across various regulatory bodies. For example, one is the NDRC-led Inter-Ministerial Task Force that has been set up to foster the development of the digital economy and coordinate policies on strategic areas such as big data and internet plus.

And I would say along that guiding principle right, we have seen a number of observations.

One is that there is actually no new.

Regulation this year that materially detrimental to the industry.

The second one is.

There is a resumption of the issuance of bonds.

There are multiple batches that have been issued.

And in addition to that thirdly, we also have seen initiatives to formulate more supporting <unk>.

Policies for platform economy across various regulatory bodies for example.

As <unk> lapped inter ministerial task force that has been set up to foster the development of digital economy and coordinate policies on the strategic areas, such as big data and Internet plus.

Unknown Executive: And the Ministry of Commerce also announced opinions to promote the development of cultural content, for example, expanding the pilot program of game approval, and fostering internationally renowned brands in games. So we have seen quite a few new developments along the line of the general, more supportive direction. Having said that, we do expect...

And the Ministry of Commerce also announced leukemias to promote development cultural content.

For example, expanding pilot program with game approval frustrating internationally renowned brands and games.

So we would have seen.

Quite a few new developments along the line of the general more supported direction.

Having said that we do expect.

Unknown Executive: The supporting measures will take time to play out, and we look forward to seeing more of them coming in the near future. Margin initiatives. Then Martin talked about the first batch of cost initiatives that we've already implemented, and for those, I think you've started to see marketing expenses come down quite sharply already. You've begun to see a partial, although not full, flow through to lower cost of sales, and you haven't yet in the second quarter, but you will in subsequent quarters see a flow through to GNA from some of the headcount and compensation adjustments we made.

The supporting measures.

Took time to play out.

We look forward to seeing more of them coming in the near future.

Well on your second question around the impact of the Veritas.

Margin initiatives spend marching talks about the first batch of cost initiatives.

We have already implemented and for those I think have started to see the marketing expense has come down quite sharply already.

<unk> began to see a partial although not fully flowed through to lower cost of sales and you haven't yet in the second quarter, but you went in subsequent quarters see a flow through to G&A from.

Our head count and compensation adjustments, we made.

Unknown Executive: Martin also talked about a second batch of expense initiatives which are more business specific and will take effect and show through during the second half of the year, and then finally, we have some high-margin revenue initiatives, of which the most immediate is video accounts flowing through too. So we believe with those three sets of initiatives taken together, we can return the business to year-on-year earnings growth even if the macro environment remains as it is today. Many thanks for the call.

And also I talked about a second batch of expense initiatives, which are more business specific which will take effect in short through during the second half of the year and then finally, we have some.

High margin revenue initiatives of which the most immediate is video accounts.

<unk> So we believe.

With those three sets of initiatives taken together, we can return the business to year on year earnings growth, even if the macro environment remains as it is today.

Many thanks for the color.

Okay.

Operator: Thank you. The next question comes from Thomas Chong of The Jefferies. Thomas, the line is open.

Thank you.

Question comes down to Thomas Chop the Jaffray. Thomas Your line is open.

Unknown Executive: Hi, good evening. Thank you management for taking my questions. I have a question regarding the macro headwinds that we are seeing globally. I understand that management has different initiatives and cost control measures, but just want to get some color with regard to the gaming side. We are seeing international and domestic games are impacted by software gamer spending. Just want to get some color about our gaming strategy in this regard. How should we tackle these macro headwinds going forward?

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

I have a question regarding the macro headwinds that we are seeing globally.

Understand that management has different in Asia and cost control measures, but just wanted to get some color with regard to the gaming side, we are seeing our international game and domestic games are impacted by salt.

Spending just wanted to get some color about our gaming strategy on this regard.

How would the.

Tackle these macro headwinds going forward and in the <unk>.

My second question is also relating to the.

Unknown Executive: And then my second question is also relating to the cost side. Given that we have done a great job with the cost control measures, I just want to get some color about the earnings growth with all these initiatives. Should we expect this to happen starting in Q3? Thank you. Thomas, on cost control, as we mentioned, we've taken a number of steps in the first half of the year, and some of those have already borne fruit in the second quarter results. Others will bear fruit in the second half of the year.

The cost side occupant that we have done a great job.

On the cost control measure just wanted to get some color about.

Things with.

With all these initiatives should we expect this to happen.

Starting in Q3, thank you.

So much so on the cost control as we mentioned we have taken a number of steps.

First half of the year some of those have already borne fruit in the second quarter results. This will bear fruit in the second half of the year will take some further steps and we believe that we can return to earnings growth in the coming quarters, even if revenue remains as it is now in terms of the game business than you are.

Unknown Executive: We'll take some further steps, and we believe that, you know, we can return to earnings growth in the coming quarters, even if our revenue remains as it is now. In terms of the game business, then you're right. It is a difficult year for different reasons, both domestic and international games, and, you know, our strategy is to accept that and to focus on really deepening our engagement with users, which we've talked about in terms of our leadership in total time spent, and also focus on developing our capabilities, especially in the international markets as well. Our growth model is not predicated on the game business returning to revenue growth.

It is a digestion year for different reasons, both domestic and international games and our strategy is to accept that and to focus on really deepening our engagement with users, which we've talked about in terms of our leadership in total time spent.

Also focus on developing our capabilities, especially in the international markets as well so.

Up.

Growth model is not predicated on the game business returning to revenue growth. We believe we can grow earnings even with the game business as it is now and for the game business, both domestically and internationally, we're focused on engagement and capabilities and we believe.

Unknown Executive: We believe we can grow earnings, even with the game business as it is now. And you know, for the game business, both domestically and internationally, we're focused on engagement and capabilities, and we believe in also developing good new games.

And also developing good new games.

And we believe that.

In time as we move into next year.

That will position us very well resume game revenue growth, but I want to reemphasize game revenue growth is not a pre condition for earnings growth.

Unknown Executive: And we believe that in time, as we move into next year, then that will position us very well to resume game revenue growth. But I want to reemphasize that game revenue growth is not a precondition for earnings growth. Thank you, Thomas. The next question comes from Eddie Liao of the Bank of China. [inaudible] It seems that Addy has some technical problems. So, let's move to the next question. Next is Joan Choi from Daiwa. The line is open.

Thank you Thomas.

Next question comes from AB.

Thank you.

Your line is open.

Okay. Thank that Andy has some technical program, let's move to the next question.

Thats it.

John .

<unk> dilemma.

John Your line is open.

Unknown Executive: Okay, can you hear me? Thank you for taking my question. My question is more on the cloud business services. I think you guys mentioned that, you know, with the more internal strategy ship focusing more on quality revenue growth, such as reducing loss-making activities. This has been a major reason. How, you know, how long do you think this will last? Can you provide some color there?

Okay can you hear me yes.

Yes, we can okay. Thank you for taking my question. My question is on more on the cloud business services I think you guys mentioned that.

With the <unk>.

More intuitive strategy shift focusing more on quality revenue growth such as reducing loss, making activities. On this has been a major reason.

Long do you think this will last.

Can you provide some color there.

Unknown Executive: And, you know, at the same time, we are hearing macro conditions are preventing a lot of cloud deployments from many of your customers. Are you also seeing that as a major, bigger impact? And just quickly on the margins, you know, what are the key areas that we could further improve profitability, you know, except for introducing more on SaaS past products? And a quick follow-up earlier, I think, you guys did mention on the ads video accounts that you would be progressive, but at the same time, it would be faster than, you know, what happened in the most recent moments. So should we be expecting a different growth or trajectory for video account revenue momentum in the coming quarters? Thank you.

At the same time, we are hearing the macro conditions are preventing up a lot.

Our deployment from from many of your customers are you also seeing out of a major a bigger impact and just quickly on the margins what are the key areas that we could further improve our profitability.

For introduce more on SaaS paas products and a quick follow up on earlier I think you guys didn't mention on the ads video accounts that you will be progressive but at the same time, it will be faster than what happened to more waste movement. So should we be expecting a different growth or trajectory for video content.

Revenue momentum in the coming quarters. Thank you.

Unknown Executive: In terms of cloud, I would say, It is indeed partly macro and partly proactive, an initiative from our side to reduce loss-making activities. Now, on the macro side, very clearly, the most impacted industry vertical is actually the internet industry. Internet customers basically got impacted the most as the industry faced macro challenges as a whole. And then, at the same time, the macro environment also impacted some enterprise clients. And even in some cases, the already signed contracts for deployment actually sort of got impacted because of the COVID-19 resurgence in different cities. So those are the factors on the macro side.

In terms of the cloud.

I would say.

It is indeed.

The macro and how.

We are proactive in.

<unk> from our sites to reduce the loss, making activities on the macro side very clearly.

The most impacted in.

Industry vertical is actually internet industry industry.

Its customers basically got impacted the most as the industry faced a macro challenges as the hole and then at the same time.

The macro environment also impacted some enterprise clients.

And even in some.

Cases, the deployments already signed contracts deployment actually sort of got impacted because of COVID-19 resurgence in different cities.

So those are the factors on the macro side and then on the proactive side I would say one is actually we reduced the loss, making activities such as sub contracting and very heavy customization, because those tends to be loss, making businesses and at the same time, we also refrain from cutthroat.

Unknown Executive: And then on the proactive side, I would say one is that we reduce loss-making activities such as subcontracting and very heavy customization because those tend to be loss-making businesses. And at the same time, we also refrain from cutthroat pricing. So certain projects which are clearly going to lose money, and at the same time, they are of little value. For example, if it's purely a CDN type of business without much opportunity for upselling, then we, in the past, would still fight for those projects. More recently, we actually sort of tend to keep them up.

So certain projects, which clearly.

You're going to lose money and at the same time they are of little value add for example, if it's purely a CDN type of business without much opportunity for upselling than we.

In the past still fight for those projects.

More recently, you actually sort of tend to keep them up so those combination of factors.

Unknown Executive: So this combination of factors would mean that our revenue actually is seeing less growth, and in the past quarter, it actually declined year on year. But I think what we try to drive for is actually an increase in terms of gross profit and a narrowing of the losses that the business actually incurs over time. And I think we're actually making good progress toward those goals. Now, in terms of margins, I would say a very important part is that, given we have a very large existing customer base already, we actually focus our development and our operational and marketing efforts on upselling our existing customers into our higher-margin path and SaaS products, especially when these products are internally developed.

Mean that our revenue actually.

Is <unk>.

Seeing less growth and.

Past quarter actually declined.

Year on year, but I think what we tried to try four is actually an increase in terms of gross profit and the narrowing of the losses that the business actually incur overtime and I think we actually making good progress toward those goals now in terms of margin.

I would say a very important product is actually.

Given we have very large existing customer base already.

We focus our development and our operational and marketing effort on Upselling, our existing customers into our higher margin Paas and SaaS products, especially when these products are internally developed they carry both revenue opportunities as well.

Unknown Executive: They carry both revenue opportunities as well as margin improvement and profit-generating opportunities. Now, in addition to that, I would say on the ice and on the cost side, we actually also try to improve our cost efficiency by managing our supply chain better and by introducing newer technologies such as newer tech and newer chip technologies. In some cases, we actually sort of work with chip developers very closely, and sometimes we work with domestic chip developers very closely to get cheaper supplies.

Our margin improvement and <unk>.

Profit generating power.

Opportunities.

Now in addition to that I would say on the ice and on the cost side right. Now we actually also tried to improve our cost efficiency by.

Managing our supply chain better by introducing newer technologies, such as newer tech newer chip technologies in some cases, we actually work with the chip developers.

Very closely and sometimes though we'd work with domestic developers very closely to get cheaper.

Unknown Executive: And at the same time, we actually mentioned that as part of the cost effort and as a very long initiative of moving all our domestic in-house services all onto our cloud infrastructure. We finally, after a few years, have got it done. And this actually helped to increase the scale of our cloud infrastructure. And by that, it's not just about procurement, but also on the same tech infrastructure, it's supporting both internal and external clients, and that actually helps to improve our cost efficiency.

Applies and at the same time.

We actually mentioned that as part of the cost effort.

A very.

Long.

The initiative of moving all our domestic in house services or onto our cloud infrastructure with finally after a few years.

Got it done and this actually helped to increase the scale of our.

Cloud infrastructure and by that it's not just about the procurement, but also on the same infrastructure, it's supporting both internal and external clients and that actually helps too.

Improve our cost efficiency and these are all activities, which would help to increase our margin.

Unknown Executive: And these are all activities which would help to increase our margin. And on the video accounts, your question was whether the advertising ramp would be faster for video accounts for moments. And the answer is yes, it is.

Unknown Executive: And you'll see in the coming days, we'll launch Bidding for the video accounts in feed ads to supplement the contractual pricing, which should contribute to that ramp. Thank you, Thank you. We are trying to reconnect with Eddie, so next is Eddie Leung from the Bank of America. Eddie, your line is open now. Can you hear me?

And on the video accounts question worst weather.

Advertising ramp would be faster for video accounts at the moment and the answer is yes. It is.

You'll see in coming days, we will launch the.

Bidding for the video accounts seeing feed ads to supplement the contractual pricing, which should contribute to that ramp. Thank you.

Thank you.

We are trying to reconnect waves to Eddie.

Eddie Downtown Bank of America. Your line is open now.

Unknown Executive: Yes, we can hear you now. Thank you. Thank you, Wendy, and I apologize.

Can you hear me, yes, we can hear you now thank you Randy and I apologize just a.

Questioned apparel retail account.

Unknown Executive: Just a follow-up question about video accounts. I think you guys mentioned it quite a bit about e-commerce advertisers. Definitely, with the connections to many programs and V-com, we can see that. But just wondering down the road, like, you know, for example, in one or two years' time, what type of use cases you can foresee from video account advertising beyond e-commerce transactions? And then related to that, how do you think it's competing for budget on other, let's say, you know, online media platforms, or do you think it's creating new advertising demand? And why?

You guys mentioned, a quite pick up all of our e-commerce advertisers definitely with the connections to our many programs and we call them. We can see that but just wondering down the road like for example, in one or two years' time or what type of use cases.

Can't foresee from retail or kind of advertising will be gone e-commerce transactions and then related to that.

How we do our <unk> effect on advertising space, specifically do you think its more competing for Patrick on the.

Sure.

Let's say you are now online media platforms are the new thing is are creating new advertising demand and why thanks.

Unknown Executive: Eddie, so it's obviously competing with other short-form video platforms. Advertisers have a budget for short-form video, and, you know, they already split that two ways, and going forward, they're increasingly splitting that three ways. So, you know, advertisers say we're going to spend X amount online, and Y percent of that will be on short-form video. And, you know, previously, we didn't tap into the X percent, and now we've begun doing so.

Yes, so it's obviously competing with other short form video platforms advertisers have a budget for short form video and they already split that two ways going forward theyre increasingly splitting that three ways.

So advertise to say, we're going to spend X amount online wide percentage of that will be on short form video and previously we didn't tap into the X percent.

Now we've begun doing so so that's why we think the budgets will come from in terms of the E. Commerce commentary then now with regards to the <unk>.

Unknown Executive: So, you know, that's where we think the budgets will come from. In terms of the e-commerce commentary, then, you know, with regard to the second quarter, what we called out was really that we saw an uplift in our e-commerce advertising spending in June, and an uplift for the overall quarter versus the first quarter, and, you know, there's a number of reasons for that, including the proliferation of mini programs, also including, you know, some of the changes in the China internet landscape meant that some big e-commerce companies, which underspent on Tencent properties in the past, have begun spending more aggressively on Tencent properties, and so there's been a market share shift in our favor from those really big companies.

Second quarter, what we called out was really that we saw an uplift in our e-commerce advertising spending in June and in <unk>.

For the overall quarter of us the first quarter and that's a number of reasons for that including the proliferation of mini programs are also including some of the changes seen in the China Internet landscape.

Some big E Commerce companies switch Underspent on Tencent properties in the past have begun spending more aggressively on Tencent properties and so thats been a market share shift in our favor from from those really big companies.

Unknown Executive: So, you know, in terms of video accounts and Advertisers by category, then, you know, just as with moments, we expect a broad spread of categories. So e-commerce is one, but Internet services is another. Consumer goods, food, and beverage, automobiles, all important as well.

In terms of video accounts.

Advertisers by category than Justice with moments, we expect a broad spread of categories. So ecommerce is one but internet services and other.

Consumer goods food and beverage automobiles or important to swell in automobiles actually are another area, where advertising has been slightly healthier than the last couple of months for us.

Unknown Executive: And, you know, automobiles actually are another area where advertising has been slightly healthier in the last couple of months for us. That's very helpful. Thank you. Thank you. Next, we will take the questions from Alicia Yap of Citigroup. Alicia, your line is open. Hi, can you hear me?

Yeah.

That's very helpful. Thank you.

Thank you.

We will take your questions Alicia Yap with Citigroup.

Felicia Your line is open.

Okay.

Okay.

Hi, Thank you Danny.

Yes, we can hi, good evening management. Thanks for taking my question I have two the first one.

Unknown Executive: Yeah, we can. Okay, hi, good evening, management. Thanks for taking my question. The first one is regarding the global gaming landscape. Obviously, we mentioned this is a post-pandemic digestion period. Is that fair to assume this digestion period will start to normalize in the next couple quarters?

Unknown Executive: How should we factor in inflation issues into the gaming virtual item price versus the entertainment spending priority among global gamers? So will the gaming industry also face challenges on the backdrop of this global macro weakness, or if we actually, if we maintain the virtual item pricing despite this inflationary environment, will gaming actually become more affordable entertainment choices that we could actually see benefiting from there? So any thoughts that management could help us think about this growth prospect of the global gaming industry will be helpful. And then second, very quickly on the cloud business. So, as I said, we have made some progress on enhancing and upgrading the various productivity software.

Many of our global.

Hum.

Obviously, we mentioned.

Danny digestion.

Is that fair to assume.

Thank you Sam.

I'll start to normalize in the next couple of quarters.

How should we factor that.

Inflation issue.

I mean, what's your outcome.

Hum.

The entertainment spending priority among the global team.

We'll give you the industry also faced challenges on the backdrop of global <unk>.

<unk> weakness.

Sure.

<unk>.

We maintained a watch item.

Despite the inflationary environment.

Actually become more affordable Entertainment choice.

Actually Anthony pop on that so any thoughts that management.

Help us think about this.

Cross back off the global gaming industry will be helpful and then.

Great.

<unk>.

The cloud business.

At this time, we have made some progress.

Unknown Executive: So this, and monetization may be still early, but any color on the latest adoption for this new solution. Will this slight decline year over year that you mentioned in business services revenue taper off in the second half, and will we start to see the positive growth earlier than that? Alicia, so on the game question, you know, there's a great deal to unpack there, and I won't even begin to start because it's actually not the most important thing for us.

Operating.

Please go back to BD software amortization.

Amortization of maybe.

Ali.

But.

Nathan adoption.

What is Nielsen motion.

Slight decline year over year, Thank you Moshe.

Thanks Robert.

Taper off in the second.

Let me quickly.

Ralph.

Thank you.

Alicia so on the game question Theres, a great deal to unpack, there and I won't even begin to start because it's actually not the most important thing for us so.

Unknown Executive: So, you know, whether the international game industry returns to growth as we enter next year or takes longer depends on whether the weakness we're seeing now is primarily a post-COPVID phenomenon, which should cycle out late this year, which would be positive, or whether it's primarily a macroeconomic phenomenon, which could, you know, last for longer, depending on how global economics play out. And historically, the game industry has not been very economically sensitive.

Whether the international game industry returns to growth as we enter next year or it takes longer it depends on whether the weakness. We're seeing now is primarily a post COVID-19 phenomenon.

Which should cycle out late this year, which would be positive or whether it's primarily a macroeconomic phenomenon, which could last for longer depending on how global economics play out and it start to the game industry has not been.

Unknown Executive: However, historically, the game industry was more of a upfront purchase model. Now, with much of the monetization of games being driven by in-game cosmetic decisions, one could argue that the game industry has become more discretionary in nature. And there are consumers who, you know, have been playing their favorite game, have been purchasing items in their favorite game. And then when conditions are more difficult in terms of employment or inflation, they reduce their spending while still continuing to play the game. And, you know, the reality is we just don't know, and no one really knows what the answer is to those imponderables.

Right economically sensitive however, historically the game industry was more of an upfront purchase model now with much of the monetization of games being driven by in game kind of cosmetics decisions. One could argue that the game industry has become more discretionary in nature.

And so there are consumers who have been playing that favorite game have been purchasing items in their favorite games and then when conditions are more difficult in terms of employment or inflation, they reduce their spending while still continuing to playing the game and the reality is we just don't know.

No one really knows what the answer is to those imponderables. What we do know is that we have some exciting games in the pipeline and it will be launching ongoing in China in the coming weeks, which we're very excited about we have data coming up internationally in the coming months.

Unknown Executive: You know, what we do know is that we have some exciting games in the pipeline, and we'll be launching Undawn in China in the coming weeks, which we're very excited about. We have Darktide coming out internationally in the coming months. And then what we do know is that, irrespective of whether the game business for us takes months or quarters to reaccelerate, we can grow the rest of our business and indeed grow our overall earnings, irrespective of what's happening with that game recovery.

And then what we do know is irrespective of whether the game business for us takes months or quarters to Reaccelerate. We can acquire the rest of our business Sandeep <unk> overall earnings.

Irrespective of what's happening with that game recovery. Thank you.

Unknown Executive: Thank you. Now in terms of productivity software and monetization, I would say this is definitely a revenue opportunity, right, you know, and it's one of the revenue opportunities that we have in our coffer, but because it's not the most immediate and sizable revenue opportunity in the near future. So that's why we didn't talk about it in the strategy update.

So in terms of.

The productivity software.

And the monetization I would say this.

This is definitely a revenue opportunity right.

It's one of the revenue opportunities that we.

Half an hour coffer, but because it's not the most.

Immediate sizable in the <unk>.

In the near future. So that's why we didn't talk about it in the strategy updates. So instead within the strategy update we only talk about the ads within the video accounts the longer term obviously.

Unknown Executive: So instead, within the strategy update, we only talk about the ads within the video accounts. In the longer term, obviously, this is a revenue opportunity. In terms of the stage, I would say adoption is still at the beginning.

This is.

And the revenue opportunity in terms of at this stage I would say the adoption is still at the beginning.

While it is encouraging it is still small in absolute numbers and we believe there needs to be a longer conversion and educational process.

Through which we can get the enterprises to start paying for this.

Our productivity software as a matter of fact, if you will.

Unknown Executive: While it's encouraging, it's still small in absolute numbers, and we believe there needs to be a longer conversion and educational process through which we can get enterprises to start paying for productivity software. As a matter of fact, if you notice, right now, this conference call now, we have actually moved from a previous web. Cass to our own Tencent Meeting service.

Notice of this conference call and now we have actually moved from a P.

Previous.

Web cast too.

To our own tens of meeting service. So in effect, our ducommun has become a paid user of our own productivity software and we hope the service level, It's actually Seth factory and you would actually help us to promote this service to other enterprises.

Unknown Executive: So, in fact, our department has become a paid user of our own productivity software, and we hope the service level is actually satisfactory, and you would actually help us to promote this service to other enterprises. Now, in terms of business services, and in particular cloud, right, which is the biggest component, I would say, for the moment, we're actually much more focused on making sure that we can grow our gross profit pool. And at the same time, we can narrow our absolute dollar loss in terms of the cloud business. So this is actually the more near-term objective.

No.

In terms of the.

Yes.

Business services in particular cloud right, which is the biggest component I would say.

For the moment, we're actually much more focused on.

Making sure that we.

We can grow our.

Gross profit pool and at the same time, we can narrow our absolute dollar in terms of losses of the cloud business.

So this is actually the more near term.

Unknown Executive: And I would say in terms of revenue growth, right, I think we'd probably be pushing it into the next. Thank you. Our next question comes from Charlene from HSBC. Charlene, your line is open now.

<unk>.

Objective and I would say in terms of the revenue growth rate I think we'd probably be.

Pushing it into the next year.

Thank you our next question comes down.

Unknown Executive: Thank you so much, Wendy. I would like to ask you if we can get some comments on recent news about potential further divestment of your portfolio companies, Meituan. And a related question is how you are thinking about your buyback plans under the backdrop of the cross-border issue and NASPERS lowering their holding in Tencent, as well as our long-term and continual investments in strategic areas like international game stats and video accounts. Thank you very much for the opportunity. Yeah, thank you, Charlene.

Shelly.

Yes.

Yeah.

Your line is open.

Thanks, so much Randy.

I would like to ask about.

I would like to ask if we can get some comments on recent news on potential further divestment of your portfolio companies May Twang and can you tell us just thoughts more broadly on the subject and whether there is any lessons learned from our early disposal of <unk>. This year.

A related question is how are you thinking about your buyback plans under the backdrop of proceeds and naspers lowering their holding in Tencent as well as our long term and continual investment in strategic areas like international games chat and video accounts.

Thank you very much for the opportunity.

Unknown Executive: So the specific news article you cited was not accurate. We are very focused on capital, returning capital to shareholders, given we believe our share price is very undervalued and also undervalued in the context of our investment portfolio. So if you look at what we've done year to date, we've returned around $17, $18 billion to Tencent shareholders, and we've been largely neutral in terms of our investments and divestments in other companies, excluding the actual JD divestiture.

Yes. Thank you Shirley inside their specific news article you cited was not accurate.

We are very focused on capital returning capital to shareholders. Given we believe up share prices is very undervalued.

Also undervalued in the context of our investment portfolio. So if you look at what we've done year to date, we have returned.

<unk> 17, $18 billion to 210 shareholders and we've been largely neutral in terms of our investments divestments and other companies executing statute J D divestiture.

So our focus from a sort of investments perspective has been buying back on dividend in Cuba in stock and that will likely remain the case.

Unknown Executive: So our focus from a sort of investment perspective has been buying back and dividending our own stock, and that will likely remain the case going forward for some period of time. In terms of your question as to how we can fund ongoing buybacks and dividends, then if you take our second quarter results, we generated annualized free cash flow of mid-teens, billions of US dollars, and that's after investing in CapEx and so forth to support video accounts and support international games and support enterprise software.

Going forward for some period of time in terms of your question as to how we can fund.

Ongoing buybacks and dividends and then if you take our second quarter results, we generated annualized free cash flow.

Mid teens billions of U S dollars and Thats after investing in the Capex and so forth to support video accounts and support.

International Games and support Enterprise software. In addition to that we have disclosed that we have an investment portfolio.

Unknown Executive: In addition to that, we've disclosed that we have an investment portfolio whose market value was $90 billion at the end of the quarter, and we've demonstrated with JD and Speed that we're willing to work down that investment portfolio over time to more effectively return capital to Tencent shareholders. In addition to that, we have an unlisted or private investment portfolio where the book value is over $50 billion US dollars, and we believe there's been substantial depreciation on that over $50 billion book value, and we also look for opportunities to return capital from that private investment portfolio in the form of dividend distributions and buyback.

Market value was $90 billion at the end of the quarter and to have demonstrated with JD and speed, we're willing to walk down that investment portfolio at the time.

To more effectively return capital to Tencent shareholders. In addition to that we have up on this state or private investment portfolio, where the book value is over 50 billion U S dollars and we believe that's been substantial appreciation.

On that over $50 billion book value and we also look for opportunities to return capital.

That private investment portfolio.

In the form of dividends distributions and buybacks. So I think if you add all of the above the annual free cash flow in the teens billions of dollars the listed and unlisted investments in excess of $150 billion, then youll see that we have substantial ammunition relative to our $370 billion market cap to.

Unknown Executive: So I think if you add all of the above, the annual free cash flow and the teens billions of dollars, the listed and unlisted investments in excess of $150 billion, then you'll see that we have substantial ammunition relative to our $370 billion market cap to continue doing dividends and buybacks at an aggressive rate. In terms of what lessons we've learned from the JD and C distributions, then I would say that we've learned how to process some of the logistics efficiently, which is good and means we can do future such distributions or sales more rapidly.

To continue doing dividends buybacks in an aggressive rate.

In terms of what are the lessons with lunch from E J.

J D and C distributions, then I would say that.

<unk>.

Process some of the logistics efficiently, which is good it means we can do to future such distributions or sales more rapidly.

Unknown Executive: We've also developed our ability to manage relationships around those transactions and demonstrate that, while we have sharply reduced our stake in JD, as an example, we continue to have a very good business relationship with JD and also with C on an ongoing basis. And then finally, I think our investors have responded quite favorably to the dividends and distributions, and that, you know, encourages us to think about how to continue down that capital return path going forward. Thank you. Thank you very much.

Also developed our ability to manage relationships on those transactions and demonstrate that while we have sharply reduced our stake in J D. As an example, we continue to have a very good business relationship with JD and <unk>.

So we'd see on an ongoing basis and then finally I think our investors.

Sure.

Responded quite favorably to the dividends and distributions.

Encourage us to think about how to continue down that capital return policy going forward. Thank you.

Thank you very much.

Operator: Thank you, Charlene. The next question comes from Gary of Morgan Stanley. Hi, thank you for the opportunity to ask questions. My first question is related to FinTech or payments. How should we look at the revenue opportunity going forward? This is a revenue line that is mostly related to consumption in the macroeconomy. So how should we look at that in the second half or maybe going into next year?

Thank you Shirley next question comes from Gary.

Sure.

Okay.

Hi, Thank you for the opportunity to ask question. My first question is related to a fintech or payments business, how should we look at the revenue opportunity going forward.

It is a revenue line, which mostly.

Related to consumption of macro economy. So how should we look at that the second half of it may be.

Going into next year.

Unknown Executive: Second, is a follow-up on veto accounts. I think we mentioned that our time span is exceeding 80% of moments. And assuming that these surpass the time spent or moments very soon, does that mean that, sometime next year or in the foreseeable future, veto accounts will very soon become our number one kind of advertising channel within the Tencent ecosystem with revenue even exceeding the moments? And if we compare with other peers, are we confident that we can have a revenue per time spent which is at least equivalent or even better than some of the other short video peers? Thank you. Yeah, thank you for the questions, Gary.

Secondly, as a follow up on Vito accounts.

I think we mentioned that.

<unk> is exceeding 80% of moments.

Assuming these are suppressed surpassed.

To pass the test.

<unk> very soon.

So does it mean that.

Sometimes next CLO in the foreseeable future.

Store counts will very soon become our number one ton of advertising channel within the Tencent ecosystem.

With the revenue even exceeding the moments that if we compare with other peers.

We call that that we can have a revenue per time spent which is at least equivalent or even better than some of the other short video peers. Thank you.

Unknown Executive: So on... the fintech business then. I think sometimes people operate under the misapprehension that Tencent operates more in the virtual world rather than the physical world and is therefore immune to slowdowns and unaffected by re-accelerations in the broader economy. And there may have been some truth to that misperception many years ago, but it's no longer the case today.

Yes, thank you for the questions Gary so on.

The Fintech business then.

I think sometimes people operate onto the misapprehension that <unk> operates.

<unk> the virtual world dropped in the physical world and is therefore.

Immune to slowdowns.

<unk> by Reacceleration in the broader economy, and there may have been some truth to that misperception many years ago, but it is no longer the case today today.

Unknown Executive: Today, the fintech business is our biggest single activity; payment merchant acceptance businesses like Visa or MasterCard in the Western world, then they're very clearly geared to economic activity. They slowed down a great deal when Western economies slowed down, and they reaccelerated as Western economies reopened. And the same thing is proving true for our payment business. As we mentioned in the introductory remarks, our payment volume growth slowed to low single digits year-on-year in April and May when cities went through the COVID-19 shocks and then accelerated to high teens growth year-on-year in June and accelerated again in July.

<unk> business is our biggest single activity.

And if you look at.

Payment much in <unk>.

Substance businesses like visa Master card in the western world than that very clearly geared to economic activity. They slowed down a great deal when western economies slowed down and they reaccelerate as western economies reopen and the same thing is proving true.

Payment business as we mentioned in the introductory remarks.

Payment volume growth slowed to low single digits year on year in April and May when cities went through the COVID-19, shocks and then accelerated to high teens growth year on year in June and accelerated again in July.

Unknown Executive: And payment volume growth correlates quite neatly with payment revenue growth, so we had a sharp deceleration just as Visa and MasterCard did because of the COVID-19 shocks. And now we're experiencing an upturn, and to the extent that the Chinese economy reaccelerates, then certainly, our payment business, also our advertising, and our business services activities should enjoy the benefits just as they have suffered during the slowdown period. So that's on the.

The payment volume growth correlates quite meet with the payment revenue growth. So we had a sharp deceleration justice visa and Mastercard date, because of COVID-19, shocks and now we are experiencing an upturn and extend the China economy.

Re accelerates then certainly our payment business also our advertising and our business services activities.

It should enjoy the benefits substance depths suffered.

During the slowdown period.

So that's on the Fintech question in terms of the video accounts and how we stack up versus peers from a monetization perspective than we have been running in feed ads within the video accounts for several weeks now those in feed ads are sold on a contract basis currently.

Unknown Executive: FinTech question. In terms of the video accounts and how we stack up versus peers from a monetization perspective, we have been running in-feed ads within the video accounts for several weeks now. Those in-feed ads are sold on a contract basis currently. The eCPM on those contract ads is moderately lower than the eCPM on contract ads on moments, but it's higher than the eCPMs, the blended eCPMs for ads on the two incumbent short video services.

<unk>.

Those.

The CPM on those contract adds is moderately lower than the CPM on contract at some moments, but it's higher than the CPM. The blended CPM ads on the two incumbent short video services.

Unknown Executive: We will be rolling out bidding price ads within video accounts in the coming days, and from that experience, we will have a clearer picture of what the long-term eCPM is for video accounts based on the two incumbent services, but based on the data that we've seen so far from both, and the enthusiasm of the sponsors for the live stream concepts on video accounts. I'd say that we're quite optimistic that the eCPMs we'll achieve for our video account ads should be at least par with the eCPM of the leading short video platform in China today. Thank you, Gary. We're going to take the next question from Jerry Liu of VBS. Gary, you're live.

We will be rolling out bidding price ads within video accounts.

Coming days.

And from that experience, we will have a clearer picture of what the long term he CPM is for.

<unk> video accounts based on the two incumbent services, but based on the data that we've seen so far from both the.

Contract price that some before that from the quality.

<unk>.

Enthusiasm of the sponsors for the live stream concepts on video accounts I would say that we're quite optimistic that the <unk> were achieved for <unk> accounts that should be at least a par with the CPM of the leading short video platform in China today.

Thank you Gary will take the next question.

Yes.

Gary Your line is open.

Unknown Executive: Yes, thank you. Thanks, management, Wendy. Yeah, I wanted to ask about maybe a little bit of the reverse of some of the questions earlier about cost control. You know, it sounds like with payments for advertising, we're seeing some improvements in businesses in just the last months and weeks. And sooner or later, we're going to have new games coming through.

Yes. Thank you Thanks management one day.

Yes, I wanted to.

Ask about maybe a little bit of the reverse of some of the questions earlier about cost control.

It sounds like.

Payments with advertising, we're seeing some improvements in these businesses in just recent months and weeks.

And sooner or later, we're going to have new games.

Coming through so I wanted to investor questions. We've been getting is as that happens are we going to ramp up some of the sales and marketing spending so I get that.

Unknown Executive: So one of the investor questions we've been getting is, As that happens, are we going to ramp up some of the social marketing and spending? So I understand that, you know, if revenues flattened, we can still get to an earnings growth environment. Now, would we, if we had the opportunity, go back to a slight investment mode to drive revenue? I think the assumption is correct, right?

Revenues flattish than what we're seeing is we can still get to earnings growth.

Environment now would we.

We have the opportunity.

Go back to it.

A slight investment mode to drive revenue growth.

Thank you.

I think the assumption is correct. If we have new game then of course, we're actually supported with.

Unknown Executive: If we have a new game, then of course, we'll actually support it with a marketing campaign, and we believe... that will be money well spent, and especially if it's on a pretty significant title like Undocked. There have been some questions recently about the growth of video accounts. What is the limiting factor or bottleneck due to the pace of the ramp?

Our marketing campaign and we believe.

That will be money well spent.

And especially if it's on.

Pretty significant title like Pandora.

If I may ask a follow up.

So there's been some questions recently.

About <unk> ramp up.

Our video accounts.

And I'm just wondering what is kind of the limiting factor there is a bottleneck to the pace of the ramp if you will.

Unknown Executive: In the past, we've talked about user experience in terms of how fast we crank up the ad load. Is that also the key consideration here, or what is perhaps the priority to determine the pace we can ramp up advertising? Thank you. Yeah, so there's a continual optimization and re-optimization process where, you know, we expand the percentage of video account users who can see ads, we show them one ad per user day, we measure the performance of that ad, we optimize, then, you know, we increase the number of ads per user day, we measure the performance of the incremental ads, and we re-optimize.

So in the past for example, with.

Moments, we've talked about user experience in terms of self help as we crank up the ad load.

Is that also a key consideration here or what is maybe the priority to determine the pace, we can ramp up advertising. Thank you.

Yes, so thats, a continual optimization and re optimization process, where we expand the percentage of video accounts users, who can see ads, we show them why not use a day, we measure the performance of that at.

Optimize then we increase the number of ads per user day, we mentioned the performance of the increments lots, we re optimize and.

Unknown Executive: And, you know, for WeChat moments, that optimization and re-optimization took a long time because it was the first time we'd done it at scale, at least within a WeChat property, and because we didn't have external comps to benchmark against.

<unk> moments that optimization and re optimization took a long time because it was the first time, we've done it at scale.

Least within away she in property and because we didn't have external comps to benchmark against.

Unknown Executive: For the video accounts, we're going through that process faster because we have the experience of moments, because we have the external comps to benchmark against, and also, I believe, because machine learning hardware and software are better now than they were then. So, by point of reference, I think if you look back at moments, then, you know, the time lag between us launching contract price ads versus bidding ads was many quarters versus for video accounts, it's a few weeks. Thank you, guys. Thank you, Jerry.

For the video accounts, we're going through that process faster because we have the experience of moments because we have the external comps to benchmark against and also I believe because machine learning hardware and software are better now than they were then.

So by point of reference I think if you look back at moments than the time lag between us launching.

Contract price adds versus beating ads was many quarters.

As for PGM accounts since a few weeks.

Thank you.

Operator: The next question comes from Esme Paul from Macquarie. I thank you for your time, and others. Hi, can you hear me?

Thank you Jami next question comes from Anthony <unk>.

Macquarie.

Alright.

Got it.

And then.

Okay.

Alright.

Anthony.

Unknown Executive: Your line is kind of breaking. Hello. Right. How about right now?

Youre live.

King.

Alright, how about right now.

Unknown Executive: Now it's much better. Go ahead. OK, all right. I do apologize for that.

Okay. Okay.

I apologize for that and thank you very much for taking my question.

Unknown Executive: And thanks very much for taking my question. This is Esme Powell of Macquarie. My first question relates to video accounts. So I'm just supplementing the previous questions that were asked. Obviously, the user engagement momentum is very strong. So it's a very clear roadmap that we have. And that goes well for monetization. So just looking at this very holistically, what are the synergies within the ways in ecosystem?

Pollack Macquarie. My first question relates to video like counts, so I'm guessing.

Unknown Executive: And how does that compare with ad formats, such as moments and official accounts, given our perspective of a full funnel strategy? And I'll ask the same question about games later. Thank you.

King.

Questions that were asked obviously that use a moment engagement momentum is based on SLS.

Well, Matt that we have and that bodes well for amortization.

Looking at this very Holistically one other thing.

Niches within the <unk> ecosystem, and how does that compare with at format such as Ah moment, an official accounts given our perspective.

On the strategy. After final question about games later.

Thank you.

Unknown Executive: I think that Martin touched on some of the synergies in his opening remarks, including the fact that, you know, when an advertiser buys a video account, they can have that link through to their mini-program, which is their private domain transactional environment that they value very highly, including the fact that they can have the ad link through to Wecom, so that a consumer who's interested in a high-value product, such as There's no cannibalization right now, both from the perspective of user time spent as well as from ad dollars spent. Sure, thank you, that's very clear.

I think that Martin touched on some of the synergies in the opening remarks, including the fact that.

An advertiser buys a video account that can have that link through to that many program, which is that private remain transactional environment that they value for a heidi, including the fact that they can have the AD link through to weaken so that a consumer who is interested in our high value products such as electric vehicles and then net.

Chat with us.

Sales for us and for the electric vehicle OEM more data.

There is no cannibalization right now both from the perspective of.

Ty.

<unk> spend as well.

Well as to from at dollar spent.

Sure. Thank you that's very clear and then my second question would be in terms of.

Unknown Executive: And then my second question would be in terms of our international game and also how that aligns with our investment strategy. So our broader investment strategy would be to emphasize strategic growth. And right now, we're in a phase of rebalancing our portfolio. So given the recent news headlines about Tencent potentially raising stakes in a global game company, how should we think about global M&A opportunities and also how does that align with Tencent's international game strategy? Thank you.

International game and also how that.

With that that strategy.

But that strategy would be to emphasize our strategic growth and right now we're in a phase of that.

Great.

No.

Given the recent news headlines about cans that potentially raising stake in acre working company, how should we think about global M&A opportunity and also how does that align with that.

Sure.

Got it.

Thank you.

Unknown Executive: Yeah, so in terms of our international game strategy, there are sort of three prongs for delivering new games. One is the existing international investors, bringing new games to market. And some of those investees, consolidated investees such as Riot and Supercell, are very well known to investors. But in the last five years, we've invested in a range of other companies, such as Stunlock, that are less well known to investors.

Yes, so in terms of our international game strategy, there are sort of three prongs for delivering new games one is.

The existing internationally investees, bringing.

Bringing new games to market in some of those investees.

Consolidated investees, such as ride and supercell, a very well known to investors, but in the last five years, we've invested in a range of other investees such as the standoff that and thats well known to investors, but with the success of be rising.

Unknown Executive: But with the success of ReRising or, hopefully, the forthcoming success of Darktide, we believe there'll be more understanding of the value of these international studios. And then, secondly, we have our big domestic studios such as Quantum, Timmy, Aurora, and Morphan that are developing games that will be released both in China and overseas, such as Undawn. And then, thirdly, we continue to be quite active in terms of acquiring new game studios.

We have therefore coming success of adopt tied we believe there'll be more understanding of the value of this.

These International Studios and then secondly, we have a big domestic studios, such as quantum Timmy Aurora and more fun.

Developing games that.

Will be released both in China and overseas such as unknown.

And then thirdly, we continue to be quite active in terms of acquiring.

New game studios, so we called out the fact that with recently mini clip has acquired.

Unknown Executive: So we called out the fact that recently Miniclip, which is, as you probably know, a consolidated subsidiary, acquired Saibot, and Saibot brings with it the game Subway Surfers. And Subway Surfers has 30 million daily active users, which is actually, a gigantic number. I mean, normally, in China, when we look at international game studios, the revenue is very impressive, the product is very impressive, but the daily active users are an order of magnitude smaller than what equivalents would achieve in China because the Chinese game market has many users.

Many kept as most of you probably know the consolidated subsidiary.

<unk>.

Cypress brings with it the game subway surfers and subway.

Subway surface has 30 million daily active users, which is actually.

Gigantic amount, but I mean normally in China, when we look at international games Cdi's revenues very impressed with the products very impressive but the daily active users are in order of magnitude smaller then.

Equivalents would achieve in China, the China game market has many users but.

30 million daily active users is a big number by anyone's standards, including our standards.

Unknown Executive: But 30 million daily active users is a big number by anyone's standards, including ours. So, as you can see from Saibo, and there are 30 million people playing Subway Surfers each day, we continue to be active in acquiring game studios outside China. Thank you very much. That's great.

As you can see from Psycho in Chinas study million people claim subway surfers. Each day, we continue to be active in acquiring game studios outside China.

Thank you.

Thanks for the insights.

Operator: Thank you. We will take the last question from Alex Yao of J.P. Morgan. (inaudible) Thank you, management, for taking my question. Two questions.

Thank you we will take the last question from Alex Yao of Jpmorgan.

Alex Your line is open.

Yeah.

Thank you management for taking my question two questions number one.

Unknown Executive: Number one... Can you share with us your latest thoughts on FinTech development strategy? For example, does Tencent need to apply for a financial holding company license? Does Tencent need to establish a separate credit scoring unit and apply for a relevant license? Are you guys going to build your FinTech business in a similar or different way compared to comparable size FinTech companies? So that's the number one question.

Can you share with us your latest thoughts on impact development strategy for some quarters and some need to apply for a financial holding company license.

Thanks, Amie to establish a separate credit scoring units.

Apply for relevant license.

Guys going to be more <unk> type business, and a similar or different way compared to.

Comparable size Fintech peers.

So that's the number one question number two.

Unknown Executive: And number two, I think, you know, after hearing your aspects of video account monetization, am I getting it right that you guys are monetizing this as property in a philosophically different way compared to your approach to moments? and thinking about the long-term monetization potential, would you say you will run the ads load at a similar level as the current peers in the market, given that the ads load on moments after years of monetization is few, significantly below the general purpose of feed-based products? Thank you.

After hearing yours.

Aspects of.

Video it comes monetization.

Turning to the ROI that you guys are monetizing this.

Property in Microsoft <unk>.

Different way compared to your.

Your approach moments.

And thinking about the long term monetization potential would.

Would you say you will.

Ron the AD loads in a similar level.

The current peers in the market.

Given that would be.

And Florida are moments after years.

Monetization is due.

A significant low general purpose of feeds based.

Products. Thank you.

Unknown Executive: So in terms of our fintech development, I think it's actually relatively stable and progressing quite well. And as you can see, fintech is already a pretty significant part of our overall business. And in the past year, we have been engaging with the regulatory authorities to make sure that each part of the FinTech business is completely compliant, and we've gone through a lot of business changes to make sure that these are all done.

So in terms of our Fintech development I think it's actually relatively.

Stable and progressing.

Quite well.

And.

As you can see Fintech is already a pretty significant part of our overall business and in the past year.

<unk> been engaging with the regulatory authorities to make sure that each part of the Fintech business.

Completely compliant and that would come through a lot of business changes to.

To make sure that.

These are all done.

In terms of the financial holding company.

Unknown Executive: And in terms of the financial holding company, we are still working with the regulators on the licensing part. And I would say whether we're going to be getting a financial holding company license, it will not have a major impact on our businesses. The key goal is actually to understand what will satisfy the regulators' most stringent requirements.

Still working with the regulators.

On the licensing part.

And.

And I would say, we whether we're going to be getting a financial holding company license.

Not have a major impact on our businesses.

The key goal is actually to understand what will be satisfying the regulators most stringent requirement. So.

If the.

Unknown Executive: The end result of the exercise is that we will be applying, and the regulator will give us one license. That will be great, and we believe it will not have an impact on our business. Our business can continue to be conducted. And likewise, for the other specific questions about whether you need a license here or you need a license there, whether you need to make some changes to the current practice, we believe we have actually been through the examination exercise for the past year and a half.

The end result of the exercises that we will be applying in the regulator would give us one license that that would be great.

And we believe it will not.

And the impact on our business our business can continue to be conducted and likewise for the other specific questions about whether you need a license here or any of the license deal whether you need to make some changes.

Two the current practice, we believe we have actually been through.

The.

Examining exercise for the past year and half and.

Unknown Executive: And we're pretty comfortable that we know exactly what we need to do in order to continue to grow our FinTech business. And on video account monetization, has the philosophy changed versus moments monetization? No, the philosophy is exactly the same, in that we prioritize the user experience first. And you can see that that prioritization is paying off because the number of video views within video accounts grew over 200% year-on-year. Now, there are some differences between now and when we began monetizing moments. One difference is that the benchmarks are much clearer for short-form video than they were for moments. The second difference is that the machine learning software and hardware is better.

We're pretty comfortable that we know exactly what we need to do in order to continue to grow our fintech.

<unk>.

And on the video accounts monetization has the philosophy changed versus moments monetization note. The philosophy is exactly the same and that we prioritize the user experience first and you can see that that prioritization is paying off because the number of video views within video accounts grew over 200% year on year.

Now there are some differences between now and when we began monetizing moments one difference is that the benchmark. So much Dara for short form video for moments. The second difference is that the machine learning software and hardware is better at that difference is arguably that.

Unknown Executive: A third difference is arguably that the cost to the consumer of an ad load within short-form video is lower than within a social network such as Twitter because, within short-form video, the consumer is continually previewing videos, swiping through those she doesn't want to watch and accepting those she does want to watch. And so if, in the same way she sees an advertisement that she doesn't want to watch, she swipes through it; she doesn't view that as necessarily detracting from her overall engagement with the short-form video product.

The cost to the consumer of an AD load within short form video, it's lower than within our social networks, such as moments because within short form video. The consumer is continually previewing videos swiping through those she doesn't want to watch and accepting does she does want to watch and so in.

In the same way she sees an advertisement that she doesn't want to watch is swipes through it she doesn't view that as necessarily detracting from our overall engagement with the short form video product and Thats why if you look at the two incumbent short form video services in China, They are able to maintain at lunch.

Unknown Executive: And that's why if you look at the two incumbent short-form video services in China, they're able to maintain ad loads of roughly 14 to 16%. For moments, as you may know, the ad load, we show three to four ads per user day. However, given not all users see all of those ads for various reasons, the effective ad load is closer to 2% to 3%.

Roughly.

14% to 16%.

At the moment as you may know.

The ad load.

<unk> for us are used today.

Given <unk> users see all of those various reasons the effective AD load is closer to 2% to 3%.

Unknown Executive: And yes, we do expect video accounts to transcend to overtake moments in terms of ad load given where the two incumbent peers are already at today. Thank you. We are now ending the webinar. Thank you all for joining our first results webinar held about internally developed Tencent meeting software. If you wish to check out our press release and other financial information, please visit the IR section of our company website at www.tencent.com. The replay of this webinar will also be available soon. Thank you, and see you next quarter.

And yes, we do expect video accounts to transcend to overtake moments in terms of AD load given where the two incumbent players are already out today.

Thank you.

Now Andy the Webby now thank you all for joining our first results bearing on how we do our internally developed Tencent meeting.

If you wish to check out our press release and other financial information.

At the IR section of our company website at Www Dot Dot com. The replay of this spreading out will also be available.

Thank you and your next quarter.